“Attorney Liens Claimed: Is It Worth The Paper It Is Written On?”

“ATTORNEY LIEN CLAIMED”:  Is it Worth the Paper it is Written on?

By Jon D. Starr 

     It has become a somewhat common practice by attorneys representing persons involved in personal injury claims to put “Attorney Lien Claimed” on both initial correspondence to insurance companies and correspondence advising that the attorney no longer represents the personal injury claimant.  Every few months a call comes into our firm from an insurance company claims person advising that a claim has been settled, but an attorney, or sometimes even multiple attorneys, who have previously represented the claimant have indicated that they have a lien.  The claims person needs to know if the previous attorney, or attorneys, have a valid lien which may necessitate the need to put any prior attorneys’ names on the settlement check.  It is the intent of this article to provide some guidance to both attorneys and insurance claims persons regarding when a valid attorney lien exists and when it does not.
Statutory Charging Lien

    The Oklahoma statute states that a statutory charging lien can only be created after the commencement of an action or the filing of an answer containing a counterclaim.  Specifically, Okla. Stat. tit. 5, § 6 provides as follows:

     From the commencement of an action, or from the filing of an answer containing a counterclaim, the attorney who represents the party in whose behalf such pleading is filed shall, to the extent hereinafter specified, have a lien upon his client’s cause of action or counterclaim, and same shall attach to any verdict, report, decision, finding or judgment in his client’s favor; and the proceeds thereof, wherever found, shall be subject to such lien, and no settlement between the parties without the approval of the attorney shall affect or destroy such lien, provided such attorney serves notice upon the defendant or defendants, or proposed defendant or defendants, in which he shall set forth the nature of the lien he claims and the extent thereof; and said lien shall take effect from and after the service of such notice, but such notice shall not be necessary provided such attorney has filed such pleading in a court of record, and endorsed thereon his name, together with the words “Lien claimed.”

    
    Thus, the statute requires two things to create a statutory charging lien: (1) commencement of an action, or filing of a counterclaim; and (2) notice, which must be given either by noting “Lien claimed” on a pleading in a court of record, or by serving notice on any defendants or proposed defendants setting forth the nature of the lien he claims and the extent of the lien.

    Oklahoma case law gives further guidance on this issue. In Wilcox v Mid-Continent Cas. Co., an attorney had been hired by an individual injured in a motor vehicle accident to provide representation pursuant to a contingent fee agreement.  The client then discharged the attorney and refused to honor the contingent fee agreement.  The attorney alleged that he had a “statutory, legal, and/or an equitable lien against the insurance proceeds” payable by the insurance company to his former client, and brought suit against the insurance company to enforce this lien.

    The insurance company moved to dismiss the action for failure to state a claim upon which relief could be granted since there had never been any pleadings filed to enforce the client’s cause of action. The trial judge granted the Motion to Dismiss, and on appeal, the Court of Appeals affirmed. The Court relied on Republic Underwriters Insurance Company v. Duncan, for authority that a cause of action must be commenced before a statutory lien can be created.  The Court held that since it was undisputed that no pleadings had been filed on behalf of the client,  the attorney could not establish the condition precedent for a statutory lien.

    The phrase “or proposed defendant or defendants” in the statute might lead one to erroneously believe that pre-suit notification of a lien claim could be sufficient to create a lien. However, the Oklahoma Supreme Court has stated that commencement of an action is a condition precedent to the creation of a lien.  Therefore, the only construction which can be given to this language is that in the event a lawsuit has been filed against one defendant and other potential defendants exist who have not yet been named, then notice could be provided to the potential defendants after the commencement of an action against the first defendant, and by so doing a valid lien could be created since the precondition of an action being commenced arguably would be met.

    It is clear from Oklahoma case law that notice of a statutory charging lien must be given prior to a settlement before it can be perfected.   In Smith v. Westgate Oil Co., a settlement was made on January 28, 1932.  Notice of the lien was not served until February 4, 1932, subsequent to the settlement. The Court held that no lien existed when the settlement was made, so no liability arose by reason of the alleged settlement by the post settlement notice of a lien.

Common-law Possessory or Retaining Lien

    “The sole basis in law for an attorney’s lien upon a cause of action is [the charging lien found in Okla. Stat. tit. 5, § 6].”  The Oklahoma Supreme Court has, however, recognized that there are two (2) types of lien by which an attorney may secure payment for services.  Besides the statutory charging lien, there is a common-law possessory or retaining lien which may be asserted against a client’s property “when: (1) Properly chargeable fees are owing and due and (2) the lawyer is in possession of property not otherwise designated for a ‘specific purpose.’” The common law possessory or retaining lien, however, has not been adopted by statute.

    Further, the common law possessory or retaining lien cannot be actively enforced by foreclosure or sale; it merely allows retention of property until payment is made. The Oklahoma Supreme Court in State ex rel. Oklahoma Bar Association v. Cummings, however, states in a footnote that the lack of forecloseability of the common law lien does not render it ineffective.  The note reads in part as follows:

    The fact that a retaining lien cannot be actively enforced (i.e., by foreclosure) does not diminish its effectiveness to a lawyer.  The retention of client’s property that comes into the practitioner’s hands allows the lawyer to hold but not liquidate the property until the counsel fee is paid in full.  A client who values the property retained by the lawyer will doubtless attempt to redeem it from the lien.

    The Court, however, does point out that Rule 1.4(b), Rules Governing Disciplinary Proceedings, limits the availability of property for attachment of a retaining lien.  The rule prohibits a lawyer from taking money or property entrusted to him or her for a “specific purpose” and applying it to the attorney fee claim.  An example of this can be seen in State ex rel. Oklahoma Bar Association v. Meek, in which the attorney, Meek, commingled the client’s funds when she deposited a check for support alimony in her operating account rather than her attorney trust account.  The Court said that “when Meek applied those funds to payment of rent, office overhead, etc., she converted funds entrusted to her for the purpose of expunging the support alimony debt [and  this was] clear and convincing evidence that Meek violated Rule 1.4, Rules Governing Disciplinary Proceedings, by applying the money toward her claimed fee.”

Defendant May Be Estopped From Denying Lien in Event of Fraud

    One circumstance where the Oklahoma Supreme Court has allowed an attorney lien to be valid against a third party to the attorney-client contract, although not in compliance with the statute, is in the event the third party has used fraud to avoid the attorney lien being perfected.   In  National Aid Life Ins. Co. v. Nash, the attorneys were employed to collect from the defendant life insurance company, the value of two (2) life insurance policies issued by the defendant.  At controversy between the client and the life insurance company was whether the policies had been permitted to lapse and the policy holder’s desire to recover for their alleged present value.  The attorneys made a number of attempts to settle the claim without success.  The client instructed the attorneys to prepare the suit and stated that if the matter was not settled by a date certain, he would return and file the case.  The attorneys were ready to prepare the suit, but the client did not return.  In the meantime, the attorneys notified the life insurance company that they claimed a lien on Moore’s claim for reasonable fees.

    The Court found evidence that the life insurance company had made promises to the attorneys that it would not settle in their absence, and had induced them to refrain from filing suit.  The life insurance company, however, without the attorneys’ knowledge held conferences with the attorneys’ client for purposes of reaching a settlement, and fraudulently, collusively, and with total disregard to the attorneys’ rights under the contract of employment, advised the client of legal aspects of the case, and fraudulently induced the client to breach his contract with the attorneys and made a direct settlement with him.

    Under these somewhat extreme facts, the Court held that the life insurance company, by reason of its actions, was estopped from denying the plaintiffs an attorney’s lien.  The Court stated that the life insurance company promised not to settle with the client in the attorneys’ absence and that the attorneys had been induced by the life insurance company to postpone filing the suit which would have included the lien claim pursuant to the attorneys’ rights under the statute for a charging lien.

Disputes Over Amount Owed on Statutory Charging Lien Decided by Court

    Finally, in the event that the attorney does have a valid statutory charging lien and a dispute arises as to what amount the attorney will receive under the lien, “an action to enforce an attorney’s lien on proceeds from settlement of client’s cause of action is of equitable cognizance and triable to the court without a jury.” In this case, the Court should take into account evidence of the relative value of each of the attorneys services to the client and award the attorney his or her fair share (quantum meruit).

    In Martin v. Buckman, the Court of Appeals stated that: “[i]f an attorney is discharged without cause, the lawyer working on a contingent fee basis is entitled to receive for his services a proportionate share of any contingent fee fund eventually created.” The Martin Court outlined that in determining the quantum meruit entitlement of both the discharged lawyer and the latter one, the Court should consider that the discharged attorney had a contract, and that the attorney undertook the risk of investing time, services, and expenses to achieve a recovery for the client based upon a promise that the attorney would receive a fair contractual share of the recovery for the services.  

The Court stated that:

    [I]n determining such share, the court should consider: (1) The amount of the settlement or judgment the discharged attorney had a reasonable possibility of realizing had she been permitted to continue in the case; (2) the nature and extent of the services she rendered within the scope of the contingent fee contract; and (3) the nature and extent of the services rendered by the second lawyer.  The proportionalization of each attorney’s services, of course, is not to be evaluated on an hourly rate basis, but consideration should be given to the nature of the case, and the relative contribution of each attorney to the creation of the contingent fee fund with considerable emphasis on the first attorney’s contractual share.  The fact that an attorney may have worked a little slower than some, or did her own investigating, or had to fly by commercial airlines instead of in her own private aircraft, or spent more time doing legal research than some other lawyer may think is necessary, generally should not play a significant part in the determination. The main objective is to evaluate the totality of involved lawyers’ efforts in terms of their proportional contribution to the creation of the fee fund to be divided. (emphasis added)

Summary

    In the absence of fraud, only statutory charging liens must be honored by third parties to the attorney/client contract, such as defendants, proposed defendants, or their insurers.  Any settlement, absent fraud, that is entered into prior to the commencement of the lawsuit cannot have a statutory attorney lien, and notice of a lien given after a settlement is made is not effective to create a valid lien. Thus, “Attorney Lien Claimed” on correspondence prior to litigation being filed or after a settlement has been reached, is probably not worth the paper it is written on.

    In the event, a lawsuit is on file when the attorney withdraws from representation or a lawsuit has been filed and dismissed without prejudice, a search of the Court records, as well as consultation with the actual defendant, should be done by the claims personnel to determine if the attorney gave proper notice of a statutory charging lien in accordance with the statute.  If the withdrawing attorney has complied with the statutory lien, his or her best interest would probably be served by including a copy of the notice sent to the defendant or proposed defendant after the lawsuit has been commenced, or by sending a copy of the pleading on which “Lien Claimed” was noted with the letter to the insurance company. In the absence of such documentation, a search will be necessitated by the insurance company or self-insured defendant, which will only serve to delay the issuance of the settlement check, and ultimately, delay the payment to the attorney of his or her portion of the proceeds.

    Ultimately, if the client and all attorneys involved cannot determine the allocation of the settlement proceeds, the court, in a non-jury proceeding, must determine what the attorney is to receive on a quantum meruit basis.  The quantum meruit analysis must focus primarily on what contribution each attorney’s effort contributed to the ultimate recovery.