What is a Disbursement Agreement?
A disbursement agreement is a binding contract meant to facilitate the distribution of assets in a business transaction. It outlines when and how the receipt of payment will occur.
These agreements are typically used when a business transaction has multiple payments. For instance, a buyer of a piece of property might make an initial deposit on it, but not pay the full amount right away. A disbursement agreement could be utilized in such a situation to establish clear conditions for when the full payment must be made and the deposit retainer will be returned to the seller.
Disbursement agreements come into play in many different types of business deals. For example , it is common for an attorney to ask a client to deposit their fee into a trust account upon signing a retainer agreement, and then only withdraw portions of that retainer as necessary, with an accounting of how much is left in the account. The retainer agreement would outline the condition under which money is disbursed from the account, so long as the attorney is diligent in keeping accurate accounting of the funds that were withdrawn.
Because these agreements facilitate conditional transactions, the party receiving funds will have some recourse and legal protection if the other party fails to meet their obligations under the agreement.
Essential Elements of a Disbursement Agreement
A well-crafted disbursement agreement contains several essential components. These clauses outline the specifics related to the agreement between the involved parties. A brief overview of each component is listed below:
- Parties. All parties involved in the underlying matter and the disbursement agreement are identified. This typically includes the names and business addresses for all clients and lawyers involved in the case.
- Conditions for Disbursement. The payment terms for every party involved are identified based on common court dockets and defined as "billable" and "out of pocket expenses." Legal fees are not subject to disbursement and will be issued in a different form of payment (i.e., check or wire). The disbursement agreement defines billable expenses, which must be paid within 30 days of the underlying case resolution to the appropriate party(s). Any remaining funds are classified as settlement proceeds, which are generally sent to the client/claimant as specified in the agreement.
- Payment Terms. The agreement defines a payment deadline by which disbursement must be made. The terms also clarifies how disbursement will be issued; the payment will be sent directly to the law office that filed the disbursement motion/correspondence with the court.
- Notices. Language clarifying the procedure by which the involved parties will receive notice of a disbursement agreement. This clause generally specifies the date by which the parties will receive notice of their disbursement agreement and what parties or businesses are required to issue a notice in the event of a disbursement.
- Disbursement Fee. This cost may be an all-inclusive disbursement fee, or broken down into its individual costs (i.e., filing fees, service fees, agency costs, etc.).
- Disbursement Allocations. This clause provides in-depth dollar amounts for the settlement disbursement payment and a quick summary of how these costs relate to the new payments (e.g., hospital charges, attorney fees, medical bills, etc.).
- Release of Liability. This clause is designed to protect all lawyers and law firms involved in a case from liability associated with any aspect of the disbursement payment.
- Indemnity Agreement. All parties involved will be obligated to indemnify the others for any damages they suffer as a result of their involvement in the case.
- Governing Law. This clause may specify the applicable state laws related to the disbursement agreement.
While your disbursement agreement may not include every one of these components, it should nevertheless contain basic terms for complete transparency between all involved parties.
How to Draft a Disbursement Agreement
Disbursement agreements will vary depending on their purpose. For purposes of this article, when I say disbursement agreement, I mean an agreement that helps you track the disbursement of settlement proceeds and outlines certain terms relating to the disbursement of settlement proceeds. Below are the basic steps involved in creating a disbursement agreement. 1) Whether you are drafting this yourself or working with counsel, it is important to know your state’s requirements for a valid settlement agreement or settlement release. For example, in Michigan a valid release for a minor child requires the signatures of the parents and that the document be filed with the court. Most states have some form of settled rules regarding settlements with minors. Regardless of what you and opposing counsel may have agreed upon, in these situations the court must be involved. 2) Create a checklist for yourself of all of the variables required under your state’s rules for disbursement agreements. For example, Michigan rules require attorney name, address, and phone number. Illinois rules require generally that all parties must sign any release. 3) Figure out the settlement proceeds – settlement amount and minus any liens, amounts owed to the particular medical providers who are claiming an interest in the settlement proceeds or judgments by the state for financial assistance paid on behalf of the claimant. 4) If you are working with other counsel, finalize the disbursement agreement with opposing counsel or opposing party. Make sure you contact lienholders (i.e. health care providers, health insurance, Medicare, Medicaid, ERISA plans, state Medicaid etc.) well before the settlement deadline to make sure you know what their respective positions are concerning their interest in the settlement proceeds. Agreeing to the final disbursement agreement can be much more complicated than you might think, even outside the context of the rules and regulations applying to settlements with minors. Considering all of the potential variables that may arise with a settlement agreement, including potential lien issues is very important to your client’s bottom line and can affect whether your client actually gets paid and if it is worth it for your client to settle. 5) Once all parties agree to the disbursement agreement, it is time for all parties to get it signed and for you to start thinking further about the process for disbursing the settlement proceeds at or near both the date of the settlement check being received and the date you will be handing them out.
Legal Aspects of Disbursement Agreements
One of the legal implications of disbursing agreements is the necessity to have the necessary authority to enter into this agreement. That may sound simple enough. However, take the example of an insurance company. The insurance company does not always issue a policy in the name of the person you are not representing. Sometimes, the policy comes in the form of an entity, in the name of the dealership, or in the name of the defendant individually in some instances. In that regard, you cannot enter an agreement without the authority of the owner of that policy, and that is usually the insurance company. Insurance companies often have issue-specific personnel assigned, and if you fail to obtain the authority of that person, your disbursement agreement may be void and unenforceable at worst, or unenforceable at the value you negotiated. You need to make sure that you have someone with authority on behalf of the responsible party to execute a disbursement agreement.
In addition, if you have multiple defendants and multiple insurance companies, you cannot push to be paid where you have not gotten the authority of the policyholder. As a result, it is important that you have each party execute no-funds agreements to bind them so that no one is left holding the bag when disbursements are to be made. This includes all defendants and all insurance companies, weather primary or excess. In addition, you should check with the clerk of court to make certain that no liens are out on your settlement proceeds. For example, in the nursing home realm, there are certain agencies who may claim that they have first dibs on the money recovered in a case, so it is important that you confirm that you can do the disbursement prior to doing the disbursement. You should also understand that where a lawsuit has been filed, you may have to file a motion for approval of the disbursements. The court will require an explanation as to why disbursements are being made, including the history of the case.
Common Issues and Resolutions
Disbursement agreements require careful execution for them to be successful. One of the most common challenges is often the inability of the parties to agree on the selected accountant. Some clients are attracted to disbursement agreements because they can minimize disputes over accounting of funds post-closing. However, if the parties cannot agree on an accountant, this time-saving mechanism can become a deal killer.
One way to address this problem is to stipulate a process for choosing an accountant in the disbursement agreement. For example, the parties can agree that if they cannot select an accountant within a certain amount of days, one or both parties will appoint an accountant to serve in this role. Sometimes, a party believes the selected accountant has a conflict of interest or will not be objective in acting as the accountant. If the accountant selected is an employee or agent of one party, that party will often try to negotiate to have its disbursement accountant do the calculation. But this problem can be solved by requiring that the accountant to be neutral and objective and to disclose to both parties any potential conflicts of interest. If the parties cannot agree on whether an accountant meets that qualification, they can submit the dispute to arbitration. Alternatively, the parties can provide for the selection of an objective and neutral accountant who is otherwise acceptable to the parties. If the parties cannot agree on the identity of the accountant, they can stipulate to a method to resolve the issue, such as submitting the dispute to the American Arbitration Association.
One challenge parties may encounter with a disbursement agreement is a dispute over whether the various terms of the disbursement are being followed. For example, if the parties have agreed to a minimum cash balance requirement immediately before a closing , a dispute may arise as to whether the parties failed to comply with that requirement. In this situation, a party can typically address the issue through the process already set in place by the disbursement agreement, including obtaining an opinion from an accountant where applicable. Sometimes, however, parties feel that those processes have not resolved the issue if, for instance, they believe that the accountant acted inappropriately. While parties cannot change a disbursement agreement unilaterally, they can opt to amend it. Parties may also be able to informally resolve the issue and then memorialize the understanding in an amendment to the disbursement agreement. Whatever course they choose, the parties need to make sure that the amendment does not require consent from third parties so as to render the amendment ineffective.
Similarly, issues may arise between the parties if one of the designated milestones under the disbursement agreement is missed. In this case, the disbursement agreement should provide a process to protect the parties. For instance, if the books and records cannot be made available by a specified deadline because of unforeseen circumstances, the disbursement agreement may provide the option to choose a remedy such as obtaining a court order to compel compliance with the agreement. Where the parties have agreed to allow for a late delivery or other type of flexibility in an effort to mitigate the risk of triggering a particular remedy, parties should follow the processes specified under the agreement to change the timing or other relevant requirements. Where one party takes a position contrary to what was agreed to under the disbursement agreement, the parties should attempt to resolve the issue via the processes designated in the agreement, including appeal to an accountant or neutral accountant where applicable.
Case Examples of Successful Disbursement Agreements
Numerous cases have established significant civil and criminal rulings, but those cases are only significant if the lawyers who first handled them used disbursement agreements. Although our firm has not handled every case, we’ve been involved in many that establish the effectiveness of disbursement agreements. Consider some examples of effective disbursement agreements.
Effective Disbursement Agreement in a Felony Arson Case
In State v. Wells (Wash. App. 1986), a fire destroyed a home owned by the defendant. After the defendant was convicted of second degree arson, the defendant challenged the trial court order assessing attorney fees. On appeal, the appellate court upheld the defendant’s conviction and upheld the imposition of attorney fees. The decision was based upon sufficient evidence of a disbursement agreement signed by the defendant giving his attorney permission to withdraw more than $400,000 from the defendant’s account to pay his attorney fees. The appellant court found the attorney had provided both an oral and written disclosure of the amount and purpose of the fee.
Effective Disbursement Agreement in a Medical Malpractice Case
In Crump v. State ex rel. Dept. of HHS (2004), a physician attempted to avoid his obligation to reimburse the State for Medicaid payments made on his behalf in a medical malpractice action by contesting the trial court’s imposition of attorney fees pursuant to a contingent fee agreement. The appellate court found that the medical malpractice statutes and DSHS rules require an attorney to record the amount and purpose of disbursements made. When disbursements are made without an exemption, the attorney must obtain prior approval by the Department. The appellate court found the attorney failed to comply with this requirement. The defendant argued that the Department’s rule violates the separate contract doctrine. The defendant contended that since contrary statute directs the result in a medical malpractice case, the Department’s rule directly contravenes legislative intent. The trial court found that there was no such express legislative intent. The appellate court disagreed and reversed the imposition of attorney fees. Unfortunately, the appellate court did not address the question of whether the Department could have required its attorneys to submit for approval before disbursement of attorney fees.
Effective Disbursement Agreements in Class Action Cases
In In Re BankAmerica Corp Securities Litig. (8th Cir. 2006), the Eighth Circuit Court of Appeals overturned Attorney General McGraw’s ruling that disbursed $50 million in attorney fees and costs for the Bank of America class action with no disbursement agreement. The court noted that West Virginia law requires attorneys to record the date, amount and purpose of each disbursement made, but does not require pre-approval of disbursements. The circuit court’s reversal of the Attorney General’s ruling removed a substantial roadblock in the appeal of the Bank of America case. This case confirms that disbursement agreements are effective in protecting against excessive attorney fees.
Successful Claims for Breach of Fiduciary Duty
In 1995, a woman hired me to represent her in an undetermined value case. I explained the possible attorney fees due ($1,000 per hour), the expenses that I would be required to advance and the fact that the contract required her to reimburse me for the entire bill at the conclusion of the case. She agreed. Three weeks later, I received a letter stating that my client was going to file a claim for damages against me, my firm and the insurance company that wrote my errors and omissions policy. I argued that my client had ample opportunity to question my fees. She chose not to do so and could not feign ignorance of the fee agreement. Consequently, she was likely barred by the doctrine of laches from claiming she had no idea what my fees were and was all the time willing to pay me for our services. My client’s rebuttal was that I had violated the applicable disbursement agreement and confidentiality agreement, which set $50,000 in attorney fees and expenses as the maximum recovery from the liable party until I received approval from the court to receive more. No combination of attorney fees and expenses could approach $50,000. My client argued that I had breached the disbursement agreement because I had released a lien and settled the case without first obtaining the court’s approval of my fees and the legal work performed on the case.
Future Developments in Disbursement Agreements
As the legal landscape continues to evolve, it is likely that we will see an expansion in the use of disbursement agreements in areas beyond class and mass actions. In particular, the growing trend of cases against larger corporate defendants by the State Attorneys General (as seen, for example, in the recent BRG litigation concerning the fracture-related issues with the DePuy Pinnacle hip implants) should lead to an increase in the number of consulting lawyers retained to assist in those matters, which may lead to the need for more disbursement agreements.
In addition to that development, technological advances in areas such as artificial intelligence and computerized document review will certainly facilitate the collection and tracking of expenses in multiple-party matters, which likewise should foster broader use of disbursement agreements . Finally, the recent explosion of "alternative fee arrangements" could encourage more use of disbursement agreements to paragraph rate and "budget" plan expenses in connection with such agreements. In this regard, substantial concerns have been raised in the legal profession about the impact of such arrangements on the administrative and billing burdens on law firms; disbursement agreements may be one way to alleviate some of those burdens, while, at the same time, addressing the clients’ concerns regarding the need for transparency in the expenses charged by law firms, and help to avoid the "sticker shock" that can often accompany final bills under alternative fee agreements.