Can a lawyer finance litigation costs with a loan from a lending institution and pass the interest on to the client?

Plain-English summary

The Committee reviewed an arrangement in which a private financial-services company lends money to law firms to finance the expenses of contingent-fee lawsuits. The company advances funds on the firm's request to cover court costs and litigation expenses; the firm pays interest monthly and repays principal at settlement, judgment, or when it stops representing the client. Client funds would not be used as collateral, and the company would not direct the firm's professional judgment, though it would have a right to case information to the extent ethics rules allow. The opinion was issued October 7, 2005, and amended June 27, 2008 to add a sentence on court approval under MCR 8.121.

The Committee concluded the arrangement is permissible under MRPC 1.8(e), which does not prohibit a lawyer from borrowing funds to advance court costs and litigation expenses for which the client is ultimately responsible. It pointed to RI-168, which approved arrangements where the client agreed in advance to pay interest on fees and costs. On confidentiality, it held that the loan agreement must limit the company's access to case information to what the ethics rules permit, and that the firm "must not reveal a confidence or secret of the client to the lending institution" under MRPC 1.6.

Surveying counterpart opinions from other states (Utah, Florida, Georgia, Illinois, Missouri, New Jersey, Ohio, Texas, and Tennessee), the Committee noted they permit similar financing "as long as it is the lawyer, and not the client, who is the obligor on the loan, and there is full disclosure to the client," analyzed against fee-splitting and independent-judgment concerns under MRPC 5.4(c). On billing, it held that loan costs may be billed only as the direct litigation expense, including interest, without a surcharge, citing ABA Formal Opinion 93-379 and Georgia's Formal Advisory Opinion 92-1. As amended, the opinion adds that in cases governed by MCR 8.121, the court must approve any interest to be passed on to the client.

In practice

The opinion holds that, under MRPC 1.8(e) and 5.4(c), a lawyer may finance contingent-fee litigation costs with a loan from a third-party lender and pass through the interest where: the lawyer, not the client, is the obligor; the client agrees in a written contingent-fee agreement after disclosure of the loan's terms; the client receives a written statement on conclusion reflecting the interest advanced and charged as an expense; only the direct interest cost is billed without a surcharge; and client confidences are not revealed to the lender. Per the opinion, in cases governed by MCR 8.121 the court must approve any interest passed on to the client.

Common questions

Q: Can a lawyer borrow money to cover a client's litigation costs and charge the interest back?

A: The opinion concluded that a lawyer may, because MRPC 1.8(e) does not prohibit borrowing funds to advance court costs and litigation expenses for which the client is ultimately responsible.

Q: Who has to be the borrower on the loan?

A: Per the opinion, the lawyer, not the client, must be the obligor on the loan, consistent with the counterpart opinions the Committee surveyed and with MRPC 5.4(c) on the lawyer's independent judgment.

Q: How may the interest be billed to the client?

A: Per the opinion, the loan costs are billed as a litigation expense including interest, and the client "may be charged only the direct cost without a surcharge," citing ABA Formal Opinion 93-379; the client must be notified of the interest in the contingent-fee contract and given a written statement at conclusion.

Q: What protects the client's confidences from the lender?

A: Per the opinion, the loan agreement limits the company's right to case information to what the ethics rules permit, and the firm must not reveal a client confidence or secret to the lending institution under MRPC 1.6.

Background and rules framework

The opinion interprets MRPC 1.8(e) / Model Rule 1.8(e) (advancing court costs and litigation expenses the client must ultimately repay), MRPC 5.4(c) / Model Rule 5.4(c) (a third party paying for legal services must not direct the lawyer's professional judgment), and MRPC 1.6 / Model Rule 1.6 (confidentiality), with billing limits drawn from ABA Formal Opinion 93-379. The analysis turns on the lawyer being the loan's obligor, full disclosure and client consent, no surcharge on interest, and protection of client confidences.

Citations and references

Rules of Professional Conduct:

• MRPC 1.8(e) / Model Rule 1.8(e) (advancing court costs and litigation expenses)
• MRPC 5.4(c) / Model Rule 5.4(c) (independent professional judgment when a third party pays)
• MRPC 1.6 / Model Rule 1.6 (confidentiality)

Court rules:

• MCR 8.121 (contingent-fee agreements; court approval of interest passed to the client, per the 2008 amendment)

Other opinions cited:

• ABA Formal Opinion 93-379 (client may be charged only the direct cost without surcharge)
• RI-168 (client agreement to pay interest on fees and costs)
• Georgia Formal Advisory Opinion 92-1; Utah Op. 02-01; Florida Op. 86-2; Illinois Op. 94-06; Missouri Op. 970066; N.J. Op. 603; Ohio Op. 2001-3; Texas Op. 465; Tennessee Op. 98-A-659: counterpart opinions permitting similar financing.

See also

• Mich Ethics Op. RI-333: Advancing Court Fines and Costs for a Client
• Mich Ethics Op. RI-321: Referring Tort Clients to a Venture-Capital Litigation Funder
• Mich Ethics Op. RI-14: Financial Assistance for a Client's Living Expenses

Source

• Landing page: https://www.michbar.org/opinions/ethics/numbered_opinions?OpinionID=1206&Type=6

Original opinion text

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

On June 27, 2008, the Standing Committee on Professional Ethics amended this opinion by adding the last sentence, "In cases governed by MCR 8.121, the court must approve any interest to be passed on to the client."

RI-336

October 7, 2005

SYLLABUS

The Michigan Rules of Professional Conduct do not preclude a lawyer from financing litigation costs through a loan from a third-party lending institution provided the lawyer discloses to the client the terms and conditions of the loan and the client consents in a written contingent fee agreement, upon conclusion the client receives a written statement reflecting interest advanced by the lawyer and charged to the client as an expense in the matter, and the lawyer, but not the client, is obligor on the loan.

References: MRPC 1.8(e), RI-168, MRPC 5.4(c) and 1.6; ABA Formal Opinion 93-379.

TEXT

A law firm represents a private financial services institution (the "Company") engaged in the business of lending money to law firms for the primary purpose of financing the expenses of contingency fee lawsuits. In a typical financing transaction by the Company, the Company would advance amounts upon funding requests by the law firm to cover court costs and other litigation expenses incurred in the course of a contingency fee matter. The law firm would be obligated to pay interest on the loan monthly and to pay the principal amount of the loan at the time of settlement or judgment, or at the time the law firm ceases to represent the client in the matter. Client funds, whether in the law firm's possession or anticipated, would not be used as collateral for the financing. The Company would not direct or regulate the law firm's professional judgment in handling a client's case. The loan agreement between the law firm and the Company would provide that the Company has a right to receive information regarding a particular client's case to the extent permitted under ethical rules governing the law firm's conduct.

The proposed financing arrangement is permissible pursuant to MRPC 1.8(e) that does not prohibit a lawyer from borrowing funds to advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client.

In prior opinions, this Committee has approved financing arrangements in which a client was responsible for the payment of interest on fees and costs, provided the client agreed to the arrangement in advance. See RI-168.

Consistent with an attorney's obligations to preserve client confidences under MRPC 1.6, the loan agreement between the law firm and the Company would provide that the Company has a right to receive information regarding a particular client's case to the extent permitted under ethical rules governing the law firm's conduct. The law firm must not reveal a confidence or secret of the client to the lending institution.

Many other state counterparts to this Committee have considered the professional ethics issues arising under financing arrangements similar to those in this opinion. These advisory opinions have analyzed the proposed financing arrangement in light of their respective rules' prohibitions against fee-splitting arrangements and the lawyer's "independent judgment". See MRPC 5.4(c). The various State Bar ethics opinions have concluded that litigation-financing arrangements similar to those described above are permissible, as long as it is the lawyer, and not the client, who is the obligor on the loan, and there is full disclosure to the client.

See Utah Op. 02-01 (2002), Florida Op. 86-2 (1986); Georgia Op. 92-1 (1992); Illinois Op 94-06 (1994); Missouri Op. 970066 (Undated); N.J. Op. 603 (197); Ohio Op.2001-3 (2001); Texas Op. 465 (1991); Tennessee Op. 98-A-659 (1989).

A remaining issue concerns the manner in which the loan costs are billed to the client. As presented to this Committee, it is assumed the loan costs will be billed as litigation expenses, including interest. Accordingly, the client may be charged only the direct cost without a surcharge. See ABA Formal Opinion 93-379.

This Committee agrees with the rationale of Formal Advisory Opinion 92-1, State Bar of Georgia (January 14, 1992), that examined whether a bank loan to a lawyer compromises the attorney/client relationship and whether it is ethical to charge clients interest. The opinion concludes that there is no ethical impropriety provided the lawyers "make sure the bank understands that its contractual arrangement can in no way affect or compromise the lawyer's obligations to his or her individual clients." On the second issue, the opinion states "it is permissible to charge interest on such advances only if (1) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances; and (2) the written statement given to the client upon conclusion of the matter reflects the interest charged on expenses advanced in the matter." In cases governed by MCR 8.121, the court must approve any interest to be passed on to the client.