Can a lawyer use a trade-credit account processor to finance non-consumer clients' fees, and sell existing receivables to it, the way lawyers accept credit cards?

Plain-English summary

The lawyer considered an agreement with a trade credit account processor (TCAP) that, working with affiliated trade lenders, would offer trade credit to the lawyer's non-consumer clients to pay the lawyer's fees, functioning much like Visa and MasterCard do in consumer transactions (which were approved for legal-fee payment in Opinion 81-01). The lawyer would submit only a client's name, address, telephone number, and the amount of credit requested. The arrangement differs from consumer credit in a few ways: the trade lenders extend only business-to-business trade credit, so only non-consumer clients (here, sophisticated lending institutions that are collection and foreclosure clients) qualify; the lenders charge clients no interest, with the lawyer paying the lenders' and TCAP's fees; and client participation is by each client's consent, applying to all matters, with the lawyer agreeing to refund the TCAP payment and resolve any fee dispute directly or through the Bar's fee dispute board. No confidential client information beyond name and address is given to TCAP. The lawyer asked whether this fee-payment arrangement is permissible and whether the lawyer may, with informed consent, sell existing accounts receivable to a TCAP for participating clients.

The committee answered yes to both. It found the facts similar to a lawyer accepting credit cards for legal fees, except that here the client is charged no fees, costs, or interest, with the lawyer apparently paying those as a premium for early payment from TCAP. The committee noted that Opinion 81-01, though written under the former Code of Professional Responsibility, remains applicable and had approved monthly service charges and an interest-bearing note for fees owed; the present facts posit no fees to the client, but the precept of client agreement still applies. It cited Opinion 96-06, which permitted credit cards for legal fees with caveats about written fee agreements and opportunities for clients to review invoices, and observed that here the lawyer's agreement provides for refund of any disputed fee and direct resolution with the client.

The committee added that, even though the arrangement applies only to sophisticated non-consumer clients, the lawyer's engagement letter and fee agreement should disclose all relevant facts, and that where the lawyer wishes to sell existing accounts whose agreements did not contemplate a TCAP, the lawyer should obtain informed client consent before passing the accounts to the TCAP. Satisfied that the arrangement contains adequate safeguards, the committee reminded practitioners of the reasonableness-of-fees requirement in Rule 1.5 and the confidentiality requirement in Rule 1.6.

In practice

Under this opinion, a lawyer may finance non-consumer clients' fees through a trade-credit account processor and may sell it existing receivables, much as lawyers accept credit cards. The committee conditioned this on informed client consent, no fees or interest charged to the client, protection of confidentiality (only name and address disclosed, with permission), refund of any disputed fee, and full disclosure in the engagement letter and fee agreement; for existing accounts whose agreements did not contemplate a TCAP, consent must be obtained before transferring them. The committee held Rules 1.5 (reasonable fees) and 1.6 (confidentiality) continue to govern.

Common questions

Q: Can a lawyer use a third-party processor to get paid early on client fees?

A: The committee concluded yes for non-consumer clients, treating the trade-credit processor like a credit-card arrangement approved in Opinions 81-01 and 96-06, provided clients consent and are charged no fees or interest and confidentiality is protected.

Q: Can the lawyer sell existing accounts receivable to the processor?

A: Yes, with informed client consent. The committee said that where the existing agreements did not contemplate a TCAP, the lawyer should obtain the client's informed consent before passing the accounts to the processor.

Q: What client information can be shared with the processor?

A: The committee noted only the client's name and address are disclosed, with the client's permission; no confidential client information is given to the TCAP, consistent with Rule 1.6.

Q: Which rules still govern the arrangement?

A: The committee reminded practitioners of the reasonableness-of-fees requirement in Rule 1.5 and the client-confidentiality requirement in Rule 1.6.

Background and rules framework

The opinion applies South Carolina Rule 1.5 (reasonable fees) and Rule 1.6 (confidentiality), which correspond to the like-numbered Model Rules. It builds on prior South Carolina opinions approving outside payment mechanisms for legal fees: Opinion 81-01 (monthly service charges and interest-bearing notes under the former Code) and Opinion 96-06 (credit cards for legal fees, with written-agreement and invoice-review caveats).

Citations and references

Rules of Professional Conduct:

• MR 1.5 / SC Rule 1.5 (reasonable fees)
• MR 1.6 / SC Rule 1.6 (confidentiality of information)

Other opinions cited:

• SC Ethics Advisory Opinion 81-01 (monthly service charges; interest-bearing note for fees owed)
• SC Ethics Advisory Opinion 96-06 (credit cards for payment of legal fees; written agreement and invoice review)

See also

• SC Bar Ethics Op. 18-06: Third-Party Fee Financing
• SC Bar Ethics Op. 07-04: Lawyers Buying Charged-Off Debt

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-08-02/
• Original PDF: https://www.scbar.org/media/m4rfkwva/08-02.pdf

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 08-02

South Carolina Rules of Professional Conduct: 1.5, 1.6

Facts:

Lawyer is considering entering into an agreement with a trade credit account processor (TCAP) who, working with affiliated lenders (Trade Lenders), will offer trade credit to Lawyer’s non-consumer clients for payment of Lawyer’s fees. TCAP performs essentially the same functions that Visa and MasterCard perform in consumer credit transactions, which were approved for payment of legal fees in Ethics Advisory Opinion 81-01.

Under this arrangement (currently in place in a variety of other trades and professions), Lawyer submits clients to TCAP for TCAP account, providing only the name, address, and telephone number of the client and the amount of credit requested. The lawyer’s agreement will be with TCAP to provide account processing and with the Trade Lender to provide the advance, just as it is in accepting Visa and MasterCard for payment. The relationships among Lawyer, TCAP, Trade Lender, and clients will differ from consumer credit bill-payment transactions in only a few ways.

First, Trade Lenders do not extend credit to individuals for consumer transactions. They extend only trade credit to businesses for business-to-business transactions. Therefore, only Lawyer’s non-consumer clients can be involved in the arrangement. Lawyer intends to enter into this arrangement only with Lawyer’s collection and foreclosure clients that have ongoing business with Lawyer in multiple legal matters who are themselves sophisticated lending institutions.

Second, Trade Lenders will not charge interest to clients on monies advanced to Lawyer. Lawyer pays Lenders’ and TCAP’s fees for this service.

Finally, client participation in these trade credit arrangements will be by consent of each non-consumer client. Client authorization for TCAP payment of Lawyer’s fees will apply to all matters in which Lawyer represents each client, just as Lawyer’s current fee agreement with each client applies to all legal matters as they arise. The agreement between Lawyer and clients will also provide that when a client disputes a fee, Lawyer will refund the TCAP payment and resolve the dispute directly with the client or through the Bar’s fee dispute board, if necessary.

As with credit card payments, no confidential client information will be given to TCAP when Lawyer submits payment requests. Detailed accounts of work performed will be sent only to clients.

Questions:

1. May Lawyer ethically enter into this fee-payment arrangement with clients?

2. May Lawyer, with informed client consent, sell existing accounts receivable to a TCAP (relating only to those clients participating in the trade credit arrangement)?

Summary:

Yes. 1) Lawyer may ethically enter into a fee-payment arrangement with clients and a trade credit account processor (TCAP) and 2) Lawyer, may sell existing accounts receivable to a TCAP, provided informed consent is obtained from the client.

The facts as presented address any ethical concerns in that the client’s informed consent is obtained prior to entering into the fee-payment arrangement; clients are not charged any fees, costs, or interest; and client confidentiality is maintained (except for client name and address, which are divulged with permission of the client).

Opinion:

The facts on which this question is based are similar those in a situation where credit cards are accepted by a lawyer in payment of legal fees, with the exception (in the instant case), that fees, costs, or interest are not charged to the client. Apparently, the lawyer here pays the associated fees as a premium for receiving payment early from TCAP.

While SC Bar Ethics Advisory Opinion 81-01 was written under the former Code of Professional Responsibility, its conclusion continues to be applicable under the present Rules of Professional Conduct (SC Ap. Ct. Rule 407). EAC 81-01 approved monthly service charges and permitted a lawyer to take an interest-bearing note for fees owed. In the present case, the facts do not posit any fees being charged to the client, but the precept of client agreement still applies.

SC Bar Ethics Advisory Opinion 96-06 specifically permitted the use of credit cards for payment of legal fees, with caveats as to written fee agreements and opportunities for clients to review invoices. Here, Lawyer’s prior agreement with clients and TCAP states that Lawyer will refund any disputed fee and resolve any such issue directly with the client.

Even though the inquiring lawyer states that the TCAP arrangement will apply only to sophisticated non-consumer clients, Lawyer’s engagement letter and fee agreement should disclose all relevant facts. If, in cases where Lawyer desires to “sell” existing accounts to the TCAP, the agreements did not contemplate using a TCAP, Lawyer should obtain informed client consent prior to passing the accounts to the TCAP.

The members of the Ethics Advisory Committee are satisfied from the recitation of the facts that the inquiring lawyer has provided adequate safeguards in the agreement with clients and the TCAP.

Practitioners are reminded of the requirement of the reasonableness of fees in Rule 1.5 and the requirement of client confidentiality in Rule 1.6.