Can a lawyer use a third-party company that finances clients' legal fees, paying the lawyer up front and collecting from the client with interest?

Plain-English summary

A company (called "Credit" in the anonymized opinion) offered to finance clients' legal fees: a participating lawyer would submit vouchers, and Credit would pay the lawyer 70-90% of each voucher up front, then collect the full amount from the client over several years, retaining the difference as its financing fee; for clients who did not qualify, Credit offered record-keeping and charged the client interest. The committee was asked whether a firm could use the service.

The committee concluded such financing is not per se unethical, but that the requirements of the leading ABA opinion (Formal Op. 338) did not address all the concerns the plan raised, and it identified eight problems requiring modification. It explained that under DR 4-101 the lawyer must control the extent to which confidences or secrets are disclosed in a fee dispute (DR 4-101(C)(4) allows only what is strictly necessary). On fee division (DR 3-102, no fee sharing with nonlawyers), the committee reasoned by analogy to its accounts-receivable opinions that Credit could take its 10-30% only on fees the lawyer had already fully earned, and that any unearned advance must be refundable under DR 2-110(A)(3). Most importantly, drawing on EC 2-23 and prior New York opinions, it held the lawyer must retain control over whether the client is sued for the fee, including the ability to repurchase the account, and must be able to stop the financier from collecting a fee that has become excessive under DR 2-106; the plan as presented did not assure that control. It also flagged conflict concerns under DR 5-107(A)(1) and (B): the lawyer must not let the financing available (or Credit's policies, such as not financing bankruptcies) influence the advice given. Finally, it stressed full client disclosure of all aspects of the arrangement, including that the client keeps against the financier all defenses the client would have against the lawyer, and that the lawyer cannot rely on the company to make that disclosure.

Currency note

This opinion was issued in 1995, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules and Ethical Considerations cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. 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 use a third-party company to finance clients' legal fees?

A: The opinion concluded such financing is not per se improper, but participation in the specific plan would be improper unless several modifications were made.

Q: Can the financing company collect a percentage of the lawyer's fee?

A: Per the opinion, the company may take its financing fee only with respect to fees the lawyer has already fully earned, to avoid an improper division of fees with a nonlawyer under DR 3-102.

Q: Who decides whether the client gets sued for an unpaid fee?

A: The committee concluded the lawyer must retain control over whether the client is sued, including the ability to repurchase the account, and must be able to prevent collection of a fee that has become excessive.

Q: Can the financing company's policies affect the lawyer's advice?

A: The committee cautioned, under DR 5-107(A)(1) and (B), that the lawyer must not let the level of available financing or the company's policies influence the legal advice given to the client.

Background and rules framework

The opinion applied New York Code DR 2-106 (reasonable fees), DR 2-110(A)(3) (refunding unearned fees), DR 3-102 (no fee sharing with nonlawyers), DR 4-101 (confidences and secrets), DR 5-107(A)(1) and (B) (third-party payment and professional independence), and DR 2-101 and 2-103 (advertising/solicitation), with EC 2-23. The analysis corresponds to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), and 5.4 (professional independence).

Citations and references

Rules of Professional Conduct:

• New York Code DR 2-101, DR 2-103, DR 2-106, DR 2-110(A)(3), DR 3-102, DR 4-101, DR 5-107(A)(1), DR 5-107(B); EC 2-23 (applied in the opinion)
• MR 1.5 (fees); MR 1.6 (confidentiality); MR 5.4 (professional independence)

Cases:

• Matter of Cooperman, 83 N.Y.2d 465 (1994), unearned retainer must be refunded on demand
• Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), non-deceptive advertising illustrations

Other opinions cited:

• ABA Formal Op. 338 (1974): credit-card payment of legal fees with guidelines
• N.Y. State 117 (1969), 362 (1974); N.Y. County 690; N.Y. City 1993-1: legal-fee financing and control over suits

See also

• NYC Bar Formal Op. 1994-9: Delegating Fee Billing to a Nonlawyer
• NYC Bar Formal Op. 1995-11: Supervising Nonlawyer Staff and Fee Sharing
• ISBA Ethics Op. 705: Acting on Claims Solicited by a Lay Corporation

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-1995-1-attorneys-fees-billing-credit-cards-and-other-financing/