After Arizona eliminated its fee-sharing ban, can a lawyer use a lender that keeps a share of the lawyer's fees, and what must the lawyer disclose?
Apply this to your situation
This page answers the general question as of 2021. Ezel answers yours: whether it's allowed on your facts, under the current rules of professional conduct in your state, with citations.
Plain-English summary
The opinion responds to an Arizona consumer-bankruptcy practice that funds itself through a lender: the lender advances up to 75% of the fees on a per-case line of credit and retains 25% to cover financing and collection, the practice assigns its accounts receivable, and the advances are with recourse to the practice. To collect, the practice gives the lender copies of fee agreements, payment authorizations, pay stubs, bank statements, and other client information. The committee answers five questions.
First, on fee-sharing: effective January 1, 2021, the Arizona Supreme Court eliminated Former ER 5.4 as part of the Task Force on the Delivery of Legal Services reforms, on the view that the prohibition reflected "economic protectionism" rather than public protection. The committee concludes that a lender retaining a percentage of the lawyer's fee is therefore no longer barred as fee-sharing, provided the arrangement does not violate other Rules.
Second, on passing the charge to the client: under ER 1.5 the fee must remain reasonable, and under ER 1.5(b), ER 1.4(b), and Ariz. Op. 01-07 the lawyer must disclose the nature and details of the charge. If the financing makes the lawyer's fee higher than other arrangements, ER 1.0(e), ER 1.4, and ABA Formal Op. 484 require telling the client that, because a client cannot give informed consent without knowing where the fees go and whether the option costs more.
Third, on disclosing client information to the lender: ER 1.6(a) applies, so the lawyer needs informed consent. The committee follows prior Arizona opinions allowing disclosure of accounts-receivable information to a bank or collection agency (Ops. 94-11, 92-04, 89-10) and distinguishes Op. 98-05 (sale of receivables that could be resold in a secondary market, an unwaivable problem) because here the lender finances and collects rather than reselling. Informed consent must cover the full consequences, including possible waiver of attorney-client privilege, and the lawyer's ER 5.3 duties over the lender's handling of the information continue.
Fourth, on conflicts: a recourse arrangement, which can make the lawyer liable for the client's unpaid fees, creates a personal-interest conflict under ER 1.7(a)(2) and ER 1.8(a) that requires informed consent confirmed in writing. Financial incentives to steer the client toward financing (ER 1.7(a)(2)), referrals to a lender in which the lawyer has a financial interest (ER 1.8(m), ER 1.0(n)), and accepting payment from someone other than the client (ER 1.8(f)) each raise conflicts the lawyer must address, ideally by presenting financing as one option among several rather than recommending it.
Fifth, on candor: under ER 3.3(a)(1), 11 U.S.C. 329(a), and Fed. R. Bankr. P. 2016(b), debtor's counsel must disclose the source of compensation to the bankruptcy court. The committee concludes that knowingly failing to disclose a fee-financing arrangement to the court both risks Bankruptcy Code sanctions and violates ER 3.3(a)(1).
In practice
The opinion holds that, under the Arizona Rules as amended effective January 1, 2021 (which eliminated Former ER 5.4), a fee-financing arrangement in which a lender retains part of the lawyer's fee is not per se unethical, but the lawyer must keep the total fee reasonable and fully disclosed under ER 1.5, obtain ER 1.6 informed consent before sharing client information with the lender, obtain written informed consent to waive the conflicts a recourse or referral arrangement creates under ER 1.7 and ER 1.8, and, in consumer bankruptcy, disclose the arrangement to the court under ER 3.3 and the Bankruptcy Code. Because the rules and bankruptcy caselaw in this area continue to develop, verify the current framework before relying on these specifics.
Common questions
Q: Is a lender keeping a percentage of a lawyer's fee still illegal fee-sharing in Arizona?
A: No. The opinion concludes that because the Arizona Supreme Court eliminated Former ER 5.4 effective January 1, 2021, an arrangement in which a nonlawyer lender retains a percentage of the lawyer's fee is permissible, provided it does not run afoul of the other Rules.
Q: Can the lawyer charge the client for the lender's financing and collection cost?
A: Only if the total fee stays reasonable and is disclosed. The opinion applies ER 1.5 and Ariz. Op. 01-07: the lawyer may pass the charge along if the fee remains reasonable, must disclose the nature and details of the charge, and, per ABA Formal Op. 484, must tell the client if financing makes the fee higher than other options.
Q: Can the lawyer hand the client's financial documents to the lender?
A: With the client's informed consent. The opinion applies ER 1.6(a), distinguishing the unwaivable receivables-resale problem in Ariz. Op. 98-05, and requires the lawyer to explain the full consequences, including possible waiver of attorney-client privilege.
Q: What conflict does a recourse loan create?
A: A personal-interest conflict. The opinion explains that recourse (lawyer liable for the client's unpaid fees) places the lawyer adverse to the client under ER 1.7(a)(2) and ER 1.8(a), so the lawyer must obtain informed consent confirmed in writing after explaining how the threat of liability could affect the lawyer's judgment.
Q: Does the lawyer have to tell the bankruptcy court about the financing?
A: Yes. The opinion concludes that under ER 3.3(a)(1) and the disclosure duties of 11 U.S.C. 329(a) and Bankruptcy Rule 2016(b), knowingly failing to disclose a fee-financing arrangement to the court violates the duty of candor and risks sanctions.
Background and rules framework
The opinion sits on Arizona's 2020-2021 elimination of Former ER 5.4 (the fee-sharing prohibition) through Supreme Court Order R-20-0034. It interprets ER 1.5 (reasonable fees; Model Rule 1.5), ER 1.4 and ER 1.0(e) (communication and informed consent; Model Rules 1.4 and 1.0), ER 1.6 (confidentiality; Model Rule 1.6), ER 1.7 and ER 1.8(a), (f), (m) (conflicts of interest; Model Rules 1.7 and 1.8), ER 3.3 (candor to the tribunal; Model Rule 3.3), and amended ER 5.3 (responsibilities regarding nonlawyers; Model Rule 5.3). The federal backdrop is 11 U.S.C. 329 and Federal Rule of Bankruptcy Procedure 2016(b).
Citations and references
Rules of Professional Conduct:
- MR 1.5 / Arizona ER 1.5(a), (b) (reasonable fees; written communication of the basis)
- MR 1.4 / Arizona ER 1.4 and MR 1.0 / ER 1.0(e), (n) (communication; informed consent; business transaction)
- MR 1.6 / Arizona ER 1.6(a) (confidentiality)
- MR 1.7 / Arizona ER 1.7(a)(2), (b) and MR 1.8 / ER 1.8(a), (f), (m) (conflicts of interest)
- MR 3.3 / Arizona ER 3.3(a)(1) (candor to the tribunal)
- MR 5.3 / Arizona ER 5.3 (responsibilities regarding nonlawyers); Former ER 5.4 (abrogated, eff. Jan. 1, 2021)
Statutes and rules:
- 11 U.S.C. 329(a), (b) (disclosure and review of debtor's-counsel compensation)
- Fed. R. Bankr. P. 2016(b), 2017 (compensation statement; review)
Cases:
- In re Milner, 2019 WL 8161155 (Bankr. W.D. Okla. 2019), disclosure duties; fee agreements void where debtor did not understand obligations
- In re Hazlett, 2019 WL 1567751 (Bankr. D. Utah 2019), concerns with the chapter 7 fee system; bifurcation
- In re Wright, 591 B.R. 68 (Bankr. N.D. Okla. 2018), candor and disclosure in consumer bankruptcy
Other opinions cited:
- ABA Formal Op. 484 (2018): lawyers' use of fee-financing companies and brokers
- State Bar of Arizona Ethics Ops. 01-07, 98-05, 94-11, 92-04, 89-10, 70-20 (prior receivables and financing guidance)
- Utah Op. 17-06; Oregon Op. 2005-133; Nevada Op. 36; North Carolina 2018 Formal Op. 4: parallel fee-financing guidance
See also
- ABA Formal Op. 484: Lawyers' Use of Fee-Financing Companies
- ABA Formal Op. 499: Passive Investment in Alternative Business Structures
- ABA Formal Op. 00-416: Purchase of Accounts Receivable From a Client
- ABA Formal Op. 02-427: Security Interest to Secure a Fee
- AZ Ethics Op. EO-19-0006: Departing-Lawyer Per-Client Fee
Source
- Landing page: https://www.azcourts.gov/cld/Attorney-Ethics-Advisory-Committee/Opinions-Issued-by-the-Committee
- Original PDF: https://www.azcourts.gov/Portals/0/26/AEA%20Committee/Issued%20Opinions/EO-20-0003.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
SUPREME COURT OF ARIZONA
ATTORNEY ETHICS ADVISORY COMMITTEE
Ethics Opinion File No. EO-20-0003
The Attorney Ethics Advisory Committee was created in accordance with Rule 42.1.
With the recent elimination of fee-sharing prohibition, a fee-financing arrangement in
which a lender will retain a portion of the lawyer’s fees is permissible. To pass along the cost of
the fees retained by the lender to the client, the lawyer must disclose the charge’s nature and
details. The lawyer must also reveal alternative payment options and the merits and drawbacks of
those alternatives. At all times, the lawyer’s fee must remain reasonable. Provided the lawyer
obtains the client’s informed consent, the lawyer may disclose information necessary to facilitate
a lender’s fee-financing arrangement. The lawyer must inform the client of the full range of
consequences presented by the disclosure of client-related information to a third party, including
the possible waiver of attorney-client privilege if applicable. The lawyer has a continuing
obligation to ensure that information disclosed to a lender is not misused or disclosed to
unauthorized individuals. Fee-financing arrangements raise several potential conflicts of interest.
The lawyer must acquire the client’s informed consent, confirmed in writing, to waive these
conflicts if a significant risk of them occurring is present. In the consumer bankruptcy context, the
lawyer’s duty of candor requires disclosure of all relevant details concerning a fee-financing
arrangement to the bankruptcy court.
FACTUAL BACKGROUND
An Arizona bankruptcy practice funds its operations through a fee-financing arrangement
with a lender. Under the terms of the arrangement, the lender provides the practice with
advances on a line of credit on a per-case basis, eventually advancing 75% of the total
amount of fees payable in connection with each case. In exchange, the lender retains 25%
of the legal fees to cover financing and collection-management services, and the practice
assigns the accounts receivable to the lender. The practice’s fee agreements disclose the
existence of this arrangement as a payment option. If clients opt for the arrangement, they
are required to pay the lender in monthly installments over varying lengths after the
bankruptcy petition is filed. Several other notable provisions of the fee-financing
arrangement include: (1) an agreement that the advances are with recourse to the practice,
meaning the practice is liable for any amount the lender is unable to recover from the
practice’s clients; and (2) to facilitate the lender’s collection activities, the practice provides
the lender with copies of the fee agreement, payment authorization, pay stubs, bank account
statements, and other personal information related to the collection of payments.
There is a dispute over whether a lawyer can ethically participate in the fee-financing arrangement
described above and, if so, the scope of a lawyer’s ethical duties under the Rules of Professional
Conduct while participating in such an agreement.
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QUESTIONS PRESENTED
1. Does a fee financing arrangement that provides for the lender to retain a portion of the
lawyer’s fee constitute impermissible fee sharing?
2. May a lawyer pass financing and collection fees charged by a lender onto a client, and,
if so, what must the lawyer disclose concerning their fee?
3. May a lawyer disclose information concerning the client to a lender to facilitate a
fee-financing arrangement?
4. What conflicts of interest may arise in fee financing-arrangements?
5. What are lawyers’ ethical duties regarding the bankruptcy court when entering a
fee-financing agreement?
APPLICABLE ARIZONA RULES OF PROFESSIONAL CONDUCT (“ER”)
ER 1.0. Terminology
***
(e) “Informed consent” denotes the agreement by a person to a proposed course of conduct
after the lawyer has communicated adequate information and explanation about the
material risks of and reasonably available alternatives to the proposed course of conduct.
***
(n) “Business transaction,” when used in reference to conflicts of interests:
(1) includes but is not limited to:
(i) the sale of goods or services related to the practice of law to existing
clients of a firm’s legal practice;
(ii) a lawyer referring a client to nonlegal services performed by others
within a firm or a separate entity in which the lawyer or the lawyer’s firm
has a financial interest; or
(iii) transactions between a lawyer or a firm and a client in which a lawyer
or firm accepts nonmonetary property or an interest in the client’s business
as payment of all or part of a fee.
(2) does not include:
(i) ordinary fee arrangements between client and lawyer; or
(ii) standard commercial transactions between a lawyer and a client for
products or services that the client generally markets to others and over
which the lawyer has no advantage with the client.
***
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ER 1.4. Communication
(a) A lawyer shall:
(1) promptly inform the client of any decision or circumstance with respect to which
the client’s informed consent, as defined in ER 1.0(e), is required by these Rules;
(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client
to make informed decisions regarding the representation.
Comment
Explaining Matters
[5] The client should have sufficient information to participate intelligently in decisions
concerning the objectives of the representation and the means by which they are to be
pursued, to the extent the client is willing and able to do so. Adequacy of communication
depends in part on the kind of advice or assistance that is involved. . . . The guiding
principle is that the lawyer should fulfill reasonable client expectations for information
consistent with the duty to act in the client’s best interests, and the client’s overall
requirements as to the character of representation. In certain circumstances, such as when
a lawyer asks a client to consent to a representation affected by a conflict of interest, the
client must give informed consent, as defined in ER 1.0(e).
ER 1.5. Fees
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an
unreasonable amount for expenses. The factors to be considered in determining the
reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved,
and the skill requisite to perform the legal service properly
(2) the likelihood, if apparent to the client, that the acceptance of the particular
employment will preclude other employment by the lawyer
(3) the fee customarily charged in the locality for similar legal services
(4) the amount involved and the results obtained
(5) the time limitations imposed by the client or by the circumstances
(6) the nature and length of the professional relationship with the client
(7) the experience, reputation, and ability of the lawyer or lawyers performing the
services and
(8) the degree of risk assumed by the lawyer.
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(b) The scope of the representation and the basis or rate of the fee and expenses for which
the client will be responsible shall be communicated to the client in writing, before or
within a reasonable time after commencing the representation, except when the lawyer will
charge a regularly represented client on the same basis or rate.
ER 1.6. Confidentiality of Information
(a) A lawyer shall not reveal information relating to the representation of a client unless
the client gives informed consent, the disclosure is impliedly authorized in order to carry
out the representation or the disclosure is permitted or required by paragraphs (b), (c) or
(d), or ER 3.3(a)(3).
ER 1.7. Conflict of Interest: Current Clients
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest. A concurrent conflict of interest
exists if:
(2) there is a significant risk that the representation of one or more clients will be
materially limited . . . by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a),
a lawyer may represent a client if each affected client gives informed consent, confirmed
in writing, and:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent
and diligent representation to each affected client:
(2) the representation is not prohibited by law; and
(3) the representation does not involve the assertion of a claim by one client against
another client represented by the lawyer in the same litigation or other proceeding
before a tribunal.
ER 1.8. Conflict of Interest: Current Clients: Specific Rules
(e) A lawyer shall not provide financial assistance to a client in connection with pending
or contemplated litigation, except that:
Page 5
(1) a lawyer may advance court costs and expenses of litigation, the repayment of
which may be contingent on the outcome of the matter . . . .
(f) A lawyer shall not accept compensation for representing a client from one other than
the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independence of professional
judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by ER
1.6.
(m) A lawyer wishing to engage in a business transaction with a client must comply with
both ER 1.7 and 1.8(a) if:
(1) the client expects the lawyer to represent the client in the transaction; or
(2) the lawyer’s financial interest otherwise poses a significant risk that the lawyer’s
representation of the client will be materially limited by the lawyer’s financial
interest in the transaction.
ER 2.1. Advisor
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 client’s situation.
ER 3.3. Candor Toward the Tribunal
(a) A lawyer shall not knowingly:
(1) make a false statement of fact or law to a tribunal . . . .
ER 5.3. Responsibilities Regarding Nonlawyers
(a) A lawyer in a firm shall make reasonable efforts to ensure that the firm has in effect
measures giving reasonable assurance that the conduct of nonlawyers engaged in activities
assisting lawyers in providing legal services and those who have access to attorney-client
information, is compatible with the professional obligations of the lawyer. Reasonable
Page 6
measures include, but are not limited to, adopting and enforcing policies and procedures
designed:
(1) to prevent nonlawyers in a firm from directing, controlling, or materially
limiting the lawyer’s independent professional judgment on behalf of clients or
materially influencing which clients a lawyer does or does not represent; and
(2) to ensure that nonlawyers assisting in the delivery of legal services or working
under the supervision of a lawyer comport themselves in accordance with the
lawyer’s ethical obligations, including, but not limited to, avoiding conflicts of
interest and maintaining the confidentiality of all lawyer client information
protected by ER 1.6.
***
(c) A lawyer shall be responsible for conduct of a nonlawyer that would be a violation of
the Rules of Professional Conduct if engaged in by a lawyer if:
(1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the
conduct involved; or
(2) the lawyer has managerial authority in the firm and knows of the conduct at a
time when its consequences can be avoided or mitigated but fails to take reasonable
remedial action.
ER 5.4. Professional Independence of a Lawyer (Abrogated August 27, 2020, Effective
January 1, 2021) (“Former ER __”)
(a) A lawyer or law firm shall not share legal fees with a nonlawyer . . . .
***
(c) A lawyer shall not permit a person who . . . pays the lawyer to render legal services
for another to direct or regulate the lawyer’s professional judgment in rendering such legal
services.
RELEVANT ARIZONA ETHICS OPINIONS
State Bar of Arizona, Rules of Professional Conduct Committee, Opinion Nos. (“Ariz.
Ethics Op. _”) 01-07, 98-05, 94-11, 92-04, 89-10, 71-34, 70-20.
OTHER RELEVANT ETHICS OPINIONS AND AUTHORITY
R-20-0034 Petition to Restyle and Amend Supreme Court Rule 31; Adopt New Rule 33.1;
and Amend Rules 32, 41, 42 (Various ERs from 1.0 to 5.7), 46–51, 54–58, 60, and 75–76
(“2020 Petition) (Jan. 2020) (Full Text Available Here).
Page 7
Arizona Supreme Court No. R-20-0034, Order Amending the Arizona Rules of the
Supreme Court and the Arizona Rules of Evidence (“Ariz. Sup. Ct. Order No. R-20-0034”)
(Aug. 2020) (Full Text Here)
Task Force on the Delivery of Legal Services, Report and Recommendations (“Task Force
Report”) (Oct. 2019) (Full Text Here)
ABA Committee on Ethics and Professional Responsibility, Formal Opinion No. 484
(“ABA Formal Op. 484”) (Nov. 2018) (Full Text Here).
Maine Board of the Overseers of the Bar Professional Ethics Commission Opinion 193
(“Maine Op. 193”) (Dec. 2007) (Full Text Here).
State Bar of Nevada, Standing Committee on Ethics and Professional Responsibility,
Formal Opinion No. 36 (“Nevada Op. 36”) (Jan. 2007) (Full Text Here).
New York State Bar Association, Committee on Professional Ethics, Formal Opinion No.
2018-5 (“New York Op. 2018-5”) (July 2018) (Full Text Here).
State Bar of North Carolina, 2018 Formal Ethics Opinion 4 (“North Carolina Op. 4”) (Apr.
2018) (Full Text Here).
State Bar of Oregon, Formal Ethics Op. 2005-133 (“Oregon Op. 2005-133”) (Revised
2016) (Full Text Here).
State Bar of Utah, Ethics Advisory Opinion Committee, Opinion No. 17-06 (“Utah Op.
17-06”) (Aug. 2018) (Full Text Here).
State Bar of Utah, Ethics Advisory Opinion Committee, Opinion No. 97-11 (“Utah Op.
97-11”) (Dec. 1997) (Full Text Here).
Virginia State Bar Standing Commission on Legal Ethics, Advisory Opinion 1764,
(“Virginia Op. 1764”) (May 2002) (Full Text Here).
Daniel E. Garrison, There’s No Such Thing As Too Much Information: Disclosure of
Bifurcation and Financing in Chapter 7 Cases, 38-JUL Am. Bankr. Inst. J. 20 (2019) (Full
Text Available on Westlaw).
Adam D. Herring, Problematic Consumer Debtor Attorneys’ Fee Arrangements and the
Illusion of “Access to Justice”, 37-OCT Am. Bankr. Inst. J. 32 (2018) (Full Text Available
on Westlaw).
American Bankruptcy Institute, Final Report of the ABI Commission on Consumer
Bankruptcy (2019) (Full Text Here).
Steven Garber, Rand Institute for Civil Justice, Law, Finance and Capital Markets
Program, Alternative Litigation Financing in the United States: Issues, Knowns, and
Unknowns 7–16 (2010) (Occasional Paper series) (Full Text Here).
American Bar Association Commission on Ethics 20/20, Informational Report to the
House of Delegates (2012) (Full Text Here).
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OPINION
The topic addressed in this opinion stands at the nexus of two recent developments within
the United States’ legal system and presents varying ethical issues for lawyers today.
The first is third-party litigation funding, referred to as “alternative litigation finance,” or “ALF,”
by the American Bar Association (“ABA”), in the United States. The numerous and evolving types
of ALF arrangements defy a single definition. Still, the ABA characterizes them most generally as
“mechanisms that give a third party (other than the lawyer in the case) a financial stake in the
outcome of the case in exchange for money paid to a party in the case.” American Bar Association
Commission on Ethics 20/20, Informational Report to the House of Delegates 5 (2012). These
transactions often involve sophisticated financial entities and have been the subject of many
studies, praise, criticism, and scrutiny by the legal community, including various states’ ethics
committees. Id. at 1–2, nn.1–4 (collecting commentary and ethics opinions on the subject); see
also Steven Garber, Rand Institute for Civil Justice, Law, Finance and Capital Markets Program,
Alternative Litigation Financing in the United States: Issues, Knowns, and Unknowns 7–16 (2010)
(Occasional Paper series) (describing the ALF industry).
The second is the current state of the law in the federal bankruptcy system, particularly the
law governing chapter 7 consumer bankruptcies. Due to language within the Bankruptcy Code and
caselaw interpreting it, lawyers offering representation in chapter 7 cases face significant hurdles
in collecting fees for their services. See Chrystin Ondersma, Small Debts, Big Burdens, 103Minn.
L. Rev. 2211, 2231–38 (May 2019) (providing a summary of the history and present situation
surrounding these hurdles). These challenges have incentivized consumer bankruptcy lawyers to
require up-front retainers to represent potential chapter 7 debtors, a cost that is impossible for
many individuals contemplating bankruptcy to afford. See Hon. Henry Callaway & Jonathan Petts,
Too Broke for a Fresh Start, 38-FEB Am. Bankr. Inst. J. 24, 24 (2019). The situation is aptly
summarized by a recent report compiled by the American Bankruptcy Institute:
How consumers pay for legal representation in bankruptcy is one
of the most important issues facing the bankruptcy system.
Consumers who cannot pay either cannot access the bankruptcy or
must file pro se, and studies show pro se filers get inferior
outcomes. Another study suggests consumers are increasingly
using “no money down” chapter 13 cases that allow payments of
their attorney’s fees through the chapter 13 plan, although such
filers end up paying more and are less likely to receive a bankruptcy
discharge. A bankruptcy system that works only for those who can
pay for legal representation does not further the American ideal of
equal justice under law.
American Bankruptcy Institute, Final Report of the ABI Commission on Consumer Bankruptcy 89–
90 (2019) (footnotes omitted); see also In re Hazlett, No. 16-30360, 2019 WL 1567751, at *5-7
(Bankr. D. Utah Apr. 10, 2019) (expressing concerns with the current state of the chapter 7
bankruptcy system).
Page 9
The confluence of these developments has resulted in the increasingly prevalent use of
fee-financing arrangements with third-party financers to provide consumer bankruptcy lawyers
with immediate payment and debtors an opportunity to delay paying the fees until after a discharge
of debt is received. 1 Scrutiny of this practice abounds, however, and critics contend these
fee-financing arrangements are designed to benefit lawyers primarily, not debtors, and that they
encourage improper behavior such as the inflation of fees and the use of deceptive practices to
convince debtors to agree to the arrangements. Adam D. Herring, Problematic Consumer Debtor
Attorneys’ Fee Arrangements and the Illusion of “Access to Justice”, 37-OCT Am. Bankr. Inst. J.
32, 58–59 (2018); see also American Bankruptcy Institute, supra at 91 (expressly disapproving
“fee factoring agreements between debtors’ counsel and third-party collectors”). This scrutiny has
triggered significant litigation within the bankruptcy courts. See, e.g., In re Carr, 613 B.R. 427,
434–42 (Bankr. E.D. Ky. 2020); In re Milner, Case No. 19-11539-SAH, 2019 WL 8161155, at
14–23 (Bankr. W.D. Okla. 2019), Hazlett, 2019 WL 1567751, at 11–12; In re Wright, 591 B.R.
68, 89–96 (Bankr. N.D. Okla. 2018).
By addressing the ethical questions presented by the fee-financing arrangement detailed
above, the opinion provides useful guidance to lawyers preparing to or already navigating the
troubled waters generated by fee-financing arrangements in consumer bankruptcy proceedings in
Arizona. Fee-financing arrangements with features akin to the arrangement at-issue here are not
per se unethical. Still, they present numerous ethical issues that lawyers must carefully resolve to
avoid running afoul of Professional Conduct Rules. Lawyers must assess their ability to participate
ethically in a fee-financing arrangement—whether it be one that resembles the arrangement
considered here or something different—on a case-by-case basis, and must adhere to the principles
of professional independence, adequate disclosure, candor, and informed consent when
participating in such an arrangement.
1 The rise of fee-financing arrangements in consumer bankruptcy cases is hand-in-hand with the
increased use of “bifurcated” fee agreements, which call for clients to enter two separate fee agreements—
one before the petition for bankruptcy is filed, and one after. Adam D. Herring, Problematic Consumer Debtor
Attorneys’ Fee Arrangements and the Illusion of “Access to Justice”, 37-OCT Am. Bankr. Inst. J. 32, 58 (2018).
Under the pre-petition agreement, the lawyer agrees to file a “skeletal” petition for little or no fee. After the
skeletal petition is filed, the client and lawyer enter a second fee agreement that covers a broad range of
services, including services that might, in usual circumstances, be done before the petition is filed. Id. The
goal of the bifurcated fee model is to avoid discharge of the debt owed for the lawyer’s services. Id.
Although the bankruptcy courts have both expressed praise and skepticism of this practice, it appears that
none has yet held it per se impermissible. See, e.g., In re Hazlett, 2019 WL 1567751, at 7–10 (distinguishing
unbundling services from bifurcated fee agreements and approving bifurcation subject to lawyer’s ethical
obligations); In re Grimmett, No. 16-01094-JDP, 2017 WL 2437231, at 4–7 (Bankr. D. Idaho 2017)
(characterizing such agreements as “unbundling” and expressing skepticism). Because the ethical propriety
of such agreements was not raised in the opinion request, however, we do not address them further in this
opinion.
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- Does a fee-financing arrangement that provides for the lender to retain a portion of
the lawyer’s fee constitute fee-sharing?Previously, a lawyer was prohibited from “shar[ing] legal fees with a nonlawyer,” exceptin limited exceptions. Former ER 5.4. Because the fee-financing arrangement described in the
opinion request provides that the lender will retain 25% of the advance proceeds used to pay the
lawyer’s fee, an issue arose concerning whether such an arrangement constituted impermissible
fee-sharing under this rule. However, effective January 1, 2021, the Arizona Supreme Court
eliminated Former ER 5.4 as part of sweeping changes to the Rules of Professional Conduct
proposed by its Task Force on the Delivery of Legal Services (the “Task Force”). Ariz. Sup. Ct.
Order R-20-0034 at 2; 2020 Petition at 1. The Task Force recommended eliminating Former ER
5.4 after finding “[t]he prohibition was not rooted in protecting the public but in economic
protectionism,” and that “it has been identified as a barrier to innovation in the delivery of legal
services and contributing to the justice gap.” 2020 Petition at 9; see also Task Force Report at
10-16. As stated by the Task Force, the elimination of Former ER 5.4
means nonlawyers could partner with lawyers in an entity that solely
provides legal services or in an entity that provides legal services
among non-legal services. A nonlawyer could make a passive
investment in a legal-services entity. A lawyer even could pay
nonlawyer personnel a percentage of fees earned by the law firm on
a particular case.
2020 Petition at 11 (emphasis added). Thus, the fee-financing arrangement at issue here is no
longer subject to Former Rule 5.4 and—provided the arrangement does not run afoul of any other
Rules of Professional Conduct—it is permissible for a nonlawyer lender to retain a percentage of
a lawyer’s fee in exchange for services rendered. As recognized by the Task Force and discussed
below, however, the goal of maintaining lawyers’ professional independence, the confidentiality
of client information, and conflict-free representation remain paramount. 2 See 2020 Petition at 11.
2. May a lawyer pass financing and collection fees charged by a lender onto a client,
and, if so, what must the lawyer disclose concerning their fee?The fee-financing arrangement described in this opinion raises two ethical questionsconcerning the fee charged under such arrangements. First, may a lawyer include the amount
retained by the lender in their fee? Second, if a lawyer can, what disclosures must they make to a
client regarding such charges and the fee generally?
ER 1.5(a) provides that a “lawyer shall not make an agreement for, charge, or collect an
unreasonable fee or an unreasonable amount of expenses.” When entering into a fee agreement
with a client, a lawyer must communicate to the client in writing “the basis or rate of the fee and
2
The Arizona Supreme Court also adopted a regulatory framework for a so-called alternative business structure
(“ABS”), or an entity that “provides legal services to third parties and in which a nonlawyer has an economic interest
or decision-making authority.” See Ariz. Code. Jud. Admin. § 7-209. This opinion does not address the ethical
propriety and ethical considerations surrounding an ABS that combines both legal and litigation-funding services.
Additionally, this opinion does not apply to excuse compliance with the ABS rules and/or structure, as applicable.
Page 11
expenses for which the client will be responsible.” ER 1.5(b). A lawyer must also “explain a matter
to the extent reasonably necessary to permit the client to make informed decisions regarding the
representation.” ER 1.4(b); see also ER 1.4 cmt. 5. When a lawyer wishes to pass charges not
associated with their services onto a client, the lawyer must inform the client of the details to the
extent reasonably necessary to allow the client to make an informed decision concerning whether
to agree to pay those expenses. Ariz. Ethics Op. 01-07.
If a fee-financing arrangement requires that a discount or service charge be deducted from
the lawyer’s accounts receivable, the lawyer may only pass that charge onto the client if his or her
fee remains reasonable. Utah Op. 17-06. Like all other lawyers, a consumer bankruptcy lawyer
participating in a fee-financing arrangement remains subject to the factors governing the
reasonableness of a fee outlined in ER 1.5(a). Id.
The lawyer must also inform the client of the nature and details of the charge. Ariz. Ethics
Op. 01-07. If passing the service charge or discount onto the clients causes a lawyer to charge a
higher fee for a fee-financing arrangement than other fee arrangements, the lawyer must inform
the client of that fact. ABA Formal Op. 484. In other words, a potential client cannot give informed
consent to a fee-financing arrangement without information concerning where the fees will be
allocated and whether selecting that arrangement will result in a greater expense to the client than
an alternative fee arrangement. ER 1.0(e) (informed consent requires “adequate information” and
information on “available alternatives”); ER 1.4(a). No matter the reasonableness of the fee
charged, a lawyer may not conceal expenses unrelated to the legal services it agrees to provide a
client or fail to provide the client with information concerning other fee arrangements. The lawyer
must convey this information to the client in as clear, direct, and simple manner as possible. ER
1.0(e); ER 1.4 cmt. 5; see also Milner, 2019 WL 8161155, at *15–18 (holding fee agreements void
where lawyer’s fee structure led the court to “seriously doubt[] that [the] [d]ebtor fully understood
her rights or her obligations and to whom they were owed”). If these requirements are met and the
client, now properly informed, gives their consent to bear the charge’s cost, the lawyer may then
account for the charge in their fee, so long as the overall fee remains reasonable.
3. May a lawyer disclose information concerning the client to a lender to facilitate a
fee-financing arrangement?
Because the fee-financing arrangement here involves furnishing the lender with
information concerning clients—including copies of the fee agreement, payment authorization,
pay stubs, bank account statements, and personal information related to the collection of
payments—the issue arises whether the lawyer may disclose such information to a third party. The
disclosure of such information falls within the scope of ER 1.6(a), which provides that “[a] lawyer
shall not reveal information relating to the representation of a client unless the client gives
informed consent.”
Several past Arizona ethics opinions have concluded that a lawyer may disclose
information such as a list of their accounts receivable, including the name of the person or
company owning the account, the account balance, and the age of the account, to a bank to
facilitate acquiring a line of credit or to assist a collection agency in collecting delinquent fees.
Ariz. Ethics Op. 94-11; Ariz. Ethics Op. 92-04; Ariz. Ethics Op. 89-10.
Page 12
On the other hand, Arizona Ethics Opinion 98-05 concluded the sale of a client’s account
receivable to a finance company created an ER 1.6(a) violation that could not be waived by client
consent. The opinion’s chief concern was that, under the terms of the proposed agreement at-issue
in that opinion, the company was permitted, in its sole discretion, to resell the accounts receivable
it purchased from the lawyer in the marketplace. The opinion found:
The lawyer could not conceivably anticipate and communicate to the client all of
the factual permutations and legal implications of such a sale to a factor. It is
unlikely any lawyer could assess the uncertainty of client accounts receivable being
sold into the secondary market replete with the time cards, file, correspondence,
legal memoranda, and all other confidential matters relating to the client,
sufficiently, for the client to appreciate the significance of what he is being asked
to do.
However, the rationale of Opinion 98-05 is unpersuasive because the disclosures contemplated by
a fee-financing arrangement such as the one at-issue here are not nearly so broad or far-reaching.
The lender is not purchasing accounts receivable that can then be resold in a secondary market.
Instead, the lender acts as the financer of a line of credit and a collection service for the accounts
receivable assigned to it as security for the loans. Thus, the lender has no right to engage in the
activities that would lead to disclosures the lawyer could not possibly “anticipate and communicate
to the client.” Instead, the disclosures involved here fall within the types of disclosures long found
ethically permissible in Arizona, subject to the requirement that the lawyer obtains informed
consent from the client to disclose the information to the lender. And this conclusion aligns our
interpretation of ER 1.6(a) in this context with those adopted by the opinions of several other
jurisdictions, including Utah, Oregon, and the ABA. Utah Op. 17-06; Oregon Op. 2005-133; ABA
Formal Op. 484.
Thus, ER 1.6 permits a lawyer to disclose information of the type described here to a lender
provided they obtain the client’s informed consent. In receiving the client’s informed consent,
however, the lawyer must inform the client of the full range of consequences that may result from
the disclosure of financial information related to the representation. This includes the potential
waiver of attorney-client privilege, provided such information is not already subject to public
disclosure as part of the bankruptcy process. ABA Formal Op. 484.
The lawyer must also be aware that assigning the accounts receivable to a lender does not
obviate their responsibility to limit the disclosure of information falling within the ambit of ER
1.6 or their ethical duties generally. See Ariz. Ethics Op. 94-11 (“[A] lawyer is legally and ethically
responsible for the conduct of the agents of a collection agency and may not ‘assist or induce’
another to act unethically, if a lawyer does turn over delinquent accounts to a collection agency.”).
Newly amended ER 5.3, adopted alongside the elimination of Former Rule 5.4, provides that
lawyers must make reasonable efforts to ensure nonlawyers assisting in the delivery of legal
services engage in conduct that aligns with the lawyer’s ethical obligations, including “avoiding
conflicts of interest” and “maintaining the confidentiality of all lawyer client information protected
by ER 1.6.” ER 5.3(a)(2); ER 5.3(c)(1) (attorney liable for conduct by nonlawyer violating Rules
of Professional Conduct if lawyer ordered or ratified such conduct); see also Petition at 14 (“[T]he
Page 13
proposed amendments to ER 5.3(a) instruct that all lawyers in a firm must ensure that the firm has
in effect measures that provide reasonable assurance that the conduct of all
nonlawyers . . . comports with a lawyer’s professional obligations.”).
4. What conflicts of interest may arise in fee-financing arrangements?
Potential conflicts of interest may arise during the execution of the fee-financing
arrangement contemplated here. ER 1.7(a)(2) provides that a concurrent conflict of interest exists
if “there is a significant risk that the representation of one or more clients will be materially limited
by the lawyer’s responsibilities to . . . a third person or by a personal interest of the lawyer. ER
1.8(a) likewise provides that a lawyer “shall not . . . knowingly acquire a[] . . . pecuniary interest
adverse to a client . . . .”
A potential conflict is present if, under the terms of the fee-financing arrangement
presented here, the lender’s advances are recourse loans to the lawyer, meaning the lawyer can be
held liable for any fees the lender fails to recover from the client. The recourse nature of the
arrangement places the lawyer in a position directly adverse to the client’s should the client be
unable to pay the lender or dispute some aspect of the lender’s collection activities. This, in turn,
raises the possibility that the lawyer will place their personal financial and pecuniary interest in
avoiding liability for the client’s unpaid fees ahead of the client’s interests. See ER 1.7(a)(2); ER
1.8(a). Prior Arizona ethics opinions considering third-party financing arrangements have
consistently stated that the arrangements must be without recourse to the lawyer to avoid such
conflicts of interest. See Ariz. Ethics Op. 98-05; Ariz. Ethics Op. 89-10; Ariz. Ethics Op. 70-20.
However, these opinions did not address whether a conflict arising out of a recourse loan could be
waived under ER 1.7(b) and ER 1.8(a).
A lawyer wishing to enter into a fee-financing arrangement with a client and a lender that
involves an advance or loan with recourse to the lawyer must comply with the process for waiving
the conflicts of interest presented by such an arrangement under both ER 1.7(b) and ER 1.8(a). To
properly acquire the client’s informed consent, confirmed in writing, the lawyer must inform the
client of the nature and details of the recourse loan and the possibility that the lawyer’s judgment
could be affected by the threat of liability. Nevada Op. 36 (“Counsel should explain that incurring
debt in connection with a case could affect counsel’s assessment of what constitutes reasonable
resolution of the case and thus affect counsel’s advice to the client regarding settlement.”).
Next, a conflict of interest may arise from the financial incentives a fee-financing
arrangement may provide a lawyer. ER 1.7(a)(2). As stated in ABA Formal Opinion 484:
“[T]he . . . risk is that the lawyer will 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.” See also Oregon Op. 2005-133.
Again, the client’s conflict may be waived, provided the lawyer complies with the waiver
provisions of ER 1.7(b). But a lawyer will avoid such conflicts altogether if they refrain from
recommending or referring a fee-financing arrangement to a client but instead first present it as
one of several payment options for the client to consider. ABA Op. 484; North Carolina Op. 4. If
the client expresses interest in a fee-financing arrangement, the lawyer may then supply more
Page 14
detailed information with little fear that they have placed a thumb on the scale in favor of one
payment option over the other.
Third, a conflict could arise if the lawyer refers the client to a lender in which the lawyer
has a financial interest if (1) the client expects the lawyer to represent them in dealings with the
lender or (2) the lawyer’s financial interest in the lender poses a significant risk to the lawyer’s
professional independence. ER 1.8(m); ER 1.0(n)(ii). In such a situation, the lawyer must comply
with ER 1.7 and ER 1.8(a). ER 1.8(m). Importantly, the Committee believes the term “financial
interest” as used in ER 1.8(m) and ER 1.0(n) is intended to be broad and includes scenarios ranging
from a lawyer owning a stake in an entity to a lawyer’s financial interest in maintaining a beneficial
relationship with a particular entity. See Ariz. Ethics Op. 01-07.
Finally, because the fee-financing arrangement here means the lawyer is effectively
accepting compensation from the lender for representing the client and not directly from the client,
the lawyer must comply with the requirements listed in ER 1.8(f). This means that: (1) the client
must give informed consent to the arrangement; (2) there can be no interference with the lawyers
“independence of professional judgment or with the client-lawyer relationship”; and (3) as
described above, information related to the representation must be protected as required by ER
1.6. ER 1.8(f).
A lawyer entering a fee-financing arrangement, such as the one contemplated here, must
be alert to the possibility of several conflicts of interest. Nevertheless, in each instance, the client
may give informed consent to the representation even in the face of such conflicts, provided the
requirements contained within ERs 1.7 and 1.8 are satisfied.
5. What are lawyers’ ethical duties regarding the bankruptcy court when entering a
fee-financing agreement?
ER 3.3(a)(1) provides that an attorney shall not knowingly “make a false statement of fact
or law to a tribunal . . . .” Comment 3 to the rule further explains that:
an assertion purporting to be on the lawyer’s own knowledge, as in
an affidavit by the lawyer or in a statement in open court, may
properly be made only when the lawyer knows the assertion is true
or believes it to be true on the basis of a reasonably diligent inquiry.
There are circumstances where failure to make a disclosure is the
equivalent of an affirmative misrepresentation.
In every bankruptcy case, the debtors’ counsel must submit a statement to the court disclosing the
source of any compensation paid or agreed to be paid to counsel. 11 U.S.C. § 329(a); Fed. R.
Bankr. P. 2016(b); Wright, 519 B.R. at 89–90. These responsibilities are critical to the bankruptcy
process. The bankruptcy court is empowered to review these disclosures and the reasonableness
of the fee charged. 11 U.S.C. § 329(b); Fed. R. Bankr. P. 2017. As summarized succinctly by the
Bankruptcy Court for the Northern District of Texas:
The honest and comprehensive disclosure of compensation
payments plays a vital role in maintaining the integrity of the
Page 15
bankruptcy system. Moreover, it is only upon full and complete
disclosure of compensation payments under section 329(a) of the
Bankruptcy Code and Rule 2016 that this court is able to review and
determine whether such payments were excessive under section
329(b) of the Bankruptcy Code and Rule 2017 . . . . Because of the
importance of this process, a bankruptcy court retains the power,
authority, and duty to police the disclosure and reporting
requirements set forth in the Bankruptcy Code and Rules with its
sanctioning powers, including the power to order the
disgorgement of all sums received by counsel and the forfeiture of
all compensation paid to counsel in a particular case.
In re Netoche Brigham Fair, Case No. 15-33400-SGJ-13, 2016 WL 3027264, at 13 (Bankr. N.D.
Tex. May 18, 2016) (footnotes omitted); see also Wright, 591 B.R. at 95 (“This Court has
previously noted the bankruptcy system is a fragile one, built on the principles of full and candid
disclosure. Its operation and survival rely on the integrity and professionalism of its practitioners.”
(footnote omitted)). Given the affirmative obligation placed on debtors’ counsel in bankruptcy
proceedings to disclose any source of compensation paid or agreed to be paid to counsel in
connection with the proceedings, a lawyer who knowingly fails to disclose the use of a
fee-financing arrangement to the bankruptcy court not only risks sanctions under the Bankruptcy
Code and Rules but also would violate their ethical duty of candor under ER 3.3(a)(1).
To avoid violating their ethical duty of candor to the tribunal, lawyers must disclose the
nature and details of a fee-financing arrangement to the bankruptcy court. As stated by the
Bankruptcy Court for the Western District of Oklahoma: “‘Disclosure, disclosure, disclosure,’
should be every debtor’s counsel’s mantra . . . .” Milner, 2019 WL 8161155, at 14; see also
Daniel E. Garrison, There’s No Such Thing As Too Much Information: Disclosure of Bifurcation
and Financing in Chapter 7 Cases, 38-JUL Am. Bankr. Inst. J. 20, 68 (2019). To help lawyers
understand the level of disclosures required, lawyers must heed the lessons found within the
numerous recent bankruptcy court decisions addressing this issue. See, e.g., Carr, 613 B.R. at 434–
42; Milner, 2019 WL 8161155, at 14–20; Hazlett, 2019 WL 1567751, at 11–12; Wright, 591
B.R. at 89–96.
CONCLUSION
Although fee-financing arrangements akin to the one considered here are not per se
unethical under the Rules of Professional Conduct, they present numerous pitfalls that lawyers
must take care to avoid. Lawyers must maintain their professional independence and remain
vigilant for conflicts of interest when engaging in such arrangements. They must also provide
clients with the information necessary to make an informed choice to participate in a fee-financing
arrangement, including detailed explanations of the nature and details of their fee, the availability
of other options, and the information to be disclosed to the lender. These explanations must be
presented in a direct, simple, and concise manner. In the consumer bankruptcy context, lawyers
must affirmatively disclose the existence and details of a fee-financing arrangement to the
bankruptcy court.
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