August 2000

Informal Opinion #1913

Informal Opinion #1913 is being published in Bar News at the request of the WSBA Rules of Professional Conduct Committee. See letter written by Committee Chairperson Tyna Ek on page 10 for additional information.

Informal Opinions are provided for the education of the Bar and reflect the opinion of the Rules of Professional Conduct Committee. Informal Opinions are provided pursuant to authorization granted by the Board of Governors, but are not individually approved by the Board and do not reflect the official opinion of the Washington State Bar Association.

Informal Opinions are based upon the facts of the inquiry. Different facts may have different results. Our Informal Opinion to your inquiry is based on the facts as you have presented them. A redacted version of your inquiry may be available to members of the Bar upon request.

The Rules of Professional Conduct Committee, in response to ethics inquiry #1913 concerning entitlement of reimbursement of PIP legal fees, has determined the following:

(1) What are the ethical responsibilities of attorneys who previously settled a personal injury action without taking a contingent fee on the PIP recovery regarding potential claims to a portion of his or her former client’s settlement in a current class action filed against insurers for the insurers’ failure to contribute a proportionate share of their insureds’ legal expenses when the insurer benefited from the settlement of the insured plaintiff’s case by recouping PIP benefits? (2) What are the ethical considerations of attorneys presently representing class action clients regarding potential claims by the class action clients’ former attorneys?

Whether or not a plaintiff’s attorney is entitled to recover a portion of a former client’s class action settlement proceeds depends upon a detailed factual and legal analysis of the fee agreement, final accounting and the communication between the attorney and his or her former client at the time of the original settlement. Such analysis is beyond the scope of this committee. However, the current class action plaintiffs’ attorneys have an ethical obligation to advise their clients of the potential adverse claim that may be asserted against their settlement proceeds by their former attorneys and what they should do if such an adverse claim is asserted. The former attorney should not provide any advice to his or her former client, should determine whether the client is represented by counsel, and should promptly act to resolve any dispute over the disbursement of the settlement proceeds.

The situation at issue arises from a plaintiff’s personal injury case, when it is settled and the plaintiff’s attorney receives his/her contingent fee. Usually, the plaintiff’s own insurer has paid the plaintiff’s medical bills under the plaintiff’s own Personal Injury Protection (PIP) coverage. When plaintiff’s case is settled, the plaintiff’s insurer is entitled to be reimbursed for these medical payments that the insurer advanced out of money recovered from the tortfeasor (or usually the tortfeasor’s insurer). Historically, the plaintiff’s insurer usually did not want the plaintiff’s attorney to represent the insurer in recouping these PIP benefits. Sometimes plaintiff’s insurer’s reimbursement was obtained directly from the tortfeasor’s insurer through inter-company arbitration. As a result, plaintiff’s attorneys whose contingent fee agreement was based on a percentage of the gross recovery and allowed them to retain a percentage of the plaintiff’s recovery, often did not retain a percentage of the PIP reimbursement that went to the plaintiff’s own insurer.

In the case of Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (1998), the court decided that the plaintiff was entitled to an offset against the PIP benefits its insurer was to receive for a portion of the attorney’s fees and costs plaintiff incurred in successfully resolving the overall case and therefore entitling the insurer to its PIP reimbursement. The court ruled that the insurer was required to pay a portion of plaintiff’s attorney’s fees and costs even when the insurer had specifically placed plaintiff’s counsel on notice that the insurer did not want plaintiff’s counsel to pursue its subrogation rights.

The Mahler decision represented a major change in the manner in which personal injury claims are settled. Now, when plaintiffs’ cases are settled, the plaintiff’s attorney typically retains a percentage of the plaintiff’s insurer’s PIP reimbursement as part of his/her contingent fee. This ethical inquiry arises because the courts have decided to apply the Mahler decision retroactively. Following the Mahler decision, approximately 10 class-action lawsuits were filed against various insurance companies on behalf of plaintiffs who have settled claims within the past six years (i.e., within the contract statute of limitations). Some of the insurance companies have decided to settle with the class action plaintiffs, and will be paying these plaintiffs an agreed sum representative of the insurer’s share of the plaintiffs’ attorneys’ fees and costs from the earlier personal injury actions. The current attorneys for the class action plaintiffs will be obtaining a fee out of this settlement amount directly from the insurers. The settlement checks are being sent directly to the plaintiffs but, in at least some instances, the settlement checks are being made out to both the plaintiff and his/her former attorney.

The question is whether, and under what circumstances, the original plaintiffs’ attorneys are entitled to a portion of the settlements paid by the insurance companies in the class action lawsuits. The inquiry comes from an attorney interested in the class action who has received a number of inquiries from the plaintiff’s bar asking about their entitlement to some or all of the class action proceeds. The inquirer asks this committee to provide guidance to the plaintiff’s bar.

RPC 1.2, RPC 1.5, RPC 1.7(b), RPC 1.14, RPC 4.3, and RPC 4.4.

RPC 1.5(c)(1) indicates that a contingent fee agreement must be in writing and must state the method by which the fee is to be determined and costs recovered. It further indicates that at the conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement expressing the outcome of the matter, the remittance to the client, and the method by which the remittance was determined. Whether or not a plaintiff’s attorney may be entitled to recover a portion of his/her former client’s settlement in the current class action depends, in part, upon the fee agreement and perhaps the final accounting.

If the attorney took the entire fee to which he/she was entitled by the terms of the contingent fee agreement at the conclusion of the former case, then the attorney is not entitled to any of his/her former client’s class action settlement. If the contingent fee agreement was limited to a percentage of the net recovery and did not clearly entitle the attorney to a contingent fee on the PIP recovery, then the attorney is not entitled to recover any of his/her former client’s class action settlement. If the fee agreement was modified prior to the conclusion of the original matter so as not to entitle the attorney to retain a contingent fee on the PIP recovery, whether that modification was in writing or oral, then the attorney is not entitled to recover any of his/her former client’s class action settlement. Thus the only remaining question is whether the former attorney is entitled to a portion of the class action settlement in those cases in which the former attorney was entitled to a contingent fee on the PIP recovery according to the fee agreement, but did not take the fee to which he/she was entitled at the time the former matter was concluded.

The substantive answer to the latter question depends upon an analysis of the specific fee agreement and final accounting in the prior matter and the facts involved in the settlement of that matter. Legal principles of waiver, estoppel, accord and satisfaction or other defenses to the former attorney’s claim would need to be examined, and such legal analysis is outside the scope of the Rules of Professional Conduct and this committee. However, the RPCs do provide guidance to both the class action plaintiffs’ attorneys and any former attorney who chooses to make a claim for a portion of his/her former client’s class action settlement.

The current attorneys for the class action plaintiffs owe an undivided loyalty to their clients, the class action plaintiffs. In the current class action, the plaintiffs’ former attorneys’ interests are adverse to their clients’ in that they have a potential claim against the plaintiffs’ settlement proceeds which they may attempt to assert when the plaintiffs attempt to get their endorsement on the settlement checks.

Under RPC 1.4(b), a lawyer has an obligation to explain a matter to the extent reasonably necessary to permit the client to make informed decisions. Under the facts as presented in the inquiry, the attorneys representing the plaintiffs in the class action have an affirmative obligation to advise their clients of the following: (1) that their clients’ former attorneys may assert a claim against their settlement proceeds; (2) that their former attorneys’ interests are adverse to them in the current class action; (3) that there may be defenses to any claim their prior attorney may assert against their settlement proceeds; and (4) what the client should do if the client’s former attorney does assert a claim against the settlement proceeds. The latter may include advising clients of their right to request mediation of a fee dispute through the Washington State Bar Association fee dispute mediation program. The class action attorneys must examine the scope of their own representation of the clients under RPC 1.2 and their own interests to determine whether assisting clients in resolving the adverse claims of their former attorneys is required under the scope of their representation, or whether they may, or must, advise clients to seek other legal assistance if a dispute arises between the client and his/her former attorney over the settlement proceeds.

It would be a violation of the RPCs for a plaintiff’s attorney who formerly represented a client in a personal injury action that settled to assert a claim against the current class action settlement proceeds of his/her former client unless: (1) the original fee agreement entitled the attorney to retain a contingent fee on the PIP recovery; (2) the fee agreement was never modified (orally or in writing) to indicate that the attorney would not take a percentage of the PIP recovery; (3) the attorney did not take the percentage of the PIP recovery to which the fee agreement entitled him or her; and (4) the attorney believes that under the specific facts involved, his or her claim could survive such legal defenses as waiver, estoppel, accord and satisfaction or similar defenses. Under such circumstances, it would not be a violation of the RPCs for a plaintiff’s attorney to assert a claim against his or her former client’s settlement proceeds. The assertion of such a claim is tantamount to a fee dispute, and the RPCs place some restrictions on the manner in which such a claim may be asserted.

First, it is clear under RPC 1.7(b) that the plaintiff’s former attorney’s personal interests are adverse to the plaintiff’s on this issue so that the former attorney may not represent or advise the client on any dispute over the disbursement of the settlement proceeds. Because the attorney previously represented the client on the personal injury case from which this dispute arises, there is a potential that the client may mistakenly believe that the attorney is representing the client on this issue, may seek the advice of his or her former attorney, or may be unduly influenced by a simple statement by his or her former attorney that the former attorney believes he or she is entitled to a portion of the class action settlement. Therefore, if a former client approaches an attorney seeking the attorney’s endorsement of a class action settlement check and the attorney chooses to assert a claim against the settlement proceeds, the attorney must advise the client that s/he is not representing the client and that the attorney’s interests are adverse to the client’s on this issue. See RPC 4.3 and RPC 1.7(b). However, the attorney is allowed to advise the former client that s/he is asserting an interest in and a claim to a portion of the proceeds, and the attorney is not required to endorse the check. The attorney also should promptly determine whether the client is represented by counsel, and if so, should not discuss the matter directly with the client. See RPC 4.2 and 4.3. Whether or not the client is represented by counsel on this issue, the attorney should not advise the client to permanently release some or all of the settlement funds to the attorney. The attorney may not ethically provide any legal advice to the client on this issue in which s/he has a personal interest.

Under RPC 4.4, if an attorney chooses to assert an adverse claim against the class action settlement proceeds of a former client, the attorney should take prompt action to resolve the dispute with his or her client. This obligation could be satisfied by offers to promptly mediate the dispute or by taking prompt legal action to resolve the claim.

Whether or not a plaintiff’s attorney is entitled to recover a portion of a former client’s class action settlement proceeds depends upon a detailed factual and legal analysis of the fee agreement, final accounting and the communication between the attorney and his or her former client at the time of the original settlement. Such analysis is beyond the scope of the Rules of Professional Conduct Committee. However, the current class action plaintiffs’ attorneys have an ethical obligation to advise their clients of the potential adverse claim that may be asserted against their settlement proceeds by their former attorneys and what they should do if such an adverse claim is asserted. The former attorney should not provide any advice to his or her former client, should determine whether the client is represented by counsel, and should promptly act to resolve any dispute over the disbursement of the settlement proceeds.

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