Connecticut Ethics Opinion
State of Connecticut
Informal Opinion 99-42
September 17, 1999
Connecticut Bar Association Committee on Professional Ethics. Advance Of Funds To Client By Third Party: The requester has asked for the opinion of this committee concerning whether it would be unethical for his office to participate in or to encourage his clients to participate in a program in which a Florida corporation has offered to advance money to personal injury claimants secured by the claimant’s potential recovery in the personal injury claim. The committee has reviewed information received from both the requester and from the Florida corporation, which we shall call, for purposes of this Opinion, “XYZ, Inc.” The requester received an unsolicited mailing from XYZ, Inc. The mailing included an introductory letter which read, in toto, as follows:
How to Earn Higher Fees via Higher Settlements; As Executive Vice President and Counsel for [XYZ, Inc.], I have the opportunity of speaking with Personal Injury Attorneys around the country. The one significant fact that seems to stand out is the frequency in which their clients badger them to accept a “quickie” settlement instead of allowing sufficient time for proper negotiations. The main reason for this being that, unable to work due to accident or personal injury, they are getting further into debt and finding it harder to meet day-to-day living expenses.This is where [XYZ, Inc.] can be of substantial benefit to both you and your client. [XYZ, Inc.] is in business to advance funds against a portion of the client’s future settlement. With the wolf removed from their door, the client is more willing and able to allow you to try the case as you see best. No credit checks are required, our service is fast and confidential. Since this is not a loan, in the event there is no settlement, or insufficient settlement, the client owes us nothing. To receive a copy of the application for your client, please complete the following and fax it to me at (000-000-0000.) Please tell your secretary you are expecting this material. (bold print in original). Underneath the body of this letter is a tear-off application form requesting the name, address, phone number and fax number of the person to whom client application forms should be sent.
As part of the application process, the client is required to fill out and/or execute two forms. The first of these is called a “Client’s authorization for release of information to (XYZ, Inc.).” This document is a client authorization which directs the attorney (1) to release to XYZ, Inc. all relevant information including medical records, demands, offers, counter-offers, medical bills, liens and letters of protection in the attorney’s file related to the client’s claim and (2) to cooperate with XYZ, Inc. to determine if the client might qualify for “interim advance financial assistance against any future settlement” the client may receive. The second of these forms is the application itself, which is entitled, “Request for information.” In this document, the claimant is asked to provide background information concerning the bodily injury involved, the treating physicians, collateral source payments, present compensation being received, the date and a description of the accident or injury, the amount of funds being requested, an estimate of the value of the claim and the name, address, telephone number and fax number of the claimant’s attorney.
The cover letter forwarded with the application explains that, “should there be no settlement, or insufficient settlement, the client applicant will owe us nothing. XYZ, Inc. assumes 100 percent of the risk in advancing such funds, however, no funds can be advanced in which an offer of settlement has already been made.” The cover letter also alludes to XYZ, Inc.’s fees, which are based upon the amount of capital advanced, the type and severity of injury involved, and the length of time to trial and/or settlement. These fees, also called a “service charge”, typically run from 8 to 10 percent a month. Parenthetically, XYZ, Inc. explains that its “service charge” is not usurious because the advance is not, strictly speaking, a loan in that there is no obligation to repay the advance if the net from the settlement or judgment is insufficient or nonexistent. XYZ, Inc. reviews the client’s application upon receipt. If the application is accepted, XYZ, Inc. proffers an agreement to the client to advance a small portion of the claim’s estimated value, usually in the range of 10 percent. The terms of the written agreement require the client to agree to repay the principal balance of the advance and the monthly service charge to XYZ, Inc. from the proceeds of any settlement or judgment after first deducting the attorney’s fees and the “outstanding medical expenses.” The client’s obligation to repay XYZ, Inc. is expressly limited to the net of the claim after “first paying any and all expenses connected therewith.” The client also agrees to pay XYZ, Inc. without “demand” any reasonable attorney’s fees and all costs and other expenses incurred in collecting or compromising any indebtedness arising out of the agreement. The agreement further states that it is governed by and construed under Florida law that XYZ, Inc. shall have a general lien against any settlement proceeds recovered against the alleged tortfeasor and that the client, pursuant to the agreement, authorizes and directs his attorney to make any payments due under the contract to XYZ, Inc. The agreement concludes by assigning to XYZ, Inc. the client’s rights against the purported tortfeasor in the event that the client abandons the claim. The client is also required to sign a letter of protection which authorizes and directs his or her attorney to withhold an appropriate sum from the net of the settlement or judgment and to forward payment from that amount to XYZ, Inc. Moreover, the letter of protection grants XYZ, Inc. a lien against “any and all proceeds of any settlement, judgment or verdict” which may be paid to the client or to his or her attorney to the extent “of the amounts due or owing to (XYZ, Inc.) pursuant to my agreement with them.”
The attorney is asked to perform the following functions in regard to the transaction described above (hereinafter the “XYZ, Inc. Transaction”). After introducing the client to XYZ, Inc., and after the client has authorized him or her to do so, the attorney forwards materials related to the client’s claim to XYZ, Inc. The committee infers that the attorney provides the monetary estimate of the client’s claim as requested in the application. Thereafter, there may be further discussions between the attorney and XYZ, Inc. as a result of the client’s written direction to the attorney to cooperate “to enable (XYZ, Inc.) to determine if I might qualify for interim advance financial assistance against any future settlement I might receive.” After the application has been accepted, the attorney subscribes to the client’s signature on a letter of protection running in favor of XYZ, Inc. In this letter of protection, the attorney agrees to “observe all terms of the above, and agrees to withhold sufficient sums from any settlement, judgment or verdict to pay XYZ, Inc. in accordance with (client’s) agreement with them.” Finally, after settlement or judgment has been received and netted out, the attorney is asked to withhold the amount owed to XYZ, Inc. and forward this amount to XYZ, Inc. No fee of any kind is paid to the attorney by XYZ, Inc. As mentioned above, the requester has asked if it would be “unethical” for his office “to participate in such an arrangement or to encourage our clients to do so.” The committee’s analysis of the requester’s question begins with its evaluation of the lawyer’s role in the XYZ, Inc. Transaction.
The attorney is asked to introduce the client to XYZ, Inc. and to serve as a conduit for the passing of information from the client to XYZ, Inc. The committee infers that the attorney provides the written estimate as to the value of the client’s claim. The committee notes that the client requests the attorney to provide, if necessary, further information verbally to XYZ, Inc. The attorney signs a letter of protection at the client’s request after the application has been accepted. Pursuant to this letter of protection, the attorney agrees to observe all of the terms of that portion of the letter of protection signed by the client, which involves the granting of a lien to XYZ, Inc. against the proceeds of a settlement or judgment. The attorney further agrees to withhold sufficient sums to repay XYZ, Inc. and, at the client’s request, to forward these to XYZ, Inc. after the attorney’s fee and other expenses have been subtracted therefrom. The attorney receives no fee per se from XYZ, Inc., although the attorney’s fee is protected in the XYZ, Inc. Transaction. The first rule that must be considered is Rule 1.8(e). The rule states that, “A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except,” in certain exceptions which are not relevant to this Informal Opinion. Although the actions of the lawyer described directly above, namely introducing the client to XYZ, Inc., providing an opinion as to the value of the client’s claim to XYZ, Inc., and, at the client’s request, signing a letter of protection, withholding an appropriate sum, and making the repayment to XYZ, Inc. may facilitate the provision of financial assistance to the client, the committee does not believe that the attorney him-or herself is actually providing financial assistance to his or her client in the XYZ, Inc. Transaction.
Therefore, the attorney would not be in direct violation of Rule 1.8(e) of the Rules of Professional Conduct. However, the committee believes that before considering entering into the XYZ, Inc. Transaction, the lawyer should seriously consider the implications of the following Rules of Professional Conduct. As a threshold matter, any attorney involved in the XYZ, Inc. Transaction should consider the application of Rule 1.6(a). This rule states that, “A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated,” in other subsections which are not relevant to this Informal Opinion. Although the XYZ, Inc. Transaction requires the client to execute a document which expressly authorizes the attorney “to release to (XYZ, Inc.) all relevant information in (the attorney’s) file relating to (the attorney’s) representation for recovery of damages,” that document, in and of itself, does not satisfy the requirements of Rule 1.6(a). As stated above, Rule 1.6(a) prohibits the attorney from disclosing information relating to the representation unless the client consents after “consultation.” The Terminology section of the Rules of Professional Conduct defines “consultation” as “communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Although the committee does not opine on questions of law, it would seem that the kind of “consultation” necessary to permit the client to appreciate the significance of the matter in question should include a discussion of, among other things, whether the disclosure by the attorney to XYZ, Inc. of the information requested might constitute a waiver of the attorney-client privilege, or render discoverable otherwise undiscoverable information.
Therefore, to avoid violating Rule 1.6(a) under these circumstances, an attorney would necessarily have to have a significant conversation with the client as to all the possible negative consequences of such a disclosure. Moreover, the document which purports to secure the client’s express permission to disclose information which otherwise would be protected by Rule 1.6(a) merely authorizes the release of information contained in the attorney’s file to XYZ, Inc. It is not clear whether the second paragraph of that document, in which the client requests the attorney’s further cooperation to enable (XYZ, Inc.) to determine if the client might qualify for the advance constitutes either the express or implied consent necessary under Rule 1.6(a) to allow disclosure of this information by the attorney to XYZ, Inc. Another rule which must be considered is Rule 1.4(b). This rule states that, “A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. “As the Scope of the Rules reflects, the use of the word “shall” in Rule 1.4(b) indicates that this rule imposes an imperative, affirmative obligation concerning communication. Rules which use the word “shall” define proper conduct for purposes of professional discipline.” As noted commentators Professors Hazard and Hodes point out in their treatise, The Law of Lawyering 2d. ed. (hereinafter “Hazard and Hodes”), “Rule 1.4(b) is not merely a prophylactic rule which requires a lawyer to provide ‘information for information’s sake.’ It makes explicit what is implicit in Rule 1.2(a): if the client is to make key decisions about his legal affairs, he must be armed with sufficient knowledge for intelligent decision making. That requires communication from his lawyer.” Hazard and Hodes at 87. Failure to advise a client sufficiently concerning, for example, (1) the monthly accumulation of the XYZ, Inc. “service charge”; (2) the fact that the attorney’s fee is protected in all circumstances, while the “service charge” builds up on a monthly basis, and/or; (3) the possible negative consequences described above in the discussion of Rule 1.6(a), would create a violation of Rule 1.4(b). The XYZ, Inc. Transaction described above creates an even greater danger of violating Rule 2.1. As mentioned above, the introductory XYZ, Inc. letter appeals to the self-interest of the attorney by stating that “with the wolf removed from their door, the client is more willing and able to allow you to try the case as you see best.” Rule 2.1 requires, that, “In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.” As with Rule 1.4(b), the use of the word “shall” posits a standard for behavior, which, if violated, could subject an attorney to professional discipline.
If an attorney were to allow anything, including his or her self-interest, or the interest of a third party to interfere with the attorney’s “independent professional judgment,” the attorney would violate Rule 2.1. For example, if an attorney were to introduce his or her client to XYZ, Inc. for the purpose of slaking the client’s immediate thirst for cash to give the attorney the freedom to try the case his or her way, this portion of Rule 2.1 would be violated. As Hazard and Hodes points out, “The first sentence of Rule 2.1 is a mandatory rule of conduct. The language ‘shall exercise independent professional judgment’ is taken from Canon 5 of the Code of Professional Responsibility and also evokes the duty to avoid improper influence by others (Rule 1.7), whether those ‘others’ are third parties, or the lawyer himself.” Hazard and Hodes, at 500. The second sentence of Rule 2.1 is also implicated when the attorney discusses a potential XYZ, Inc. Transaction with his or her client. This second sentence states that, “In rendering advice, a lawyer may refer not only to law but to other considerations such as economic factors, that may be relevant to the client’s situation.” One relevant economic factor which should be brought up in the discussion of a potential XYZ, Inc. Transaction is the economic impact of the XYZ, Inc. Transaction “service charges” on the client. Another rule which should be considered by any lawyer considering participating in or encouraging his or her client to participate in the XYZ, Inc. Transaction is Rule 1.7(b). This rule states, in pertinent part, that:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to a third person, or by the lawyer’s own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation.
The Comment to Rule 1.7 reveals that the duty of loyalty an attorney owes to a client is the linchpin of Rule 1.7. As the Comment puts it, “Loyalty is an essential element to the lawyer’s relationship to a client.” As mentioned above, the initial solicitation letter sent by XYZ, Inc. to the requester states that clients across the country “badger” their attorneys to accept a “‘quickie’ settlement” instead of allowing proper time for negotiation. This solicitation letter further states that, “with the wolf removed from their door, the client is more willing and able to allow you to try the case as you see best.” The transaction, as presented by XYZ, Inc. is one which protects, in its entirety, the attorney’s fee, while lashing the client to monthly “service charges” in the amount of 8 to 10 percent. One does not need to be a mathematician to realize that, in a relatively short period of time, the client owes to XYZ, Inc. an amount equal to or greater than the principal initially advanced. The sales pitch found in this solicitation letter is that the advance made by XYZ, Inc. to the client removes financial pressure from the client, and therefore allows the attorney the freedom to try the case as the attorney desires. Reviewed in this fashion, the transaction proposed may result in a violation of Rule 1.7(b), which is excerpted above.??A lawyer who participates in the XYZ, Inc. Transaction in the manner described above, may help to create a situation in which the lawyer’s own interest in collecting a larger contingent fee materially erodes the undivided loyalty which the lawyer owes to his or her client. Although the XYZ, Inc. advance may satisfy the client’s pressing need for cash, the 8 to 10 percent monthly service charge soon becomes a millstone around the client’s neck. If a Connecticut lawyer were to encourage his or her client to enter into an XYZ, Inc. Transaction or, simply present the XYZ, Inc. materials to his or her client for the purpose of allowing the attorney the opportunity to control the decision-making process, the lawyer’s representation of his or her client would be materially limited by the lawyer’s own interest. The exceptions found in subsection (1) and (2) of Rule 1.7(b) would not rescue the attorney from a Rule 1.7(b) violation unless (1) the attorney “reasonably believes” that the representation will not be adversely affected and (2) the client were to consent after consultation. In the Terminology section of the Rules of Professional Conduct, the phrase “reasonably believes” is defined to mean that the lawyer actually believes the matter in question and that the circumstances are such that the belief would be reasonable in the eyes of a prudent and competent attorney. If the attorney can vault that hurdle, the attorney must secure the client’s consent after consultation. As mentioned above, the Terminology section defines “consultation” to denote communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.”
Further, though the committee does not issue legal opinions, it notes that any attorney who considers participating in or encouraging his or her client to participate in an XYZ, Inc. Transaction should review all potentially applicable rules, statutes and cases to determine whether the transaction is illegal or violative of public policy. For example, in light of the XYZ, Inc. Transaction’s requirement that the claimant must assign his or her rights to XYZ, Inc. if the claimant chooses not to pursue the alleged tortfeasor, a practitioner should review Dodd v. Middlesex Assurance Company, 242 Conn. 375, 382 (1997). This case describes in detail Connecticut’s proscription against the assignment of personal injury actions. By way of illustration, but not of limitation, the committee directs any practitioner considering participation in an XYZ, Inc. Transaction to the case of Rice v. Farrell, 129 Conn. 362; 28 A.2d 7 (1942). This case holds that, “the common law doctrines of champerty and maintenance as applied to civil actions have never been adopted in the state,” but that the touchstone used in evaluating a similar transaction is whether it is “against public policy.” In Rice, a third party offered to finance a lawsuit to be instituted by a plaintiff to recover certain real property, with the following understanding: If the suit were unsuccessful, the plaintiff would not need to reimburse the third party; but if the suit were successful, the third party would be able to buy the property from the plaintiff for fair market value minus the expenses of the litigation. In this case, the Supreme Court stated that, “while a stranger to litigation may properly assist a poor person to assert his rights, such assistance is not permissible when the stranger is to share in the proceeds of the action the agreement before us is against public policy and therefore, as between the parties to it, unenforceable.” See also Robertson v. Town of Stonington, 1999 WL 99214 (Conn. Super February 17, 1999.) Similarly, before a practitioner recommends that his or her client enter into the XYZ, Inc. Transaction, the practitioner should conduct his or her own analysis of, among other issues, (1) whether the XYZ, Inc. Transaction complies with state and federal laws relating to truth-in-lending, (2) whether the XYZ, Inc. Transaction complies with state and federal laws relating to usury, (3) which choice of law rules would apply to the XYZ, Inc. Transaction, and (4) all aspects of the XYZ, Inc.
Transaction under applicable contract law. Before an attorney advises a client whether or not to participate in a program such as the one proposed by XYZ, Inc., very careful consideration should be given to the problems discussed above. In considering whether to participate and/or encourage his or her client to participate in the XYZ, Inc. Transaction, an attorney should also bear in mind that an attorney-client relationship gives rise to a fiduciary relationship. A fiduciary relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other. Dunham v. Dunham, 204 Conn. 303, 319-322 (1987).
Connecticut Bar Association
INTEREST CHARGES ON LITIGATION EXPENSES ADVANCED BY PLAINTIFF’S COUNSEL
Informal Opinion Number 02-03
February 27, 2002
We have been asked to express an opinion to the following question:
May a lawyer charge a personal injury client interest on costs and expenses of litigation advanced if the interest rate is reasonable and is disclosed to the client and approved by the client in the contingent fee agreement?
Rule 1.5(a) of the Connecticut Rules of Professional Conduct requires that a lawyer’s fee shall be reasonable, and lists factors to be considered in determining the reasonableness of a fee. In Informal Opinion 94-24 this Committee previously concluded that: “the factors listed relate to the reasonableness of the lawyer’s professional efforts, and do not expressly include or refer either to the lawyer’s general overhead or to out-of-pocket expenses incurred on behalf of a client. Nonetheless, we believe the overriding limitation of reasonableness in Rule 1.5 also applies to the manner of charging for administrative expenses and disbursements.” There is a further statutory limitation on what may be appropriately charged by an attorney in a personal injury action. Connecticut General Statute § 52-251c(a) provides that: “In any claim or civil action to recover damages resulting from personal injury, wrongful death or damage to property occurring on or after October 1, 1987, the attorney and the claimant may provide by contract, which contract shall comply with all applicable provisions of the Rules of Professional Conduct governing attorneys adopted by the judges of the superior court, that the fee for the attorney shall be paid contingent upon, and as a percentage of: (i) damages awarded and received by the claimant; or (ii) settlement amount pursuant to a settlement agreement.” Connecticut General Statute § 52-251c(b) further provides that: “In any such contingency fee arrangement such fee shall be the exclusive method for payment of the attorney by the claimant ….” However, it is clarified in Conn. Gen .Stat. § 52-251c(c) that the term “fee” shall not include disbursements or costs incurred in connection with the prosecution or settlement of the claim or civil action, other than ordinary office overhead and expense.”Informal Opinions 94-13 and 99-26 addressed the propriety of a lawyer or law firm charging a client interest on accounts receivable for legal services that are more than thirty days past due. In Informal Opinion 94-13, this committee opined that “… an attorney may charge interest on overdue accounts provided notice is given and the client agrees.” In Informal Opinion 99-26 the issue was further clarified to reflect that interest on delinquent accounts may be charged, provided that “full disclosure of this factor is made to the client prior to taking on the new matter, and the client agrees ….”*2 Rule 1.8, which previously prohibited making the repayment of court costs and litigation expenses advanced by a lawyer on behalf of a personal injury client contingent on the outcome of the matter, has been amended to allow such expense repayments to be contingent. As a result, some lawyers have adopted the practice of making the repayment of such costs and expenses contingent upon a successful outcome. Other lawyers continue to follow the previous model of requiring the client to be liable for the repayment, of such costs or expenses, irrespective of the outcome. Under Rule 1.5(c) a contingent fee agreement “shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages of the recovery that shall accrue to the lawyer as a fee in the event of settlement, trial or appeal, whether and to what extent the client will be responsible for any court costs and expenses of litigation, and whether such expenses are to be deducted before or after the contingent fee is calculated.”
Accordingly, we are of the opinion that a lawyer may charge a personal injury client interest on costs and expenses of litigation that are advanced by the lawyer provided the following conditions have been satisfied: The written contingent fee agreement clearly indicates who is ultimately responsible for the payment of costs and expenses advanced by the lawyer, and whether the repayment of such costs and expenses is contingent on the outcome of the subject litigation. The written contingent fee agreement states the conditions under which such costs and expenses will be advanced. The written contingent fee agreement states the extent to which interest will be charged on such advances. The written contingent fee agreement states the applicable interest rate terms. The written contingent fee agreement shall otherwise comply with the requirements set forth in Conn. Gen. Stat. § 52-251c and Rule 1.5. We have not addressed the issue of what rate of interest may appropriately be charged under these circumstances and note, as set forth in Informal Opinion 99-26, that the appropriate terms under which interest may be imposed “… are governed by rules of reason and fairness, the guidelines set forth in Rule 1.5 and the comments thereto, and the law applicable in the jurisdiction governing the contractual relationship of which the conditions under which interest may be charged are a part.” We also do not express an opinion as to whether any state or federal statutes relating to interest charges on advanced disbursements will be implicated. The Committee on Professional Ethics
Wesley W. Horton Chair CT Eth. Op. 02-03, 2002 WL 570600 (Conn.Bar.Assn.)
