Could a Maine lawyer use a bank line of credit to advance litigation costs and pass the interest on to the client?

Plain-English summary

An attorney asked whether the Bar Rules permitted advancing litigation costs through a bank line of credit and passing the interest and other financing costs to the client. Two financing structures were described: separate credit lines for individual cases, or a single line of credit for several cases with the lender tracking each draw and separately calculating interest so the interest could be tied to individual cases. The Commission concluded the practice was permissible under certain conditions.

The inquiry implicated Maine Bar Rule 3.7(d), which permitted a lawyer to advance or guarantee the expenses of litigation (court costs, investigation, medical examination, and obtaining and presenting evidence). Reasoning that the rule plainly allowed advancing such funds, the Commission addressed whether the lawyer's financing costs could be charged to the client. Where the interest and financing costs could be directly linked to a specific case, the Commission saw no basis in the Bar Rules for requiring the lawyer to absorb them, noting that other jurisdictions had reached similar conclusions. The Commission drew on its prior financing opinions (Opinions 138, 144, and 152), which had approved various client-financing arrangements subject to safeguards.

The Commission concluded the lawyer should not profit from the financing but should pass through the financing expense like any other disbursement, and identified six safeguards: (1) the client's informed consent, including how and when advances would be financed, the lender's name, and the expected costs and interest rate; (2) in contingent-fee or limited-representation cases, the client's responsibility for interest and financing costs spelled out in the written agreement; (3) a financing arrangement that accurately allocated interest and costs to specific clients, not a single line of credit with estimated allocation; (4) no lien or security interest in the client's claim without the client's informed consent, and no deprivation of the client's right to challenge interest and costs through fee arbitration under Rule 9.3; (5) reasonable interest and financing costs (to avoid an excessive fee under Rule 3.3(a)); and (6) no disclosure of client confidences or secrets to the financing institution without the client's informed written consent. The opinion also noted that Rule 3.7(c) barred the lawyer from acquiring a proprietary interest in the subject matter of the litigation to secure repayment.

Currency note

This opinion was issued in 2001, before Maine's replacement of the former Maine Bar Rules with the Maine Rules of Professional Conduct (effective August 1, 2009). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer charge clients the interest on borrowed litigation costs?

A: Yes, where tied to the case. The opinion concluded that when interest and financing costs could be directly linked to a specific case, nothing in the Bar Rules required the lawyer to absorb them, so they could be passed through as a litigation cost.

Q: Could a lawyer profit from the financing arrangement?

A: No. The opinion stated the lawyer should not profit from the financing but should simply pass through the financing expense to the client, like any other disbursement.

Q: What did the client have to agree to?

A: Informed consent to the financing. The opinion required, at a minimum, advising the client how and when advances would be financed, the lender's name, and the expected costs including the interest rate, and, in contingent-fee or limited-representation cases, spelling out the client's responsibility for interest in the written agreement.

Q: Could the lender take a security interest in the client's claim?

A: Not without informed consent. The opinion provided that the lawyer could not let the financing institution acquire a lien or security interest in the client's claim without the client's informed consent, and that the lawyer could not acquire a proprietary interest in the litigation under Rule 3.7(c).

Background and rules framework

The opinion interpreted Maine Bar Rule 3.7(d) (a lawyer may advance or guarantee the expenses of litigation), Rule 3.7(c) (no proprietary interest in the subject matter of litigation), Rule 3.3(a) (no excessive fee), Rule 3.4(f)(2)(i) (avoiding an interest adverse to the client), and Rule 3.6(h)(1) (protecting client confidences). These correspond to ABA Model Rule 1.8(e) (financial assistance to a client in litigation), Model Rule 1.5 (reasonable fees), Model Rule 1.8(a) and 1.8(i) (business transactions with, and proprietary interests in a client's cause of action), and Model Rule 1.6 (confidentiality). The Commission relied on its prior Opinions 138, 144, and 152, and on authorities from Arizona, Ohio, and Louisiana.

Citations and references

Rules of Professional Conduct:

• Model Rules 1.8(e), 1.5, 1.8(a), 1.8(i), 1.6
• Maine Bar Rules 3.7(d), 3.7(c), 3.3(a), 3.4(f)(2)(i), 3.6(h)(1), 9.3

Cases:

• Chittenden v. State Farm Mut. Auto. Ins. Co., 2000-C-414 (La. May 15, 2001), litigation-cost financing.

Other opinions cited:

• Maine Prof. Ethics Comm'n Ops. 138, 144, and 152.
• Ariz. Op. 2001-07 (Sept. 2001); Ohio Op. 2001-3 (June 7, 2001).

See also

• NY State Bar Op. 754: Passing On Litigation Loan Interest
• NY State Bar Op. 464: Contingent Repayment of Litigation Costs
• NY State Bar Op. 1044: Advancing Litigation Expenses

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89473

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Issued by the Professional Ethics Commission

Date Issued: December 14, 2001

Facts and Question

An attorney has requested an opinion on whether it is ethically permissible under the Bar rules to advance litigation costs through the use of a bank line of credit, passing interest and other costs of financing onto the client. The attorney has provided written material suggesting two alternative ways for financing litigation costs. Each would allow for interest to be tracked to individual cases. The first involves the use of separate credit lines for individual cases. The second involves the use of a single line of credit for more than one case, with the financing institution tracking each draw to an individual case and separately calculating interest on each draw so that interest can also be tracked to individual cases.[1]

Opinion

In the view of the Professional Ethics Commission, it is permissible under the Bar Rules for an attorney to finance litigation costs, and pass the interest and other costs of financing onto the client, under certain conditions. The attorney?s inquiry calls into question Maine Bar Rule 3.7(d), which provides:

Financial assistance. While representing a client in connection with contemplated or pending litigation, a lawyer may not advance or guarantee financial assistance to the client, except that a lawyer may advance or guarantee the expenses of litigation, including court costs, expense of investigation, expenses of medical examination, and expenses of obtaining and presenting evidence.

This rule unambiguously permits a lawyer to advance funds on behalf of a client for litigation expenses. The question then becomes: If a lawyer arranges for financing of those client advances, can the lawyer?s costs associated with the financing be charged to the client?2 When the costs and interest associated with financing litigation expenses can be directly linked to a specific case, the Commission sees no basis in the Bar Rules for requiring the lawyer to absorb those costs. Several other jurisdictions have reached a similar conclusion. See e.g.Ariz. St. Bar Comm. On the Rules of Prof. Conduct, Op. 2001-07, (9/2001); Ohio Opinion 2001-3 (6/7/2001); Chittenden v. State Farm Mut. Auto. Ins. Co. La. Sup. Ct, 2000-C-414 (5/15/2001).

The Commission has previously opined about several financing arrangements involving lawyers and clients. In Opinion 138, the Commission concluded that Rule 3.3(b), allowing lawyers to accept payment by credit card, would permit other client financing arrangements for legal fees, provided certain safeguards were maintained. In Opinion 144, the Commission determined that a lawyer could, without violating the bar rules, insure the payment of legal fees through a promissory note secured by client property unrelated to the representation, provided certain safeguards were maintained. In Opinion 152, the Commission advised that it would be permissible for a lawyer to enter into a financing arrangement with a third-party financial institution with a security interest in accounts receivables from legal services, again provided certain safeguards were maintained.

These opinions suggest that certain measures are necessary to assure that the financing arrangement does not result in the violation of the lawyer?s obligations to the client. For example, to avoid a potentially excessive fee prohibited by Rule 3.3(a), the terms for the loan including costs and rate of interest should be reasonable. Further, the requirements of Rule 3.4(f)(2)(i), concerning the lawyer?s obligations to avoid acquiring an interest adverse to a client, guide ME. MAN. ON PROF. RESP. (2002) many of the other necessary safeguards. The lawyer should not profit from the financing arrangement, but should simply pass through to the client the expenses attributable to financing the litigation costs, like any other disbursement. The terms of the fee arrangement, identifying the litigation expenses including the financing arrangement and its terms, should be clearly explained to permit the client to make an informed decision.

In order to comply with Rule 3.6(h)(1), the security agreement for the financing must not require the lawyer to disclose client confidences or secrets without the client?s informed written consent. In addition, the prohibition of Rule 3.7(c) against a lawyer acquiring a proprietary interest in the subject matter of litigation would require that the lawyer not attempt to obtain any interest in the client?s settlement or judgment to secure the lawyer?s obligation to repay the financing institution. See also Opinion #144.

In light of the foregoing considerations, the Commission concludes that it is reasonable for a lawyer to charge financing expenses to the client as a cost of litigation so long as the following safeguards are maintained.

First, the financing arrangement must have the informed consent of the client. At a minimum, the client should be advised of how and when the attorney will finance advances, the name of the lending institution, and the expected costs associated with financing, including rate of interest.

Second, in a contingent fee or limited representation case, the client?s responsibility for interest and other financing costs should be spelled out in the written contingent fee or limited representation agreement.

Third, the attorney must use a financing arrangement that accurately allocates interest and other financing costs to specific clients. The attorney should not use a single line of credit to finance advances on behalf of numerous clients and estimate how interest will be allocated among those clients.

Fourth, the attorney may not allow the financing institution to acquire any lien or other security interest in the client?s claim without the informed consent of the client. Moreover, whatever the nature of the financing arrangement, the client may not be deprived of his/her rights to challenge the amount of interest and other costs through fee arbitration as provided under Maine Bar Rule 9.3

Fifth, any interest or other financing costs passed onto the client must be reasonable.

Sixth, the lawyer may not disclose any client confidences or secrets to the financial institution without the informed written consent of the client.

Footnotes

[1] We understand that most banks will not take on the burden of tracking individual draws and interest to specific cases. The written material provided by the inquiring attorney, however, suggests that at least one relatively new bank specializes in providing such a line of credit.

[2] This opinion does not address the situation of a lawyer making interest bearing loans to a client for litigation expenses which may raise issues under consumer credit laws as well as other ethical concerns.

[3] Under no circumstances may the attorney acquire any security in the client?s claim to secure repayment beyond a lien granted by law as referenced in Maine Bar Rule 3.7(c).