Ethics Opinions


Pre-settlement funding companies provide a useful service that aids clients with paying food, mortgage, medical, and other bills while a claim is ongoing.

For more about the legality and ethics of pre-settlement and litigation financing, view the 2012 American Bar Association (ABA) White Paper on the Ethics of Alternative Legal Financing.


To find the ethics opinion regarding pre-settlement funding please click on your the state

Alaska

Alaska State Bar Link

Ethics Opinion No. 92-3
Clarification of Ethics Opinion 86-4 Regarding Attorney's Duty when Dispute Arises Concerning the Rights of Third Parties to Client Funds in the Possession of Attorney.

A number of questions have arisen regarding the scope of Opinion 86-4, and the circumstances under which an attorney may be held responsible for failing to honor a claim by a third party against client funds in the possession of the attorney.

It is the opinion of the Committee that: (1) In order to trigger an obligation on the part of the attorney to pay a creditor's claim, in contravention of a client's instructions, the creditor's claim must be a valid assignment on its face or statutory lien which has been brought to the attorney's attention (endnote 1) (2) If a client instructs an attorney to ignore or disregard a valid assignment or statutory lien, the attorney should advise the client that absent an explanation (e.g., a written release, or some other form of written waiver by the lienor or assignee) the attorney will withhold the disputed funds, and, absent some amicable resolution, the funds will be deposited into court where the dispute can be decided by the judge.

A. What Third Party Claims Must be Honored?

This is another way of asking the question when is the attorney obligated to deliver to the client funds "which the client is entitled to receive." See DR 9-102(B)(4) (emphasis added). The Committee believes that when a client executes a valid assignment from settlement proceeds, or there exists a perfected statutory lien against settlement proceeds, it creates a presumption that the client is not "entitled" to those funds. Bonanza Motors, Inc. v. Webb, 657 P.2d 1102 (Idaho App. 1983); Herzog v. Riace, 594 A.2d 1106 (Me. 1991).

There may be other claims unrelated to the subject matter of the representation; for instance child support, alimony, restitution for criminal conduct and so on. "However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party." See Comment to Model Rule 1.15. (endnote 2) A client is capable of and responsible for payment of his or her own obligations. Unless the claim in question has been reduced to a valid assignment or perfected lien, a creditor has no more special "entitlement" to those funds than does the client. The creditor in that situation has other remedies, such as prejudgment attachment. See Alaska R. Civ. P. 89. However, where a settlement includes or references specific allocation for a lien claimed by a third party, the amount designated for satisfaction of the lien must be utilized for that purpose. In re Burns, 679 P.2d 510 (Ariz. 1984).

B. When Does a Dispute Arise Over the Client's Entitlement to His or Her Funds, and How Should those Disputes be Resolved

In the view of the Committee, if a client instructs an attorney to disregard the terms of a valid assignment or statutory lien, the attorney should promptly inform the client that the attorney is obligated to withhold and segregate those funds in question. Unless the client and the creditor are able to amicably resolve their differences, or unless the client provides the attorney with some verification that the lienor or assignee have waived their interest in those funds, the attorney will be required to deposit the funds into court for disposition by the judge. Given the fact that both sides will incur expense and delay in the event this step is taken, it would be appropriate to encourage the client and the creditor to resolve their differences promptly and amicably.

C. The Attorney Should be Careful not to Induce Reliance on the Part of the Third Party Creditor

Any number of questions may arise regarding a client's "entitlement" to funds being held by the attorney. The Committee believes that care should be taken to dispel any confusion which might arise regarding the attorney's obligations under these circumstances.

If, for instance, an attorney receives a letter from a medical provider to the effect that he or she is owed money for services provided to the client relating to the subject matter in question, that does not, in the Committee's view, create a presumption that the client is not entitled to receive the funds in question at his or her request. However, the Committee believes that the attorney in that instance should respond to the letter and convey to the medical provider the fact that this is a matter between the client and the medical provider. The medical provider should be on notice that the attorney will not be assuming the responsibility for payment of the client's bills relating to the subject matter in question; that is the client's responsibility.

The Committee believes it is inappropriate for the attorney to remain silent after having received notice of such a potential claim. While the attorney may believe that his or her silence in the face of receiving such notice is or may be interpreted as a constructive denial of the creditor's position, it is just as likely that the third party creditor may view that silence as implicit or tacit acceptance of the third party claim.

The situation is ripe for confusion, and the Committee believes the attorney should take the affirmative step of responding to these claims by shifting the burden back where it belongs, namely on the third party creditor and the client.

In conclusion, the Committee believes that an attorney is not ethically obligated to arbitrate claims between creditors and his or her client. With respect to third party creditors who have not received an assignment from the client, or who have not perfected a statutory lien, and assuming the attorney has followed the recommendations outlined in Section C above and informed the creditor that the claim should be taken up directly with the client, the attorney should be free to follow the client's instructions with respect to return of client property. Even though the attorney may be aware of a potential problem in this regard, the Committee does not believe this vitiates the client's "entitlement" to return of his or her property, pursuant to DR 9-102 (B)(4).

If a client instructs an attorney to disregard the terms of a valid assignment or statutory lien, the attorney should promptly take the appropriate steps to segregate those funds in question, and to inform the client that, absent a resolution which is satisfactory to all parties concerned, the attorney will be obliged to deposit the funds into court for disposition by the judge.

Approved by the Alaska Bar Association Ethics Committee on April 2, 1992.

Adopted by the Board of Governors on June 1, 1992.

Endnotes:

(E. Op. No. 92-3) However, practitioners should be aware that under some tax lien statutes, the statutory filing requirements provide the element of notice. See 26 U.S.C. § 6321.

The Model Rules of Professional Conduct have been approved by the Alaska Board of Governors and are currently pending before the Alaska Supreme Court.

California

California State Bar

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2002-159

ISSUE:

Is it ethically permissible for a lawyer to: (1) to tell a potential client of the possibility of financing the legal representation by taking out a mortgage loan on the client's real property and (2) to refer the client to an independent broker who might arrange the financing, where the resulting loan funds are placed in an escrow account which is not controlled by the lawyer and from which the funds are disbursed to the lawyer for fees and costs for work performed on behalf of the client?

DIGEST:

A lawyer may refer a potential client to a broker for a real property loan to pay for attorney's fees and costs so long as the lawyer does not provide legal representation or receive compensation with regard to the referral or the resulting loan or escrow transactions, and has no undisclosed business or personal relationship with the broker.

AUTHORITIES INTERPRETED:

Rules 1-320, 3-300, 3-310, and 4-100 of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code sections 6068, subdivision (e), 6148, and 6200 et seq.

STATEMENT OF FACTS

A lawyer has been consulted by a potential client who seeks representation by the lawyer. The potential client presently is not able to pay for the legal services. The potential client owns real estate which can be encumbered as security for a loan, the proceeds of which could be used to pay for legal services. The lawyer provides the potential client with the name of a licensed broker, who she says might be able to arrange such a loan as one possible method for financing the legal representation. The lawyer also states in writing to the potential client that she neither is advising the potential client concerning alternative methods for financing legal representation nor recommending the use of the particular broker. The lawyer further states in writing that she does not represent the broker, the lender, or the prospective client in the loan transaction, and that she does not represent any of them or the escrow company with regard to the escrow in which the lender and the prospective client agree to place the loan proceeds. None of the participants compensate the lawyer with regard to the referral, the loan, or the escrow. Further, the lawyer does not condition her representing the client on the client having the recommended broker arrange the financing. The lawyer sends statements each billing cycle to the escrow account, seeking disbursements of funds to compensate the lawyer for attorney's fees and costs during the billing cycle; and the lawyer simultaneously sends a copy of each bill to the client. After the client has a reasonable amount of time to object to the lawyer's bill, the funds then are released for payment of legal services according to the fee agreement between the attorney and the client.

DISCUSSION

  1. The Proposed Escrow Arrangement Does Not Require Compliance With Rule 3-300

Rule 3-300 of the Rules of Professional Conduct of the State Bar of California governs a lawyer's business transactions with a client. [1] Rule 3-300 prohibits a lawyer from entering into a business transaction with her client, and from knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to her client, unless she first complies with the requirements set out in the rule. [2] Rule 3-300 does not apply to the referral and escrow arrangement described in the hypothetical. First, the lawyer has not entered into a business transaction with the prospective client because she is not a direct or indirect party to the loan, the broker is independent of the lawyer, and the lawyer does not benefit from the loan transaction in violation of rule 3-300. (E.g., Rodgers v. State Bar (1989) 48 Cal.3d 300, 313 [256 Cal.Rptr. 381] [lawyer violated former rule 5-101, the predecessor of current rule 3-300, by not disclosing to client conservator that a third party to whom lawyer recommended conservator loan money was another client and former business partner of lawyer, where proceeds of loan were used to pay off legal fees second client owed lawyer]; Rose v. State Bar (1989) 49 Cal.3d 646, 662-663 [262 Cal.Rptr. 702] [lawyer violated former rule 5-101 where he recommended that the client lend money to a third party for investment in a venture in which lawyer received a 25 percent interest]. See also Cal. State Bar Formal Opn. No. 1995-140 [lawyer paid referral fee by life insurance agent for referring client to agent will be deemed to have entered into a business transaction with the client].) The lawyer in the hypothetical, however, has received no such financial benefit-she has no interest in the broker's business and is receiving no payment for referring the potential client to the broker. [3] Moreover, the lawyer has not obtained a "pecuniary interest adverse to a client" merely by the deposit of the loan proceeds in an escrow account. The first sentence of the discussion accompanying rule 3-300 states the rule is "not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member ownership, possessory, security, or other pecuniary interest adverse to the client." [4] Here, the lawyer will not acquire any pecuniary interest in the funds until after performing the legal services and after the process for paying the lawyer is completed. The loan and escrow arrangement gives the lawyer assurance that she will be paid her fees and costs; even assuming that this assurance amounts to a "pecuniary interest," it is not "adverse" within the meaning of rule 3-300. In applying rule 3-300 and its predecessors, the California Supreme Court has held that a lawyer acquires a pecuniary interest adverse to the client where it is reasonably foreseeable that it may be detrimental to the client's interests. (Hawk v. State Bar (1988) 45 Cal.3d 589, 599-600 [247 Cal.Rptr. 599].) Because almost any financial transaction can be adverse to a client if he or she has to pay money, the California Supreme Court has developed a more precise definition: a lawyer's pecuniary interest is "adverse" to the client within the meaning of rule 3-300 if the lawyer acquires the ability to extinguish a client's interest in the property, without the possibility of judicial intervention, whether or not the lawyer ever acts to do so. (Connor v. State Bar (1990) 50 Cal.3d 1047, 1058 [269 Cal.Rptr. 742]; Hawk v. State Bar, supra, 45 Cal.3d at p. 600; In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 759-760.) For example, in Connor, supra, under an agreement with the client, the lawyer took full title to the client's property. Thus, the lawyer extinguished any rights the client had in the property. (Connor v. State Bar, supra, 50 Cal.3d at p. 1058). Similarly, in Hawk, supra, a lawyer who secured payment of fees by acquiring a note secured by a deed of trust on the client's property was held to have acquired a pecuniary interest adverse to the client because the deed of trust gave the lawyer the power of sale in a nonjudicial foreclosure procedure. (Hawk v. State Bar, supra, 45 Cal.3d at p. 600.) The statement of facts shows that the lawyer does not have the ability to extinguish the client's interest without judicial intervention. The mere deposit of funds in escrow does not extinguish the client's interest. It is the escrow holder, not the lawyer, who is in possession of the funds. The lawyer may only acquire payment for her services or for the costs advanced by her after satisfying the terms of the fee agreement and meeting the escrow requirements. Where the escrow instructions require the lawyer to submit to the client for the client's review a billing in compliance with Business and Professions Code section 6148, where the client has an opportunity to contest the billing, and where the disputed portion of the billing will remain in escrow or the lawyer's trust account until the dispute is resolved, there is no violation of rule 3-300 because the lawyer is unable to extinguish the client's right to control the payment of fees. In summary on the facts presented, unless the lawyer has a financial interest in the broker or receives some form of compensation from the broker for referring a potential client, rule 3-300 does not apply.

  1. The Proposed Escrow Arrangement Does Not Require Compliance with Rule 4-100

Rule 4-100 is the primary professional standard regulating lawyers' handling of client funds. Rule 4-100(A) requires, with certain exceptions, that any "funds received or held for the benefit of clients" by a lawyer must be deposited in the lawyer's client trust fund account. [5] Under rule 4-100(B), "the client's funds, securities or other properties" which are received by the lawyer or which "come into the possession of the" lawyer are subject to certain requirements regardless of whether the funds, securities, or properties are deposited in a trust account. These requirements include: (1) a notice requirement, (2) a requirement to maintain specified records, and (3) a requirement to render appropriate accounts to a client. [6] The precise issues here are first whether rule 4-100(A) requires that the loan proceeds be placed in the lawyer's trust account rather than the escrow account and second, even if the proposed arrangement does not activate rule 4-100(A)' s deposit requirement, whether it nevertheless triggers rule 4-100(B)' s notice, record-keeping, and accounting requirements. Under our facts, we do not need to address the rule 4-100 requirements because the loan proceeds are never "received or held" by the lawyer. Instead, they are placed by the lender directly in the escrow account. The lawyer receives funds only after she has performed legal services and has otherwise complied with the terms of her fee agreement with the client. When the lawyer has performed legal services and received fees from the escrow account pursuant to the process agreed upon by client and lawyer, the fees are fixed and earned. Under these circumstances, the earned fees belong to the lawyer and should not be placed in the client trust account. [7] In summary, we note that because the loan proceeds are not "received or held" by the lawyer and have not "come into the possession of the" lawyer, the proposed escrow arrangement does not appear to violate rule 4-100. We caution, however, that our conclusion rests on the fact that the commercial escrow holder is truly independent from the lawyer. We have assumed that the lawyer cannot access any of the escrow funds until she has earned a fee or accrued costs on the client's behalf, has properly documented her fees and costs, and has submitted her documented request to the escrow holder with notice to the client. [8]

III. The Proposed Escrow Arrangement Does Not Require Written Disclosure Under Rule 3-310(A)

Rule 3-310 requires disclosure where the lawyer has a legal, business, financial, professional, or personal relationship with a party in the same matter (rule 3-310(B)(1)) or has a business, financial, or professional interest in the subject matter of the representation (rule 3-310(B)(4)). [9] Neither of these provisions, however, applies to this independent broker and escrow arrangement. Rule 3-310(B)(1) does not apply to our facts. The lawyer does not have any relationship with the broker. Although the lawyer may refer potential clients to the broker to arrange financing, the lawyer is under no legal obligation to do so. Moreover, there are no facts suggesting that the lawyer and broker are engaged in either a formal or an informal business relationship. The broker is not a witness or a party to the subject matter of the representation, the lawyer receives no compensation from the broker for referring potential clients, and the lawyer does not represent the potential client in the transaction among broker, lender, and client. [10] Further, rule 3-310(B)(4) is not applicable.

> Our facts are distinctly different from the facts posed in California State Bar Formal Opinion Number 1995-140, where we concluded that an insurance agent's payment of a commission to an estate planning lawyer as compensation for the lawyer's referring clients to the agent did trigger rule 3-310(B)(4)' s disclosure requirements. We reasoned that the lawyer has a business or financial interest in that representation because the lawyer stands to obtain compensation from the insurance agent if the client decides to purchase insurance from the insurance agent with whom the lawyer has made the referral arrangement. Rule 3-310(B)(4)' s written disclosure requirement is directly implicated because the lawyer in the hypothetical has an interest in the client's representation and may well compromise that representation "in order to advance the attorney's own financial or personal interests." (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 546 [28 Cal.Rptr.2d 617].) Unlike the situation presented in Formal Opinion Number 1995-140, the lawyer here is not compensated for the referral. [11] Finally, rule 3-310(F), which prohibits a lawyer from accepting "compensation for representing a client from one other than the client" unless certain conditions are met, does not apply to this situation. Subdivision (F) applies only where the funds of a third party are being used to pay the lawyer. It is intended to avoid the situation where the lawyer's duty of undivided loyalty to her client could be affected by the involvement and interests of a third party paying the attorney's fees and costs. Here, that risk does not appear to exist where the third party is an escrow agent who does not own the loan proceeds, but only is responsible for holding and disbursing the client's own funds. [12] In summary, because the lawyer does not represent adverse interests, have a relationship with a party in the same matter, or have an interest in the subject matter of the representation, rule 3-310 is inapplicable. This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar. [1] / Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of California.

[2] / Rule 3-300 provides: A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.

[3] / Although the lawyer does receive some benefit from the escrow arrangement--she is assured that there are funds available to pay her fees and costs--this is no different from the benefit the lawyer receives by requiring an advanced fee and placing it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within rule 3-300. (Rule 3-300, discussion.) The situation would be quite different, however, if the broker were to compensate the lawyer for referring clients to the broker. Then, the lawyer would be "soliciting a client's transaction in which the lawyer will receive a financial benefit," and the lawyer will be deemed to have entered into a business transaction with her client to which rule 3-300 would apply. In that case, the lawyer would have to follow a specific protocol, including obtaining written consent from the client. (See Cal. State Bar Formal Opn. No. 1995-140.) Compensation may be in a form other than monetary. For example, the broker could compensate the lawyer by referring clients to the lawyer as a quid pro quo for the lawyer referring business to the broker. In that event, not only would the lawyer's conduct in referring clients to the broker be governed by rule 3-300, but the lawyer would also violate rule 1-320(B) , which provides that a lawyer "shall not compensate, give or promise anything of value to any person or entity for the purpose of recommending or securing employment of the member . . . by a client, or as a reward for having made a recommendation resulting in employment of the member . . . by a client." See also Bus. § Prof. Code § 6152 (prohibiting running and capping).

[4] / See also California State Bar Formal Opinion Number 1995-140, footnote 5, which notes that this is an important exception to the general applicability of the rule.

[5] / Rule 4-100(A) provides:

(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account," "Client's Funds Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:

(1) Funds reasonably sufficient to pay bank charges.

(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed. However, when the right of the member or law firm to receive a portion of trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved.

[6] / Rule 4-100(B) provides:

(B) A member shall:

(1) Promptly notify a client of the receipt of the client's funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

[7] / Rule 4-100(A) provides that, except for "[f]unds reasonably sufficient to pay bank charges" and funds that are subject to a dispute between lawyer and client, "[n]o funds belonging to the member or the law firm shall be deposited" in the lawyer's trust account "or otherwise commingled" with funds held for the client.

[8] / Our conclusion on the applicability of rule 4-100 is limited to the facts presented. These facts do not include a situation where the client disputes a disbursement that is received by the lawyer. The ethical obligations of the lawyer in such circumstances, including any obligation to deposit disputed funds into a trust account under rule 4-100(A) or to render an appropriate accounting to the client under rule 4-100(B), are beyond the scope of this opinion.

[9] / Rule 3-310(B) provides in part:

(B) A member shall not accept or continue representation of a client without providing written disclosure to the client where:

(1) The member has a legal, business, financial, professional, or personal relationship with a party or witness to the same matter; or (4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation.

[10] / With respect to this, the lawyer must be careful not to inadvertently mislead the prospective client into believing the lawyer represents the client in the identification of financing alternatives, in deciding to use a particular loan broker, or in the loan or escrow transactions. An attorney-client relationship may result from an express or implied contract. Except when created by court appointment, the attorney-client relationship may be found to exist based on the intent and conduct of the parties and the reasonable expectations of the potential client (Flatt v. Superior Court (1994) 9 Cal.4th 275, 281, fn.1 [36 Cal.App.2d 537]; Hecht v. Superior Court (1987) 192 Cal.App.3d 560, 565 [237 Cal.Rptr. 528]; Fox v. Pollack (1986) 181 Cal.App.3d 954 [226 Cal.Rptr. 532] [absent some objective evidence of an agreement to represent, it is not sufficient that plaintiffs "thought" defendant was their attorney]). Even if the possible client has not paid or promised to pay the attorney, an attorney-client relationship may be found to exist where she has communicated confidential information to the attorney (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [86 Cal.Rptr.2d 816]; Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39-40 [154 Cal.Rptr. 22]; Perkins v. West Coast Lumber Co. (1900) 129 Cal. 427; L.A. Cty. Bar Assn. Formal Opn. No. 449). Under our facts, the lawyer has given the prospective client the name of a licensed broker and stated that the broker might be able to arrange a loan to finance legal representation by the lawyer. In such situations, a prospective client might assume from a lawyer identifying a single broker that the lawyer has investigated the broker and in essence is advising the prospective client that it is safe to enter into a loan transaction and to do so through that broker. On the other hand, the fact that the prospective client has had no previous professional relationship with the lawyer, and the absence of any facts indicating that the prospective client has disclosed confidential information to the lawyer, argue against an attorney-client relationship having been formed. Nevertheless, while not necessarily required, to avoid creating a reasonable expectation in the prospective client to the contrary, here the lawyer has stated in writing to the prospective client that she does not represent the prospective client with regard to the identification of financing alternatives, the selection of the broker, or the resulting loan or escrow transactions.

[11] / California State Bar Formal Opinion Number 1995-140 is further distinguishable because the estate planning lawyer had a financial interest "in the subject matter of the representation." The lawyer was preparing an estate plan which required the availability of liquid funds to pay estate taxes at the time of the client's death. Referring clients to an agent for a life insurance policy that would provide those funds was thus central to the actual subject matter of the representation. Unlike that situation, however, financial arrangements for paying the lawyer's legal fees will usually be independent of the purpose for which the lawyer is retained.

[12] / Although the lawyer's duty of undivided loyalty to her client does not appear threatened, there is a possibility that the lawyer's billing statements could disclose confidential client information to the escrow agent in violation of the lawyer's duties under Business and Professions Code section 6068, subdivision (e). The lawyer must be careful in submitting the billing statements not to reveal any protected client information without the client's consent. If the client gives such consent, the lawyer should caution the client concerning the possibility of waiving the attorney-client privilege. (Evid. Code § 912.)

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1988-101

ISSUE:

Client employs attorney to represent client in a personal injury matter on a contingent fee basis. Client is also in need of health care. Health care provider agrees to treat client with the understanding that health care provider will be paid out of the proceeds from any recovery in the personal injury matter. Attorney and client both acknowledge in writing health care providers' interest in the recovery. Thereafter when recovery is had, client instructs attorney not to disburse any funds to health care provider, but to disburse the proceeds to client alone. What is the ethical duty of the attorney in this situation?

DIGEST:

It is the opinion of the Committee that the safest course of action is to commence an action in interpleader. In the alternative, the attorney may contact both parties to the dispute, stating: a) the existence and nature of the dispute; b) that the attorney cannot represent either side in the dispute; c) that the attorney can retain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and d) that if the parties do not so agree, an interpleader action will be commenced.

AUTHORITIES INTERPRETED:

Rules 4-100 and 4-210 of the Rules of Professional Conduct of the State Bar of California (operative May 27, 1989).

DISCUSSION

In addressing this issue, it is assumed that:

1) there is no dispute between the attorney and the client regarding the attorney's fee interest in the recovery proceeds; (2) there is no dispute that the client initially authorized the disbursement of funds to the third party and thereafter instructed the attorney to pay the funds to the client; and (3) the attorney, as well as the client, acknowledged the third party's interest in the funds.1

Generally, mishandling of client trust funds constitutes moral turpitude and warrants severe disciplinary action. (See Greenbaum v. State Bar (1976) 15 Cal.3d 893 [126 Cal.Rptr. 785].) Rule 4-100 of the California Rules of Professional Conduct specifically addresses an attorney's responsibilities regarding trust funds. Paragraph (B)(4) provides:

A member of the State Bar shall:

(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

The only exception to this rule, set forth in rule 4-100(A)(2), acknowledges the right of an attorney to hold in trust, contrary to client instructions, that portion of trust funds in which the attorney and client have conflicting interests. This rule does not, however, address conflicting interests between the client and a third party in funds held by the attorney. Rule 4-210(A)(1) touches on this issue by expressly allowing an attorney, with the consent of the client, to pay or agree to pay third parties out of funds collected or to be collected on behalf of the client.

The American Bar Association Model Rules of Professional Conduct also addresses this issue briefly in the comment to rule 1.15. There it is observed:

Third parties, such as the client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

The comment to rule 1.15 also observes that the duties of a lawyer with respect to trust funds in his or her possession go beyond those limited solely to the client. This is consistent with California law. An attorney who holds funds on behalf of a non- client third party is a fiduciary as to that party and is governed by the California Rules of Professional Conduct, even when not acting as an attorney per se in the transaction. (See Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-56 [49 Cal.Rptr. 97] where an attorney assumes a fiduciary relationship with a third party and violates his duty in a manner that would justify discipline if that relationship was with a client, he is subject to discipline.) (See also Simmons v. State Bar (1969) 70 Cal.2d 361, 365-66 [74 Cal.Rptr. 915]; Clark v. State Bar (1952) 39 Cal.2d 161, 166 [246 P.2d 1]; Crooks v. State Bar (1970) 3 Cal.3d 346, 355 [90 Cal.Rptr. 600].)

Although the above authorities touch on the issue presented here, none advise an attorney what to do when, as postulated here, the attorney obtains client consent to honor a third party's interest in trust funds under rule 4-210(A)(1), the attorney and client give assurances that the third party's interest will be honored, and then the client demands upon the attorney's receipt of the funds that they be promptly paid over to the client under rule 4- 100(B)(4) instead of the third party. An attorney confronted with this dilemma has five potential alternatives:2

  1. The safest course of action when confronted with such conflicting demands in trust funds, is to commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves the resolution of the dispute to the court. (See Code Civ. Proc., sec. 386 et seq.) Such an approach has received judicial approval in certain circumstances. (See Miller v. Rau, supra, 216 Cal.2d at p. 76.)
  2. Where consent is obtained from the client and the third party, the attorney may retain the funds in trust pending a resolution of the dispute between the parties. The funds retained must be placed in the client trust account, must be limited to the amounts in dispute, and all other funds should be appropriately distributed. An attorney, however, cannot unilaterally undertake to hold the disputed funds without the permission of the client and the third party. The attorney is authorized to do so only when the dispute over the funds is between the attorney and the client. (See rule 4-100(A)(2).)
  3. Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. However, under our assumed facts, the attorney and client both individually acknowledged the existence of the health care provider's interest in the funds. Under such circumstances, should the attorney pay the funds to the client, it may be found that the attorney did so in degradation of an enforceable third party lien exposing the attorney to potential civil liability to the health care provider. Paying the funds to the client also potentially violates the attorney's fiduciary duties to the health care provider under Johnstone v. State Bar, supra, 64 Cal.2d 153. By individually acknowledging the existence of the health care provider's interest in the funds, the attorney undertook potential civil and fiduciary duties to the health care provider which now conflict with his duty to obey his client's instructions. 3 For this reason, paying the funds to the client is a resolution of the dilemma fraught with difficulties.
  4. Paying the disputed funds to the health care provider contrary to client instructions would violate an attorney's duties under rule 4-100(B)(4). Rule 4-100(B)(4) requires the attorney to pay to the client only those funds "which the client is entitled to receive." Even though the client under our assumed facts has revoked the authorization initially given to release the funds to the third party, it is risky for the attorney to unilaterally determine the legal effect of the revocation and who is legally "entitled" to the funds. There are, in addition, equitable considerations which bear upon whether an attorney should disburse the funds to the health care provider. The reasons for the client's demand that the health care provider not be paid may be due to a legitimate dispute over the amount allegedly due or with the quality of the services rendered. An attorney is ill-advised to unilaterally prejudge the merits of such disputes and act in favor of one individual or the other.
  5. From a practical standpoint, a combination of the first and second alternatives above may be most appropriate. In this circumstance, the attorney contacts both parties to the dispute in writing stating: (a) the existence and nature of the dispute; (b) that the attorney cannot represent either side in the dispute;4 (c) that the attorney will maintain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and (d) that if the parties do not agree in writing within a set period of time that the attorney may retain the funds in trust pending resolution of the dispute, an interpleader action will be filed at which time the parties will have to proceed to resolve their dispute in court.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

1 The legal enforceability under California law of a third party's interest in client trust funds held by an attorney is beyond the purview of this Committee. However, attorneys are well- advised when confronted with this issue to consider the potential for civil liability irrespective of pertinent ethical considerations. (See, e.g., Miller v. Rau (1963) 216 Cal.App.2d 68 [30 Cal.Rptr. 612]; Weiss v. Marcus (1975) 51 Cal.App.3d 590 [124 Cal.Rptr. 297]; McCafferty v. Gilbank (1967) 249 Cal.App.2d 569 [57 Cal.Rptr. 695]; Siciliano v. Fireman's Fund Insurance Co. (1976) 62 Cal.App.3d 745 [133 Cal.Rptr. 376]; Skelly v. Richman (1970) 10 Cal.App.3d 844 [89 Cal.Rptr. 556].)

2 The best alternative is to anticipate the problem before it arises and address it in a written fee agreement with the client or in the lien form itself. For example, monetary limits should be placed on the maximum amount of the lien and authority should be obtained from each party for the attorney to hold the funds in trust should a dispute arise between the client and health care provider as here contemplated. The situation addressed here arises when such precautions are not taken.

3 Undertaking such obligations to a third party places the attorney in a potential conflict of interest under California Rule of Professional Conduct 3-310(B). Rule 4-210, however, allows for this conflict of interest, but only where there is full consent by the client.

4 Because the attorney has, by executing the lien document, acknowledged a duty to the third party regarding the funds, a conflict of interest is presented which precludes the attorney from continuing to represent the client in connection with the dispute over the lien. (See Johnstone v. State Bar, supra, 64 Cal.2d 153.) It is because of this potential conflict of interest that rule 4-210 requires full disclosure to the client when the lien agreement is first executed. Such disclosure should advise the client that if a dispute arises regarding the lien, the attorney will be unable to represent the client in the dispute and that if the lien dispute cannot be resolved by any other means, an interpleader action will be commenced in which the client will have to obtain other counsel. The attorney may, of course, continue to represent the client in all other respects.

LOS ANGELES COUNTY BAR ASSOCIATION PROFESSIONAL RESPONSIBILITY AND ETHICS COMMITTEE FORMAL OPINION NO. 478: July 18, 1994

SUMMARY

MEDICAL LIENS - DISBURSEMENT OF CLIENT FUNDS.

An attorney who has notice of a medical lien on funds recovered by a client in a personal injury action should not disburse those funds to the lienholder without the client's consent. The attorney may not simply disburse the contested funds to the client under such circumstances, however, even where the client so instructs the attorney.

AUTHORITIES CITED

American Bar Association Informal Opinion No. 1295

California Rules of Professional Conduct, Rules 4-100 and 4-210

Crooks v. State Bar, 3 Cal. 3d 346, 90 Cal. Rptr. 600 (1970)

"Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee to Confer With the CMA, State Bar of California (Revised 1991)

In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993)

Johnstone v. State Bar of California, 64 Cal. 2d 153, 49 Cal. Rptr. 97 (1966)

Los Angeles County Bar Association Formal Opinions No. 368 (June 16, 1977) and 454

Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963)

Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979)

State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101

FACTS AND ISSUES PRESENTED

The Committee has been asked for an opinion regarding the following facts: A client obtained medical services paid for by a health plan. An attorney filed a personal injury suit on the client's behalf. Prior to settling the client's case, the attorney received a notice of lien from the health plan and a copy of a lien acknowledgment form signed by the client. When the case settled, the client instructed the attorney not to pay the lien but, rather, to remit the settlement funds to the client. At the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt.

The issues presented to the Committee are whether an attorney may properly remit settlement funds to a client, in accordance with the client's instructions or, alternatively, to a third party lienholder, despite the client's lack of consent, where (1) the attorney has notice of the third party's interest in those funds; (2) the attorney is aware that the client has executed a lien acknowledgment form; and (3) the client subsequently acknowledges his or her own responsibility to pay the third-party debt.

DISCUSSION

It should first be noted that the legal enforceability of a third party's interest in client trust funds held by an attorney is a question of law beyond the purview of this Committee. Thus, we limit our consideration of the issues presented here to their ethical components.[1] The general rule concerning funds received or held by an attorney for the benefit of a client is stated in Rule 4-100 of the California Rules of Professional Conduct. That Rule provides in pertinent part that: "A member shall...[p]romptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive." (Emphasis added.)

Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. Under the facts presented here, however, should the attorney disburse the funds to the client without the lienholder's consent, the attorney may be subject to discipline. Because the attorney received a notice of lien from the health plan, as well as a copy of a lien acknowledgment form executed by the client, certain fiduciary duties to the health plan have arisen which now conflict with the attorney's duty to obey the client's instructions regarding disbursement of the funds.[1] See, e.g., Crooks v. State Bar, 3 Cal. 3d 346, 355, 90 Cal. Rptr. 600, 606 (1970) ("When an attorney receives money on behalf of a third party who is not his

California Ethics opinions

California

California State Bar

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2002-159

ISSUE:

Is it ethically permissible for a lawyer to: (1) to tell a potential client of the possibility of financing the legal representation by taking out a mortgage loan on the client's real property and (2) to refer the client to an independent broker who might arrange the financing, where the resulting loan funds are placed in an escrow account which is not controlled by the lawyer and from which the funds are disbursed to the lawyer for fees and costs for work performed on behalf of the client?

DIGEST:

A lawyer may refer a potential client to a broker for a real property loan to pay for attorney's fees and costs so long as the lawyer does not provide legal representation or receive compensation with regard to the referral or the resulting loan or escrow transactions, and has no undisclosed business or personal relationship with the broker.

AUTHORITIES INTERPRETED:

Rules 1-320, 3-300, 3-310, and 4-100 of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code sections 6068, subdivision (e), 6148, and 6200 et seq.

STATEMENT OF FACTS

A lawyer has been consulted by a potential client who seeks representation by the lawyer. The potential client presently is not able to pay for the legal services. The potential client owns real estate which can be encumbered as security for a loan, the proceeds of which could be used to pay for legal services. The lawyer provides the potential client with the name of a licensed broker, who she says might be able to arrange such a loan as one possible method for financing the legal representation. The lawyer also states in writing to the potential client that she neither is advising the potential client concerning alternative methods for financing legal representation nor recommending the use of the particular broker. The lawyer further states in writing that she does not represent the broker, the lender, or the prospective client in the loan transaction, and that she does not represent any of them or the escrow company with regard to the escrow in which the lender and the prospective client agree to place the loan proceeds. None of the participants compensate the lawyer with regard to the referral, the loan, or the escrow. Further, the lawyer does not condition her representing the client on the client having the recommended broker arrange the financing. The lawyer sends statements each billing cycle to the escrow account, seeking disbursements of funds to compensate the lawyer for attorney's fees and costs during the billing cycle; and the lawyer simultaneously sends a copy of each bill to the client. After the client has a reasonable amount of time to object to the lawyer's bill, the funds then are released for payment of legal services according to the fee agreement between the attorney and the client.

DISCUSSION

  1. The Proposed Escrow Arrangement Does Not Require Compliance With Rule 3-300

Rule 3-300 of the Rules of Professional Conduct of the State Bar of California governs a lawyer's business transactions with a client. [1] Rule 3-300 prohibits a lawyer from entering into a business transaction with her client, and from knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to her client, unless she first complies with the requirements set out in the rule. [2] Rule 3-300 does not apply to the referral and escrow arrangement described in the hypothetical. First, the lawyer has not entered into a business transaction with the prospective client because she is not a direct or indirect party to the loan, the broker is independent of the lawyer, and the lawyer does not benefit from the loan transaction in violation of rule 3-300. (E.g., Rodgers v. State Bar (1989) 48 Cal.3d 300, 313 [256 Cal.Rptr. 381] [lawyer violated former rule 5-101, the predecessor of current rule 3-300, by not disclosing to client conservator that a third party to whom lawyer recommended conservator loan money was another client and former business partner of lawyer, where proceeds of loan were used to pay off legal fees second client owed lawyer]; Rose v. State Bar (1989) 49 Cal.3d 646, 662-663 [262 Cal.Rptr. 702] [lawyer violated former rule 5-101 where he recommended that the client lend money to a third party for investment in a venture in which lawyer received a 25 percent interest]. See also Cal. State Bar Formal Opn. No. 1995-140 [lawyer paid referral fee by life insurance agent for referring client to agent will be deemed to have entered into a business transaction with the client].) The lawyer in the hypothetical, however, has received no such financial benefit-she has no interest in the broker's business and is receiving no payment for referring the potential client to the broker. [3] Moreover, the lawyer has not obtained a "pecuniary interest adverse to a client" merely by the deposit of the loan proceeds in an escrow account. The first sentence of the discussion accompanying rule 3-300 states the rule is "not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member ownership, possessory, security, or other pecuniary interest adverse to the client." [4] Here, the lawyer will not acquire any pecuniary interest in the funds until after performing the legal services and after the process for paying the lawyer is completed. The loan and escrow arrangement gives the lawyer assurance that she will be paid her fees and costs; even assuming that this assurance amounts to a "pecuniary interest," it is not "adverse" within the meaning of rule 3-300. In applying rule 3-300 and its predecessors, the California Supreme Court has held that a lawyer acquires a pecuniary interest adverse to the client where it is reasonably foreseeable that it may be detrimental to the client's interests. (Hawk v. State Bar (1988) 45 Cal.3d 589, 599-600 [247 Cal.Rptr. 599].) Because almost any financial transaction can be adverse to a client if he or she has to pay money, the California Supreme Court has developed a more precise definition: a lawyer's pecuniary interest is "adverse" to the client within the meaning of rule 3-300 if the lawyer acquires the ability to extinguish a client's interest in the property, without the possibility of judicial intervention, whether or not the lawyer ever acts to do so. (Connor v. State Bar (1990) 50 Cal.3d 1047, 1058 [269 Cal.Rptr. 742]; Hawk v. State Bar, supra, 45 Cal.3d at p. 600; In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 759-760.) For example, in Connor, supra, under an agreement with the client, the lawyer took full title to the client's property. Thus, the lawyer extinguished any rights the client had in the property. (Connor v. State Bar, supra, 50 Cal.3d at p. 1058). Similarly, in Hawk, supra, a lawyer who secured payment of fees by acquiring a note secured by a deed of trust on the client's property was held to have acquired a pecuniary interest adverse to the client because the deed of trust gave the lawyer the power of sale in a nonjudicial foreclosure procedure. (Hawk v. State Bar, supra, 45 Cal.3d at p. 600.) The statement of facts shows that the lawyer does not have the ability to extinguish the client's interest without judicial intervention. The mere deposit of funds in escrow does not extinguish the client's interest. It is the escrow holder, not the lawyer, who is in possession of the funds. The lawyer may only acquire payment for her services or for the costs advanced by her after satisfying the terms of the fee agreement and meeting the escrow requirements. Where the escrow instructions require the lawyer to submit to the client for the client's review a billing in compliance with Business and Professions Code section 6148, where the client has an opportunity to contest the billing, and where the disputed portion of the billing will remain in escrow or the lawyer's trust account until the dispute is resolved, there is no violation of rule 3-300 because the lawyer is unable to extinguish the client's right to control the payment of fees. In summary on the facts presented, unless the lawyer has a financial interest in the broker or receives some form of compensation from the broker for referring a potential client, rule 3-300 does not apply.

  1. The Proposed Escrow Arrangement Does Not Require Compliance with Rule 4-100

Rule 4-100 is the primary professional standard regulating lawyers' handling of client funds. Rule 4-100(A) requires, with certain exceptions, that any "funds received or held for the benefit of clients" by a lawyer must be deposited in the lawyer's client trust fund account. [5] Under rule 4-100(B), "the client's funds, securities or other properties" which are received by the lawyer or which "come into the possession of the" lawyer are subject to certain requirements regardless of whether the funds, securities, or properties are deposited in a trust account. These requirements include: (1) a notice requirement, (2) a requirement to maintain specified records, and (3) a requirement to render appropriate accounts to a client. [6] The precise issues here are first whether rule 4-100(A) requires that the loan proceeds be placed in the lawyer's trust account rather than the escrow account and second, even if the proposed arrangement does not activate rule 4-100(A)' s deposit requirement, whether it nevertheless triggers rule 4-100(B)' s notice, record-keeping, and accounting requirements. Under our facts, we do not need to address the rule 4-100 requirements because the loan proceeds are never "received or held" by the lawyer. Instead, they are placed by the lender directly in the escrow account. The lawyer receives funds only after she has performed legal services and has otherwise complied with the terms of her fee agreement with the client. When the lawyer has performed legal services and received fees from the escrow account pursuant to the process agreed upon by client and lawyer, the fees are fixed and earned. Under these circumstances, the earned fees belong to the lawyer and should not be placed in the client trust account. [7] In summary, we note that because the loan proceeds are not "received or held" by the lawyer and have not "come into the possession of the" lawyer, the proposed escrow arrangement does not appear to violate rule 4-100. We caution, however, that our conclusion rests on the fact that the commercial escrow holder is truly independent from the lawyer. We have assumed that the lawyer cannot access any of the escrow funds until she has earned a fee or accrued costs on the client's behalf, has properly documented her fees and costs, and has submitted her documented request to the escrow holder with notice to the client. [8]

III. The Proposed Escrow Arrangement Does Not Require Written Disclosure Under Rule 3-310(A)

Rule 3-310 requires disclosure where the lawyer has a legal, business, financial, professional, or personal relationship with a party in the same matter (rule 3-310(B)(1)) or has a business, financial, or professional interest in the subject matter of the representation (rule 3-310(B)(4)). [9] Neither of these provisions, however, applies to this independent broker and escrow arrangement. Rule 3-310(B)(1) does not apply to our facts. The lawyer does not have any relationship with the broker. Although the lawyer may refer potential clients to the broker to arrange financing, the lawyer is under no legal obligation to do so. Moreover, there are no facts suggesting that the lawyer and broker are engaged in either a formal or an informal business relationship. The broker is not a witness or a party to the subject matter of the representation, the lawyer receives no compensation from the broker for referring potential clients, and the lawyer does not represent the potential client in the transaction among broker, lender, and client. [10] Further, rule 3-310(B)(4) is not applicable.

> Our facts are distinctly different from the facts posed in California State Bar Formal Opinion Number 1995-140, where we concluded that an insurance agent's payment of a commission to an estate planning lawyer as compensation for the lawyer's referring clients to the agent did trigger rule 3-310(B)(4)' s disclosure requirements. We reasoned that the lawyer has a business or financial interest in that representation because the lawyer stands to obtain compensation from the insurance agent if the client decides to purchase insurance from the insurance agent with whom the lawyer has made the referral arrangement. Rule 3-310(B)(4)' s written disclosure requirement is directly implicated because the lawyer in the hypothetical has an interest in the client's representation and may well compromise that representation "in order to advance the attorney's own financial or personal interests." (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 546 [28 Cal.Rptr.2d 617].) Unlike the situation presented in Formal Opinion Number 1995-140, the lawyer here is not compensated for the referral. [11] Finally, rule 3-310(F), which prohibits a lawyer from accepting "compensation for representing a client from one other than the client" unless certain conditions are met, does not apply to this situation. Subdivision (F) applies only where the funds of a third party are being used to pay the lawyer. It is intended to avoid the situation where the lawyer's duty of undivided loyalty to her client could be affected by the involvement and interests of a third party paying the attorney's fees and costs. Here, that risk does not appear to exist where the third party is an escrow agent who does not own the loan proceeds, but only is responsible for holding and disbursing the client's own funds. [12] In summary, because the lawyer does not represent adverse interests, have a relationship with a party in the same matter, or have an interest in the subject matter of the representation, rule 3-310 is inapplicable. This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar. [1] / Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of California.

[2] / Rule 3-300 provides: A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.

[3] / Although the lawyer does receive some benefit from the escrow arrangement--she is assured that there are funds available to pay her fees and costs--this is no different from the benefit the lawyer receives by requiring an advanced fee and placing it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within rule 3-300. (Rule 3-300, discussion.) The situation would be quite different, however, if the broker were to compensate the lawyer for referring clients to the broker. Then, the lawyer would be "soliciting a client's transaction in which the lawyer will receive a financial benefit," and the lawyer will be deemed to have entered into a business transaction with her client to which rule 3-300 would apply. In that case, the lawyer would have to follow a specific protocol, including obtaining written consent from the client. (See Cal. State Bar Formal Opn. No. 1995-140.) Compensation may be in a form other than monetary. For example, the broker could compensate the lawyer by referring clients to the lawyer as a quid pro quo for the lawyer referring business to the broker. In that event, not only would the lawyer's conduct in referring clients to the broker be governed by rule 3-300, but the lawyer would also violate rule 1-320(B) , which provides that a lawyer "shall not compensate, give or promise anything of value to any person or entity for the purpose of recommending or securing employment of the member . . . by a client, or as a reward for having made a recommendation resulting in employment of the member . . . by a client." See also Bus. § Prof. Code § 6152 (prohibiting running and capping).

[4] / See also California State Bar Formal Opinion Number 1995-140, footnote 5, which notes that this is an important exception to the general applicability of the rule.

[5] / Rule 4-100(A) provides:

(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account," "Client's Funds Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:

(1) Funds reasonably sufficient to pay bank charges.

(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed. However, when the right of the member or law firm to receive a portion of trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved.

[6] / Rule 4-100(B) provides:

(B) A member shall:

(1) Promptly notify a client of the receipt of the client's funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

[7] / Rule 4-100(A) provides that, except for "[f]unds reasonably sufficient to pay bank charges" and funds that are subject to a dispute between lawyer and client, "[n]o funds belonging to the member or the law firm shall be deposited" in the lawyer's trust account "or otherwise commingled" with funds held for the client.

[8] / Our conclusion on the applicability of rule 4-100 is limited to the facts presented. These facts do not include a situation where the client disputes a disbursement that is received by the lawyer. The ethical obligations of the lawyer in such circumstances, including any obligation to deposit disputed funds into a trust account under rule 4-100(A) or to render an appropriate accounting to the client under rule 4-100(B), are beyond the scope of this opinion.

[9] / Rule 3-310(B) provides in part:

(B) A member shall not accept or continue representation of a client without providing written disclosure to the client where:

(1) The member has a legal, business, financial, professional, or personal relationship with a party or witness to the same matter; or (4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation.

[10] / With respect to this, the lawyer must be careful not to inadvertently mislead the prospective client into believing the lawyer represents the client in the identification of financing alternatives, in deciding to use a particular loan broker, or in the loan or escrow transactions. An attorney-client relationship may result from an express or implied contract. Except when created by court appointment, the attorney-client relationship may be found to exist based on the intent and conduct of the parties and the reasonable expectations of the potential client (Flatt v. Superior Court (1994) 9 Cal.4th 275, 281, fn.1 [36 Cal.App.2d 537]; Hecht v. Superior Court (1987) 192 Cal.App.3d 560, 565 [237 Cal.Rptr. 528]; Fox v. Pollack (1986) 181 Cal.App.3d 954 [226 Cal.Rptr. 532] [absent some objective evidence of an agreement to represent, it is not sufficient that plaintiffs "thought" defendant was their attorney]). Even if the possible client has not paid or promised to pay the attorney, an attorney-client relationship may be found to exist where she has communicated confidential information to the attorney (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [86 Cal.Rptr.2d 816]; Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39-40 [154 Cal.Rptr. 22]; Perkins v. West Coast Lumber Co. (1900) 129 Cal. 427; L.A. Cty. Bar Assn. Formal Opn. No. 449). Under our facts, the lawyer has given the prospective client the name of a licensed broker and stated that the broker might be able to arrange a loan to finance legal representation by the lawyer. In such situations, a prospective client might assume from a lawyer identifying a single broker that the lawyer has investigated the broker and in essence is advising the prospective client that it is safe to enter into a loan transaction and to do so through that broker. On the other hand, the fact that the prospective client has had no previous professional relationship with the lawyer, and the absence of any facts indicating that the prospective client has disclosed confidential information to the lawyer, argue against an attorney-client relationship having been formed. Nevertheless, while not necessarily required, to avoid creating a reasonable expectation in the prospective client to the contrary, here the lawyer has stated in writing to the prospective client that she does not represent the prospective client with regard to the identification of financing alternatives, the selection of the broker, or the resulting loan or escrow transactions.

[11] / California State Bar Formal Opinion Number 1995-140 is further distinguishable because the estate planning lawyer had a financial interest "in the subject matter of the representation." The lawyer was preparing an estate plan which required the availability of liquid funds to pay estate taxes at the time of the client's death. Referring clients to an agent for a life insurance policy that would provide those funds was thus central to the actual subject matter of the representation. Unlike that situation, however, financial arrangements for paying the lawyer's legal fees will usually be independent of the purpose for which the lawyer is retained.

[12] / Although the lawyer's duty of undivided loyalty to her client does not appear threatened, there is a possibility that the lawyer's billing statements could disclose confidential client information to the escrow agent in violation of the lawyer's duties under Business and Professions Code section 6068, subdivision (e). The lawyer must be careful in submitting the billing statements not to reveal any protected client information without the client's consent. If the client gives such consent, the lawyer should caution the client concerning the possibility of waiving the attorney-client privilege. (Evid. Code § 912.)

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1988-101

ISSUE:

Client employs attorney to represent client in a personal injury matter on a contingent fee basis. Client is also in need of health care. Health care provider agrees to treat client with the understanding that health care provider will be paid out of the proceeds from any recovery in the personal injury matter. Attorney and client both acknowledge in writing health care providers' interest in the recovery. Thereafter when recovery is had, client instructs attorney not to disburse any funds to health care provider, but to disburse the proceeds to client alone. What is the ethical duty of the attorney in this situation?

DIGEST:

It is the opinion of the Committee that the safest course of action is to commence an action in interpleader. In the alternative, the attorney may contact both parties to the dispute, stating: a) the existence and nature of the dispute; b) that the attorney cannot represent either side in the dispute; c) that the attorney can retain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and d) that if the parties do not so agree, an interpleader action will be commenced.

AUTHORITIES INTERPRETED:

Rules 4-100 and 4-210 of the Rules of Professional Conduct of the State Bar of California (operative May 27, 1989).

DISCUSSION

In addressing this issue, it is assumed that:

1) there is no dispute between the attorney and the client regarding the attorney's fee interest in the recovery proceeds; (2) there is no dispute that the client initially authorized the disbursement of funds to the third party and thereafter instructed the attorney to pay the funds to the client; and (3) the attorney, as well as the client, acknowledged the third party's interest in the funds.1

Generally, mishandling of client trust funds constitutes moral turpitude and warrants severe disciplinary action. (See Greenbaum v. State Bar (1976) 15 Cal.3d 893 [126 Cal.Rptr. 785].) Rule 4-100 of the California Rules of Professional Conduct specifically addresses an attorney's responsibilities regarding trust funds. Paragraph (B)(4) provides:

A member of the State Bar shall:

(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

The only exception to this rule, set forth in rule 4-100(A)(2), acknowledges the right of an attorney to hold in trust, contrary to client instructions, that portion of trust funds in which the attorney and client have conflicting interests. This rule does not, however, address conflicting interests between the client and a third party in funds held by the attorney. Rule 4-210(A)(1) touches on this issue by expressly allowing an attorney, with the consent of the client, to pay or agree to pay third parties out of funds collected or to be collected on behalf of the client.

The American Bar Association Model Rules of Professional Conduct also addresses this issue briefly in the comment to rule 1.15. There it is observed:

Third parties, such as the client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

The comment to rule 1.15 also observes that the duties of a lawyer with respect to trust funds in his or her possession go beyond those limited solely to the client. This is consistent with California law. An attorney who holds funds on behalf of a non- client third party is a fiduciary as to that party and is governed by the California Rules of Professional Conduct, even when not acting as an attorney per se in the transaction. (See Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-56 [49 Cal.Rptr. 97] where an attorney assumes a fiduciary relationship with a third party and violates his duty in a manner that would justify discipline if that relationship was with a client, he is subject to discipline.) (See also Simmons v. State Bar (1969) 70 Cal.2d 361, 365-66 [74 Cal.Rptr. 915]; Clark v. State Bar (1952) 39 Cal.2d 161, 166 [246 P.2d 1]; Crooks v. State Bar (1970) 3 Cal.3d 346, 355 [90 Cal.Rptr. 600].)

Although the above authorities touch on the issue presented here, none advise an attorney what to do when, as postulated here, the attorney obtains client consent to honor a third party's interest in trust funds under rule 4-210(A)(1), the attorney and client give assurances that the third party's interest will be honored, and then the client demands upon the attorney's receipt of the funds that they be promptly paid over to the client under rule 4- 100(B)(4) instead of the third party. An attorney confronted with this dilemma has five potential alternatives:2

  1. The safest course of action when confronted with such conflicting demands in trust funds, is to commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves the resolution of the dispute to the court. (See Code Civ. Proc., sec. 386 et seq.) Such an approach has received judicial approval in certain circumstances. (See Miller v. Rau, supra, 216 Cal.2d at p. 76.)
  2. Where consent is obtained from the client and the third party, the attorney may retain the funds in trust pending a resolution of the dispute between the parties. The funds retained must be placed in the client trust account, must be limited to the amounts in dispute, and all other funds should be appropriately distributed. An attorney, however, cannot unilaterally undertake to hold the disputed funds without the permission of the client and the third party. The attorney is authorized to do so only when the dispute over the funds is between the attorney and the client. (See rule 4-100(A)(2).)
  3. Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. However, under our assumed facts, the attorney and client both individually acknowledged the existence of the health care provider's interest in the funds. Under such circumstances, should the attorney pay the funds to the client, it may be found that the attorney did so in degradation of an enforceable third party lien exposing the attorney to potential civil liability to the health care provider. Paying the funds to the client also potentially violates the attorney's fiduciary duties to the health care provider under Johnstone v. State Bar, supra, 64 Cal.2d 153. By individually acknowledging the existence of the health care provider's interest in the funds, the attorney undertook potential civil and fiduciary duties to the health care provider which now conflict with his duty to obey his client's instructions. 3 For this reason, paying the funds to the client is a resolution of the dilemma fraught with difficulties.
  4. Paying the disputed funds to the health care provider contrary to client instructions would violate an attorney's duties under rule 4-100(B)(4). Rule 4-100(B)(4) requires the attorney to pay to the client only those funds "which the client is entitled to receive." Even though the client under our assumed facts has revoked the authorization initially given to release the funds to the third party, it is risky for the attorney to unilaterally determine the legal effect of the revocation and who is legally "entitled" to the funds. There are, in addition, equitable considerations which bear upon whether an attorney should disburse the funds to the health care provider. The reasons for the client's demand that the health care provider not be paid may be due to a legitimate dispute over the amount allegedly due or with the quality of the services rendered. An attorney is ill-advised to unilaterally prejudge the merits of such disputes and act in favor of one individual or the other.
  5. From a practical standpoint, a combination of the first and second alternatives above may be most appropriate. In this circumstance, the attorney contacts both parties to the dispute in writing stating: (a) the existence and nature of the dispute; (b) that the attorney cannot represent either side in the dispute;4 (c) that the attorney will maintain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and (d) that if the parties do not agree in writing within a set period of time that the attorney may retain the funds in trust pending resolution of the dispute, an interpleader action will be filed at which time the parties will have to proceed to resolve their dispute in court.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

1 The legal enforceability under California law of a third party's interest in client trust funds held by an attorney is beyond the purview of this Committee. However, attorneys are well- advised when confronted with this issue to consider the potential for civil liability irrespective of pertinent ethical considerations. (See, e.g., Miller v. Rau (1963) 216 Cal.App.2d 68 [30 Cal.Rptr. 612]; Weiss v. Marcus (1975) 51 Cal.App.3d 590 [124 Cal.Rptr. 297]; McCafferty v. Gilbank (1967) 249 Cal.App.2d 569 [57 Cal.Rptr. 695]; Siciliano v. Fireman's Fund Insurance Co. (1976) 62 Cal.App.3d 745 [133 Cal.Rptr. 376]; Skelly v. Richman (1970) 10 Cal.App.3d 844 [89 Cal.Rptr. 556].)

2 The best alternative is to anticipate the problem before it arises and address it in a written fee agreement with the client or in the lien form itself. For example, monetary limits should be placed on the maximum amount of the lien and authority should be obtained from each party for the attorney to hold the funds in trust should a dispute arise between the client and health care provider as here contemplated. The situation addressed here arises when such precautions are not taken.

3 Undertaking such obligations to a third party places the attorney in a potential conflict of interest under California Rule of Professional Conduct 3-310(B). Rule 4-210, however, allows for this conflict of interest, but only where there is full consent by the client.

4 Because the attorney has, by executing the lien document, acknowledged a duty to the third party regarding the funds, a conflict of interest is presented which precludes the attorney from continuing to represent the client in connection with the dispute over the lien. (See Johnstone v. State Bar, supra, 64 Cal.2d 153.) It is because of this potential conflict of interest that rule 4-210 requires full disclosure to the client when the lien agreement is first executed. Such disclosure should advise the client that if a dispute arises regarding the lien, the attorney will be unable to represent the client in the dispute and that if the lien dispute cannot be resolved by any other means, an interpleader action will be commenced in which the client will have to obtain other counsel. The attorney may, of course, continue to represent the client in all other respects.

LOS ANGELES COUNTY BAR ASSOCIATION PROFESSIONAL RESPONSIBILITY AND ETHICS COMMITTEE FORMAL OPINION NO. 478: July 18, 1994

SUMMARY

MEDICAL LIENS - DISBURSEMENT OF CLIENT FUNDS.

An attorney who has notice of a medical lien on funds recovered by a client in a personal injury action should not disburse those funds to the lienholder without the client's consent. The attorney may not simply disburse the contested funds to the client under such circumstances, however, even where the client so instructs the attorney.

AUTHORITIES CITED

American Bar Association Informal Opinion No. 1295

California Rules of Professional Conduct, Rules 4-100 and 4-210

Crooks v. State Bar, 3 Cal. 3d 346, 90 Cal. Rptr. 600 (1970)

"Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee to Confer With the CMA, State Bar of California (Revised 1991)

In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993)

Johnstone v. State Bar of California, 64 Cal. 2d 153, 49 Cal. Rptr. 97 (1966)

Los Angeles County Bar Association Formal Opinions No. 368 (June 16, 1977) and 454

Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963)

Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979)

State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101

FACTS AND ISSUES PRESENTED

The Committee has been asked for an opinion regarding the following facts: A client obtained medical services paid for by a health plan. An attorney filed a personal injury suit on the client's behalf. Prior to settling the client's case, the attorney received a notice of lien from the health plan and a copy of a lien acknowledgment form signed by the client. When the case settled, the client instructed the attorney not to pay the lien but, rather, to remit the settlement funds to the client. At the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt.

The issues presented to the Committee are whether an attorney may properly remit settlement funds to a client, in accordance with the client's instructions or, alternatively, to a third party lienholder, despite the client's lack of consent, where (1) the attorney has notice of the third party's interest in those funds; (2) the attorney is aware that the client has executed a lien acknowledgment form; and (3) the client subsequently acknowledges his or her own responsibility to pay the third-party debt.

DISCUSSION

It should first be noted that the legal enforceability of a third party's interest in client trust funds held by an attorney is a question of law beyond the purview of this Committee. Thus, we limit our consideration of the issues presented here to their ethical components.[1] The general rule concerning funds received or held by an attorney for the benefit of a client is stated in Rule 4-100 of the California Rules of Professional Conduct. That Rule provides in pertinent part that: "A member shall...[p]romptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive." (Emphasis added.)

Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. Under the facts presented here, however, should the attorney disburse the funds to the client without the lienholder's consent, the attorney may be subject to discipline. Because the attorney received a notice of lien from the health plan, as well as a copy of a lien acknowledgment form executed by the client, certain fiduciary duties to the health plan have arisen which now conflict with the attorney's duty to obey the client's instructions regarding disbursement of the funds.[1] See, e.g., Crooks v. State Bar, 3 Cal. 3d 346, 355, 90 Cal. Rptr. 600, 606 (1970) ("When an attorney receives money on behalf of a third party who is not his

California Ethics opinions

California

California State Bar

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2002-159

ISSUE:

Is it ethically permissible for a lawyer to: (1) to tell a potential client of the possibility of financing the legal representation by taking out a mortgage loan on the client's real property and (2) to refer the client to an independent broker who might arrange the financing, where the resulting loan funds are placed in an escrow account which is not controlled by the lawyer and from which the funds are disbursed to the lawyer for fees and costs for work performed on behalf of the client?

DIGEST:

A lawyer may refer a potential client to a broker for a real property loan to pay for attorney's fees and costs so long as the lawyer does not provide legal representation or receive compensation with regard to the referral or the resulting loan or escrow transactions, and has no undisclosed business or personal relationship with the broker.

AUTHORITIES INTERPRETED:

Rules 1-320, 3-300, 3-310, and 4-100 of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code sections 6068, subdivision (e), 6148, and 6200 et seq.

STATEMENT OF FACTS

A lawyer has been consulted by a potential client who seeks representation by the lawyer. The potential client presently is not able to pay for the legal services. The potential client owns real estate which can be encumbered as security for a loan, the proceeds of which could be used to pay for legal services. The lawyer provides the potential client with the name of a licensed broker, who she says might be able to arrange such a loan as one possible method for financing the legal representation. The lawyer also states in writing to the potential client that she neither is advising the potential client concerning alternative methods for financing legal representation nor recommending the use of the particular broker. The lawyer further states in writing that she does not represent the broker, the lender, or the prospective client in the loan transaction, and that she does not represent any of them or the escrow company with regard to the escrow in which the lender and the prospective client agree to place the loan proceeds. None of the participants compensate the lawyer with regard to the referral, the loan, or the escrow. Further, the lawyer does not condition her representing the client on the client having the recommended broker arrange the financing. The lawyer sends statements each billing cycle to the escrow account, seeking disbursements of funds to compensate the lawyer for attorney's fees and costs during the billing cycle; and the lawyer simultaneously sends a copy of each bill to the client. After the client has a reasonable amount of time to object to the lawyer's bill, the funds then are released for payment of legal services according to the fee agreement between the attorney and the client.

DISCUSSION

  1. The Proposed Escrow Arrangement Does Not Require Compliance With Rule 3-300

Rule 3-300 of the Rules of Professional Conduct of the State Bar of California governs a lawyer's business transactions with a client. [1] Rule 3-300 prohibits a lawyer from entering into a business transaction with her client, and from knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to her client, unless she first complies with the requirements set out in the rule. [2] Rule 3-300 does not apply to the referral and escrow arrangement described in the hypothetical. First, the lawyer has not entered into a business transaction with the prospective client because she is not a direct or indirect party to the loan, the broker is independent of the lawyer, and the lawyer does not benefit from the loan transaction in violation of rule 3-300. (E.g., Rodgers v. State Bar (1989) 48 Cal.3d 300, 313 [256 Cal.Rptr. 381] [lawyer violated former rule 5-101, the predecessor of current rule 3-300, by not disclosing to client conservator that a third party to whom lawyer recommended conservator loan money was another client and former business partner of lawyer, where proceeds of loan were used to pay off legal fees second client owed lawyer]; Rose v. State Bar (1989) 49 Cal.3d 646, 662-663 [262 Cal.Rptr. 702] [lawyer violated former rule 5-101 where he recommended that the client lend money to a third party for investment in a venture in which lawyer received a 25 percent interest]. See also Cal. State Bar Formal Opn. No. 1995-140 [lawyer paid referral fee by life insurance agent for referring client to agent will be deemed to have entered into a business transaction with the client].) The lawyer in the hypothetical, however, has received no such financial benefit-she has no interest in the broker's business and is receiving no payment for referring the potential client to the broker. [3] Moreover, the lawyer has not obtained a "pecuniary interest adverse to a client" merely by the deposit of the loan proceeds in an escrow account. The first sentence of the discussion accompanying rule 3-300 states the rule is "not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member ownership, possessory, security, or other pecuniary interest adverse to the client." [4] Here, the lawyer will not acquire any pecuniary interest in the funds until after performing the legal services and after the process for paying the lawyer is completed. The loan and escrow arrangement gives the lawyer assurance that she will be paid her fees and costs; even assuming that this assurance amounts to a "pecuniary interest," it is not "adverse" within the meaning of rule 3-300. In applying rule 3-300 and its predecessors, the California Supreme Court has held that a lawyer acquires a pecuniary interest adverse to the client where it is reasonably foreseeable that it may be detrimental to the client's interests. (Hawk v. State Bar (1988) 45 Cal.3d 589, 599-600 [247 Cal.Rptr. 599].) Because almost any financial transaction can be adverse to a client if he or she has to pay money, the California Supreme Court has developed a more precise definition: a lawyer's pecuniary interest is "adverse" to the client within the meaning of rule 3-300 if the lawyer acquires the ability to extinguish a client's interest in the property, without the possibility of judicial intervention, whether or not the lawyer ever acts to do so. (Connor v. State Bar (1990) 50 Cal.3d 1047, 1058 [269 Cal.Rptr. 742]; Hawk v. State Bar, supra, 45 Cal.3d at p. 600; In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 759-760.) For example, in Connor, supra, under an agreement with the client, the lawyer took full title to the client's property. Thus, the lawyer extinguished any rights the client had in the property. (Connor v. State Bar, supra, 50 Cal.3d at p. 1058). Similarly, in Hawk, supra, a lawyer who secured payment of fees by acquiring a note secured by a deed of trust on the client's property was held to have acquired a pecuniary interest adverse to the client because the deed of trust gave the lawyer the power of sale in a nonjudicial foreclosure procedure. (Hawk v. State Bar, supra, 45 Cal.3d at p. 600.) The statement of facts shows that the lawyer does not have the ability to extinguish the client's interest without judicial intervention. The mere deposit of funds in escrow does not extinguish the client's interest. It is the escrow holder, not the lawyer, who is in possession of the funds. The lawyer may only acquire payment for her services or for the costs advanced by her after satisfying the terms of the fee agreement and meeting the escrow requirements. Where the escrow instructions require the lawyer to submit to the client for the client's review a billing in compliance with Business and Professions Code section 6148, where the client has an opportunity to contest the billing, and where the disputed portion of the billing will remain in escrow or the lawyer's trust account until the dispute is resolved, there is no violation of rule 3-300 because the lawyer is unable to extinguish the client's right to control the payment of fees. In summary on the facts presented, unless the lawyer has a financial interest in the broker or receives some form of compensation from the broker for referring a potential client, rule 3-300 does not apply.

  1. The Proposed Escrow Arrangement Does Not Require Compliance with Rule 4-100

Rule 4-100 is the primary professional standard regulating lawyers' handling of client funds. Rule 4-100(A) requires, with certain exceptions, that any "funds received or held for the benefit of clients" by a lawyer must be deposited in the lawyer's client trust fund account. [5] Under rule 4-100(B), "the client's funds, securities or other properties" which are received by the lawyer or which "come into the possession of the" lawyer are subject to certain requirements regardless of whether the funds, securities, or properties are deposited in a trust account. These requirements include: (1) a notice requirement, (2) a requirement to maintain specified records, and (3) a requirement to render appropriate accounts to a client. [6] The precise issues here are first whether rule 4-100(A) requires that the loan proceeds be placed in the lawyer's trust account rather than the escrow account and second, even if the proposed arrangement does not activate rule 4-100(A)' s deposit requirement, whether it nevertheless triggers rule 4-100(B)' s notice, record-keeping, and accounting requirements. Under our facts, we do not need to address the rule 4-100 requirements because the loan proceeds are never "received or held" by the lawyer. Instead, they are placed by the lender directly in the escrow account. The lawyer receives funds only after she has performed legal services and has otherwise complied with the terms of her fee agreement with the client. When the lawyer has performed legal services and received fees from the escrow account pursuant to the process agreed upon by client and lawyer, the fees are fixed and earned. Under these circumstances, the earned fees belong to the lawyer and should not be placed in the client trust account. [7] In summary, we note that because the loan proceeds are not "received or held" by the lawyer and have not "come into the possession of the" lawyer, the proposed escrow arrangement does not appear to violate rule 4-100. We caution, however, that our conclusion rests on the fact that the commercial escrow holder is truly independent from the lawyer. We have assumed that the lawyer cannot access any of the escrow funds until she has earned a fee or accrued costs on the client's behalf, has properly documented her fees and costs, and has submitted her documented request to the escrow holder with notice to the client. [8]

III. The Proposed Escrow Arrangement Does Not Require Written Disclosure Under Rule 3-310(A)

Rule 3-310 requires disclosure where the lawyer has a legal, business, financial, professional, or personal relationship with a party in the same matter (rule 3-310(B)(1)) or has a business, financial, or professional interest in the subject matter of the representation (rule 3-310(B)(4)). [9] Neither of these provisions, however, applies to this independent broker and escrow arrangement. Rule 3-310(B)(1) does not apply to our facts. The lawyer does not have any relationship with the broker. Although the lawyer may refer potential clients to the broker to arrange financing, the lawyer is under no legal obligation to do so. Moreover, there are no facts suggesting that the lawyer and broker are engaged in either a formal or an informal business relationship. The broker is not a witness or a party to the subject matter of the representation, the lawyer receives no compensation from the broker for referring potential clients, and the lawyer does not represent the potential client in the transaction among broker, lender, and client. [10] Further, rule 3-310(B)(4) is not applicable.

> Our facts are distinctly different from the facts posed in California State Bar Formal Opinion Number 1995-140, where we concluded that an insurance agent's payment of a commission to an estate planning lawyer as compensation for the lawyer's referring clients to the agent did trigger rule 3-310(B)(4)' s disclosure requirements. We reasoned that the lawyer has a business or financial interest in that representation because the lawyer stands to obtain compensation from the insurance agent if the client decides to purchase insurance from the insurance agent with whom the lawyer has made the referral arrangement. Rule 3-310(B)(4)' s written disclosure requirement is directly implicated because the lawyer in the hypothetical has an interest in the client's representation and may well compromise that representation "in order to advance the attorney's own financial or personal interests." (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 546 [28 Cal.Rptr.2d 617].) Unlike the situation presented in Formal Opinion Number 1995-140, the lawyer here is not compensated for the referral. [11] Finally, rule 3-310(F), which prohibits a lawyer from accepting "compensation for representing a client from one other than the client" unless certain conditions are met, does not apply to this situation. Subdivision (F) applies only where the funds of a third party are being used to pay the lawyer. It is intended to avoid the situation where the lawyer's duty of undivided loyalty to her client could be affected by the involvement and interests of a third party paying the attorney's fees and costs. Here, that risk does not appear to exist where the third party is an escrow agent who does not own the loan proceeds, but only is responsible for holding and disbursing the client's own funds. [12] In summary, because the lawyer does not represent adverse interests, have a relationship with a party in the same matter, or have an interest in the subject matter of the representation, rule 3-310 is inapplicable. This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar. [1] / Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of California.

[2] / Rule 3-300 provides: A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.

[3] / Although the lawyer does receive some benefit from the escrow arrangement--she is assured that there are funds available to pay her fees and costs--this is no different from the benefit the lawyer receives by requiring an advanced fee and placing it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within rule 3-300. (Rule 3-300, discussion.) The situation would be quite different, however, if the broker were to compensate the lawyer for referring clients to the broker. Then, the lawyer would be "soliciting a client's transaction in which the lawyer will receive a financial benefit," and the lawyer will be deemed to have entered into a business transaction with her client to which rule 3-300 would apply. In that case, the lawyer would have to follow a specific protocol, including obtaining written consent from the client. (See Cal. State Bar Formal Opn. No. 1995-140.) Compensation may be in a form other than monetary. For example, the broker could compensate the lawyer by referring clients to the lawyer as a quid pro quo for the lawyer referring business to the broker. In that event, not only would the lawyer's conduct in referring clients to the broker be governed by rule 3-300, but the lawyer would also violate rule 1-320(B) , which provides that a lawyer "shall not compensate, give or promise anything of value to any person or entity for the purpose of recommending or securing employment of the member . . . by a client, or as a reward for having made a recommendation resulting in employment of the member . . . by a client." See also Bus. § Prof. Code § 6152 (prohibiting running and capping).

[4] / See also California State Bar Formal Opinion Number 1995-140, footnote 5, which notes that this is an important exception to the general applicability of the rule.

[5] / Rule 4-100(A) provides:

(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account," "Client's Funds Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:

(1) Funds reasonably sufficient to pay bank charges.

(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed. However, when the right of the member or law firm to receive a portion of trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved.

[6] / Rule 4-100(B) provides:

(B) A member shall:

(1) Promptly notify a client of the receipt of the client's funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

[7] / Rule 4-100(A) provides that, except for "[f]unds reasonably sufficient to pay bank charges" and funds that are subject to a dispute between lawyer and client, "[n]o funds belonging to the member or the law firm shall be deposited" in the lawyer's trust account "or otherwise commingled" with funds held for the client.

[8] / Our conclusion on the applicability of rule 4-100 is limited to the facts presented. These facts do not include a situation where the client disputes a disbursement that is received by the lawyer. The ethical obligations of the lawyer in such circumstances, including any obligation to deposit disputed funds into a trust account under rule 4-100(A) or to render an appropriate accounting to the client under rule 4-100(B), are beyond the scope of this opinion.

[9] / Rule 3-310(B) provides in part:

(B) A member shall not accept or continue representation of a client without providing written disclosure to the client where:

(1) The member has a legal, business, financial, professional, or personal relationship with a party or witness to the same matter; or (4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation.

[10] / With respect to this, the lawyer must be careful not to inadvertently mislead the prospective client into believing the lawyer represents the client in the identification of financing alternatives, in deciding to use a particular loan broker, or in the loan or escrow transactions. An attorney-client relationship may result from an express or implied contract. Except when created by court appointment, the attorney-client relationship may be found to exist based on the intent and conduct of the parties and the reasonable expectations of the potential client (Flatt v. Superior Court (1994) 9 Cal.4th 275, 281, fn.1 [36 Cal.App.2d 537]; Hecht v. Superior Court (1987) 192 Cal.App.3d 560, 565 [237 Cal.Rptr. 528]; Fox v. Pollack (1986) 181 Cal.App.3d 954 [226 Cal.Rptr. 532] [absent some objective evidence of an agreement to represent, it is not sufficient that plaintiffs "thought" defendant was their attorney]). Even if the possible client has not paid or promised to pay the attorney, an attorney-client relationship may be found to exist where she has communicated confidential information to the attorney (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [86 Cal.Rptr.2d 816]; Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39-40 [154 Cal.Rptr. 22]; Perkins v. West Coast Lumber Co. (1900) 129 Cal. 427; L.A. Cty. Bar Assn. Formal Opn. No. 449). Under our facts, the lawyer has given the prospective client the name of a licensed broker and stated that the broker might be able to arrange a loan to finance legal representation by the lawyer. In such situations, a prospective client might assume from a lawyer identifying a single broker that the lawyer has investigated the broker and in essence is advising the prospective client that it is safe to enter into a loan transaction and to do so through that broker. On the other hand, the fact that the prospective client has had no previous professional relationship with the lawyer, and the absence of any facts indicating that the prospective client has disclosed confidential information to the lawyer, argue against an attorney-client relationship having been formed. Nevertheless, while not necessarily required, to avoid creating a reasonable expectation in the prospective client to the contrary, here the lawyer has stated in writing to the prospective client that she does not represent the prospective client with regard to the identification of financing alternatives, the selection of the broker, or the resulting loan or escrow transactions.

[11] / California State Bar Formal Opinion Number 1995-140 is further distinguishable because the estate planning lawyer had a financial interest "in the subject matter of the representation." The lawyer was preparing an estate plan which required the availability of liquid funds to pay estate taxes at the time of the client's death. Referring clients to an agent for a life insurance policy that would provide those funds was thus central to the actual subject matter of the representation. Unlike that situation, however, financial arrangements for paying the lawyer's legal fees will usually be independent of the purpose for which the lawyer is retained.

[12] / Although the lawyer's duty of undivided loyalty to her client does not appear threatened, there is a possibility that the lawyer's billing statements could disclose confidential client information to the escrow agent in violation of the lawyer's duties under Business and Professions Code section 6068, subdivision (e). The lawyer must be careful in submitting the billing statements not to reveal any protected client information without the client's consent. If the client gives such consent, the lawyer should caution the client concerning the possibility of waiving the attorney-client privilege. (Evid. Code § 912.)

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1988-101

ISSUE:

Client employs attorney to represent client in a personal injury matter on a contingent fee basis. Client is also in need of health care. Health care provider agrees to treat client with the understanding that health care provider will be paid out of the proceeds from any recovery in the personal injury matter. Attorney and client both acknowledge in writing health care providers' interest in the recovery. Thereafter when recovery is had, client instructs attorney not to disburse any funds to health care provider, but to disburse the proceeds to client alone. What is the ethical duty of the attorney in this situation?

DIGEST:

It is the opinion of the Committee that the safest course of action is to commence an action in interpleader. In the alternative, the attorney may contact both parties to the dispute, stating: a) the existence and nature of the dispute; b) that the attorney cannot represent either side in the dispute; c) that the attorney can retain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and d) that if the parties do not so agree, an interpleader action will be commenced.

AUTHORITIES INTERPRETED:

Rules 4-100 and 4-210 of the Rules of Professional Conduct of the State Bar of California (operative May 27, 1989).

DISCUSSION

In addressing this issue, it is assumed that:

1) there is no dispute between the attorney and the client regarding the attorney's fee interest in the recovery proceeds; (2) there is no dispute that the client initially authorized the disbursement of funds to the third party and thereafter instructed the attorney to pay the funds to the client; and (3) the attorney, as well as the client, acknowledged the third party's interest in the funds.1

Generally, mishandling of client trust funds constitutes moral turpitude and warrants severe disciplinary action. (See Greenbaum v. State Bar (1976) 15 Cal.3d 893 [126 Cal.Rptr. 785].) Rule 4-100 of the California Rules of Professional Conduct specifically addresses an attorney's responsibilities regarding trust funds. Paragraph (B)(4) provides:

A member of the State Bar shall:

(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

The only exception to this rule, set forth in rule 4-100(A)(2), acknowledges the right of an attorney to hold in trust, contrary to client instructions, that portion of trust funds in which the attorney and client have conflicting interests. This rule does not, however, address conflicting interests between the client and a third party in funds held by the attorney. Rule 4-210(A)(1) touches on this issue by expressly allowing an attorney, with the consent of the client, to pay or agree to pay third parties out of funds collected or to be collected on behalf of the client.

The American Bar Association Model Rules of Professional Conduct also addresses this issue briefly in the comment to rule 1.15. There it is observed:

Third parties, such as the client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

The comment to rule 1.15 also observes that the duties of a lawyer with respect to trust funds in his or her possession go beyond those limited solely to the client. This is consistent with California law. An attorney who holds funds on behalf of a non- client third party is a fiduciary as to that party and is governed by the California Rules of Professional Conduct, even when not acting as an attorney per se in the transaction. (See Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-56 [49 Cal.Rptr. 97] where an attorney assumes a fiduciary relationship with a third party and violates his duty in a manner that would justify discipline if that relationship was with a client, he is subject to discipline.) (See also Simmons v. State Bar (1969) 70 Cal.2d 361, 365-66 [74 Cal.Rptr. 915]; Clark v. State Bar (1952) 39 Cal.2d 161, 166 [246 P.2d 1]; Crooks v. State Bar (1970) 3 Cal.3d 346, 355 [90 Cal.Rptr. 600].)

Although the above authorities touch on the issue presented here, none advise an attorney what to do when, as postulated here, the attorney obtains client consent to honor a third party's interest in trust funds under rule 4-210(A)(1), the attorney and client give assurances that the third party's interest will be honored, and then the client demands upon the attorney's receipt of the funds that they be promptly paid over to the client under rule 4- 100(B)(4) instead of the third party. An attorney confronted with this dilemma has five potential alternatives:2

  1. The safest course of action when confronted with such conflicting demands in trust funds, is to commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves the resolution of the dispute to the court. (See Code Civ. Proc., sec. 386 et seq.) Such an approach has received judicial approval in certain circumstances. (See Miller v. Rau, supra, 216 Cal.2d at p. 76.)
  2. Where consent is obtained from the client and the third party, the attorney may retain the funds in trust pending a resolution of the dispute between the parties. The funds retained must be placed in the client trust account, must be limited to the amounts in dispute, and all other funds should be appropriately distributed. An attorney, however, cannot unilaterally undertake to hold the disputed funds without the permission of the client and the third party. The attorney is authorized to do so only when the dispute over the funds is between the attorney and the client. (See rule 4-100(A)(2).)
  3. Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. However, under our assumed facts, the attorney and client both individually acknowledged the existence of the health care provider's interest in the funds. Under such circumstances, should the attorney pay the funds to the client, it may be found that the attorney did so in degradation of an enforceable third party lien exposing the attorney to potential civil liability to the health care provider. Paying the funds to the client also potentially violates the attorney's fiduciary duties to the health care provider under Johnstone v. State Bar, supra, 64 Cal.2d 153. By individually acknowledging the existence of the health care provider's interest in the funds, the attorney undertook potential civil and fiduciary duties to the health care provider which now conflict with his duty to obey his client's instructions. 3 For this reason, paying the funds to the client is a resolution of the dilemma fraught with difficulties.
  4. Paying the disputed funds to the health care provider contrary to client instructions would violate an attorney's duties under rule 4-100(B)(4). Rule 4-100(B)(4) requires the attorney to pay to the client only those funds "which the client is entitled to receive." Even though the client under our assumed facts has revoked the authorization initially given to release the funds to the third party, it is risky for the attorney to unilaterally determine the legal effect of the revocation and who is legally "entitled" to the funds. There are, in addition, equitable considerations which bear upon whether an attorney should disburse the funds to the health care provider. The reasons for the client's demand that the health care provider not be paid may be due to a legitimate dispute over the amount allegedly due or with the quality of the services rendered. An attorney is ill-advised to unilaterally prejudge the merits of such disputes and act in favor of one individual or the other.
  5. From a practical standpoint, a combination of the first and second alternatives above may be most appropriate. In this circumstance, the attorney contacts both parties to the dispute in writing stating: (a) the existence and nature of the dispute; (b) that the attorney cannot represent either side in the dispute;4 (c) that the attorney will maintain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and (d) that if the parties do not agree in writing within a set period of time that the attorney may retain the funds in trust pending resolution of the dispute, an interpleader action will be filed at which time the parties will have to proceed to resolve their dispute in court.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

1 The legal enforceability under California law of a third party's interest in client trust funds held by an attorney is beyond the purview of this Committee. However, attorneys are well- advised when confronted with this issue to consider the potential for civil liability irrespective of pertinent ethical considerations. (See, e.g., Miller v. Rau (1963) 216 Cal.App.2d 68 [30 Cal.Rptr. 612]; Weiss v. Marcus (1975) 51 Cal.App.3d 590 [124 Cal.Rptr. 297]; McCafferty v. Gilbank (1967) 249 Cal.App.2d 569 [57 Cal.Rptr. 695]; Siciliano v. Fireman's Fund Insurance Co. (1976) 62 Cal.App.3d 745 [133 Cal.Rptr. 376]; Skelly v. Richman (1970) 10 Cal.App.3d 844 [89 Cal.Rptr. 556].)

2 The best alternative is to anticipate the problem before it arises and address it in a written fee agreement with the client or in the lien form itself. For example, monetary limits should be placed on the maximum amount of the lien and authority should be obtained from each party for the attorney to hold the funds in trust should a dispute arise between the client and health care provider as here contemplated. The situation addressed here arises when such precautions are not taken.

3 Undertaking such obligations to a third party places the attorney in a potential conflict of interest under California Rule of Professional Conduct 3-310(B). Rule 4-210, however, allows for this conflict of interest, but only where there is full consent by the client.

4 Because the attorney has, by executing the lien document, acknowledged a duty to the third party regarding the funds, a conflict of interest is presented which precludes the attorney from continuing to represent the client in connection with the dispute over the lien. (See Johnstone v. State Bar, supra, 64 Cal.2d 153.) It is because of this potential conflict of interest that rule 4-210 requires full disclosure to the client when the lien agreement is first executed. Such disclosure should advise the client that if a dispute arises regarding the lien, the attorney will be unable to represent the client in the dispute and that if the lien dispute cannot be resolved by any other means, an interpleader action will be commenced in which the client will have to obtain other counsel. The attorney may, of course, continue to represent the client in all other respects.

LOS ANGELES COUNTY BAR ASSOCIATION PROFESSIONAL RESPONSIBILITY AND ETHICS COMMITTEE FORMAL OPINION NO. 478: July 18, 1994

SUMMARY

MEDICAL LIENS - DISBURSEMENT OF CLIENT FUNDS.

An attorney who has notice of a medical lien on funds recovered by a client in a personal injury action should not disburse those funds to the lienholder without the client's consent. The attorney may not simply disburse the contested funds to the client under such circumstances, however, even where the client so instructs the attorney.

AUTHORITIES CITED

American Bar Association Informal Opinion No. 1295

California Rules of Professional Conduct, Rules 4-100 and 4-210

Crooks v. State Bar, 3 Cal. 3d 346, 90 Cal. Rptr. 600 (1970)

"Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee to Confer With the CMA, State Bar of California (Revised 1991)

In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993)

Johnstone v. State Bar of California, 64 Cal. 2d 153, 49 Cal. Rptr. 97 (1966)

Los Angeles County Bar Association Formal Opinions No. 368 (June 16, 1977) and 454

Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963)

Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979)

State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101

FACTS AND ISSUES PRESENTED

The Committee has been asked for an opinion regarding the following facts: A client obtained medical services paid for by a health plan. An attorney filed a personal injury suit on the client's behalf. Prior to settling the client's case, the attorney received a notice of lien from the health plan and a copy of a lien acknowledgment form signed by the client. When the case settled, the client instructed the attorney not to pay the lien but, rather, to remit the settlement funds to the client. At the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt.

The issues presented to the Committee are whether an attorney may properly remit settlement funds to a client, in accordance with the client's instructions or, alternatively, to a third party lienholder, despite the client's lack of consent, where (1) the attorney has notice of the third party's interest in those funds; (2) the attorney is aware that the client has executed a lien acknowledgment form; and (3) the client subsequently acknowledges his or her own responsibility to pay the third-party debt.

DISCUSSION

It should first be noted that the legal enforceability of a third party's interest in client trust funds held by an attorney is a question of law beyond the purview of this Committee. Thus, we limit our consideration of the issues presented here to their ethical components.[1] The general rule concerning funds received or held by an attorney for the benefit of a client is stated in Rule 4-100 of the California Rules of Professional Conduct. That Rule provides in pertinent part that: "A member shall...[p]romptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive." (Emphasis added.)

Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. Under the facts presented here, however, should the attorney disburse the funds to the client without the lienholder's consent, the attorney may be subject to discipline. Because the attorney received a notice of lien from the health plan, as well as a copy of a lien acknowledgment form executed by the client, certain fiduciary duties to the health plan have arisen which now conflict with the attorney's duty to obey the client's instructions regarding disbursement of the funds.[1] See, e.g., Crooks v. State Bar, 3 Cal. 3d 346, 355, 90 Cal. Rptr. 600, 606 (1970) ("When an attorney receives money on behalf of a third party who is not his

[or her]

client, he

[or she]

nevertheless is a fiduciary as to such third party. . . .When an attorney assumes a fiduciary relationship and violates [that] duty in a manner that would justify disciplinary action if the relationship had been that of attorney and client, he

[or she]

may properly be disciplined for [that] misconduct"), quoting Johnstone v. State Bar, 64 Cal. 2d 153, 155-156, 49 Cal. Rptr.[CP_CALCULATED_FIELDS] 97, 98 (1966). See also In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993) ("An attorney holding funds for a person who is not the attorney's client must comply with the same fiduciary duties in dealing with such funds as if an attorney-client relationship existed"); LACBA Formal Opinion No. 454 (An attorney's fiduciary obligation extends to all third-party assets in his or her possession, not only to client funds).

Because the client is not necessarily "entitled to receive" the full sum in his or her account where a third party has what appears to be a legitimate interest in those funds, Rule 4-100 does not require the attorney to remit the full amount to the client upon his or her request. The attorney must, however, release those funds not in dispute to which the client is entitled. On the other hand, the attorney may not simply disburse the contested funds to the health plan. American Bar Association Informal Opinion No. 1295 reminds us that "

[o]

bviously the attorney must always keep in mind that his

[or her]

responsibility is to represent the interests of the client and not of the physician." Rule 4-210 of the California Rules of Professional Conduct provides that an attorney may pay expenses incurred by the client to third persons out of funds collected for the client as a result of the representation only where the client consents. When the client does not consent, the attorney should not disburse funds to a third party. See also, LACBA Formal Opinion No. 368 (June 16, 1977) (attorney who has notice of physician's lien on funds recovered by client in personal injury action may not disburse funds to physician without client's consent).

The attorney has several viable options:

  1. The attorney may obtain the consent of both the client and the lienholder to hold the funds in trust pending resolution of the dispute between the parties. The funds retained must be placed in the client trust account and must be limited to the amount in dispute. All other funds should be appropriately disbursed. Without the consent of both the client and the lienholder, however, the attorney may not unilaterally undertake to hold the disputed funds: authorization to do so exists only where the dispute over the funds is between the attorney and the client. [See Rule 4-100(A)(2) of the California Rules of Professional Conduct]; or
  2. The attorney may commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves resolution of the dispute to the appropriate court.[3] See State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101; "Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee To Confer With The CMA, State Bar of California (Revised 1991).[4] This opinion is advisory only. The Committee acts on specific questions submitted ex parte, and its opinions are based only on such facts as set forth in the questions submitted.

[1] Nevertheless, attorneys would be well-advised to consider the potential for incurring civil liability to the third-party lienholder under such circumstances. See, e.g., Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979); Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963).

[2] The fact that, at the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt does not alleviate these concerns, inasmuch as an agreement between the attorney and client cannot serve to alter or eliminate the attorney's fiduciary duties to the lienholder.

[3] Although outside the purview of this opinion, it should be noted that commencement of an interpleader action may create a conflict of interest between the attorney and his or her client.

[4] Alternatively, the Interprofessional Guidelines provide as follows: "[T]he attorney may contact both parties to the dispute in writing advising them:

  1. Of the existence and nature of the dispute;
    b. That the attorney cannot represent either side in the dispute;
    c. That, if the parties agree in writing, the attorney can maintain the funds in trust until the parties resolve the dispute between themselves;
    d. That, if the parties do not agree in writing within a set period of time, an interpleader action may be filed and the parties will be required to resolve their dispute in court."
    Disclaimer and Proprietary Notice

(c)2000 Los Angeles County Bar Association All Rights Reserved.

LACBA Privacy Statement

Colorado

Colorado State Bar

Abstract 96/97-17

Summary of Facts Provided

An attorney represents a personal injury client who wishes to sell a portion of the proceeds of the client's personal injury claim to a third party in order to obtain living expenses from the third party pending resolution of the claim. The attorney has been requested to acknowledge and agree to the arrangement, and to pay over to the third party the amount of advances and a percentage of the gross recovery upon final disposition of the claim, after deducting attorneys' fees, expenses of litigation, and hospital and medical liens.

Issue and Conclusion

Does the attorney violate the Colorado Rules by consenting to an agreement between the client and third party for advances of living expenses? If the attorney has no financial interest in the arrangement with the third party, the attorney is not prohibited from acknowledging and honoring the agreement. Although the Colorado Rules do not prohibit the concept of the proposed arrangement, any such agreement must be closely examined in order to confirm that its terms and implementation will not violate individual provisions of the Colorado Rules.

A number of possible effects of the Colorado Rules were considered and determined not to prevent the agreement. Colorado Rule 1.8(e), while prohibiting the attorney from advancing or guaranteeing financial assistance to a client, does not apply to the proposed agreement if the attorney has no financial interest in the agreement. Because Colorado Rule 5.4 requires protection of the attorney's professional independence against interference from third parties, any proposed agreement must be reviewed in order to confirm that this prohibition is not violated. Any limitation upon the attorney's professional independence or judgment under Colorado Rule 1.2, any provision which could result in a breach of confidentiality prohibited under Colorado Rule 1.6, or a conflict of interest prohibited under Colorado Rule 1.7 should be expunged or the problem should be specifically discussed with the client and the client's consent should be obtained, if compliance with the Colorado Rules can be attained through such consent. Examples of provisions which would require particular scrutiny under the Colorado Rules include a requirement to disclose information to the third party; restrictions on the attorney's ability to proceed independently on behalf of the client in the event of a dispute with the third party or a negotiated settlement of the litigation; restrictions on the client's right freely to change attorneys; and definitions of expenses which may be deducted prior to computing the percentage due to the third party.

Because of the involvement of the attorney in the transaction, it may be advisable to have the client consult with other counsel to satisfy the spirit of Colorado Rule 1.8(a)(2).

District of Columbia
Florida

Florida State Bar

District Court of Appeal of Florida, Fourth District. Julian B. KRAFT; Falcon Food Service Company, Inc., Harold R. Newburg, Sea-Good Seafood, Inc., a Florida corporation, Seagood Trading Corporation, a Florida Corporation, and Blaine H. Winship as partner of Winship & Byrne, Appellants/Cross-Appellees, v. Zelda Pincourt MASON, Appellee/Cross-Appellant. No. 94-2544. Feb. 28, 1996.

Reconsideration and Clarification Denied April 19, 1996.

Sister who lent brother money to continue antitrust litigation, in consideration of share of proceeds if case settled or was decided in brother's favor, sought share of proceeds after suit was settled. The Circuit Court, Palm Beach County, Richard I. Wennet, J., entered final judgment on behalf of sister while rejecting sister's claim to share of full settlement amount before deducting attorney fees. Cross-appeals were taken. The District Court of Appeal, Henning, Patti Englander, Associate Judge, held that: (1) loan agreement was not champertous; (2) loan was not usurious; (3) action for sister's share of recovery was within statute of limitations; and (4) sister was entitled to recover share of proceeds calculated prior to deduction of attorney fees.

Affirmed in part, reversed in part and remanded.

HENNING, PATTI ENGLANDER, Associate Judge. STATEMENT OF THE FACTS

Julian Kraft, Harold Newburg and their companies were plaintiffs in a federal antitrust suit in the mid-1980s. They were represented by a law firm, which, after a time, told them that the firm would be required to settle the case or withdraw from representation unless fees and costs were paid. Without the financial wherewithal themselves, the plaintiffs sought financing from others.

First, Kraft approached a gentleman named Gross with a contract drafted by Kraft himself. The contract provided for an interest in the antitrust suit if Gross would obtain a bank loan and, in turn, lend the proceeds to the plaintiffs. Specifically, the terms were for 20% of the first $1,000,000 recovered, 6% of the next $4,000,000 recovered and 3% of any recovery in excess of $5,000,000 in exchange for a loan of $100,000. The plaintiffs were obligated to pay Gross the first $100,000 of any recovery, and Gross was obligated to utilize that $100,000 in reducing the loan principal. Additionally, the loan was guaranteed and the borrowers would pay interest payments. Gross declined to provide the financing.

Still needing the funds, Kraft sought help from his sister Zelda Mason. She reviewed the loan agreement (identical to the one Kraft had drafted for Gross) and after considering the matter for a few weeks agreed to lend her brother the money. She made no changes in the loan document. She believed that the $100,000 loan would be repaid and that she would receive interest payments on the loan. She was also obligated by the loan agreement to use the first $100,000 received by her to reduce the loan principal. She testified that her brother said any additional money received under the loan agreement was like "icing on the cake" for her. Mason did not consider it a necessary incentive for making the loan. She had no expectations as to any further recovery. Important for issues presented to this court, we note that the contract contained no fixed repayment dates.

Once Mason lent the money, the antitrust lawsuit continued. The law firm modified its agreement with Kraft and Newburg to a straight contingent fee agreement. Because of this, Mason actually bore the cost of the litigation with her $100,000 loan.

In 1987, there was a partial settlement of the antitrust litigation for $200,000. Mason received $85,000 to reduce her loan obligations with the bank; with agreement of all, $15,000 was paid to her prior attorney; and all agreed the remaining $15,000 principal would be paid from any later settlement.

In June of 1987, Kraft stopped making the contractually mandated interest payments. By October, Mason demanded in writing full payment of the principal and unpaid interest. Testimony reveals that Kraft had repudiated the contract because of an unrelated family dispute Kraft had with his sister. Mason did not file a lawsuit at that time.

Eventually in December 1992, the antitrust suit settled for $5,015,000. Although the attorneys notified Mason in writing that she was entitled to $355,450, no money was actually disbursed at the direction of Kraft. He still believed he was entitled to a setoff for that family matter. Mason demanded her settlement proceeds and instituted this suit when she was not paid. The suit was defended on the basis that the original contract was champertous and usurious and that the suit had been filed outside the statute of limitations.

This amount was calculated by Kraft's attorney pursuant to paragraph 6 of the loan agreement by taking 20% of the first $1 million ($200,000), 6% of the next $4 million ($240,000) and 3% of the remaining $15,000 ($450) less the $85,000 previously paid to Mason. Interestingly, this original calculation is the calculation demanded by Mason at trial and before this court on appeal, but rejected by the defendants and trial court below.

After a nonjury trial, the trial court entered final judgment on behalf of Mason rejecting all defenses. However, the trial judge rejected Mason's position that she was entitled to have her recovery based on the full settlement amount before deducting attorneys' fees. This is the appeal and cross-appeal to this court of those rulings.

MAINTENANCE AND CHAMPERTY

"Maintenance is an officious intermeddling in a suit which in no way belongs to the intermeddler, by maintaining or assisting either party to the action, with money or otherwise, to prosecute or defend it." 9 Fla.Jur.2d Champerty and Maintenance § 1 (1979). Under the modern view, "it is the act of one improperly, and for the purpose of stirring up litigation and strife, encouraging others either to bring [an] action or to ... defend [a suit] which they have no right to make...." Id.

Champerty is a form of maintenance wherein one will carry on a suit in which he has no subject-matter interest at his own expense or will aid in doing so in consideration of receiving, if successful, some part of the benefits recovered. 14 C.J.S. Champerty and Maintenance § 1a (1991).

Historically, the common-law doctrines of champerty and maintenance arose in England from causes unique to society as it then existed. §14 Am.Jur.2d Champerty and Maintenance 1 (1964). "The power of influential persons to whom rights of action were transferred in order to obtain their support and favor in suits brought to assert those rights was the cause of the rigid doctrine...." 14 C.J.S., supra, § 3. As civilization and law progressed, the need for these strict rules decreased. 14 Am.Jur.2d, supra, § 1. Today, none of the states adhere to the rigor of the original champerty and maintenance doctrines. Id.

Though Appellants argue to this court that we should follow the strict common-law definitions, the few cases in Florida on this subject support the more modern-day approach that officious intermeddling is a necessary element of champerty. We define officious as "offering unnecessary and unwanted advice or services; meddlesome, esp. in a highhanded or overbearing way." Webster's New World Dictionary 988 (2d col. ed. 1986).

In Brown v. Dyrnes, 109 So.2d 788 (Fla. 2d DCA 1959), the Second District Court determined there was sufficient evidence to support the jury's finding that the contract was champertous. The litigation in question was provoked by the champertor who unjustly aroused the suspicion of one litigant against the other. There, a widow inherited numerous parcels of real estate. Brown managed these properties for the husband and for the widow after her husband's death. Sometime later, the widow met the plaintiff/champertor and discussed the property. At the time she was content with the management services of Brown. The plaintiff/champertor, however, persuaded the widow to believe that Brown was profiting from the handling of her properties and that through a lawsuit she could recover a large judgment. Believing this, she contracted with the champertor, agreeing to pay him percentages of all properties and money recovered in the suit. Furthermore, if the suit settled without his consent, he would be paid for services rendered.

The litigation that ensued exonerated Brown, and the widow eventually had to pay him $10,000. Next, the champertor filed suit alleging that the widow owed him for his services in the unsuccessful litigation. This time, the widow prevailed. The Second District Court found the verdict could well be sustained on the theory the contract was champertous.

This court in Anderson v. Trade Winds Enterprises Corp. 241 So.2d 174 (Fla. 4th DCA 1970), cert. denied, 244 So.2d 432 (Fla.1971), accepted the definition of maintenance as stated above as well as the following definition of champerty: " 'a bargain by a champertor with a plaintiff or defendant for a portion of the matter involved in a suit in case of a successful termination of the action, which the champertor undertakes to maintain or carry on at his own expense.' " 241 So.2d at 177 (quoting 14 Am.Jur. § 3 (1964)). After accepting these definitions, this court determined that the facts in that case could not "even remotely resemble maintenance or champerty. In the first place there was obviously no officious intermeddling by anyone in a lawsuit. In the second place there was no bargaining between any person not involved in a law suit to acquire an interest in a matter in litigation". 241 So.2d at 177 (emphasis added).

In the instant case, Mason clearly did not act in an officious manner. She was not intermeddling in a lawsuit. She did not instigate the litigation. Her assistance was sought out by Kraft when he needed money to continue his lawsuit. She did not bargain for the terms under which she made the loan--they too were prepared by Kraft. Nor did she concern herself with the antitrust litigation or impose her views upon the attorneys or the litigants once she provided the loan.

Accordingly, this court holds that the trial court correctly rejected the champerty argument raised below.

USURY

There are four requirements necessary to establish usury:

1. A loan, express or implied.
2. An understanding between the parties that the money loaned must be repaid.
3. In consideration of the loan, a greater rate of interest than is allowed by law is paid or agreed to be paid by the borrower.
4. A corrupt intent to take more than the legal rate for the use of the money loaned.

See Jersey Palm-Gross, Inc. v. Paper, 639 So.2d 664, 666 (Fla. 4th DCA 1994), app'd, 658 So.2d 531 (Fla.1995); 32 Fla.Jur. Interest and Usury § 52 (1994).

The main issue before this court is whether the trial court erred in determining that no corrupt intent existed to collect interest at a usurious rate. This court in Jersey provided a succinct background on usury relevant to this issue:

Civil usury involves loans of $500,000 or less and an interest rate of greater than 18% and less than 25%. See § 687.03, Fla.Stat. (1993). Criminal usury involves any loan amount with a rate of interest greater than 25% but not in excess of 45%. See § 687.071, Fla.Stat. (1993). The penalties for civil usury include forfeiture of all interest charged; the civil penalties for criminal usury are forfeiture of the right to collect the debt. See § 687.04, Fla.Stat. (1993). In the case of either criminal or civil usury, the lender's willfulness to charge an excessive interest rate is determined by considering all of the circumstances surrounding the transaction. This might involve looking beyond the terms of the loan documents. If a borrower promises or is otherwise required to pay a bonus or other consideration as an inducement to the lender to make the loan, such added obligations may be considered interest and can render a loan usurious. 639 So.2d at 667 (citations omitted).

In Jersey, the lender was to receive 15% interest on a loan of $200,000 for eighteen months. Shortly before closing on the loan, the lender insisted upon 15% equity in the borrower's partnership. With the inclusion of the partnership interest, the interest rate on the loan was 45% per annum. The trial court found that the lender had knowingly and willingly charged a usurious rate.

This court affirmed and stated:

The determination of intent is the responsibility of the trier of fact. .... The supreme court in Dixon

[v. Sharp, 276 So.2d 817 (Fla.1973) ]

cited with approval the definition of willfully and knowingly set forth in Chandler v. Kendrick, 108 Fla. 450, 146 So. 551, 552 (1993):

A thing is willfully done when it proceeds from a conscious motion of the will intending the result, which actually comes to pass. It must be designed or intentional, and may be malicious, though not necessarily so.

We agree that mathematical calculations alone do not equate with usurious intent. However, here the lender knew at the outset the total value of the amount he was receiving in consideration for making the loan. Gross, the lender's president and sole stockholder, is a developer with 40 years experience and not an unsophisticated lender. He knew that the borrowers had an urgent need for the money. He dictated the terms of the loan. The fact that the borrowers were "in distress" or "necessitous" when the loan was made is as significant as the fact that the lender dictated the terms of the loan. Our supreme court explained the purpose of Florida's usury statute:

The very purpose of statutes prohibiting usury is to bind the power of creditors over necessitous debtors and prevent them from extorting harsh and undue terms in the making of the loans.

639 So.2d at 668 (citations omitted). The Supreme Court, in approving this court's opinion, further stated:

"[U]sury is largely a matter of intent, and is not fully determined by the fact that the lender actually receives more than law permits, but is determined by the existence of a corrupt purpose in the lender's mind to get more than legal interest for the money lent." Moreover, "the question of intent is to be gathered from the circumstances surrounding the entire transaction." Consequently, the ultimate arbiter on the issue of intent is the trial court because "the question of intent is one of fact."

658 So.2d at 534 (citations omitted).

The instant case appears to be the antithesis of Jersey. Here, Mason was an unsophisticated lender. She did not know at the outset the total amount she would receive. The evidence is uncontroverted that it was the borrowers who dictated the terms of the loan, not Mason. The loan was to be paid back after the disposition of the lawsuit. Accordingly, no one could have known at the loan's inception the total amount Mason would be receiving in consideration for making the loan. Clearly, the record does not demonstrate the necessary " 'corrupt purpose in the lender's mind to get more than legal interest....' " Jersey, 658 So.2d at 534 (quoting Dixon, 276 So.2d at 820). This is not a case of an overreaching lender taking advantage of a desperate borrower to impose undue or harsh terms.

Yet another reason the loan was not usurious is that the money to be paid Mason could be characterized as a bonus to be received for participating in an uncertain transaction. A loan agreement is not usurious when payment depends upon a contingency. See, e.g., Bailey v. Harrington, 462 So.2d 861 (Fla. 3d DCA), rev. denied, 472 So.2d 1180 (Fla.1985), and rev. denied sub nom., N-Site Associates v. Harrington, 472 So.2d 1181 (Fla.1985); Schwab v. Quitoni, 362 So.2d 297 (Fla. 3d DCA 1978). Here, when the loan was given, any talk of recovery was pure speculation. Quite possibly, there would be no successful recovery from the antitrust litigation, and Mason might have collected nothing beyond the pay back of the loan. This contingent nature of any "interest" to Mason makes the agreement non-usurious.

Case appears to be the antithesis of Jersey. Here, Mason was an unsophisticated lender. She did not know at the outset the total amount she would receive. The evidence is uncontroverted that it was the borrowers who dictated the terms of the loan, not Mason. The loan was to be paid back after the disposition of the lawsuit. Accordingly, no one could have known at the loan's inception the total amount Mason would be receiving in consideration for making the loan. Clearly, the record does not demonstrate the necessary " 'corrupt purpose in the lender's mind to get more than legal interest....' " Jersey, 658 So.2d at 534 (quoting Dixon, 276 So.2d at 820). This is not a case of an overreaching lender taking advantage of a desperate borrower to impose undue or harsh terms.

Yet another reason the loan was not usurious is that the money to be paid Mason could be characterized as a bonus to be received for participating in an uncertain transaction. A loan agreement is not usurious when payment depends upon a contingency. See, e.g., Bailey v. Harrington, 462 So.2d 861 (Fla. 3d DCA), rev. denied, 472 So.2d 1180 (Fla.1985), and rev. denied sub nom., N-Site Associates v. Harrington, 472 So.2d 1181 (Fla.1985); Schwab v. Quitoni, 362 So.2d 297 (Fla. 3d DCA 1978). Here, when the loan was given, any talk of recovery was pure speculation. Quite possibly, there would be no successful recovery from the antitrust litigation, and Mason might have collected nothing beyond the pay back of the loan. This contingent nature of any "interest" to Mason makes the agreement non-usurious.

Thus, the trial court's finding that the usury defense was inapplicable was correct and is affirmed.

STATUTE OF LIMITATIONS

We write briefly on this issue to affirm the trial court's finding that the statute of limitations did not commence as to the shares of the recovery and the $15,000 in unpaid principal until the settlement of the underlying antitrust case in December 1992. It did expire as to some unpaid interest payments on the principal as Mason concedes and as the trial court correctly held. When interest payments are payable in installments, the statute of limitations can run on some but not others. See Hannett v. Bryan, 640 So.2d 203 (Fla. 4th DCA 1994); Central Home Trust Co. v. Lippincott, 392 So.2d 931 (Fla. 5th DCA 1980).

CALCULATING SHARES OF THE RECOVERY

Paragraph 6 of the Loan Agreement reads as follows:

6. In consideration of the above, Borrowers hereby direct Winship & Byrne to pay to Lender the following percentages of any Recovery by plaintiffs in the Lawsuit: 20 percent of the first $1,000,000.00 of any Recovery; 6 percent of the next $4,000,000.00 of any Recovery; and 3 percent of any additional Recovery. The term "Recovery", as used herein, means the proceeds received from any settlement in plaintiffs' favor of any claims brought by them in the Lawsuit and the proceeds received from any judgment awarding damages to plaintiffs in the Lawsuit, including any amount obtained by reason of trebling of damages or punitive damages, but excluding any award of costs, interest or attorneys fees. Any payment made to Lender by Winship & Byrne in accordance with the provisions of this paragraph shall be made from the net proceeds of any settlement and/or judgment payable to Borrowers, and not from the portion payable to Winship & Byrne. Notwithstanding the above, the first $100,000 of any Recovery shall be paid by Winship & Byrne to Lender for the purpose of enabling Lender to pay off the principal amount of the loan, with said $100,000 to be credited against Lender's 20 percent share of the first $1,000,000.00 of any Recovery.

The trial court interpreted this provision as requiring Mason's share to be calculated on the net proceeds of the settlement after attorneys' fees had been deducted from the gross amount. Mason argues that the trial court's interpretation is wrong. We agree with Mason.

A careful reading shows that the portion of the paragraph defining "Recovery" relates to the calculation of the lender's share. Once calculated, the remainder of the paragraph defines how the calculated amount is to be paid. Payment to the lender is to come from the proceeds of the settlement to which the borrowers are entitled after attorneys' fees are deducted and paid to the lender from Kraft and Newburg's recovery proceeds and not from the share due the attorneys (Winship & Byrne). The loan agreement does not require that the Lender's share be calculated from that reduced amount.

The well-formed law on contract construction is dispositive of this issue. Clear and unambiguous contract terms should be construed as written. Institutional & Supermarket Equipment, Inc. v. C & S Refrigeration, Inc., 609 So.2d 66 (Fla. 4th DCA 1992). Extrinsic evidence regarding a contract's meaning should not be admitted if the contract is not ambiguous. J.C. Penney Co., Inc. v. Koff, 345 So.2d 732 (Fla. 4th DCA 1977).

"[T]he construction placed on the terms of an agreement by a trial court must be accepted by a reviewing court unless the construction is clearly erroneous." Elmore v. Enterprise Developers, Inc., 418 So.2d 1078, 1079 (Fla. 4th DCA 1982). Here, the trial court clearly erred in finding the agreement ambiguous. Its interpretation of the agreement based on evidence taken at trial need not and should not be accepted by this court. To do so would be to rewrite a contractual provision or vary a party's obligations under a clearly written contract. This is impermissible under the law. See Koff.

Moreover, even had there been an ambiguity in the contract the record unequivocally confirms that the agreement was drafted by one of the borrowers and so should be construed against them and in favor of the lender. See Home Savings of America, F.A. v. Roehner, 491 So.2d 612 (Fla. 4th DCA 1986); Finlayson v. Broward County, 471 So.2d 67 (Fla. 4th DCA 1985).

On this point, then, the case must be remanded to the trial court for calculations of an award to Mason consistent with this opinion.

CONCLUSION

Because this court holds that the trial court correctly found the contract in issue was neither champertous nor usurious and that the suit was not filed beyond the statute of limitations, the case is affirmed on those issues. Because the trial court erred in calculating the recovery to which Mason is entitled, the case is reversed on that issue. AFFIRMED, in part; REVERSED in part and REMANDED.

GUNTHER, C.J., and SHAHOOD, J., concur. Fla.App. 4 Dist.,1996. Kraft v. Mason

Florida

OPINION 61-29
January 10, 1962

As to the ethical propriety of the Bar or a lawyer's association providing a revolving fund to be used for loans to needy plaintiffs, to enable them to bear the cost of litigation until recovery can be had, the following issues are raised:

1. The increased ability of plaintiffs to finance themselves would tend to create litigation, which could be construed as champerty.
2. If a lawyer must follow Canon 42 relating to expenses, logic indicates a bar association should not violate the same canon.
3. There never would be a case in which the plaintiff was certain to obtain recovery.
4. Any attorney forced to contribute to such a fund would therefore have an interest in the litigation and be subject to conflicting interests.

Canons: 6, 10, 28, 42

Chairman Holcomb stated the opinion of the committee:

A member of The Florida Bar has in mind the possibility of The Florida Bar, the Academy of Florida Trial Lawyers or some other similar group providing a revolving fund to be used in loans to needy plaintiffs having meritorious personal injury claims to enable them to meet their many medical and living costs while awaiting collection on their claims. He points out that many persons with small cash reserves are unable to finance themselves; that their counsel cannot advance funds because of a champerty problem; that they cannot borrow on their claim even though it is apparently clear cut and there is adequate insurance coverage; thus placing the claimant at the mercy of borrowing from a small loan company at exorbitant rates of interest.

He also suggests that it might be possible for the lawyer to seek third parties to lend the client money upon being satisfied the claim was one on which recovery was certain and that he would be repaid out of any judgment or settlement. He points out the social problem involved and asks if there is an ethical problem involved and asks for suggestions.

One Committee member thinks that the increased ability of persons having claims for personal injuries to finance themselves would tend to create litigation which would otherwise be settled because of the economic pressure. A literal application of the principle that anything tending to promote litigation tends toward champerty would suggest the impropriety of such a proposal. But against this is the fact that defendants, and particularly insurers of defendants, capitalize upon the economic need of the claimant to obtain settlements at less than the real value of the claim. One of the major factors leading to the adoption of workmen's compensation laws has been the deliberate delay of employers in making settlement to force injured employees to accept unreasonably low settlements. Such a plan could not be adopted without adequate regulation and safeguard by The Florida Bar. More good than bad would result from such a plan.

Another member thinks we should in no way approve any of the projects mentioned. We should not do by indirection what we cannot do directly. There is a substantial possibility that any such plan might be misunderstood and lead to improper practices. Another member thinks such a plan would not be ethical.

Another member suggests that there never would be a case in which the plaintiff was certain to obtain a recovery. If such a fund were to be set up by the Bar, any attorney forced to contribute thereto would have an interest in the litigation and be subject to conflicting interests, violating Canon 6, also Canon 10, and also possibly Canon 28 against stirring up litigation. If a lawyer must follow Canon 42 relating to expenses, a bar association should not violate the same canon. Likewise, the question arises as to loans to needy defendants, possibly uninsured, and burdened with the defense of an unjust claim. Certainly a claimant has the right to borrow from whomever he wants and from whomever will loan to him.

Florida

OPINION 65-39
June 15, 1965

A lawyer may not advance living expenses to a client pending settlement and collection of a claim, judgment, or award.

Canons: 6, 10
Opinions: ABA 288, NY City 779

Chairman Smith stated the opinion of the committee:

In fine, a member of The Florida Bar inquires if it is unethical for an attorney to advance money to a client for living expenses while awaiting payment of the client's claim against a third party. Further, he asks us to assume that the client badly needs the money for basic necessities and inquires if it would make a difference (1) if there was no dispute as to liability, the third party was financially responsible at the time, and the client was simply waiting to determine the result of medical treatment or (2) if settlement had been agreed upon and the attorney was merely awaiting receipt of the release and draft.

This Committee has considered and answered the same inquiry, or ones quite similar, on several occasions. Canon 6 provides that an attorney should not allow himself to be placed in inconsistent positions and Canon 10 prohibits an attorney from acquiring a financial interest in the subject matter of litigation he is handling. The member indicates his awareness of Opinion 288 of the Professional Ethics Committee of the American Bar Association and the holding therein that an attorney may not ethically lend or advance living expenses to clients during the pendency of personal injury actions even though the clients are injured and cannot work. The same conclusion has been reached by a similar committee for the Bar Association of the City of New York, Opinion 779.

This Committee heretofore has agreed with the views expressed in the opinions aforementioned. It continues to do so. Further, it is our opinion that the additional circumstances stated in this inquiry do not prompt a different response in either case posed.

The rule prohibiting an attorney from acquiring a financial interest in the litigation of a client has proved to be of benefit both to the public and the bar. The plight of a client undoubtedly will invoke the sympathies of his attorney from time to time. In our opinion, however, the solution does not lie in relaxing a salutary ethical standard. Generally the lawyer can assist his client in obtaining the essential financial support from appropriate sources and/or can assist in postponing payment of outstanding debts. This would be particularly true in those cases when payment of third party claims is assured. In those cases where such solution is not possible the remedy, in our opinion, does not lie in alteration of the Canons of Ethics.

Florida
OPINION 65-39
June 15, 1965

A lawyer may not advance living expenses to a client pending settlement and collection of a claim, judgment, or award.

Canons: 6, 10
Opinions: ABA 288, NY City 779

Chairman Smith stated the opinion of the committee:

In fine, a member of The Florida Bar inquires if it is unethical for an attorney to advance money to a client for living expenses while awaiting payment of the client's claim against a third party. Further, he asks us to assume that the client badly needs the money for basic necessities and inquires if it would make a difference (1) if there was no dispute as to liability, the third party was financially responsible at the time, and the client was simply waiting to determine the result of medical treatment or (2) if settlement had been agreed upon and the attorney was merely awaiting receipt of the release and draft.

This Committee has considered and answered the same inquiry, or ones quite similar, on several occasions. Canon 6 provides that an attorney should not allow himself to be placed in inconsistent positions and Canon 10 prohibits an attorney from acquiring a financial interest in the subject matter of litigation he is handling. The member indicates his awareness of Opinion 288 of the Professional Ethics Committee of the American Bar Association and the holding therein that an attorney may not ethically lend or advance living expenses to clients during the pendency of personal injury actions even though the clients are injured and cannot work. The same conclusion has been reached by a similar committee for the Bar Association of the City of New York, Opinion 779.

This Committee heretofore has agreed with the views expressed in the opinions aforementioned. It continues to do so. Further, it is our opinion that the additional circumstances stated in this inquiry do not prompt a different response in either case posed.

The rule prohibiting an attorney from acquiring a financial interest in the litigation of a client has proved to be of benefit both to the public and the bar. The plight of a client undoubtedly will invoke the sympathies of his attorney from time to time. In our opinion, however, the solution does not lie in relaxing a salutary ethical standard. Generally the lawyer can assist his client in obtaining the essential financial support from appropriate sources and/or can assist in postponing payment of outstanding debts. This would be particularly true in those cases when payment of third party claims is assured. In those cases where such solution is not possible the remedy, in our opinion, does not lie in alteration of the Canons of Ethics.

Florida
OPINION 67-44

Originally issued January 8, 1968
Revised April 23, 1993

A member of The Florida Bar who subpoenaed a physician to offer expert testimony in a personal injury case and who did not advise the physician until subsequent to his testimony that he considered the expert witness fee to be an obligation of his client should advance such reasonable witness fee as may be assessed by the court.

Statute: F.S. § 92.231

In the course of the presentation of a plaintiff's personal injury case, a member of The Florida Bar subpoenaed a physician to offer expert testimony, such subpoena being accompanied by the standard mileage and per diem fee as prescribed in the Florida Statutes. Before trial, counsel had advised the plaintiff that the expenses of the trial, including expert witness fees, would be entirely his obligation. Although no agreement was made by the attorney to compensate the physician for his expert witness fee, apparently the attorney did not advise the physician until subsequent to his testimony that he considered the expense an obligation of the client. Following the rendition of a verdict for the defendant, the physician has requested that his compensation as an expert witness be paid by the attorney. We are requested to advise the lawyer concerning his professional responsibility with reference to this request.

We emphasize at the outset that to the extent this inquiry involves the law of express or implied contracts it is one beyond our jurisdiction. A comprehensive annotation setting forth cases expressing divided views on the subject is found in 15 ALR 3rd 531.

We deal solely with the ethical aspect of the matter. We further assume at the outset that there is no custom in the community or county involved wherein it was or should have been understood by the physician that he was to look solely to the client, and further that there is no inter-professional code between the county bar association and the county medical society, which in effect would be a written embodiment of the custom governing attorneys and physicians insuch circumstances.

With these assumptions, we note the provisions of Section 92.231, Florida Statutes, provide in part as follows:

(2) Any expert or skilled witness who shall have testified in any cause shall be allowed a witness fee including the cost of any exhibits used by such witness in the amount of $10 per hour or such amount as the trial judge may deem reasonable, and the same shall be taxed as costs.

In view of the fact that the physician who was entitled to rely upon this statute appeared and offered expert testimony, and in the absence of a disclaimer by the attorney prior to the testimony, we think that it would be unprofessional for the lawyer to decline under these particular circumstances to advance such reasonable fee as may be assessed by the court. It is to be noted that while ordinarily costs are taxed only to a successful party, the statute in question is not limited to experts testifying for the successful party.

Florida
OPINION 72-27

Originally issued July 30, 1972
Revised April 23, 1993

A lawyer may advance or guarantee fees of medical witnesses in accordance with Rule of Professional Conduct 4-1.8(e).

RPC: 4-1.8(e)

A lawyer whose firm frequently represents plaintiffs in personal injury litigation advises that he is often requested by medical witnesses to guarantee payment of their witness fees. He asks whether he may properly do so under the Rules of Professional Conduct.

Rule 4-1.8(e) provides:

(e) Financial Assistance to Client. A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
(2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

Clearly the lawyer is permitted, but not required, to advance litigation costs and expenses-including witness fees-on behalf of a client. Subdivision (1) of this rule allows the lawyer and a non-indigent client to agree that the client is obligated to repay the lawyer for advanced costs and expenses only if a recovery is obtained. In a contingent fee case, any such agreement should be included in the required written employment contract.

Subdivision (2) allows the lawyer and an indigent client to agree that the lawyer will pay the litigation costs and expenses of the indigent client if a recovery is not obtained.

Florida
OPINION 75-24

November 30, 1975

A lawyer may not participate in an arrangement in which a small loan company agrees to make loans for living expenses to the attorney's clients awaiting settlements on the condition that the attorney and client sign an agreement that the loan will be repaid from the settlement proceeds.

CPR: EC 5-8; DR 5-103(B)
Opinions: 65-39, 68-15, 70-8, 72-27
Statute: F.S. §516

Vice Chairman Sullivan stated the opinion of the committee:

A company, duly registered as a small loan business pursuant to Chapter 516, Florida Statutes, is willing to make loans to persons who are awaiting settlement of estates or are involved in personal injury suits or in divorce cases and who are in immediate need of funds for living expenses.

The company considers an application for such a loan only upon the recommendation of a member of The Florida Bar representing the client seeking the loan. The company then makes its own determination about the basic security for each loan, i.e., the probability of success and recovery in the court proceeding. If it decides to make the loan, the company requires both the borrower and his lawyer to sign a loan disbursement agreement which obligates both lawyer and client to see that the loan is repaid from the proceeds of the settlement or judgment before other funds are disbursed.

The loans average between $100 and $600 although on occasion the company makes loans up to its legal limit of $2,500. The loan agreement calls for monthly payments, but in practice the loans are repaid from the proceeds of funds received from court proceedings or not at all. A lawyer representing a loan applicant has no personal liability on the loan but obviously is obligated to comply with the terms of the loan disbursement agreement.

We are asked whether a lawyer may ethically participate in this arrangement, and our answer is that he may not.

DR 5-103(B) forbids a lawyer from advancing or guaranteeing financial assistance to clients except it allows a lawyer to advance or guarantee litigation expenses provided the client remains ultimately liable for them. EC 5-8 and our Opinion 72-27 are to the same general effect. In Opinion 70-8 the Committee said that a lawyer should not guarantee a client's financial obligation for litigation expenses.

In Opinion 65-39, decided under the former Canons, the Committee said a lawyer should not advance living expenses to a client pending settlement of a lawsuit. The Opinion did state that generally lawyers can assist clients in obtaining financial support but did not suggest how this could be done.

In Opinion 68-15, also decided under the former Canons, the Committee disapproved a proposal similar in many ways to the present one. A lawyer proposed instituting a non-profit lending fund financed by contributions from lawyers. The lawyers would process loans to accident victims, and the loans would be secured by assignments of claims and repaid by proceeds of settlements or judgments.

Although the CPR allows a lawyer to advance litigation costs under certain conditions, we do not believe that concept should be expanded. Where the lawyer initiates the loan by recommending his client to the loan company, it seems to us that he is inherently representing to the loan company that the client's claim is meritorious. It becomes unclear whether the lawyer is acting for the client or the loan company.

Even though the lawyer recommending a loan applicant has no personal liability on the loan, the amount of the recovery in court in relation to the amount of the loan also presents problems in relation to the lawyer's right to recover costs he may have advanced and the lawyer's right to a contingent fee from that recovery, as well as payment of other outstanding litigation expenses.

A lawyer may suggest to a client where the client may try to obtain financial help for individual needs, Opinion 65-39, but the lawyer should not become part of the loan process.

Florida
OPINION 92-6

March 1, 1993

An attorney's involvement with a proposed corporation that would loan money to claimants in personal injury matters would be unethical. Under the proposed plan, in order to ensure repayment of the loan from the recovery the attorney and the client would sign a trust declaration by which the attorney would become a trustee for benefit of the loan company. Note: This opinion was approved by the Board of Governors at its February 1993 meeting.

RPC: 4-1.7, 4-1.8(e), 4-3.7(a), 4-8.4(a)
CPR: DR 5-103(B)

Opinion: 75-24

Case: The Florida Bar v. McAtee, 601 So.2d 1199 (Fla. 1992)

The inquiring attorney previously received an informal staff opinion concerning the inquiry presented below. At the inquirer's request, the Committee reviewed the staff opinion. Following the Committee's affirmance of the staff opinion, the inquirer petitioned for Board of Governors review. The Board approved the result reached in the staff opinion, but directed that the Committee render an advisory opinion to provide guidance to the practicing bar.

The inquiring attorney states that his client is considering forming a corporation that would loan money to claimants in personal injury matters. The loans would be made pursuant to the following arrangement:

(1) In consideration of the proceeds of the loan, the personal injury claimant would execute and deliver to the lender an interest-bearing promissory note.

(2) In addition to the execution and delivery of the promissory note, the personal injury claimant would execute a trust declaration by which his or her lawyer would become a trustee for the benefit of the lender.

(3) The personal injury claimant's lawyer would sign the trust declaration, thereby accepting responsibility for repayment to the lender of the loan out of the proceeds of the personal injury claim.

(4) The personal injury claimant's lawyer would receive no pecuniary compensation from any source for his or her service as trustee.

(5) The personal injury claimant's lawyer would advance none of his or her funds, either directly or indirectly, to his or her client.

(6) The ownership and management of the lender would be completely independent of the personal injury claimant's lawyer.

The inquiring attorney has asked whether the participation of the personal injury claimant's lawyer in the proposed financing arrangement would be ethically permissible. For the reasons expressed below, the Committee is of the opinion that an attorney's participation in this financing arrangement would be unethical.

In Opinion 75-24 we concluded that it would be improper for an attorney to participate in an arrangement in which a lender would agree to make loans to the attorney's clients for living expenses on the condition that attorney and client sign an agreement that the loan would be repaid from the settlement proceeds. Although Opinion 75-24 was decided under the former Code of Professional Responsibility, for purposes of this inquiry former DR 5-103(B) and present Rule 4-1.8(e) are substantially similar. Rule 4-1.8(e) provides:

(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

(2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

In reality, an attorney who routinely refers clients to a loan company and actively participates in the loan transactions would be providing financial assistance to those clients. Such conduct would be unethical even though the attorney would be providing financial assistance indirectly rather than directly. An attorney may not violate the Rules of Professional Conduct through the acts of another. Rule 4-8.4(a). Therefore, if the loan proceeds were used for anything other than "court costs and expenses of litigation," the attorney would be acting unethically by participating in the proposed financing arrangement.

Other practical problems exist. For example, in some cases a client might stand to receive no cash from a recovery because the client's entire share of the expected recovery proceeds had been "advanced" by, and thus was owed to, the loan company. Upon realizing that no cash would be forthcoming, the client could decide to cease cooperating with the attorney or simply to forego pursuing the matter. In such a situation, the fact that the client's share of the expected recovery already had been received by the client could adversely affect the relationship between attorney and client. The attorney's interest would be served by settlement of the case, yet the client might have little incentive to settle or even to cooperate in pursuing the case.

An attorney's involvement in the loan process to the extent contemplated by the proposed arrangement also would raise the issue of the attorney's duty to arrange for financing on the most advantageous terms available for the client. Would the attorney be obligated to "shop" the client's case to various loan companies in order to obtain the best deal? Must the attorney counsel the client on how much money the client should borrow?

Additional ethical concerns could arise as a result of the attorney's participation in the proposed arrangement. It is apparent that, in the event of a dispute between the client and the loan company, the attorney would be placed squarely in the middle. A principal purpose underlying Rule 4-1.8(e) is to prevent unnecessary conflict between attorney and client. In the view of the Committee, an attorney's involvement in the proposed financing arrangement would serve only to increase the likelihood of such conflict. Furthermore, the attorney's extensive involvement in the loan process could result in the attorney being ethically precluded from representing the client in litigation resulting from the dispute-for example, Rule 4-3.7(a) would prohibit the attorney from representing the client in the litigation if the attorney would be a necessary witness on the client's behalf.

Finally, under existing ethics rules a potential conflict of interest would be present if an attorney acted to protect the lender's interest by agreeing to act as trustee for benefit of the lender. See The Florida Bar v. McAtee, 601 So.2d 1199 (Fla. 1992), and Rule 4-1.7. Attorney McAtee was disciplined for representing a personal injury client while, without that client's knowledge or consent, simultaneously representing the medical provider that had filed a notice of lien against the personal injury client's recovery. Although such conflicts often can be waived by the affected clients, it is evident that our statement in Opinion 75-24 seems especially applicable to the financing arrangement proposed by the inquiring attorney:

Where the lawyer initiates the loan by recommending his client to the loan company, it seems to us that he is inherently representing to the loan company that the client's claim is meritorious. It becomes unclear whether the lawyer is acting for the client or the loan company.

In closing, it is noted that the Committee's opinion is directed at the financing arrangement presented by the inquiring attorney; we have not been asked, nor do we attempt, to provide an opinion concerning ethically proper use of "letters of protection" in personal injury cases.

Illinois

Illinois State Bar

ILLINOIS STATE BAR ASSOCIATION

ISBA Advisory Opinion on Professional Conduct ISBA Advisory Opinions on Professional Conduct are prepared as an educational service to members of the ISBA. While the Opinions express the ISBA interpretation of the Illinois Rules of Professional Conduct and other relevant materials in response to a specific hypothesized fact situation, they do not have the weight of law and should not be relied upon as a substitute for individual legal advice.

Opinion No. 92-9

January 22, 1993

Topic: Financial Support to Clients; Confidentiality Digest: 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. Ref.: Illinois Rules of Professional Conduct, Rules 1.4(b), 1.6 (a), 1.8(d), 1.16(e), and 5.4(a)

ISBA Opinion 295 (1968)

FACTS

Attorney A is requesting an opinion as to whether or not attorneys may ethically become associated with Finance Company for the purpose of obtaining loans for clients to pay attorney fees. The attorney pays an initial fee of $500 for which he is given the right to submit loan applications from clients. Upon approval of the loan, the client would be solely responsible for its repayment. The attorney would receive the loan proceeds, less a 10% fee.

QUESTIONS

  1. Does an attorney who assists in obtaining financing for a client to pay his fee violate Rule 1.8(d), which prohibits advances or guaranteed financial assistance in connection with contemplated or pending litigation. 2. Does the attorney's agreement to pay a 10% fee to Finance Company A constitute a fee splitting arrangement in violation of Rule 5.4(a)?

OPINION

Rule 1.8(d) provides in part: While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client,...

The type of financial assistance prohibited by the Rule is the guaranteeing of financial assistance or direct assistance by the attorney to the client with the exception that the attorney is allowed to advance the "expenses of litigation." The fact situation presented does not violate Rule 1.8(d) since the attorney is assisting the client in making financing available between the client and some third party without directly involving the attorney in the making of the loan or guaranteeing of the loan.

This issue was addressed previously in Opinion No. 295 (1968). In that opinion, the Committee found a particular plan for bank financing to be ethical. The Committee recognized the need of the general public to have legal services made more available. The issues dealt with in that decision were confidentiality or information and possible disputes over legal fees. We affirm our position, in Opinion No. 295, that financial plans which are suggested by an attorney are permissible when certain requirements are met. First, there must be compliance with Rule 1.6, which concerns confidentiality. The attorney must fully disclose to the client that the information contained in the loan application will be forwarded and disclosed to the lender. We encourage the attorney to document the disclosure by written instrument. Rule 1.6 provides in part:

(a) ...a lawyer shall not, during or after termination of the professional relationship with the client, use or reveal a confidence or secret of the client known to the lawyer unless the client consents after disclosure. Secondly, the attorney, as fiduciary, has the duty to disclose to the client his complete involvement in the transaction. It is the Committee's opinion that the attorney's duty, as a fiduciary, requires that the transaction and terms be fair and reasonable to the client. The terms must be fully disclosed and transmitted to the client in writing in a manner reasonably understood. see Rule 1.4(b).

Therefore, this fact situation would require the attorney disclose to the client the complete details of the loan and the nature of his association with Finance Company A. He must disclose the fact that he was required to make an initial payment of $500 in order to submit loan applications to this particular lender. He must also inform the client that he is discounting his attorney fees by 10% as part of the agreement to submit the loan applications to Finance Company A.

Additionally, the fiduciary relationship requires that the attorney inform the client that his representation is not contingent upon the use of Finance Company A and also that the client is free to obtain alternative financing. An additional question submitted by the inquirer is whether or not the practice of discounting the attorney fee would be a fee sharing agreement in violation of Rule 5.4(a). The Committee finds that an attorney's agreement to discount a portion of a loan given to a client is distinguishable from an attorney's agreement to share fees with a non-attorney. The facts as set out in the inquiry indicate a business agreement between the attorney and the finance company by which the attorney agrees to accept that portion of his fee which was financed minus a 10% service charge. This practice makes it possible for the business to bear a portion of the cost of the loan thereby making the borrower more attractive to the lender. The business benefits since its product can be sold to customers who do not possess sufficient cash.

We believe that the problem that could arise due to an early withdrawal of an attorney is adequately addressed by Rule 1.16(e), which requires the withdrawing attorney to promptly refund any part of the fee paid which is not earned.

For the reasons stated, the Committee is of the opinion that it is ethical for an attorney to suggest a loan agreement with a particular financial institution for the payment of his legal fees on the conditions that he complies with Rule 1.6 concerning the disclosure of confidences and also that he meets his further fiduciary obligations concerning full disclosure of all the terms of his involvement with the financial institution, the terms of the transactions are fair and reasonable, and also the client's right to obtain alternative financing. See also Rule 1.4(b) requiring full explanation of the transaction in term the client can understand.

Kentucky

Kentucky State Bar

SCR 3.130 KENTUCKY RULES OF PROFESSIONAL CONDUCT COUNSELOR Current with amendments received through 6/30/99 SCR 3.130(2.3) EVALUATION FOR USE BY THIRD PERSONS

(a) A lawyer may undertake an evaluation of a matter affecting a client for the use of someone other than the client if:

(1) The lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer's relationship with the client; and (2) The client consents after consultation.

(b) Except as disclosure is required in connection with a report of an evaluation, information relating to the evaluation is otherwise protected by Rule 1.6.

Adopted by Order 89-1, eff. 1-1-90
COMMENTARY
Supreme Court 1989:

Definition

[1] An evaluation may be performed at the client's direction but for the primary purpose of establishing information for the benefit of third parties; for example, an opinion concerning the title of property rendered at the behest of a vendor for the information of a prospective purchaser, or at the behest of a borrower for the information of a prospective lender. In some situations, the evaluation may be required by a government agency; for example, an opinion concerning the legality of the securities registered for sale under the securities laws. In other instances, the evaluation may be required by a third person, such as a purchaser of a business.

[2] Lawyers for the government may be called upon to give a formal opinion on the legality of contemplated government agency action. In making such an evaluation, the government lawyer acts at the behest of the government as the client but for the purpose of establishing the limits of the agency's authorized activity. Such an opinion is to be distinguished from confidential legal advice given agency officials. The critical question is whether the opinion is to be made public.

[3] A legal evaluation should be distinguished from an investigation of a person with whom the lawyer does not have a client-lawyer relationship. For example, a lawyer retained by a purchaser to analyze a vendor's title to property does not have a client-lawyer relationship with the vendor. So also, an investigation into a person's affairs by a government lawyer, or by special counsel employed by the government, is not an evaluation as that term is used in this Rule. The question is whether the lawyer is retained by the person whose affairs are being examined. When the lawyer is retained by that person, the general rules concerning loyalty to client and preservation of confidences apply, which is not the case if the lawyer is retained by someone else. For this reason, it is essential to identify the person by whom the lawyer is retained. This should be made clear not only to the person under examination, but also to others to whom the results are to be made available.

Duty to Third Person

[4] When the evaluation is intended for the information or use of a third person, a legal duty to that person may or may not arise. That legal question is beyond the scope of this Rule. However, since such an evaluation involves a departure from the normal client-lawyer relationship, careful analysis of the situation is required. The lawyer must be satisfied as a matter of professional judgment that making the evaluation is compatible with other functions undertaken in behalf of the client. For example, if the lawyer is acting as advocate in defending the client against charges of fraud, it would normally be incompatible with that responsibility for the lawyer to perform an evaluation for others concerning the same or a related transaction. Assuming no such impediment is apparent, however, the lawyer should advise the client of the implications of the evaluation, particularly the lawyer's responsibilities to third persons and the duty to disseminate the findings.

Access to and Disclosure of Information

[5] The quality of an evaluation depends on the freedom and extent of the investigation upon which it is based. Ordinarily a lawyer should have whatever latitude of investigation seems necessary as a matter of professional judgment. Under some circumstances, however, the terms of the evaluation may be limited. For example, certain issues or sources may be categorically excluded, or the scope of search may be limited by time constraints or the noncooperation of persons having relevant information. Any such limitations which are material to the evaluation should be described in the report. If after a lawyer has commenced an evaluation, the client refuses to comply with the terms upon which it was understood the evaluation was to have been made, the lawyer's obligations are determined by law, having reference to the terms of the client's agreement and the surrounding circumstances.

Financial Auditors' Requests for Information

[6] When a question concerning the legal situation of a client arises at the instance of the client's financial auditor and the question is referred to the lawyer, the lawyer's response may be made in accordance with procedures recognized in the legal profession. Such a procedure is set forth in the American Bar Association Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information, adopted in 1975.

KBA E-383

Question 1:

Does a lawyer have an ethical obligation to ensure payment to an individual who has provided services to, or on behalf of the lawyers client, or in the furtherance of the clients case:

  1. a) if the lawyer hired the individual provider?
    b) if the lawyer did not hire the individual provider?
    c) if, under the same circumstances as 1(a) and 1(b) above, no recovery is had, or the recovery is insufficient?
    d) if the client directs the lawyer not to pay the third person, and instead directs the lawyer to deliver all funds or property to the client?

Question 2:

Do the Rules of Professional Conduct require a lawyer to recognize and comply with a third person's claim of ownership to the client's property that is in the lawyer's possession?

Answers: 1(a). Yes. l(b), l(c), l(d), and 2. See Opinion.

References: KBA E-297; Leon v. Martinez, 614 N.Y.S.2d 972 (N.Y. 1994); Rule(s) 1.2(d) & (e), 1.15(b) and 4.1; Unigard Ins. Co. v. Tremont, 430 A.2d 30 (Conn. 1981); KBA/KMA Interprofessional Code, Minnesota Op. 7 (1983). Dist. of Col. Op. 251 (1995).

OPINION

The inquiry presents mixed questions of law and ethics and this committee is limited to responding based upon matters of ethics. See KBA E-297.

Regarding Question 1(a):

An attorney has an ethical as well as a legal obligation to ensure payment to a third party employed by the attorney to provide services in furtherance of the client's claim where there is no valid dispute that the services were performed in accordance with the employment.

Under certain circumstances an attorney is required by the applicable law of the case to ensure payment to a third party. See Rule 1.15(b); Interprofessional Code, para VI and VII. Reference is also made to Minnesota Op. 7 (1983), which provides:

Opinion 7 Costs of litigation; Fees.

An attorney may not deny responsibility for the compensation of services rendered by doctors, engineers, accountants, attorneys or other persons, when the attorney requested the services without explicitly stating that the provider should not look to the attorney for payment. Lawyers should expressly disclaim liability in writing at the time the services are requested. A lawyer ordering services is liable as a principal for those services absent an express disclaimer. A lawyer may not, by deceitful or fraudulent means, seek to avoid financial obligations. DRs 102 (A) (4) (5). 7-101(A)(1)(2)(7). (Adopted 1/26/74, amended 10/26/79, repealed 1/7/83).

In those situations where the attorney ordered the performance of services for the client, participated in obtaining services for the benefit of the client, obtained services for the benefit of the client without making it clear to the provider of such services that the provider should look solely to the client, or where the lawyer conferred with a third party, with the client's knowledge, to take no present action against the client, for example, a third person's pursuing a collection action against the client until the settlement of the client's claims which is the basis of the lawyer's representation of the client, the lawyer has an obligation under the Rules of Professional Conduct to ensure payment of those services. However, absent these circumstances, an attorney is under no ethical obligation to assume the role of an insurer of third party claims. When an attorney accepts such a role at the direction of the attorney's client or where such a role is imposed on an attorney as a result of representing the client, then the attorney is bound by the Rules of Professional Conduct to fulfill the responsibility as part of the lawyer's duty to the client.

Regarding Question 1(b):
See above.

Regarding Question 1(c):
See above.

Regarding Question 1(d):

If an attorney is under a duty imposed by law, then the attorney is required to comply with the law. Where prior actions of the client or the circumstances of the representation place the attorney in the position of a surety, then the attorney's conduct must comply with the law of surety. If a dispute should arise between the client and the third party, concerning a properly asserted claim, then the attorney should protect the funds and property until the dispute is settled or until ordered to distribute the funds or property. See Leon v. Martinez (citing DR 9-102, the predecessor to Rule 1.15(b); Unigard Ins. Co. v. Tremont (lawyer who ignored insurer's statutory lien committed conversion); Rule(s) 1.2(d) & (e) and Rule 4.1.

In this regard the following Comments to Rule 1.15 provide guidance that has applicability here.

(2) Lawyers often receive funds from third parties from which the lawyer's fee will be paid. If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds should be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration.

(3) Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

Regarding Question 2:

In the circumstances stated above, an attorney may refuse to surrender the property to the client, but the attorney is not under an ethical obligation, under the Rules of Professional Conduct, to protect the interests of third parties. See comments at page 262 of the American Bar Association's text, Annotated Model Rules of Professional Conduct, Second Edition (1992).

RICHARD H. UNDERWOOD
ETHICS COMMITTEE CHAIR
7/95

KBA E-375

Question: During the course of the representation, may a lawyer loan money to his or her client for financial assistance other than the expenses of litigation.

Answer: No.

References: Rule 1.8(e); Model Code DR 5-103(A) and EC 5-8; KBA E-51 (1971); selected state versions of ABA Rule 1.8(e); Charles Wolfram, Modern Legal Ethics (St. Paul: West, 1986); KBA v. Mills, 808 S.W.2d 804 1991.

OPINION

Advancing or lending money to the client for medical and living expenses, to be repaid from the proceeds of the litigation, may seem to some a decent and humanitarian thing to do. However, this was punishable at common law as criminal maintenance and champerty. These old crimes have been "defanged", but the notion that the lawyer should not acquire an interest in the litigation was carried forward in DR 5-103(B) and now in Rule 1.8(e). See Wolfram at pp. 489-490, 507-509. "Both the Code and the Model Rules [and the Kentucky Rules] - implicitly but clearly - prohibit a lawyer from making any other financial assistance available to a client." Id at 509. The answer to the question is still "no." The Rule makes an exception for the "expenses of litigation."

A few jurisdictions have amended Rule 1.8 to allow for some advances along these lines, which would be prohibited by the Model Rule and by Kentucky Rule 1.8(e). See, e.g., District of Columbia Rule 1.8(d)(2); Minnesota Rule 1.8(e)(3); Texas Rule 1.08(d). The thought behind these amendments is obvious. The argument is that poor clients may need help to sustain the burden of litigation, and litigation delay that otherwise favors their opponent. Critics contend that dropping the time-honored rule will invite bidding by lawyers for clients, and investment in the cause of action.

A majority of the Committee is persuaded that the Rule is, for the most part, well understood, and generally accepted. See KBA E-51 (1971). Any change should come by way of an amendment to Rule 1.8(e).

RICHARD H. UNDERWOOD
ETHICS COMMITTEE CHAIR
3/17/95

Massachusetts

Massachusetts State Bar

Opinion No. 78-13

Summary:

A lawyer who represents the plaintiff in a medical malpractice action may advance cash to his indigent client for the purpose of posting a bond required pursuant to G.L. c.231, S60B, provided that the client remains ultimately liable for this expense.

Facts:

A law firm represents the plaintiff in a medical malpractice action against a surgeon and a hospital. After commencement of this action, a tribunal determined that plaintiff had failed to make the offer of proof required by the statute, G.L. c.231, S60B. It ordered the posting of two $2,000 bonds to secure payment of any costs assessed in favor of each defendant. The firm asks if it may provide cash for the purpose of posting these bonds. The client does not have the funds to do this himself.

Discussion:

G.L. c.231, S60B, is intended to "weed out" frivolous medical malpractice actions. It attempts to do this by requiring plaintiffs to make a preliminary showing of meritoriousness before a special "tribunal" composed of a judge, a lawyer and a physician. If unsuccessful before the tribunal, "... the plaintiff may pursue the claim through the usual judicial process only upon filing bond in the amount of two thousand dollars secured by cash or its equivalent ... ." G.L. c.231, S60B (added by 1975 Mass. Acts, c.362, S5). The bond must be "... payable to the defendant for costs assessed, including witness and experts fees and attorneys fees if the plaintiff does not prevail in the final judgment." G.L. c. 231, S60B. See Paro v Longwood Hospital, 1977 Mass. Adv. Sh. 2353, for a detailed description of this legislation.

The inquiry is governed by DR 5-103(B). This disciplinary rule provides that:

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 a 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. Cf. Superior Court Rule 11 (1974) authorizing an attorney to become liable as an "endorser for costs."

In our opinion, the cash bonds are an "expense of litigation." Hence, a lawyer may advance cash for the purpose of posting these bonds. The client must remain ultimately liable for this expense. Admittedly, posting such bonds is not specifically permitted by the disciplinary rule. However, we regard the list of specific expenses as illustrative rather than exclusive. Such a bond seems rather closely analogous to the payment of court costs. In order to enter a civil action in Massachusetts, an entry fee must be paid. We note that it is an almost universal practice for plaintiff's attorneys to pay this fee on behalf of their clients and then include it as an item of expense in their client billing when the action is concluded. While the amounts involved might differ greatly, the principle is the same.

We also note that the legislature has provided that the court may reduce the bond if the plaintiff is indigent, G.L. c.231, S60B. See also Paro v. Longwood Hospital, 1977 Mass. Adv. Sh. 2353. We do not feel that advancing cash to an indigent client to post a bond will defeat the purpose of the statute. Even if it did, the disciplinary rules do not prohibit the practice.

Opinion No. 83-7

Summary:

A lawyer may borrow funds from a bank to assist him in bearing the expenses of litigation. A lawyer representing a client in litigation may not lend money to the client for purposes of helping the client defray non-litigation-related expenses, nor may the lawyer's firm do so, nor may the lawyer or his firm cosign or guarantee a bank loan to the client for such purposes or purchase a percentage of the client's claim. However, the lawyer or the firm may properly refer the client to unaffiliated third parties who would lend the client money or purchase a portion of the tort claim, at least so long as no commission, finder's fee, or the like is to be paid to the lawyer or the law firm for doing so.

Facts:

The committee has received two inquiries. In the first, an attorney who represents the plaintiff in a personal injury case inquires if he may borrow funds from a chartered lending institution to help defray the costs and expenses of the litigation, supporting his application for the loan by describing the lawsuit to the prospective lender. The debt would be unsecured and the due date of the loan would not in any way depend upon the outcome of the litigation.

In the second inquiry, an attorney who represents the plaintiff in a tort suit inquires if, in view of the client's severe financial need, he or his law firm may lend money to the client, cosign, or guarantee a bank loan to her, purchase a percentage of her tort claim, or refer her to a third party who would lend her money or purchase a percentage of her claim.

Discussion:

The first inquiry relates to the propriety of a lawyer's borrowing to defray the expenses of litigation. The committee assumes that these expenses are being carried by the lawyer in conformity with Disciplinary Rule 5-103(B), which is discussed infra. Borrowing to defray such expenses is not per se a violation of the Disciplinary Rules. However, DR 5-107(A)(2) provides that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not . . . [a]ccept from one other than his client anything of value related to his representation of or his employment by his client." Such consent is therefore required where, as here, the loan application is to be supported largely by a description of the particular case. See also DR 5-101(A), which provides that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial . . . interests." Thus, if the borrowing would be so large that it would or might reasonably affect the lawyer's judgment, full disclosure of this problem should precede consent. Finally, note that any description of the lawsuit made to the prospective lender must comply with Canon 4 ("A Lawyer Should Preserve the Confidences and Secrets of a Client") and the disciplinary rules thereunder.

The second inquiry asks, first, if a lawyer may lend money to "tide over" an indigent plaintiff whom he represents in a tort suit. Disciplinary Rule 5-103(B) provides:

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 a 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.

Thus, if the funds would not be used to cover expenses of litigation in any sense--and there is nothing in the inquiry which indicates that they would--the lawyer could not advance them. See Embler, Professional Responsibility, Malpractice, and Competency, 32 So. Car. L. Rev. 165 (1980) and authorities cited. The rule may be harsh where the client is indigent, but in two recent South Carolina cases attorneys were disciplined for advancing funds to needy clients in violation of this rule. See In re Pusser, 273 S.C. 115, 254 S.E.2d 926 (1979); In re Leppard, 272 S.C. 414, 252 S.E.2d 143 (1979). An indigent client is likely to be less able than others to protect himself against the dangers of such transactions, such as the danger that the lawyer will settle the case for less than it is worth in order to assure repayment of the loan.

It is further asked if the attorney's firm may make the loan, or whether the attorney or the firm could properly cosign or guarantee a loan to the client from a bank. Under any of these approaches, the attorney would stand to lose if the debt were not repaid, and so be subject to pressures similar to those DR 5-103(B) was designed to prevent. Consequently the rule must be interpreted to reach those arrangements as well.

It is further asked if the firm or the attorney could properly "purchase a further percentage of [the client's] tort claim over and above the original contingency fee agreement." DR 5-103(A) prohibits a lawyer from acquiring "a proprietary interest in the cause of action ... of litigation he is conducting for a client." DR 5-103(A)(2) affords an exception for reasonable contingency fee arrangements, but where as in the proposed arrangement some of the monies contingently payable by the client are attributable not to legal services but to a purchase, they do not constitute a "fee."

Finally, it is asked whether the lawyer could properly refer the client to a third party who would lend money to the client or purchase a portion of the client's tort claim. We assume that the third party is one in no way affiliated with the attorney, that the attorney would obtain no fee or commission for the referral, that the attorney would give no assurances to the third party as to the conduct or likely outcome of the litigation and would not give the third party any right to control the conduct of the litigation, and that the attorney would conform to Canon 4 and the disciplinary rules thereunder relating to the confidences and secrets of the client. Under those circumstances, making such a referral would not violate the Disciplinary Rules.

Permission to publish granted by the Board of Delegates on May 12, 1983. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.

Massachusetts Legal Opinion

Michigan

Michigan State Bar

Opinion RI-14 Opinion RI-321

RI-14

January 26, 1989

SYLLABUS

The ethical prohibition against attorneys advancing living or medical expenses to a client applies to lawyers employed by legal service organizations.

References: MRPC 1.8(e)(1) and (2).

TEXT

A lawyer employed by a legal services agency and specializing in domestic relations matters asks whether it is permissible to personally give clients, during pending litigation, monetary or in-kind gifts for living and medical expenses, such as (a) $150 to an indigent to enable a client to comply with the court's custody order; (b) the cost of transportation for a client in an abuse and neglect matter to attend occasional therapy sessions when the social caseworker is unavailable; (c) donation of furniture to an indigent and/or solicitation of household items needed to establish a satisfactory home environment to qualify for child visitation rights.

The lawyer proposes to donate the necessary funds from personal resources and/or to solicit contributions from professional colleagues and other persons.

MRPC 1.8(e)(1) and (2) state:

"(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: "(1) A lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client; and "(2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client."

MRPC 1.8(e)(1) permits a lawyer to advance court costs and litigation expenses, provided the client remains ultimately liable for repayment of all advances, regardless of the outcome of the litigation. MRPC 1.8(e)(2) is more liberal in the case of an indigent client, since a lawyer is permitted to pay court costs and litigation expenses on behalf of an indigent client without any requirement of client reimbursement, but MRPC 1.8(e) applies only to costs associated with litigation.

MRPC 1.8(e) is the result of the common law rules against champerty and maintenance. Champerty is an investment in the cause of action of another by purchasing a percentage of any recovery. Maintenance is another form of investment by providing living or other expenses to finance litigation. When a lawyer has a financial stake in the outcome of a client's lawsuit, there is a legitimate concern that the lawyer's undivided loyalty to the client may be compromised in an effort to protect the lawyer's personal financial investment in the outcome. Also financial support to a client could interfere with settlement efforts, by enabling the client to prolong the dispute. MRPC 1.8(e) makes no distinction between private practitioners and legal aid staff attorneys. The Rule does not allow attorneys practicing in Michigan to personally donate and/or solicit monetary or in-kind gifts for clients to meet living expenses during pending litigation, even when necessary to comply with court orders.

If an indigent person is unable to secure financial assistance needed to comply with court orders, qualify for child visitation rights, obtain necessary medical treatment incident to an abuse proceeding or other similar necessities of life during pending litigation, the client may be referred to the appropriate social services agencies, and there is no ethical rule prohibiting the lawyer or the legal services agency from assisting those agencies in securing resources necessary to make social services available to needy members of the community.

In conclusion, it is unethical for an attorney employed by a state-funded legal services agency to personally donate and/or solicit monetary or in-kind gifts to clients for living and medical expenses during pending litigation.

RI-321

June 29, 2000

SYLLABUS

A lawyer who represents claimants in tort proceedings would have an irreconcilable conflict of interest if the lawyer entered into an agreement to refer existing and future clients to a venture capital company which would acquire an interest in the proceeds of the claimants' personal injury actions in exchange for immediate cash payments to meet the living needs of the tort claimants.

Draft documents prepared by a venture capital company and presented to the Ethics Committee contain a number of onerous conditions which would individually create ethical problems and which collectively make the proposed agreements unethical.

Regardless of the specific terms of the documentation, the proposed arrangement between the lawyer and the venture capital company would inevitably create a conflict of interest by significantly interfering with the lawyer's relationship with the clients, with the lawyer's ability to advise the clients, with the clients' control of the litigation, with the clients' power and right to terminate the lawyer and/or to settle or abandon the claims.

The depth of the conflicts of interest identified in this opinion makes it highly unlikely that consent or waiver by the client could resolve the conflicts.

References: MRPC 1.6, 1.7 and 1.8; Virginia Ethics Opinion 1155.

TEXT

Inquiry has been made as to: (1) Whether a lawyer representing civil tort plaintiffs remains in compliance with the Michigan Rules of Professional Conduct if the lawyer refers his or her client to a venture capital corporation that have formed a business for the purpose of advancing funds to personal injury plaintiffs to satisfy their immediate needs for cash in return for a share of the tort judgment or settlement, enforced by lien on the proceeds and a number of conditions inherent in the agreement. (2) Whether a lawyer representing civil tort plaintiffs remains in compliance with the Michigan Rules of Professional Conduct if the lawyer receives payment for costs as part of plaintiffs' contract with the venture capital corporation in the event that the suit is not successful.

In the proposed agreement offered to the committee, there are many conditions placed upon the individual tort plaintiff who accepts funds from the venture capitalists. It is our view that these terms have the potential of becoming adverse and onerous in any dispute between the client and the venture capital corporation as the litigation unfolds. The lawyer agrees, for example, to hold all funds in trust for the venture capital corporation and to restrain the use of disbursed structured settlement funds until all "capital advances" paid to the individual plaintiff have been repaid. The monies paid by the venture capital corporation to the client create liens that while inferior to statutory liens, are obligations that are equal or superior to other nonstatutory liens. Both the individual plaintiff and the lawyer must agree to decline to terminate legal representation as to that lawyer or to make a change from present counsel without the express written consent of the venture capital corporation, so that any change of a new lawyer is restricted. In the event of a legal dispute, all settlement funds must be interpleaded in a case to be started in the Eighth District Court for Clark County, Las Vegas, Nevada, with the individual plaintiff agreeing to this out-of state venue without further objection to the forum selection as inconvenient or unlawful.

The agreement that the plaintiff has with the venture capital corporation also creates concerns. The sample agreement provided to the committee provides that the individual plaintiff waives all legal defenses to any of the payments from settlement proceeds that are required to be made to the venture capital corporation relating to the propriety of the agreement. In another paragraph of that agreement, the venture capital corporation represents that it is the "provider of funds of last resort" and it specifically advises the individual client that other financial services are available on terms that may be more favorable and available at better rates and conditions than this group allows. Furthermore, a representation that all other attempts to borrow money has been explored by the client and has failed whether this has actually been done or not. It is the plaintiff's tort counsel who has his or her own interests guaranteed who is under an individual obligation to review the agreement documents for a legal opinion to his or her client. Under all circumstances, all amounts advanced by the venture capital corporation must be repaid. The sample agreement provides that plaintiff's tort lawyer must warrant that he or she has reviewed the documents and has answered all of the questions of the client regarding the arrangement.

Under the sample agreement, the tort-claimant client is specifically advised that the venture capital corporation may make a "substantial profit" from the contractual arrangement. There is an adverse venue/forum selection claim, as all disputes must be litigated in the state of Nevada. In addition, the laws of Nevada, not Michigan, will control. There is a forum selection clause for all state and federal suits taking place in Las Vegas, Nevada, requiring all suits regarding disputes about the agreements take place there.

The document known as the Assignment of Proceeds also has a provision that causes concern. The individual tort plaintiff assigns all proceeds of the settlement or judgment to the venture capital corporation to the extent of the payments to be repaid. A paragraph of the Assignment of Proceeds Agreement specifically restrains the plaintiff from discharging his or her present lawyer and from selecting new counsel. Further, the selection of the lawyer in charge of the litigation requires the approval of the venture capital corporation that retains rights to refuse any change of counsel. Under this agreement, all disputes must be litigated in the remote sites of Clark County, Nevada, or the United States District Court for the Las Vegas District.

Among the various documents provided to the committee is a Security Agreement that makes the proceeds of the suit "collateral" for the advancement of the funds. The venture capital corporation is granted a specific "security interest" in the settlement or judgment proceeds of the case. The venture capital corporation, as the "secured party", is entitled to inspect all records, including all privileged attorney-client records, "relating to the collateral". Plaintiff must also agree to continue the case with his or her present lawyer and, if new counsel is selected, plaintiff is immediately liable for repayment in full of all monies advanced by the venture capital corporation. Plaintiff must agree to continue to litigate the case under all circumstances (despite possible contrary personal desires later) and must continue to "defend" the value of the collateral, i.e., the tort suit. Upon demand, plaintiff must sign all necessary documents that are demanded by the venture capital corporation, and must proceed to do all things demanded by the venture capital corporation in connection with maintenance of the litigation.

The Committee is aware that Virginia Ethics Opinion 1155 permit lawyers and law firms to refer clients to banks and finance companies to loan funds to clients whom, presumably or arguably, demand a "security interest" in the case. However, after examination of the documents provided to the committee, there are potential conflicts of interest and ethical perils that are also, a priori, evident from the contractual documents furnished.

The contractual documents specifically represent that tort counsel should give a legal opinion as to whether his or her client should enter into the agreement. This presents a potential for additional professional responsibilities on the part of counsel, as well as potential conflicts of interest. Under the terms of MRPC 1.7(a), a lawyer shall not represent a client if the representation of that client will be directly adverse to another client unless (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client and (2) each client consents after consultation. The contractual papers seem to subordinate the legal interests of the individual tort client to the venture capital corporation, as the latter becomes the decision making and controlling client. There are, in addition, substantial legal responsibilities owed to each other that certainly could conflict, as their interests appear. Given the course of litigation and settlement decisions to be made, continuance of the litigation, withdrawal of the litigation, change of counsel, etc., these differing contractual obligations have a serious potential for conflict that can only be resolved and made known if careful discussion takes place with both the individual tort client the venture capital corporation and counsel.

Under MRPC 1.7(b)(2), any consent to waive a conflict by a client must be given after full consultation. The consultation must include explanation of the implications of the common representation and the advantages and risks involved. After the agreements are signed, the venture capital corporation becomes, in real terms, a "client" with a co-equal, if not superior, decision making role.

Because of the complexities that this advancement of funds and the contract with the venture capital corporation bring to the litigation, and the fact that the lawyer becomes irrevocably appointed as counsel for all future litigation purposes, the termination of employment cannot be accomplished without disastrous financial consequences befalling the tort client. If the lawyer is replaced, the lawyer effectively enters into a business transaction with the tort client with the potential of a pecuniary interest that may be adverse to the client. This potential adverse interest must be clearly made known to the client in a fashion beforehand that can be reasonably understood by the tort client. See MRPC 1.8(a)(1). The tort client must by given a reasonable opportunity to seek the advice of independent counsel to evaluate the complicated transaction. Moreover, the bargain, taken as a whole, makes the lawyer not capable of being discharged for any reason and subject to the venture capital corporation's controlling the litigation. That may amount to a property interest in the case for both the lawyer and the venture capital corporation. MRPC 1.8(a)(2).

The Committee is also concerned that the arrangement specified by the contractual documents has the potential of running afoul of MRPC 1.8(g) that prohibits a lawyer from representing two or more clients in a conflicting position as that combination may relate to the making of "an aggregate settlement" that may be to the advantage of the venture capital corporation or to the disadvantage of the tort client, "… unless each client consents after consultation. …" Given the vagaries and difficulties of predicting the results of modern day tort litigation, together with the candid assessment by the venture capital corporation that it will make a "substantial profit" under the circumstances, the committee finds it difficult to ascertain how the early client consultation could effectively predict, with a reasonable degree of certainty, how these complicated contractual documents could work to the advantage or disadvantage of the parties at a later time, given the twists and turns that tort litigation sometimes takes. Because the contract documents furnished make clear that the venture capital corporation has the superior right to conduct the litigation once the funds are paid as the venture capital corporation sees fit, it becomes obvious that the lawyer must guard against interference with his or her professional judgment for the tort client. See MRPC 1.8(f)(2); MRPC 1.7(b).

In addition, the contract documents give the venture capital corporation the right to inspect all legal documents, presumably, even if legally privileged, and this may violate MRPC 1.8(h)(3) that requires a lawyer to protect all information relative to the representations. See MRPC 1.6.

In light of the fact that original tort counsel is given an irrevocable commitment to continue in employment as counsel by virtue of the financial arrangement with the venture capital corporation, irrespective of the quality of relations with the client or his or her performance or the needs of the client to continue with the case or to terminate it, the committee is also concerned that MRPC 1.8(j), that prohibits a lawyer from acquiring a proprietary interest in the cause of action, may also be violated by this arrangement. The contractual documents virtually remove from the tort claimants any ability on their part to select new counsel, without risking disastrous legal consequences, i.e., the immediate requirement of the repayment of all sums to the venture capital corporation, termination of the case, conducting it as he or she see fit or protecting privileged materials. Severe financial penalties virtually assure the non-discharageable lawyer's having acquired a proprietary interest in the cause of action and the clients being bludgeoned to actions that may conflict with their interests. The committee concludes that agreements such as those presented to the committee create an impermissible conflict of interest under MRPC 1.7(a)(2), 1.7(b)(2) and 1.8, because:

  1. The ultimate control of the litigation may be transferred to the venture capital corporation due to the fact that the lawyer is permanently appointed to the case;
  2. The original lawyer cannot be terminated without the venture capital corporation's consent in light of the fact that on demand of the venture capital corporation all documents and things must be demanded by that group; and
  3. Privileged materials may be disclosed. Furthermore, given the employment status of tort counsel as irreplaceable and incapable of being substituted, except with the consent of the venture capital corporation, it remains our view that MRPC 1.8(a)(2) requires the consultation with independent counsel who has no relationship with either the tort counsel or the venture capital corporation as this is the only lawyer who can properly advise the tort claimant.

Finally, with respect to the inquiry by the lawyer as to whether the provision in the contractual documents of the venture capital corporation will not seek court costs and expenses of litigation advanced by the lawyer and reimbursed by the venture capital corporation from the individual tort client, it is our opinion that this could also be inappropriate. Under MRPC 1.8(e)(1), a lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client. There is no ethical objection to the venture capital corporation advancing these sums once adequate disclosure is made if the complicated transaction is fully explained to the tort client. The agreement must be ethically modified to have the tort client understand and agree that ultimate responsibility for all such advanced costs and fees will be borne by the individual client to meet these ethical strictures. Of course, if the client is truly indigent as contemplated by MRPC 1.8(e)(2), this modification would not be necessary.

Missouri

Missouri State Bar

From the Office of Chief Disciplinary Counsel Informal Opinion Number 940122

QUESTION: Attorney would like to co-sign a consumer loan for a client in a personal injury case.

ANSWER: This would violate Rule 4-1.8(e).

The Missouri Bar, P.O. Box 119, Jefferson City, MO 65102-0119

From the Office of Chief Disciplinary Counsel Informal Opinion Number 950224

QUESTION: Attorney represents injured employees in workers compensation cases. May Attorney pay the cost of medical treatment and transportation for medical treatment for the employee while the case is pending if the employee cannot afford it otherwise?

ANSWER: Under Rule 4-1.8(e) an attorney may not provide financial assistance to a client except to advance costs and expenses or, if the client is indigent, to pay costs and expenses. Therefore, Attorney may not pay or advance the costs of the client´s medication, treatment or travel expenses related to treatment. However, if the visit to the health care provider is genuinely for the purpose of evaluation for the litigation, even if it is also for treatment, Attorney may advance the expenses of the visit and the transportation. However, to the extent that the evaluation portion of the visit can be segregated from the treatment portion, Attorney may only advance the expenses related to the evaluation.

The Missouri Bar, P.O. Box 119, Jefferson City, MO 65102-0119

Montana

Montana State Bar

ETHICS OPINION 860723

QUESTION PRESENTED:

May an attorney borrow money in their firm name and then advance the loan proceeds to their clients during the pendency of the client's lawsuit or guarantee a loan which is made to the client during the pendency of a claim or litigation?

ANSWER: No.

ANALYSIS:

The Disciplinary Rule 5-103 of the Model Code of Professional Responsibility, which pertains to this situation, does not appear verbatim in the Model Rules of Professional Conduct which were adopted by the Montana Supreme Court in 1985. DR 5-103 stated:

Avoiding acquisition of an interest in litigation:

(a) A lawyer shall not acquire a proprietary interest in a cause of action or subject matter of litigation he is conducting for a client, except that he may:

(1) Acquire a lien granted by law to secure his fee or expenses;

(2) Contract with a client for a reasonable contingency fee in a civil case.

(b) 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 a lawyer may advance or guarantee the expenses of investigation, expense of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses.

The new Rules of Professional Conduct Rule 1.8, Conflict of Interest: Prohibited Transactions provides:

(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(i) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

(ii) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:

(i) acquire a lien granted by law to secure the lawyer's fee or expenses; and

(ii) contract with the client for a reasonable contingent fee in a civil case.

It is obvious that DR 5-103(a) has been retained, virtually verbatim, in Rule 1.8(j). The changes in the text of the rule do not produce any substantive change. The substantive thrust of the old DR 5-103(b) has been retained in our new Rules. The old rule provided that a lawyer could not advance or guarantee financial assistance to a client. It further provided that a lawyer could advance or guarantee litigation expenses so long as the client remained ultimately responsible for such expenses. The new Rules do not make specific reference to either the advance or guarantee. It simply says a lawyer shall not provide financial assistance to a client in connection with contemplated or pending litigation. It goes on to say that the lawyer may advance litigation expenses and that such an advance may be contingent upon a recovery being made. Further, the new rules provide that when representing an indigent client, the lawyer can pay court costs and expenses without any such contingency. The rule does not allow the advance of payment of money under any other circumstance.

The clear purpose of the rules, both old and new, is to preclude any transaction where the lawyer's interest could, under any circumstances, become adverse to those of the client. Clearly, if a lawyer borrows money for the purpose of advancing the funds to the client or guarantees the client's loan, the economic interests of the client and attorney are potentially adverse. It should be noted that there was a conflict in the authority of earlier cases concerning the advance of monies for purposes other than costs and expenses of the client's litigation. The proposed Final Draft of the Model Rules of Professional Conduct dated May 30, 1981 provided:

1.8(e)(1) A lawyer may advance court costs, expenses of litigation, and reasonable and necessary medical and living expenses, the repayment of which may be contingent on the outcome of the matter; The ABA House of Delegates struck the language allowing advance of medical and living expenses when the Rule was finally adopted. Our court did not adopt the language which authorizes the advance of medical or living expenses either. Borrowing money for the purpose of advancing funds to a client or guaranteeing a loan for a client produces the same result and are in direct contravention of Rule 1.8(e and (j). In this regard, a situation where a lawyer was providing living expenses for a client during the pendency of a case was addressed by the Ohio Supreme Court in 1967. The Court's interpretation of Cannon 42 was:

It is clear that the words "expenses" appearing after the semi-colon refers to "expenses of litigation." It would not include advances of the kind admittedly made by respondent for "living expenses during the period between the filing and the trial or disposal of a case."

It is obvious that, where the advancement of living expenses is made, as in the instant case, to enable the disabled client and his family to survive, any agreement by the disabled client to repay them would not have the effect of providing the attorney with any reasonable source of repayment other than the proceeds received on trial or settlement of his client's claim. In effect, the attorney has purchased an interest in the subject matter of the litigation that he is conducting. The Cannons contemplate that this will be proper only where the advance is for "expenses of litigation." Mahoning County Bar Association v. Ruffalo, 199 N.E.2d 396 at 398, 176 Ohio 263 (1964). This case is correctly decided. Its logic continues to apply under our Rules of Professional Conduct. It is noteworthy that the Ohio court suspended the respondent from the practice of law for an indefinite period of time as a result of the lending transactions at issue. While not part of the opinion requested, there are attorneys in this state who have engaged in prohibited lending transactions under the mistaken impression that the same are now permitted, they should not necessarily be subject to disciplinary proceedings for those transactions. Section 37-61-408(2), MCA, provides:

(2) An attorney and counselor must not, by himself or by or in the name of another person, either before or after action brought, promise or give or procure to be promised or given a valuable consideration to any person as an inducement to placing or in consideration of having placed in his hands or in the hands of another person a demand of any kind for the purpose of bringing an action thereon. This subsection does not apply to an agreement between attorneys and counselors, or either, to divide between themselves the compensation to be received.

The statute indicates that an attorney cannot provide valuable consideration in the form of a loan or guaranty to a client or potential client. It has always been deemed unseemly and improper for an attorney to purchase an interest in any litigation. Clearly, if the attorney is personally responsible for the repayment of any client's loan, whether directly or indirectly, the attorney has necessarily, as a matter of economic reality, purchased an interest in the litigation.

Section 37-61-409, MCA, provides:

Penalty for violation. An attorney and counselor who violates 37-61-409 is guilty of a misdemeanor and on conviction thereof shall be punished accordingly and must be removed from office by the Supreme Court. While the legislature's capacity to mandate the Montana Supreme Court's regulation of practice of law is questionable, the statutory message which embodies the common law rules against champerty and maintenance is clear. The Bar should not continue activities which violate common law, the announced position of the Montana Legislature and the Rules of Professional Conduct.

THIS OPINION IS ADVISORY ONLY.

Nebraska

Nebraska State Bar Link

Nebraska Ethics Advisory Opinion for Lawyers
No. 00-2

AN OPINION OF THE ADVISORY COMMITTEE HAS BEEN REQUESTED AS TO WHETHER IT IS ETHICAL FOR A LAWYER TO REFER A CLIENT TO A BUSINESS WHICH ADVANCES MONEY TO THE CLIENT FOR LITIGATION OR LIVING EXPENSE PURPOSES IN EXCHANGE FOR AN EQUITY POSITION IN THE CLIENT'S CASE. THE LENDER WILL EXPECT A LIEN ON THE PROCEEDS OF THE LAWSUIT OR THE SETTLED CLAIM AND ABOVE-MARKET INTEREST PLUS SERVICE FEES.

RESTATEMENT OF FACTS

The Advisory Committee has been provided with advertising materials and a brochure which outline the nature of the lender's business and the relationship which the lender expects to have with the client and with the lawyer. It is anticipated that the lender will primarily acquire customers by lawyer referral, but it is not anticipated that the lawyer receive a fee or compensation of any sort for making the referral.

The lender is expected to evaluate the matter to determine whether or not the case or claim qualifies for funding. The lawyer is not expected to provide any assurances as to the outcome of the litigation, and if the client does not prevail, the lender's loan is not paid. Because the lender will be risking its advances on the success of the claim or the lawsuit, the lender represents that it is not subject to state usury laws.

According to one of the printed items provided the Advisory Committee, the lawyer is expected to "issue" the lender "a lien" which will "guarantee" payment upon settlement from the lawyer's trust account.

STATEMENT OF APPLICABLE CANONS, ETHICAL CONSIDERATIONS AND DISCIPLINARY RULES RELIED ON

Canon 2. Lawyer Should Assist in Maintaining the Integrity and Competence of the Legal Profession.

EC 2-16. The legal profession cannot remain a viable force in fulfilling its role in our society unless its members receive adequate compensation for services rendered, and reasonable fees should be charged in appropriate cases to clients able to pay them. Nevertheless, persons unable to pay all or a portion of a reasonable fee should be able to obtain necessary legal services, and lawyers should support and participate in ethical activities designed to achieve that objective.

Canon 4. A Lawyer Should Preserve the Confidences and Secrets of a Client.

EC 4-2. The obligation to protect confidences and secrets obviously does not preclude a lawyer from revealing information when the lawyer's client consents after full disclosure, when necessary to perform his or her professional employment, when permitted by a Disciplinary Rule, or when required by law.

DR 4-101. Preservation of Confidences and Secrets of a Client

(C) A lawyer may reveal:

(1) Confidences or secrets with the consent of the client or clients affected, but only after a full disclosure to them.

Canon 5. A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client.

EC 5-8. A financial interest in the outcome of litigation also results if monetary advances are made by the lawyer to his or her client. Although this assistance generally is not encouraged, there are instances when it is not improper to make loans to a client. For example, the advancing or guaranteeing of payment of the costs and expenses of litigation by a lawyer may be the only way a client can enforce his or her cause of action, but the ultimate liability for such costs and expenses must be that of the client.

DR 5-103. Avoiding Acquisition of Interest in Litigation.

(A) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that he or she may:

(1) Acquire a lien granted by law to secure the lawyer’s fee or expenses.

(2) Contract with a client for a reasonable contingent fee in a civil case.

(B) While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client, except that a 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 remain ultimately liable for such expenses.

DISCUSSION

Clearly, a lawyer's ability to advance funds is sharply circumscribed by DR 5-103(B). The prohibitions against a lawyer "providing financial assistance to a client have their origins in the common law doctrines of champerty and maintenance." ABA/BNA Lawyers' Manual on Professional Conduct, "Financial Assistance to Client," § 51:803. Several commendable objectives are intended to be served by the ban on lawyers advancing money to clients. Some of these objectives are the prevention of lawyers enticing clients by promises of financial help; the avoidance of conflicts created by the lawyer becoming both lender and advocate; and the protection of lawyers from client requests for financial assistance. Id.

It could certainly be fairly debated that at times there exists at least some tension between this absolute ban on lawyers advancing funds for a client's living expenses and Canon 2 which encourages lawyers to find ways for those of moderate means to have access to the courts. The argument is essentially that if a client is unable provide his or her family with basic necessities during the course of claim negotiation or litigation, the client is less able to achieve a settlement or verdict which might otherwise have been realized had personal finances not become a concern. See In re Minor Child K.A.H., 967 P.2d 91 (Alaska 1998) (analyzing the issue under Model Rule 1.8(e) which is the counterpart to DR 5-103(B)); Mississippi Bar v. Attorney HH, 671 So.2d 1293 (Miss. 1996) (also analyzing the issue under Model Rule 1.8(e)); and Louisiana State Bar Ass'n v. Edwins, 329 So.2d 437 (La. 1976)(DR 5-103(B) analysis).

Perhaps at least in part due to the attorney's inability to finance a client's living expenses and likely in part due to the high cost of litigation, there appear to be some movements nationwide toward reexamining the value of the ancient doctrines of champerty and maintenance and to developing appropriate and ethical means of providing meaningful access to the courts. See Susan Lorde Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity, 30 Am. Bus.L.J. 485 (1992). Recently, in Osprey, Inc. v. Cabana Limited Partnership, 532 S.E.2d 269 (S.C. 2000), champerty was abolished as a defense in contract actions in South Carolina. According to the South Carolina Supreme Court, well-developed principles of law can more effectively accomplish goals of preventing speculation in groundless lawsuits than the doctrine of champerty. In Saladini v. Righellis, 426 Mass. 231, 687 N.E.2d 1224 (1997), the Massachusetts Supreme Judicial Court abolished champerty, maintenance and barretry. The court observed that the decline of champerty, maintenance and barretry are symptomatic of a change in a view of litigation as a social ill to a view that litigation is a useful way to resolve disputes.

One development in the reconsideration of conventional thought regarding the financing of cases is certainly the appearance of the type of lender described in the request for an opinion received by this Committee. The appropriateness of referring a client to this type of lender has been discussed by other bar associations. In Advisory Ethics Opinion 99-A-666, the Board of Professional Responsibility of the Supreme Court of Tennessee responded to the issue of whether it was ethical for an attorney to refer clients to a venture capital company investing in select cases. The Board concluded that DR 5-103(A) prohibits a lawyer from acquiring an interest in the litigation, but that the lawyer could make the referral provided the lawyer (1) does not evaluate the merits of the case for the company; (2) does not guarantee the financial assistance to the client; and (3) gets no benefit from the client for the client using the company.

The Ethics Committee of the Los Angeles County Bar Association, in Opinion 500 (5/10/99), affirmatively answered the question of whether a lawyer could establish a business which would finance litigation in exchange for an assignment of a portion of the recovery. According to the Committee, the lawyer could be involved in such a business if (1) the assignors brought the lawsuit in their own name by their own lawyer; (2) the lending lawyer exercised no control over the assignors' lawsuit; (3) the lawyer for the assignors preserves client confidences; and (4) the lending lawyer signs a confidentiality agreement.

CONCLUSIONS

We conclude that it is not a violation of the Code of Professional Responsibility for a lawyer to refer a client to a lender which the lawyer knows will expect a lien on the client's recovery. We believe the lawyer considering such a referral should be guided by the following:

  1. The lawyer should receive no fee or commission from the client or the lender for making the referral. Receiving consideration from either could effect the independent judgment of the lawyer.
  2. The lawyer should provide no assurances to the third party as to the conduct or likely outcome of the litigation. The Advisory Committee believes that such representations could be detrimental to the exercise of independent judgment by the lawyer.
  3. The lawyer must conform to Canon 4 relating to the preservation of client confidences. The lawyer must be attentive to what can or should be revealed to the lender as part of the client's efforts to get the loan.
  4. Prior to making the referral, the lawyer must disclose to the client what advances the lawyer would make consistent with DR 5-103(B) in the absence of the lender making a loan. In the context of the lender advancing funds to the client for purposes of litigation expenses, it is possible that the lawyer would directly benefit by referring the client to a third party lender. The Advisory Committee believes that the client should be fully informed as to what the lawyer would be willing to do with respect to making proper advances under DR 5-103(B) before being referred to a lender who will likely expect significant profit on the money advanced in the event of recovery.
  5. Prior to making the referral, the lawyer must inform the client as to the cost of the loan. Prior to the client borrowing money from a lender who will likely require an assignment of settlement or lawsuit proceeds and a high rate of return, the lawyer must instruct the client as to the cost of the loan. The client must understand that the interest rate in such a scenario is likely much higher than a more conventional loan arrangement.

This Committee does not give legal advice. Consequently, we specifically do not give any opinion here relative to the enforceability of a loan agreement between the lender and the client, the validity of the lender's lien, or the viability of the doctrines of champerty and maintenance in the State of Nebraska.

November 30, 2000.
Nebraska Ethics Advisory Opinion for Lawyers
No. 00-2

Nevada

Nevada State Bar

Court Case in Nevada

Achrem v. Expressway Plaza Ltd. Partneship, 112 NV 737, 937 P.2d 447 (1996) Cited in : Balish v. Farnham, 92 Nev. 133, 546 P.2d 1297(1976)

"When a client assigns rights to the proceeds of a case or tort action to a creditor, those proceeds no longer belong to the client. Accordingly, the attorney is not obligated to pay those funds to his client. Even, if a conflict had existed between the client's interest and the third party assignee's interest, the attorney should have deposited the settlement proceeds in a trust fund account and requested a court to direct the fund's distribution."

New Jersey

New Jersey State Bar

JOHN SCHOMP v. ISRAEL SCHENCK
Supreme Court of New Jersey.

June Term, 1878.

  1. A contract of an attorney at law for a certain remuneration for his services is legal and can be enforced by suit, such an officer not standing on the same footing as an advocate.
  2. The law of maintenance and champerty does not prevail in this state. The plaintiff was an attorney at law, and brought this suit against the defendant for moneys alleged to be due for services rendered as such attorney, under a special contract. It was shown at the trial that the defendant was interested in resisting the probate of the will of the late Dr. Vanderveer, and that he had put in a caveat, which had been drawn by the plaintiff. The testimony of the plaintiff, in proof of his bargain, was as follows: "He," the defendant, "said he couldn't afford to go to much expense, and asked me what I would charge him; he said that if the will were set aside, and he got a share of the estate, he could afford to pay well; if it was not, he couldn't afford to pay me much; I told him I didn't hardly know what I ought to charge him; that it would be a big case; I said to him that the usual charge for collections would be five per cent. but I didn't know how that would be in this case; he said he would be very willing to pay me that in case I succeeded, and he got his share of the money; but that if he didn't, or if the will was not set aside, that then he couldn't afford to pay much more than my expenses; I told him I was willing to undertake to look after his interest upon those terms, if he would agree to give me that and pay such necessary expenses as I had been to, in case we lost, and run the risk of getting the rest out of any allowance made by the court; he said he was satisfied."

Argued at February Term, 1878, before BEASLEY, CHIEF JUSTICE, and Justices DEPUE, SCUDDER and 40 N.J.L. 195

The opinion of the court was delivered by BEASLEY, CHIEF JUSTICE.

This suit is brought to recover the amount alleged to be due to the plaintiff for certain services rendered, as an attorney at law, to the defendant, and which were to be paid for at a certain rate, according to the terms of a payroll contract made between them. At the time of this engagement of the plaintiff, a proceeding was pending before the surrogate-general, touching the probate of a will, against which the defendant had filed a caveat, and, as has been found by the jury, the plaintiff was duly employed by the defendant to attend in his behalf to that litigation, with the understanding that if successful in the suit, he was to be paid in the ratio of five per cent. on the sum recovered, but if thwarted, he was to receive his expenses and such compensation as might be awarded to him out of the estate, according to the practice in the ecclesiastical courts. The will referred to was rejected, and in the distribution of the estate a considerable sum came to the defendant; so that no question can be made with respect to the plaintiff's right to recover in this action, if it be settled that his contract providing for his remuneration in a specified manner, be a valid one.

The legality of that contract, therefore, is the essential question in this and this, on the argument, was put in dispute on two grounds.

In the first place, it was insisted that the law will not permit an attorney at law to contract with his client for a compensation for his services, and that if such contract be made, it cannot be enforced by an action.

The ground of this contention was, that an attorney belongs to a liberal profession, one of whose cardinal rules it is, that it would suffer a disparagement if its members could put out their intelligence and learning to hire, and that, consequently, the rewards for their services must be altogether voluntary gifts, not merces, but honoraria. To sustain this position, the cases of Seeley and others v. Crane, 3 Green 35, and Vanatta v. McKinney's Executors, 1 Harr. 235, were cited. But it is very plain that neither of these decisions is in point, for neither of them related to services of an attorney at law, but both to the functions of an advocate. In the case now before this court, it is shown that at the time this contract was entered into, the plaintiff was an attorney, but was not a counselor, and that, therefore, the services bargained for did not pertain to advocacy; and this difference places this case entirely aside of the line of these previous judgments. In the former of these reported cases, all that was adjudged was, that the fees of counsel, eo nomine, could not be recovered in an action of assumpsit, the reason assigned being, that, following the example of the Roman orators and English barristers and sergeants, such counsel did not demand compensation as a matter of right, but accepted a fee as an honorary gift; the court, however, expressly reserving the question whether such counsel fees, when due by special contract, could not be recovered by suit. And nothing different from this was settled by the latter of the cited cases, it being there declared that the service of counsel in speaking to a cause in court was an exception to the ordinary rule that a claim for labor, done at the request of another, was legally enforceable.

And this I regard as the established discrimination. I do not find anywhere, that it was the common law rule that, irrespective of the law of maintenance, an attorney at law could not stipulate for his compensation. Such contracts were undoubtedly regarded with great jealousy by the courts, and were very generally discountenanced by the legal profession, and were seldom enforced, and were not infrequently set aside by courts of equity. But the idea that attorneys were subject to the same disability as an advocate was, in regard to contracting with their clients for their remuneration, has no foundation in legal history or adjudged cases. Unlike those of the English barrister, the services of the attorney were not thought to be purely honorary. He was of right entitled to certain fees, and the conditions of his status were not such as to disqualify him to contract for remuneration. The attorney could bind himself to his client, and the client to the attorney, by a contract, which was reciprocally enforceable, but no such tie as this could be created between the client and the advocate. In legal theory the connection of the counsel with his client was voluntary, and rested altogether in moral considerations, and no agreement for service on the one side, or for remuneration on the other, could be made by expression or implication, that would form the basis for a suit. On such an agreement neither could sue nor be sued. In Fell v. Brown, Peake 96, Lord Kenyon held that an action would not lie against a barrister for misconduct in the management of a cause; and in Turner v. Phillips, Peake 122, that a fee given to such an officer to argue a cause which he did not attend, could not be recovered; and, so again, in Mulligan v. McDonough, 2 L. T. (N. S.) 136, it was ruled that an action against a barrister for non-attendance at a trial, was not maintainable. The law was thoroughly settled that the client could not convert what the courts regarded as a moral obligation on the part of the advocate, into a legal one. And, conversely, the same infirmity of obligation was held to exist wherever the advocate presented himself as the dominus litis, the response to his plaint being that his claim, however fair or equitable, had no legal force. And this immunity and disability of these officers were entirely the creatures of the importance of their functions and the powers and privileges with which they were invested. Chief Justice Erle, in his masterly opinion in Kennedy v. Broun, 13 C. B. (N. S.) 677, which is the leading case upon this subject, when expressing the reason why the advocate should theoretically be considered an unhired agent, thus describes the magnitude and importance of his office. He says, speaking of the advocate: "He is trusted with interests, and privileges and powers almost to an unlimited degree. His client must trust to him at times for fortune and character and life. The law trusts him with a privilege in respect of liberty of speech, which is in practice bounded only by his own sense of duty; and he may have to speak upon subjects concerning the deepest interest of social life, and the innermost feelings of the human soul. The law also trusts him with a power of insisting on answers to the most painful questioning, and this power, again, is in practice, only controlled by his own view of the interests of truth. It is of the last importance that the sense of duty should be in active energy proportioned to the magnitude of these interests. If the law is, that the advocate is incapable of contracting for hire to serve when he has undertaken an advocacy, his words and acts ought to be guided by a sense of duty, that is to say, duty to his client, binding him to exert every faculty and privilege and power in order that he may maintain that client's right, together with duty to the court and himself, binding him to guard against abuse of the powers and privileges entrusted to him, by a constant recourse to his own sense of right." These were the principles adopted in this celebrated judgment, and upon which the conclusion was founded that the express promise of the client to pay the advocate "did not constitute any legal obligation." The question was directly presented, and was directly decided; and that such was the rule of the common law I have not a particle of doubt, so that if that was the aspect of the question now presented to this court, I should be in no doubt how to decide, for I should feel that I had not the power, and I certainly should not have the inclination, to put aside a rule which has been so long established, and which carries with it all the authority that wisdom and learning can impart. But this subject is no further within the scope of the present inquiry than for the purpose of showing the exact limits of the doctrine that an obligation to pay for legal services cannot, with respect to the advocate, be put in the form of a legal obligation, for, as we have seen, such inability does not reach to others besides advocates. So sharply is the boundary of such disability defined, that in the case just referred to, it is shown, by a reference to decisions, that even barristers can enter into legal compacts, with respect to their compensation, in other matters than those of advocacy, and Chief Justice Erle says that his proposition "is confined to incapacity for contracts concerning advocacy in litigation." It seems to me clear, therefore, that such incapacity does not appertain to the office of attorney, and that the contracts of this class of persons touching their services cannot be impugned simply on the ground of their supposed incompetence to bind themselves or others in such matters. I have already said that such contracts will be inspected with jealous vigilance by the courts, on account of the delicacy of the relationship of the parties to them, and the most transparent candor and good faith is required on the part of the attorney in these dealings with his client; and on such occasions, a court of equity is ever on the alert, for, as was said by Lord Hardwicke, in the case of Saunderson v. Glass, 2 Atk. 296, "if an attorney, pendente lite, prevails upon a client to agree to an exorbitant reward, the court will either set it aside entirely, or reduce it to the standard of those fees to which he is properly entitled;" but, subject to these safeguards, I can find no ground for saying that such a general restraint is imposed on an attorney, with respect to contracts for his remuneration, as is inherent in the office of the advocate.

Before closing my remarks on this head, I will add the observation that the American decisions on the subject have not been overlooked, and that it is quite understood that the weight of such decisions is in favor of considering the English doctrine relating to this topic, even as it relates to advocates, as obsolete and inapplicable to the times. All I wish to say is, that I cannot concur in this view, for the rule in question has always flourished in full vigor as a part of the common law, and has never, during any interval of time, fallen into disuse; and that as its only foundation was its supposed efficacy in sustaining the honorable standing of the advocate, I can by no means admit that such a rule is alien to the professional ethics of this country. The principle that the advocate cannot stipulate with his client for his perquisites, is one of the established customs of our inherited jurisprudence, and is entirely consistent with our social conditions, and, therefore, in my opinion, is not to be eliminated except by legislation.

The second objection to the maintenance of this suit is that the agreement sued on is champertous.

The engagement of the client in the present case was that the attorney should, if successful in the suit, be entitled to a certain part of the moneys thus recovered, and such an agreement, I am satisfied, would be champertous by force of the ancient English statutes. It was urged, on the argument, that a stipulation to bear the expenses of the litigation is an essential ingredient in the offence of champerty, and that there was no such stipulation in this case; but the authorities do not sustain, but, on the contrary, they overthrow this contention. Lord Coke, in 2 Inst. 564, says, treating of champerty, "an apprentice or attorney cannot contract to have any part of the thing in demand, after the recovery;" and in Box v. Barnaby, Hob. 117, the similar view of Chief Justice Hobart is thus expressed: "I hold that if an attorney follow a cause to be paid in gross, when it is recovered, that is champerty." The consent of the attorney to give his services is in effect a stipulation to contribute largely to the ordinary expense of a suit, and, consequently, it would seem to follow, reasoning upon general principles, that such an arrangement must be deemed illegal wherever the statutes in question are in force. Entertaining this view, the only remaining question is whether the English statutory or common law, touching this subject, has been adopted in this state.

It appears to me safe to say that, upon examination, any inquirer into this branch of jurisprudence will be satisfied that the entire doctrine of maintenance was the product of a state of society very different from that which now exists, or has ever existed, in this state. The entire object of the doctrine was to protect the weak against the oppressions of the powerful, and such an object could be appropriate only in an age when the social adjustments, with respect to rank and prerogative, were incomplete and there was instability in the administration of the laws. There was an epoch in the history of our English ancestors when the influence of power and exalted station was not unfelt even within the precincts of a court of justice, and when, in a contest with such influence, even truth and right could not be sure of prevailing. In such a state of things, it was a matter of the utmost importance that the sale of rights in litigation should be interdicted by rigorous laws, under highly punitive sanctions; and, consequently, we are not inclined to dispute the wisdom of those successive acts of parliament which were from time to time enacted, and which, upon their face and in their phraseology, give evidence of the existence of social conditions entirely foreign to those with which we are familiar. The prohibition of this law is aimed, primarily, at the officers of the king, at the chancellor, treasurer, justices, king's counselors, clerks of chancery and exchequer, at any of the king's house, clerk or lay, and at pleaders, apprentices, attorneys, and stewards of great men, showing, in its application, the character and the magnitude of the evil to be suppressed, so that it is not a matter of surprise that these laws were liberally expounded by the courts, and that a system was thus gradually established, originally beneficial, but which became, as time passed and social circumstances changed, unduly restrictive of the dealings of men with each other. As was to be expected, as the times improved and thus these laws became less essential for the protection of the humbler classes, somewhat of the original severity which had been shown in their execution was mitigated, and the scope of their operation was, by judicial construction, contracted. This decline from the primitive rigor in the application of this series of acts, was noticed by Judge Buller, in the case of Master v. Miller, 4 T. R. 320, his comments being expressed in these words: "It is curious, and not altogether useless, to see how the doctrine of maintenance has from time to time been received in Westminster Hall. At one time not only he who laid out money to assist another in his cause, but also he that by his friendship or interest saved him an expense which he would otherwise be put to, was held guilty of maintenance. Bro., tit. """Maintenance,'' 7, 14, 17, &c. Nay, if he officiously gave evidence, it was maintenance, so that he must have had a subpoena or suppress the truth. That such doctrine, repugnant to every honest feeling of the human heart, should be soon laid aside must be expected. Accordingly, a variety of exceptions were soon made, and, amongst others, it was held that if a person has any interest in the thing in dispute, though on contingency only, he might lawfully maintain an action on it. 2 Roll. Abr. 115. But in the midst of all these doctrines on maintenance, there was one case in which the courts of law allowed of an assignment of a chose in action, and that was in the case of the crown; for the courts did not feel themselves bold enough to tie up the property of the crown, or prevent that from being transferred. 3 Leon. 198; Cro. 180. Courts of equity, from the earliest times, thought the doctrine too absurd for them to adopt, and therefore they always acted in direct contradiction to it, and we shall soon see that courts of law also altered their language on the subject very much." From this quotation, it is obvious that the system that had grown up under these laws relating to maintenance was not altogether in harmony with the habits, needs and business of modern life, and this consideration has helped me to the conclusion to which I have arrived, that the doctrine of maintenance has never had a foothold in the jurisprudence of this state. I shall designate, as briefly as possible, the grounds of this opinion.

By the act of November 24th, 1792, (Pamph. L. 794,) Judge Paterson was authorized to collect and put in form all the statutes of England and of this state which then remained in force here, and Mr. Griffith, in referring to the revision that was the result of this authority, says that the compiler "omitted, as inapplicable, the English statutes relative to the buying and selling of titles. 1 R. II., ch. 9; 32 Hen. VIII., ch. 2. As he did also those against maintenance. 1 Ed. III., ch. 14; 20 El., ch. 4, &c. Also of ""Champerty," 3 Ed. I., ch. 25; 28 Ed. I., ch. 11." The question then arises, what was the meaning of this omission? I can perceive no other solution except the inference that Judge Paterson considered them neither a part of the statute law of this state, or as adapted to our circumstances. By the constitution of 1776, it was declared, in Article XXII. "That the common law of England, as well as so much of the statute law as have been heretofore practiced in this colony, shall still remain in force, until they shall be altered by a future law of the legislature;" and when, therefore, this particular series of acts was not comprised in this accurate and authentic compilation of the laws in force, it seems manifest that such leaving out was a meditated exclusion. If it be said that such a rejection of the statute law did not affect the common law, and that, by the common law, maintenance was prohibited, my answer is, that since the publication of the body of selected laws just referred to, there is no trace of the prevalence of any part of such a doctrine, either in our practice, judicial dicta, or decisions. It is obvious that Mr. Griffith inferred that the entire doctrine of maintenance and champerty was thought by Judge Paterson to be "inapplicable" to the polity of this state. And although in some of the older legal digests and commentaries the doctrine of maintenance is said to be a part of the common law, nevertheless I am strongly of the opinion that it would be altogether impracticable to ascertain of what rules such doctrine consisted, as embodied in that ancient system. To what books are we to have recourse if we would enter on so difficult an investigation?

The beginning of the statutory law prohibitive of maintenance is coeval with the Year Books, so that all the recorded decisions of the courts, which have come down to us upon this subject, consist of an application and construction of such statutes. I know no means of discovering what was the substance or definite form of the legal rules relating to this doctrine existing antecedently to such recorded decisions. If we were to go back to the time of Richard I., the era when legal memory begins, and examine the rotuli curiae regis, we could probably glean not a fragment of useful learning on this theme, and we would certainly obtain nothing that would be serviceable to our inquiry from the pages of the earliest text writers or commentators, for there appears to be no single sentence in any of those works that can be said, unless by an exceedingly fantastic construction, to be applicable at all to this subject. Thus, when the Mirror declares that the law opposes itself to all those ministers of the king who maintain false actions, false appeals, and false defenses, knowingly, ("touts ceux ministers le roy, que mainteinont faux actions, faux appeales, on faux defences a escient'') the rational interpretation of such expressions is, that they are prohibitive, not of giving assistance to suits or defenses which are believed to be true, which would be maintenance, but of aiding in suits or defenses known to be false, which would be acts akin to malicious prosecutions or fraud. Nor can I think that there is any reference to the doctrine of maintenance in those declarations of Bracton and Fleta, that the justices in ere should inquire into the misfeasance's of sheriffs and other bailiffs in stirring up suits with a view to their own gain, %7F'per quod justitia et veritas occultetur.'' And yet it is out of such materials as this, thus obscure and indefinite, that the law of maintenance is to be fashioned, if it is to be sought behind the statutes and their explanations by the courts. The truth is, there is the best reason for believing that the entire law of maintenance, regarding it as an intelligible subject, is the creature of the English statutory law, and of the judicial constructions of such law, and the consequence is, that when this set of acts was designedly left out of our statute book, there existed no rational ground for the contention that any part of this law of maintenance, in any form, remained in force in this state. And it is also certain that if these English acts had been incorporated in the compilation authorized by the statute of 1792, they would have had but a mutilated and imperfect operation, for our courts of common law, from earliest times, have, by force of their inherent equitable powers, protected the rights of an assignee of a chose in action; and lands, the title to which was in dispute, or the possession of which was adversely held, could be conveyed by a deed of bargain or sale, by force of the statute passed March 17th, 1713-14, which gives to the grantee to uses "as full and ample possession" as if he were "possessed thereof by solemn livery of seizing and possession." With these subjects taken out of the field of its operation, it may well be concluded that Judge Paterson was led to the conclusion that this system that had been built up in England, which was intended to prevent the acquisition of any right to litigate, or any interest in such right, would be but a disturbing force, and unsymmetrical if introduced in the body of our laws, that were, in a considerable degree, constructed on an opposite theory.

These are some of the principal considerations from which I have concluded that the doctrine of maintenance does not prevail in this state, and that, as a consequence, the contract sued on cannot be avoided on this ground.

The jury having found this contract to be devoid of deception or fraud, the only inquiry remaining is as to its meaning. I cannot agree to the construction put upon it. I think the fair interpretation is, that the plaintiff was to take the entire charge of the case of the defendant then in litigation, and this, I think, implied that the defendant was to be at no further expense, with respect to lawyer's fees, and it was therefore incumbent on the plaintiff to employ, at his own charge, such counsel as was needful, as he was not capacitated to argue the matter in his own person. The fees actually paid for such counsel by the defendant are to be charged to the plaintiff. So the moneys paid to the plaintiff out of the estate, must be deducted; he had no right to these, by reason of his agreement, and with the knowledge of the existence of such agreement, it is not at all likely that the surrogate-general would have ordered such allowances, unless upon the footing that they should operate in ease of the defendant. The defendant is entitled to a credit to the extent of such allowances.

Neither do I think the plaintiff can claim any percentage on the moneys derived or to be derived from the real estate. The contract did not touch such real estate; it related to the suit then pending, which altogether pertained to the personality. The language of the agreement, as proved by the plaintiff himself, is extremely clear to this effect.

If the plaintiff is willing that these deductions shall be made, the verdict may stand for the residue; otherwise, let the rule be made absolute.

N.J.Sup. 1878. JOHN SCHOMP v. ISRAEL SCHENCK

New York

New York State Bar

New York State Bar Association Committee on Professional Ethics

Opinion 666 (73-93) 6/3/94

Topic: Conflict of interest; maintenance; referring client to institution that will lend money for living expenses contingent on resolution of personal injury claim

Digest: Lawyer may refer client to institution that will lend money for client's living expenses contingent on the resolu-tion of personal injury claim.

Code: DR 4-101(B), (C)(1); 5-103(B)

QUESTION

May a lawyer refer a client to a financial institution that will lend the client money for living expenses, where the repayment of the loan is contingent on the successful resolution of the client's claim for personal injuries?

OPINION

New York has long proscribed "maintenance." The First Department, for example, has a separate rule of court that expressly forbids, "any attorney, directly or indirectly, as a consideration for [the placing of a] retainer, [to] pay any expenses attending the prosecution or defense of any ... claim or action." Rules of the Appellate Division, First Department, 22 N.Y.C.R.R. ¤603.18. The perceived evils addressed by the traditional prohibition are the stirring up of unmeritorious litigation and the improper solicitation of retainers to pursue it. Thus, prior to Bates v. State Bar of Arizona, 433 U.S. 350 (1977), when lawyer advertising was proscribed, condemnation of maintenance often was combined with references to "barratry" and "champerty." Whether, or to what extent, those concerns continue to be viable in an age of widespread lawyer advertising, and whether the proposed conduct should be deemed "indirectly" paying a client for the placement of a retainer in construing the rule against maintenance, are matters of law on which this committee does not opine. Thus, in answering the question, we express no opinion as to whether the proposed conduct would violate the substantive law of New York. If what is proposed is illegal, then it would perforce be unethical. See, e.g., N.Y. State 495 (1978).

Ethically, the principles underlying the traditional ban on maintenance found their expression in DR 5-103 (B). That rule prohibits a lawyer from advancing litigation expenses, the repayment of which is contingent on the outcome of the claim, because the client must remain "ultimately liable" for the expenses. See, e.g., N.Y. State 553 (1983); N.Y. State 464 (1977). The client must bear those expenses regardless of the outcome of the claim. The rule was only recently eased in this State for "indigent" clients "represented on a pro bono basis;" as of September 1990, lawyers are permitted to pay the expenses of litigation without holding such clients ultimately liable. DR 5-103(B)(2).

In the instant matter, the lawyer does not propose to "pay" or "advance" any part of the loan. The lawyer's sole function would be to refer the client to a lending institution that then would assess the value of the claim and take a lien on its proceeds to secure the loan. Thus, a mere referral to the lending institution would not be unethical per se. See Philadelphia Op. 91-9 (1991), indexed in ABA/BNA Lawyers' Manual on Professional Conduct at 1001:7502 (not improper for lawyer to refer clients to finance company which would make loans based on its assessment of the clients' cases). Cf. Fla. Op. 75-24 (1975), indexed in Maru's Digest of Bar Association Ethics Opinions at 10832 (1980 Supp.) (unethical for lawyer to recommend a client to a lending institution that would loan client funds to cover living expenses pending outcome of case where lawyer, in effect, guarantees payment of loan).

The lawyer must be careful not to compromise confidentiality in disclosing information to the lending institution. The client must be made aware of such a possibility and any disclosures to the lending institution by the lawyer should be made with the fully informed consent of the client. See DR 4-101(B), (C)(1); see also Philadelphia Op. 91-9. Furthermore, the lawyer cannot own an interest in the lending institution, as that would indirectly constitute a loan by the lawyer to the client. Finally, the lawyer cannot be paid a fee or receive any other compensation from the lending institution. Cf. S.C. Op. 92-06 (1992), indexed in ABA/BNA Lawyers' Manual on Professional Conduct at 1001:7909 (lawyer may form corporation to make consumer loans to plaintiffs, secured by proceeds of a case, provided the loans are not to clients of the lawyer); Md. Op. 84-11 (1983), indexed in ABA/BNA Lawyers' Manual on Professional Conduct at 801:4334 (lawyer may not arrange for bank loan to pay for legal fees from litigation).

CONCLUSION

For the reasons stated and subject to the qualifications discussed above, the question posed is answered in the affirmative.

North Carolina

North Carolina Bar Association

North Carolina 2000 Formal Ethics Opinion 4

Acknowledging a Finance Company's Interest in a Client's Recovery

Inquiry # 1:

Attorney represents Plaintiff in personal injury action. Plaintiff needed money for living expenses. In exchange for a cash advance, Plaintiff entered into an agreement with Finance Company whereby the company received a partial interest in any recovery Plaintiff might obtain in the personal injury action. Repayment of Finance Company is contingent upon Plaintiff's recovery by settlement or judgment. The interest Finance Company holds in the potential recovery is a fixed dollar amount but Attorney is familiar with other agreements in which a finance company is granted a percentage of the recovery. The agreement does not give Finance Company any right to control or direct the lawsuit. Attorney has no contractual relationship with Finance Company.

Plaintiff provided Attorney with a copy of the agreement with Finance Company and requested Attorney sign a statement acknowledging that attorney received a coy of the assignment and agreeing to remit payment to Finance Company, pursuant to Plaintiff's agreement, from any recovery realized for Plaintiff. May Attorney sign the statement?

Opinion # 1:

Although a lawyer may find a client's assignment of the proceeds of a personal injury recovery lender to be repugnant, this may be the only way for an indigent client to obtain the funds necessary for living expenses during the pendency of the clientclaim and lawsuit. Therefore, a lawyer may cooperate subject to the requirements of the Revised Rules of Professional Conduct and the dictates of competent representation.

In Charlotte-Mecklenburg Hosp. V. First Georgia Insurance Co., 340 N.C. 88, ___ S.E. 2d. ____ (1995), the North Carolina Supreme Court held that an assignment of the proceeds of a personal injury claim to a medical provider to pay for medical services was valid and could be enforced. The Court found that the statement in the assignment authorizing any one having notice of the assignment to pay the assignee "should alleviate any doubt that the assignment required the defendants [an insurance company and insurance adjusting company] to pay the assigned money to the [assignee]."

Although the Ethics Committee cannot interpret the law, a lawyer who receives notice of an assignment of the proceeds of a personal injury lawsuit should take care to examine the applicable law to determine if the assignment is valid and enforceable. If the assignment appears to be illegal or otherwise unenforceable, the lawyer may not acknowledge or honor the assignment. See, e.g. Rule 1.2 (d). Moreover, competent representation dictates that the lawyer provide the client with legal advice about the client's recourses or refer the client to appropriate legal counsel. Rule 1.1.

Rule 1.15-2(h) generally requires a; lawyer to disburse settlement proceeds in accordance with the client's instructions.

The only exception to this rule arises when the medical provider has managed to perfect a valid physicians' lien. In such a situation the lawyer is relieved of any obligation to pay the subject funds to his or her client, and may pay the physician directly if the claim is liquidated, or retain in his or her trust account any amounts in dispute pending resolution of the controversy.

RPC 69.

Assuming that Attorney determines that assignment in this inquiry is valid (or, if the law is not clear, Attorney believes that the assignment is probably valid) and the effective equivalent of a contractual lien on the recovery proceeds, Attorney may sign an acknowledgment of the assignment subject to certain conditions.

A lawyer must exercise independent professional judgment on behalf of the client. See Rule 1.7 and comment. If Attorney's ability to represent Plaintiff will be compromised by the extent of Finance Company's interest in the outcome of the case, Attorney Should not participate in the arrangement and he should counsel the client on the risks to the representation. Attorney must also preserve the right to examine the legality and enforceability of the assignment.

A lawyer may not participate in an agreement that commits the lawyer to act in a way that is adverse to the client's interests. See Rule 1.7. in addition, a lawyer is prohibited from making a false statement of material fact or law to a third person. Rule 4.1. Therefore, Attorney's written acknowledgement must discloses that, if it is subsequently determined that the assignment does not create a valid lien on the recovery proceeds, Attorney must disburse the recovery funds as instructed by Plaintiff. The acknowledgment must also disclose that, even where Finance Company obtains a valid lien on the recovery proceeds, in the event Plaintiff disputes that the debt is owed (or disputes the amount of debt), Attorney may hold the disputed funds in his or her trust account until the dispute is resolved of the funds, or Attorney interplead the funds.

Finally, RPC 229 prohibits a lawyer from executing an agreement to indemnify the tortfeasor's liability insurance carrier against the unpaid liens of medical providers. At the time the claim is resolved, attorney must refuse to execute an indemnification agreement for any unpaid lien of Finance Company as well as the unpaid liens of medical providers.

Inquiry # 2:

May an Attorney remit payment to Finance Company if there is a recovery?

Opinion # 2:

Ordinarily, Attorney must disburse the recovery proceeds according to the instructions of Plaintiff. If Plaintiff instructs Attorney to pay Finance Company at the time of disbursement, Attorney must comply with this instruction. See opinion # 1 above. If Plaintiff instructs Attorney to pay the money to Plaintiff instead of Finance Company, Attorney may ignore this instruction only if there is a valid lien against the proceeds or other valid legal assignment of the rights in the proceeds. If Attorney determines that the assignment is valid (or arguably valid) and creates a lien against the proceeds, Attorney may remit payment to Finance Company only if Plaintiff concedes that the debt is owed. If Plaintiff contests the debt, or the amount of the debt, Attorney must avoid the conflict between the interest of the client and interest of Finance Company. See Rule 1.7. Attorney should hold the disputed funds in the trust account until the dispute is resolved, a court orders disbursement, or Attorney interpleads the funds to the court.

Inquiry #3:

May Attorney refer a client to Finance Company?

Opinion #3:

Yes, if Attorney is satisfied that the company's financing arrangement is legal, Attorney receives no consideration from Finance Company for making the referral, and, in Attorney's opinion, the referral is in the best interest of the client.

Inquiry #4:

May Attorney disclose confidential client information about Plaintiff's claim to assist Finance Company in evaluating the claim? May Attorney provide Finance Company with an opinion on the value of the claim?

Opinion #4:

A lawyer may disclose confidential information, such as an opinion as to the value of the claim, with a client's consent. Rule 1.6(d)(2). However, given the potential risk that disclosure to third party, such as Finance Company, may waive the right privilege with regard to the information, Attorney should counsel Plaintiff about the potential risk in order that the client's consent to disclosure will be informed.

Pennsylvania

Pennsylvania State Bar

OPINION 87-7

(May 1987)

By letter dated March 20, 1987, you asked the Professional Guidance Committee to reconsider Professional Guidance Opinion 86-8. That opinion concluded that it would be a violation of DR5-l03 for an attorney to advance funds to his client after a case had been settled. You have asked us to reconsider that ruling in light of your statement that "the established legal doctrine that once a case is settled, the litigation is terminated and the subject matter of the litigation is replaced in toto by the settlement contract."

The Committee has reviewed your letter and the case law which is cited. We compliment you on the thoroughness of your presentation. Nevertheless, after discussion of the issue, the Committee voted not to revise Guidance Opinion 86-8 and to reaffirm its position within that opinion.

Disciplinary Rule 5-103(A) prohibits a lawyer from acquiring a proprietary interest in the cause of action or subject matter of litigation which he is undertaking on his client's behalf. Disciplinary Rule 5-103(B) prohibits a lawyer from providing any financial assistance to his or her client, other than advancement of "expenses of litigation." These disciplinary rules have been followed, in large part, in the Model Rules of Professional Conduct. See Rules 1.8(e) and 1.8(j).

The Committee noted that both the Code of Professional Responsibility and the Model Rules of Professional Conduct refer to "pending" litigation. In that regard, the Committee concluded that so long as litigation is "pending," an attorney cannot advance funds in anticipation of expected settlement proceeds.

In your letter you state, based upon case law authority, that once a case is "settled," it replaces the underlying litigation. That position assumes that a case is, in fact, "settled" because a settlement agreement is reached. However, as I am sure you can imagine, there are many reasons why a settlement agreement can be voided (e.g., lack of authority, etc.) and the parties directed to continue with the underlying litigation Accordingly, the Committee was unwilling to assume that litigation was no longer "pending" simply because a settlement agreement was reached. However, the Committee was of the view that once an order to settle, discontinue and end, or other such order is entered, the action is no longer "pending." At that time, monies may be advanced to the client, so long as the procedure is ethically permissible.

The ABA/BNA Lawyers' Manual on Professional Conduct recently issued a practice guide dealing with the issue on financial assistance to clients. It is a good overview of the issue [fn1].

  1. In regard to the overview, please note the discussion of Louisiana State Bar Association v. Edwins, 329 So.2d 437 (La. 1976) (and two other opinions cited), which would appear to permit the advancement of living expenses to a client. Compare that opinion with In re Berlant, 458 Pa. 439, 32 A.2d 471 (1974), which rejected the client's indigency as a justification for advancing funds to a client. 328 A.2d at 476 n.7.

Opinion 99-8

(February 2000)

The inquiry is whether it is permissible under the Pennsylvania Rules of Professional Conduct (the "Rules") for an attorney to provide substantive information about a personal injury client's claim to a third-party lender which is considering providing funds to the client during the pendency of the personal injury case. Repayment of the funds would be contingent upon the successful resolution of the client's case, i.e., the loan would be repaid only if the client secured a recovery. The lender would compensate the lawyer for the time spent in providing the information about the strengths and weaknesses of the client's case (and periodic updates) on an hourly basis, with a maximum aggregate fee of $250. As indicated below, assuming full disclosure to the client of the advantages and disadvantages of this transaction to the client including, in particular, the risk of waiver of the attorney-client privilege (and the potential ramifications thereof), as well as the attorney's financial interest in the additional fee from the lender, the contemplated transaction does not violate the current Rules.

Rule 1.6:

As an initial matter, the Committee directs the inquirer's attention to Rule 1.6 which addresses issues relating to confidentiality of client information. This Rule, and the related concerns about the attorney-client privilege, presents the most serious ethical concern prompted by this inquiry. The importance of consultation with the client about the possible risk of loss of not only client confidentiality but also of the attorney-client privilege as a result of supplying assessment-type information to the potential lender cannot be underestimated. The inquirer is well advised to document carefully the client's assent to the disclosure and, even then, to make it clear to the lender that the disclosures will be restricted as much as possible--perhaps even limited to only that information which would be discoverable without intrusion upon the privilege.

Rule 1.7:

Rule 1.7(b), which prohibits a lawyer from representing a client if that representation may be materially limited by another client's interests (i.e., if the lender is considered to be a client of the lawyer's for this limited purpose) or the lawyer's own interests, requires the attorney to disclose to the client any benefit that he/she may receive from the contemplated transaction. Thus, if the attorney is to receive a fee from the lender (however modest), this is a benefit to the attorney that must be adequately disclosed to the client. Additionally if on a regular basis, the attorney provides legal services or conducts business with the loan company, this fact should be disclosed pursuant to Rules 1.7 and 1.8. To the extent this arrangement may be considered to be one involving the lawyer's multiple representation of the personal injury client and the lender, both clients must be fully informed of the scope of the lawyer's responsibilities to the other client, as well as how they may conflict with each other (i.e., the impact on the personal injury client's right to confidentiality), and waivers of the potential conflicts should be secured.

Rule 1.8(b):

A lawyer shall not use information relating to representation(Rule 1.8(b) ( of a client to the disadvantage of the client unless the client consents after ) requires that the driving force and apparent result of this(consultation transaction be to place the client in an arguably better position than he/she would be without the loan arrangement for which the lawyer's compensated input is a requisite. Any advantage to the attorney from such an arrangement must be secondary, and fully disclosed.

Rule 1.8 (f):

If the lender is not considered to be a client of the attorney for a limited purpose (thus triggering the Rule 1.7 analysis above), Rule 1.8(f) would require full disclosure to and knowledgeable consent of the client in order for the lender to pay the attorney for the services rendered in providing the loan to the client.

Rule 4.1:

In view of the fact that the lawyer will be supplying information that a lender intends to use in evaluating whether to make a loan to the lawyer's client, the lawyer's liability risks to both the lender and the borrower are unmistakable. From an ethical standpoint, the Committee notes the lawyer's Rule 4.1 obligations to refrain from making false statements of fact or law.

Rule 5.4:

The Committee also notes, in conjunction with Rule 1.8(f), the possible role of Rule 5.4(c) and the importance of a lawyer maintaining his or her professional independence in representing the personal injury client. In closing, the Committee brings the inquirer's attention to its recently issued Opinion 99-4 which addresses a somewhat similar tri-partite financial arrangement undertaken in connection with a client's pending personal injury claim.

CAVEAT:

The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.

South Carolina

South Carolina State Bar

Ethics Advisory Opinion 90-40

Facts:

All facts provided with this inquiry are contained in the text of the questions.

Questions:

  1. May an attorney ask for referrals from a doctor and agree to protect the doctor's medical fees (if the referral consents to this, of course) from the results of suit or settlement?
  2. May a business not engaged in the practice of law advise customers (or potential customers) that all funds received from sales or rentals are escrowed by the business's attorney?

Summary:

  1. An attorney may not exchange assistance in collecting medical fees for referral of client. Rule of Professional Conduct. 7.2(c).
  2. An attorney may provide escrow services for a client provided he complies with the requirement of the rules for maintenance of client funds and the arrangement is not misrepresented to the business's customers. Rules of Professional Conduct 1.15 and 4.1.

Opinion:

Question 1. This question implies a quid pro quo with a physician referring patients with potential legal claims to an attorney who in turn guarantees in all instances where there is recovery and the client agrees to pay outstanding medical bills.

Rule 7.2(c) is explicit: A lawyer shall not give anything of value to a person for recommending the lawyer's services,

Assurances of assistance in the collection of outstanding medical bills are questionably of value and therefore this arrangement is proscribed by the Rules. See also In Re Bloom, 217 S.E. 2d 143 (1975).

However, it is permissible for a lawyer on behalf of a client to assure a physician that their bills will be paid in order to obtain continued treatment for the client or reports necessary to pursue the client's legal claims. The lawyers arrangement with the client should provide for reimbursement by the client for these costs. See ABA Informal Ethics Opinion 664 (1963) and 1084 (1969). The arrangement must be in the interest of an existing client rather than as a reward for soliciting business on behalf of an attorney. Question 2. The second question presented by the inquiry asks whether an attorney can escrow sales proceeds for a client on a regular basis. Nothing in the rules forbids this practice provided the attorney complies with Rule 1.15(b) which sets forth the conditions for an attorney holding funds for a client or third party. These include promptly notifying the client or third party of the deposit of such funds, providing a full accounting of the funds for the client or third party on request and promptly delivering funds to which a client or third party is entitled.

The third requirement of prompt delivery has the potential for placing the attorney in a position of conflict with his client should a dispute arise between the client and a customer about the disposition of funds. The commentary at Rule 1.15 discusses this situation:

"Third parties, such as client's creditors, may have just claims against funds or other property in a lawyer custody. A lawyer may have a duty applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer may not unilaterally assume to arbitrate a dispute between the client and third party." These considerations and the possible difficulties should be discussed thoroughly with the client prior to undertaking such an arrangement. Furthermore, the client should be informed that if the attorney became aware that the client was not escrowing all funds with him after such assertions were made, Rule 4.1 could require the attorney to unilaterally inform the client's customers of this fact. While the rules do not prohibit such an arrangement, it would be fraught with difficulties if done on a wholesale basis and should only be undertaken after careful considerations by the attorney and client of the responsibilities and potential costs involved.

Ethics Advisory Opinion South Carolina

Ethics Advisory Opinions

Upon the request of a member of the South Carolina Bar, the Ethics Advisory Committee has rendered this opinion on the ethical propriety of the inquirer's contemplated conduct. This Committee has no disciplinary authority. Lawyer discipline in South Carolina is administered solely by the South Carolina Supreme Court through its Commission on Lawyer Conduct.

Ethics Advisory Opinion 91-31

Facts:

Clients has sought Lawyer's assistance in settling insurance claims arising out of an automobile accident. Prior to settlement, Client requires transportation, but cannot afford a rental car.

Question:

May the Lawyer advance money to Client prior to settlement of the insurance claim to pay for a rental car.

Summary:

Lawyer may not advance money to Client to pay the cost of a rental car prior to settlement since that is not a cost of litigation.

Opinion:

Whenever a lawyer advances money to a client during or prior to contemplated litigation, the lawyer acquires a proprietary interest in the matter, since repayment likely depends upon a successful resolution of the matter. See Ethical Consideration 5-8 under former S.C. Code of Prof. Resp. (repealed Sept. 1, 1990). Rule 1.8 (j) is general prohibition on a lawyer acquiring such proprietary interest. Rule 1.8 (e) more specifically prohibits a lawyer from providing any financial assistance to a client in connection with pending or contemplated litigation, with one specific, limited exception.

It may reasonably be assumed that a lawyer hired to settle an insurance claim in an accident case is representing the client in connection with at least contemplated litigation. The question here, then, is whether advances of the type described are permitted within the exception of 1.8 (e). Rule 1.8 (e) permits a lawyer to advance (or pay if the client is indigent) only "court costs and expenses of litigation." This narrow exception recognizes that without an advance of costs of litigation clients might be unable to seek legal redress of injuries. The exception permits such advances as are needed to avoid that result.

The Rule makes no mention of permitting a lawyer to advance other expenses such as living expenses or transportation expenses. In the absence of any express exception for rental car or similar costs, we believe that any such advance would be improper under the general prohibition of Rule 1.8 (e). Prior Disciplinary Rule 5-103 under the old Code of Professional Responsibility did differ significantly from Rule 1.8 (e) with regard to the types of costs and expenses that could be advanced.1 Applying DR 5-103, the South Carolina Supreme Court indicated in 1978 that loans to clients were impermissible unless "confined to a permissible guarantee of the expenses of litigation including such items as court costs and expenses of preparing a case for trial."In re Reaves, 250 S.E.2d 329, 330 (1978). Costs of a rental car would not appear to be of the type contemplated by the Court as permissible under old DR 5-103, and we find no language in the current Rules to suggest a different result following their adoption.

1 DR 5-103 provided in relevant part 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 a 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.

The main difference between DR 5-103 (B) and Rule 1.8 (e) is that Rule 1.8 (e) permits costs to be advanced on a contingent basis.

Ethics Advisory Opinion South Carolina

Ethics Advisory Opinion 92-06

Facts:

An attorney desires to organize an independent corporation to make consumer loans. Although loans by the proposed corporation would be available to the general public, the attorney views the corporation's primary market as plaintiffs in pending personal injury actions who are in need of relatively short term financial assistance and are unable to obtain such assistance from traditional sources. The corporation would not make loans to the attorney's own clients.

Creditworthiness would be determined, at least in part, upon an evaluation of the borrower's potential recovery. The loan would be secured in whole of in part by a security interest in or assignment of a portion of the borrower's recovery in the pending legal action.

Referrals would be sought from plaintiff's attorneys who may be barred from lending money to their own clients because of Rule 1.8 (a) of the Rules of Professional Conduct. As a part of the loan application process, the prospective borrower would execute a written consent authorizing disclosure by his attorney of information concerning his case. This information would be used by the corporation to evaluate the security offered for the loan.

Questions:

  1. Does the above situation violate Rule 7.2 (c), which prohibits paying someone to recommend a lawyer's services?
    2. Does the above violate Rule 1.8 (e), which prohibits a lawyer from lending non-litigation-related expenses to a client?
    3. Does the above violate Rules 1.6 or 2.3 relating to confidentiality of information?

Summary:

Since the attorneys have no financial interest in the cases at issue of the borrowers, Rule 1.8 and 7.2 have not been violated. Assuming the clients consent and do not withdraw consent at the time the personal injury case is settled, the attorneys may honor the assignments to the loan company, and may refer clients to the lender.

There would be no violation of Rules 1.6 or 2.3 because disclosure of client information would be made only after consent of the client.

Opinion:

In Advisory Opinion 91-15, a situation was approved wherein attorneys assisted in the establishment of a loan business, to which they then referred their own personal injury clients. Opinion 91-15 allowed such conduct since the attorney had no financial interest in the loan company. In the present case, the attorney would retain an interest in the loan company, but the company would not make loans to the attorney's own clients. This situation does not violate either Rules 1.8 or 7.2, since the attorney's own clients are not involved. To rule otherwise would essentially question the right of an attorney to own or operate any financial institution, where no clients of the attorney are borrowers.

The market for the lender would consist primarily of persons who may not otherwise be creditworthy absent their pending personal injury cases. Pawn shops and finance companies are examples of other lenders whose market consists of normally non-creditworthy persons, and lawyers are not forbidden to own pan shops and finance companies.

In order to analyze the worth of the borrower's only substantial asset, the lender will rely in part of information supplied by the borrowers' attorneys about the merits of the pending cases. Most lending institutions rely on third parties to check creditworthiness of a borrower, the only difference here is the nature of the asset, not the idea of disclosing data to third parties.

Rule 1.6(a) allows a lawyer to reveal information about a client if the client consents after consultation. Rule 2.3 allows such a disclosure if the client consents, and the disclosure does not otherwise conflict with the lawyer's representation.

If the client withdraws his consent, the lawyer would be prohibited form honoring the assignment at the time the funds are disbursed without complying with Advisory Opinion 91-10.

Ethics Advisory Opinion South Carolina

Ethics Advisory Opinion 94-04

Facts:

A number of attorneys in South Carolina have received communications from a company that is engaged in the business of financing litigation by purchasing or taking assignments of personal injury causes of action. The communications include a "green card" that provides the name, address, and telephone number of the financing entity. The card states: "We will purchase a percentage of the expected personal injury action (prior to the resolution of the case)." The card also states: "When Clients Ask You For A Cash Advance Give Them This Card." The Committee has also received copies of two form documents that the financing entity plans to use to carry out the proposed transaction. One document is entitled "Assignment and Sale." Under this document in exchange for an agreed-upon payment, the client transfers to the financing entity a specified percentage of the gross settlement amount of the client's personal injury action. The document provides that the assignment and sale may not be canceled without the express written consent of the financing entity. The second document is a letter from the client to the attorney informing the attorney of the sale/assignment and directing the attorney to pay a designated percentage of the gross settlement amount to the financing entity within 10 days after the attorney receives settlement funds.

The Committee has been asked whether an attorney may ethically participate in such a financing transaction.

Summary:

The Committee does not express opinions on questions of law. An attorney considering participating in such a financing transaction, however, should review applicable statutory provisions and common law principles to determine whether such financing transactions are illegal under South Carolina law. In particular, the Committee notes the possible applicability of S.C. Code Ann. 16-17-10, prohibiting various practices that amount to barratry. If the transaction is illegal under South Carolina law, an attorney may not ethically participate. S.C. Rule of Prof. Cond. 1.2(d), 8.4(b).

Assuming that the transaction is not illegal under South Carolina law, an attorney may ethically counsel a client of the availability of opportunities to finance litigation when the client asks for such information or when the attorney in his professional judgment concludes that a client's legal and economic position warrants advice about such an opportunity. An attorney should render candid advice to the client about the advantages and disadvantages of the proposed transaction. S.C. Rule of Prof. Conduct 2.1.

If a client decides to proceed with a financing transaction, the attorney should inform both the client and the financing entity in writing that the client retains the right to control all aspects of the litigation and that the attorney will maintain confidentiality of client communications. Cf. S.C. Rule of Prof.

Cond. 1.8(f), 5.4(c).

Opinion:

The Committee does not issue opinions on questions of law. An attorney who is considering participating in such a transaction, however, should review applicable statutory and common law to determine whether the proposed transaction is illegal under South Carolina. If the transaction is illegal, an attorney may not ethically participate in the transaction. S.C.

Rule of Prof. Cond. 1.2(d), 8.4(b). In particular, the Committee notes the possible applicability of the South Carolina barratry statute, S.C. Code Ann. 16-17-10, which provides as follows:

Any person who shall:

(1) Willfully solicit or incite another to bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) thereby seeks to obtain employment for himself or for another to prosecute or defend such action, (b) has no direct and substantial interest in the relief thereby sought, (c) does so with intent to distress or harass any party to such action, (d) directly or indirectly pays or promises to pay any money or other thing of value to, or the obligations of, any party to such an action or (e) directly or indirectly pays or promises to pay any money or other thing of value to any other person to bring about the prosecution or maintenance of such an action; or (2) Willfully bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) has no direct or substantial interest in the relief thereby sought, (b) thereby seeks to defraud or mislead the court, (c) brings such action with intent to distress or harass any party thereto or (d) directly or indirectly receives any money or other thing of value to induce the bringing of such action; shall be guilty of the crime of barratry. The crime of barratry shall be punishable by a fine of not more than five thousand dollars or by imprisonment of not more than two years, or both.

The Committee is also not passing on whether the financing transaction involves a "security" under either federal or state securities laws.

Assuming that the transaction is not illegal under South Carolina law, may a lawyer ethically participate in such a transaction? The Committee assumes that the attorney representing the client does not also have a financial interest in the financing entity. If so, the attorney could not ethically participate in the transaction because the attorney would be violating Rule 1.8(e) (providing financial assistance to a client other than litigation costs) and Rule 1.8(j) (acquiring a proprietary interest in the client's cause of action). See S. C.

Bar Advisory Opinions 92-06 (lawyer may have financial interest in business organized to make consumer loans so long as business does not make loans to lawyer's clients) and 91-15 (lawyer may participate in organization of loan business to which they referred their clients when lawyers did not have financial interest in business). The Committee also assumes that the attorney is not receiving a fee from the financing entity. If so, the attorney could not participate in the transaction without complying with the requirements of Rules 1.8(a) and 1.7(b). Cf. S.C. Bar Advisory Opinion 92-03 (permissible for lawyer to act as agent for title insurance company and receive commission provided lawyer complies with Rules 1.8(a) and 1.7(b)).

Rule 2.1, dealing with the lawyer's role as advisor, provides as follows:

In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the clients situation.

The Committee concludes that under this rule a lawyer may appropriately advise a client of the opportunity to finance the client's personal injury cause of action when the client asks about such a possibility, or when the attorney in his professional judgment concludes that the client's situation warrants such advice. See also Rules 1.2(a) (lawyer shall consult with client regarding means used in handling case); Rule 1.4(b) (lawyer shall explain matter to client so that client can make informed decisions).

As Rule 2.1 requires, in advising a client about financing options, the attorney should fully advise the client about the advantages and disadvantages of the transaction that the client is considering. It appears to the Committee that the principal advantage of the transaction is that the client obtains immediate cash rather than having to wait until the conclusion of the personal injury action to receive funds. Some clients may want or even have a desperate need for immediate funds. The transaction, however, may have a number of disadvantages that the attorney should bring to the client's attention. These include the following: The amount that the financing entity is offering to the client may be too low based on the attorney's evaluation of the case. If the client assigns a percentage of the gross settlement proceeds to the financing entity, the client may regret the transaction if the ultimate settlement or judgment turns out to be more favorable than client anticipates. Further, if the settlement or judgment of the client's case is insufficient to repay the financing entity, the client may have an obligation to repay the entity the difference, depending on the terms of the assignment. If the client has a specific, immediate financial need, the client may be better off considering other possible sources of funds, such as a credit union, an insurance policy, family or friends. Any communications between the attorney and the financing entity may not be subject to the attorney-client privilege. The terms of the financing arrangement may be discoverable and could adversely affect settlement negotiations.

If a client decides to proceed with the transaction after being fully advised by the attorney, the attorney may ethically participate in the financing transaction by recognizing the financing entity's interest and by paying any settlement proceeds to the financing entity in accordance with the terms of the assignment. Before accepting any assignment the attorney should clarify in writing to both the client and the financing entity that the attorney will still look to the client for all decisions regarding the litigation, and will maintain confidentiality of client communications. Cf. Rule 1.8(f) and 5.4(c) (prohibiting third party interference with lawyer's professional judgment).

Ethics Advisory Opinion South Carolina

Tennessee

Tennessee State Bar

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

ADVISORY ETHICS OPINION 99-A-666

Inquiry is made as to the ethical propriety of a plaintiff's attorney referring clients to a venture capital company who invests in select workers compensation and automobile accident lawsuits by buying a share of the settlement based on the merits of the case. If the suit is unsuccessful the company gets no buyout of their interest and the plaintiff pays nothing to the company. The buyout figure is calculated after expenses and attorney fees.

In the instant inquiry the venture capital company is in essence loaning money to the plaintiff contingent upon the outcome of the plaintiff's case, if it appears particularly meritorious.

Clearly a lawyer may not loan living expenses or other expenses, which are not litigation expenses to the client, but clients are free to obtain loans for such expenses. See DR 5-103 (B). Virginia Ethic Opinion 1155 and opinions from other jurisdictions permit lawyers and law firms to refer clients to finance companies who loan funds to clients based on an investigation of the case made by the finance company with the client's consent. The opinion prohibits the lawyer from co-signing or guaranteeing the loan and the client remains ultimately liable.

Any direct involvement of the lawyer might violate DR 5-103 which prohibits a lawyer from acquiring an interest in litigation and also from advancing financial assistance other than for expenses of litigation, court costs, expenses of investigation, expenses of medical examination, and costs of presenting evidence.

So long as a lawyer does not evaluate the merits of the case for the company; and does not guarantee the financial assistance to the client; and gets no benefit from the client for the client availing himself/herself of the financial assistance of the venture capital company, there does not appear to be any ethical reason the lawyer could not ethically refer the client to the venture capital company, if there is no legal prohibition against such and arrangement.

Pursuant to Rule 9(26.5), this opinion is not binding on the Court, the Borard or the Ethics Committee.

This 11 day of January, 1999

Texas

Texas State Bar

OPINION 465

October 1990

Tex. Comm. on Professional Ethics, Op. 465, V. 54 Tex. B.J. 76 (1991)

QUESTIONS PRESENTED

  1. May an attorney ethically own an interest in a lending institution which loans money to personal injury clients of the attorney?
  2. May an attorney borrow money from a lending institution for case expenses (court costs, expenses of litigation or administrative proceedings, or reasonably necessary medical and living expenses) for a personal injury client, and ethically charge, or pass on, to the client, as a part of case expense, the out-of-pocket interest or finance charges of the lending institution?

DISCUSSION

In both inquiries, we assume as fact:

(a) The attorney is engaged by the client on a contingent fee basis which fully complies with the mandates of Rule 1.04, and particularly Subsection (d) thereof, of the Texas Rules of Professional Conduct, and the Comments under such Rule;

(b) The attorney (and/or his firm) does not own or control the lending institution to the extent that the lending institution only makes loans to clients of the attorney, and no conflict of interest as prohibited by Rule 1.06 of the Texas Rules of Professional Conduct, or the Comments under such Rule, exists;

(c) The relationship between the attorney and the lending institution is not used to secure or continue the employment of the attorney by the client, or in any manner which violates the provisions of Rules 7.02 or 7.03 of the Texas Rules of Professional Conduct, or the Comments under such Rules;

(d) No communication or advertising of the attorney's services exist in violation of Rule 7.01 of the Texas Rules of Professional Conduct, or the Comments under such Rule;

(e) Any subject transaction with the client in which the attorney is involved, whether: [1] indirectly under Question I; or, [2] directly under Question II, is not done or accomplished in any manner which violates the Conflict of Interest concepts of, or constitutes a prohibited Transaction under, Rule 1.08 of the Texas Rules of Professional Conduct, and particularly Subsections (a), (d), (e), and (h) thereof, and the Comments under such Rule; and, further, that the requirements of such Rule are followed;

(f) The attorney does not conduct himself in any manner which violates Rule 8.04 of the Texas Rules of Professional Conduct, and particularly Subsections (a) (3) and (8) thereof, and the Comments under such Rule; and,

(g) The interest charges of the lending institution are fair, reasonable, customary and at a lawful rate.

It is noted that neither Question presented asks about the propriety of an attorney himself or herself charging the client interest on monies personally loaned to, or advanced for, the client by the attorney; consequently, that matter is not addressed by this opinion.

CAVEAT

A reading of each and all of the above specifically referenced Rules of Professional Conduct, and the Comments thereunder, is necessary to a proper understanding of the following conclusions.

CONCLUSIONS

  1. Under the specific facts assumed above, an attorney may properly own an interest in a lending institution which loans money to personal injury clients of the attorney;
  2. Under the specific facts assumed above, 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.

 

Utah

Utah State Bar

ETHICS ADVISORY OPINION COMMITTEE Opinion No. 97-11 (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.1 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.2 We 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. 3

However, once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated.4 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. 5 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.

Footnotes

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."

Virginia

Virginia State Bar

Legal Ethics Opinion No. 1379

Conflict of Interest--Multiple Clients: Attorney Persuading Finance Company to Loan Funds to Client; Client Executing Lender's Documents in Attorney's Office

You have directed the committee's attention to the conclusions of prior Legal Ethics Opinion #ll55 indicating that it would not be improper for an attorney to persuade a finance company to loan funds to the attorney's personal injury client, or to honor the finance company's lien on the client's settlement proceeds, so long as the attorney does not guarantee or co-sign the loan. Based upon those conclusions, you have requested that the committee opine as to the propriety of the attorney receiving the completed but unsigned loan documents from the finance company, having the client execute the documents in the attorney's office, and then returning the documents to the finance company so long as the attorney undertakes no legal services for the finance company.

The committee is of the opinion that, since the attorney is providing no legal services or advice to the lender, no attorney-client relationship with the lender arises out of the circumstances you describe since the committee is of the opinion that the tasks you describe, when performed by the attorney for the lender, are merely those of a ministerial nature. The committee cautions that, although the attorney is providing no legal services to the lender, the circumstances of the transaction and the attorney's performance of ministerial tasks for the lender may give rise to certain contractual obligations owed by the attorney to the finance company. Thus, the committee is of the opinion that it would not be improper for the attorney to supervise his client's execution of the documents and then return the documents to the finance company.

Committee Opinion
November 30, 1990

Legal Ethics Opinion No. 1471

Zealous Representation--Trust Accounts: Disbursing Client's Proceeds to Creditor of Client

You have presented a hypothetical situation wherein X Corp., a Virginia corporation, makes cash advances to plaintiffs involved in personal injury tort actions. As security for these advances, including accrued finance charges and related fees, X Corp. receives a security interest in and an assignment of proceeds of the claim under the terms of a Security Agreement and Assignment executed by the plaintiff prior to receiving any funds. Receipt of this Security Agreement and Assignment is acknowledged in writing by plaintiff's attorney who has no pecuniary interest in X Corp. either as an investor or lender.

You further indicate that liens in excess of a stipulated amount are further perfected by filing a financing statement. The Credit Application and Credit Agreement, both of which are also signed by the plaintiff prior to receiving funds from X Corp., direct the attorney to pay X Corp. in full upon resolution of the claim. The Security Agreement and Assignment further contains a provision that, in the event of any dispute between plaintiff and X Corp., plaintiff's attorney is to hold in escrow all funds due plaintiff, after satisfying statutory liens, pending resolution of the dispute.

Furthermore, you indicate that, although the plaintiff's attorney does not guarantee the repayment of the loan, nor does he make any representation that the settlement proceeds will be sufficient to repay the loan, X Corp. does rely on the plaintiff's authorization to his attorney to repay the loan, on the direction to hold disputed amounts in escrow, and on the attorney's acknowledgment of that authorization.

Finally, in our telephone conversation of October l9, l992, you asked that the committee assume that there is no dispute as to the ownership of the funds or that any such dispute has been or will be resolved presumably by judicial means. The committee notes also that there is no indication that the cash advances received by plaintiff from X Corp. are to be used for expenses of litigation.

You have asked the committee to opine whether, under the facts of the inquiry, if the client does not deny the debt to X Corp. but nevertheless directs the attorney, after the settlement proceeds are received, not to pay off X Corp.'s loan but to pay the proceeds directly to the client, it is improper for the attorney to comply with his client's direction, or must he honor the lien and the assignment of proceeds executed earlier by the client. Additionally, you have asked whether the response would differ if the client in good faith disputes the validity or amount of the debt to X Corp.

The appropriate and controlling disciplinary rules relative to your inquiry are DR 9-l02(B)(4), which states that a lawyer shall promptly pay or deliver to client or another as requested by such person the funds, securities, or other properties in possession of the lawyer which such person is entitled to receive; and DR 7-l02(A)(7) which prohibits a lawyer from counseling or assisting his client in conduct that the lawyer knows to be illegal or fraudulent.

The committee has previously opined that it is not improper for an attorney to persuade a finance company to agree to loan funds to the lawyer's personal injury clients who are unable to obtain bank loans, where the loan would become due upon resolution of the case either by settlement or trial and where the attorney would not guarantee, cosign, or be responsible for the loan, but would honor a lien on the case. LEO #ll55. The committee has also opined that, while it may not be improper per se for an attorney to enter into a contract with a health care provider for the purpose of authorizing the attorney to pay the provider's fee from the client's recovery, the more effective solution would be to have the client execute a release or consent form authorizing the attorney to pay or deliver the fees owed to the provider. LEO #ll82. Furthermore, Legal Ethics Opinion #421, rendered on August l4, l98l, found that, where a personal injury client has authorized the attorney to pay a treating physician and hospital from settlement proceeds, it is not improper for the attorney to notify the physician and hospital of the receipt of such proceeds. Finally, the committee has opined that "when an attorney assumes the responsibility of acting as a fiduciary and violates his or her duty in a manner that would justify disciplinary action had the relationship been that of attorney/client, the attorney may be properly disciplined pursuant to the Code of Professional Responsibility". LEO #l325.

In the facts you present, the committee is of the view that, by virtue of having acknowledged receipt of the Security Agreement and Assignment executed by the personal injury client, upon which the Credit Application and Credit Agreement are based, the attorney has accepted the fiduciary responsibility of disbursing settlement proceeds to satisfy the loan. The committee is of the further opinion that, where the client subsequently directs the attorney, after settlement proceeds are received, not to pay off the loan but to pay the proceeds directly to the client, it would be improper for the attorney to unilaterally arbitrate such a money dispute between lender and borrower/personal injury client. In order to protect his client's interests, however, the committee believes it is incumbent upon the attorney to counsel his client as to liabilities which may be incurred as a result of the client's failure to satisfy the Agreement. See Delaware Ethics Op. l98l-3 (April 2l, l98l). Furthermore, although it is beyond the committee's purview to opine as to contractual provisions such as the Security Agreement's requirement that all funds due plaintiff be held in escrow by the attorney, the committee is of the opinion that it would not be improper for the attorney to disburse the undisputed portion of the proceeds to the borrower/personal injury client, while either holding in escrow any disputed sums, i.e., those owed to X Corp., or interpleading such sums to the appropriate court for determination of the entitlement as articulated in DR 9-l02(B)(4).

It is the committee's view that it is irrelevant to the propriety of the attorney's actions whether the client does not deny the debt or has a good faith dispute as to the validity or amount of the debt to X Corp.

In addition, the committee opines that should the attorney's release of the settlement proceeds to the client, irrespective of the attorney's recognition of the outstanding lien held by X Corp., amount to his knowingly assisting the client in fraud, such conduct would be improper and violative of DR 7-l02(A)(7). See Cleveland Bar Ass'n Op. 87-3 (March 29, l988).

Committee Opinion
August 24, 1992

Legal Ethics 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.

Committee Opinion
January 6, 1992

Virginia State Bar

LEO: Acquiring An Interest in the Litigation - Commingling - Trust Accounts: Advancing Funds from Settlement Check Prior to Clearing of Check.

July 25, 1989

You have advised that your firm has been adhering to the disciplinary rules and prior legal ethics opinions which require that identifiable funds must be irrevocably credited to a trust account before making disbursements of insurance company personal injury settlement proceeds. You have indicated that many personal injury clients do not understand the need to adhere to the seven or ten day requisite period before disbursing to them from "cleared" funds after they have already waited typically nine to twelve months to obtain a settlement of their case. In addition, you believe that it would be very unlikely for an insurance company check to "bounce."

You wish to know whether establishing a line of credit with a commercial bank would provide "identifiable funds, irrevocably credited," to the firm's trust account in the event a check from an insurance company should be returned for insufficient funds. You further believe that this arrangement would not result in the disbursement of funds belonging to other clients.

You have indicated that at the time of such credit, the bank would notify the firm that the line of credit has been utilized and that a loan in the amount credited is then due and payable by the law firm. For checks in the amount of $10,000.00 or more, the firm would only utilize this method for those checks issued by insurance companies rated A+ by A.M. Best & Company. In addition, the firm would make only partial payments to the clients pending clearance of the insurance company's check where larger settlements are involved.

The appropriate and controlling rules relative to your inquiry are DR:5-103(A),(B) and DR:9-102(A). Disciplinary Rule 5-103(A) and (B) provide that a lawyer shall not acquire a proprietary interest in the client's cause of action or subject matter of the litigation, nor shall a lawyer advance or guarantee financial assistance to his client except that the expenses of litigation, including court costs, investigations, medical examinations, and costs of obtaining and presenting evidence may be advanced or guaranteed by the lawyer provided the client remains ultimately liable for such expenses.

Disciplinary Rule 9-102(A) provides that all funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein, except that funds to pay bank charges and funds belonging in part to the client and in part presently or potentially to the lawyer or law firm may be deposited therein (emphasis added). The committee believes that the funds provided by the line of credit are, in fact, the law firm's or attorney's funds since it would be the law firm or attorney who would become the obligor on the note payable to the bank for such credit. Thus, the result of crediting attorney's funds to the clients' trust account is commingling and is violative of DR:90-102(A).

The Committee would direct your attention to LE Op. 1219 in which the Committee stated that the clear intention of DR:5-103(B) is to preclude an attorney from acquiring an interest in the outcome of the litigation since holding an interest would create a personal conflict and would compromise his undivided loyalty to the client in order to protect his own financial interests. The Committee believes that the terms of the line of credit whereby the law firm would ultimately become responsible for any loans as a result of advancing or disbursing funds to a client which have not "cleared" is tantamount to acquiring an interest in the out come of the litigation and could also constitute a breach of the attorney's fiduciary relationship . The Committee stated in LE Op. 183:

A lawyer who receives funds not his own becomes a fiduciary for the person or others entitled. A lawyer owes a duty to all who have entrusted him with funds to preserve the same in such manner that it can, at all times, be identified and recovered. The public trust and faith in the profession impose a moral responsibility on every lawyer to so conduct the management of funds not his own that not only is all question of impropriety removed, but that there can be no basis for suspicion of misuse of client's funds.

The Committee believed that the proposed arrangement is violative of DR:5-103 in that the financial assistance contemplated under the facts of the inquiry would not come under the definition of "expenses" which a lawyer may advance or guarantee as prescribed in DR:5-103(B). In addition, the potential for the law firm's acquiring a personal interest in the outcome of the client's litigation is so overwhelming under the terms of the line of credit that it may be violative of DR:5-103(A).

Finally, it is the view of the Committee that providing a line of credit to the clients' trust account when an insurance company's settlement check has been returned for insufficient funds would be improper and violative of the Code of Professional Responsibility since it is a blatant form of commingling attorney's funds with that of a client's. Furthermore, the proposed line of credit arrangement with a bank is unethical if, in doing so, it if the attorney's or law firm's purpose to circumvent a disciplinary rule precluding disbursement on uncollected funds. (see DR:1-102(A)(2)).

Committee Opinion July 25, 1989

Virginia State Bar

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 occasion, 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.

Committee Opinions November 15, 1988

Virginia State Bar

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.

Committee opinion April 3, 1999

Virginia State Bar

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.

October 3, 1989

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).

Committee Opinion October 3, 1989

Washington

Washington State Bar

Formal Opinion 185 (1990)

Ethical Duty of a Lawyer Who Guarantees Payment on Behalf of a Client to a Creditor from Proceeds of Settlement or Judgment

Question:

What are the ethical duties of a lawyer who guarantees payment, either orally or in writing, on behalf of a client to a creditor such as healthcare provider, from proceeds of settlement or judgment?

Discussion:

Frequently, a lawyer representing an injured person in a contingent fee case is requested by a healthcare provider or other creditor to guarantee payment of the creditor's claim (not related to the expenses of the litigation) from the proceeds of any settlement or judgment recovered on behalf of the client in return for an agreement by the creditor to forego any attempt to collect the debt in the meantime. At times a creditor such as a healthcare provider may ask the lawyer and/or the client to sign a lien form or other written "guarantee"; at other times, the creditor may merely accept the assurances of the lawyer that the debt will be paid from any settlement or judgment. Assuming that the client consents to such a "guarantee," a lawyer may properly enter into such an arrangement with the client's creditor. The ethical dilemma arises when, after settlement or judgment, the client requests that the lawyer disburse all proceeds of the settlement or judgment directly to the client, without paying the creditor. RPC 1.14(b)(4) requires that a lawyer pay at a client's request all funds in the lawyer's possession which the client is entitled to receive. The question is whether the client is entitled to receive those funds which the lawyer, with the client's consent, has guaranteed would be paid to the creditor.

Before the lawyer may guarantee payment of such funds, or advise a client to sign a lien or guarantee, the lawyer must explain the matter to the client "to the extent reasonably necessary to permit the client to make informed decisions regarding" the lien or guarantee. (RPC 1.4(b). This explanation may be included in the written contingent fee agreement. RPC 1.5(c). The explanation should include the advice to the client that once the client has authorized payment of such debts, that authorization is irrevocable by the client. If the client subsequently has a good-faith dispute as to the amount to be paid, the lawyer should advise the client and the creditor that the lawyer will continue to hold the funds in trust until the dispute is resolved.

Assuming that the client has been properly advised of the effect of making or signing a guarantee or lien, and has consented thereto, the Committee is of the opinion that, absent a good-faith dispute as to the amount of debt claimed by the creditor to be due, the client has authorized payment of those funds by the lawyer and is no longer "entitled" to disbursal of those funds by the lawyer. Further, the Committee is of the opinion that failure by the lawyer to honor a guarantee or lien the lawyer has signed or agreed to in connection with representation of a client would violate RPC 4.3 where the lawyer has failed to correct a misunderstanding by an unrepresented person as to the obligation by the lawyer to pay the creditor; and would violate RPC 4.4, which prohibits a lawyer from using means that have no substantial purpose other than to burden a third party, in this case by misleading the creditor into believing that the debt of the client would be paid.

If the lawyer had entered into such a "guarantee" without the client's consent, then the lawyer may not withhold the funds from the client if the client requests them. Whether by making such a "guarantee" the lawyer has obligated himself or herself to the creditor is a legal question on which the Committee can render no opinion. However, representing to a creditor of a client that the lawyer had authorization to enter into such an arrangement when the client had not consented to it might constitute a violation of RPC 8.4(c) and might subject the lawyer to discipline.

Financial obligations owed by a client, such as medical bills owed to a healthcare provider, must be distinguished from expenses related to litigation, such as expert witness and court reporter fees. See, In re Witteman, 108 Wn.2d 281, 737 P.2d 1268 (1987); Copp v. Breskin, et al., 56 Wn. App. 229, 782 P 2d 1104 (1989).


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