Priority of Liens in Personal Injury Settlement

Motor Vehicle Accident Indem. Corp. v Bader & Yakaitis LLP et al., 2020 NY Slip Op 50798(U) Supreme Court, New York County, Index No. 450314/2019. Decided 08 July 2020

This lawsuit arose out of a motor vehicle accident where a claimant was injured by an uninsured motorist. When a settlement was reached with the tortfeasor, a dispute arose over the priority of several liens on the settlement funds.

This was a motion to determine whether defendant Bader & Yakaitis LLP, a law firm, and defendant Devina Pope were personally liable to repay plaintiff Motor Vehicle Accident Indemnification Corporation’s (MVAIC’s) statutory lien.

As an introductory matter, MVAIC is a New York quasi-governmental agency which provides insurance benefits for certain victims of uninsured motorists. As relevant to this case, a “covered person” means a person who meets the statutory requirements of eligibility for No Fault benefits (it does not mean a person who has valid insurance coverage).

Pope sustained personal injuries on March 25, 2013, as the result of an automobile collision with non-party Ben Haidara. At the time of the collision, Haidara was insured by Unique Insurance Company, which was not authorized to do business in New York (and therefore not required to provide New York PIP benefits). Haidara was therefore a “non-covered person” under Articles 51 and 52 of the Insurance Law (the No Fault statute and the MVAIC statute, respectively).

Pope, as a “covered person,” was entitled to receive no-fault benefits from plaintiff MVAIC. Pope accordingly filed for and received $12,124.03 in no-fault benefits from MVAIC for her medical treatment.

Pope retained Bader to sue Haidara for Pope’s injuries. Bader brought an action against Haidara in Supreme Court, New York County. The action settled for $40,000—without notice to MVAIC. Haidara deposited those funds in Bader’s bank account.

MVAIC contended that after issuing Pope $12,124.03 in no-fault benefits, it possessed a statutory lien under Insurance Law § 5104 (b) on “any recovery” Pope obtained in the action against Haidara. MVAIC brought this action against Bader and Pope, asserting claims for (i) breach of fiduciary and legal duty owed by Bader under Insurance Law § 5104 (b); and (ii) breach of Pope’s statutory and legal duty to repay plaintiff’s lien.

Two New York City agencies, the Office of Child Suport Services (OCSS) and the Investigation, Revenue and Enforcement Administration (IREA), also claimed liens over the settlement funds. OCSS claimed a lien of $43,228.27 for unpaid child support. IREA claimed a $1,495.60 Medicaid lien. Bader itself, as Pope’s attorney, held a charging lien for his legal fees of $15,004 over the settlement funds under Judiciary Law § 475.

MVAIC, Bader, OCSS, and IREA each contended that their lien was superior to the others. Bader interpleaded the two City agencies to resolve the various conflicting claims over the settlement funds (which it has maintained in an escrow account).

MVAIC moved for summary judgment against Bader and Pope, seeking $12,124.03 plus interest from June 12, 2018 (the date of settlement of the third- party action); and 22% in legal fees on the gross recovery under State Finance Law §18, totaling $2,667.29.

The Court held, first, that MVAIC has a statutory lien for $12,124.03 under Insurance Law §5104 (b). Under §§ 1.15 (c) (1) and (c) (4) of the Rules of Professional Conduct, Bader, as Pope’s attorney, was required to notify MVAIC of the settlement and to promptly pay MVAIC’s lien. Because Bader and Pope settled without plaintiff’s knowledge or consent, held the Court, MVAIC is entitled to judgment on liability against Bader and Pope as a matter of law.

But with regard to MVAIC’s claim of 22% in legal fees on the $12,124.03 in outstanding debt under State Finance Law § 18, the Court disagreed. This statute provides that a debtor who owes money to a state agency and fails to make payment of the debt within 90 days of receipt of notice that the debt is owed is liable for “an additional collection fee charge to cover the cost of processing, handling and collecting such debt, not to exceed twenty-two percent of the outstanding debt.” Here, MVAIC did not introduce evidence establishing that either Bader or Pope received a billing invoice or notice that might start the 90-day statutory clock running.

Then, Bader and Pope sought an order pursuant to CPLR 1006 (f) permitting Bader to deduct its charging lien from the settlement funds (leaving $24,996), and then either pay those remaining funds into court, deliver the funds to a person designated by the court, or to retain the funds to the credit of the action; discharging Bader and Pope from liability to any party; and dismissing the cross-claims against Bader and Pope.

But “for this court to grant relief under CPLR 1006 (f), Bader must be a mere stakeholder—a holder of funds who is exposed to multiple liability as the result of adverse claims on those funds.” Here, Bader is not a mere stakeholder.

Bader’s failure promptly to notify MVAIC of the settlement, repay the lien, or commence an interpleader action under CPLR 1006 exposed Bader and Pope to personal liability to MVAIC. (See Disciplinary Rule 9-102 [c] [1] [“A lawyer shall promptly notify a . . . third person of the receipt of funds, securities, or other properties in which the client or third person has an interest.”].) When an independent claim exists against the holder of the funds at issue, the holder is not a mere stakeholder entitled to relief under CPLR 1006.

Bader contended that the delay in payment of the settlement funds resulted simply from doubt over which parties’ lien should be repaid from those funds. Each competing claim, though, must rest on a reasonable basis. “Here, the relevant law should have demonstrated to Bader’s satisfaction that MVAIC’s statutory lien attached to the settlement funds after Bader’s charging lien, but before OCSS’s and IREA’s liens,” because statutory liens take precedence over personal liens as well as welfare liens.

MVAIC is an insurer holding a lien conferred by statute to secure the repayment of no-fault benefits. (See Insurance Law § 5104 (b).) “The purported conflicting liens did not provide a reasonable basis for Bader to withhold funds.”

Bader did not interplead OCSS and IREA until six months after MVAIC filed this lawsuit, over one year after the third-party settlement with Haidara. Bader and Pope were aware of MVAIC’s, OCSS’s, and IREA’s liens at the time they settled with Haidara but did nothing with the funds. Bader and Pope did not provide a reasonable basis for this delay. “This failure, and their exposure to liability, establish that Bader and Pope are not mere stakeholders entitled to relief under CPLR 1006. Bader and Pope cannot pay the settlement funds into this court, be discharged of liability, or have the cross-claims dismissed.”

As a result, MVAIC was awarded summary judgment for the amount of the lien (plus interest), but its bid for a 22% legal fee was denied. Bader was granted permission to deduct its charging lien for legal fees from the settlement funds, pay MVAIC from the remaining funds, then repay OCSS’s and IREA’s liens to the extent possible with the funds left over, before Pope may recover.

Comment

Therefore, the order of priority is: attorney’s fee, statutory liens, then welfare and child support liens. Only after these are paid does the injured claimant get the remainder.