Can a lawyer refer a client to a third-party broker or lender to finance the lawyer's fee, similar to financing a purchase?

Plain-English summary

A firm asked whether it could refer prospective clients who cannot afford an up-front retainer to a third-party legal-financing broker that arranges loans through multiple lenders, with the firm directing the client to the initial financing application. The opinion concludes the arrangement is permitted.

The opinion reasons that nothing in MRPC 1.8 prohibits referring a client to a fee-financing company, provided the referring lawyer has no interest in the lender, receives no referral fee, takes no direction from the lender about the matter financed, and discloses no information about the representation. It analogizes the arrangement to accepting payment by credit card, which the Committee approved in Formal Opinion 135 (1997), noting only that some additional safeguards apply. Because the client applies directly to the lender, who independently sets the loan terms, a separate lender-borrower relationship forms and no client information passes to the financing company to implicate MRPC 1.6.

The opinion conditions the conclusion on the lawyer's other duties. Under MRPC 1.4(b) and 2.1, the lawyer must explain the financing arrangement enough for an informed decision, including the lawyer's relationship with the finance company, the costs and terms (such as the interest rate and that the loan must be repaid regardless of outcome), and that other options exist. Any fee, financed or not, must be reasonable under MRPC 1.5, and any increase due to financing must still be reasonable and disclosed. Financed retainers, advance fees, or flat fees are unearned and must go into trust under MRPC 1.15(a) and (c), with any unearned portion refunded under MRPC 1.16(d) if the representation ends early.

In practice

The opinion holds that, under the Mississippi rules as they stood at the time of the opinion, a lawyer may direct a client to a third-party broker to finance the lawyer's fee so long as the lawyer keeps independence from the lender, takes no referral fee, shares no client information, explains the arrangement and its terms under MRPC 1.4(b) and 2.1, charges only a reasonable fee under MRPC 1.5, and treats any financed unearned fee as trust property under MRPC 1.15 subject to refund under MRPC 1.16(d).

Common questions

Q: Can a lawyer send a client to a financing company to pay the lawyer's fee?

A: Yes. The opinion concludes a lawyer is not prohibited from referring a client to a third-party fee-financing broker, provided the lawyer has no interest in the lender, takes no referral fee, takes no direction from it, and discloses no client information.

Q: What must the lawyer tell the client about the financing?

A: Per the opinion, under MRPC 1.4(b) and 2.1 the lawyer must explain the arrangement enough for an informed decision, including the interest rate, that the loan is repaid regardless of outcome, and that other options exist.

Q: Where does a financed advance fee go?

A: The opinion concludes that a financed retainer, advance fee, or flat fee is unearned and must be deposited in a trust account under MRPC 1.15(a) and (c), with any unearned portion refunded under MRPC 1.16(d).

Background and rules framework

The opinion interprets MRPC 1.8 (prohibited transactions and third-party compensation), 1.6 (confidentiality), 1.4 (communication), 1.5 (reasonable fees), 1.15 (safekeeping property), 1.16 (declining or terminating representation), and 2.1 (independent advice), corresponding to the same-numbered Model Rules. It builds on the Committee's prior Formal Opinion 135 (credit-card payment of fees).

Citations and references

Rules of Professional Conduct (Mississippi; cf. Model Rules):

• MRPC 1.8 (prohibited transactions; third-party compensation) (cf. Model Rule 1.8)
• MRPC 1.6 (confidentiality) (cf. Model Rule 1.6)
• MRPC 1.4, 2.1 (communication; independent advice) (cf. Model Rules 1.4, 2.1)
• MRPC 1.5 (reasonable fees) (cf. Model Rule 1.5)
• MRPC 1.15, 1.16 (safekeeping property; refund of unearned fees) (cf. Model Rules 1.15, 1.16)

Other opinions cited:

• Mississippi Formal Opinion 135 (1997) (payment of fees by credit card)

See also

• NY State Bar Op. 1108: Referring to a Fee Lender
• ABA Formal Op. 00-419: Credit Card Payment of Legal Fees

Source

• Landing page: https://www.msbar.org/ethics-discipline/ethics-opinions/formal-opinions/262/
• Original PDF: https://www.msbar.org/media/4252/ethics-opinion-262.pdf

Original opinion text

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

ETHICS OPINION NO. 262

OF THE MISSISSIPPI BAR

RENDERED February 07, 2020

CAVEAT: This Opinion is limited strictly to the facts as presented for analysis under Mississippi’s Rules of Professional Conduct. The facts and questions outlined below and the opinion rendered is limited to ethical issues only.

The Ethics Committee of the Mississippi Bar has been asked to respond to the following question and hypothetical:

Is it ethical for an attorney to refer financing for legal services, excluding bankruptcy and contingency matters, through a third party broker that offers such financing through multiple potential lenders?

Our firm has been in discussions with a third-party legal financing business, that works with lenders to offer legal financing options to potential clients that may not otherwise be able to afford up-front retainers, similar to financing the purchase of goods. As part of the process we would direct the prospective client to the initial financing application.

Applicable Rules

The following Rules of Professional Conduct are applicable to this opinion. The relevant portions of those Rules provide:

Rule 1.8 Conflict of Interest: Prohibited Transactions

• A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or pecuniary interest adverse to a client unless:

• the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

• the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

• the client consents in writing.

• A lawyer shall not use information relating to representation of a client

• To the disadvantage of the client, or

• To the advantage of himself or a third person, unless the client consents after consultation

. . .

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

• The client consents after consultation;

• There is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

• Information relating to representation of a client is protected as required by Rule 1.6.

Rule 1.6 Confidentiality of Information

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by paragraph (b).

Rule 1.4 Communication

• A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

Rule 1.5 Fees

• A lawyer’s fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:

• the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

• the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

• the fee customarily charged in the locality for similar legal services;

• the amount involved and the results obtained;

• the time limitations imposed by the client or by the circumstances;

• the nature and length of the professional relationship with the client;

• the experience, reputation, and ability of the lawyer or lawyers performing the services; and

• whether the fee is fixed or contingent.

• When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.

Rule 1.15 Safekeeping Property

• A lawyer shall clients’ and third persons’ property separate from the lawyer’s own property. Funds shall be kept in a separate trust account . . . .

• When a lawyer is in possession of property in which both the lawyer and another person claim an interest, the property shall be kept separate by the lawyer until completion of an accounting and severance of their respective interest.

Rule 1.16 Declining or Terminating Representation

• Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interest . . . and refunding any advance payment that has not been earned.

Rule 2.1 Advisor

In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.

Analysis

Nothing in Rule 1.8 prohibits a lawyer from referring a client to a fee financing company that advances the client funds to obtain legal services; provided the referring attorney has no interest in the lending institution, receives no fee for the referral, takes no direction from the lender regarding the matter financed, and discloses no information regarding the client’s representation to the fee financing company. A client may not be able to afford a lawyer’s upfront retainer at the outset of a representation but the lawyer is unwilling to accept incremental payments. This Committee previously opined that it was ethical for a lawyer to accept payment of his fees by credit card in Formal Opinion No. 135 (September 11, 1997). The Committee sees little difference between the acceptance of payment by credit card and the arrangement presented here, though some additional safeguards should be taken.

In the scenario described by the requester if the client is interested in financing the attorney’s fee, the client completes an application with the third party lender. The lender then determines whether to approve the credit application and on what terms, establishing a lender/borrower relationship separate from the attorney client relationship. Further, under this scenario no information about the client’s legal matter or its likelihood of success is provided by the lawyer to the finance company to implicate Mississippi Rule of Professional Conduct 1.6.

In such a scenario the lawyer must also still comply with his obligations under 1.4(b), 1.5(a) and (b), 1.15(a) and (c), 1.16(d) and 2.1. Pursuant to Mississippi Rules of Professional Conduct 1.4(b) and 2.1 the lawyer must explain the financing arrangement to the client to the extent reasonably necessary for the client to make an informed decision. This could include explaining the lawyer’s relationship with the finance company, the costs and benefits of the transaction to the client, the terms of the client’s arrangement with the finance company such as the interest rate and that the amount borrowed will have to repaid regardless of the outcome of the legal matter, that other financing options exist, and any other factors relevant to the client’s decision.

Additionally, any fee charged by the lawyer to the client, whether financed or not, must be reasonable pursuant to Rule 1.5. If the fee is increased due to financing it must not only still be reasonable, but the client must also be informed. If the fee financed is a retainer, advance fee or flat fee the funds received must be placed in a trust account as unearned fees until the lawyer has performed the agreed services to earn the fee pursuant to Rule 1.15(a) and (c) of the Mississippi Rules of Professional Conduct. If the client or lawyer terminates the representation prior to the lawyer fully earning the fee, any unearned portion must be returned to the client pursuant to Rule 1.16(d).

Conclusion

The Committee is of the opinion that a lawyer is not prohibited from directing clients to a third party broker to secure financing of the lawyer’s fee provided the lawyer complies with his obligations under Rules 1.4, 1.5, 1.15, 1.16 and 2.1 of the Mississippi Rules of Professional Conduct.