Can a lawyer refer a client to a litigation funding company owned by the lawyer's sibling for a non-recourse loan to cover litigation expenses?

Plain-English summary

A personal injury lawyer who handles infant medical malpractice actions (brought by a parent or guardian, with contingent fees subject to court approval under Judiciary Law § 474) found one alternative litigation funding (ALF) company willing to finance these cases. That company is owned by the lawyer's sibling. The lawyer has no financial interest in the sibling's company and the sibling has none in the firm; their only overlap is separate minority interests in a family property neither manages. The lawyer proposes referring guardians to the sibling's company for non-recourse loans covering only litigation expenses, not attorneys' fees or living expenses.

The opinion first clears the Rule 1.8(e) and 1.8(i) hurdles. Those rules bar a lawyer from providing financial assistance to a client or acquiring a proprietary interest in the litigation, with an exception allowing advances of litigation expenses recoverable from the proceeds in contingent matters. The committee distinguishes N.Y. State 855 (2011) (spouse-owned funder for living expenses) and N.Y. State 1145 (2018), noting that the proposed funding is for litigation expenses (within the exception) and, more importantly, that the lawyer has no interest in the sibling's company. Unlike spouses, siblings are not treated as having a "unified financial interest," so the referral is not a subterfuge for prohibited assistance; a referral to a funder in which the lawyer has no interest is permissible if no referral fee is paid and confidentiality is protected.

The committee then finds a Rule 1.7(a)(2) personal-interest conflict does exist: filial bonds could lead the lawyer to favor the sibling's financial interests when advising the client on loan terms, alternatives, settlement timing, and litigation spending. The committee concludes this conflict is waivable under Rule 1.7(b) if the lawyer reasonably believes competent and diligent representation is possible and the client gives informed consent confirmed in writing, including disclosure of the family relationship, the profit potential, and the differing risk tolerances, and a discussion of the desirability of independent counsel (citing N.Y. City 2011-2). Finally, because the sibling's loan is a "thing of value" indirectly benefiting the lawyer, Rule 1.8(f) applies; its consent and non-interference conditions are met if the Rule 1.7(b) waiver is satisfied, and confidential information may be shared with the funder for underwriting only with the client's informed consent.

In practice

Under this opinion, a New York lawyer with no interest in a sibling's litigation funding company may refer a client to that company for non-recourse loans covering litigation expenses, because the family tie does not create the imputed financial interest the rules attribute to spouses. The opinion holds that the arrangement nonetheless creates a Rule 1.7(a)(2) personal conflict the lawyer may act under only with the client's informed written consent under Rule 1.7(b), and that Rule 1.8(f) requires the same consent, no interference with the lawyer's judgment, and protection of confidences. Per the opinion, no referral fee may be paid, and the consent disclosure should cover the family relationship, the funder's profit potential, differing risk tolerances, and the option of independent counsel.

Common questions

Q: Do Rules 1.8(e) and 1.8(i) bar referring a client to a sibling's litigation funder?

A: Per the opinion, no, where the funding covers litigation expenses and the lawyer has no interest in the sibling's company; siblings are not treated as sharing a "unified financial interest" the way spouses are.

Q: Is there still a conflict?

A: Yes. Per the opinion, the family relationship creates a Rule 1.7(a)(2) personal-interest conflict because the lawyer might favor the sibling's interests when advising the client.

Q: Can the conflict be waived?

A: Per the opinion, yes, under Rule 1.7(b), if the lawyer reasonably believes competent and diligent representation is possible and the client gives informed consent confirmed in writing, after disclosure of the family relationship and the relevant risks.

Q: Does Rule 1.8(f) apply to the sibling's loan?

A: Per the opinion, yes; the loan is a "thing of value" indirectly benefiting the lawyer, so the lawyer must meet Rule 1.8(f)'s consent, non-interference, and confidentiality conditions, sharing information with the funder only with the client's informed consent.

Background and rules framework

The opinion interprets New York Rules 1.8(e) (financial assistance to a client), 1.8(i) (proprietary interest in litigation), 1.7(a)(2) and 1.7(b) (personal-interest conflicts and waiver), and 1.8(f) (compensation or things of value from a non-client), with Rule 1.6(a) and the Rule 1.0(j) definition of informed consent. These correspond to ABA Model Rules 1.8, 1.7, and 1.6.

Citations and references

Rules of Professional Conduct:

• New York Rules of Professional Conduct 1.8(e), 1.8(i), 1.7(a)(2), 1.7(b), 1.8(f), 1.6(a), 1.0(j)
• ABA Model Rules 1.8, 1.7, 1.6 (analogues)

Statutes:

• New York Judiciary Law § 474 (court approval of infant's contingent fee)

Other opinions cited:

• N.Y. State 855 (2011): spouse-owned litigation funder for living expenses
• N.Y. State 1145 (2018): firm lawyer's investment in an ALF funder
• N.Y. State 666 (1994): referral to a funder in which the lawyer has no interest
• N.Y. City 2011-2: advising clients on non-recourse litigation financing

See also

• NY State Bar Op. 1206: Referring Clients to an Of-Counsel Lawyer's Spouse's Litigation Financing Company
• NY State Bar Op. 1277: Crowdfunding on Behalf of Indigent Clients
• NY State Bar Op. 1200: Practicing Law and Providing Wealth Management Services

Source

• Landing page: https://nysba.org/ethics-opinion-1196/