State of Michigan
October 7, 2005
The Michigan Rules of Professional Conduct do not preclude a lawyer from financing litigation costs through a loan from a third-party lending institution provided the lawyer discloses to the client the terms and conditions of the loan and the client consents in a written contingent fee agreement, upon conclusion the client receives a written statement reflecting interest advanced by the lawyer and charged to the client as an expense in the matter, and the lawyer, but not the client, is obligor on the loan.
References: MRPC 1.8(e), RI-168, MRPC 5.4(c) and 1.6; ABA Formal Opinion 93-379
A law firm represents a private financial services institution (the “Company”) engaged in the business of lending money to law firms for the primary purpose of financing the expenses of contingency fee lawsuits. In a typical financing transaction by the Company, the Company would advance amounts upon funding requests by the law firm to cover court costs and other litigation expenses incurred in the course of a contingency fee matter. The law firm would be obligated to pay interest on the loan monthly and to pay the principal amount of the loan at the time of settlement or judgment, or at the time the law firm ceases to represent the client in the matter. Client funds, whether in the law firm’s possession or anticipated, would not be used as collateral for the financing. The Company would not direct or regulate the law firm’s professional judgment in handling a client’s case. The loan agreement between the law firm and the Company would provide that the Company has a right to receive information regarding a particular client’s case to the extent permitted under ethical rules governing the law firm’s conduct.
The proposed financing arrangement is permissible pursuant to MRPC 1.8(e) that does not prohibit a lawyer from borrowing funds to advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client.
In prior opinions, this Committee has approved financing arrangements in which a client was responsible for the payment of interest on fees and costs, provided the client agreed to the arrangement in advance. See RI-168.
Consistent with an attorney’s obligations to preserve client confidences under MRPC 1.6, the loan agreement between the law firm and the Company would provide that the Company has a right to receive information regarding a particular client’s case to the extent permitted under ethical rules governing the law firm’s conduct. The law firm must not reveal a confidence or secret of the client to the lending institution.
Many other state counterparts to this Committee have considered the professional ethics issues arising under financing arrangements similar to those in this opinion. These advisory opinions have analyzed the proposed financing arrangement in light of their respective rules’ prohibitions against fee-splitting arrangements and the lawyer’s “independent judgment”. See MRPC 5.4(c). The various State Bar ethics opinions have concluded that litigation-financing arrangements similar to those described above are permissible, as long as it is the lawyer, and not the client, who is the obligor on the loan, and there is full disclosure to the client.
See Utah Op. 02-01 (2002), Florida Op. 86-2 (1986); Georgia Op. 92-1 (1992); Illinois Op 94-06 (1994); Missouri Op. 970066 (Undated); N.J. Op. 603 (197); Ohio Op.2001-3 (2001); Texas Op. 465 (1991); Tennessee Op. 98-A-659 (1989).
A remaining issue concerns the manner in which the loan costs are billed to the client. As presented to this Committee, it is assumed the loan costs will be billed as litigation expenses, including interest. Accordingly, the client may be charged only the direct cost without a surcharge. See ABA Formal Opinion 93-379.
This Committee agrees with the rationale of Formal Advisory Opinion 92-1, State Bar of Georgia (January 14, 1992), that examined whether a bank loan to a lawyer compromises the attorney/client relationship and whether it is ethical to charge clients interest. The opinion concludes that there is no ethical impropriety provided the lawyers “make sure the bank understands that its contractual arrangement can in no way affect or compromise the lawyer’s obligations to his or her individual clients.” On the second issue, the opinion states “it is permissible to charge interest on such advances only if (1) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances; and (2) the written statement given to the client upon conclusion of the matter reflects the interest charged on expenses advanced in the matter.”