Litigation Financing

A lawyer represents a client in a personal injury matter. The client is unable to finance the costs of the litigation, and is considering dropping the case.

• May the lawyer refer the client to a litigation financing company?
• May the lawyer assist the client in obtaining a "nonrecourse" loan, the repayment of which is contingent on the outcome of the case?
• May the lawyer obtain financing to fund the litigation, and allow the financing company to take a percentage of the settlement as its fee?
• May the lawyer refer a client to a litigation finance company in which the lawyer owns an interest?

Over the past several years, ETHICSearch has received many inquiries about the ethical propriety of lawyers' involvement with various litigation financing arrangements.

ABA Opinions

ABA Standing Committee on Ethics and Professional Responsibility Formal Op. 00-419 [PDF] (2000) Use of Credit Cards for Payment of Legal Fees; Withdrawal of Formal Opinions 320 (1968) and 338 (1974) and Informal Opinions 1120 (1969) and 1176 (1971) is the ABA Standing Committee's latest pronouncement on this topic. Citing to outmoded restrictions on lawyer advertising, this opinion withdrew most of the older ABA opinions discussing financing arrangements for clients. In its discussion of ABA Formal Opinion 338 (1974), the opinion stated:

...Formal Opinion 338, although not formally withdrawing Informal Opinions 1120 and 1176, had rejected their reasoning that credit cards or other bank- financing arrangements properly could be employed only for "facilitating the sales of merchandise and sales of non-professional services," and not for legal services; in so doing, the Committee accepted, per se, the propriety of using credit cards to pay legal fees. However, Opinion 338 carried forward from another earlier opinion, Formal Opinion 320 (Legal Fee Finance Plan), a series of requirements that are not justified by the present-day Model Rules of Professional Conduct.

Because the Model Rules require only that any advertising materials used by a lawyer not be false, fraudulent, or misleading, and because they do not require any advance approval by a bar association for a lawyer's participation in a credit-card plan, the Committee hereby withdraws each of the four opinions referred to above. 00-419 at 1.

State Bar Ethics Opinions

There have been a great number of state bar ethics opinions issued on various issues relating to this topic. (See, the digests of 46 state bar opinions dating from 1986 through 2003 listed in the additional resources page. Where available, links to the full text of the opinions are also included). These opinions focus on the following ethics rules:

1. Rule 5.4 (Professional Independence of a Lawyer) prohibitions against fee-sharing with non-lawyers may arise if the lawyer receives a fee, or the loan is secured by the client's settlement or judgment.
2. Rule 1.7 (Conflict of Interest: Current Clients) personal interest conflicts may arise where the lawyer's financial interest could be affected by advice given to the client.
3. Rule 1.8 subsection (e) (Conflicts of Interest: Current Clients: Specific Rules) may be implicated, in that it forbids a lawyer from providing financial assistance to a client in connection with pending or contemplated litigation except under certain enumerated circumstances.
4. Model Rule 2.1 (Advisor) Under Model Rule 2.1, a lawyer "shall exercise independent professional judgment and render candid advice" in representing a client. Involvement of a third party company poses risks that lawyers may not exercise independent professional judgment.

Because of the significant differences in how financing arrangements with clients may be structured, a variety of ethical issues may be implicated, and the opinions tend to be fact specific. For example, a common question is whether a lawyer can refer his client to a litigation financing company. Many bar opinions state that this is appropriate provided that such an arrangement does not interfere with the lawyer's independent professional judgment and the lawyer does not disclose client confidences without the client's consent. See, Florida State Bar Association Opinion 00-3 (2000) (A lawyer may provide client with information about litigation finance companies if the lawyer believes this to be in the client's best interest. The lawyer may also give factual information about the case with the client's consent, and the lawyer may honor the client's written assignment of a portion of the recovery to the company). See Also New Jersey Advisory Committee on Professional Ethics Opinion 691 (2001). Some of these opinions state that the lawyer should warn the client about the possible loss of the attorney-client privilege when making disclosures to financing companies. See, e.g. New Jersey Advisory Committee on Professional Ethics Opinion 691 (2001), Missouri Office of Chief Disciplinary Counsel Informal Opinion 2000-0229 (11/00) Committee on Ethics of the Maryland State Bar Association Opinion 92-25 (1992), Committee on Professional Ethics of the Connecticut Bar Association Opinion 99-2 (1999) and Committee on Legal Ethics and Professional Responsibility of the Pennsylvania State Bar Opinion 99-8.

Committee on Professional and Judicial Ethics of the Michigan State Bar Opinion RI 321 (2000) found an agreement between a venture capital company and plaintiff to be so onerous that it created irreconcilable conflicts of interest between the lawyer and his client. The Michigan Committee noted that the agreement required among other things that the client waive any defenses in the event of a dispute between the client and the company and restricted the right of the plaintiff to discharge his lawyer.

Many opinions caution lawyers who have interests in or who receive referral fees or other benefits from the finance companies they refer their clients to. See, Pennsylvania Opinion 91-9, Committee on Professional Ethics of the New York State Bar Opinion 666 (1994), and Board of Commissioners on Grievances and Discipline of the Ohio Supreme Court Opinion 2000-01 (2000). Compare Texas Opinions 465 (1990) (A lawyer may own an interest in a lending institution that loans money to the lawyer's personal injury clients so long as the lawyer complies with the rules on conflicts of interest, advertising and misconduct.) and 483 (1994). Ethics Advisory Committee of the South Carolina Bar Opinion 92-06 (1992) states that a lawyer may own an interest in a company that makes loans to non-clients. New York State Bar Opinion 769 (2003) states that after full disclosure, a lawyer may bill a client for services in representing the client in negotiations with the financing company. See also Board of Commissioners on Grievances and Discipline of the Ohio Supreme Court Opinion 2002-2 (2002):

...improper under DR 5-101(A)(1) and DR 5-104(A) of the Ohio Code of Professional Responsibility for a lawyer to provide loan applications and make referrals of clients to lenders recommended to the law firm by a consulting company that receives commissions or referral fees from the lender for each loan completed and also receives an annual consulting fee from the law firm, unless there is full disclosure and informed consent.

Another common scenario involves lawyers who wish to finance the costs of litigation for their clients through third-party lending institutions that loan funds to lawyers for litigation expenses. May the attorney borrow money from the lending institution for case expenses, and ethically charge or pass on to the client the interest or finance charges of the institution? Most opinions state that this is permissible so long as the lawyer obtains the client's consent and the interest rate is reasonable. See, e.g. Committee on Rules of Professional Conduct of the State Bar of Arizona Opinion 2001-07 (2001), Maine Board of Bar Overseers Opinion 177 (2001), Missouri Bar Ass'n Informal Opinion No. 970066, (2001), New York State Bar Opinion 754 (2002) and Ethics Committee of the Utah State Bar Opinion 02-01 (2001).

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Yet another scenario involves situations where the lawyer obtains nonrecourse loans to finance the litigation in a contingent fee case, where the lawyer is obligated to repay the loan from his fee generated in the case. Utah Bar Association Opinion 97-11 (1997) found such an arrangement to constitute the sharing of legal fees with non-lawyers. See Also Board of Commissioners on Grievances and Discipline of the Ohio Supreme Court Opinion 2004-2:

...improper for an attorney, upon reaching a settlement agreement in a client's legal matter, to sell or assign his or her legal fee to a funding company in exchange for immediate cash at a small discount to the full value of the legal fee. Such sale or assignment of an attorney's legal fee is an improper division of legal fees with a non-attorney and is an interference with the duty of loyalty in an attorney-client relationship.

Caselaw

There are a number of recent cases that have discussed litigation financing issues. Theses cases address some of the ethics issues implicated, but they tend to focus on legal questions including champerty, maintenance and usury. See, e.g Rancman v. Interim Settlement Funding Corp. 789 N.E. 2d 217 (2003) (except as otherwise provided by legislative enactment or the Code of Professional Responsibility, a contract taking the repayment of funds advanced to a party to a pending case contingent upon the outcome of that case is void as champerty and maintenance.) After the Rancman case was issued, the Ohio Board of Commissioners on Grievances and Discipline withdrew their Opinion 99-6 (1999). Compare Saladini v. Righellis, 687 N.E.2d 1224 (Mass. 1997) and Osprey, Inc. v. Cabana, 532 S.E. 2d 269 (2000), in which the South Carolina Supreme Court abolished the defense of champerty:

...we abolish champerty as a defense. We are convinced that other well-developed principles of law can more effectively accomplish the goals of preventing speculation in groundless lawsuits and the filing of frivolous suits than dated notions of champerty.

...We note two peripheral matters that we do not address today. First, the case before us involves a financial arrangement between non-lawyers. Various ethical constraints closely control and in many instances prohibit business transactions between a lawyer and his or her client. See Rule 1.8, RPC. In particular, a lawyer may not acquire a proprietary interest in the subject matter of litigation the lawyer is conducting for a client, except that the lawyer may acquire a lien to secure the lawyer's fees or expenses, and the lawyer may contract with a client for a reasonable contingent fee in a civil case. Rule 1.8(j), RPC. We do not address whether a lawyer may act as a financier in a case involving a litigant who is not the lawyer's client. See Susan Lorde Martin, Syndicated Lawsuits: Illegal Champerty or New Business Opportunity?, 30 Am.Bus.L.J. 485, 488 (1992) (listing statutes in several states that prohibit attorneys or others connected with the judicial process from engaging in maintenance and champerty). Second, our decision today neither addresses nor authorizes the syndication of lawsuits, a practice in which a litigant sells shares in his lawsuit to investors. See Martin, supra; Dobner, supra (discussing syndication of lawsuits). Osprey, at 382.

In Echevierra v. Lindner, 801 N.Y.S. 2d 233 (2005), the court held that while under New York law an agreement between the plaintiff and a litigation finance company was not champertous, it did violate the New York state usury laws.

In Lawsuit Financial v. Curry, 683 N.W. 2d 233 (2004), the Michigan Court of Appeals held that non recourse capital advances made by litigation funding company were loans, and that the loans were usurious. In Curry, the funding company loaned the client $177,500 and soon after demanded payment of $887,500.

In Core Funding Group v. McDonald, 2006 WL 832833 (2006), the Ohio Court of Appeals court rejected the reasoning in Board of Commissioners on Grievances and Discipline of the Ohio Supreme Court Opinion 2004-2 found that a law firm's assignment of its interest in attorney's fees to a litigation finance company was enforceable, and was not violative of Rule 5.4:

[I]t is routine practice for lenders to take security interests in the contract rights of other business enterprises. A law firm is a business, albeit one infused with some measure of the public trust, and there is no valid reason why a law firm should be treated differently than an accounting firm or a construction firm. The Rules of Professional Conduct ensure that attorneys will zealously represent the interests of their clients, regardless of whether the fees the attorney generates from the contract through representation remain with the firm or must be used to satisfy a security interest. Parenthetically, the Court will note that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney's accounts receivable. It is, in fact, a common practice. Yet there is no real 'ethical' difference whether the security interest is in contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as Rule of Professional Conduct 5.4, the rule prohibiting the sharing of legal fees with a nonlawyer, is concerned. It does not seem to this Court that we can claim for our profession, under the guise of ethics, an insulation from creditors to which others are not entitled. PNC Bank at fn. 5.

{¶ 63} We agree that at this juncture, we cannot claim for appellees, under the guise of ethics, an insulation from appellant-creditor. Core Funding Group, at 10.

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In Fausone v. U.S. Claims, Inc. 915 So.2d 626 (2005) the Supreme Court of Florida upheld an agreement between a litigation financing company and the plaintiff, noting that Florida did not appear to have laws regulating such loan agreements. The Court went on to state:

...V. A Possible Need For Regulation

The Florida Bar has issued an Ethics Opinion ruling that a lawyer may provide a client with information about companies like U.S. Claims and may provide factual information to those companies with the consent of the client. The lawyer may honor the written assignment of claim but may not issue a letter of protection to the funding company. See Prof'l Ethics of the Florida Bar, Op. 00-3 (2002). Although lawyers may take these actions, the literature concerning litigation loans provides divergent views of their merit. See Kenneth L. Jorgensen, Presettlement Funding Agreements: Benefit or Burden, 61 Bench & B. Minn. 14 (2004); Andrew Hananel & David Staubitz, The Ethics of Law Loans in the post-Rancman Era, 17 Geo. J. Legal Ethics 795 (2004); Terry Carter, Cash Up Front, 90 A.B.A.J. 34 (2004); Douglas R. Richmond, Other People's Money: The Ethics of Litigation Funding, 56 Mercer L.Rev. 649 (2005).

A person who suffers a severe personal injury will often need money to care for herself and her family during the pendency of litigation. Lawsuits take time and come with few guarantees. Grocery stores and home mortgage lenders do not wait for payment merely because a person is unable to work due to an automobile accident or other injury. Thus, it cannot be denied that people like Ms. Fausone may need a credit source during litigation.

On the other hand, a person who is the victim of an accident should not be further victimized by loan companies charging interest rates that are higher than the risks associated with the transaction. We emphasize that the record does not reflect the value of Ms. Fausone's claim when U.S. Claims negotiated with her, but a company that only loaned money when it was secured by high-grade personal injury claims would seem to be able to charge a lower interest rate than some of the rates described in this opinion, even when the arrangement is a nonrecourse loan.

The purchase agreement in this case is one-sided and designed to prevent a Florida citizen from having access to a local court or another local dispute resolution forum. Such agreements create confusion concerning the party who actually owns and controls the lawsuit, and create risks that the attorney-client privilege will be waived unintentionally.

This court has no authority to regulate these agreements. However, if The Florida Bar is going to allow lawyers to promote and provide such agreements to their clients, it would seem that the legislature might wish to examine this industry to determine whether Florida's citizens are in need of any statutory protection. Fausone, at 629

For further resources on legal ethics issues as they relate to litigation financing, see the list of law review articles and state bar ethics opinions that are listed in the additional resources page.

ETHICSearch is intended to stimulate awareness of ethical problems and illustrate the varying approaches of different jurisdictions. It is not intended as legal advice. The ABA Model Rules of Professional Conduct and the opinions discussed are advisory only; the ethics rules, laws and court decisions of your jurisdiction may dictate a different result.

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