Can a lawyer represent a client who uses third-party (non-recourse) litigation funding?

Plain-English summary

The opinion addresses non-recourse litigation financing, where a funder advances money to a litigant (or counsel) that is repaid, with a fee, only out of any settlement or judgment. The committee concludes that representing a client who uses such financing is not unethical per se, but that the arrangements raise a cluster of ethical issues the lawyer must be prepared to address.

On legality, under Rule 1.2(d) the lawyer must not facilitate an unlawful transaction, so the lawyer should be aware that particular arrangements may run afoul of usury or champerty law (matters the committee notes are governed by substantive law outside its jurisdiction). As an advisor under Rule 2.1, a lawyer who recommends, reviews, or negotiates a financing agreement must give candid advice on whether it is in the client's interest, weighing the often-high cost against the benefit of access to funds, and should investigate providers before recommending them. On conflicts, the lawyer may not accept a referral fee that would impair independent judgment about whether the financing serves the client (and may have to remit any permitted fee to the client), and the conflict rules constrain a lawyer's advancing fees or financing a client's matter through a company the lawyer owns.

On confidentiality and privilege, the committee stresses that funders typically demand access to case information to evaluate and monitor their investment, which may waive the attorney-client privilege (the common-interest privilege may not apply because the funder's interest is commercial, not legal); a lawyer therefore may not disclose privileged information to a funder without the client's informed consent, after explaining the waiver risk, and should disclose no more than necessary. Finally, on control of the litigation, while a client may consent to giving the funder a role, absent client consent the lawyer may not let the funder influence the lawyer's professional judgment, including decisions about strategy or whether and for how much to settle (Rules 1.7(a), 1.8(f), 5.4(c)).

In practice

The opinion holds that, under the New York rules as they stood at the time, non-recourse financing is permissible but the lawyer carries ongoing duties: candid Rule 2.1 advice; no disclosure of privileged material to the funder without informed consent and only as much as necessary; careful conflict screening around referral fees and fee advances; and a firm line against letting the funder direct strategy or settlement without the client's consent. Per the opinion, the lawyer should raise these issues with the client when financing is contemplated.

Common questions

Q: Is it ethical to represent a client who takes a lawsuit loan?

A: Yes. The opinion concludes it is not unethical per se for a lawyer to advise on or be involved with a non-recourse litigation financing arrangement, though the lawyer must address the ethical issues the financing raises.

Q: Can I send the funder my case file and analysis?

A: Only with the client's informed consent. Per the opinion, sharing privileged information may waive the privilege (the common-interest doctrine may not protect it), so the lawyer must explain that risk, get consent, and disclose no more than necessary.

Q: Can the funder tell me how to run the case or whether to settle?

A: No, absent client consent. The opinion concludes the lawyer may not let the funder's financial interest influence the lawyer's professional judgment on strategy or settlement (Rules 1.7(a), 1.8(f), 5.4(c)), though a client may agree to give the funder a role.

Q: Can I take a referral fee from a funder I recommend?

A: The opinion concludes a lawyer may not accept a referral fee that would impair the lawyer's judgment about whether the financing is in the client's interest, and even a permitted fee may have to be remitted to the client.

Background and rules framework

The opinion interprets New York Rules 1.2(d) (counseling unlawful conduct; Model Rule 1.2), 2.1 (advisor; Model Rule 2.1), 1.6(a) (confidentiality; Model Rule 1.6), 1.7(a) (personal-interest conflict; Model Rule 1.7), 1.8(e) and 1.8(f) (financial assistance and third-party payment; Model Rule 1.8), and 5.4(c) (third-party interference with judgment; Model Rule 5.4), against the backdrop of usury and champerty law it does not decide.

Citations and references

Rules of Professional Conduct:

• Model Rule 2.1 / NY RPC 2.1 (candid advice on the arrangement)
• Model Rule 1.6 / NY RPC 1.6(a) (confidentiality; privilege waiver risk)
• Model Rule 1.7 / NY RPC 1.7(a) (personal-interest conflicts)
• Model Rule 1.8 / NY RPC 1.8(e), (f) (financial assistance; third-party payment)
• Model Rule 5.4(c) / NY RPC 5.4(c) (no third-party interference with judgment)

Cases:

• Leader Technologies, Inc. v. Facebook, Inc., 719 F. Supp. 2d 373 (D. Del. 2010), discovery of documents shared with funders
• Echeverria v. Estate of Lindner, 2005 N.Y. Slip Op. 50675(U) (Sup. Ct. Nassau County 2005), non-recourse advance found usurious

Other opinions cited:

• NYSBA Ethics Op. 769 (2003) and Op. 666 (1994): advising on and referring clients to litigation funding

See also

• NYC Bar Ethics Op. 2018-5: Litigation funder's contingent interest in legal fees
• NYC Bar Ethics Op. 2020-1: Ongoing relationship with a nonlawyer-owned ABS firm
• NYC Bar Ethics Op. 2014-1: Business arrangements with non-legal organizations

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-2011-2-third-party-litigation-financing/
• Original PDF: https://www.nycbar.org/wp-content/uploads/2023/05/20072132-FormalOpinion2011-2Third-partyLitigationFinancing.pdf