Can an attorney who takes default judgments on accounts referred by a collection agency be paid a flat hourly rate by the agency, with collected attorney's fees routed through the agency's trust account?

Plain-English summary

The inquiry described a collection company, principally handling consumer debts including hospital, medical, and utility bills, that referred uncollectible accounts to an attorney once it had verified the debtor's employment or assets. The collection company prepared the civil warrant for filing in General Sessions Court, listing the creditor (not the collection agency) as plaintiff and the attorney as plaintiff's attorney; the attorney appeared and took default judgments, contacting the creditor-client directly only on contested matters. The collection agency paid the attorney a flat hourly rate, and any attorney's-fee awards were collected by the agency, deposited in a separate trust account, and remitted to the attorney monthly in full; the agency also handled garnishment and follow-up on most accounts, referring problem accounts directly to the attorney.

The opinion stated the governing principle that a lawyer's professional services should not be controlled or exploited by any lay agency, personal or corporate, that intervenes between the lawyer and client, and that a lawyer should avoid relations that direct the lawyer's duties by or in the interest of an intermediary, keeping the relationship to the client personal and the responsibility direct. Applying that principle, the opinion held that once the law firm handles a collection matter referred by the agency, the attorney must immediately establish a direct attorney-client relationship with the creditor, and the collection agency must have no further interest or activity in the matter. The opinion applied Disciplinary Rule 3-102, which prohibits a lawyer from dividing a legal fee with a non-lawyer, and Disciplinary Rule 5-107(A)(1), which prohibits a lawyer from accepting compensation for legal services from anyone other than the client, concluding the attorney must not share or divide the attorney's fee with the collection agency. The opinion declined to resolve whether the collection agency's own activities constitute the unauthorized practice of law, pointing to Tennessee Formal Ethics Opinion 83-F-44(a) for the general framework on whether specific non-lawyer services constitute the practice of law.

Currency note

This opinion was issued in 1984, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility. 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: Once a collection agency refers an account to an attorney, can the agency stay involved in the matter?

A: Under this opinion, no: the attorney must immediately establish a direct attorney-client relationship with the creditor, and the collection agency must have no further interest or activity in the matter. A later opinion, 85-F-81(a), clarified that an agency acting as the creditor's ongoing agent in referring matters does not itself create an impropriety; see that opinion for the refined rule.

Q: Can the attorney share the collected attorney's fees with the collection agency that referred the accounts?

A: No. Disciplinary Rule 3-102 prohibits dividing a legal fee with a non-lawyer, and DR 5-107(A)(1) prohibits accepting compensation for legal services from anyone other than the client; the opinion held the attorney must not share the fee with the collection agency.

Background and rules framework

The opinion applied Disciplinary Rule 3-102 (no fee division with a non-lawyer) and Disciplinary Rule 5-107(A)(1) (no compensation for legal services from a non-client) of the Code of Professional Responsibility. The modern correlates are Model Rule 5.4 (professional independence of a lawyer; fee-sharing with nonlawyers) and Model Rule 1.8 (conflict-of-interest rules including third-party compensation), cited here as navigational cross-references rather than rules the opinion itself applied.

Citations and references

Other opinions cited:

• Tennessee Formal Ethics Opinion 83-F-44(a), framework for whether non-lawyer services constitute the practice of law

See also

• Tenn. Ethics Op. 85-F-81(a): Fee Sharing With a Collection Agency (refines this opinion's rule on the agency's ongoing role as the creditor's agent)
• AL Ethics Op. 1993-20: Rule 5.4 Prohibits Fee-Splitting With Non-Lawyer, but Lawyer May Pay a Non-Lawyer for Services Rendered to the Lawyer

Source

• Landing page: https://www.tbpr.org/ethic_opinions/84-f-81

Original opinion text

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

84-F-81 - Fee sharing with Collection agency

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 84-F-81

Inquiry is made concerning the propriety of an attorney arranging to assist a collection agency in collection of delinquent accounts in a manner where the creditor has no contact with the attorney.

The collection company engages in the practice of collecting delinquent accounts, principally consumer debts. The collection company is incorporated and actively seeks new accounts for collection through advertising and personal contacts. A large volume of the accounts are hospital, medical or utility bills.

The typical procedure for the handling of an account is that the creditor turns the account over to the collection agency. The collection agency goes through its normal procedures of notice, followed by telephone calls and additional notices, in an attempt to collect the account. If the account proves to be uncollectible and the collection agency has verified employment or assets, or both, then the collector recommends suit. After suit is recommended, a check is made by the collection company to make sure that the collection company does not already have a judgment against the particular debtor, that the debtor has not filed bankruptcy, or if there is some other reason why suit should not be brought. At this point, a civil warrant is prepared by the collection company for filing in General Sessions Court. The civil warrant will list the attorney as the Plaintiff's attorney. The Plaintiff is the creditor and not the collection agency. The attorney appears on behalf of his client in the General Sessions Court and takes a default judgment. On contested matters, he contacts the client and arranges the handling of a suit. Unless the matter is contested, the creditor/client has no contact with the attorney.

The collection agency pays the attorney a flat hourly rate for his services. Any awards of attorney's fees are collected by the collection agency, placed in a separate trust account and remitted monthly to the attorney in full. The garnishment and follow-up procedures on the collection of most accounts are handled by the collection agency. On any accounts where there are any problems, they are referred directly to the attorney.

The professional services of a lawyer should not be controlled or exploited by any lay agency, personal or corporate, which intervenes between client and lawyer. A lawyer's responsibilities and qualifications are individual. He should avoid all relations which tend to direct the performance of his duties by or in the interest of any intermediary. A lawyer's relation to his client should be personal and the responsibility should be direct to the client.

When the law firm handles a collection matter referred by the agency, the attorney must immediately establish a direct attorney-client relationship with the creditor and the collection agency must have no further interest or activity in the matter. Disciplinary Rule 3-102 prohibits a lawyer from dividing a legal fee with a non-lawyer and Disciplinary Rule 5-107(A)(1) prohibits a lawyer from accepting compensation for his legal services from one other than his client. Therefore, the attorney must not share or divide his attorney fee with the collection agency.

The matters of unauthorized practice of law by the non-lawyer collection agency are not determined herein since the above matters are determinative of the entire matter. For a discussion of whether certain specific services by a non-lawyer constitute the practice of law or performance of legal services, see Tennessee Formal Ethics Opinion 83-F-44(a).

This 17th day of October, 1984.

ETHICS COMMITTEE:

O. B. Hofstetter, Jr., Chairman

Jerry Colley

William R. Willis

APPROVED AND ADOPTED BY THE BOARD