Can a lawyer use a company he owns to buy a client's litigation claim and then have a law firm prosecute it?

Plain-English summary

The inquirer is employed, with no ownership interest, by a law firm whose practice includes suing insurers that deny coverage. Some clients would rather sell and assign their denied claims outright for an agreed price than have the firm litigate for them. The inquirer asked whether a company he owns could buy those claims and then either retain his firm or an unaffiliated firm to litigate them.

On the first question, the opinion applies Rule 1.8(i), which provides that a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client. The opinion concludes this prevents the inquirer from buying his firm's clients' denied claims through a company he owns and then retaining that firm to litigate them. The opinion notes, as a question of law beyond its jurisdiction, that the inquirer should also consider Judiciary Law section 488, which prohibits an attorney from buying a thing in action with the intent of bringing an action on it.

On the second question, the opinion observes that while prosecuting through an unaffiliated firm is not expressly governed by Rule 1.8(i), Rule 8.4(a) bars a lawyer from violating the Rules through the acts of another. Assuming the purchase is not illegal under the Judiciary Law and other substantive law, the opinion concludes the transaction is subject to Rule 1.8(a), which governs business transactions with clients: the terms must be fair and reasonable and fully disclosed in writing, the client must be advised in writing of the desirability of seeking independent counsel and given a reasonable opportunity to do so, and the client must give informed written consent to the essential terms and the lawyer's role.

In practice

Under this opinion, a lawyer may not buy his own firm's clients' claims through a company he owns and then have that firm prosecute them, because Rule 1.8(i) bars acquiring a proprietary interest in litigation the lawyer is conducting. Per the opinion, a purchase structured to be litigated by an unaffiliated firm is not expressly addressed by Rule 1.8(i) but, if not illegal under the Judiciary Law, is a business transaction with a client governed by Rule 1.8(a)'s fairness, written-disclosure, independent-counsel, and informed-consent requirements.

Common questions

Q: Can a lawyer's company buy a claim from his own firm's client and then have the firm litigate it?

A: Per the opinion, no. Rule 1.8(i) bars a lawyer from acquiring a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client.

Q: What about buying the claim and using a firm the lawyer has no affiliation with?

A: Per the opinion, that is not expressly governed by Rule 1.8(i), but Rule 8.4(a) forbids violating the Rules through another's acts, and, assuming the purchase is legal, the transaction is subject to Rule 1.8(a) on business transactions with clients.

Q: What does Rule 1.8(a) require for such a purchase?

A: Per the opinion, the terms must be fair and reasonable and fully disclosed in writing, the client must be advised in writing to seek independent counsel and given a reasonable chance to do so, and the client must give informed written consent to the essential terms and the lawyer's role.

Background and rules framework

The opinion interprets New York Rule 1.8(i) (no proprietary interest in the client's litigation), Rule 1.8(a) (business transactions with clients), and Rule 8.4(a) (violating the Rules through the acts of another). These correspond to ABA Model Rules 1.8 and 8.4. The opinion flags, but does not decide, whether the conduct is barred by Judiciary Law section 488.

Citations and references

Rules of Professional Conduct:

• New York Rules of Professional Conduct 1.8(a), 1.8(i), 8.4(a)
• ABA Model Rules 1.8, 8.4 (analogues)

Statutes:

• New York Judiciary Law section 488 (buying demands on which to bring an action)

Other opinions cited:

• N.Y. State 1231 (2021): lawyer with an interest in a nonlegal company recommended to clients must comply with Rule 1.8(a)

Other authorities:

• Restatement (Third) of the Law Governing Lawyers section 36 (forbidden client-lawyer financial arrangements)

See also

• NYSBA Ethics Op. 1283: Attorney-Owned Title Agency
• CA Op. 1999-154: Lawyer Dual-Practice and Referral Fees

Source

• Landing page: https://nysba.org/ethics-opinion-1256-lawyer-purchasing-claims-from-clients-of-his-law-firm-through-a-company-he-owns/