Personal Liability Of Attorney For Failing To Pay Subrogation Lien In Indiana

Indiana SubrogationIn Indiana, a subrogated carrier may be able to sue the attorney on behalf of its insured when the attorney settles a third-party tort claim without reimbursing the subrogated carrier. In Holland v. Indiana Farm Bureau Insurance, 110 N.E.3d 369 (Ind. App. 2018), Farm Bureau sued attorney Douglas Holland to recover money owed to it from a $5,000 med pay subrogation claim that arose from Holland’s representation of his client – Farm Bureau’s insured – who was injured in a vehicle collision.

The factual timeline was as follows:

September 19, 2012 – Accident

November 10, 2012 – Farm Bureau paid $5,000 in benefits.

August 28, 2014 – Farm Bureau gives Holland subrogation notice.

September 4, 2014 – Holland acknowledges subrogation lien.

October 22, 2014 – Holland requested subrogation waiver.

December 22, 2014 – Bodily injury lawsuit settled and dismissed; Holland asked client if he could hold $3,500 to repay Farm Bureau for one year.

June 9, 2015 – Farm Bureau requested damages hearing and Holland advised them to file small claims action.

December 29, 2015 – Holland returned $3,500 to client.

July 13, 2017 – Farm Bureau made formal demand for $3,333 (lien minus 1/3 fees).

September 14, 2017 – Farm Bureau filed suit against Holland for $3,333.

September 27, 2017 – Holland answered suit and filed Motion for Summary Judgment alleging that he had no legal authority to pay Farm Bureau and that the statute of limitations ran.

October 27, 2017 – Farm Bureau filed Motion for Summary Judgment alleging a lien, that Holland had a fiduciary duty to Farm Bureau, a construction trust was created, and the statute of limitations was six years and had not yet run.

Holland argued that he owed no duty to Farm Bureau and the two-year statute of limitations had run. Farm Bureau argued that it had a medical payments lien, that Holland had a fiduciary duty, that a constructive trust was created when Holland received the funds in which Farm Bureau had an interest, and that the applicable statute of limitations was six years and had not yet run.

The Court of Appeals announced that the Indiana Rules of Professional Conduct 1.15 provides that:

(d) Upon receiving funds or other property in which the client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or *373 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 and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(e) When in the course of representation, a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

Comment 4 to the Rule provides:

Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

The court ruled that Holland had a duty to retain the funds until the parties resolved their dispute over the amount of the subrogation claim. That duty, however, was not interminable – the attorney need not hold the money forever. As to the statute of limitations, the court held that the two-year statute of limitations applied because breach of a fiduciary duty is a tort claim for injury to personal property and an action for injury to personal property must be commenced within two years after the cause of action accrues. I.C. § 34-11-2-4(a). The statute of limitations begins to run when the plaintiff knew or, in the exercise of ordinary diligence, could have discovered that an injury had been sustained as a result of the tortious act of another. First Farmers Bank & Tr. Co. v. Whorley, 891 N.E.2d 604 (Ind. App. 2008). Farm Bureau acknowledges that it first became aware of Holland’s refusal to repay the lien on June 9, 2015. Accordingly, we find that the statute of limitations began to run on June 9, 2015 and expired on June 9, 2017. Farm Bureau filed its complaint against Holland on September 14, 2017 – more than three months too late. The trial court erred by granting summary judgment for Farm Bureau and by denying Holland’s motion for summary judgment when Farm Bureau’s claim was time-barred.

Although Farm Bureau ultimately lost in this case because it waited too long to pursue Holland, the case has established that an attorney can be personally liable for not paying a subrogation interest. This case has incredible ramifications for all those subrogation professionals who have been stiffed by attorneys refusing to repay subrogation liens. Many other states have ethics rules similar to Indiana’s Rules of Professional Conduct 1.15. Therefore, a similar argument could be made in many other states.

If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].

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Gary L. Wickert
Partner

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has 35 years of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.