North Carolina Attorneys are on Notice that They Could Be Held Personally Liable for Failing to Reimburse the State Health Plan after Recovering Damages for an Injured Client

            When the law imposes personal liability on an attorney for actions connected with the representation of a client, it is worth noting and bringing to all of our attention.  Under North Carolina law, if a state employee is injured by a third party and recovers damages from the third party, the State Health Plan for Teachers and State Employees (the “State Health Plan”) has the right to reimbursement for the medical expenses it has covered due to the injury.  In the first North Carolina appellate case to review the statute that gives the State Health Plan this right, The State Health Plan for Teachers and State Employees v. Barnett, et al., NO. COA12-999, (NC Ct. App. May 7, 2013), the Court of Appeals upheld the trial court’s $28,000 judgment against the attorney who successfully represented a state employee in a personal injury action and followed the client’s instructions not to disperse settlement funds to the State Health Plan.  The State Health Plan sought the $28,000 from the injured state employee and the attorney, but the employee filed for bankruptcy, which stayed the proceedings against the employee.  The trial court subsequently granted summary judgment against the attorney for the full amount.  The relevant statute – N.C. Gen. Stat. § 135-45.15 (2009), recodified as N.C. Gen. Stat. § 135-48.37 as of January 1, 2012 – does not explicitly impose personal liability on attorneys.  So, we will review the pertinent provisions of the statute and reasoning driving the court’s decision.

             What the Statue Says: N.C. Gen. Stat. § 135-48.37 grants the State Health Plan (1) the right of first recovery of any damages that an injured plan member recovers from a third party and (2) a lien on the damages that an injured plan member recovers from the third party, up to 50% of the total damages, less attorney’s fees.  The statute states, in pertinent part:

(a)   The Plan shall have the right of subrogation upon all of the Plan member’s right to recover from a liable third party for payment made under the Plan, for all medical expenses, including provider, hospital, surgical, or prescription drug expenses, to the extent those payments are related to an injury caused by a liable third party….The Plan has the right to first recovery on any amounts so recovered, whether by the Plan or the Plan member, and whether recovered by litigation, arbitration, mediation, settlement, or otherwise.

….

(c)    In the event a Plan member recovers any amounts from a liable third party to which the Plan is entitled under this section, the Plan may recover the amounts directly from the Plan member. The Plan has a lien, for not more than the value of claims paid related to the liability of the third party, on any damages subsequently recovered against the liable third party.

(d)    In no event shall the Plan’s lien exceed fifty percent (50%) of the total damages recovered by the Plan member, exclusive of the Plan member’s reasonable costs of collection as determined by the Plan in the Plan’s sole discretion.

With respect to the injured plan member’s attorney, N.C. Gen. Stat. § 135-48.37(d) provides that: “Notice of the Plan’s lien or right to recovery shall be presumed when a Plan member is represented by an attorney, and the attorney shall disburse proceeds pursuant to this section.”

            The Attorney’s Duty and Liability:  N.C. Gen. Stat. § 135-48.37(c) states that the State Health Plan “may recover the amounts directly from the Plan member.” (Emphasis added). Despite the statute’s failure to explicitly impose liability on attorneys, the court reasoned that the statute’s command in § 135-48.37(d) that “the attorney shall disburse proceeds pursuant to this section” creates an affirmative duty on the attorney to disperse the client’s settlement funds to the State Health Plan and violation of the duty subjects the attorney to personal liability to satisfy the lien:

The plain language of N.C. Gen. Stat. § 135-45.15 [recodified as § 135-48.37] similarly places a duty upon an injured party’s attorney to direct settlement funds recovered by an injured State Health Plan member to plaintiff in satisfaction of its statutory lien. By establishing this duty, the statute necessarily also creates a cause of action by which the State Health Plan may enforce its lien under the statute against an attorney who violates its requirements by failing to disburse his client’s settlement proceeds in accordance with the statute.

To support its holding, the Court of Appeals looked to North Carolina Supreme Court and Court of Appeals cases imposing legal liability on attorneys for violating the duty to disperse funds under a similar statute that creates a physician’s lien on settlement funds.

            A Client’s Instructions Are Immaterial:  The court rejected the attorney’s argument that he should not be liable for satisfying the lien because he followed his client’s explicit instructions not to disperse the funds to the State Health Plan.  The court noted that the attorney “cites no authority for the proposition that an attorney may violate a statutory duty based upon his client’s instructions,” and the North Carolina State Bar Ethics Opinion the attorney relied upon may state that “[a] lawyer is generally obliged . . . to disburse settlement proceeds in accordance with his client’s instructions,” but it goes on to “clearly acknowledge[] that, regardless of a client’s instructions, an attorney cannot ignore a valid statutory lien.”

            At the end of the day, attorneys must be mindful that they have an affirmative duty to disperse a client’s settlement funds to the State Health Plan, in accordance with N.C. Gen. Stat. § 135-48.37.  This duty must be satisfied, regardless of the client’s instructions, otherwise the attorney will be legally responsible for satisfying the lien.  While the state employee’s notification of the State Health Plan’s lien is presumed under the statute if represented by an attorney, the attorney representing a state employee should take steps to ensure that a client clearly understands the duty placed upon the client and the attorney.

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