Can a lawyer use a third-party financing company to help clients borrow money to pay legal fees, and do the fees the lawyer pays the company count as sharing fees with a non-lawyer?

Plain-English summary

The Committee combined two inquiries about associating with a financial brokerage to help clients who cannot afford fees in cases not suited to contingent fees. Under the arrangement, the broker or vendor applies for financing for the client; if approved, the client receives the loan independently of the lawyer, and the lawyer pays the vendor setup, technology, administration, and merchant fees (a percentage of the amount financed). The loan is offered to clients as one payment option, the proceeds go directly to the client, the client is not required to hire the lawyer or to use the money for fees, the lawyer is not responsible for repayment, and the broker is not referring clients to the lawyer.

The Committee concluded the arrangement does not violate the Rules of Professional Conduct, assuming the fees paid to the broker are reasonable for the service in the industry. The fees are not paid for a referral, not paid for legal work performed by a non-lawyer, and the broker is not sending the lawyer cases, so the lawyer is not paying for referrals.

On conflicts, the Committee found no Rule 1.7 concurrent conflict: the representation is not directly adverse to another client and is not materially limited by responsibilities to the broker, vendor, or lender, because the lawyer takes on no duty to repay the loan. Rule 1.8 does not apply because the lawyer acquires no ownership interest in the lender or broker, and the lawyer provides no financial assistance to the client: the lender loans to the client, who then pays the lawyer. The Committee likened the merchant fee to an advertising-type cost, noting it is comparable to a lawyer reducing the fee, so long as the client is not responsible for the merchant fee and the fee does not exceed the legal fee.

On fee-sharing, Rule 5.4 bars sharing fees with a non-lawyer, forming a partnership with one, or letting a payor direct the lawyer's judgment. The Committee found none of these implicated because the lender pays the client, not the lawyer, and none of the lender, broker, or vendor directs the lawyer's professional judgment. The Committee aligned the result with its prior opinions: EAC 11-05 (a "Daily Deal" website's percentage was the reasonable cost of advertising under Rule 7.2(c), not fee-sharing under Rule 5.4(a)) and EAO 08-02 (a fee-payment arrangement with a trade-credit account processor).

In practice

Under this opinion, and under the South Carolina rules as they stood at the time, a lawyer may use a third-party financing broker to let clients borrow money to pay fees, provided the broker fees are reasonable for the service, the broker is not referring clients, the loan proceeds go to the client, the lawyer takes on no repayment obligation, and the broker does not direct the lawyer's judgment. The opinion treats the merchant fee as an advertising-type cost rather than prohibited fee-sharing, conditioned on the client not bearing the merchant fee and the fee not exceeding the legal fee.

Common questions

Q: Can a lawyer set up a financing option so clients can borrow to pay legal fees?

A: Yes. The opinion concludes a lawyer may associate with a third-party broker or vendor that arranges client loans, where the loan proceeds go directly to the client and the lawyer is not responsible for repayment.

Q: Do the fees the lawyer pays the financing broker count as sharing fees with a non-lawyer?

A: No. The opinion concludes that reasonable broker fees are not prohibited fee-sharing under Rule 5.4 because they are not paid for referrals or for legal work, and the lender pays the client rather than the lawyer.

Q: Does this arrangement violate the rule against giving financial assistance to a client?

A: No. The opinion concludes Rule 1.8(e) is not violated because the lender, not the lawyer, loans money to the client; the lawyer merely pays a fee to the broker to help the lawyer receive payment.

Q: Can the client be charged the merchant fee?

A: The opinion's approval is conditioned on the client not being responsible for the merchant fee and the fee not exceeding the amount of the legal fee.

Background and rules framework

The opinion interprets Rule 1.7 and Rule 1.8 (conflicts of interest with current clients, including 1.8(e)'s bar on financial assistance in litigation), Rule 5.4 (professional independence; no fee-sharing with non-lawyers), and Rule 7.2(c) (reasonable cost of advertisements). The South Carolina versions track the corresponding ABA Model Rules. The Committee built on EAC 11-05 and EAO 08-02, which treated payments to third-party service providers as advertising costs or service premiums rather than fee-sharing.

Citations and references

Rules of Professional Conduct:

• MR 5.4 / SC RPC 5.4 (professional independence; fee-sharing with non-lawyers)
• MR 1.8 / SC RPC 1.8 (current-client conflicts; 1.8(e) financial assistance)
• MR 1.7 / SC RPC 1.7 (concurrent conflict of interest)
• MR 7.2 / SC RPC 7.2(c) (reasonable cost of advertisements)

Other opinions cited:

• S.C. Bar EAC Op. 11-05: "Daily Deal" website percentage is advertising cost, not fee-sharing.
• S.C. Bar EAO 08-02: fee-payment arrangement with a trade-credit account processor.

See also

• ABA Formal Op. 484: Client Fee-Financing Companies
• ABA Formal Op. 465: Deal-of-the-Day Marketing Programs
• ABA Formal Op. 464: Fee Division With Nonlawyers

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-18-06/
• Original PDF: https://www.scbar.org/media/narab1lp/18-06.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 OF THE ETHICAL PROPRIETY OF THE INQUIRER'S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY.

The Ethics Advisory Committee renders opinions exclusively to members of the South Carolina Bar concerning ethical issues raised by the inquirer's contemplated conduct not relating to a pending matter. This Committee has no disciplinary authority. Lawyer discipline in South Carolina is administered solely by the South Carolina Supreme Court through its Commission on Lawyer Conduct.

South Carolina Rules of Professional Conduct: 1.7, 1.8, 5.4

Factual Background:

The Ethics Advisory Committee received two inquiries regarding the propriety of associating with a financial brokerage company. The Committee is addressing both inquiries in this opinion because they concern the same legal issue. Lawyer or law firm desires to offer legal services to individuals or parties who are not able to afford the services. The cases are not appropriate for contingent fee contracts. Therefore, the lawyer would associate with a financial brokerage company or other third-party financing vendor. The broker or vendor would apply for financing for the client to pay the attorney's fee, and, if approved for financing, the client would receive financing completely independently of the lawyer or law firm. The broker or vendor charges an initial setup fee, a monthly technology fee for maintaining the payment web page and an administration fee. The lawyer would also pay the vendor or broker a merchant fee, which would be a percentage of the amount financed for the legal fee. The loan service would be explained to clients as a payment option along with any other options such as credit cards, checks, cash, etc. The proceeds of the loan are paid directly to the potential client by the lender. The client then pays a fee to the lawyer in accordance with the relevant fee agreement. The potential client is not required to hire this particular lawyer or law firm, nor is the potential client required to use the money for legal fees. The lawyer or law firm is not responsible for repayment of the loan, either directly or indirectly. The brokerage company or vendor is not referring potential clients to the lawyer; the lawyer/law firm simply desires to use the brokerage company or vendor to enable potential clients to pay legal fees.

Questions Presented:

1. May a lawyer or law firm associate with the brokerage company or vendor under the proposed arrangement?

2. Do any of the fees paid to the broker or merchant constitute the prohibited sharing of legal fees with non-lawyers pursuant to Rules 1.7, 1.8, 5.4 or any other Rule?

Summary:

The arrangement does not violate any Rules of Professional Conduct assuming the fees paid by the lawyer or law firm to the broker or vendor are reasonable fees for the service provided in the industry. The fees are not paid for the purpose of getting a referral. The fees are not paid for legal work performed by a non-lawyer. The broker is not referring cases to the lawyer so the lawyer is not paying for referrals.

Discussion:

Rule 1.7 and Rule 1.8 relate to conflicts of interest involving current clients. Rule 1.7(a) prohibits representation if the representation involves a concurrent conflict of interest. Under the facts presented, the representation of the potential client will not be directly adverse to another client, and there is no significant risk that the representation of the potential client will be materially limited by the lawyer's responsibility to anyone else. The lawyer is not undertaking any responsibility to the broker, the vendor, or the lender to repay the loan.

Rule 1.8 is not applicable because the lawyer has not acquired an ownership or other interest in the lending institution company or the brokerage/vendor. The lender has loaned the money to the client and the client then pays the lawyer. Rule 1.8(e) states that a lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation. 1.8(e) only applies to pending or contemplated litigation, so if the matter is anything other than a litigation matter, this particular rule is irrelevant. Even with regard to pending or contemplated litigation, the lawyer has not provided financial assistance to the client in connection with the litigation. The lawyer is merely paying a fee akin to advertising to the broker or vendor. In return for the service of the broker or vendor, the broker/vendor arranges a loan to the potential client.

The lawyer has not given the potential client anything; instead the lawyer has paid money to the lender or vendor or broker in order to help the lawyer himself receive a fee. While the lawyer's actions have indirectly enabled the client to obtain legal services, it is no different than if a lawyer reduces his fee; a lawyer has the discretion to charge a reduced fee. Comment 10 to Rule 1.8 discusses financial assistance. This Comment prohibits making or guaranteeing loans for living expenses; the lawyer has not loaned the client anything in this case. This is the case only if the client is not responsible for paying the merchant fee and the basis for the imposition of the fee does not exceed the amount of the legal fee.

Rule 5.4 states that a lawyer shall not share fees with a non-lawyer or form a partnership with a non-lawyer. It also prohibits a lawyer from permitting a person who pays the lawyer from directing or regulating the lawyer's professional judgement. None of this applies because the lender is not paying the lawyer. The lender is paying the client who then pays the lawyer; in any event the lender, the broker, or the vendor are not directing or regulating the lawyer's professional judgement in rendering the legal services.

Previous Ethics Advisory Opinions of the South Carolina Bar have addressed issues such as payments by lawyers to third parties. The use of "Daily Deal" websites to sell vouchers for discounted services when the proceeds of the purchase are split between the lawyer and the service offering the voucher was found not to violate Rule 5.4(a) prohibiting the splitting of legal fees with non-lawyers in Ethics Advisory Opinion 11-05. The Committee found that the payment to the website provider was either the reasonable cost of advertisement or communications permitted by Rule 7.2(c)1 or was consistent with the policy of the rule, which is to prevent interference with a lawyer's independent professional judgement. Regarding the payment to the third-party service provider, EAC 11.05 opined:

The fee charged by a company for use of its service (i.e., a percentage of the money paid by the customer for the discounted coupon) constitutes the payment of 'the reasonable cost of advertisements or communications' permitted under Rule 7.2(c)1 and not the sharing of a legal fee with a non-lawyer prohibited by Rule 5.4(a).

South Carolina Ethics Advisory Opinion 08-02 found that a lawyer may ethically enter into a fee payment arrangement with clients and a trade credit account processor, when "the lawyer here pays the associated fees as a premium for receiving payment early from TCAP."