Can a South Carolina lawyer take a fee from an out-of-state debt-management firm for steering people who are not good bankruptcy candidates to that firm, and act as the firm's local of counsel?

Plain-English summary

A South Carolina lawyer who practiced only consumer bankruptcy was approached by an out-of-state, for-profit firm that provided debt-management services for a fee. No member of the firm was licensed in South Carolina, and the lawyer was not licensed where the firm practiced. The firm proposed to pay the lawyer a referral fee for any prospective client the lawyer interviewed and decided was not a good bankruptcy candidate but who might benefit from debt management; in return, the firm would refer to the lawyer prospective clients it thought would be better served by bankruptcy, with no fee for those referrals. The firm also asked the lawyer to serve as of counsel to assist with litigation in the firm's debt-management cases, for a monthly retainer.

The committee first noted that whether the firm's debt-management services were the practice of law was a legal question outside its jurisdiction; if they were, the lawyer could not participate without assisting the unauthorized practice of law under Rule 5.5(b). Assuming the services were not the unauthorized practice of law, the committee concluded the lawyer could ethically receive a referral fee from the firm so long as the lawyer complied with Rule 1.8(f) and Rule 1.7(b), which requires the client's disclosure and consent where the lawyer's representation may be materially limited by the lawyer's own interests. It analogized the fee to commissions from title insurers, which prior opinions had found ethical when fully disclosed and consented to.

On the reciprocal referrals, the committee explained that mutual referrals between firms are not necessarily unethical so long as there is no quid pro quo, but if the firm's referrals to the lawyer were contingent on the lawyer referring debt-management clients in return, the arrangement would violate Rule 7.2(c). It could not tell from the facts whether such a quid pro quo existed. As to the of-counsel proposal, the committee found it more troubling: if the out-of-state firm intended to appear in South Carolina litigation through the lawyer as local counsel, the firm would be practicing law in the state, and whether it could do so with no in-state partner or associate was beyond the committee's jurisdiction. The arrangement could be restructured so the firm simply referred litigation clients to the lawyer, who would handle them directly and be paid by the clients or by the firm subject to Rule 1.8(f).

Currency note

This opinion was issued in 2000, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. 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: Could the lawyer take a fee from the debt-management firm for referring unsuitable bankruptcy clients?

A: The committee concluded yes, assuming the firm's services were not the unauthorized practice of law and the lawyer complied with Rule 1.8(f) and Rule 1.7(b), disclosing the arrangement and obtaining the client's consent, treating the fee like a title-insurance commission.

Q: Could the firm condition its referrals to the lawyer on the lawyer referring clients back?

A: The committee concluded no: mutual referrals are not necessarily unethical, but if the firm's referrals were contingent on the lawyer referring debt-management clients in return, that quid pro quo would violate Rule 7.2(c).

Q: Was the proposed of-counsel arrangement permissible?

A: The committee concluded it was troubling because, if the out-of-state firm appeared in South Carolina litigation through the lawyer, the firm would be practicing law in the state; the arrangement could be restructured so the firm referred litigation clients to the lawyer to handle directly.

Background and rules framework

The opinion interpreted South Carolina RPC 1.7(b) (representation materially limited by the lawyer's own interests), 1.8(f) (compensation from a third party), 5.5(b) (assisting unauthorized practice), and 7.2(c) (giving something of value for a referral), corresponding to the like-numbered Model Rules. The committee relied on its prior Opinions 92-03, 82-20 (title-insurance commissions), and 90-40 (improper referral exchange with a physician).

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.7(b) / Model Rule 1.7: conflicts where representation is materially limited by the lawyer's own interests.
• South Carolina RPC 1.8(f) / Model Rule 1.8(f): accepting compensation from someone other than the client.
• South Carolina RPC 5.5(b) / Model Rule 5.5: assisting the unauthorized practice of law.
• South Carolina RPC 7.2(c) / Model Rule 7.2: giving something of value for recommending the lawyer's services.

Other opinions cited:

• S.C. Bar Ethics Advisory Ops. 92-03, 82-20 (title-insurance commissions ethical if disclosed and consented to).
• S.C. Bar Ethics Advisory Op. 90-40 (improper to protect a doctor's fees in exchange for patient referrals).

See also

• SC Bar Ethics Op. 03-09: Brokerage Fees From a Collector
• SC Bar Ethics Op. 06-13: Referrals From a Trade Group
• SC Bar Ethics Op. 13-03: Title Agency With a Realtor

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-00-16/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 00-16

Attorney, the owner of a small law firm, who practices exclusively in the area of consumer bankruptcy, has been approached by an out-of-state law firm ("Firm"), which has asked Attorney to assist Firm with regard to a limited area of Firm's practice. Firm is a for profit law firm that provides debt management services for a fee. No attorney or member of Firm is licensed to practice in South Carolina, and Attorney is not licensed to practice in the jurisdiction of Firm. Attorney would be paid a referral fee for any potential client interviewed by Attorney who Attorney decides would not be a good candidate for bankruptcy, but who may in fact benefit from a debt management service.

In return, Firm would refer potential clients to Attorney if Firm believes the client may be better served by bankruptcy filing than by a debt management service. Firm will receive no fee for its referral to Attorney.

Firm has also asked Attorney to be of counsel to assist Firm with any litigation Firm may encounter in its debt management service cases. For this service, Firm would pay Attorney a monthly retainer.

QUESTION:
Does the above-described arrangement conflict with any ethical rules?

Assuming that Firm's debt management services do not amount to the unauthorized practice of law, Attorney may ethically receive a fee from Firm for referring clients who Attorney decides would not be good candidates for bankruptcy and who may benefit from debt management, provided the lawyer complies with Rule 1.7(b). Attorney may accept referrals of potential clients from the Firm, as long as the referral of those potential clients is not contingent upon, or in exchange for, the Attorney having referred customers to the Firm. The proposed "Of Counsel" arrangement might involve the lawyer in assisting Firm in the unauthorized practice of law, but could be restructured to avoid this problem.

OPINION:
An initial question is whether Firm's debt management services constitute the practice of law. While debt management services would not seem to be the practice of law, when conducted by a Law Firm without separation from its general practice, they might be treated differently. If so, Attorney could not ethically participate in the arrangement because he would be assisting in the unauthorized practice of law in violation of Rule 5.5(b). What constitutes the unauthorized practice of law is a question of law which the Committee cannot address.

Assuming that Firm's debt management services do not amount to the unauthorized practice of law, Attorney may ethically receive a fee from Firm for referring clients who Attorney decides would not be good candidates for bankruptcy and who may benefit from debt management. The lawyer must comply with the requirements of Rule 1.7(b), which requires disclosure and consent of the client when the lawyer's representation may be materially limited by the "lawyer's own interests." In the Committee's opinion the referral fee involved in this situation is similar to commissions from title insurance companies, which the Committee has found to be ethical provided they are fully disclosed and consented to by the client. See S.C. Ethics Adv. Op. #92-03 and 82-20.

It might be argued that Attorney is indirectly giving something of value by referring potential debt management clients to Firm. Mutual referrals between firms are not necessarily unethical, if there is no quid pro quo for the referrals. However, if the referral of clients to Attorney by the Firm is contingent upon Attorney, in return, referring debt management clients to Firm, then the relationship would violate Rule 7.2(c). See S.C. Ethics Adv. Op. 90-40 (finding it improper for a lawyer to agree to protect a doctor's fees in exchange for doctor referring patients to lawyer). From the facts given, the committee cannot determine in this case whether an inappropriate quid pro quo exists for the referral of clients to Attorney.

The proposed "Of Counsel" relationship is somewhat more troubling to the Committee. The Committee assumes from the question that under the proposed arrangement Firm would enter an appearance in South Carolina on behalf of debt management clients involved in litigation though Attorney as local counsel. If the Firm plans to appear in South Carolina to represent these clients in litigation through Attorney, the Firm is clearly practicing law in South Carolina. The Committee questions whether an out-of-state firm can practice law in South Carolina when the only South Carolina lawyer is neither a partner nor an associate of the firm but is of counsel. This question is beyond the scope of the Committee's jurisdiction. Rather than appearing in South Carolina, Firm could simply refer debt management clients to Attorney to handle in South Carolina. These clients could pay Attorney directly for his services, or Firm could agree to pay Attorney for his services on an hourly basis or pursuant to a retainer. If Firm is paying Attorney's fees, Attorney must comply with Rule 1.8(f).