RPC 1.2(a), 1.4(b), 1.0(e), 1.15A, 1.15A(f), 1.15A(g)
Ethical Duty of a Lawyer Who Guarantees Payment on Behalf of a Client to a Creditor from Proceeds of Settlement or Judgment
What are the ethical duties of a lawyer who guarantees payment on behalf of a client to a creditor, such as a healthcare provider, from a judgment or settlement?
In the course of representing a client in a lawsuit, a lawyer may be requested to provide some form of guarantee to a creditor that the client’s debt to the creditor will be paid out of the proceeds of the lawsuit. In exchange for such a guarantee, the creditor may agree to forego attempts to collect the debt while the suit is pending. Such guarantees of payment may be made orally, in writing, or by way of a letter of protection. Ethical issues arise in the context of making guarantees to creditors and if the client demands that the lawyer disburse proceeds directly to the client, without paying the creditors.
A lawyer should not provide a guarantee of payment from settlement or judgment funds to a creditor without the consent of the client. RPC 1.2(a) provides that “a lawyer shall abide by a client’s decisions concerning the objectives of representation…” Whether creditors should be paid with proceeds of the suit is within the scope of decisions concerning the objectives of the representation. Pursuant to RPC 1.4(b), the lawyer must explain the matter “to the extent reasonably necessary” to permit the client to make an informed decision. The explanation may, but need not, be in writing or in the fee agreement. As explained in Comment  to RPC 1.4, “[t]he guiding principle is that the lawyer should fulfill reasonable client expectations for information consistent with the duty to act in the client’s best interests . . . as to the character of the representation.” See also RPC 1.0(e) (“‘Informed consent’ denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.”). At a minimum, the lawyer must advise the client that consent to the payment of debts from the judgment or settlement will be irrevocable once the lawyer has made a guarantee based upon that consent.
RPC 1.15A governs the issue of payment to the client and to third persons of funds each is entitled to receive. RPC 1.15A(f) provides that “[e]xcept as stated in this Rule, a lawyer must promptly pay or deliver to the client or third person the property which the client or third person is entitled to receive.” (Emphasis added.) Pursuant to this Rule, a creditor who has been guaranteed, with the client’s consent, payment from the proceeds of the lawsuit is generally “entitled” to receive payment from the settlement or judgment funds.
In the event of a dispute as to the amount of the debt, RPC 1.15A(g) requires that the lawyer maintain the property in trust until the dispute is resolved and take reasonable steps to resolve the dispute, including, if appropriate, interpleading the disputed funds.