§ 5.1 Non-Statutory Consensual Liens

• Jurisdiction: Arizona

§ 5.1 - Non-Statutory Consensual Liens

Non-statutory "consensual liens," sometimes called "letters of protection," are "liens by an agreement," and because agreements themselves can vary in infinite ways, these types of third-party interests can vary as well. See In re Vaughan, 311 B.R. 573, 583 (B.A.P. 10th Cir. 2004) (noting "[a] security interest, or consensual lien, is a 'lien created by an agreement.'"). In the personal injury context, consensual liens may provide emergency services, goods, or funds to injured persons who lack these basic resources.

a. The Scope of Non-Statutory Consensual Liens

Consensual liens can sometimes take the form of a "lien against proceeds," but other times these liens take on the characteristics of an "assignment of rights" or create "agency relationships" where attorneys are acting as escrow or collection agents for a third party. Sometimes consensual liens can be contingent upon the favorable outcome of an injured person's claim, and other times they are not contingent but merely secure payment or repayment. Perhaps the most familiar form of "consensual lien" for personal injury attorneys, however, will be their own contingency fee retainer agreements. See Harleysville Mut. Ins. Co. v. Lea, 2 Ariz. App. 538, 543, 410 P.2d 495, 500 (App. 1966).

But regardless of the form, "consensual liens" are typically in favor of third parties who provide services, goods, or funds to a client with the anticipation they will receive payment or repayment from proceeds obtained at the conclusion of an injured person's case. Absent a statutory or regulatory requirement for them to be in writing—i.e., they are purely contractual—they need not be written. Notwithstanding this and as a practical matter, they are typically on boilerplate forms or agreements prepared by the third party and signed by the injured person and their attorney.

b. Limitations on Non-Statutory Consensual Liens

Since consensual liens are contracts, limitations on such liens relate to the nature of the contractual terms. Although we make no attempt to exhaust the potential limitations, we explore some reoccurring issues below.

i. Terms

First and foremost, the express terms of a consensual lien should be carefully evaluated in light of traditional contractual analysis. What was the intent of the parties at the time the lien agreement was made? See Forbes v. Arizona-Parral Mining Co., 15 Ariz. 30, 32, 135 P. 715, 716 (1913) (noting "the first and main rule of construction is that the intent of the parties as expressed in the words they have used must govern."). Are the terms clear and unambiguous? Cf. Hill v. Hill, 37 Ariz. 406, 410, 294 P. 831, 833 (1931) (holding that, where terms are ambiguous, "parol evidence" may be used to determine meaning).

Even where the terms are clear and unambiguous, do the terms reflect the parties' reasonable expectations? That is, do the terms "undercut the dickered deal," which constitutes the dominant and real expression of the agreement? See, e.g., Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 390, 682 P.2d 388, 395 (1984).

Is the agreement a product of fraud, duress, or undue influence? Are the terms a mistake or unconscionable? Consensual liens, for example, may be presented to and signed unwittingly by injured persons who have adequate health insurance so medical providers or medical factoring companies can obtain higher levels of reimbursement than is...