Can a New Jersey lawyer and client sell a final judgment to a factor at a discount, and can the lawyer use the fee portion as loan collateral?

Plain-English summary

The "JUA freeze" (a freeze on paying out final Joint Underwriting Association judgments) prompted inquiries about selling or pledging those judgments. The Committee addressed three questions: whether an attorney and client may sell the entire JUA settlement to an independent factor at a discount; whether an attorney may advise a client to accept an immediate discounted cash payment, given that the attorney would also be paid sooner; and whether an attorney may use the counsel-fee portion as security for a loan or line of credit.

The Committee answered on stated assumptions: that the litigation is fully and finally concluded with the litigant's and attorney's fee components established and agreed (per Opinion 663 and RPC 1.8(j)), that the client has been advised of the JUA freeze and its consequences, and that the proposed factor is wholly independent of counsel so as not to violate RPC 1.7 and RPC 1.8(a). On the first two questions, it found no impropriety in advising a client of the possibility of factoring such a judgment, so long as the attorney first satisfies himself as to the available alternatives and reasonableness of the discounts and presents them to the client, including the alternatives of full payment when the freeze lifts and seeking a hardship exemption. The client must be told that accepting a discounted sum means the attorney will be paid immediately as well, and the decision rests with the client; the Committee advised securing the client's choice in writing.

On the third question, the Committee concluded that using an uncollected fee as collateral for a loan or line of credit is a business decision between borrower and lender, not governed by ethical considerations, unless doing so would hinder the client's ability to sell the underlying judgment for discounted value; if it impairs that ability, the client's interests must be considered paramount.

Currency note

This opinion was issued in 1992, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and it addressed a specific JUA-freeze situation that may no longer exist. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

Common questions

Q: Can a lawyer and client sell a final judgment to a factor at a discount?

A: Per the opinion, yes, where the litigation is finally concluded and the factor is independent, the Committee found no impropriety, provided the client is fully informed of the alternatives and makes the decision.

Q: Is it a problem that the lawyer gets paid sooner when the client factors the judgment?

A: The Committee required that the client be told the attorney will be paid immediately as well, and left the decision to the client; on that basis it found no impropriety in advising the client of the option.

Q: Can a lawyer pledge the unpaid fee portion as loan collateral?

A: The opinion treated that as a business decision not governed by ethics, unless it would impair the client's ability to sell the underlying judgment, in which case the client's interests are paramount.

Background and rules framework

The opinion rested on New Jersey RPC 1.8 (specifically the assumptions that RPC 1.8(j) was satisfied per Opinion 663 and that no RPC 1.8(a) business-transaction conflict arose) and RPC 1.7 (the factor's independence from counsel), together with the lawyer's duty to keep the client fully and accurately informed (Model Rules 1.7 and 1.8). The analysis turned on the litigation being finally concluded, the factor being independent, and the client making an informed decision.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / NJ RPC 1.8(a), 1.8(j) (business transactions; concluded-litigation interest)
• MR 1.7 / NJ RPC 1.7 (conflicts of interest; independence of the factor)

Cases:

• Matter of Stein, 97 N.J. 550 (1984), the duty to keep the client fully informed

Other opinions cited:

• NJ ACPE Op. 663 (131 N.J.L.J. 856), prerequisites for sale or pledge of a concluded judgment

See also

• NJ ACPE Op. 682: Attorney-Owned Title Insurance Company and Divided Loyalty
• ABA Formal Op. 00-418: Acquiring Ownership in a Client

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2005/acp670-1.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.

1 N.J.L. 1921, December 14, 1992

132 N.J.L.J. 978, December 14, 1992

OPINION 670

Sale or Pledge of Final JUA Judgements

The JUA freeze has generated a series of inquiries related to the sale or pledge of final judgements, both as to the client component and the counsel fee component. See Opinion 663, 131 N.J.L.J. 856, 1 N.J.L. 1043 (July 13, 1992). The three specific inquiries brought to this Committee are: (1) Whether an attorney and client can sell the entire JUA settlement to an independent factor at a discounted price. (2) Subsumed in the first question is the second question: Whether an attorney can advise a client to accept an immediate discounted cash payment for a judgement, in view of the attorney's thus benefitting from immediate payment. (3) Whether an attorney can use the counsel fee portion of the judgement as security for a loan or line of credit.

For the purposes of these inquiries, we assume that the strictures of RPC 1.8(j) consistent with Opinion 663, supra, have been met, namely, the litigation has been fully and finally concluded with the litigant's and attorney's fees components of the judgment established and agreed upon by both client and counsel. We must further assume that consistent with an attorney's duty to keep a client completely and accurately informed, the client has been advised of the JUA freeze and, insofar as current knowledge permits, of its consequences. See Matter of Stein, 97 N.J. 550 (1984). Finally, we assume that the proposed factor is totally independent of counsel so as not to violate RPC 1.7 and RPC 1.8(a).

As to the first and second inquiries, we find no impropriety in advising a client of the possibility of factoring a judgement meeting all of these criteria. In so doing, the attorney should first satisfy himself or herself as to all currently available alternatives and the reasonableness of the proposed discounts under each alternative and present those alternatives to the client, together with the alternatives of receiving full payment when the freeze is lifted and of seeking a hardship exemption in conformity with the freeze, if such an exemption is viable. The client should also be advised that the acceptance of a discounted sum in return for the judgement will result in the attorney's being paid immediately as well (as is true, we note, with any settlement). The decision as to which option to pursue rests with the client. In order to avoid misunderstanding, it is always advisable to describe the options and secure the written acknowledgment of the client's choice in writing.

The answer to the third inquiry, whether an uncollected fee can be used for collateral for a loan or line of credit is clear: This is a business decision between borrower and lender and as such, is not governed by ethical consideration, unless utilizing the uncollected fee for collateral will hinder the viability of the client's selling the underlying judgment for discounted value. If utilization of the fees for collateral in any way impairs the ability of the client to sell the judgment, the interests of the client must be considered paramount.