Can a lawyer provide bankruptcy services to clients as a salaried employee of a nonprofit credit-counseling corporation that is not a law firm?

Plain-English summary

A lawyer asked whether the Maine Bar Rules permit representing bankruptcy clients as a salaried employee of a private, nonprofit corporation (not a law firm) that provides credit counseling and arranges debt repayment plans. Under the proposed plan, the corporation's credit counselors would refer appropriate clients to its staff attorney; those clients would pay fees to the corporation for the attorney's bankruptcy services; the fees would sit in an IOLTA account until "earned," then transfer to the corporation's general account; the corporation, its nonlawyer officers and directors, and the staff attorney would all be covered by a malpractice policy the corporation paid for; and the corporation was funded in part by creditors of its credit-counseling clients.

The Commission concluded the arrangement would violate the Bar Rules on four grounds. First, Bar Rule 3.2(a)(2) bars a lawyer from aiding any person, association, or corporation in the unauthorized practice of law. The corporation, not a law firm, would be paid fees to provide its clients legal services, a point the Commission found the corporation effectively conceded by obtaining malpractice insurance to protect its nonlawyer officers and directors; the staff attorney would be supporting the corporation's unauthorized practice. Second, Bar Rule 3.12(a) bars sharing legal fees with a nonlawyer; the Commission saw little substantive difference between sharing fees with a nonlawyer and being paid a salary by a nonlawyer to provide legal representation to the nonlawyer's fee-paying clients. Third, Bar Rule 3.12(b) prohibits a lawyer from being employed by a nonlawyer who directs or regulates the lawyer's professional judgment; the Commission found the employer-employee relationship would make it very difficult, if not impossible, to avoid that result. Fourth, the Commission noted conflict-of-interest difficulties under Bar Rule 3.4(b)(1), because the lawyer would owe duties both to the bankruptcy clients and to the corporate employer, whose interests could differ. The Commission reviewed supplemental materials proposing safeguards and policy justifications but was not persuaded the arrangement is permitted under the Bar Rules as written.

In practice

Under the Maine Bar Rules as the opinion read them (the unauthorized-practice bar corresponds to ABA Model Rule 5.5, the fee-sharing and independence limits to Model Rule 5.4, and the conflict concern to Model Rule 1.7), the opinion holds that the proposed structure fails on multiple independent grounds. The opinion makes the salary-versus-fee-sharing point central: paying a lawyer a salary out of fees the nonlawyer corporation collects for legal services is treated as the functional equivalent of prohibited fee sharing, and the corporation's collection of fees for legal work it is not licensed to provide is the unauthorized practice the lawyer would be aiding. The opinion holds the conflict between duties to the client and to a creditor-funded employer compounds the problem, and that the proffered safeguards did not cure the violations.

Common questions

Q: Can a lawyer be the in-house bankruptcy attorney for a nonprofit credit-counseling corporation?

A: No, on these facts. The opinion holds that having a nonlawyer corporation collect fees for legal services and employ a salaried lawyer to provide them violates the Bar Rules, including the bar on aiding the unauthorized practice of law.

Q: Why is a salary treated like fee sharing with a nonlawyer?

A: Because the substance is the same. The opinion finds little, if any, difference between a lawyer sharing fees with a nonlawyer and a lawyer being paid a salary by a nonlawyer in order to provide legal representation to the nonlawyer's fee-paying clients, which Rule 3.12(a) prohibits.

Q: Could safeguards limiting the corporation's control fix the problem?

A: The opinion was not persuaded. It holds that whatever measures the corporation adopts, the employer-employee relationship would make it very difficult, if not impossible, to avoid a violation of Rule 3.12(b)'s bar on nonlawyer direction of professional judgment, and that the supplemental materials did not change the conclusion.

Q: What conflict of interest did the Commission identify?

A: Client versus employer. The opinion notes that under Rule 3.4(b)(1) the lawyer would owe a duty to the bankruptcy clients while simultaneously owing a duty to the corporate employer, which is funded in part by creditors, creating a substantial risk that the representation would be materially and adversely affected.

Background and rules framework

The opinion interprets Maine Bar Rule 3.2(a)(2) (no aiding the unauthorized practice of law), Rule 3.12(a) (no sharing legal fees with a nonlawyer), Rule 3.12(b) (no nonlawyer direction or regulation of a lawyer's professional judgment), and Rule 3.4(b)(1) (conflicts arising from duties to a third person). These correspond to ABA Model Rule 5.5 (unauthorized practice), Model Rule 5.4 (professional independence and fee sharing), and Model Rule 1.7 (conflicts of interest).

Citations and references

Rules of Professional Conduct:

• Model Rules 5.5, 5.4, 1.7
• Maine Bar Rules 3.2(a)(2), 3.12(a), 3.12(b), 3.4(b)(1)

See also

• NY State Bar Op. 618: Remitting Legal Fees to a Corporate Employer
• NY State Bar Op. 992: Nonlawyer 'Disability Office' Business Structure
• Maine Ethics Op. 189: Unauthorized Practice in Maine

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89467

Original opinion text

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

Issued by the Professional Ethics Commission

Date Issued: November 14, 2002

Question

The Commission has been asked whether it would be a violation of the Maine Bar Rules for a lawyer to represent bankruptcy clients as a salaried employee of a private, non-profit corporation (which is not a law firm), whose business it is to provide credit counseling services and arrange debt repayment plans for these clients. Under the proposed arrangement, the corporation?s credit counselors would refer clients that they consider appropriate candidates for bankruptcy to the corporation?s staff attorney. These selected clients would pay fees to the corporation in exchange for bankruptcy legal services provided by the staff attorney. These fees would be held in an IOLTA account until ?earned,? at which time they would be transferred to the corporation?s general account. The corporation, its officers and directors (who are not lawyers), together with its staff attorney, would all be covered by a legal malpractice liability insurance policy paid for by the corporation. The corporation is funded in part by creditors of its credit-counseling clients.

Opinion

The Commission is of the opinion that this arrangement would violate the Bar Rules. First, Bar Rule 3.2(a)(2) provides that ?a lawyer shall not aid any person, association or corporation in the unauthorized practice of law.? Here, the corporation, which is not a law firm, would be paid fees to provide its clients with legal services. The corporation effectively acknowledges as much in undertaking to acquire legal malpractice liability insurance to protect itself, its officers and directors, who are not lawyers. The Commission believes that this proposed arrangement would result in the lawyer supporting the corporation in the unauthorized practice of law.

To the same effect, Bar Rule 3.12(a) provides that, subject to exceptions not relevant here, ?a lawyer or law firm shall not share legal fees with a non-lawyer.? Here, the corporation, which is not a law firm, would be paid fees by its clients in exchange for which legal representation would be provided by its salaried lawyer. Applying this Bar Rule to these facts, the Commission believes that there is little, if any, substantive difference between a lawyer sharing fees with a non-lawyer and, as here, a lawyer being paid a salary by a non-lawyer in order to provide legal representation to fee-paying clients of the non-lawyer.

The Commission further believes that the proposed arrangement would very likely result in a violation of Bar Rule 3.12(b). This Rule, in pertinent part, prohibits a lawyer from being employed by a non-lawyer who directs or regulates the lawyer?s professional judgment in rendering legal services to another person.[1] Whatever measures the corporation may put in place to minimize its control over its staff lawyer, the nature of the employer-employee relationship in this factual setting would make it very difficult, if not impossible, to practicably avoid violation of this rule.

Finally, the Commission makes note of the further difficulties that this arrangement would likely create for the lawyer in complying with conflict of interest rules. The pertinent portion of Maine Bar Rule 3.4(b)(1) provides that a conflict of interest occurs ?if there is a substantial risk that the lawyer?s representation of one client would be materially and adversely affected by the lawyer?s duties to?a third person ?? The prospect of a conflict of interest looms large in the work undertaken by the lawyer in this situation, since the lawyer owes a duty to represent the interests of the bankruptcy clients and simultaneously owes a duty to uphold the potentially different interests of the corporation that is the employer.

The Commission has received and reviewed letters and other written materials supplementing the opinion request. Some of these materials suggest approaches that the corporation and its lawyer would take in order to minimize the effects of the deviations from the Bar Rules noted here, while some offer what may be legitimate public policy reasons supporting different conclusions. However, these materials do not persuade the Commission that the type of practice contemplated here is permitted under the Bar Rules as written.

In sum, the Commission is of the opinion that the Bar Rules would be violated if the lawyer undertakes legal representation of the corporation?s clients in this factual setting.

Footnote

[1] In pertinent part, Bar Rule 3.12(b) reads as follows: ?A person who recommends, employs or pays a lawyer to render legal services for another shall not be permitted by the lawyer to direct or regulate the lawyer?s professional judgment in rendering such legal services unless direction or regulation occurs in the course of supervision by another lawyer who participates in the attorney-client relationship with the supervised lawyer.?