Can a lawyer set up a mutual referral arrangement with a debt-reduction company and charge clients a contingent fee based on the debt reduced?
NY State Bar Ethics Opinion 870: Debt-Reduction Referrals and Contingent Fees
Short answer: A lawyer may enter a non-exclusive reciprocal referral arrangement with a debt-reduction company and charge a contingent fee on the debt reduced, subject to Rule 1.7 disclosure and consent, but a fee based on nominal debt reduction may be excessive when the client likely cannot meet the future payment obligations.
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 inquiring lawyer proposed a business arrangement with a debt-reduction company. The lawyer and company would have no common employees, share no offices, and the lawyer would hold no equity in the company. The lawyer would provide fee-for-service legal work to the company (incorporation, licensing, claim defense, and similar), and would separately represent the company's customers when they need legal help, with the customers paying their own fees. The referral arrangement would be reciprocal and non-exclusive: each side would remain free to refer to others or not refer at all, and the lawyer would refer a client to the company only when the lawyer believed it was in the client's best interest. When a client retained both, the company would provide nonlegal debt-reduction services for a separate contingent fee, and the lawyer would provide legal services for a separate contingent fee, each measured as a percentage of the debt reduction and billed and collected separately.
On the referral arrangement, the committee held it permissible. Following N.Y. State 765 (2003), it reasoned that Rule 5.8(c) exempts relationships consisting solely of non-exclusive reciprocal referral agreements from Rule 5.8's restrictions, and that Rule 7.2(a)'s bar on compensating a person to recommend the lawyer was not triggered. The committee then asked whether the relationship made the lawyer "affiliated" with the company under Rule 5.7, which would subject the company's nonlegal services to the Rules if a recipient could reasonably believe a client-lawyer relationship existed. It concluded that something more than a non-exclusive referral arrangement is needed for affiliation, and that the limited connections here (a non-exclusive referral and each side independently using a percentage-of-debt-reduction fee, with no shared employees, offices, or equity) did not amount to affiliation.
Even without affiliation, the committee held the lawyer may need to disclose the relationship and obtain informed consent under Rule 1.7(a), because the lawyer's financial and other interests, heightened by the fact that the company is itself one of the lawyer's clients, could create a significant risk of adversely affecting the lawyer's professional judgment. It added that while Rule 5.7(a)(4) did not require the lawyer to give clients the written "not legal services" disclaimer, doing so would be prudent to avoid confusion.
On the contingent fee, the committee held that Rule 1.5(c) authorizes a fee contingent on outcome unless prohibited, and it found no prohibition on a contingent fee for legal services producing a debt reduction (citing N.Y. State 705). It cautioned, however, that under the Rule 1.5(a) factors a fee based on the nominal debt reduction could be excessive: where debt reduction depends on the client meeting future obligations the client likely cannot afford, the nominal reduction may overstate the actual reduction ultimately attained and thus the value of the services. The committee expressed no opinion on the fee the company charges, as its jurisdiction is limited to the Rules governing lawyers.
In practice
The opinion holds that, under Rules 1.5, 1.7, 5.7, 5.8, and 7.2 as they stood at the time, a lawyer may form a non-exclusive reciprocal referral arrangement with a debt-reduction company and may charge a contingent fee for legal services tied to debt reduction. The committee identified two operative conditions. First, although the limited relationship did not make the lawyer "affiliated" with the company under Rule 5.7, Rule 1.7 may require the lawyer to disclose the referral relationship and obtain informed consent before referring clients to or accepting clients from the company, a need the committee said is heightened because the company is also the lawyer's client. Second, while a contingent fee on debt reduction is permissible, the committee held that a fee measured by the nominal reduction may be excessive under Rule 1.5(a) when the lawyer knows the client is unlikely to have the resources to meet the future obligations on which the reduction depends.
Common questions
Q: Can a lawyer and a debt-reduction company refer clients to each other?
A: Yes, if the arrangement is non-exclusive in fact. The committee, following N.Y. State 765, held that Rule 5.8(c) exempts relationships consisting solely of non-exclusive reciprocal referral agreements and that Rule 7.2(a) is not violated.
Q: Does referring clients to the company make the lawyer "affiliated" with it under Rule 5.7?
A: No, on these facts. The committee held that more than a non-exclusive referral arrangement is needed for affiliation, and that the limited relationship here, with no shared employees, offices, or equity, did not rise to that level.
Q: Does the lawyer have to disclose the referral relationship to clients?
A: The committee held that Rule 1.7 may require disclosure and informed consent, especially because the company is also the lawyer's client, and that giving the Rule 5.7(a)(4) "not legal services" disclaimer, though not required here, would be prudent.
Q: Is a contingent fee based on debt reduced ever excessive?
A: It can be. The committee held that under the Rule 1.5(a) factors, a fee based on the nominal debt reduction may be excessive if the lawyer knows the client is unlikely to be able to meet the future obligations on which the reduction depends.
Background and rules framework
The opinion interprets New York Rule 1.5 (fees, including the Rule 1.5(a) excessive-fee factors and Rule 1.5(c) contingent fees), Rule 1.7(a) (conflicts from the lawyer's own interests), Rule 5.7 (responsibilities regarding nonlegal services), Rule 5.8(c) (non-exclusive reciprocal referral exemption), and Rule 7.2(a) (payment for referrals), corresponding to ABA Model Rules 1.5, 1.7, 5.7, and 7.2. The committee built on N.Y. State 765, 705, 697, and 390.
Citations and references
Rules of Professional Conduct:
- MR 1.5 / NY Rule 1.5(c), 1.5(a): contingent fees permitted unless prohibited; factors for whether a fee is excessive
- MR 1.7 / NY Rule 1.7(a): conflicts where the lawyer's interests create a significant risk to professional judgment
- MR 5.7 / NY Rule 5.7(a)(3)-(4): nonlegal services and the rebuttable presumption of a client-lawyer relationship
- NY Rule 5.8(c): exemption for non-exclusive reciprocal referral agreements
- MR 7.2 / NY Rule 7.2(a): no compensation to recommend or obtain employment
Other opinions cited:
- N.Y. State 765 (2003): non-exclusive reciprocal referral arrangement with a nonlegal service company
- N.Y. State 705 (1998): contingent fee as a percentage of a tax-reduction company's contingent fee
- N.Y. State 697 (1997); N.Y. State 390 (1975): hybrid and contingent fees
See also
- NY State Bar Ethics Op. 885: Business Relationship With a Non-Attorney
- NY State Bar Ethics Op. 891: Referrals by an Attorney to a Title Company
- NY State Bar Ethics Op. 896: Providing Lien-Search Services to Clients
Source
- Landing page: https://nysba.org/ethics-opinion-870/