Can a lawyer take out a loan from a bank to pay a client's litigation costs and have the client reimburse the loan and its interest?

Plain-English summary

Personal-injury lawyers often handle cases where, even on a contingent fee, the client cannot pay the out-of-pocket litigation expenses (which in product-liability or malpractice cases can run into the hundreds of thousands of dollars) and the lawyer may find it impractical to advance them. The Committee considered whether the Nevada rules let a lawyer borrow from a third-party lender to pay litigation costs, with the lawyer obligated to repay the loan and the client in turn obligated to reimburse the lawyer, and whether the client can also be made responsible for the interest and other costs of the loan.

The Committee answered that a lawyer may borrow for this purpose, with safeguards. As to the lender, it must be a recourse loan: the lawyer must be the obligor, solely responsible for repayment without regard to the outcome of the matter, so repayment may not be contingent on the success of the litigation. The opinion sharply distinguishes this from "factoring" or non-recourse lending, where funds are lent directly to the client at high rates with repayment contingent on success, an arrangement many bars have disapproved as creating an additional lien on the recovery and potentially undermining the client's settlement judgment. The opinion grounds the analysis in NRPC 1.8(e) (a lawyer may advance court costs and litigation expenses, with repayment contingent on outcome, and may pay an indigent client's costs) and NRPC 5.4 (a nonlawyer may not direct or control a lawyer's professional judgment), and cautions that significant deviations from the basic recourse-loan framework may make the arrangement impermissible.

The opinion sets out a series of safeguards. The lawyer must disclose the planned loan, its nature, and material terms (including the maximum interest rate) and explain that the debt could affect the lawyer's settlement advice, reminding the client that under NRPC 1.2 the settlement decision is the client's. The client must give written consent before the loan. A separate written agreement should specify the client's obligation to reimburse reasonable litigation expenses and whether the client is responsible for interest and other lending costs, with any maximum interest charge specified and reasonable in light of the credit market. The borrowed amount must be reasonable in relation to the claim, with unspent funds kept in the trust account; the lawyer must make the lender understand the lawyer's fiduciary duty to the client and that the lender has no authority over the client's case or the settlement decision; the lawyer may pledge assets as security in the lawyer's best judgment but is not required to seek a loan or to encumber assets that could impede the representation if foreclosed; the lawyer may consider insurance against default; and the lawyer may not use the borrowing to solicit or retain clients or to fund a client's living expenses. The opinion concludes that, if appropriately structured and obtained with client disclosure and consent, a lawyer may borrow to finance litigation costs reasonably necessary to prosecute a client's claim.

In practice

The opinion holds that, under the Nevada rules as they stood at the time, a lawyer may use a recourse bank loan to fund a client's litigation costs and pass the reasonable interest through to the client, provided the lawyer remains personally obligated on the loan, fully discloses the terms (including a specified, reasonable maximum interest rate), obtains the client's written consent before borrowing, keeps the lender from influencing the representation or the client's settlement decision (NRPC 1.2, 5.4), and does not use the loan to solicit clients or fund living expenses. The opinion stresses this addresses recourse loans to counsel, not non-recourse "factoring" arrangements lent directly to the client, and not lawyer-client loans for other purposes.

Common questions

Q: Can a lawyer borrow money to cover a client's litigation expenses?

A: Yes. The opinion concluded a lawyer may take a recourse loan for litigation costs, but the lawyer must remain solely obligated to repay it regardless of the case outcome; repayment cannot be contingent on success.

Q: Can the client be charged the interest on that loan?

A: Per the opinion, yes, through a separate written agreement, but the maximum interest charge must be specified in the agreement and be reasonable in light of the credit market when the loan is obtained.

Q: What does the lawyer have to do before taking the loan?

A: The opinion requires the lawyer to disclose the loan and its terms, explain that the debt could affect settlement advice (the settlement decision being the client's under NRPC 1.2), and obtain the client's written consent before borrowing.

Q: How is this different from a litigation-funding company lending to the client?

A: The opinion distinguishes non-recourse "factoring," where funds go directly to the client with repayment contingent on success; it approves only recourse loans to counsel and notes the concerns bars have raised about direct, contingent client lending.

Background and rules framework

The opinion interprets NRPC 1.8 (conflicts and business arrangements, including 1.8(e) on advancing litigation costs and a lawyer's financial assistance to a client) and NRPC 5.4 (professional independence; a nonlawyer may not direct or control a lawyer's judgment), in the context of financing litigation expenses, and surveys ethics opinions from many states and cases on litigation-funding and lawyer lending.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8 / Nev. RPC 1.8(e) (financial assistance to a client; advancing litigation costs)
• Model Rule 5.4 / Nev. RPC 5.4 (professional independence of a lawyer)

Cases:

• Chittenden v. State Farm Mut. Auto. Ins. Co., 788 So. 2d 1140 (La. 2001), agreement to reimburse counsel for principal and interest on a litigation loan
• In re Brown, 298 Ore. 285, 692 P.2d 107 (1984), suspension for lending to entice a client
• Kentucky Bar Ass'n v. Mills, 808 S.W.2d 804 (Ky. 1991), reprimand for lending to a client

Other opinions cited:

• Florida Bar Ethics Op. 86-2 (1986): charging interest on costs advanced for litigation

See also

• NV Ethics Op. 29: referring a client to a litigation-funding company
• NY State Bar Op. 769: representing a client who uses a litigation-financing company

Source

• Landing page: https://nvbar.org/for-lawyers/ethics-discipline/ethics-opinions/
• Original PDF: https://nvbar.org/wp-content/uploads/opinion_36.pdf