Can a lawyer take collection suits referred by a commercial collection agency that handles the lawyer's retention and fees, where the agency is only the assignee of the creditors' claims?

Plain-English summary

The inquirer asked whether an attorney may be engaged by a commercial collection agency to sue debtors of the agency's customers, with the customers' consent, where the agency solicits customers, tries to collect without litigation, and refers matters needing suit to the attorney, and where all arrangements for the attorney's retention and fees run through the agency. The Committee recalled its Opinion 17, which had held it improper for an attorney to be engaged by a collection agency to sue debtors of the agency's customers, drawing on the ABA's 1937 Statement of Principles barring an agency from controlling or exploiting the attorney's services or sharing in the attorney's fees, and its Opinion 66, which distinguished claims the agency purchases (where engaging an attorney is permissible) from claims merely assigned (governed by Opinion 17).

The Committee explained that, with the Canons superseded by the Disciplinary Rules, DR 5-107(A) and (B) controlled. Assuming the agency was merely the assignee, the "client" under DR 5-107(A) is the creditor, not the agency, so it would be unethical for the attorney to be engaged without the creditor's consent after full disclosure and unless the public interest is not adversely affected. Under DR 5-107(B), the agency may under no circumstances direct or regulate the attorney's professional judgment. Assuming consent could be obtained, the essential question was whether allowing the agency to retain the attorney would adversely affect the public interest.

Drawing on the ABA opinions collected in Wise, Legal Ethics, the Committee set out the conditions under which a collection agency may properly engage an attorney: the agency must be authorized as the creditor's agent to employ the attorney; the attorney must represent the creditor and not the agency; there must be no sharing of fees between attorney and agency; the lawyer must deal directly with the creditor unless the creditor expressly authorizes the agency to act in his place (with the lawyer responsible for confirming the agency's authority); and the attorney must remit directly to the creditor, deducting his fee, unless satisfied the creditor authorized the agency to receive the remittance net of the fee.

Currency note

This opinion was issued in 1976, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and predates the 1984 replacement of the Disciplinary Rules by the RPCs. The third-party-payer and professional-independence concerns then in DR 5-107 are now addressed by RPC 5.4 and RPC 1.8(f). 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: Who is the lawyer's client when a collection agency refers the case?

A: Under this opinion, where the agency is merely the assignee, the creditor is the client, not the agency.

Q: Can the lawyer share fees with the collection agency?

A: No. The Committee listed "no sharing of fees between attorney and agency" as a condition, and DR 5-107 barred the agency from controlling the lawyer.

Q: Can the agency direct how the lawyer handles the case?

A: No. Under DR 5-107(B), the agency may under no circumstances direct or regulate the attorney's professional judgment.

Background and rules framework

The opinion applied DR 5-107(A) and (B), as developed in its Opinions 17, 66, and 264 and the ABA opinions collected in Wise, to a collection agency engaging an attorney as assignee of creditors' claims. In current New Jersey terms, the third-party-payer and independence concerns are governed by RPC 5.4 and RPC 1.8(f).

Citations and references

Rules of Professional Conduct:

• DR 5-107(A) and (B) (avoiding influence by, and direction from, one who pays for legal services), as in effect 1976; now MR 5.4 / NJ RPC 5.4 and MR 1.8(f) / NJ RPC 1.8(f)

Other opinions cited:

• NJ ACPE Opinion 17, 87 N.J.L.J. 113 (1964); Opinion 66, 88 N.J.L.J. 49 (1965); Opinion 264, 96 N.J.L.J. 1239 (1973)
• ABA Statement of Principles in Reference to Collection Agencies (1937)

See also

• NJ ACPE Op. 488: Furnishing Fee Information to a Group Legal Services Plan
• NJ ACPE Op. 595: Collection Letter Threatening a Criminal Complaint
• NJ ACPE Op. 416: Referral Fee From a Realtor

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp338-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

99 N.J.L.J. 588, July 1, 1976

OPINION 338

Engagement by Collection Agency Suing Debtors of Its Customers

The inquirer asks whether it is permissible for an attorney to be engaged by a commercial collection agency to institute suit against debtors of the customers of the agency if the customers consent to the arrangement. He indicates that the firm of which he is a member would accept matters on a case-by-case basis from the collection agency which for a fee solicits customers who are in need of its services and attempts to effectuate collections of debts without the necessity of litigation. Where litigation is necessary, the collection agency refers the matter to an attorney to institute legal action against the debtor. Most significantly the inquirer indicates that all arrangements for the attorney's retention, payment of fees, etc., would be through the collection agency.

This Committee in Opinion 17, 87 N.J.L.J. 113 (1964), stated that it "would be improper for an attorney to be engaged by a commercial collection agency for the purpose of instituting suit against debtors of the customers of such agency." That opinion was based at least in part on the "Statement of Principles in Reference to Collection Agencies" made by the Committee on Unauthorized Practice of the Law of the American Bar Association during its 1937 annual meeting. That statement included certain prohibitions involving collection agencies among which were "to assume authority on behalf of creditors to retain or discharge an attorney or arrange this compensation, to intervene between attorney and client so as to control or exploit the services of the attorney in the interest of the agency," and to otherwise obtain a share in the attorney's fees earned in the collection of a claim.

Our Opinion 66, 88 N.J.L.J. 49 (1965), made a distinction between claims which are purchased by a collection agency and those which are merely assigned, holding that it would not be improper for a collection agency purchasing a claim to engage an attorney to represent the collection agency, whereas Opinion 17, supra, was controlling with respect to claims which are merely assigned to the collection agency. Opinion 264, 96 N.J.L.J. 1239 (1973), while dealing with a different subject, nonetheless did discuss the general prohibition of the present Code of Professional Responsibility against intermediaries between an attorney and his client and cited with approval Opinion 17, supra.

As pointed out in Opinion 264, the Canons of Professional Ethics, which were in effect at the time of the issuance of Opinions 17 and 66, were superseded by the Disciplinary Rules of the Code of Professional Responsibility. DR 5-107 (A) and (B) must be interpreted in light of the present inquiry. On the assumption that the collection agency engaging the attorney is merely the assignee of the claim, the "client" referred to in DR 5-107(A) must be the creditor and not the collection agency. Thus it is clear that it would be unethical for an attorney to be engaged by such agency without the consent of the creditor after full disclosure and unless the public interest is not adversely affected. Secondly, as pointed out in section (B) of DR 5-107, under no circumstances may the collection agency direct or regulate the professional judgment of the attorney rendering the legal services. Assuming that it would not be difficult for appropriate consent to be obtained from a creditor engaging a collection agency after appropriate full disclosure, the essential question to be decided would be whether or not it would adversely affect the public interest to permit the collection agency to retain the services of the attorney. Wise, Legal Ethics, 103 (1966) lists several opinions of the American Bar Association Committee on Professional Ethics, holding that a collection agency may properly engage an attorney if:

1. the agency is authorized as an agent by the creditor to employ the attorney,

2. the attorney represents the creditor and not the agency;

3. there is no sharing of fees between the attorney and the agency;

4. the lawyer deals directly with the creditor unless the creditor has expressly authorized the agency to act in his place in dealing with the lawyer; (It is incumbent upon the lawyer to be sure of the nature and extent of the agency's authority in this regard.)

5. the attorney remits directly to the client but may deduct his own fee unless he is satisfied the creditor has authorized the agency to receive the remittance less the attorney's fee.