Can a New York lawyer take litigation funding where the lawyer's repayment to the funder is tied to the legal fees the lawyer collects?
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This page answers the general question as of 2018. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.
Plain-English summary
The opinion addresses arrangements in which a lawyer or law firm, rather than a client, borrows from a litigation funder and agrees that what the lawyer repays will depend on the legal fees the lawyer earns. It concludes that such an arrangement violates Rule 5.4(a), which prohibits a lawyer from sharing legal fees with a non-lawyer.
The opinion reasons that where the lawyer's obligation to the funder rises and falls with the lawyer's receipt or amount of legal fees in particular matters, the funder is effectively sharing in those legal fees. The opinion treats the litigation funder as a non-lawyer for purposes of Rule 5.4(a), so the contingent tie between repayment and fees is impermissible fee-sharing.
The opinion is narrow. It addresses funding agreements with the lawyer where repayment is contingent on the lawyer's legal fees in specific matters; it does not purport to resolve every litigation-funding structure or funding provided directly to clients.
In practice
Under this opinion, as the New York rule stood at the time, the dividing line is whether the funder's return is pegged to the lawyer's legal fees. The opinion holds that a financing agreement under which the lawyer's payments to the funder are contingent on the lawyer's receipt or amount of legal fees in one or more specific matters is prohibited fee-sharing with a non-lawyer under Rule 5.4(a).
Common questions
Q: Can a law firm borrow from a litigation funder and repay out of the fees it wins?
A: Not when repayment is contingent on those fees. The opinion concludes Rule 5.4(a) bars a financing agreement under which the lawyer's payments to the funder are contingent on the lawyer's receipt of legal fees, or the amount of fees, in specific matters.
Q: Why is this treated as fee-sharing rather than an ordinary loan?
A: Because the funder's return is tied to legal fees. The opinion reasons that when what the lawyer owes the funder depends on the legal fees the lawyer receives, the non-lawyer funder is effectively sharing in those fees, which Rule 5.4(a) prohibits.
Q: Does this opinion ban all litigation funding?
A: No. The opinion addresses the specific structure where a non-lawyer funder's repayment from the lawyer is contingent on the lawyer's legal fees in particular matters; it does not resolve every funding arrangement.
Background and rules framework
The opinion interprets New York Rule of Professional Conduct 5.4(a) (a lawyer or law firm shall not share legal fees with a non-lawyer, analogous to Model Rule 5.4(a)), which protects the lawyer's professional independence. The opinion applies that prohibition to a financing agreement between a lawyer and a litigation funder.
Citations and references
Rules of Professional Conduct:
- NY RPC 5.4(a) (sharing legal fees with a non-lawyer)
- MR 5.4(a) (Model Rule analogue)
See also
- NYC Bar Ethics Op. 2024-2: Advice to clients on client funding and litigation finance
- NYC Bar Ethics Op. 2020-1: Ongoing relationships with alternative legal business entities
- NYC Bar Ethics Op. 2011-2: Third-party litigation financing
Source
- Landing page: https://www.nycbar.org/reports/formal-opinion-2018-5-litigation-funders-contingent-interest-in-legal-fees/
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