Opinion 90-4
(June 1990)

You have requested that the Committee provide you with a guidance opinion in connection with the following facts: You state that you seek guidance on a question involving an attorney's responsibility in the distribution of funds where there is a subrogation claim for reimbursement of benefits paid by a union welfare fund.

The facts of the case are as follows. Your client was a passenger in a motor vehicle involved in an accident. The motor vehicle was uninsured; therefore, your client was entitled to benefits through the Pennsylvania Assigned Claims Plan and was entitled to medical benefits through her union welfare trust fund. As a prerequisite for the union providing benefits, your client was required to sign a subrogation agreement, a copy of which you enclosed with your inquiry letter. Along with other language, the agreement provided an assignment of benefits for monies to be repaid directly to the fund. Recently the Third Circuit Court of Appeals issued a decision, FMC Corporation v. Holliday 885 F.2d 79 (3d Cir. 1989), based on which your office felt that your client was not obligated to repay benefits to the union.

Since there appeared to you to be a questionable subrogation representation relationship between your office and the union (a fee was never agreed upon) you contacted the union and informed them of your position. You indicated that you could no longer represent them and that they should seek other counsel. In response to this communication with the union, you received a letter from counsel for the union, indicating that the fund continues to make a subrogation claim.

You stated that you are not clear regarding your position with respect to the apparent conflict between your client and the union welfare fund. At the time of your inquiry letter, your client had executed a general release pursuant to the settlement, and you have tendered that release to defense counsel. You are expecting to recover the settlement funds shortly. You indicated that you shall be placing the settlement funds in escrow pending receipt of this formal guidance opinion.

Simply put, the primary issue is whether you are obligated to protect the union fund's subrogation interest as represented in your client's agreement with the union, in light of the Third Circuit opinion in FMC Corporation, which predicted that Pennsylvania law would find such subrogation agreements unenforceable under Pennsylvania's Motor Vehicle Financial Responsibility. As you note in your letter, the Supreme Court has accepted review of the FMC Corporation case for its next term.

Preliminarily, your interim remedy of placing the disputed fund in escrow is viewed as the prudent course. The Comment to Rule 1.15 of the Rules of Professional Conduct provides, in relevant part, as follows:

Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly, may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

When this comment is read in conjunction with Rule 1.15(b), we are led to the conclusion (though it is not expressly compelled by the Rule itself) that placing the funds in escrow pending a determination of the union welfare fund's right to subrogation is the best course. Rule 1.15(b) provides, in relevant part:

Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive (emphasis added).

As the emphasized portion indicates, an attorney only has an obligation to turn over funds to which a third person "is entitled." Thus, since there is a legitimate question as to the union welfare fund's entitlement to the settlement proceeds, as a result of the FMC Corporation decision, you do not run afoul of Rule 1.15(b) by withholding the funds until a resolution of this question of entitlement.

The more important question, however, is whether you may simply decline to protect the union welfare fund's asserted interest, and turn the settlement proceeds over to your client. Again, it is Rule 1.15 that governs, but this question can only be answered with finality by actually making a determination as to whether or not the union welfare fund has an interest in the settlement proceeds which you are required to protect under Rule 1.15.

To that end, the Committee was in agreement that, under the FMC Corporation decision, the subrogation contract is unenforceable, and you are under no obligation to turn over any funds to the union welfare fund.

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.