Washington State Bar

Formal Opinion 185 (1990)

Ethical Duty of a Lawyer Who Guarantees Payment on Behalf of a Client to a Creditor from Proceeds of Settlement or Judgment

Question:

What are the ethical duties of a lawyer who guarantees payment, either orally or in writing, on behalf of a client to a creditor such as healthcare provider, from proceeds of settlement or judgment?

Discussion:

Frequently, a lawyer representing an injured person in a contingent fee case is requested by a healthcare provider or other creditor to guarantee payment of the creditor’s claim (not related to the expenses of the litigation) from the proceeds of any settlement or judgment recovered on behalf of the client in return for an agreement by the creditor to forego any attempt to collect the debt in the meantime. At times a creditor such as a healthcare provider may ask the lawyer and/or the client to sign a lien form or other written “guarantee”; at other times, the creditor may merely accept the assurances of the lawyer that the debt will be paid from any settlement or judgment. Assuming that the client consents to such a “guarantee,” a lawyer may properly enter into such an arrangement with the client’s creditor. The ethical dilemma arises when, after settlement or judgment, the client requests that the lawyer disburse all proceeds of the settlement or judgment directly to the client, without paying the creditor. RPC 1.14(b)(4) requires that a lawyer pay at a client’s request all funds in the lawyer’s possession which the client is entitled to receive. The question is whether the client is entitled to receive those funds which the lawyer, with the client’s consent, has guaranteed would be paid to the creditor.

Before the lawyer may guarantee payment of such funds, or advise a client to sign a lien or guarantee, the lawyer must explain the matter to the client “to the extent reasonably necessary to permit the client to make informed decisions regarding” the lien or guarantee. (RPC 1.4(b). This explanation may be included in the written contingent fee agreement. RPC 1.5(c). The explanation should include the advice to the client that once the client has authorized payment of such debts, that authorization is irrevocable by the client. If the client subsequently has a good-faith dispute as to the amount to be paid, the lawyer should advise the client and the creditor that the lawyer will continue to hold the funds in trust until the dispute is resolved.

Assuming that the client has been properly advised of the effect of making or signing a guarantee or lien, and has consented thereto, the Committee is of the opinion that, absent a good-faith dispute as to the amount of debt claimed by the creditor to be due, the client has authorized payment of those funds by the lawyer and is no longer “entitled” to disbursal of those funds by the lawyer. Further, the Committee is of the opinion that failure by the lawyer to honor a guarantee or lien the lawyer has signed or agreed to in connection with representation of a client would violate RPC 4.3 where the lawyer has failed to correct a misunderstanding by an unrepresented person as to the obligation by the lawyer to pay the creditor; and would violate RPC 4.4, which prohibits a lawyer from using means that have no substantial purpose other than to burden a third party, in this case by misleading the creditor into believing that the debt of the client would be paid.

If the lawyer had entered into such a “guarantee” without the client’s consent, then the lawyer may not withhold the funds from the client if the client requests them. Whether by making such a “guarantee” the lawyer has obligated himself or herself to the creditor is a legal question on which the Committee can render no opinion. However, representing to a creditor of a client that the lawyer had authorization to enter into such an arrangement when the client had not consented to it might constitute a violation of RPC 8.4(c) and might subject the lawyer to discipline.

Financial obligations owed by a client, such as medical bills owed to a healthcare provider, must be distinguished from expenses related to litigation, such as expert witness and court reporter fees. See, In re Witteman, 108 Wn.2d 281, 737 P.2d 1268 (1987); Copp v. Breskin, et al., 56 Wn. App. 229, 782 P 2d 1104 (1989).