Can a law firm take out a bank loan to advance litigation expenses in a contingent-fee personal injury case and deduct the loan interest from the client's recovery?

Currency note

The Board withdrew this opinion on April 9, 2021 in Advisory Opinion 2021-02, so it is not current guidance; it is indexed here as historical research only.

This opinion also issued in 2001, before Ohio's adoption of the Ohio Rules of Professional Conduct (effective February 1, 2007). The DR 5-103, DR 5-104, and DR 3-102 provisions discussed here are now addressed by Ohio Prof. Cond. R. 1.8 and 1.5. The Ohio Revised Code contingent-fee requirements cited may also have changed. Treat this page as historical context, not current guidance. Verify against current rules and Opinion 2021-02 before relying on anything here.

Plain-English summary

The Board addressed a law firm's proposal to obtain a loan from a third-party financial institution, use the money to advance costs and expenses of litigation in a contingent-fee personal injury matter, and then deduct the interest and costs of the loan from the client's settlement or judgment as an expense of litigation. In the proposed facts, the firm would secure the loan but not with the client's recovery, would make monthly interest payments, and would disclose the arrangement at the outset, with the client approving the loan in the contingent fee agreement and all figures set out in writing at closing.

The Board began with DR 5-103(B), which permits a lawyer to advance the expenses of litigation (court costs, investigation, medical examinations, and the cost of obtaining and presenting evidence) with repayment contingent on the outcome. It noted that DR 5-103(B) does not itself address borrowing from a bank to fund those expenses or deducting the loan's costs from the recovery, so it analyzed related rules. Under DR 5-103(A) (no proprietary interest in the cause of action), the Board found no proprietary interest because the loan was not secured by the client's settlement or judgment. It analyzed DR 5-104(A) (business transactions with a client where interests differ) and DR 3-102(A) (sharing fees), and concluded the arrangement was permissible subject to conditions.

The Board set out the conditions: the loan may not be secured with the client's settlement or judgment; the terms of the loan, including amount, interest rate, and costs, must be appropriate and reasonable; the client must be informed and must consent at the outset; and the loan's terms must be disclosed and agreed upon in the contingent fee agreement. The Board also reminded attorneys of the existing disclosure rules, citing DR 2-101(E)(1)(c) (communications about fees must state whether contingent percentages are computed before or after deduction of costs, and whether the client is liable for expenses on an adverse result) and Section 4705.15(B) and (C) of the Ohio Revised Code (a tort contingent fee agreement must be in writing and signed, a copy given to the client, and a signed closing statement provided at or before receipt of compensation).

Common questions

Q: Could an Ohio law firm finance litigation expenses with a bank loan in a contingent-fee case?

A: Yes, under conditions. The opinion concluded the firm could borrow to advance expenses and deduct the loan's interest and costs from the recovery, so long as the loan was unsecured by the client's recovery, the terms were reasonable, and the client consented in a written contingent fee agreement.

Q: Could the loan be secured with the client's settlement or judgment?

A: No. The opinion concluded the loan may not be secured with the client's settlement or judgment; doing so would implicate the prohibition on acquiring a proprietary interest in the cause of action under DR 5-103(A).

Q: What did the client have to be told?

A: The opinion required disclosure of the arrangement at the outset and the client's consent in the contingent fee agreement, with the loan terms disclosed; it also pointed to the contingent-fee writing and closing-statement requirements of Section 4705.15(B) and (C) of the Ohio Revised Code.

Background and rules framework

The opinion interprets former Ohio Code of Professional Responsibility DR 5-103(B) (advancing litigation expenses), DR 5-103(A) (no proprietary interest in the cause of action), DR 5-104(A) (business transactions with a client), DR 3-102(A) (dividing legal fees), and DR 2-101(E)(1)(c) (fee communications), together with Section 4705.15 of the Ohio Revised Code. The advancing-expenses and business-transaction subjects are now addressed by Ohio Prof. Cond. R. 1.8 (Model Rule 1.8), and the contingent-fee writing requirement by Ohio Prof. Cond. R. 1.5 (Model Rule 1.5).

Citations and references

Rules of Professional Conduct:

• Former Ohio Code of Professional Responsibility DR 5-103(A), DR 5-103(B), DR 5-104(A), DR 3-102(A), DR 2-101(E)(1)(c)

Statutes:

• Ohio Revised Code Section 4705.15(B), (C) (written and signed contingent fee agreement and closing statement in tort actions)

See also

• Ohio BPC Op. 1987-001: Advancing Litigation Expenses
• Ohio BPC Op. 1999-006: Referral to a Litigation-Funding Company
• Ohio BPC Op. 1995-007: Hourly or Contingent, Whichever Is Larger

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2017/04/Op-01-003.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

The Supreme Court of Ohio
BOARD OF COMMISSIONERS ON GRIEVANCES AND DISCIPLINE 41 SOUTH HIGH STREET-SUITE 3370, COLUMBUS, OH 43215-6105 (614) 644-5800 FAX: (614) 644-5804

OFFICE OF SECRETARY

OPINION 2001-3
Issued June 7, 2001
Withdrawn by Adv. Op. 2021-02 on April 9, 2021 [CPR Opinion-provides advice under the Ohio Code of Professional Responsibility which is superseded by the Ohio Rules of Professional Conduct, eff. 2/1/2007.]

SYLLABUS: A law firm may obtain a loan from a third party financial institution to advance expenses of litigation in a personal injury matter accepted on a contingent fee basis and may deduct the interest fees and costs of the loan from a client’s settlement or judgment provided that certain conditions are met. The law firm may not secure the loan with the client’s settlement or judgment. The terms of the loan, including the amount borrowed, the interest rates, and costs of the loan must be appropriate and reasonable. At the outset of the representation, the client must be informed and must provide consent. The terms of the loan must be disclosed to the client and must be agreed upon by the client in the contingent fee agreement. The contingent fee agreement must inform the client of whether repayment of litigation expenses is contingent upon the outcome of the matter. The contingent fee agreement must clearly state whether contingent fee percentages are computed before or after deduction of costs and expenses. As required by Section 4705.15 (B) and (C) of the Ohio Revised Code, the contingent fee agreement must be reduced to writing, signed by the attorney and the client, and a signed copy must be given to the client. At the time of, or prior to the receipt of compensation, a signed closing statement must be provided to the client.

OPINION: This opinion addresses the ethical propriety of a law firm borrowing money, using the funds to advance costs and expenses of litigation in a personal injury matter accepted on a contingent fee basis, and then passing the interest fees and costs of the loan to the client as expenses of litigation.

Is it proper for a law firm to obtain a loan from a third-party financial institution, use the money to advance costs and expenses of litigation in a personal injury matter accepted on a contingent fee basis, and then deduct the interest fees and costs of the loan from a client’s settlement or judgment as an expense of litigation?

A law firm inquires as to obtaining a loan from a third-party financial institution for use in advancing expenses in a client’s personal injury litigation. The law firm would secure the loan, but not with the client’s settlement or judgment. The law firm would make monthly payments of interest to the institution and would be obligated to repay the loan. The law firm’s obligation to repay the loan would be triggered at the conclusion of the client’s representation by settlement or final judgment.
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At the outset of the representation, the lawyer would disclose the arrangement between the law firm and the third-party financial institution. The lawyer and the client would enter into a contingent fee agreement that would include client approval of the loan agreement between the law firm and the financial institution. The contingent fee agreement would provide for the deduction of the interest fees and cost of the loan from the client’s settlement or judgment. At the closing with the client, all of the figures would be set forth in writing.

As a reminder to Ohio attorneys, DR 2-101(E)(1)(c) requires that all communications to the public regarding fees and charges must clearly state whether contingent fee percentages are computed before or after deduction of costs and expenses and whether in the event of an adverse verdict or decision the litigant is liable for repayment of litigation expenses. In addition, as required by Section 4705.15 (B) and (C) of the Ohio Revised Code, a contingent fee agreement in a tort action must be reduced to writing, signed by the attorney and the client, and a signed copy must be given to the client. At the time of, or prior to the receipt of compensation, a signed closing statement must be provided to the client.

Part 1. Law firm obtaining a loan from a financial institution to advance litigation expenses.

Under DR 5-103(B) of the Ohio Code of Professional Responsibility, Ohio lawyers are permitted to advance the expenses of litigation and to allow a client’s repayment of expenses to be contingent on the outcome of the matter. Examples of expenses that may be advanced include court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence. The repayment of expenses may be contingent on the outcome of the matter.

DR 5-103(B) While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client, except that a lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, the repayment of which may be contingent on the outcome of the matter.

DR 5-103(B) does not address whether a lawyer may obtain a loan from a financial institution for use in advancing litigation expenses in personal injury litigation. Nor, does the rule address whether fees and costs of a loan obtained by a lawyer may be deducted from the client’s settlement or judgment.

The Board considers the application of other rules, namely, DR 5-103(A), DR 5-104(A), and DR 3-102(A), to the question raised. The prohibition in DR 5-103(A) is that “[a] lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting.” Under the proposed facts, the law firm is not securing the loan with a client’s settlement or judgment; therefore, the lawyer and the law firm are not obtaining a proprietary interest in any one specific cause of action.
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The prohibition in DR 5-104(A) is that “[a] lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise his [her] professional judgment therein for the protection of the client, unless the client has consented after full disclosure. A law firm’s decision to obtain a loan from a third party financial institution does not involve the lawyer in a business transaction with a client, provided that the loan is not secured by the client’s settlement or judgment. In contrast, financial assistance from a financing company to a law firm, used to pay a lawyer’s legal fees and expenses and secured by the company receiving an interest in the lawyer’s anticipated proceeds from a client’s money judgment, intertwines the attorney in a business transaction with a client. See, Ohio Sup Ct, Bd of Comm’rs on Grievances & Discipline, Op. 99-6 (1999) advising that “[i]t is ethically improper for an attorney to receive financial assistance from a company in exchange for the company receiving an interest in the attorney’s anticipated proceeds from a client’s money judgment.”

The prohibition in DR 3-102(A) is that “[a] lawyer or law firm shall not share legal fees with a non-lawyer, except that [exceptions not applicable herein]. When a law firm obtains a loan that is not secured by a client’s settlement or judgment, it does not constitute the sharing of legal fees with a non-lawyer. In contrast, a loan between a lawyer and a third-party financial institution secured by a specific client’s settlement or judgment constitutes an improper division of a legal fee with a non-lawyer. See, Ohio Sup Ct, Bd of Comm’rs on Grievances & Discipline, Op. 94-11 (1994) advising that “[i]t is improper under DR 3-102(A) of the Ohio Code of Professional Responsibility for an attorney to refer a client to a financing company that require the attorney to prospectively agree to pay the company a percentage of a legal fee when earned as a quid pro quo for the company’s agreement to loan money with interest to a client.”

Upon review of these rules, the Board finds that there is no rule prohibiting a lawyer from obtaining a loan from a third party institution for use in advancing the expenses of litigation provided that the loan is not secured by the client’s settlement or judgment. However, the client should be informed. Under DR 5-107(A), a lawyer should inform the client that the law firm is obtaining a loan for use in advancing the expenses of litigation and obtain client consent.

DR 5-107 (A) Except with the consent of his [her] client after full disclosure, a lawyer shall not:

(2) Accept from one other than his client any thing of value related to his representation of or his employment by his client.

Part 2. Deducting interest fees and costs of a loan from a client’s settlement or judgment.

As to the deduction of interest fees and costs of a loan from the client’s settlement or judgment, the Board finds it proper to do so. Interest fees and costs of a loan obtained by a law firm are a client’s “expenses of litigation.” The interest fees and costs of a loan obtained by a law firm are not the law firm’s “costs of doing business.” Since clients are not always financially able to obtain a loan to finance the expenses of litigation, the clients look to lawyers to advance the expenses of litigation. Depending upon a lawyer’s
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financial position, a lawyer may need to obtain a loan in order to advance the litigation expenses. As a fiduciary for the client, the lawyer must negotiate appropriate and reasonable loan terms.

Other state ethics committees find it proper for interest to be deducted from a client’s judgment or settlement. See e.g., Ass’n of Bar of the City of New York, Formal Op. 1997-1 (1997); Illinois State Bar Ass’n, Op. 94-6 (1994); State Bar of Georgia, Formal Op. 92-1 (1992); New Jersey Sup Ct, Advisory Comm, Op. 603 (1987); Missouri, Office of Chief Disciplinary Counsel, Informal Op. 970066 (undated). Further, in Chittenden v. State Farm Mutual Automobile Insurance Company, No. 00-C-0414, 2001 WL 508342, at *6 (La May, 15, 2001), the Louisiana Supreme Court held that an attorney is not ethically prohibited from entering an agreement that obligates the client to reimburse the attorney for interest charged on loans used to fund litigation expenses.

This Board finds it proper for the interest fees and costs of a loan, used for advancing litigation expenses, to be deducted from a client’s settlement or judgment, provided that certain conditions are met. Thus, this Board advises that a law firm may obtain a loan from a third party financial institution to advance expenses of litigation in a personal injury matter accepted on a contingent fee basis and may deduct the interest fees and costs of the loan from a client’s settlement or judgment provided that certain conditions are met. The law firm may not secure the loan with the client’s settlement or judgment. The terms of the loan, including the amount borrowed, the interest rates, and costs of the loan must be appropriate and reasonable. At the outset of the representation, the client must be informed and must provide consent. The terms of the loan must be disclosed to the client and must be agreed upon by the client in the contingent fee agreement. The contingent fee agreement must inform the client of whether repayment of litigation expenses is contingent upon the outcome of the matter. The contingent fee agreement must clearly state whether contingent fee percentages are computed before or after deduction of costs and expenses. As required by Section 4705.15 (B) and (C) of the Ohio Revised Code, the contingent fee agreement must be reduced to writing, signed by the attorney and the client, and a signed copy must be given to the client. At the time of, or prior to the receipt of compensation, a signed closing statement must be provided to the client.

Advisory Opinions of the Board of Commissioners on Grievances and Discipline are informal, nonbinding opinions in response to prospective or hypothetical questions regarding the application of the Supreme Court Rules for the Government of the Bar of Ohio, the Supreme Court Rules for the Government of the Judiciary, the Code of Professional Responsibility, the Code of Judicial Conduct, and the Attorney’s Oath of Office.