State of Kansas
OPINION No. 94-08; August 16, 1994
Topic: Assignment of lawyer’s accounts receivable Digest: The proposal to assign client accounts to a bank in return for a discounted loan may be permissible but amounts to self-dealing for the attorney and is not permissible under the Model Rules unless there is consent, after full disclosure, by the client, which under Kansas case law may require independent advice of counsel. We feel such an assignment, if undertaken, should be restricted to clients for whom the legal work is complete, the fee is reasonable, the attorney has a right to
collect the fee, the balance due is undisputed, and the information to be conveyed to the bank is limited to name, address and the amount due. The function of the Kansas Bar Association’s ethics advisory service is to respond to inquiries from Kansas lawyers concerning proposed conduct. The limitations on the service do not allow us to render an opinion regarding past conduct or the conduct of someone other than the inquirer. Any opinion approved for release by the Professional Ethics-Advisory Committee of the Kansas Bar Association will be limited to interpretation of the Rules of Professional Conduct, as augmented by clear judicial case law statement.
It is not within the committee’s province to conduct extensive decisional research or express an opinion as to any question of law applicable to the contemplated conduct that is the subject of an inquiry. The following constitutes only the opinion of the Committee on Ethics-Advisory Services, and is not in any way intended to be a guarantee of a particular result or a conclusion by appropriate authorities. Further, this letter constitutes the Committee’s opinion based upon the facts and information contained in correspondence above referenced. It is based upon a review of the disciplinary rules, model rules of professional responsibility and conduct, and applicable case law. This opinion is not a grant of immunity from any form of legal or disciplinary proceeding. The Kansas Bar Association opinion herein is that of a committee without official governmental status. The KBA expressly disclaims any liability in connection with the issuance of this opinion. FACTS Banker wants to purchase a law firm’s receivables. The bank would pay 90 percent of the face value of the receivables. The bank would have the right to collect all of the face amount of the receivables directly from the lawyer’s clients or ex-clients. If the banker is unable to collect after several months banker has the right of recourse to collect the money from the law firm.
Does this scenario violate DR 3-102 concerning dividing legal fees with a nonlawyer or any other Model Rule?
We state at the outset that we are puzzled why a bank would want to engage in this sort of collection, since K.S.A. 60-2310(d) disallows the benefits of wage garnishment to “persons” including corporations that take an assignment of an account and later secure a judgment thereon. DR 3-102 prevented division of legal fees with nonlawyers. The DRs were part of the older Model Code of Professional Conduct. A similar rule is found in KRPC 5.4. We choose to review this question in light of the Kansas Rules of Professional Conduct. There is a fundamental difference between a law firm pledging accounts receivable to a bank as security for a loan and the same firm assigning their accounts receivable to the bank for discounted value. In the typical loan situation the law firm (and perhaps individual partners or shareholders therein) owes the money and must repay the loan regardless whether individual clients on the receivables list pay their fees.
The bank takes the receivables as security on the loan and has no interest in the actual identity of the clients unless the firm defaults on the loan. Indeed, the bank and the borrower can determine among themselves the level of detail that goes into the “accounts receivable” designation on the loan ap. Essentially, the giving of accounts receivable to the bank simply entitles the bank to be first in line on the receivables if there is a default. Unless the assignment is irrevocable, where the bank takes the receivables subject to all attendant explosives that may lie within that minefield of receivables such as legal malpractice counterclaims, it might be inferred that the attorney is still the real party at interest in the collection and is using the bank as cover for collection purposes.
Conversation with officials at the Kansas Bankers Association, August 3, 1994.
The Kansas Supreme Court has held that interests in legal malpractice claims cannot be assigned. It seems reasonable that if for public policy reasons such interests cannot be assigned by the client to a third party, for those same public policy reasons the attorney cannot assign to a third party lender the joy of defending a counterclaim for legal malpractice. Bank IV Wichita, National Association, Et Al., V. Arn, Mullins, Unruh, Kuhn & Wilson, et al, 250 Kan. 490, 139 L.R.R.M. (BNA) 2920, 827 P.2d 758 (1992) See also Heinson v. Porter, 244 Kan. 667, 675, 772 P.2d 778 (1989), overruled on other grounds Glenn v. Fleming, 247 Kan. 296, 799 P.2d 79 (1990). The attorney may be able to assign the bank the attorney’s interest in collecting the fee if the assignment makes it clear that if an allegation of malpractice is part of a counterclaim, the assignment is voidable by the bank. This would appear to require a reimbursement clause where the money paid on that assigned case would be fully refunded with interest. This is complicated, however, by the fact that until the bank files suit on the assigned account they may not know of the pending counterclaim, in spite of repeated attempts to contact the client. Assignment, Generally. Law firms sometimes must borrow money from lending institutions for business operations.
We often do not think of lawyers negotiating bank financing as being subject to professional conduct rules. They are. n4 When granting loans, banks often want a security interest in a borrower’s accounts receivables. Often the bank promises on default to preserve confidences of who the clients are, and the nature of their legal requirements. This may not be enough. Under the Model Code, DR 4-101 required lawyers to maintain the confidences and secrets of clients, and allowed clients to instruct lawyers not to reveal information, even client identity.
In re Pendergast, 247 Kan. 322, 799 P.2d 474 (1990). Philadelphia Bar Association Opinion 91-31. Model Rule 1.6 no longer contains prohibitions on revealing mere confidences and secrets. Instead, the rule goes further, indicating a lawyer “shall not” reveal any “information relating to representation of a client” unless the client consents, or to prevent the client from committing a crime or comply with requirements of law or orders of any tribunal. Thus it seems that clients could consent to the disclosure of their name and address to the bank in order for the lawyer to use their receivables to secure a loan, but if the clients do not consent the attorney cannot reveal that information. Without the information the assignment is useless to the bank. Without disclosing his or her intentions and consulting with the attorney’s clients, an attorney cannot agree to allowing the bank to take a confidential agreement not to disclose names and addresses as a condition of the loan, the bank’s oath of secrecy notwithstanding.
KRPC 1.6(b). Philadelphia Bar Association Opinion 91-31. The rules permit disclosure of information pertaining to the representation of a client to the extent necessary for the lawyer to establish his right to the fee. When clients do not pay lawyers, lawyers may sue for the fee but generally the profession frowns on such suits because of the special relationship between lawyers and clients. The Model Rules urged lawyers “not to sue clients or former clients for nonpayment of fees except when litigation becomes absolutely necessary for the lawyer to avoid an unbearable financial burden that would result from nonpayment.”
KRPC 1.6(b)(2). ABA/BNA Lawyer’s Manual on Professional Conduct, p. 41:2001 (1993). Informed Consent. Other states opine that lawyers may sell accounts receivable but only if the clients have consented to the release of their names and debts to a third party. It is also permitted that a lawyer can assign his claim for outstanding legal fees to a third party if the transaction is a true assignment of the lawyer’s rights to payment, and the assignment is in return for consideration, not merely a paper transaction by which the lawyer hides behind another person to enforce his right to compensation.
Iowa Ethics Opinion 81-37 (1981); Massachusetts Ethics Opinion 82-3 (1982); Texas Ethics Opinion 464 (1989). Alabama Ethics Opinion 86-126 (1987) Missouri Informal Ethics opinion 5 (10/1/81). Client consent to the release of such client information is possible. However, depending on how one reads the authorities, Kansas may or may not have extraordinary disclosure requirements not found in other states. In the attorney discipline case of In re Wilkinson, our court has held when lawyers are involved in self-dealing matters with clients, a client may consent to the attorney’s use of client information for self-dealing if the safeguards of full disclosure and consent are met. The attorney is wanting to pledge the client’s fees for the attorney’s own advantage, that is, to get 90% of the value of the fee now without having to wait for full payment. The benefit of that transaction is entirely the lawyer’s. The downside for the client is the bank may be less inclined to carry the client’s installment payments without imposing significant interest and financing charges. By desiring to pledge the client’s account to secure a loan, the attorney is using information acquired in representing the client to the client’s possible disadvantage. That is not allowed under KRPC 1.6 without client consent after full disclosure.
242 Kan. 133, 744 P.2d 1214 (1987). What constitutes full disclosure and consultation? The Wilkinson court held while an attorney may disclose a conflict of interest, if the client did not have outside counsel and advice before agreeing to permit the conflict, the client is uninformed for purposes of the Model Code DR 5-101(A). In a similar case, an attorney was suspended from the practice of law for soliciting unsecured loans from criminal defense clients without allowing them even an opportunity for consulting independent counsel. One commentator has reviewed these cases and determined that Kansas has unique law on the subject requiring actual consultation with independent counsel in order to have “full disclosure.” On the other hand, the definition of consultation is “communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question. That phrase does not appear to require actual referral to independent counsel.
In re Norwood, 252 Kan. 711 (1993). Reynolds, Conflicts of Interest: Disclosure, Consent and Related Issues, 2 Georgetown J. of Legal Ethics 143, 147 (1988). KRPC, Prefatory Comments. We are dealing here with attorney self-interest. While the argument can be made that an attorney seeking to resolve any conflict of interest is engaged in the self-interest of keeping the legal work for as many clients as possible, it would appear reasonable that when engaged in self-dealing or self-interest situations, the standards should be higher. Obviously consent to the disclosure of the client information to the bank must be voluntary. Attorneys cannot coerce a client into consent by threatening to cease representing them. Nor, in our opinion, would it be permissible for the attorney who has entered into an agreement with a client for the repayment of fees over time to threaten or in any way give the impression the attorney will change or alter the terms of that agreement depending on whether the client allowed the attorney to submit the client’s account to the bank for discounted value.
2 Georgetown J. of Legal Ethics at 151 Our model rules do not require the consent after consultation be in writing. It is a good idea, however, to have such consent in writing. Waiver. If counsel has an ongoing relationship with the bank as a borrower, can the attorney request written authority from clients as they are initially counseled in the office for permission to assign their accounts receivable to the bank at some later date? We think this is permissible but it must be done with consent, after full disclosure, required in the above discussion. The client should be made aware of the public policy that by assigning the AR to the bank the firm does not (and cannot) assign defense of a malpractice lawsuit; thus such assignment does not waive the client’s right to a malpractice action against the attorney.
Further, the client should be told that only the client’s name, address and amount owed would be the information given to the bank. Information Given; Limitations On. We feel there should be restrictions on what client information is given to the bank under these facts. First, we think only the accounts of clients whose legal work is complete should be considered for assignment. If a client is incurring on-going monthly billings and not paying them, it is simpler to wait until the legal representation is concluded — and the final amount of outstanding fee is known — before assigning an amount to the bank. Second, the fee sought must be reasonable and the attorney must have a right to the fee. Third, the amount due should be undisputed (thus diluting the possibility of a legal malpractice counterclaim). Finally, the information should be limited to name, address and amount due from the client and given only with client consent. We think these restrictions on disclosure are reasonable.
KRPC 1.5. The Second Circuit has ruled that identifying the clients on the IRS form 8300I (where clients give attorneys more than $10,000 in cash for a fee) is not a disclosure of privileged information. United States v. Goldberger & Dubin PC., 935 F.2d 501 (2d Cir. 1991). The court held that even if disclosure was part of the privilege, it must bow to a federal statute, such as the tax code, that “implicitly precludes it.” Id. The Uniform Commercial Code and banking laws of Kansas regulate how accounts receivables are handled, perhaps assignments too. However, the purpose behind Form 8300I (detecting possible drug money laundering) and the banking code regulating assignments and accounts receivable are different. The banking code might not arguably be implicit in its repeal of Model Rule 1.6. Thus absent client consent the client identity information cannot be given to anyone, including the bank. The restrictions are similar to those found in Florida Opinion 90-2 (March 1, 1991) which attempted to answer the question of what information could be turned over to a credit bureau concerning delinquent client accounts. Thus regardless whether ethically the attorney can effect this assignment, the hoops through which the attorney must go to get client’s consent in a matter that is pure self-dealing and the restrictions on disclosure of the information may require advice from independent counsel.
The proposal to assign client accounts to a bank in return for a discounted loan may be permissible but amounts to self-dealing for the attorney and is not permissible under the Model Rules unless there is consent, after full disclosure, by the client, which under Kansas case law may require independent advice of counsel. We feel such an assignment, if undertaken, should be restricted to clients for whom the legal work is complete, the fee is reasonable, the attorney has a right to collect the fee, the balance due is undisputed, and the information to be conveyed to the bank is limited to name, address and the amount due.
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