Can a lawyer or law corporation act as trustee to collect clients' delinquent accounts receivable, filing suit when needed, for a contingent fee?

Plain-English summary

The committee was asked whether an attorney or an attorney's professional corporation may act as trustee to collect a client's delinquent accounts receivable, bringing suit when necessary. It answered yes, if the trust is properly established.

The committee treated the professional corporation as the alter ego of the attorney and subject to the same standards. It found the contingent fee on collections sanctioned by Rule 1.8(j), which lets a lawyer contract for a reasonable contingent fee in a civil case, and concluded that an appropriately contracted, reasonable contingent fee would not violate the rules. It also reviewed Montana's Trust Code and concluded that creating a trust, transferring claims into it, and collecting through a trustee are not, by themselves, prohibited; a trustee of an express trust may sue in his own name under Rule 17(a), M.R.Civ.P.

The committee acknowledged potential conflicts arising from the lawyer's dual roles as trustee (holding bare legal title) and as counsel receiving a contingent fee, noting that requiring beneficiary consent to suit or compromise removes much of the conflict risk. It addressed section 37-61-408(1), MCA, which bars an attorney from buying a thing in action with the intent of bringing an action on it, and reasoned that keeping the two roles separate, plus the trust's stated service purpose and the fact that suits were filed in only a small fraction of claims, meant the arrangement was not devised for that improper purpose. Tracing a line of Montana cases on assignment of claims and the real-party-in-interest rule, the committee concluded that unless an assignment is made for an illegal purpose, the claim may be brought by the trustee. Its conclusion: a properly established arrangement is not expressly prohibited, but care must be taken that contingent fees are freely contracted and reasonable, and the lawyer must carefully define the trustee and counsel roles and stay alert to conflicts from the dual roles.

Currency note

This opinion was issued in 1991, before the State Bar of Montana's adoption of the 2004 revisions to the Rules of Professional Conduct. 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 Treat this page as historical context, not current guidance.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: Can a lawyer serve as trustee to collect clients' overdue accounts and sue on them?

A: The opinion concludes yes, if the trust is properly established and the roles of trustee and counsel are kept separate.

Q: Is a contingent fee on the collections allowed?

A: The opinion finds the contingent fee sanctioned by Rule 1.8(j) provided it is freely contracted and reasonable.

Q: Does the rule against an attorney buying a thing in action bar this?

A: The opinion concludes it does not, because the arrangement was not devised to bring actions for an improper purpose; it serves clients and suits are filed in only a small fraction of claims.

Q: What conflict concerns did the committee flag?

A: The opinion warns of conflicts from the lawyer's dual roles as trustee and fee-earning counsel, noting that requiring beneficiary consent to suit or compromise reduces much of the risk.

Background and rules framework

The opinion interprets Montana Rule of Professional Conduct 1.8(j) (acquiring an interest in litigation; reasonable contingent fees in civil cases; Model Rule 1.8) and the general conflicts principle of Rule 1.7 (Model Rule 1.7), against Montana's Trust Code (Title 72, ch. 33, MCA), the attorney-champerty statute (section 37-61-408(1), MCA), and Rule 17(a), M.R.Civ.P. (real party in interest).

Citations and references

Rules of Professional Conduct:

• Mont. R. Prof. Cond. 1.8(j) (contingent fees; interest in litigation) / Model Rule 1.8

Statutes:

• Mont. Code Ann. section 37-61-408(1) (attorney buying a thing in action)
• Mont. Code Ann. sections 72-33-108(4), 72-33-201(2), 72-33-204, 72-33-206 (Trust Code)
• Mont. R. Civ. P. 17(a) (real party in interest)

Cases:

• Streetbeck v. Benson, 107 Mont. 110, 80 P.2d 861 (1938), trust purpose and real party in interest
• Rae v. Cameron, 112 Mont. 159, 114 P.2d 1060 (1941), assignment for collection vests legal title in assignee

See also

• State Bar of Montana Ethics Op. 910226: Withholding Disputed Fees From Trust Funds
• State Bar of Montana Ethics Op. 930927: Referral by Runners

Source

• Landing page: https://www.montanabar.org/For-Attorneys/State-Bar-Resources/Ethics-Opinions
• Original PDF: https://www.montanabar.org/Portals/MONTANA/910529.pdf

Original opinion text

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

QUESTION PRESENTED: May an attorney or attorney's professional corporation act as trustee to collect client's delinquent accounts receivable, bringing suit, when necessary?

ANSWER: Yes, if trust is properly established.

ANALYSIS:

A. Professional Corporation Status. Different rules apply to corporations which act as trustee and attorneys. The rules of professional conduct and statutes governing attorneys at law discussed herein apply to individual attorneys. However, because an individual who renders professional services as an employee of a professional corporation is liable for negligent or wrongful acts or omissions in which the individual participates to the same extent as if he had acted as a sole practitioner, Section 35-4-404, MCA, for purposes of this discussion the corporation will be viewed as the alter ego of the attorney and subject to the same standards as the attorney.

B. Contingency Fee. The attorney's acceptance of a contingency fee on the collections appears to be sanctioned by the following rule of professional conduct:

(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:

(1) acquire a lien granted by law to secure the lawyer's fee or expense; and
(2) contract with a client for a reasonable contingent fee in a civil case.

Rule 1.8(j) Rules of Professional Conduct. While the attorney, as trustee holding bare legal title, does not appear to have any proprietary interest in the cause of action or subject matter of the transaction, the attorney, as the attorney for the trustee, does. However, the nature of the interest appears to be limited to a sanctioned contingency fee arrangement. Assuming that the attorney has appropriately contracted with the clients concerning the contingency fee, and the contingency fee is reasonable, the activity would not appear to run afoul of the Rules of Professional Conduct.

C. Trust Arrangement. Creation of a trust, transfer of claims into the trust, and collection by a trustee, per se, are not prohibited by statutory rules or ethical considerations. Under Montana's Trust Code, the term "trust" does not include:

. . . trusts for the primary purpose of paying debts, dividends, interest, salaries, wages, profits, pensions, or employee benefits of any kind and any arrangement under which a person is nominee or escrowee for another.

Section 72-33-108(4), MCA. Interestingly, Montana's recently revised Trust Code does not include the additional language found in the California equivalent that the term "trust" excludes "transfers in trust for purpose of suit or enforcement of a claim or right." Cal.Prob.Code Section 82. By statute, "[a] trust may be created for any purpose that is not illegal or against public policy," Section 72-33-204, MCA, and it is permissible for a trustee of an express trust to "sue in his own name without joining the party for whose benefit the action is brought," Mont.R.Civ.P. 17(a).

The attorney's clients create trusts through the statutorily approved method of "a transfer of property by the owner . . . to another person as trustee," Section 72-33-201(2), MCA, Designating themselves as beneficiaries, Section 72-33-206, MCA. As trustee capable of making decisions concerning the trust, and as attorney receiving a contingency fee, the attorney could face potential conflicts of interest. However, the language of the trust agreement requiring beneficiary's consent to suit or compromising of claims removes a great deal of the conflict risk.

Another difficulty with respect to the attorney's involvement is encountered when consideration is given to the following provision relating to an attorney at law practice:

An attorney and counselor must not directly or indirectly buy or be interested in buying a bond, promissory note, bill of exchange, book debt, or other thing in action with the intent and for the purpose of bringing an action thereon.

Section 37-61-408(1), MCA. In these circumstances, the attorney as trustee holds bare legal title to the action, and the attorney as attorney for the trust is receiving a contingency fee. Not only is receipt of the contingency fee authorized as discussed above, but also if the two roles are kept separate and distinct there would never be any suggestion that the attorney had in any manner "bought" a thing in action.

Moreover, it does not appear that the attorney has devised this trust arrangement with the intent and purpose of bringing actions on the claims. In fact, the stated purpose of the trust is to provide a service to clients, the attorney represents that civil suits are commenced in a small fraction of the claims transferred into trust, and the beneficiaries are required to consent to the bringing of actions.

A stated rationale for the rule against attorneys buying things in action is to discourage litigation and keep it within certain bounds in the interest of sound public policy. Streetbeck v. Benson, 107 Mont. 110, 114, 80 P.2d 861, 863 (1938). Without the prohibition, an attorney's ability to purchase claims at a discount and bring actions for collection could easily be abused.

The rationale relating to discouraging litigation has also been cited as a purpose behind the rule of procedure which mandates that actions be brought by the real party in interest:

Every actions shall be prosecuted in the name of the real party in interest. A personal representative, guardian, bailee, trustee of an express trust, a party with whom or in whose name a contract has been made for the benefit of another, or a party authorized by statute may sue in his own name without joining with him the party for whose benefit the action is brought; . . .

Rule 17(a) Mont.R.Civ.P. In fact, both rules were discussed in Streetbeck v. Benson which is the second in a string of four cases discussing the propriety of assigning claims and the real party in interest rules.

In the initial cases, the courts were concerned that assignments of claims and transfers into trusts were merely "simulated transfers" and resulted in actions being pursued by someone other than the "real party in interest." Specifically, in Streetbeck v. Benson, the creation of an express trust was considered to be for an "illegal purpose" in violation of a statute relating to trust purposes. Eventually, however, the court resolved that the purpose of the real party in interest statute was really to avoid duplication of actions, and thus eventually became less concerned with the intent of the parties in assigning accounts or placing them in trust. In fact, in the final case of the series, Rae v. Cameron, 112 Mont. 159, 114 P.2d 1060 (1941), the court concluded that allowing the assignment of claims made it possible "for wage earners with legitimate claims to unite in one action to enforce rights which individually would, as a practical matter, be lost to them by reason of the smallness of the amount involved." Id. at 176, 114 P.2d 1060, 1068. The court concluded:

It is well settled that an assignment for collection, without any consideration being paid by the assignee, vests the legal title in the assignee, which is sufficient to enable him to recover, although the assignor retains an equitable interest in the thing assigned.

Id.

The evolution of cases suggests that unless an assignment of claim is made for an illegal purpose, the claim may be brought by the assignee, or, as in this case, the trustee for an express trust. Thus, the question which remains is whether the assignment of claims to an express trust managed by a lawyer-trustee and represented by the lawyer receiving a contingency fee constitutes an illegal purpose in light of the prohibition against an attorney directly or indirectly buying a thing in action with the intent and for the purpose of bringing an action thereon.

It does not appear that the creation of a trust and appointment of the attorney's corporation as trustee has been devised for any illegal purpose. The service is provided for the benefit of clients who desire to keep a low profile in the collection process, and civil suits are commenced in a small fraction of the matters transferred into trust.

CONCLUSION: If properly established, the attorney's trust arrangement is not expressly prohibited by ethical or statutory rules affecting attorneys at law. Care should be taken that any contingency fees received by the attorney are contracted freely and are reasonable. The attorney should carefully define the roles of trustee and counsel for the trust, and should be acutely sensitive to conflict which may arise from participation in dual roles.

THIS OPINION IS ADVISORY ONLY