Legal Ethics

Does your client need fee financing? New ABA ethics opinion provides guidance

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Lawyers may refer clients to fee financing companies even if they own a financial interest in the lender or broker, according to a new Formal Opinion from the ABA Standing Committee on Ethics and Professional Responsibility.

Released on Tuesday, Formal Opinion 484 hopes to create clarity regarding attorney fee financing that assists in closing the access to justice gap.

“By some estimates, more than 75 percent of low-income and middle-income individuals have legal needs that go unmet for financial reasons,” said 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 document 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 five and 15 percent. In another instance, a lawyer will pay an initial fee to a finance company so 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 lender or broker 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 litigation financing, which is a nonrecourse cash advance to a litigant in exchange for a percentage of the judgement or settlement. Being that this opinion only covers instances where a lawyer is being paid by money a client borrowed, Rule 5.4(c) (Professional Independence of a Lawyer) does not apply.

From December’s ABA Journal: Other People’s Money: Rise of litigation finance companies raises legal and ethical concerns.

If a lawyer recommends a fee financing or brokerage company which she has an ownership or financial stake in, then the lawyer must disclose the relationship, ensure fair and reasonable terms, advise the client seek independent legal advice on the transaction and obtain the client’s informed and written consent.

The Formal Opinion 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, that 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.”

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