Can a lawyer with a contingent-fee agreement take a fee out of a litigation-funding advance the client received against a future recovery?
NY State Bar Ethics Opinion 1051: Taking a contingent fee from a litigation-funding advance
Short answer: Whether a "settlement or judgment" contingent fee already reaches a third-party advance is a question of law the committee does not resolve; a retainer may ethically provide for such payment from the start, but if it does not, an amendment to allow it is scrutinized under Rule 1.8(a) as a business transaction with the client.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
The inquirer represented many plaintiffs in a settled mass-tort action whose fund would pay individual class members only if and when they develop defined symptoms, possibly years later. A funding company offered class members an immediate non-recourse "advance" secured by a lien on any eventual recovery; if a member never recovered, nothing would be owed. The inquirer's retainer set a 25% contingent fee on "a monetary recovery obtained for client by settlement or judgment," and asked whether the lawyer could take that fee from the advance (¶¶ 1-5). The committee declined to opine on litigation-funding issues generally, citing its prior treatment in N.Y. State 666, N.Y. State 769, and N.Y. City 2011-2 (¶ 6).
Whether the existing agreement's "monetary recovery by settlement or judgment" language covers an advance is a matter of contract and court-rule interpretation that the committee, which does not decide questions of law, left open, noting that fee agreements are strictly construed against the lawyer and that an unauthorized fee would be "excessive" under Rule 1.5(a) (¶¶ 7-12). The committee said a retainer that provided ab initio for payment of the fee out of a loan or advance secured by the client's claim would not violate Rule 1.5 so long as the fee was not excessive (¶ 13).
Turning to amendment, the committee applied the framework of N.Y. State 910: some fee-agreement amendments are tested only under Rule 1.5, while others are "business transactions with a client" subject to Rule 1.8(a), depending on factors like a material change in circumstances, the time since contracting, the client's sophistication, and whether the amendment benefits the client or only the lawyer (¶¶ 14-16). Applying those factors, the committee concluded an amendment to let the lawyer take the fee from the client's advance should be scrutinized under Rule 1.8(a): there was no apparent change of circumstances beyond the client's decision to seek early funds; the lawyer would reach property other than what the lawyer's efforts recovered (Rule 1.8 Cmt. [16]); the amendment benefits solely the lawyer; it would likely cost the client significantly given typical high funding charges; and the client would likely be looking to the lawyer for professional judgment on the amendment (¶¶ 17-19). Where Rule 1.8(a) applies, the amendment must be fair and reasonable, fully disclosed in writing, accompanied by written advice to seek independent counsel, and confirmed by the client's signed informed consent, with the lawyer bearing the burden of showing fairness (¶ 20).
In practice
Under the New York rules as they stood at the time of the opinion, the committee separated the contract question from the ethics question. Whether the lawyer's existing "settlement or judgment" fee already reaches a funding advance is a matter of law for the lawyer and the courts, and collecting a fee the agreement does not authorize would be an excessive fee under Rule 1.5(a). A retainer can provide for payment out of an advance from the outset without violating Rule 1.5, provided the fee is not excessive. But amending the retainer to add that term, on these facts, is a Rule 1.8(a) business transaction with the client, so it must be fair and reasonable, disclosed in writing, accompanied by written advice to seek independent counsel, and confirmed by the client's signed informed consent, with the lawyer carrying the burden of demonstrating fairness.
Common questions
Q: Can a lawyer take a contingent fee out of money a litigation funder advances to the client?
A: Only if the retainer authorizes it. Whether the existing "settlement or judgment" language reaches the advance is a question of law the committee does not decide, and an unauthorized fee would be excessive under Rule 1.5(a) (¶¶ 10-11).
Q: Can the retainer provide for this from the start?
A: Yes. The committee said a retainer that provides ab initio for payment of the fee out of a loan or advance secured by the client's claim does not violate Rule 1.5, as long as the fee is not excessive (¶ 13).
Q: What happens if the lawyer asks the client to amend the retainer to allow it?
A: The committee concluded such an amendment should be scrutinized under Rule 1.8(a) as a business transaction with the client, so it requires fair terms, full written disclosure, written advice to seek independent counsel, and signed informed consent, with the lawyer bearing the burden of fairness (¶¶ 17, 20).
Background and rules framework
The opinion interprets New York Rule 1.5 (fees, including the bar on excessive fees and the contingent-fee requirements of Rule 1.5(c)) and Rule 1.8(a) (business transactions with a client), corresponding to ABA Model Rules 1.5 and 1.8. The analysis turns on whether amending a fee agreement to benefit the lawyer is governed only by Rule 1.5 or also by the heightened Rule 1.8(a) safeguards, applying the factor test the committee set out in N.Y. State 910.
Citations and references
Rules of Professional Conduct:
- MR 1.5 / NY RPC 1.5, 1.5(a), 1.5(c) (fees; excessive fees; contingent-fee requirements)
- MR 1.8 / NY RPC 1.8(a) (business transactions with a client)
Cases:
- Matter of Kuneicki, 35 A.D.3d 742 (2d Dept 2006), fee agreements construed favorably to the client
- Baye v. Grindlinger, 78 A.D.2d 60 (2d Dept 1980), post-employment terms beneficial to the attorney must be shown fair and known
- Knight v. Aqui, 966 F. Supp. 2d 989 (N.D. Cal. 2013), pro rata fee where the agreement is silent on a structured settlement
Other opinions cited:
- N.Y. State 910 (2012): when a fee-agreement amendment is a Rule 1.8 business transaction
- N.Y. State 666 (1994); N.Y. State 769 (2003); N.Y. City 2011-2: litigation-funding ethics issues
- ABA 11-458 (2011): switching from hourly to contingent fee tested under Rule 1.5
See also
- NY State Bar Op. 1108: Referring clients to third-party fee financing
- NY State Bar Op. 1145: Investing in a litigation funder for the lawyer's clients
- NY State Bar Op. 1206: Referring clients to a spouse-owned litigation financing company
- NY State Bar Op. 1202: Flat fees, advance payments, and a client-satisfaction discount
Source
- Landing page: https://nysba.org/ethics-opinion-1051/