Can a Texas lawyer work for a collection agency and share in its fees, and can the lawyer own part of the agency while representing its creditor clients?

Plain-English summary

The inquiry asked whether an attorney may represent a collection agency and share in the fees the creditor pays the agency, whether the attorney may own a share of the agency when a client also owns a share, and whether the attorney may keep accepting work from the agency or its creditor clients.

On the first question, the Committee concluded that a lawyer may accept work from a collection agency only under three conditions: no portion of the legal fee may be divided with the agency, because DR 3-102(A) bars sharing fees with a non-lawyer and the agency functions only as a conduit passing the full fee to the attorney; under DR 5-107(B), the agency may not regulate or direct the attorney's legal services for the creditor; and the attorney may not be compensated by the agency on its own behalf or regardless of creditor payment, because that would aid the agency in the unauthorized practice of law in violation of DR 3-101(A). The Committee noted ABA Informal Opinion 735 reached a similar result.

On the second question, the Committee relied on Texas Opinion 92 that an attorney may participate in a collection agency as a legitimate business. Where the attorney's client also owns a share, DR 5-104(A) governs the business transaction, and EC 5-3 calls for full disclosure and client consent, so the attorney should discuss the situation with the client and proceed only with consent. On continued employment, the Committee concluded that once the attorney has a financial interest in the agency, accepting employment by or through it is impermissible: under ABA Formal Opinion 225 and DR 2-103(E), the agency is an organization that recommends or furnishes legal services, and the attorney as co-owner would be assisting it. The Committee answered 6-0.

Currency note

This opinion was issued in 1984, under the former Texas Code of Professional Responsibility, which the Texas Disciplinary Rules of Professional Conduct replaced effective January 1, 1990. The Disciplinary Rules have since been amended, and Texas never adopted the ABA's Ethics 2000 framework. The current Texas rules are Rule 5.04 (professional independence and fee sharing), Rule 5.05 (unauthorized practice), and Rule 1.08 (business transactions with clients), with closest ABA analogs Model Rules 5.4, 5.5, and 1.8. Subsequent rule changes 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: Can a Texas lawyer split fees with a collection agency?

A: Per the opinion, no. The Committee concluded that under DR 3-102(A) the legal fee may not be divided with the agency at all; the agency acts only as a conduit and must pass the full fee for legal services to the attorney.

Q: Under what conditions can a lawyer take work from a collection agency?

A: The Committee set three conditions: the attorney receives all fees paid for his legal services, the agency does not direct or interfere with his representation of the creditor, and the attorney acts as counsel for the creditor rather than for the agency.

Q: Can a lawyer own a stake in a collection agency that a client also owns?

A: Yes, with safeguards. The Committee concluded that under DR 5-104(A) and EC 5-3 the attorney must make full disclosure of the implications and proceed only with the client's consent.

Q: Can a lawyer keep taking the agency's cases after buying into it?

A: No. The Committee concluded that once the attorney has a financial interest in the agency, accepting employment by or through it is impermissible under DR 2-103(E), because the co-owner attorney would be assisting an organization that furnishes legal services.

Background and rules framework

The opinion interprets DR 3-102(A) (no fee sharing with non-lawyers), DR 5-107(B) (no third-party direction of the lawyer's services), DR 3-101(A) (aiding the unauthorized practice of law), DR 5-104(A) (business transactions with a client), and DR 2-103(E) (assisting an organization that furnishes legal services), informed by EC 5-3, of the former Texas Code of Professional Responsibility. The closest current concepts are Texas Rules 5.04, 5.05, and 1.08 and Model Rules 5.4, 5.5, and 1.8. The analysis turns on keeping the legal fee undivided and avoiding a financial interest that turns the agency into a feeder for the lawyer's work.

Citations and references

Rules of Professional Conduct:

• MR 5.4 (professional independence; sharing fees with non-lawyers)
• MR 5.5 (unauthorized practice of law)
• MR 1.8 (business transactions with a client)
• MR 7.2 (recommendation of a lawyer's services)
• DR 3-102(A), DR 5-107(B), DR 3-101(A), DR 5-104(A), DR 2-103(E), EC 5-3, Texas Code of Professional Responsibility

Other opinions cited:

• ABA Informal Opinion 735 (1964): similar conditions on representing a collection agency
• ABA Formal Opinion 225 (1941): a financially interested attorney may not accept employment through a soliciting collection agency
• Texas Professional Ethics Committee Opinion 92 (1953): an attorney may participate in a collection agency as a legitimate business

See also

• TX Ethics Op. 446: Referrals and Fee Payment From a Financial-Planning Organization
• TX Ethics Op. 438: Law Firm Employing a Non-Lawyer CPA for Unsupervised Tax Services

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-417/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_417.pdf

Original opinion text

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

QUESTION PRESENTED

May an attorney represent a collection agency and share in the fees paid to the collection agency by the creditor?
May an attorney own a share of a collection agency if the attorney's client also owns a share of the agency? May the attorney continue to accept employment by the agency or its creditor clients?

DISCUSSION

As to Question One, the Texas Code of Professional Responsibility does not prohibit an attorney from accepting employment by a collection agency provided several conditions are met.

First, any amounts charged the creditor for legal services rendered must not be divided in any way with the collection agency. Such a division of fees with a non-lawyer is expressly prohibited by DR 3-102(A). There is no exception made in that Disciplinary Rule for the collection agency. Therefore, all amounts charged to the creditor by the agency for legal services must be passed on to the attorney. The agency merely functions as a conduit with regard to these fees.

Second, in accordance with DR 5-107(B), the attorney cannot permit the agency to regulate or direct the attorney's performance of legal services on behalf of the client creditor.

Third, if the attorney is compensated by the agency in its own behalf, or if the agency is obligated to compensate the attorney regardless of whether payment is received from the creditor, the attorney would then be aiding a non-lawyer in the unauthorized practice of law. The agency, in effect, would be accepting compensation from the creditor for the rendering of legal services. The attorney's participation in such an instance would therefore violate DR 3-101(A).

A similar conclusion concerning this same question was reached in ABA Informal Opinion 735 (May 19, 1964). The present Texas Code of Professional Responsibility is substantially in agreement with the Canons on which that opinion relies.

As to Question Two, Texas Ethics Opinion 92 (November, 1953) expressly permits the attorney to participate in the collection agency. The agency is a legitimate business activity; nothing in the present Code of Professional Responsibility would alter this conclusion.

Nevertheless, the situation is more complicated when the attorney's client also owns a share in the same agency. DR 5-104(A) prohibits an attorney from entering into a business transaction with the client if the attorney and the client would have differing interests therein or if the client expects the attorney to exercise his professional judgment therein for the protection of the client. The interests involved here would not necessarily be differing, yet there may be some expectation that the attorney will act to protect the client in the conduct of the business. In such a situation, EC 5-3 suggests that there be full disclosure by the attorney and the consent of the client. Therefore, the attorney should discuss the situation with the client, in light of DR 5-104(A), and then participate in the business only with the client's consent.

Regarding the attorney's continued employment by the agency once he is financially interested in the agency, such continued employment would be ethically impermissible. ABA Formal Opinion 225 (July 12, 1941) prohibits such an attorney from accepting employment through the agency as attorney for the creditor, if the agency solicits the collecting of claims (such solicitation is presumed here). DR 2-103(E) prohibits an attorney from knowingly assisting an organization that recommends, furnishes, or pays for legal services to promote the use of his services. The collection agency would be such an organization; the attorney, as co-owner of the organization, would be "assisting" it. It therefore remains unethical for an attorney with a financial interest in a collection agency to accept employment from or through that agency.

An attorney may accept employment from a collection agency provided: 1) he received all fees paid to the agency by the creditor for legal services rendered by the attorney; 2) he does not permit the agency to direct or interfere with his representation of the creditor; and 3) he acts as attorney for the creditor rather than the agency.

An attorney may have a financial interest in a collection agency. If a client also has an interest in the agency, the attorney should disclose the possible ramifications of both the attorney and client having an interest in the same concern, and should then participate only with the client's consent. Once the attorney has a financial interest in the agency, he may no longer accept employment by or through the agency. (6-0).

CONCLUSION

An attorney may accept employment from a collection agency provided: 1) he received all fees paid to the agency by the creditor for legal services rendered by the attorney; 2) he does not permit the agency to direct or interfere with his representation of the creditor; and 3) he acts as attorney for the creditor rather than the agency.

An attorney may have a financial interest in a collection agency. If a client also has an interest in the agency, the attorney should disclose the possible ramifications of both the attorney and client having an interest in the same concern, and should then participate only with the client's consent. Once the attorney has a financial interest in the agency, he may no longer accept employment by or through the agency. (6-0).

Tex. Comm. On Professional Ethics, Op. 417 (1984)