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You Need to Know
How to Deal
Appropriately
with Lienholders
Sure as God made
little green
apples, if you
are recovering
money for your
clients you will
be faced with
liens. So, in a
way, needing to
know about lien
claimants is a
good thing,
because it means
you are earning
money for your
clients.
Just the same,
if you are not
managing your
dealings with
lien claimants
in an
appropriate
manner, you are
at risk at a
number of
unpleasant,
unhappy and
potentially
nasty
consequences.
Indeed, the
potential
problems range
from personal
liability for
the funds that a
lienholder is
claiming all the
way to State Bar
disciplinary
action.
If follows that knowing how to deal appropriately
with lienholders
is serious
business.
Lien and
Lienholder
Basics
Lawyers
frequently
receive and hold
funds that are
subject to third
party liens. A
"lien" is simply
a claim of a
right to funds
that might be
received in the
future. A
"lienholder" is
the holder of
that lien right.
There are all
different sorts
of liens. Some
are statutory by
nature, such as
the workers'
compensation
lien (Labor
Code section
3856), the
Medi-Cal lien
(Welfare &
Institutions
Code sections
14124.72-14124.791),
the county
medical benefits
lien (Government
Code section
23004.1) or the
hospital lien
for emergency
medical care or
services (Civil
Code sections
3045.1-3045.6).
Other liens are
contractual,
i.e., they arise
out of some
written contact
between client
and lienholder.
These include
attorney liens
and medical care
provider liens.
In some cases,
contractual
liens may be
"tri-partite,"
that is, the
parties are the
lienholder, the
client and the
attorney.
There are also
equitable liens
that come into
being when a
"court of equity
decides that the
equities require
it." See,
Farmers Ins.
Exch. v. Smith,
71 Cal.App.4th
660, 83
Cal.Rptr.2d 911
(1999). However,
since you will
rarely see this
type of lien in
practice, we
won't be
discussing it
beyond letting
you know it
exists.
Each different
type of lien
imposes a
different
obligation on
the
practitioner.
For example,
some statutory
liens require
the attorney to
provide notice
of settlement.
Such is the case
with Medi-Cal
liens, where
Welfare &
Institutions
Code section
14124.76
requires notice
to the Director
of Health
Services before
a judgment,
award or
settlement may
be satisfied.
Indeed, the
attorney's
responsibility
to the
lienholder has
often been
characterized as
a fiduciary
duty. See,
Matter of
Respondent P, 2
Cal. State Bar
Ct.Rptr. 622,
630 (Rev.Dept.
1993) (attorney
had fiduciary
duty to inform
Director of
Medi-Cal
beneficiary's
impending
settlement).
Generally
speaking, an
attorney's
knowing failure
to honor a valid
lien is cause
for discipline.
Matter of Riley,
3 Cal.State Bar
Ct.Rptr. 91,
110-112
(Rev.Dept.
1994). Failure
to promptly pay
liens when funds
were withheld
from settlement
for that purpose
can likewise
result in
discipline.
Matter of Mapps,
1 Cal. State Bar
Ct.Rptr. 1, 6-7
(Rev.Dept.
1990).
So, recognizing
and acting on
liens is an
important part
of any practice.
Recognizing
Liens
When taking a
new case, it is
fundamental that
the attorney
must identify
any potential
lien claimants
and analyze the
potential impact
any lien claim
might have upon
recovery.
Identifying
potential liens
requires
interviewing the
client to
determine what
if any benefits
might have been
paid by a
lienholder and
reviewing
medical records.
The simplest
liens to
identify in a
file are
contractual
liens, such as
medical
provider,
hospital or
attorney liens.
These will
generally appear
in written form
and should be
kept in a
separate folder
with the
client's file.
However, liens
need not appear
in your file to
effectively
attach to your
client's funds.
An attorney with
a lien, for
example, is
considered "an
equitable
assignee of the
judgment or
settlement to
the extent of
fees and costs
which are due .
. . for
services." Levin
v. Gulf Ins.
Group, 69
Cal.App.4th
1282, 1286, 82
Cal.Rptr.2d 228
(1999). Notice
of the lien is
not required for
the lien right
to be effective.
See, Cetenko v.
United Calif.
Bank, 30 Cal.3d
528, 533, 179
Cal.Rptr. 902
(1982).
Medicare liens
do not require
notice and there
is no statute of
limitations. In
fact, Medicare
can come looking
for recovery
years after a
matter has been
resolved and, if
the client has
no money, is
empowered to go
directly after
the attorney. So
it is incumbent
upon the
attorney to
determine if
Medicare has
paid any
benefits that
might give rise
to a lien and
act accordingly.
See 42 U.S.C.
sections
1395y(b)(1) &
(2), 2651-2653.
Where Medi-Cal
has paid
benefits the
attorney is
obligated to
inform the
Director of
Health Services
within thirty
days of filing a
complaint and no
settlement,
judgment or
award is
effective
without such
notice. Welfare
& Institutions
Code sections
14124.73,
14124.76.
Crime victims
assisted by the
State
Restitution Fund
are subject to a
state lien.
Again, the
attorney is
obligated to
notify the State
within thirty
days of filing.
Government Code
section
13966.01(e).
Any county
provided
hospital,
medical or
dental care
gives rise to a
county lien.
There is no
notice
requirement on
the part of the
plaintiff's
attorney.
Government Code
section 23004.1.
Workers'
compensation
benefits paid
give rise to a
lien right and
the employer is
entitled to
notice of a
third party
lawsuit. Labor
Code sections
3853, 3858,
3861.
Filing an action brought by or on behalf of a recipient of
Children's
Services Program
benefits
requires that
the attorney
give notice of
that filing to
the State
Director of
Health Services.
Health & Safety
Code section
123980.
HMOs and ERISA
health plans can
also have
subrogation
rights that
create a lien
interest in a
case. The
operative policy
or plan
documents will
indicate what
those rights
are.
Negotiating
with
Lienholders
A. The Attorney
Owes A Duty To
The Lienholder
"(A)n attorney
on notice of a
third party's
contractual
right to funds
received on
behalf of his
client disburses
those funds at
his own risk."
Kaiser Found.
Health Plan,
Inc. v. Aguiluz,
47 Cal.App.4th
302, 304, 54
Cal.Rptr.2d 665
(1996).
Once an attorney
receives notice
of a lien, he or
she is held to a
fiduciary
obligation with
respect to the
funds. Matter of
Respondent P, 2
Cal.State Bar
Ct.Rptr. 622,
632 (Rev.Dept.
1993).
Even so, an attorney receiving settlement
proceeds or
other funds is
not generally
obligated to
satisfy non-lien
client debts out
of that money.
Farmers Ins.
Exch. v. Zerin,
53 Cal.App.4th
445, 459, 61
Cal.Rptr.2d 707
(1997).
Since the
attorney owes a
dual duty to
both lienholder
and client, it
is important to
be proactive in
negotiating with
and transferring
funds to
lienholders.
B. Negotiable
Liens
It is always
best to
negotiate with a
lienholder prior
to a case
settling. You
and your client
have maximum
leverage when
payment is only
a prospect and
you can argue
persuasively
that a
lienholder's
flexibility will
be key in
getting
everyone,
including the
lienholder,
paid.
As a general
rule,
contractual
liens provide
the most
flexibility in
negotiation.
Many offices
routinely
contact all
medical care
providers
following a
settlement
asking for a
reduction in the
lien claims.
Often, such
reductions are
granted as a
matter of
course.
Whether an
attorney with a
lien claim will
be amenable to
negotiating a
lien is often a
significant
issue in
resolving a
case. The best
practice when a
prior attorney
has handled a
case is to
inquire early on
what the fee and
cost expectation
is should the
matter settle.
Sometimes there
is bad blood
between client
and former
attorney that
further
complicates the
negotiation
process. An
agreement
pre-settlement
is the optimum
course.
Workers'
compensation
liens are
generally
negotiable.
Since an
employer's own
negligence can
diminish their
lien right, it
is always worth
looking for some
employer
negligence when
working up a
case, just so
long as it does
not overwhelm
the negligence
of the
third-party
tortfeasor. The
comp carrier
lien is net of
an "equitable
share" of the
employee’s
attorney fee
liability,
effectively a
"common fund"
doctrine where
the client
receives a
benefit for
having created
the fund that
the lienholder
can draw from.
This is a
complex area
that requires
some research
and reflection.
See, Labor Code
section 3856,
3860.
Medi-Cal affords
the State a
first lien
against a damage
recovery, less
25% to defray
attorney fees,
up to one half
the settlement
proceeds.
Welfare &
Institutions
Code sections
14124.72-14124.791.
Medicare liens
can generally
also be reduced
through
negotiation to
account for
litigation costs
and for the
plaintiff's
inability to
recoup for all
losses. See,
Cockerham v.
Garvin, 768 F.2d
784, 787 (6th
Cir. 1985).
HMOs and ERISA
plans will
generally
consider
reducing their
lien claims
under certain
circumstances. A
new statute,
Civil Code
section 3040,
provides some
leverage for
plaintiff's
counsel in this
regard.
If your client
is facing
special
circumstances
that mean paying
a lien will
create undue
hardship, this
will often
affect the
flexibility of
the lienholder
when negotiating
a reduction.
C.
Non-Negotiable
Liens
Where a county
has the right of
subrogation for
the reasonable
value of any
hospital,
medical or
dental care
furnished to an
injured person,
the court is not
empowered to
reduce the lien
amount. City &
County of San
Francisco v.
Sweet, 12
Cal.4th 105,
116-117, 48
Cal.Rptr.2d 42
(1995);
Government Code
section 23004.1.
The county may
compromise,
settle or waive
all or part of
its lien claim
either for the
convenience of
the county or if
collection would
result in undue
hardship.
However, many
county
governments are
rigid in this
regard.
Children's
Services Program
liens likewise
cannot be
reduced by the
court. See,
Tapia v.
Pohlmann, 68
Cal.App.4th
1126, 1130-1134,
81 Cal.Rptr.2d
1.
Even so, if your
client is facing
a special
hardship, this
may be grounds
for the county
or State to
consider
reducing or
waiving the
lien. The
argument is
worth making.
Conclusion
Pay attention to
liens from the
beginning of
your case.
Notify
government
agencies where
required and
consider the
impact of lien
claims in your
overall
assessment of
the matter. Lien
claims may
dramatically
limit your
client's
ultimate
recovery
prospects,
something that
both attorney
and client need
to examine when
deciding whether
or not to go
forward.
Resources
The following
are excellent
sources of
practical
information for
issues
concerning liens
and lienholders:
Flahavan, et
al., California
Practice Guide —
Personal Injury
(2000 The Rutter
Group) Chapter
1; Summer, New
Ways to Cut
Health Insurer
Liens CAOC Forum
(Mar. 2001) at
26. Vapnek, et
al., California
Practice Guide —
Professional
Responsibility
(2000 The Rutter
Group) Chapter
9;
Weil, California
Practice Guide —
Civil Procedure
Before Trial
(2001 The Rutter
Group) Chapter 1.
September
2001 CAALA Las
Vegas Convention
Syllabus
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