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September 29, 2006

Time for Payee Notification

By Peter Morin and Walter Olson

Here are stories of three Massachusetts clients victimized by bad lawyers:

Ann, as we'll call her, fell and was seriously hurt in early 2002 on premises owned by a non-profit association. Three months later the association's insurance company settled her claim by cutting a check for $112,000 – which never reached Ann. Her lawyer pocketed it instead, while signing her name to a release for the insurer. Two years later, the lawyer indicated the claim had been settled for $20,000 and sent Ann a check for the sum supposedly owed her after fees and expenses – amounting to $12,834.82.

Brianna, after an auto accident, signed up with one lawyer to pursue an injury claim and later switched to a second lawyer. The second lawyer settled her case for $3,900 and spent the money without informing either Brianna or her first lawyer, who was legally entitled to a portion of the proceeds.

Christine, 64 at the time, was crossing a street in Woburn when a car struck her, inflicting multiple fractures. She was hospitalized and later transferred to a nursing home. An insurer wrote a check for $20,000 payable jointly to Christine, her lawyer, and the Department of Public Welfare. The lawyer deposited the check but did not disburse the proceeds to either his client or the welfare department, spending it instead.

In one sense all three of these episodes ended with some measure of justice being done: they resulted in disbarment or other removal of a lawyer from practice, according to the reports published by the Commonwealth's Office of Bar Counsel. In the mean time, however, a client's life had been disrupted, perhaps gravely and irreparably. While episodes like these are fortunately not an everyday occurrence in Massachusetts, they are not exactly rare either. In its latest annual report, the state's Client Security Board, which has the mission of compensating clients victimized by lawyer misconduct, reported that it made good on 55 claims against 24 lawyers in 2005. Just three lawyers were responsible for more than two-thirds ($1.59 million) of the total payout of $2.2 million; in the previous year, one of those lawyers had been responsible for defrauding 43 other clients out of $1.1 million.

The sorts of defalcations cited at the outset of this piece—and dozens of others like them that could have been listed—conspire to damage the reputation of the whole legal profession. And most of them were entirely and easily preventable.

The simple fix is a rule that goes by the name "payee notification". It would require insurance companies to notify a claimant when they forward a settlement check to claimant's counsel. At a single stroke, the client is made aware of the timing and size of the settlement, taking away most of the leeway a dishonest lawyer has to withhold the client's funds.

Several other states, including California, New York, and Connecticut, have already instituted payee-notification rules, and they have worked well. The Client Protection Board of the Massachusetts Supreme Judicial Court recently announced its support for such a rule. An ABA Model Rule for Payee Notification dates back to 1991. So who would oppose it?

Interesting that you should ask. According to an article in the Massachusetts Lawyers Weekly, the proposal is running into resistance from some quarters of the Massachusetts bar, principally on the ground that it would "interfere with the attorney-client relationship." In fact, the MLW itself proceeded to publish an editorial opposing the rule change. It said the proposed rule (a) was "overbroad" because it imposes on all lawyers in order to hinder theft by a few, (b) would interject the insurance company into the attorney-client relationship, and (c) would be "burdensome" to insurance companies.

Let's examine each of these objections in turn.

1) It's wrong to inconvenience the honest majority of lawyers just to thwart a dishonest minority.

You'd think this point would long since have been settled. Earlier client-protection measures, today viewed as uncontroversial, impose much more serious inconveniences on ordinary lawyers. For example, there's the requirement that lawyers establish separate client trust accounts, with serious penalties if they convert the moneys therein to their own use. Even more to the point, all fifty states have established some version of client guarantee funds, which help compensate victimized clients. These funds are supported by mandatory cash assessments levied against innocent lawyers, a far greater imposition on them than is at issue here. Moreover, the fact is that payee notification imposes an obligation not on the lawyer but on the insurer.

Most personal injury attorneys in fact appear to recognize this. Edward McIntyre, vice president of the Massachusetts Bar Association and a personal injury lawyer himself, is a former hearing officer and board member of the Massachusetts Client Security Board who has been involved in the payee notification issue for more than three years. He regards the proposed rule as an unobtrusive and prudent means of reducing the temptation available to a few weak lawyers. McIntyre has spoken with representatives from other states' client security boards about their successful experience with payee notification rules, and he has spoken with many members of the plaintiff bar, reporting that the vast majority of them express no opposition or are actively in favor of such a rule.

2) The rule "interjects the insurance company into the attorney-client relationship."

It is difficult to make sense of this objection. The insurance company, which makes this communication only as it departs the stage after a settlement, is merely providing the client with a record of information that the attorney has an obligation to disclose in the first place. (A lawyer has an ethical obligation to "keep a client reasonably informed about the status of a matter"). And the ABA, which is not shy about protecting the lawyer-client relationship from outside meddling in other contexts, expresses in the comments to its Model Rule no disquiet about any danger that notifications would somehow disrupt the relationship.

3) The rule is overly burdensome to insurers.

As implemented in other states (and likely to be implemented here), the rule would be promulgated by the state commissioner of insurance as one more of the myriad of administrative and record-keeping requirements imposed on insurers licensed to do business in the state. As part of the rulemaking process, if insurers have objections to the proposed rule, they have a forum in which to make those objections. Checks with several state commissioners who have imposed the rule indicate that the industry as a whole was more supportive than not in each instance.

In practice, McIntyre notes, the sending of notice becomes swiftly embedded into the insurer's ordinary day-to-day business practice. He likens it to that of banks that send confirmation of electronic deposits to customers, sometimes in the form of "dummy checks," so that the depositor has a paper record of the date and amount of deposit and the identity of the payor. In this instance, the claimant might receive a copy of the transmittal letter from insurer to counsel, or a "dummy" check. So while perhaps the insurance industry might appreciate the Lawyers Weekly editors' apparent solicitousness for their administrative concerns, payee notification appears not to have inflicted a great burden elsewhere.

One has to wonder what is taking a progressive state such as Massachusetts so long to adopt a measure implemented successfully elsewhere. If nothing else, collective self-interest on the part of the state’s lawyers should be a factor promoting change: attorneys’ registration fees are what support the Client Security Fund, so it can be fairly said that every lawyer already pays a price for the misconduct of the few who offend. The legal profession does not benefit from a single additional instance in which a preventable crime is committed by one of its own.

* * *

Peter Morin is a real estate, zoning and land use attorney with McDermott Quilty & Miller LLP in Boston. He also writes the WaveMaker blog. Walter Olson, the author of several books on the American litigation system, is senior fellow at the Manhattan Institute and edits Point of Law and Overlawyered.

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Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.