State of Utah
Utah Ethics Advisory Opinion Committee
Opinion No. 02-01
Issued February 11, 2002
Issue: Do the Utah Rules of Professional Conduct preclude a Utah lawyer from financing litigation costs through a loan from a third-party lending institution, if (a) the lawyer is obligated to repay the loan and (b) the client, by separate agreement with the lawyer, is obligated to reimburse the lawyer for such costs?
Conclusion: The Utah Rules of Professional Conduct do not preclude such litigation-financing arrangements, provided the lawyer discloses to the client the terms and conditions of the loan, the client consents, and the lawyer, but not the client, is obligor on the loan.
Background: A Utah State Bar lawyer seeks an advisory opinion regarding the ethical propriety under the Utah Rules of Professional Conduct of participating in a “recourse” loan program,1by which the lawyer would finance the costs of litigation for his client through a third-party lending institution offering loans to lawyers for litigation expenses.
The primary features of a typical program include: The program allows a lawyer, often a personal-injury lawyer seeking to finance a contingent-fee case, to raise the money at low cost to be invested in litigation expenses. This is accomplished through a low-interest, recourse loan to the lawyer or law firm who uses the potential fees from the case as loan collateral. Under the terms of the loan, the lending institution advances reimbursable litigation costs, as defined in the loan agreement, to the lawyer. The brochure of one such lending institution claims it advances 95% to 100% of the lawyer’s case costs.
The lawyer pays monthly interest charges on funds advanced under the loan, and remits the loan principal upon settlement or resolution of the case. By a separate agreement with the client, the lawyer ultimately recoups litigation expenses and interest charges from the client if the case is successful. If the case is abandoned or lost, the lawyer is obligated to repay advanced costs and expenses and any outstanding interest to the lender. The lawyer may elect not to receive funding from the lending institution on a particular case if the potential for success is not deemed high enough. The client remains obligated to repay the lawyer for such advanced costs under a separate agreement between the lawyer and the client.
The lending institution recommends the lawyer add language to the client fee agreement that discloses the case-financing transaction. A sample client letter discloses, “If no recovery is obtained, you will be obligated only for disbursements and charges as described below.” Such disbursements include photocopying, messenger service, computerized research, videotape recordings, travel expenses, experts, investigators, etc. In disclosing the financing arrangement, the letter states, “You acknowledge and agree that we [the law firm] may borrow funds from time to time to pay certain of the costs referred to above and agree that, in addition to reimbursing us for the amount of such costs, you also will reimburse us for any interest charges and related expenses we incur in connection with such borrowings.” Variations of such financing arrangements are possible, but the essential features for purposes of this opinion are that the lawyer is obligated to the lending institution to repay the loan principal, and the client is obligated to reimburse the lawyer for advanced litigation costs, plus any applicable interest.
Analysis: The letter requesting our opinion notes a concern with our Opinion 97-11, dealing with a “non-recourse” cost-financing program. In that opinion, we concluded, “An attorney’s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a).” In other words, the lender’s fee was contingent upon the lawyer’s contingent fee. The Committee disagreed with the lender’s contention that such an arrangement did not involve fees, but merely a repayment of costs. The opinion added, “Once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated. Upon that grant, Lender has the right to attach upon default in payment of the loan.” That particularized interest would “compromise the lawyer’s judgment in a number of ways,” primarily by creating potential conflicts between the lawyer and the lender, thereby undermining the lawyer’s duty of independent professional judgment and the duty of client loyalty.
The proposed financing arrangement explained above has none of the objectionable features described in Opinion 97-11. Here, the lending institution has no interest in the lawyer’s contingent-fee award because, under the separate loan agreement between the lawyer and the lender, the lawyer is obligated to repay the loan whatever the outcome of the case. Because this obligation is not contingent, the lawyer is not compromised, as was the lawyer under the arrangement described in Opinion 97-11. Similarly, in this case, the client, by separate agreement, remains obligated to the lawyer for payment of litigation costs. The lawyer is not compromised because the client’s obligation is not contingent upon the outcome of litigation. The arrangement described above simply makes it easier for clients and attorneys to finance litigation and is mutually beneficial to both.
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.” In Utah, these ethical standards are found in Rule 5.4(a). The various state bar ethics opinions summarized in the Appendix to this opinion have invariably concluded that litigation-financing arrangements similar to those described above are permissible, provided the attorney remains obligated on the loan and there is full disclosure to the client. Our research has not disclosed a contrary opinion, and we generally concur with the reasoning and conclusions of these opinions.
Formal Advisory Opinion No. 86-2, State Bar of Florida (April 15, 1986), asks whether “[l]awyers may charge a lawful rate of interest on liquidated fees and costs either as provided in advance by written agreement or upon reasonable notice.” The committee’s answer, in its entirety, states, “The Committee finds no basis for distinguishing between fees and costs advanced for the purpose of charging interest. Accordingly, the Committee concludes that the Code of Professional Responsibility does not prohibit in advance by written agreement or, in the absence of a written agreement, upon reasonable notice. It is the Committee’s view that 60 days would constitute reasonable notice.”
Formal Advisory Opinion No. 92-1, State Bar of Georgia (January 14, 1992), describes a system for payment of certain costs and expenses in contingency-fee cases where the law firm sets up a draw account with a bank, secured by a note from individual firm lawyers. When a client makes a payment toward expenses incurred on the case, the law firm credits the client’s account, and if the case is settled or verdict paid, the firm pays off the client’s share of the money advanced on the loan. If no verdict or settlement is obtained, the lawyers are contractually obligated to repay the loan, although the client remains ultimately liable to the lawyer, not the bank, to reimburse such expenses. The opinion raises two issues: whether the bank loan to the lawyer compromises the attorney -client relationship and whether it is ethical to charge clients interest. As to the first issue, the opinion concludes there is no ethical impropriety provided the lawyers “make sure that the bank understands that its contractual arrangement can in no way affect or compromise the lawyer’s obligations to his or her individual clients.” The opinion similarly concludes on the second issue, “[I]t is permissible to charge interest on such advances only if (i) 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 (ii) the written statement given to the client upon conclusion of the matter reflects the interest charged on expenses advanced in the matter.”
Opinion No. 92-9, Illinois State Bar Ass’n (January 22, 1993), posits a different factual arrangement. The question was whether the lawyer may ethically help clients obtain financing. Under the proposed arrangement, the lawyer pays an initial fee of $500 for which he is given the right to submit loan applications from clients. If the loan is approved, the client becomes solely responsible on the loan, but the attorney receives the loan proceeds less a 10% fee. The opinion concluded that an “attorney may ethically assist clients in obtaining loans for payment of attorney fees, providing the attorney protects the client’s confidences and meets his fiduciary obligation of complete disclosure.”
Informal Opinion No. 970066, Missouri Bar Ass’n (August 20, 2001), asks, “If an Attorney borrows money in order to fund the litigation expenses in a case, may an attorney pass the interest on the loan through to the client?” In a terse answer, the Opinion concludes the “Code of Professional Responsibility does not prohibit an attorney from charging a lawful rate of interest on liquidated fees and costs, either as provided in advance by written agreement or, in the absence of a written agreement, upon reasonable notice.”
120 N.J.L.J. 252, N. J. Advisory Comm. on Professional Ethics (July 30, 1987), discusses whether “it is appropriate for the firm to advance disbursements” in a contingency fee case. The financing arrangements are virtually identical to those described in the Utah inquiry. Consistent with its counterparts, the Committee found “nothing unethical or contrary to the letter of the rules of the Court, or Rules of Professional Conduct in the proposed provision.”
Opinion 2001-3, The Supreme Court of Ohio, Board of Commissioners (June 7, 2001), addresses “the ethical propriety of a law firm borrowing money, using the funds to advance costs and expenses of litigation in a personal injury matter accepted on a contingent fee basis, and then passing the interest fees and costs of the loan to the client as expenses of litigation.” Again, the financing arrangements are virtually identical to those described in the Utah inquiry. The Ohio Board found: “[T]here is no rule prohibiting a lawyer from obtaining a loan from a third party institution for use in advancing the expenses of litigation provided the loan is not secured by the client’s settlement or judgment. However, the client should be informed.”
Tex. Comm. on Professional Ethics, Op. 465, V. 54 Tex. B.J. 76 (1991), discusses two issues: whether an attorney may “ethically own an interest in a lending institution which loans money to personal injury clients of the attorney,” and whether the attorney “may borrow money from a lending institution for case expenses… and ethically charge, or pass on, to the client, as part of the expense, the out of pocket [sic] interest or finance charges of the lending institution.” The Committee found “an attorney may properly own an interest in a lending institution which loans money to personal injury clients of the attorney,” and that “an attorney may properly borrow money from a lending institution for case expenses for a personal injury client, and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institution.”
Advisory Ethics Opinion 98-A-659, Board of Professional Responsibility of the Supreme Court of Tennessee (July 9, 1989), draws a similar conclusion from similar facts described in the Utah inquiry. The Board concludes “a lawyer may advance or guarantee certain expenses” by means of “a lending company or recommending such services to clients.”
1.A “recourse loan” in this context is one for which the lawyer would be liable to a lending institution irrespective of the outcome of litigation being financed. See Black’s Law Dictionary (“recourse loan” under “loan” entries) (7th ed. 1999).
2.Utah Ethics Adv. Op. 97-11, 97 WL 770890 (Utah St. Bar).
3.Id. at 1.
4.Id. at 2.
5.”A lawyer or law firm shall not share legal fees with a nonlawyer” with noted exceptions, none of which is applicable here. Professional Independence of a Lawyer, Utah Rules of Professional Conduct 5.4(a) (2001).
Approved December 5, 1997
Issue: May an attorney finance the expected costs of a case by borrowing money from a non-lawyer pursuant to a non-recourse promissory note, where the note is secured by the attorney’s interest in his contingent fee in the case?
Conclusion: An attorney’s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a).
Facts: “Attorney” has consulted with a private individual who is not an attorney (“Lender”). Lender proposes to loan to Attorney an agreed-on amount to be used for costs and expenses in pursuing a matter on behalf of Attorney’s client (“Client”). Attorney and Client have a contingent-fee agreement under which Attorney is responsible for costs, and under which Attorney is entitled to a percentage of the recovery. A promissory note would be executed under which an interest rate would be calculated on the basis of the risk of loss of the case and the fact that Attorney’s portion of the recovery would be the only source of repayment of the funds. Funds would be disbursed by Attorney in periodic draws as expenses were incurred.
The loan agreement would also state that Attorney would pay Lender the first proceeds of his share of any recovery until the amount of the note, plus interest, was paid. However, the loan would be “nonrecourse” to Attorney; that is, in the event the loan is not repaid, the Attorney could not be held personally liable by Lender for repayment. As security for the loan, Attorney would assign to Lender his interest in the contingent-fee agreement with Client. A security agreement and financing statement would be signed and proper filings with the appropriate authorities would be made to perfect Lender’s security interest. Client would specifically consent to the loan in writing. Lender would agree that he has no right to direct or influence the litigation, that his sole contact with Attorney would be for Attorney to report on the progress of the case, and that Lender could audit expenses paid from loan proceeds for genuineness.
Analysis: Except in certain circumstances, none of which apply to the matter before us, Rule 5.4(a) prohibits a lawyer or law firm from sharing legal fees with a nonlawyer. The Comment to Rule 5.4 states that the rule “expresses traditional limitations on sharing fees,” and that “[t]hese limitations are to protect the lawyer’s professional independence of judgment.”
Lender contends that the proposed arrangement does not involve “fees,” because it is merely the repayment of “costs.” We disagree. First, the proposed source of repayment is from Attorney’s share of the award under the contingent-fee agreement with Client. Attorney agreed to accept responsibility to pay costs and took the risk that he would not recover them out of his share of the award. For our purposes, all of his receipts are “fees.” Even if we were to view the first funds coming to Attorney as reimbursement of costs, however, it is clear that, due to the interest factor on the loan, some amounts from the pure “fee” portion of the recovery could have to be paid to Lender to pay the note in full.
Lender also contends that, because Attorney has merely agreed to repay the loan with interest, as opposed to granting a percentage in legal fees received, the proposed loan is merely like any other non-recourse loan. Again, we disagree.2We are not troubled by the fact that Attorney needs to borrow funds to run his practice. Many attorneys and firms borrow money and grant security interests in their accounts receivable generally as collateral for the loan. Likewise, it is axiomatic that most attorneys’ primary, if not sole, source of revenue is from fees generated from matters undertaken on behalf of clients. Taken to its logical extreme, a Rule 5.4 prohibition on lawyers’ meeting their loan repayment obligations from fees received would mean not only the lawyers could not borrow money to run their practices, but that they could not pay for any goods or services on credit.
However, once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated. Upon that grant, Lender has an interest in the attorney’s contingent-fee award, which Lender has the right to attach upon a default in payment on the loan. That particularized interest in the contingent fees of a case could compromise the lawyer’s judgment in a number of ways. For example, the lawyer’s judgment may be impaired in drawing up the proposed budget for expenses. He may be influenced in recommending that a client accept a settlement offer because of the impact it may have on the repayment of the debt with Lender. The fact that Lender may agree not to be involved in decisions involving the case or that Client may agree in writing and in advance does not save the proposed arrangement, as Rule 5.4(a) makes no exception for such cases.
Accordingly, we find that an attorney may not finance the costs of a contingent-fee case in which a non-recourse promissory note is secured by the attorney’s interest in the contingent fee.
1.(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) An agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or to one or more specified persons;
(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer; and
(3) A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.
Utah Rules of Professional Conduct 5.4(a).
2.See In re Van Cura, 504 N.W.2d 610 (Wis. 1993) (unethical fee splitting found when law firm agreed to finance its product-liability litigation with nonlawyer consulting firm in return for which consulting firm would receive half the fees received from such cases).
3.See ABA Formal Op. 320 (1968), which held a financing plan did not constitute a per se violation of Rule 5.4 where a lawyer charged a client a fixed fee, took a promissory note for the fee, and then sold the note to a bank at a discounted price. The note was endorsed to the bank “without recourse,” and the attorney had the right to repurchase the note prior to the bank’s instituting any legal action on it. The plan, however, specifically excluded contingent fees.
4.See Utah State Bar Ethics Advisory Op. No. 139, 1994 WL 579849 (“[P]rovided no other rule of professional conduct is violated, compensation of non-lawyer employees may be based upon a percentage of gross or net income so long as it is not tied to the fees from a particular case.”)
5. If neither Lender nor Client is an attorney, the Rules of Professional Conduct would not apply to them, and a loan transaction between Lender and Client, where Client signs the promissory note and secures the note by granting a security interest in his share of the recovery, would not violate the Rules. We caution, however, that attorneys should be aware of Rule 8.4(a), which provides that a lawyer may not “violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another.”
Opinion No. 1441
Acquiring an Interest in Client’s Matter–Conflict of Interest: Attorney Making Loans to Finance Company Which Makes Loans to Attorney’s Personal Injury Clients
You have presented a hypothetical situation in which an attorney (A), who represents personal injury plaintiffs, occasionally refers clients to Corporation X (X) which is a Virginia corporation engaged in extending credit to injured persons while they are awaiting resolution of their tort claims to recover damages for their injuries. The credit line is evidenced by a personal note from the plaintiff secured by an assignment of the proceeds from the claim and is due and payable in full at the time of settlement. The plaintiff’s attorney does not guarantee, nor obligate himself or his firm in any way, for repayment of the credit extended to his client, but he is obligated, however, to acknowledge the assignment and disburse to X the funds to repay the note from the proceeds of the settlement. You have additionally indicated that plaintiff’s attorney may be asked to oversee the execution by his client of the credit documents from X. Attorney A also furnishes information to X relative to the claim, with his client’s authorization, which information later becomes the basis for the credit determination. Attorney A receives no fee or other compensation from X for these services, nor will he either provide any legal advice or services to X or have any input into X’s decision with regard to the establishment of the credit limit. A desires to lend money to X and you have indicated that no portion of those funds being loaned to X by A will be earmarked for A’s clients, nor will A have any influence upon X’s decision as to how any of the funds are utilized.
Furthermore, none of X’s receivables from A’s clients will be assigned to A as security for his loan nor will A receive any corporate stock or other form of ownership interest in X. You indicate that the only benefit from the loan which A will receive is the payment of interest which will be equal to that which X would pay to any other lender under similar circumstances. Finally, A will not be a member of X’s board of directors or advisory board. Finally, you indicate that all such exclusions from any direct or indirect management, control, or influence over the operations and business decisions of X will also extend to A’s family, other relatives, and members and employees of his firm.
You have asked the committee to opine whether, under the facts of the inquiry, it would be proper for A to make such a loan to X and whether such a loan to X made by A’s spouse or A’s employees would be proper as to A. The appropriate and controlling Disciplinary Rules related to your inquiry are DR 5-l03(A) which mandates that a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client; DR 5-103(B), which provides that a lawyer representing a client in contemplated or pending litigation shall not advance or guarantee financial assistance to his client, except that the lawyer may advance or guarantee the expenses of litigation, provided the client remains ultimately liable for such expenses; and DR 5-l0l(A), which precludes a lawyer from accepting employment, absent the consent of his client after full disclosure, if the exercise of his professional judgment on behalf of his client may be affected by his own financial, business, property, or personal interests. The committee has previously opined that an attorney may persuade a finance company to loan funds to the attorney’s personal injury client and may honor the finance company’s lien on the client’s settlement proceeds, as long as the attorney did not guarantee or cosign the loan. See LEO #ll55.
The committee has also opined that where an attorney has persuaded a finance company to loan funds to the attorney’s personal injury client, it is not improper for the attorney to receive completed but unsigned loan documents, supervise his client’s execution of the documents, and then return the documents to the finance company. See LEO #1379. The committee believes that A’s loan to X is thus a means by which A has provided indirectly what he may not provide directly, i.e., financial assistance to his client in connection with litigation. Furthermore, the committee views such an arrangement as a means by which A has also acquired indirectly what he may not acquire directly, i.e., an interest in the client’s litigation matter. Thus, the committee is of the opinion that, despite the controls you propose, it would be improper and violative of Disciplinary Rules 5-l03(A) and (B) and 5-l0l(A) for A, his spouse or employee, to make a loan to X Corporation unless X agrees to make no loans to A’s clients during A’s representations of those individuals or entities.
LEO: Acquiring an Interest in Litigation – LE op. 1155
Acquiring an Interest in Litigation – Personal Injury Representation: Assisting Clients to Obtain Loan From Finance Company
November 15, 1988
You advise that you have represented personal injury clients for many years and are confronted 90 percent of the time with an innocent victim of an automobile accident who has incurred unanticipated medical bills and injuries which have put him or her out of work. In almost half of these cases, your clients do not have the benefit of health insurance or disability insurance. You are also confronted daily with requests for a loan from your clients in order to obtain proper medial treatment and medication so they may continue to pay their mortgages as well as provide food and other necessities for their families. On numerous occasions, you have referred your clients to banks to obtain loans; however, due to the loss of their jobs as a result of their injuries, they are poor credit risks and it is virtually impossible for them to obtain loans. There being no other alternative, you attempt to obtain liens against your client’s case to provide them credit which, inmost cases, the landlords and hospitals simply reject.
You have asked the Committee to consider the propriety of your persuading a finance company to agree to loan funds ranging from $1,000 to $10,000 to personal injury clients who cannot get bank loans. You have proposed that the company would investigate the case to confirm the liability, damages, and insurance coverage with the client’s written consent. If the investigation revealed facts or evidence pertinent to the case which the client’s attorney did not already know, said facts would be conveyed to that attorney at no expense. If the loan is approved, the loan would become due upon resolution of the case either by settlement or trial and the borrower would be charged at a lawful interest, similar to that used by major credit card companies. Upon obtaining a favorable settlement or verdict the client would direct the attorney involved to repay the loan out of the case proceeds. In no way would the attorney guarantee, cosign, or be responsible for the loan, except that he would honor a lien on the case.
The Committee believes DR.5-103 (B) is the appropriate and controlling rule relative to your inquiry, and it provides as follows: While representing a client in connection with contemplated or pending litigation a lawyer shall not advance or guarantee financial assistance to his client, except that the lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses ( see also LEO. 34).
The Committee would also direct your attention to Professional Guidance Opinion no.86-36 from the Philadelphia Bar Association, which states that a lawyer may not act as a guarantor for a bank loan for his client; however, he may attempt to convince the bank to grant the loan and to take a security interest in the client’s personal injury case. Under the facts as you have presented them in you inquiry, the Committee opines that there would not be a violation of Disciplinary Rule 5-103(B) as long as the attorney does not guarantee or cosign for the loan.
LEO: Attorney/Client Relationship: Engaging LE Op. 1219
Attorney/Client Relationship: Engaging in Arrangement of Champerty and Maintenance; Multiple Representation- Conflict of Interest: Attorney Engaging in Making A Loan to One Client Through Another Client/Lender.
April 3, 1989
Your firm has advised that it has a wealthy individual client who is willing to make small loans to your personal injury clients for the purpose of assisting those personal injury clients with their living expenses during the pendency of their litigation. The prospective lender-client would make such loans in return for 15% interest and a promissory note in which the personal injury client would agree to repay the loan contingent upon his or her receipt of settlement proceeds. Should there not be a settlement, the lender-client would bear the loss. Your firm would obtain the promissory note from the borrower-client for the benefit of the lender-client, and the lender-client would establish a separate bank account in his own name while designating your firm to draw upon it for the purpose of making the loans to the borrower-client(s).
You further indicated that the lender-client would place approximately $10,000 into the account with the typical loan being about $200; thus a possible total of some 50 such loans could be made. You specify that the firm would not reimburse the lender-client for any losses borne by him as a result of the borrow-client not receiving a settlement. Your firm has inquired as to the feasibility of such an arrangement under the requirements of the Virginia Code of Professional Responsibility. It is well settled, and you have correctly identified the prohibition under DR:5-103(B) against a lawyer’s advancing or guaranteeing financial assistance of his client for expenses other than those directly related to the expenses of litigation. The same rule permits the advancement of only those specific litigation expenses provided the client remains ultimately liable for such expenses. The clear intent of DR:5-103(B) is to preclude the lawyer’s acquiring an interest in the outcome of the litigation, since holding such an interest would create a personal conflict in the lawyer and compromise his undivided loyalty to his client in order to protect the lawyer’s own financial interest in the litigation.
Furthermore, since the lawyer is precluded from providing such assistance to his client, his securing of another of his client to provide that assistance would be improper under DR:1-102(A)(2) if his purpose in doing so was to circumvent DR:5-103(B). In the circumstances you have described, the lawyer’s undivided loyalty to his individual lender-client and to his individual borrower-client(s) would be great diluted, most particularly since the lender-client’s receipt of repayment is expressly contingent on the outcome of the suit. Under DR:5-105(B), a lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be likely to be adversely affected by his representation of another client, unless permitted by DR:5-105(C). under those permissive provisions, the lawyer may continue multiple representation if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each.
It is the opinions of the Committee, assuming that your firm is representing the lender-client in his lender capacity, that the arrangement you described clearly does not allow for obviously adequate representation of both the lender-client and the borrower-clients(s). Thus, the arrangement would be improper and violate DR:5-105 (B) and (C). Finally, since the arrangement provides the repayment of the principal to the lender-client only on the contingency of the borrower-client receiving settlement proceeds, the Committee is of the opinion that particular attention must be paid to any common law or statutory prohibitions against champerty and maintenance. The determination of whether or not the arrangement you describe would be champertous or provide maintenance to the litigant is a matter of law and thus beyond the purview of the Committee. Should it be violative of those provisions, however, the Committee recognizes that your firm’s role in creating such arrangement would be violate of DR:7-102(A)(7), which prohibits a lawyer from counseling or assisting his client in conduct that the lawyer knows to be illegal or fraudulent.
LEO: Acquiring An Interest in Client’s Matter LE Op. 1269
Acquiring An Interest in Client’s Matter – Business Transactions Between Attorney and Client – Personal Interest: Attorney Making Loans to Client. You have advised that you represent an injured client whose medical bills have been paid by his insurance carrier, but who has not been able to earn significant income to meet his living expenses. You further indicate that the client has no other source of income pending disposition on his claim. Your client will probably lose an additional six weeks of income during surgery and recuperation. You indicate that you have arranged for a third party to loan your client up to $7,000 at 12% interest, under the terms of which loan the lender will be designated as a beneficiary under your client’s life insurance policy and the client agreed to have any remaining outstanding debt act as a lien on any recovery made on the personal injury matter. Finally, you advise that the loan will not be contingent on any recovery but will remain the personal obligation of the client regardless of the outcome of the cause of action.
You have inquired as to the propriety of the terms of the loan as outlined and have further inquired as to the propriety of you loaning a client money pursuant to the same terms.??With regard to your first question, the Committee believes that prior LE Op. 1155 is dispositive of the issue. With regard to your second question, the appropriate and controlling disciplinary rules are DR:5-103(A) and DR:5-104(A). Under DR:5-103(A), a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client. A lawyer may, however, acquire a lien granted by law to secure his fee or expenses; and may contract with the client for a reasonable contingent fee in a civil case. Under DR:5-104(A), a lawyer may not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to (continue to ) exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure and provided that the transaction is not unconscionable, unfair or inequitable when made.
The Committee is of the opinion that loans made to clients for assistance with living expenses during the course of litigation constitute the lawyer’s entering into employment and a business transaction that would allow his professional judgment to be attached by his own financial interest; thus such conduct would be improper and violative of both DR:5-103(A) and DR:104(A). The rule against a lawyer acquiring an interest in a client’s litigation is based on concerns about compromised loyalty to the client in pursuing a result which should be in only the client’s best interests. The lawyer’s acquisition of a personal interest in the outcome of the litigation may result in the lawyer’s independent judgment on behalf of his client becoming clouded by his interest in recouping his own funds. In addition to the prohibition against a lawyer acquiring a proprietary interest in the litigation through the making of a loan to a client, the Committee is of the opinion that such a loan would create an improper adverse relationship between the lawyer as creditor and the client as debtor. The client’s consent as described in DR:5-104(A), which, in other circumstances, might cure the conflict, would not suffice to alleviate the Impropriety created by the violation of DR:5-103(A).
Legal Ethics Opinion #1595
Fees: Interest Charges on Unreimbursed Costs and Expenses
You have presented a hypothetical situation in which a three-attorney firm represents a large number of clients in litigation on a contingent fee basis. The majority of the firm’s practice consists of representing plaintiffs in civil rights matters, including discriminatory discharge from employment on the basis of sex, race, religion, age, or disability.
You indicate that the standard written fee agreement used by the firm provides, in pertinent part, that costs and expenses are separate and distinct from the fee for professional services charged by the firm, and that the client remains ultimately responsible for costs and expenses regardless of the outcome of the matter. The agreement also recites that “the recovery of damages, whether at trial or through settlement, is an inherently
uncertain process, and no member or employee of the firm has represented to me that any recovery, or any level of recovery, is assured.”
You also indicate that the firm routinely requests payment of a modest advance against costs from each contingent fee client, which funds are deposited in a trust account. In matters which do not settle before filing, the advanced amount usually is exhausted quickly, and additional costs and expenses are incurred
on behalf of the client. Further, the agreement executed by each client also provides: “I understand that the amount of the initial [funds] requested is not an estimate of the total amount of costs and expenses which may be incurred in my case, which may be substantially higher than the amount of the initial [advance].” The hypothetical facts you provide also indicate that these costs, including copying expenses, deposition transcripts, and expert witness fees, are often substantial.
Furthermore, the fee agreement signed by each client also contains the following provisions:
“I agree that I will replenish this…account, if necessary and if requested by the Firm, to maintain a sufficient balance in the account to cover projected costs and expenses.”
“I understand that the Firm may request payment and reimbursement of costs and expenses in advance of any recovery with respect to my claims.”
You indicate that, despite these provisions, in the normal course [of representing a client], the firm usually advances costs and expenses on behalf of the client, whether or not the client reimburses these costs on a current basis. In many cases, despite request by the firm, the client does not replenish the advance account and does not pay for costs and expenses on a current basis. Where costs and expenses are outstanding at the conclusion of the matter, reimbursement is made from the proceeds of settlement or judgment.
Finally, you advise that the firm is relatively new and has relatively limited resources. Clients currently owe this firm approximately $150,000 in outstanding cost advances. Nonpayment of this amount on a current basis has forced the firm to draw down a line of credit, personally guaranteed by the principals of the firm, at a certain rate of interest.
You have asked the committee to opine whether, under the facts of
1. the firm may incorporate in its fee agreement offered to new prospective clients the following provision:
For all costs and expenses not paid within 30 days of billing to the Client by the firm, the Client hereby agrees to pay to the Firm interest at the rate of 12% per annum on the outstanding balance, accrued on a monthly basis, until such costs, expenses and interest are fully paid;
2. the firm may begin charging interest on unpaid cost and expense balances to existing clients of the firm
and, if so, whether the written agreement of the existing client is required prior to imposition of an
interest charge; and
3. if charging interest on overdue cost and expense balances is permissible, what, if any, limit on the rate
of interest would be appropriate.
The appropriate and controlling Disciplinary Rules related to your inquiry are DR 2-105(A), which provides that a lawyer’s fees shall be reasonable and adequately explained to the client; and DR 5-103(B), which states that a lawyer shall not advance or guarantee financial assistance to the client, except that the lawyer may advance or guarantee the expenses of litigation, provided the client remains ultimately liable for such expenses.
As applied to prospective clients, in response to your first question, the committee is of the opinion that the provision as articulated is not improper, provided that the costs and expenses are reasonable and adequately explained to the client. The committee also cautions that the firm must explain to the client that, under DR 5-103(B), he is to remain ultimately liable for such expenses. Additionally, as the committee has earlier
opined, any deferred payment must be for the client’s convenience; the interest rate must not be in violation of state laws; and the client must have the unrestricted right to prepay any balance of the costs, without penalty. See LEOs #642, #1247.
As applied to existing clients of the firm, in response to your second question, the committee has previously opined that an automatic (and unilateral) imposition of an interest or finance charge on client’s overdue accounts is improper. The committee believes, then, that there must be an agreement between the firm
and client prior to imposition of an interest charge. Furthermore, although not required by the Code of Professional Responsibility, the committee suggests that a written agreement is appropriate. See LEO #186-B.
Finally, in response to your third question as to the limit on the rate of interest, the committee believes that this question raises a legal issue requiring a determination which is beyond the committee’s purview. Similarly, the committee expresses no opinion as to whether the imposition of interest, where permissible, requires compliance with any consumer credit protection laws.
June 14, 1994
Full Opinion 97
Full Opinion 02