Can a lawyer sell or assign a settlement legal fee to a funding company for immediate cash at a discount?

Currency note

This opinion was issued in 2004, before Ohio's adoption of the Ohio Rules of Professional Conduct (effective February 1, 2007). The Board flagged it as a "CPR Opinion" because it interprets the former Ohio Code of Professional Responsibility, since superseded. The fee-sharing and conflict provisions discussed here are now addressed by Ohio Prof. Cond. R. 5.4 and 1.7. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Plain-English summary

The Board addressed an attorney who, after reaching a settlement in a client's matter, proposed to sell or assign the resulting legal fee to a funding company in exchange for immediate cash at a small discount from the fee's full value. The Board concluded that the practice is improper.

It gave two reasons. First, the sale or assignment of the legal fee is an improper division of legal fees with a nonlawyer. Second, it interferes with the duty of loyalty in the attorney-client relationship, because the attorney brings an outside funding company's interest into a matter that should be governed by the lawyer's obligations to the client.

Common questions

Q: Can a lawyer sell an earned fee to a funding company to get paid sooner?

A: No, under this opinion. It concluded that selling or assigning the legal fee to a funding company is improper as a fee division with a nonlawyer and as interference with the duty of loyalty.

Q: Does it matter that the discount is small or that the matter has already settled?

A: The opinion addressed exactly that situation, a settled matter and a small discount, and still found the sale or assignment improper.

Background and rules framework

The opinion interprets former Ohio Code of Professional Responsibility DR 3-102(A) (a lawyer or firm shall not share legal fees with a nonlawyer, with narrow exceptions) and the duty of loyalty reflected in DR 5-101(A). The current analogues are Ohio Prof. Cond. R. 5.4 (professional independence; fee-sharing with nonlawyers) and 1.7 (concurrent conflicts) (Model Rules 5.4, 1.7).

Citations and references

Rules of Professional Conduct:

• Former Ohio Code of Professional Responsibility DR 3-102(A), DR 5-101(A)
• Current analogues: Ohio Prof. Cond. R. 5.4, 1.7 (Model Rules 5.4, 1.7)

See also

• Ohio BPC Op. 1994-008: Splitting a Contingency Fee With a Nonlawyer Investigator
• Ohio BPC Op. 1999-006: Referral to a Litigation Funding Company for a Money Judgment
• Ohio BPC Op. 1989-002: Sharing Fees With a Suspended or Disbarred Lawyer

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2017/04/Op-04-002.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 2320, COLUMBUS, OH 43215-6104
(614) 644-5800 (888) 664-8345 FAX: (614) 644-5804
www.sconet.state.oh.us

                                         OFFICE OF SECRETARY




                                       OPINION 2004-2
                                      Issued June 3, 2004

[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: It is improper for an attorney, upon reaching a settlement agreement in a
client’s legal matter, to sell or assign his or her legal fee to a funding company in
exchange for immediate cash at a small discount to the full value of the legal fee. Such
sale or assignment of an attorney’s legal fee is an improper division of legal fees with a
non-attorney and is an interference with the duty of loyalty in an attorney-client
relationship.

OPINION: The opinion addresses the propriety of an attorney selling a legal fee to a
funding company upon reaching a settlement of a client’s legal matter.

    Is it proper for an attorney, upon reaching a settlement agreement in a
    client’s legal matter, to sell or assign his or her legal fee to a funding
    company in exchange for immediate cash at a small discount to the full
    value of the legal fee?

A funding company offers opportunities for attorneys in sole proprietorships to sell their
legal fees to the funding company as soon as reaching settlement agreements in clients’
legal matters. Rather than waiting for payment of settlement funds, the attorney gets
immediate cash from the funding company at an amount less than the full value of the
legal fee. The client awaits payment of the settlement funds and disbursement, but the
attorney receives his or her legal fee immediately from the funding company. The
funding company profits from the difference between the full legal fee, paid from the
settlement, and the discounted amount it funded to the attorney.

Pertinent rules in the Ohio Code of Professional Responsibility are set forth.

    DR 3-102 Dividing legal fees with a nonlawyer

    (A) A lawyer or law firm shall not share legal fees with a nonlawyer,
        except that:

            (1) An agreement by a lawyer with his or her firm, partner, or
                associate may provide for the payment of money, over a

Opinion 2004-2 2

               reasonable period of time after the lawyer’s death, to the
               lawyer’s estate or to one or more specified persons.

           (2) An agreement to purchase the practice of a deceased, disabled,
               or disappeared lawyer in accordance with DR 2-111 may
               provide for the payment of money, over a reasonable period of
               time, to a nonlawyer.

           (3) A lawyer who undertakes to complete unfinished legal
               business of a deceased lawyer may pay to the estate of the
               deceased lawyer a portion of the total compensation that fairly
               represents the services rendered by the deceased lawyer.

           (4) A lawyer or law firm may include nonlawyer employees in a
               retirement plan, even though the plan is based in whole or in
               part on a profit-sharing arrangement.

           (5) A lawyer participating in a lawyer referral service that satisfies
               the requirements of DR 2-103(C) may pay to the service a fee
               calculated as a percentage of legal fees earned by the lawyer in
               his or her capacity as a lawyer to whom the service has
               referred a matter. This percentage fee is in addition to any
               reasonable membership or registration fee established by the
               service.

   DR 5-107 Avoiding influence by others than the client

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

           (1) Accept compensation for his [her] legal services from one
               other than his [her] client.

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

   (B)   A lawyer shall not permit a person who recommends, employs, or
         pays him [her] to render legal services for another to direct or
         regulate his [her] professional judgment in rendering such legal
         services.

It is unethical for an attorney to sell his or her legal fees. An attorney who upon reaching
a settlement agreement sells or assigns his or her legal fee to a funding company is
dividing a legal fee with a non-attorney. The attorney gets only part of his or her legal
fee--the amount advanced by the funding company. The non-attorney funding company
gets the rest of the attorney’s legal fee. This proposed conduct violates DR 3-102(A).
None of the exceptions to the division of fees with non-lawyers, listed in DR 3-102(A)(1)
through (5), applies.

Opinion 2004-2 3

Delay between reaching a settlement agreement and the payment of the settlement funds
is not justification for a lawyer selling his or her legal fee to obtain immediate cash.
Delay is part of the process. Attorneys and clients should be well aware that money does
not appear like magic upon reaching a settlement agreement.

A lawyer’s legal representation of the client does not end upon reaching a settlement
agreement, but continues from settlement agreement through the time of receiving and
disbursing the settlement money. A lot can happen in that interval. As one example,
settlement agreements requiring court approval always carry uncertainty as to whether
approval will be forthcoming from the court. Until the money agreed upon in the
settlement is paid and disbursed, the attorney has not completed his or her legal
representation of the client.

Not only does the proposed sale or assignment of legal fees violate the rule barring
division of fees with non-lawyers, it is an interference with the attorney-client
relationship. Pursuant to the proposed assignment and sale agreement, inter alia:

          The attorney (assignor) “agrees that it will not consent to, or
           permit, any change to the terms of the settlement and/or resolution
           of the Case that will affect Assignee’s interest in the Legal Fee,
           including, without limitation, the amount or payment terms of the
           Legal Fee.”

          The attorney (assignor) “grants to Assignee a security interest in all
           Assignor’s present and future accounts, chattel paper, equipment,
           instruments, investment property, documents, letter of credit rights
           and general intangibles.”

          The attorney (assignor) promises that “[a]t Assignee’s request,
           Assignor will notify the insurance company or similar party that it
           is obligated to pay the Settlement Amount and/or Legal Fee (and
           Assignee may also so notify such party) of the terms of this
           Assignment and Assignor will direct such insurance company or
           similar party to make any proceeds for such Settlement Amount
           payable to Assignee instead of (and not to) Assignor.”

These types of provisions interfere with the attorney-client relationship by diluting an
attorney’s loyalty to a client and promoting an appearance that the attorney’s new loyalty
is to the funding company.

Thus, this Board advises as follows. It is improper for an attorney, upon reaching a
settlement agreement in a client’s legal matter, to sell or assign his or her legal fee to a
funding company in exchange for immediate cash at a small discount to the full value of
the legal fee. Such sale or assignment of an attorney’s legal fee is an improper division
of legal fees with a non-attorney and is an interference with the duty of loyalty in an
attorney-client relationship.

Opinion 2004-2 4

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.