Can a lawyer co-sign or guarantee a bank loan covering a client's living expenses when the loan is to be repaid from the client's pending, unliquidated claim?

Plain-English summary

An attorney represented a client in a filed but untried workers' compensation case. The client, unemployed and behind on his mortgage, owned a home with some equity. The attorney took the client to the attorney's banker and co-signed a six-month promissory note with the client, anticipating that the client would recover enough in the pending case to repay it. The attorney asked whether guaranteeing the client's note was improper when repayment was anticipated from the unliquidated claim the attorney was handling.

The opinion concluded the conduct was prohibited by Rule 5-103(B), which provides that while representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client. It noted that although some states permit plaintiffs' attorneys to advance living expenses, New Mexico does not, and that while an attorney may advance or guarantee the costs of litigation, advancing general living expenses to be repaid from an anticipated recovery is generally forbidden. The opinion explained the purpose of the rule as preventing the attorney from resolving a case in a manner most favorable to the attorney to the client's detriment, observing that the six-month note would pressure the attorney to resolve the case quickly to pay it off, even if waiting could bring a larger settlement.

The opinion stated that an attorney is simply forbidden to act as the client's banker, and that the conduct is expressly prohibited regardless of altruistic motives, citing Matter of Horton, in which the New Mexico Supreme Court disbarred an attorney on charges that included making loans to clients for purposes unrelated to litigation. It acknowledged arguments that the guarantee might be permissible but concluded they did not overcome the controlling authority, and held that it was improper for the attorney to guarantee the client's payment of the note.

Currency note

This opinion was issued in 1986, when New Mexico lawyers were governed by the former New Mexico Code of Professional Responsibility, which the State Bar later replaced with the Rules of Professional Conduct; it also predates the State Bar of New Mexico's November 3, 2008 revisions to those Rules (the New Mexico adoption of the ABA Ethics 2000 changes). The financial-assistance rule it cites (Rule 5-103(B)) is no longer in force, and the modern rule treats financial assistance to clients differently. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer guarantee a client's bank loan for living expenses during a case?

A: The opinion concluded it was improper to guarantee a client's promissory note repaid from a pending unliquidated claim, because Rule 5-103(B) barred a lawyer from advancing or guaranteeing financial assistance to a client in pending litigation.

Q: Could the lawyer advance anything to the client?

A: The opinion noted a lawyer may advance or guarantee the costs of litigation, but not general living expenses to be repaid from an anticipated recovery.

Q: Why did the rule prohibit this even with good intentions?

A: The opinion explained the rule's purpose was to prevent the attorney from resolving the case to the attorney's advantage and the client's detriment, noting the six-month note would pressure the attorney to settle quickly even if waiting might yield more, and that the bar applied regardless of altruistic motives.

Background and rules framework

The opinion interpreted Rule 5-103(B) of the former New Mexico Code of Professional Responsibility, which barred a lawyer, while representing a client in contemplated or pending litigation, from advancing or guaranteeing financial assistance to the client beyond the costs of litigation, citing Matter of Horton as enforcement authority.

Citations and references

Rules of Professional Conduct (former Code):

• Model Code DR 5-103 / NM Code Rule 5-103(B) (no advancing or guaranteeing financial assistance to a client in litigation)

Cases:

• Matter of Horton, 100 N.M. 13 (1983), attorney disbarred on charges including making loans to clients unrelated to litigation

See also

• NM Ethics Op. 1985-4: Retaining Lien and Fee Division

Source

• Landing page: https://www.sbnm.org/Leadership/Committees/Ethics-Advisory-Committee/Ethics-Advisory-Opinions
• Original PDF: https://www.sbnm.org/Portals/NMBAR/AboutUs/committees/Ethics/1986/1986-2.pdf

Original opinion text

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

Advisory Opinion 1986-2
An attorney has requested an opinion from the Advisory Opinions Committee regarding the possible improprieties of guaranteeing a bank loan made to a client who is anticipating a workman's compensation settlement.
FACTUAL SITUATION
The attorney represents the client in a workman's compensation case which has been filed, but has not been tried or settled. The client owns a home which has some equity in it. The client is unemployed and is behind on his mortgage payments. The attorney took the client to the attorney's banker and co-signed with the client a six month promissory note. The attorney anticipates the client recovering sufficient funds in the pending case to repay the note.
QUESTION PRESENTED
Is it improper for the attorney to guarantee a client's payment of a promissory note when repayment is anticipated from an unliquidated claim being handled by the attorney?
DISCUSSION
Rule 5-103 of the Code of Professional Responsibility is on point.
Although, in some states, it is quite common and permissible for plaintiffs' attorneys to advance living expenses to clients, this is not the situation in New Mexico.
Rule 5-103 of the New Mexico Code appears to prohibit exactly this type of conduct:
(B) While representing a client in connection with contemplation or pending litigation, a lawyer shall not advance or guarantee financial assistance to his client . . . Rule 5-103(B) [emphasis added].
While an attorney may advance or guarantee costs of litigation, it is generally forbidden for the attorney to advance general living expenses which are to be repaid from an anticipated recovery.
The purpose of this rule is obviously to prevent the attorney from resolving a case in a manner most favorable to the attorney at the client's detriment.
The prohibition can work a hardship on clients, and situations can tug at the heart strings of the attorney who sees an unemployed client faced with the possibility of losing his home, but in our present situation, the attorney will be under pressure to resolve the case within six months to pay off this promissory note even if waiting for trial could bring a larger settlement.
An attorney is simply forbidden to act as his client's banker and this conduct is expressly prohibited, regardless of the altruistic motives. See also Matter of Horton, 100 N.M. 13 (1983), in which the Supreme Court disbarred a New Mexico attorney on nine charges, of which three included making loans to his clients for purposes unrelated to litigation.
There are some arguments that could be made that the attorney's guarantee of the loans was permissible. These arguments, based upon the authorities cited in the attached document, do not appear to overcome the authorities cited above. Therefore, the opinion of the Advisory Opinions Committee is that it is improper for the attorney to guarantee a client's payment of a promissory note when repayment is anticipated from an unliquidated claim being handled by the attorney.