May a California lawyer set up a business that finances another person's lawsuit in exchange for a partial assignment of the proceeds, where the claimant retains independent counsel?
LACBA Ethics Opinion 500: Financing Another Person's Lawsuit
Short answer: Under former California Rules 1-600(A), 3-310(F), 4-200, and 4-210 as analyzed in this opinion and under Bus. & Prof. Code section 6129 as construed, a California lawyer may establish a business that finances another person's lawsuit in exchange for an assignment of an interest in the proceeds, when (1) the claimant is represented by an independent attorney of the claimant's choice, (2) the claimant brings the lawsuit in the claimant's own name, (3) the financier does not control or interfere with the claimant's attorney, and (4) the financier recovers the expenses and a percentage of the total recovery. The claimant's attorney must comply with Rule 3-310(F) if compensated by the financier and Rule 1-600(A)'s independence requirements, and must preserve confidentiality under section 6068(e).
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Los Angeles County Bar Association's view of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
The committee considers a California lawyer who proposes to set up a company financing business and real-estate litigation. The company would pay the claimants' attorneys' fees and costs; in return, the company would recover its investment plus a percentage of any recovery. The claimants would retain their own attorneys; no attorney-client relationship would exist between the financier-lawyer and the claimants. The financier proposes to monitor the cases by reviewing pleadings, attending hearings, and discussing the cases with the attorneys, and to reserve the right to terminate financing on disagreement.
The committee organizes its analysis in four parts.
First, the doctrines of maintenance and champerty do not bar the arrangement. The committee follows Mathewson v. Fitch (Cal. 1863), Estate of Cohen (1944), and 1 Witkin, Summary of California Law, Contracts section 921, which establish that California has never adopted the common-law prohibition. The committee notes that California's Civil Code sections 953 and 954 expressly authorize assignment of choses in action (except certain personal-tort claims, Fireman's Fund Ins. Co. v. McDonald, Hecht & Solberg (1994)). The committee identifies California's substitute protections against champerty's evils: barratry remains a misdemeanor under Penal Code sections 158-159 (Howard v. Superior Court (1975)); frivolous-suit deterrence comes from CCP sections 128.5, 128.7, and malicious-prosecution actions (Sheldon Appel v. Albert & Oliker (Cal. 1989)); and overreaching is regulated by Bus. & Prof. Code section 6146 and former Rule 4-200.
Second, the proposal does not violate Bus. & Prof. Code section 6129 (buying claim as misdemeanor). The committee, following Martin v. Freeman (1963), Crocker Citizens National Bank v. Knave (1967), Cohn v. Thompson (1932), and Caras v. Parker (1957), reads section 6129 narrowly to reach only attorneys who buy a debt or chose in action with the intent to bring suit themselves on it as a party or as the attorney. Where the lawyer obtains an assignment of an interest in proceeds, does not intend to bring suit on it, and the assignor sues in the assignor's own name with independent counsel, section 6129 is not violated.
Third, the syndication-of-lawsuits jurisprudence is open. The committee surveys Saladini v. Righellis (Mass. 1997), which rejected the champerty doctrine but cautioned that judges retain inherent power to scrutinize financing agreements for excessive fees or overreaching. The committee discusses Killian v. Millard (1991), where the First District Court of Appeal reversed on standing without endorsing or rejecting the trial court's finding that syndication violated public policy. The Court of Appeal noted in dictum that trial courts may police the action to prevent investor influence on the lawyer's judgment, including ordering refunds or disqualification, dismissal as frivolous, or dismissal for non-justiciability.
Fourth, the claimant's attorney's duties. Three rules apply. Rule 1-600(A) (no participation in non-governmental organizations furnishing or paying for legal services that interfere with independent judgment) reaches the financing arrangement because the financier is paying for legal services. Rule 3-310(F) (no acceptance of compensation from one other than the client) applies if the attorney is compensated directly by the financier; the rule requires no interference with the attorney's independent judgment, protection of confidentiality under section 6068(e), and the client's informed written consent. If the financier pays the claimant, who then pays the attorney, Rule 3-310(F)'s text does not directly apply, but the independence and confidentiality duties remain via Rule 1-600(A) and section 6068(e). The committee notes that the possibility of revoked financing does not automatically impair independence; revocation may follow from re-evaluation of merits, and Rule 3-700(C)(1)(e) and (f) permit withdrawal where the client insists on conduct contrary to the attorney's advice or breaches the fee obligation.
On confidentiality, the committee identifies Evidence Code section 952's third-party exception: communications shared with a third party "reasonably necessary" to accomplish the purpose for which the lawyer was consulted remain privileged. De Los Santos v. Superior Court (Cal. 1980); Hoiles v. Superior Court (1984). The committee directs the parties to document the agreement to clarify the essential nature of disclosure to the financier, have the financier sign a confidentiality undertaking, and have the attorney report to the financier "to further the interest of the Claimant."
In practice
The opinion holds that, under California's pre-2018 rules and Bus. & Prof. Code section 6129 as it stood in 1999, the four conditions (independent counsel, suit in claimant's name, no financier control, expense-plus-percentage recovery) form the baseline for the financing arrangement. The committee directs the claimant's attorney to evaluate the engagement against Rules 1-600(A) and 3-310(F), to obtain informed written consent if compensated by the financier, to preserve confidentiality under section 6068(e), and to structure disclosure to the financier under Evidence Code section 952's third-party exception.
California's professional-conduct rules were revised effective November 1, 2018; former Rules 1-600(A), 3-310(F), 4-200, and 4-210 correspond substantially to current Rules 5.4(c), 1.8.6, 1.5, and 1.8.5 respectively. The committee's analysis predates the 2018 revisions.
Common questions
Q: Is litigation financing in exchange for a share of the proceeds permitted in California?
A: Per the opinion, yes, on the stated conditions. The committee finds no champerty doctrine in California and reads Bus. & Prof. Code section 6129 not to bar an assignment of an interest in proceeds where the assignor sues in the assignor's own name with independent counsel.
Q: What conditions must the financing agreement satisfy?
A: Per the opinion, four: (1) the claimant is represented by an independent attorney of the claimant's choice; (2) the claimant brings the lawsuit in the claimant's own name; (3) the financier does not control or interfere with the claimant's attorney; (4) the financier's recovery is limited to repayment of advanced expenses and a percentage of the total recovery.
Q: Does the lawyer paying the claimant's lawyer trigger any rule?
A: Per the opinion, Rule 3-310(F) applies if the claimant's lawyer is compensated by the financier. The rule requires no interference with independent judgment, confidentiality under section 6068(e), and the client's informed written consent.
Q: Can the financier monitor the case and discuss it with the lawyer without breaking privilege?
A: Per the opinion, yes, if disclosure is reasonably necessary to accomplish the representation's purpose under Evidence Code section 952. The committee directs the agreement to clarify the essential nature of the disclosure and have the financier sign a confidentiality undertaking.
Q: Can the financier terminate financing if the financier disagrees with the lawyer's tactics?
A: Per the opinion, yes in principle, but the parties must document the relationship to avoid driving a wedge between lawyer and client. The lawyer must continue to exercise independent judgment under Rule 1-600(A). If the client then insists on conduct contrary to the lawyer's advice or breaches the fee obligation, the lawyer may withdraw under Rule 3-700(C)(1)(e) or (f).
Background and rules framework
The opinion interprets former California Rules of Professional Conduct 1-100(B)(2), 1-600(A), 3-310(F), 3-700(C)(1)(e) and (f), 4-200, and 4-210, and Bus. & Prof. Code sections 6068(e), 6129, 6146, 6147, and 6147.5, Civil Code sections 953 and 954, CCP sections 128.5, 128.7, and 2018, Evidence Code sections 952 and 953, and Penal Code sections 158 and 159. It anchors the champerty analysis in Mathewson v. Fitch (Cal. 1863) and Estate of Cohen (1944), the section 6129 analysis in Martin v. Freeman (1963) and Caras v. Parker (1957), and the confidentiality framework in De Los Santos v. Superior Court (Cal. 1980) and Hoiles v. Superior Court (1984).
Citations and references
Rules of Professional Conduct:
- Former California Rule 1-100(B)(2) (definition of "member")
- Former California Rule 1-600(A) (third-party-funded legal services)
- Former California Rule 3-310(F) (third-party compensation)
- Former California Rule 3-700(C)(1)(e) and (f) (permissive withdrawal)
- Former California Rule 4-200 (unconscionable fees)
- Former California Rule 4-210 (advancing litigation costs)
Statutes:
- Bus. & Prof. Code section 6068(e), 6129, 6146, 6147, 6147.5
- Civil Code sections 953, 954
- Code of Civil Procedure sections 128.5, 128.7, 2018
- Evidence Code sections 952, 953
- Penal Code sections 158, 159
Cases:
- De Los Santos v. Superior Court, 27 Cal.3d 677 (Cal. 1980), third-party privilege under section 952
- Estate of Cohen, 66 Cal.App.2d 450 (1944), champerty inapplicable in California
- Fireman's Fund Ins. Co. v. McDonald, Hecht & Solberg, 30 Cal.App.4th 1373 (1994), assignability of choses
- Hoiles v. Superior Court, 157 Cal.App.3d 1192 (1984), business-associate disclosure preserves privilege
- Howard v. Superior Court, 52 Cal.App.3d 722 (1975), barratry
- In re Cummins Estate, 143 Cal. 525 (Cal. 1904), contingent fee not section 6129 violation
- Intex Plastics Sales Co. v. Hall, C-85-2987 JPV (N.D. Cal.), unpublished syndication-of-counterclaim ruling
- Killian v. Millard, 228 Cal.App.3d 1601 (1991), syndication and standing
- Martin v. Freeman, 216 Cal.App.2d 639 (1963), narrow reading of section 6129
- Mathewson v. Fitch, 22 Cal. 86 (Cal. 1863), maintenance unknown to California law
- Saladini v. Righellis, 426 Mass. 231 (Mass. 1997), champerty abandoned but financing scrutinized
- Sheldon Appel Co. v. Albert & Oliker, 47 Cal.3d 863 (Cal. 1989), malicious-prosecution deterrent
Other opinions cited:
- LACBA Formal Opinion 435 (1985)
See also
- LACBA Opinion 510: Lawyer Salaried by Financial Planning Company
- LACBA Opinion 503: Workers' Compensation Referral Fees
- LACBA Opinion 511: Sharing Fees Across Two Law Firms
Source
- Landing page: https://lacba.org/?pg=ethics-opinions
- Original PDF: https://lacba.org/docDownload/2010608