Can a law firm sell its delinquent accounts receivable to a third party or hire a collection agency to collect unpaid fees from former clients?

Plain-English summary

Opinion 723 answers whether a law firm may sell some of its delinquent accounts receivable to a third party to collect fees owed by former clients, and the parallel question of retaining a collection agency. The Committee concludes that, provided only the information reasonably necessary to establish the claim for monies is released and the other conditions below are met, both the sale of receivables and the use of a collection agency are permissible.

The analysis turns on confidentiality. RPC 1.6(a) makes information relating to the representation of a client confidential. But RPC 1.6(d)(2) lets a lawyer reveal such information to the extent the lawyer reasonably believes necessary to establish a claim or defense in a controversy between the lawyer and the client. A lawyer entitled to a fee from a former client has such a claim and may reveal confidential information to the extent reasonably necessary to establish the claim and collect the fee. The Committee quotes Comment 11 to Model Rule 1.6 for the principle that the beneficiary of a fiduciary relationship may not exploit it to the detriment of the fiduciary.

The Committee attaches conditions. Before any sale or referral, lawyers should first try to resolve disputes directly with the client. Lawyers may not initiate collection action against current clients. Lawyers should not circumvent the fee arbitration process and, before referring a matter to a collection agency or selling the receivables, should send the client an arbitration notice under Rule 1:20A-6. Lawyers should make reasonable efforts to satisfy themselves that the collection agency or purchaser is reputable and will not take improper or illegal measures to collect. Finally, lawyers may not reveal information about the client or the legal services provided beyond what is reasonably necessary for the agency or purchaser to collect the debt.

In practice

The opinion holds that, under RPC 1.6 as it stood at the time, a law firm may sell delinquent accounts receivable or retain a collection agency to collect fees owed by former clients, because RPC 1.6(d)(2) permits disclosure of confidential information reasonably necessary to establish a fee claim against the client. Per the opinion, the firm must first try to resolve the dispute with the client directly, may not initiate collection against current clients, should send the client a fee-arbitration notice under Rule 1:20A-6, should confirm the agency or purchaser is reputable, and must limit any disclosure to what is reasonably necessary to collect. Because this opinion predates the most recent five years, verify the current Rules of Professional Conduct and Court Rules before relying on the specific requirements it describes.

Common questions

Q: Can I sell my firm's unpaid client accounts to a debt buyer?

A: The opinion concludes yes, for fees owed by former clients, as long as you release only the information reasonably necessary to establish and collect the claim and meet the other conditions it lists.

Q: Doesn't RPC 1.6 confidentiality bar disclosing client information to a collection agency?

A: The opinion explains RPC 1.6(d)(2) permits a lawyer to reveal information reasonably necessary to establish a claim in a controversy between the lawyer and the client, which includes collecting an earned fee from a former client.

Q: Can I refer a current client's unpaid balance to collections?

A: No. Per the opinion, lawyers may not initiate collection action against current clients; the analysis applies to fees payable by former clients.

Q: What steps does the Committee say to take before selling receivables or using an agency?

A: Per the opinion: first try to resolve the dispute directly, send the client a fee-arbitration notice under Rule 1:20A-6, confirm the purchaser or agency is reputable, and limit disclosure to what is reasonably necessary to collect.

Background and rules framework

The opinion interprets RPC 1.6(a) (confidentiality of information relating to the representation) and RPC 1.6(d)(2) (allowing disclosure to the extent reasonably necessary to establish a claim or defense in a controversy between the lawyer and the client), the New Jersey analogs to Model Rule 1.6; the Committee quotes Comment 11 to Model Rule 1.6. The conditions draw on the New Jersey fee-arbitration process under Rule 1:20A-6.

Citations and references

Rules of Professional Conduct:

• MR 1.6 / NJ RPC 1.6(a) (confidentiality of information relating to representation)
• MR 1.6 / NJ RPC 1.6(d)(2) (disclosure to establish a claim between lawyer and client)
• Model Rule 1.6, Comment 11 (beneficiary of a fiduciary relationship may not exploit it to the detriment of the fiduciary)

Court rules:

• N.J. Court Rule 1:20A-6 (pre-action notice of fee arbitration)

See also

• ABA Formal Op. 00-416: Buying a Client's Receivables
• ABA Formal Op. 00-419: Credit Card Payment of Fees
• NY State Bar Op. 474: Confession of Judgment for a Fee

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2012/acp723-1.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. Spaces and apostrophes dropped by the mirror's text extraction have been restored; the linked official source controls.

Appointed by the Supreme Court of New Jersey

OPINION 723

Selling Law Firm Accounts Receivable to a Third Party or Retaining a Collection Agency For Collection of Fees Payable by Former Clients

The Advisory Committee on Professional Ethics received an inquiry asking whether a law firm may sell some of its delinquent accounts receivable to a third party for collection of fees payable by its former clients. Similar issues arise when a law firm retains a collection agency. Provided that only such information reasonably necessary to establish the claim for monies is released, and subject to further conditions set forth below, the Committee finds that a sale of accounts receivable to a third party or retention of a collection agency is permissible.

Rule of Professional Conduct 1.6(a) states that information relating to representation of a client is confidential and may not be disclosed by the lawyer. Rule of Professional Conduct 1.6(d)(2), however, provides that a lawyer may reveal such information to the extent the lawyer reasonably believes necessary . . . to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client . . . . A lawyer entitled to a fee from a former client has a claim in a controversy between the lawyer and the client, and may reveal confidential information to the extent the lawyer believes it reasonably necessary to establish such claim and collect the fee. As Comment 11 to Model Rule of Professional Conduct 1.6 states: This aspect of the rule expresses the principle that the beneficiary of a fiduciary relationship may not exploit it to the detriment of the fiduciary.

Prior to any sale of accounts receivable or retention of a collection agency, lawyers should first try to resolve disputes directly with the client. Lawyers may not initiate collection action against current clients. Lawyers should not circumvent the fee arbitration process and, before referring a matter to a collection agency or selling the accounts receivable, lawyers should first send the client an arbitration notice pursuant to Rule 1:20A-6. Lawyers should make reasonable efforts to satisfy themselves that the collection agency or purchaser of accounts receivable is reputable and will not take improper or illegal measures to collect the debt. Lastly, lawyers may not reveal information about the client or the legal services provided beyond what is reasonably necessary for the agency or purchaser to collect the debt. Subject to these conditions, the Committee finds that a sale of accounts receivable to a third party or retention of a collection agency is permissible.