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1. It is ethical for an attorney to borrow funds from a third party lender to cover litigation expenses, or to fund his law practice.
2. The interest charged by the lender to a lawyer on the funds borrowed by the lawyer to fund litigation expenses may be passed on to the client as a legitimate litigation expense if certain conditions are met:
A. the client must remain ultimately liable for expenses paid under DR 5-103(b)(1),
B. the lawyer can not have any interest in the lender,
C. client confidentiality cannot be compromised,
D. the terms of the borrowing are disclosed with adequate advance notice to the client,
E. the time after which interest is charged to the client, and the loan interest rate, are both reasonable,
F. the client has consented to the loan in advance of the closing thereof,
G. the client is permitted to avoid paying the interest charges by paying the funded disbursements before the loan is taken, and
H. the disbursements themselves must be fair and appropriate to the case.
See also , Ass’n. of the Bar of the City of New York, Formal Op. 1997-1.
1. It is ethical for an attorney to borrow funds from a third party funding company to cover litigation expenses, or to fund his law practice. However, in this case the Ethics Opinion requires that “…the costs [be] repaid, plus additional fees, only if the case were successfully concluded and funds were derived by the attorney.” Moreover, “[i]f there is a recovery, the only claim by the Funding Company is against the attorney and the attorney’s bank account (after distribution of all recoveries from the attorney’s escrow account) and not against the client or the client’s recovery.” The funding company has no private right of action and no claim against the client.
2. The Opinion further holds that : “[t]here will be no alteration of the fee arrangement between the attorney and client based upon the existence of a funding agreement between the attorney and the Funding Company.” Therefore, for safety’s sake, CFS should recommend to borrowing attorneys in Pennsylvania that they include in their retainer forms a clause covering both the borrowing of funds to cover litigation expenses, and the client’s acceptance of the fact that he/she is chargeable (out of the settlement) with the interest on such a loan insofar as it applies to the client’s case.
1. It is ethical for an attorney to take a loan from a third party funding company cover litigation expenses, or to fund his law practice.
2. It is ethical for that attorney, if successful in the litigation, to pass on any interest and charges on any such loan to the client as an appropriate litigation expense, as to the portion of the loan which funded that client’s case.
Special State of Texas Caveats:
In coming to the above conclusions the following warnings and assumptions were employed by the Center:
A. The borrowing 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 all official Comments published pursuant to Rule 1.04;
B. The borrowing attorney (and/or the law firm) does not own or control the lending company to the extent that the lending company makes loans only to clients of that attorney or law firm, and further, that no conflict(s) of interest such as those prohibited under Rule 1.06 of the Texas Rules of Professional Conduct, or the official Comments published pursuant to Rule 1.06, exists;
C. The relationship between the borrowing attorney and the lending company is not used to secure or continue the employment of the attorney by the client, or in any other manner which violates the provisions of Rules 7.02 and 7.03 of the Texas Rules of Professional Conduct, or the official Comments published pursuant to Rules 7.02 and 7.03;
D. The loan does not occasion any communication or advertising regarding the borrowing attorney's services which would violate the standards enunciated in Rule 7.01 of the Texas Rules of Professional Conduct, and the official Comments published pursuant to Rule 7.01;
E. Any subject transaction with the client in which the borrowing attorney is engaged, involving either the attorney’s taking of the loan or the attorney’s “pass along” of the appropriate portion of the loan interest, is not accomplished in any manner which
i. violates the Conflict of Interest concepts of 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, or
ii. constitutes a prohibited transaction pursuant to Rule 1.08 and its Comments.
iii. violates any of the requirements of Rule 1.08 and its Comments.
F. The attorney must 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 official Comments published pursuant to Rule 8.04;
G. The interest charges of the lending company are fair, reasonable, customary and at a lawful rate.
The cited Texas Ethics Opinion may be found on the web at : http://www.txethics.org/
1. It is ethical for an attorney to borrow funds from a third party lending company to cover litigation expenses, or to fund his law practice.
2. It is ethical for that attorney to pass on to the client, as an appropriate litigation expense, any interest and charges on any such loan, to the extent of that portion of the loan which funded that client’s case.
New Jersey Ethics Opinion 603 is copied in its entirety below :
The inquirer asks our opinion concerning the ethical propriety of the below described provision in a contingency fee arrangement in a tortious conduct matter, where it is appropriate for the firm to advance disbursements, pursuant to RPC 1.8(e), to be reimbursed pursuant to RPC 1.5(c) and R. 1:21-7(d). The proposed provision would be made clear to the client at the outset of the litigation and would be instituted only if the client agreed to the same.
Under the proposed provision, the inquirer's law firm would borrow the funds to cover the disbursements in the matter from a third party lending company at the most favorable available interest rate. Upon the favorable outcome of the matter, the firm would reimburse itself for both the principal and interest charges relating to the borrowed funds and presumably would deduct the total from the recovery before computing the net sum subject to the contingency fee arrangement pursuant to R. 1:21-7(c) and (d).
We find nothing unethical or contrary to the letter or spirit of the rules of the Court, or Rules of Professional Conduct in the proposed provision. This Committee's Opinions 446, 105 N.J.L.J. 105 (1980), and 582, 117 N.J.L.J. 394 (1986) and the Notice to the Bar published in 101 N.J.L.J. 265 (1978) authorizing credit card use for legal fees attest to the recent liberalization of the attitude of the courts and the bar, recognizing that appropriate and reasonable interest charges or credits in various situations are not unethical as long as they are made clear to the client at the outset of the retention and the client agrees to the same.
The cited New Jersey Ethics Opinion may be found on the web at : http://lawlibrary.rutgers.edu/
1. A lawyer may obtain a loan from a third party lending company provided that the loan is not secured by the client’s interest in any settlement or judgment. This provision does not prohibit the lending company from securing the loan through the borrowing attorney’s fee on the case. The client should also be informed of the loan and his or her consent should be obtained by the borrowing attorney/firm.
2. It is proper for the borrowing attorney to deduct the costs of the loan and interest or fees thereon from a client’s settlement or judgment, since these costs are appropriately considered “costs of doing business” or “litigation expenses”.
The cited Ohio Ethics Opinion may be found on the web at :
http://www.sconet.state.oh.us/
1. It is ethical for an attorney to borrow funds from a third party lending company to cover litigation expenses, or to fund his law practice
Excerpts from Massachusetts Ethics Opinion 83-7 :
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 company 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.
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 the attorney’s 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.
Massachusetts Ethics Opinion 83-7 may be found on the web at :
http://www.massbar.org/publications
2. Whether or not the cost of the fees and interest on the loan may ethically be passed on to the client was not addressed in this opinion. To date we have researched several other ethics opinions and have not yet found one that addresses this issue.
1. A lawyer may obtain a loan from a lending company to fund litigation expenses, provided that the terms of the loan are fair, the client has an opportunity to consult with another attorney on the issue, and that the client consents in writing to the loan.
District of Columbia Rules of Professional Conduct, Rule 1.8(a), (d) and Comments 1, 3, and 5 may be found on the web at :
http://www.dcbar.org/
2. Whether or not the interest on the loan may ethically be passed on to the client was not addressed in these Rules. To date we have researched several other District of Columbia Rules and have not yet found one that addresses this issue
1. It is ethical for an attorney to borrow funds from a third party lending company to cover litigation expenses, or to fund his law practice
* The costs, fees and interest from the litigation loan may be passed on to the client, provided that:
o The interest rate is reasonable, and the lawyer does not profit financially from the third party lending arrangement.
o The lawyer must explain the terms of the loan to the client.
o Client confidences may not be disclosed without the client’s informed written consent, and the lawyer must not acquire a proprietary interest in the subject matter of litigation.
o From Ethics Opinion #177 – Other than the agreed-upon fee “[t]he lawyer must not attempt to obtain any interest in the client’s settlement or judgment to secure the lawyer’s obligation to repay the financing company.”
1. It is ethical for a lawyer to borrow funds from a third party lending company to fund litigation. However, attorneys are generally discouraged from having an interest (beyond their fees) in the outcome of the litigation or lending money to their clients directly.
* Fees, interest and expenses associated with the loan may be passed on to the client as appropriate expenses of litigation. However, the client must be notified in his or her contract with the attorney that he or she will be ultimately liable for the expenses. Nevertheless, it is always the attorney, not the client, who is ultimately liable to the funding company for repayment the loan. The funding company cannot breach attorney-client confidentiality and has no recourse directly against the client. This provision does not prohibit the securing of the loan through the borrowing attorneys fee on the case. In addition, interest and fees of the loan may be passed to the client only if the following two criteria enunciated in Formal Advisory Opinion No. 92-1are met :
A. “ (1) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances”; and
B. “(2) the written statement given to the client upon conclusion of the matter reflects the interest charged on the expenses advanced in the matter.” The goal is to assure the client is informed of all possible charges and fees that can ultimately affect his or her recovery in a case.
The New Hampshire Bar authorities do not officially address the ethics of an attorney borrowing funds from a third party funding company. However, Practical Ethics Article: May 21, 1987 (“Law Firm Use of Outside Services Providers”) acknowledges and supports opinions that have condoned attorney borrowing from financial companies to fund litigation.
The Article stresses the caveat that the confidentiality of the attorney-client relationship must not be breeched. It is not mandatory to inform the client that the attorney will receive funds from a lending company. However, the Article states that clients who may not know that the use of these outside funding resources is commonplace in today’s legal system should be informed of this, and should be further informed that such an company’s services may (or will) be utilized in their case.
1. It is ethical for an attorney to take a loan from a third party company to cover litigation expenses, or to fund his law practice.
* It is ethical for an attorney to pass the costs and fees from the loan on to the client if:
A. the lawyer has no financial interest in the lending company,
* the interest charged to the client must does exceed the actual interest incurred by the attorney,
* the arrangement is explained clearly to the client, and
* client information may be disclosed to the lender only upon consent of the client after consent after consultation.
1. It is ethical for an attorney to borrow funds from a third party lending company to cover litigation expenses, or to fund his law practice.
2. The cost of the fees and interest associated with the loan may be passed to the client provided that the client consents in writing to the loan and its charges/interest rate.
