It’s well settled that a lawyer may ethically withhold judgment funds from a personal injury client to satisfy an insurer’s lien, but personally guaranteeing the client’s payment is going too far.

A “personal guarantee is considered improper financial assistance to a client,” the New Jersey Supreme Court’s Advisory Committee on Professional Ethics held in a Sept. 19 formal opinion.

An unidentified plaintiff attorney suggests that he was being asked to make a personal guarantee that his client repay his self-funded health benefits plan for costs of medical treatment advanced after an automobile accident.

The undertaking, establishing first subrogation rights on any insurance or third-party recovery, says the signing attorney “shall be required to pay to the plan the total amount of the Lien prior to disbursement or the Recovery to you or any other person or entity.”

Failure to sign by the employer or the attorney would result in denial of medical benefits, the agreement stated.

The committee, in Opinion 727, declined to dissect the language to decide whether a personal guarantee was in fact created, calling it a substantive question of law. But research “has not disclosed any decision stating that a plan’s subrogation agreement imposes on a lawyer a requirement to ‘personally guarantee’ the client’s performance or otherwise become a fiduciary to the plan.”

It’s not unusual, and not inherently unethical, for a lawyer to sign a contract agreeing to pay a lien out of judgment proceeds, so long as the lawyer doesn’t agree to do anything that would breach the duty to the client, the panel said.

“If … the agreement requires the lawyer to acknowledge the lien and satisfy it out of funds in the lawyer’s possession, and the plan does not attempt to control the direction of the litigation or otherwise interfere with the lawyer’s duties to the client, ethical issues do not arise,” it said.

However, any personal guarantee by the lawyer would violate Rule of Professional Conduct 1.8(e), which bars giving a client financial assistance.

Stephanie Mitterhoff, chairwoman-elect of the New Jersey State Bar Association’s Civil Trial Bar Section, says it’s “very common” for a plan administrator to demand that a lawyer sign a personal guarantee, whether or not one was demanded in this case.

“I guess it’s a hammer to make sure they get paid,” adds Mitterhoff, a plaintiff personal injury partner at Bramnick, Rodriguez, Mitterhoff, Grabas & Woodruff in Scotch Plains. “I’ve consistently refused to do it,” she adds.

As the committee noted, a health plan administrator may sue a lawyer under the Employee Retirement Income Security Act (ERISA), through equity principles of constructive trust, regardless of whether the lawyer signed a subrogation contract. Reimbursement can take priority over payment of legal fees.

Mitterhoff says it’s typical for an attorney’s retainer agreement to require that fees be paid off the top of any recovery, with any lien or obligation coming out of the client’s share.

ACPE Chairman Richard Badolato, a partner at Connell Foley in Roseland, declines to comment. •