Can a Maine lawyer take a non-recourse loan from a litigation finance company to fund a contingency-fee case, repayable only if the case wins?

Plain-English summary

Bar Counsel asked whether an attorney may participate in litigation-expense funding for individual cases on a non-recourse basis offered by litigation finance companies. In the example presented, a company advances a contingency-fee attorney funds to cover litigation costs in a personal injury case; if the case loses, the attorney owes nothing, and if the case wins, the company is repaid the advance plus substantial interest. The company represents that it does not "share" in the attorney's legal fees and may or may not take a lien on the fees.

The Commission concludes that the attorney may not enter into such a non-recourse loan. Regardless of how the company characterizes the agreement, the structure involves sharing legal fees with a nonlawyer: repayment is tied directly to the attorney's recovery of a legal fee in the particular case, and the risk-based interest premium reflects the company participating in the success or failure of the litigation. The opinion distinguishes its earlier Opinion #191, which addressed loans offered to clients, and limits this opinion to non-recourse loans to attorneys.

The opinion applies former Maine Bar Rule 3.12(a), which prohibits a lawyer from sharing legal fees with a nonlawyer except in limited circumstances not relevant here. It identifies the rule's rationale as preventing an unacceptable risk that the lawyer's professional independence will be influenced by a nonlawyer with an interest in the fee, and it agrees with Utah Bar Opinion 97-11 (1997), which reached the same conclusion about non-recourse litigation financing in contingency cases.

In practice

Under the former Maine Bar Rules in effect when the opinion issued (the fee-sharing prohibition has since been carried forward in Maine Rule of Professional Conduct 5.4), the opinion holds that a lawyer may not take a non-recourse litigation expense loan whose repayment depends on the lawyer recovering a fee in the case. The opinion holds the dispositive features are that repayment is owed only if the attorney succeeds and recovers a fee, and that the interest functions as a premium for the financer's participation in the litigation's outcome; together these make the arrangement fee sharing with a nonlawyer. The opinion is limited to non-recourse loans to attorneys and does not address recourse loans or loans to clients.

Common questions

Q: Can a Maine lawyer borrow litigation costs from a finance company on a non-recourse basis?

A: No, where repayment is owed only if the lawyer wins and recovers a fee. The opinion concludes that arrangement is prohibited fee sharing with a nonlawyer.

Q: Does it matter that the finance company says it does not share in the fee?

A: No. The opinion states that irrespective of how the company characterizes its agreement, the structure involves sharing legal fees with a nonlawyer because repayment is tied directly to the recovery of a legal fee.

Q: Why does tying repayment to the fee matter?

A: The opinion explains that Rule 3.12(a) guards against the risk that a lawyer's professional independence will be influenced by a nonlawyer who has an interest in the attorney's fee, and the risk-based interest reflects the financer participating in the case's success or failure.

Q: Does this opinion cover loans made to clients?

A: No. The opinion addresses loans to attorneys and distinguishes Opinion #191, which addressed loans offered to clients; it is also limited to non-recourse (not recourse) loans.

Background and rules framework

The opinion interprets former Maine Bar Rule 3.12(a), the prohibition on sharing legal fees with a nonlawyer, which corresponds to ABA Model Rule 5.4(a). The opinion frames the rule as protecting the lawyer's professional independence from the influence of a nonlawyer with a financial stake in the fee. It builds on the Commission's Opinion #191 (loans to clients) and adopts the reasoning of Utah Bar Opinion 97-11.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4(a)
• Maine Bar Rule 3.12(a)

Other opinions cited:

• Utah State Bar Op. 97-11 (1997).
• Maine Prof. Ethics Comm'n Op. #191.

See also

• ABA Formal Op. 464: Fee Division With a Lawyer Who Shares With Nonlawyers
• CA Formal Op. 2020-204: Litigation Funding
• ABA Formal Op. 474: Referral Fees and Conflicts of Interest

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=86896

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 10, 2007

Question

Bar Counsel has requested an opinion on the ethics of an attorney participating in litigation expense funding for individual cases on a non-recourse loan basis that is offered by a number of litigation finance companies.

As an example, a Company offers wholly non-recourse loan advances to attorneys representing clients subject to a contingency fee arrangement. Under this arrangement, the Company will undertake the financial risk in a personal injury case by providing the attorney an advance on that case to cover litigation costs. If the case is unsuccessful, the attorney owes the Company nothing. If the case succeeds, either by way of settlement or judgment, the Company is entitled to be repaid its loan along with very substantial interest. The Company represents that it does not "share" in the attorney's legal fees. The Company may or may not require a lien on the attorney's fees in the case.

Opinion

In Opinion #191 we addressed ethical issues that attorneys must consider when asked to assist their clients in obtaining personal injury lawsuit loans. The question currently posed by Bar Counsel addresses personal injury lawsuit loans offered to attorneys rather than their clients. While these attorney loans may be offered as recourse as well as non-recourse, the current question relates only to non-recourse loans. Accordingly, this opinion is limited to loans in that context.

We conclude that an attorney may not enter into a non-recourse loan under the circumstances presented in Bar Counsel's question. Irrespective of how the finance company may characterize its agreement, the nature and structure of such an arrangement involves the sharing of legal fees with a non-lawyer. Repayment to the finance company is tied directly to the recovery of legal fees by the attorney in the particular case. The attorney must repay the finance company only if the attorney is successful and recovers a fee. Further, the interest charged upon repayment involves a premium based upon the risk incurred by the finance company in sharing in the prospects of success or failure of the particular litigation in which the company is thereby participating.

Maine Bar Rule 3.12(a) prohibits a lawyer from sharing legal fees with a non-lawyer except in limited circumstances not relevant here. The underlying rationale for the rule is that any fee sharing arrangement creates an unacceptable risk that the professional independence of the lawyer will be influenced by the non-lawyer who has an interest in the attorney's fee. We agree with Utah Bar Association Opinion 97-11 (1997), to the effect that payment on a non-recourse loan to finance litigation in a contingency fee case, where the lawyer is obligated to repay the loan only if a fee results in the case, constitutes sharing legal fees with a non-lawyer in violation of the rule.