Can a North Dakota lawyer use an outside collection agency to collect unpaid client fees, and how should the lawyer pay the agency and protect client confidences?

Plain-English summary

The committee was asked whether an attorney may use an outside collection agency or other third-party recovery service to collect outstanding client accounts receivable, before litigation, after litigation is filed, and after judgment. The committee answered that a lawyer may do so, subject to two ethical constraints drawn from Rules 5.4(a) and 1.6.

On payment, Rule 5.4(a) prohibits a lawyer or law firm from sharing legal fees with a non-lawyer. The committee concluded that paying an outside collection agency a percentage of the amount recovered would be improper fee sharing in violation of Rule 5.4(a). It identified compliant alternatives the lawyer can use instead: hire a collections attorney if payment is to be a percentage of successful collections, pay a non-lawyer entity a set hourly rate regardless of success, or sell and assign the unpaid receivables.

On confidentiality, Rule 1.6(a) bars revealing information relating to the representation unless the client consents or an exception applies; Rule 1.6(c)(4) lets a lawyer reveal information necessary to establish a claim in a controversy with the client, such as a fee dispute. The committee concluded that, unless the client consented in writing at the outset to a confidentiality waiver for collection purposes, the lawyer should disclose only the essential information needed to establish and defend the collection claim, for example the debtor's contact information, the amount due, and the general nature of the legal services, and for matters of public record, the case title, number, date range, and total fees and costs without itemized substantive detail. Once collection litigation begins, the lawyer must still take care to reveal as little substantive confidential information as possible.

In practice

This opinion, approved October 23, 2013, applies North Dakota Rules of Professional Conduct 5.4(a) and 1.6 as they stood at that time. The committee held that a lawyer or firm may assign or outsource unpaid client receivables to an outside collection agency or third-party recovery service, but the fee arrangement may not be a percentage of the collection proceeds, because that is improper fee sharing with a non-lawyer under Rule 5.4(a). The committee held that, under Rule 1.6, the lawyer must limit disclosures to the essential information needed to establish the unpaid amount, unless the client consented in writing at the outset of the representation to a waiver of confidentiality for collection purposes, and must continue to exercise care to minimize substantive disclosures once collection litigation begins.

Common questions

Q: Can a North Dakota lawyer hand unpaid fee accounts to an outside collection agency?

A: Yes. The committee concluded a lawyer may use an outside collection agency or third-party recovery service for unpaid client accounts receivable, subject to the fee-sharing and confidentiality limits in Rules 5.4(a) and 1.6.

Q: Can the lawyer pay the collection agency a percentage of what it collects?

A: No. The committee concluded that paying a non-lawyer collection agency a percentage of the amount recovered is improper fee sharing in violation of Rule 5.4(a); the lawyer should instead pay a set hourly rate, hire a collections attorney, or sell and assign the receivables.

Q: What can the lawyer tell the collection agency about the client?

A: Under Rule 1.6, unless the client consented in writing at the outset, only the essential information needed to establish the claim, such as the debtor's contact information, the amount due, and the general nature of the services; for matters of public record, the case title, number, date range, and total fees, without itemized substantive detail.

Background and rules framework

The opinion interprets North Dakota Rule of Professional Conduct 1.6 (Model Rule 1.6, confidentiality of information), including Rule 1.6(c)(4)'s exception permitting disclosure to establish a claim in a controversy between lawyer and client, and Rule 5.4(a) (Model Rule 5.4, professional independence of a lawyer; no sharing of legal fees with non-lawyers). It surveys authority on whether fee-arrangement information is privileged and on an outsourcing lawyer's continuing responsibility for the conduct of collection agents.

The opinion is issued under North Dakota Rule for Lawyer Discipline 1.2(B), the safe-harbor provision protecting good-faith reliance on a written ethics-committee opinion.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.6 / N.D.R. Prof. Conduct 1.6(a), 1.6(c)(4) (confidentiality; disclosure to establish a claim)
• Model Rule 5.4 / N.D.R. Prof. Conduct 5.4(a) (professional independence; no fee sharing with non-lawyers)
• N.D.R. Lawyer Discipline 1.2(B) (safe harbor for reliance on a committee opinion)

Cases:

• In re Grand Jury Subpoena (Alexiou), 39 F.3d 973 (9th Cir. 1994), client identity and fee arrangements not ordinarily privileged
• In re Grand Jury Subpoena (Horn), 976 F.2d 1314 (9th Cir. 1992), exception where identity itself is privileged
• Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960), privileged client identity

Other opinions cited:

• Tex. Prof. Ethics Comm. Op. 464 (1989); Ga. Disciplinary Bd. Op. 49 (1985); Fla. Ethics Op. 81-3; ABCNY Formal Op. 1994-9; Montana Ethics Op. 960828

See also

• ABA Formal Op. 08-451: Outsourcing Legal Services
• AZ Ethics Op. 98-05: Selling Client Receivables

Source

• Landing page: https://www.sband.org/page/ethics_opinions
• Original PDF: https://cdn.ymaws.com/www.sband.org/resource/resmgr/docs/for_lawyers/opinion_NO__13-01.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

STATE BAR ASSOCIATION OF NORTH DAKOTA
ETHICS COMMITTEE
OPINION NO. 13-01

THIS OPINION IS ADVISORY ONLY
QUESTION PRESENTED

The Ethics Committee has been asked to render its opinion on whether an attorney may
use the services of an outside collection agency or other third party recovery service to
collect outstanding client accounts receivable before litigation is filed, after litigation is
filed, and after judgment is entered.

OPINION

An attorney or law firm may use the services of an outside collection agency or other
third party recovery service to collect outstanding client accounts receivable if the fee
arrangement with the outside collection agency or other third party recovery service
does not constitute improper fee sharing with a non-lawyer.

If an attorney or law firm uses the services of an outside collection agency or other third
party recovery service to collect outstanding client accounts receivable, the attorney or
law firm must consider the requirements of Rule 1.6, N.D.R. Prof. Conduct to not reveal
confidential information.

APPLICABLE NORTH DAKOTA RULES OF PROFESSIONAL CONDUCT

Rule 1.6(a), N.D.R. Prof. Conduct: Confidentiality of information
Rule 5.4(a), N.D.R. Prof. Conduct: Professional independence of a lawyer

FACTS PRESENTED
None
DISCUSSION

Confidentiality of information about the client in relation to collections and attorney-client
privilege is the primary ethical concern with outsourcing collection of unpaid legal fees.
The client’s identity, the nature of the legal services, the amount of the fee owing, and
the fact that the fee hasn’t been paid is information contained in the billing statement
that the average client would expect to remain confidential. See Tx. State Bar Prof’
Ethics Comm. Op. 464 (Aug. 10, 1989). Nevertheless, courts generally hold that
"information about fee arrangements is not protected because the payment of fees is
not usually considered a confidential communication between a client and lawyer."
ABA/BNA Manual on Prof! Conduct 55:309 (1994). In In re Grand Jury Subpoena
(Alexiou), 39 F.3d 973, 976 (9'" Cir. 1994), the court held the attorney-client privilege

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does not ordinarily protect against disclosure of the identity of a client and the fee
arrangement between an attorney and the client. There is an exception to this rule when
the identification of a client conveys information that itself is privileged. For example, if
revealing the client's identity would constitute an acknowledgment of guilt of the offense
which led the client to seek legal assistance, then the identity of the client would be
privileged. In re Grand Jury Subpoena (Horn), 976 F.2d 1314, 1317 (9"" Cir.1992); In re
Grand Jury Subpoena (Alexiou), 39 F.3d 973, 976 (9 Cir. 1994) (citing Baird v.
Koerner, 279 F.2d 623, 630 (9"" Cir. 1960)).

The North Dakota confidentiality rule is straightforward in addressing the confidentiality
issue in relation to unpaid bill collection. Rule 1.6(a), N.D.R. Prof. Conduct:
Confidentiality of information, provides: “A lawyer shall not reveal information relating to
the representation of the client unless the client consents .. . or the disclosure is .. .
permitted by paragraph (c).” Rule 1.6(c), N.D.R. Prof. Conduct provides: “A lawyer may
reveal information relating to the representation of a client to the extent the lawyer
reasonably believes necessary: . . . (4) to establish a claim or defense on behalf of the
lawyer in a controversy between the lawyer and the client... .” The comment to Rule
1.6(c)(4), N.D.R. Prof. Conduct states: “A lawyer entitled to a fee is permitted by
paragraph (c)(4) to prove the services rendered in an action to collect it. This aspect of
the rule expresses the principle that the beneficiary of a fiduciary relationship may not
exploit it to the detriment of the fiduciary.” Id. at cmt. 11.

If an attorney uses the services of an outside collection agency or other third party
recovery service to collect client outstanding accounts receivable, no more than the
essential information needed to establish and defend a collections claim should be
disclosed, unless the client consents in writing at the outset of representation. For
example, if the charge for services stems from a legal action of public record, the lawyer
could refer to the case title, case number, the date range of services rendered, and the
total attorney's fees and costs involved, with no itemized detail or substantive
information about the provided legal services being revealed unless challenged by the
client. Prior to litigation, limiting disclosed information to the minimal information
necessary to effectively use collection services is advisable. Once litigation
commences, due care should be exercised to not reveal confidential information that is
irrelevant in establishing the unpaid amount for legal services rendered, with the
information revealed being of public record and available for use to the collection
agency during and after litigation for unpaid legal fees. See Ga. State Bar Disciplinary
Bd. Op. 49 (July 26, 1985).

Another ethical issue with outsourcing collections is the payment arrangement. Rule
5.4(a), N.D.R. Prof. Conduct states that a “lawyer or law firm shall not share legal fees
with a non-lawyer....” A payment arrangement between an attorney or a law firm
with an outside collection agency or other third party recovery service that is a
percentage of the amount recovered would constitute improper fee sharing, in violation
of Rule 5.4(a), N.D.R. Prof. Conduct. A best practice in utilizing an outside collection
agency or other third party recovery service is to 1) hire an attorney specializing in
collections if fees are to be paid on a percentage of successful collections, 2) pay a non-

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lawyer entity a set hourly rate, regardless of their collection success, or 3) sell and
assign the unpaid accounts receivable. Other states have held the outsourcing attorney
is ultimately responsible for any ethical improprieties of its collection agents, regardless
of the payment arrangement. Fla. Ethics Op. 81-3, Ass’n of the Bar of the City of N.Y.
Comm. on Prof & Judicial Ethics, Formal Op. 1994-9 (July 27, 1994): Montana Ethics
Op. 960828.

CONCLUSION

An attorney or law firm may assign its unpaid client accounts receivable to an outside
collection agency or other third party recovery service. The fee arrangement with the
outside collection agency or other third party recovery service, however, may not
constitute improper fee sharing with a non-lawyer, such as by being based upon a
percentage of collection proceeds. Moreover, unless the client consents in writing at
the outset of representation to a waiver of confidentiality for collection purposes, only
the debtor's contact information, the amount due, and the general nature of the provided
legal services should be disclosed for pre-litigation collection outsourcing. Once
collection litigation commences, due care in revealing as little substantive confidential
information as possible must be exercised in legally establishing the amount of unpaid
legal services rendered.

This opinion was drafted by R.T. Gordon and was unanimously approved by the Ethics
Committee on the 23" day of October, 2013.

Ethics Committee Chairperson
This opinion is provided under Rule 1.2(B), North Dakota Rules for Lawyer Discipline,
which states:

A lawyer who acts with good faith and reasonable reliance on a written
opinion or advisory letter of the ethics committee of the association is not
subject to sanction for violation of the North Dakota Rules of Professional
Conduct as to the conduct that is the subject of the opinion or advisory
letter.

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