Texas: another case for payee notification

by Walter Olson on September 6, 2008

ABA Journal: “After stealing more than $1.6 million from at least 46 clients over a six-year period, then-personal injury attorney Steven Bearman reportedly kept working as a Houston lawyer while awaiting trial after his 2006 arrest.” Among other defalcations, “Bearman settled clients’ cases without telling them”, exactly the sort of misconduct that payee notification (having insurers give notice directly to claimants of the timing and amount of settlements) is meant to stop. Texas unfortunately is not one of the dozen states that have enacted the reform (per an ABA compilation, they are California, Connecticut, Delaware, Georgia, Hawaii, Kansas, Massachusetts, Nevada, New Jersey, New York, Pennsylvania, and Rhode Island).

{ 10 comments }

1 Bill Poser 09.06.08 at 1:10 pm

I’ve never understood why it is that settlements are paid to the lawyers rather than their clients in the first place. Given all the problems this causes, including also theft of client funds, the need for lawyers to maintain multiple bank accounts, etc., I wonder if it wouldn’t be smarter to have settlement funds and other client funds handled by a kind of escrow agent, perhaps operated by the courts, perhaps by banks. A settlement would be paid to the escrow agent, to which the law firm would present its bill. Once any disputes had been settled, the escrow agent would pay the law firm and disburse funds to the client.

2 JTT 09.06.08 at 4:48 pm

One example of a lawyer in Texas stealing from his client supports an argument for yet more regulatory overlay on insurance companies and plaintiff’s attorneys? Seems a little much.

3 Bill Poser 09.06.08 at 4:51 pm

JTT,

Don’t be silly. Just because my comment is on a story about one case hardly means that it is the only case. If you’ll look at the disciplinary proceedings of any state bar association, you’ll find a bunch of them for mishandling and misappropriation of client funds.

4 Richard Souther 09.06.08 at 5:15 pm

“I wonder if it wouldn’t be smarter to have settlement funds and other client funds handled by a kind of escrow agent, perhaps operated by the courts, perhaps by banks.”

When a personal injury attorney takes on the representation of a client, the attorney is not just responsible for making sure the client gets his or her money. The attorney is usually also responsible for making sure that any outstanding medical bills get paid out of the settlement as well. In the usual circumstances, the medical providers have agreed to wait for payment in exchange for the attorney protecting their lien and making sure they get paid as well. When a case settles, an attorney will negotiate those medical bills down and pay the lowered amount before paying the client. When the client receives his recovery from the attorney, all of the medical bills have been paid and the client does not have to worry about collection agents trying to collect the bills. An escrow agent would not have any such responsibility and the client would be faced with possibly multiple collection agents demanding the full amount of the medical bills, which might exceed the recovery from the lawsuit.

Finally, who is going to pay the escrow agents? The negotiations described above are included in the contingency fee that the lawyer charges the client. It costs the client nothing for the lawyer to reduce the outstanding medical bills.

5 Bill Poser 09.06.08 at 5:34 pm

Richard Souther,

Your point is well taken, but: (a) there are plenty of lawsuits in which there are no third parties like insurance companies to be paid off; (b) in the cases where there are, why can’t the lawyer negotiate with the insurance companies exactly as under the current system and then submit the result, along with his bill, to the escrow agent, which, after determining that all parties are in agreement, will pay out to the client, the lawyer, and the third parties?

6 JTT 09.06.08 at 7:24 pm

Bill,

I’m not being silly. Misappropriation of client funds is extremely rare and doesn’t justify the imposition of the regulations being discussed.

7 VMS 09.06.08 at 8:12 pm

In almost all the cases the lawyer follows the rules, and the lawyer gets the settlement check and disburses the client’s funds to the client with a detailed accounting of expenditures in the case within 15 days. In the rarer case where the client questions an item on the accounting the lawyer is required to hold the questioned amount in escrow until the dispute is resolved. It is my practice to include the actual dollar amount of the settlement in any release that the client signs instead of the vague term “for good and valuable consideration.” Every payor that I have dealt with requires a release, and requiring the specific dollar amount will make the client aware.

A few rotten apples settle the client’s case without telling the client and keep the money or tell the client that the case settled for less then the true amount and keep the excess. From a statistical viewpoint, if one looks only at the cases that are before the Disiplinary Committee, one would think (incorrectly) that 95%+ of the lawyers are crooks.

In any event, requiring the payor to send a letter directly to the client detailing the settlement is a good idea that will cut down on this type of theft. Even though I practice in NY, until now I was unaware that this State requires such client notifcation. Even so, it seems that only a small percentage of payors actually follow this law.

8 Bob Neal 09.07.08 at 10:46 am

JTT, one has to wonder what you are afraid of?

Misappropriate of client funds happens every day. Bar disciplinary records from across the country show this to be the case. I guess those attorneys who engage is such conduct are just trying to test their clients’ assertion that it’s ‘not about the money?’

Given the number of insurance claims that are made, and the relatively few which become litigation, statistically then there is no need to sue insurance companies either, right plaintiffs’ bar? Riiiight.

9 Richard Souther 09.07.08 at 10:35 pm

Bill,

The question still remains, who is going to pay the escrow agents? Ultimately, it will be the clients. Either the escrow agents are an independent third party who charges the client a fee for ensuring that the client receives the client’s own funds, or the escrow agent will be a government entity that will be funded through a percentage of jury awards or fees on lawyers. These are the only politically palatable ways of generating the funds to cover the enormous accounting costs that are going to be incurred. The first two ways are direct fees charged to the clients in the form of a reduced settlement amount. If the third is enacted, the lawyers will just increase their contingency fees to cover the increased costs, or account for the fees as a cost of litigation. Either way, the client pays a fee to protect himself from his lawyer.

Also, if you are going to draw any statistical significance from the total number of bar disciplinary cases for misappropriation of funds, you need to compare that number to the total number of settlements/lawyers that occur. The percentage of bar disciplinary cases that are for misappropriation of funds is high precisely because the profession takes it duty to protect the clients’ interests very seriously.

-Richard Souther

10 Commentor 09.08.08 at 9:14 am

JTT and Bob Neal; you are both correct. Misappropriation of client funds happens relatively often but is still statistically quite rare. Richard Souther is absolutely correct.

Better reforms might be to either (1) require all members of the bar to carry malpractice insurance or (2) make whether or not a lawyers has such coverage public record.

Attorneys do have a legitimate interest in getting paid. In my experience, most attorneys do send settlements directly to the client unless there is a contingency agreement or unpaid bills that the attorney is concerned about the client paying.

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