Part 5: Ethical Issues at Settlement – Protecting the Injury Victim Client

Posted date in Jason D. Lazarus, J.D., LL.M., MSCC Settlement Planning

Conclusion:  Ethical and Legal Duties to the Plaintiff at Settlement

The fact that all of the issues relating to the form of the recovery touch the law drives home the fact that it is the personal injury lawyer’s obligation to at least raise these issues as part of their discussions with the disabled client.  As discussed above, there are provisions in the United States Code along with the Internal Revenue Code that impact the form of the recovery.  These provisions, if not explained to the injury victim client, can result in the inability to avail themselves of options available under the law.  If the injury victim’s lawyer does not explain these issues to them, who will?

If the disabled client is not given advice about how to structure their recovery, they could suffer quantifiable damages that can be proven in a legal malpractice case later on.  There are many experts that can be hired to make sure clients are properly advised of all their options for their recovery.  To avoid future liability, the personal injury lawyer should hire such experts to protect their clients and themselves.  If clients refuse counseling or refuse methods to protect their recovery, a good course of action is to have them sign a waiver that they have been advised of their options and understand what they are giving up.  If the personal injury practitioner gives clients all of their options regarding how to structure their recovery and have them sign a waiver if they decline the options presented to them, the lawyer has at least documented the file so if there is a subsequent legal malpractice claim they can offer evidence of the advice they gave.

Reading the Grillo decision together with the Model Rules, a lawyer must counsel clients regarding their financial options and techniques to preserve public benefits to avoid causing a potential loss to the client.  Grillo’s message to plaintiff lawyers is to employ or consult competent experts in taxation, trusts and structured settlements prior to distributing any funds to the injury victim.  If a lawyer fails to discuss the financial options a client has and then the client sues for legal malpractice, there are demonstrable damages as Grillo so aptly demonstrated.  Without knowledge of the tax law, the client can lose the power of a significant tax exemption offered for structured settlement recipients.  He or she can lose out on the opportunity for a safe investment with competitive rates of return.  Finally and potentially the most damaging, the client can lose public assistance eligibility.

The problem is that plaintiff counsel typically has a very short time period within which to counsel the client in between settlement/verdict and disbursement of the funds.  The biggest mistake a personal injury lawyer can make is triggering constructive receipt[1] by placing the settlement proceeds in his or her trust account.  One solution to the settlement time crunch is to use a qualified settlement fund (QSF).  A QSF is a temporary settlement related trust that can be created pursuant to Treasury Regulations to receive personal injury settlement proceeds.[2]  A court with jurisdiction over the matter must issue an order creating the trust and the trust must meet the definition of a trust under state law.[3] Once created, it allows for an immediate cash settlement with the defendant and removes the defendant from the process.  The QSF acts as a holding tank for the settlement proceeds and gives plaintiff counsel time to employ experts while preserving the ability to structure the settlement as well as create public benefit preservation trusts without violating the tax doctrine of constructive receipt.  A financial plan can be developed and the client’s needs addressed.

In conclusion, it is this author’s opinion that a personal injury practitioner must discuss with disabled clients the form of their personal injury recovery or hire an expert to do so.  There are many different options when it comes to the form of the financial recovery.  While there certainly is no clear cut answer as to the amount of the recovery that would trigger the counseling obligation, if a physical injury recovery could result in loss of public benefits it seems prudent for the lawyer give advice to that client about the options or have an expert do so.  Every client, no matter age, sex or level of sophistication, should be given their options regarding the form of the recovery which are available under the law.  Disabled clients especially need counseling given the likelihood they will be receiving some type of public benefits.  To prevent being exposed to a malpractice cause of action, the personal injury practitioner should understand the types of public benefits that a disabled client may be eligible for and techniques that are available to preserve those benefits.  Having this knowledge will help the lawyer identify disabled clients they may want to refer for further consultation with other experts. 

[1] Constructive receipt is a tax doctrine that says even though a taxpayer might not have actual possession of money, they have constructively received the money if it has been set aside, credited to an account or otherwise is available without limitation to the taxpayer.  Money held in a plaintiff attorney’s trust account that belongs to the personal injury victim are constructively received for tax purposes.  This concept is important because once triggered; the plaintiff forever loses the ability to structure his or her settlement and possibly could lose public benefits. 

[2]  Treas. Reg. § 1.468B-1 (2007).  There are three requirements for creation of a QSF:  (1) It is established pursuant to an order of . . . a court of law . . .; (2) It is established to resolve or satisfy one or more contested or uncontested claims . . . and that has given rise to at least one claim asserting liability (i) Under CERCLA (ii) Arising out of a tort, breach of contact, or violation of law; or (iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and (3) The fund, account, or trust is a trust under applicable state law . . .

[3]  Treas. Reg. § 1.468B-1 (2007).  The mechanical steps involved in utilizing a QSF are as follows: 1.  Settle with Defendant for cash and execute a cash release which includes the agreement that Defendant will pay the settlement proceeds into the QSF.  2.  Petition a court with jurisdiction for creation of Qualified Settlement Fund and obtain order creating QSF.  3.  Defendant writes a check for the net proceeds to the Plaintiff to the Qualified Settlement Fund. 4.  Funds remain in Qualified Settlement Fund, without violating constructive receipt doctrine, until: a.  Allocation decisions are made; b.  Liens are satisfied; c.  Special Needs Trust is created or deemed not necessary.  Amount to be structured and the plan are decided upon.  5.  QSF automatically terminates when all funds have been dispersed.