LETTERS OF PROTECTION

 

A “Letter of Protection” is a lawyer’s representation that his client has agreed that an amount, which is owed to a creditor by the client, will be paid to the creditor by the lawyer from the client’s share of a proposed monetary recovery.

 

Commonly Used For Medical Providers

 

This letter is commonly given by lawyers on behalf of their clients to medical care providers. Personal injury lawsuits and workman’s compensation claims are types of lawsuits in which letters of protection are often used. When a client has suffered a physical injury, he may not have sufficient money to pay for his medical care. Doctors, hospitals, and others who provide the medical care are promised payment from the client’s monetary recovery. They are more willing to render the medical care if they have some assurance from the lawyer that they will be paid before the money is distributed to the client. However, letters of protection can be given to any creditor of the client in the hope that the creditor will forego payment, accept the letter of credit and rely upon the possible recovery for payment.

 

Not Much Protection

 

The problem is that such a letter is not much protection for the manager. If and when the resident recovers any money in his lawsuit, he has instructed his lawyers to pay his manager an amount owed from the resident’s share of the recovery. The key words are “if and when” a recovery is made. If the resident loses his lawsuit or his workman’s compensation claim, than there is neither recovery for the resident nor payment to anyone. If a recovery is made, when it will be made is another question. The resident’s legal action or claim could take months or years.

 

What is Covered by the Letter?

 

It is important to understand how much a letter of protection is actually “protecting”. The resident may tell the manager that the letter will cover the past and future rent. Whatever the resident is saying, it’s the wording of the letter of protection that is important. Some letters are promising payment only of the amount owed at the time the letter is received, not future amounts owed.

 

No Guarantee of Full Payment

 

A resident’s recovery doesn’t guarantee full payment to his letter of protection creditors. The attorney fees and costs of the lawsuit are first deducted from the client’s recovery. It’s possible that after payment to the letter of protection creditors, the balance to the client will be little or nothing. Despite having given letters of protection, a lawyer is unlikely to make distribution from the client’s recovery without the client’s final consent. A client, who is receiving nothing or very little from his recovery, may not be disposed to give final consent. The lawyer might then ask the creditors to agree to accept only a percent of their amount owed, so that the client can receive more. If an agreement cannot be reached that induces the client to consent to distribution, the lawyer is likely to deposit the client’s recovery into court and let the court decide who gets what.

 

Significant Risks

After reading this, I am sure you understand why our law firm advises its clients that reliance on letters of protection poses significant risks. Managers invest in rental units, not in lawsuit recoveries. Foregoing collecting rent to rely on a letter of protection is a voluntary act by the manager. The manager is not required to do this. If the manager is unwilling to rely on a letter of protection, the manager should write a letter to the resident, with a copy to the law firm, indicating that the manager will not accept and rely upon the letter of protection. The rent must be paid timely and in full.