Ezel / Ethics Opinions / NYSBA
NYSBA 2018-03-07

Can a lawyer represent a client in a lawsuit financed by a litigation-funding company in which the lawyer is an investor?

Short answer: No. Even with disclosure and consent, the lawyer's investment routes financial assistance to the client and gives the lawyer a proprietary interest in the claim, violating Rules 1.8(e) and 1.8(i); those bars are not waivable and are imputed to the whole firm.
Currency note: this opinion is from 2018
Subsequent statutory amendments, court decisions, or later opinions or rule amendments may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
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About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 1145: Investing in a litigation funder for one's clients

Short answer: A lawyer may not represent a client in litigation funded by a litigation-finance company the lawyer invests in. The investment channels prohibited financial assistance to the client (Rule 1.8(e)) and gives the lawyer a proprietary interest in the claim (Rule 1.8(i)); neither bar can be waived, and both are imputed to the lawyer's firm.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York 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.

View original opinion

Plain-English summary

The inquirer is the managing partner of a firm representing plaintiffs in commercial litigation, who sometimes refers clients to a litigation-financing company that advances money in exchange for a percentage of any recovery. The company is a limited partnership raising money from qualified investors, and the inquirer wants to become a direct and substantial investor. The company funds some of the inquirer's clients' suits and some brought by others; neither the inquirer nor the firm represents clients in negotiating the financing terms. The question is whether the lawyer or the firm may represent a client in litigation funded by a company in which the lawyer invests.

The committee identifies four conflict rules. Two could in principle be cured by disclosure and consent. Rule 1.8(a) applies because the client's funding from a source in which the lawyer has a financial interest, used in part to pay the lawyer's fees, is a business transaction with differing interests and a client expectation of professional judgment; if fair and reasonable, it can be satisfied with full written disclosure and informed written consent, and the conflict imputed to the firm under Rule 1.10(a) can likewise be waived under Rule 1.10(d). Rule 1.7(a)(2) also applies, because the lawyer's stake in the company could create a significant risk to the lawyer's judgment (for instance, the company's interest in expediting or prolonging the case may diverge from the client's), but that conflict too can be disclosed and waived under Rule 1.7(b).

The other two rules cannot be cured. Rule 1.8(e) bars a lawyer from advancing or guaranteeing financial assistance to a client in litigation, and the committee concludes the company's payments are financial assistance from the inquirer to the inquirer's client; routing the money first as an investment in a limited partnership does not change that (Rule 8.4(a) bars violating a rule through the acts of another). The narrow Rule 1.8(e) exceptions (court costs, indigent or pro bono clients, and contingency matters) do not cover the broad assistance, such as non-contingent attorney's fees, that the company would provide. Rule 1.8(i) bars acquiring a proprietary interest in the cause of action; by taking a percentage of the recovery, the company, and the inquirer as part owner, would acquire such an interest, and neither the lien nor the contingent-fee exception applies. These prohibitions are imputed to the firm under Rule 1.10(a). The committee explains they are not subject to waiver: Rule 1.10(d) allows waiver of a "disqualification," but Rules 1.8(e) and 1.8(i) impose an outright prohibition with no informed-consent exception and no negatively affected client to consent, so neither the prohibition nor its imputed form can be waived.

In practice

Under this opinion, a lawyer's direct and substantial investment in a litigation-funding company disqualifies the lawyer and the entire firm from representing any client the company funds. The committee holds that while the Rule 1.8(a) business-transaction conflict and the Rule 1.7(a)(2) personal-interest conflict could be cured by disclosure and informed written consent, the conduct independently violates Rule 1.8(e) (prohibited financial assistance to a client) and Rule 1.8(i) (proprietary interest in the claim), which are not waivable and are imputed to the firm under Rule 1.10(a). The committee limits its holding to a direct and substantial investment and does not address indirect investments through intermediate entities of which the lawyer may be unaware.

Common questions

Q: Can a lawyer invest in a litigation funder and still represent clients it finances?

A: No, for the lawyer's own clients funded by the company. The investment violates the non-waivable bars in Rules 1.8(e) and 1.8(i), and the disqualification is imputed to the firm (Opinion 1145 ¶¶ 15-19, 21).

Q: Could disclosure and the client's consent fix the problem?

A: Not entirely. Consent can cure the Rule 1.8(a) and Rule 1.7(a)(2) conflicts, but the Rule 1.8(e) and Rule 1.8(i) prohibitions are outright and have no informed-consent exception, so they cannot be waived (¶¶ 9-12, 20).

Q: Does it matter that the money is routed through a limited partnership with many investors?

A: No. The committee holds that money from the inquirer reaching the inquirer's client is financial assistance regardless of the limited-partnership structure; Rule 8.4(a) bars achieving indirectly what the rule forbids directly (¶ 15).

Background and rules framework

The opinion applies four conflict rules. Rule 1.8(a) (Model Rule 1.8) on business transactions and Rule 1.7(a)(2) (Model Rule 1.7) on personal-interest conflicts are treated as consentable. Rule 1.8(e) (financial assistance to a client) and Rule 1.8(i) (proprietary interest in the cause of action) are treated as non-waivable, with Rule 8.4(a) barring indirect violation. Rule 1.10(a) and (d) (Model Rule 1.10) govern imputation to the firm and the limits of waiver.

Citations and references

Rules of Professional Conduct:

  • New York Rule 1.8(e) (Model Rule 1.8): no advancing or guaranteeing financial assistance to a litigation client
  • New York Rule 1.8(i) (Model Rule 1.8): no proprietary interest in the cause of action
  • New York Rule 1.8(a) (Model Rule 1.8): business transactions with a client
  • New York Rule 1.7(a)(2), (b) (Model Rule 1.7): personal-interest conflicts and consent
  • New York Rule 1.10(a), (d) (Model Rule 1.10): imputation and waiver
  • New York Rule 8.4(a) (Model Rule 8.4): violating a rule through the acts of another

Other opinions cited:

  • N.Y. State 769 (2003): a lawyer may not own an interest in the client's financing source
  • N.Y. State 666 (1994): referral to a litigation funder; confidentiality limits
  • ABA Commission on Ethics 20/20, Informational Report (2011): alternative litigation finance and non-waivable conflicts
  • N.Y. City Formal Op. 2011-2: third-party litigation funding

See also

Source