Lawyers can refer clients to lending companies in which they have a stake, ethics opinion says
Lawyers may refer clients to fee financing companies, even if they own a financial interest in the lender or broker, according to a November opinion from the ABA Standing Committee on Ethics and Professional Responsibility.
Formal Opinion 484 intends to clarify attorney-fee financing used to help close the access-to-justice gap. While some in the business of facilitating loans welcome the opinion, others see it as nothing new.
“By some estimates, more than 75 percent of low-income and middle-income individuals have legal needs that go unmet for financial reasons,” says Barbara S. Gillers, chair of the ABA Standing Committee on Ethics and Professional Responsibility. “Formal Opinion 484 is important because it addresses a way to increase access to legal services for those persons who may wish to or need to finance legal fees in order to retain counsel. The opinion protects clients by identifying lawyers’ obligations when they refer clients to financing companies or brokers.”
The opinion lays out various ways that fee financing services are already being used by attorneys. For example, clients can apply for a loan directly from a financing company to cover their lawyer’s fees, which the client then pays back to the lender with interest rates between 5 and 15 percent.
In another instance, a lawyer will pay an initial fee to a finance company so he or she can submit loan applications from clients. If a client receives a loan in this scenario, the lawyer receives the money minus a 10 percent finance fee. Similarly, a lawyer can help a client set up what is essentially a retainer or voucher through a lender minus a service charge.
In other arrangements, the loaned money may go directly to the client, and the attorney will be notified, often through an online portal—a service the attorney pays for. There are also “same as cash” programs, where the attorney has the tools in her office to help the client apply for the loan. If a loan is created, the financial relationship remains between the lender and the client.
Lastly, the opinion says that a lawyer may work with a financial brokerage company that helps find legal fee financing options.
In the above examples, the attorney making the referral does not have an ownership or financial interest in the loan and has explained the arrangement so the client can make an informed decision.
Additionally, the opinion makes clear that these arrangements are permissible only if other Model Rules of Professional Conduct are met, including:
• Model Rule 1.2(c) (Scope of Representation and Allocation of Authority Between Client and Lawyer)
• Model Rule 1.4(b) (Communications)
• Model Rule 1.5(a) and (b) (Fees)
• Model Rule 1.6 (Confidentiality of Information)
• Model Rule 1.7(a)(2) (Conflict of Interest: Current Clients)
• Model Rule 1.9(a) (Duties to Former Clients)
The opinion does not touch on nonrecourse loans like litigation financing, which is a cash advance to a litigant in exchange for a percentage of the judgment or settlement. Being that this opinion only covers instances where a lawyer is being paid by money a client borrowed, the committee notes that Rule 5.4(c) (Professional Independence of a Lawyer), does not apply.
Nonrecourse financing, which often falls outside of state regulations on consumer loans and may have rates of 44 percent or higher annually, has led to litigation and divergent outcomes in recent years. In Colorado, the state supreme court in 2015 found the state’s Uniform Consumer Credit Code applied to these types of loans. In 2018, the Supreme Court of Georgia found that the Industrial Loan Act and Payday Lending Act did not apply to nonrecourse litigation loans.
Regarding traditional consumer loans, if a lawyer recommends a fee financing or brokerage company that he or she has an ownership or financial stake in, then the lawyer must disclose the relationship, ensure fair and reasonable terms, advise the client to seek independent legal advice on the transaction and obtain the client’s informed and written consent, according to the opinion.
It also states that if a lawyer charges a higher fee to account for any transactional costs or subscription fees the lawyer must pay the lender, the fee must be reasonable and disclosed to the client. Additionally, the opinion cautioned that lawyers should not “recommend the finance company or broker to the client even though fee financing is not in the client’s interests because the client’s arrangement of financing best assures payment or timely payment of the lawyer’s fee.”
From an ethics standpoint, Anthony Sebok, co-director of the Jacob Burns Center for Ethics in the Practice of Law at the Benjamin N. Cardozo School of Law in New York City, doesn’t understand the need for the new opinion.
“I don’t actually know why it was written, in the sense that it seems to confirm what other bar committees have said,” says Sebok, who is an ethics consultant for litigation finance company Burford Capital. “It’s not a major development in either reasoning or setting out new, deeper thoughts about this particular practice.”
For example, bar associations in Arizona, Florida, Maine and North Carolina have all tackled legal fee financing to some extent.
Sebok says it’s unknown how often loans like this are used or how much is lent for legal services each year. However, with online direct-to-consumer loan providers such as Avant and Upstart making this process easier, including for those without good or traditional credit scores, the practice is becoming more common.
Access to Justice?
James Jones Jr. and his wife, Kristina Jones, co-founders of San Francisco-based Court Buddy, an online platform that connects clients to unbundled legal services, see the opinion as a good thing for improving financial access to justice. While the platform didn’t initially connect clients to loans, Kristina Jones explains that they saw users of their tool turn down a $350 court appearance fee because they needed a couple of pay cycles to cover the cost, for example.
“It didn’t sit well with us that we were having to turn people away,” she says.
Now they connect their users to a microlender for loans ranging from $50 to $1,500. The loans are provided at 10 percent interest for three, six or 12 months. Court Buddy does not take a cut of the loan, and the founders would not disclose the name of the lender. The company won the ABA Brown Select award for legal access in 2017.
Opinion 484 “is a recognition that this is an option that consumers need to have with respect to closing the access-to-justice gap,” says James Jones, who practiced law for 10 years before co-founding the company.
Bob Lovinger, president of Port St. Lucie, Florida-based Flexxbuy, a lender platform that helps businesses, including lawyers, find loans for clients, says some lawyers considering his platform would play it safe and check with their local bar for guidance. But not every bar was versed on the subject.
Now, Lovinger says he’ll be able to use the new opinion to help sell attorneys on his company’s services and help the industry.
“When there’s uncertainty, some lawyers that are very careful will say, ‘You know what? I’m going to play it safe and not go forward,’” Lovinger says. “I think [the opinion] clears it up and basically gives attorneys the green light.”
This article appeared in the March 2019 issue of the ABA Journal with the headline "Fee financing: Avoiding pitfalls."