Report Title:

Attorney Liens

Description:

Allows for attorneys' liens to prevent double federal taxation on non-physical injury settlements or awards. (SD1)

THE SENATE

S.B. NO.

2443

TWENTY-SECOND LEGISLATURE, 2004

S.D. 1

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to attorneys' liens.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that the alternative minimum tax was passed by Congress to ensure that individuals who have legitimate federal tax liabilities pay their fair share of federal taxes.

Some federal circuit courts of appeals have interpreted the alternative minimum tax to require that a person who receives a non-personal injury settlement (such as for non-physical injury) must pay federal taxes on the full amount of an award or settlement, without receiving a deduction for the attorney's fees part of the award. Because attorneys also pay taxes on their portion of a court awarded or contingency fee award, this results in double taxation on the award.

The Ninth Circuit Court of Appeals has ruled that if the court ordered or contingent attorney's fees are considered to be property of the attorney, then such fees would not be subject to double taxation and therefore only the attorney—not the client—would have to pay income tax on the fees. The client still pays taxes on the amount the client receives after deducting the amount of attorney's fees. (See Banaitis v. Commissioner of Internal Revenue, 340 F.3d 1074 (9th Cir. 2003), ruling that under Oregon law, court ordered or contingent attorney fees are considered property of the attorney and not subject to double taxation.)

The purpose of this Act is to enact an attorneys' lien statute modeled after the provisions in the Oregon statute relied upon by the Banaitis decision, to ensure that Hawaii residents who receive non-physical injury settlements or awards are not subject to double federal taxation.

SECTION 2. Chapter 605, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§605-   Attorneys' liens. (a) An attorney shall have an attorneys' lien by law upon an action, suit, or proceeding that results in an award, settlement, or judgment in the client's favor in the same action that the attorney represented the client; provided that the lien shall be limited to the fees or compensation specifically agreed upon with the client, or if there is no agreement, for the reasonable value of the services of the attorney or in the amount allowed by the court or arbitrator.

(b) Except for tax liens, prior encumbrances and prior liens of record on the real or personal property subject to the lien created under subsection (a), the lien created by subsection (a) shall be superior to all other liens. When the lien of an attorney created under subsection (a) attaches to a judgment, settlement, or decree allowing or enforcing a client's lien, the attorney's lien has the same priority as the client's lien with regard to personal or real property subject to the client's lien.

(c) The party against whom the action, suit, or proceeding was brought shall satisfy the judgment, settlement, or award with a check bearing the name of the party and the party's present and former attorneys as payees."

SECTION 3. This Act shall be liberally construed to effectuate its remedial purpose.

SECTION 4. New statutory material is underscored.

SECTION 5. This Act shall take effect upon approval, and shall apply to all attorneys' fees and compensation paid on or after its effective date.