Can a lawyer sell unpaid client legal bills to a factoring company to collect on them?

Plain-English summary

A lawyer asked when delinquent accounts receivable (unpaid legal fees) may be sold outright to a third-party factoring company. The Rules contain no provision specifically addressing such a sale. The Committee first noted that Rule 1.04(a) bars charging or collecting an illegal or unconscionable fee whether the lawyer collects directly or sells the receivable, and assumed for the rest of the opinion that the receivables were for fees permitted under Rule 1.04.

The Committee then focused on confidentiality. The amount a client owes a lawyer ordinarily involves confidential information: in some cases the fact of the engagement, often the nature of the services, and usually the amount owed and the fact it is unpaid. That is "unprivileged client information" under Rule 1.05(a), and Rule 1.05(b) requires a lawyer to protect confidential information from disclosure unless an exception applies. Two exceptions could be relevant: Rule 1.05(c)(5), permitting disclosure reasonably necessary to collect a fee in a controversy between lawyer and client, and Rule 1.05(c)(2), permitting disclosure with the client's consent after consultation.

The Committee concluded that the 1.05(c)(5) exception does not apply: disclosing confidential information as part of selling a delinquent account to a factor is not necessary to enforce the fee claim. That left client consent under 1.05(c)(2) as the only permissible basis. The consent must be informed and uncoerced. It may be obtained at the outset of the representation (for example, in an engagement letter) or later, but only after the lawyer has consulted with the client about the consequences of the disclosure involved in selling the receivable. A lawyer may make such consent a condition of accepting employment, but after the representation begins may not coerce consent by threatening to withdraw or take other adverse action, and the consent must come from an affirmative client communication, not mere inaction. Accordingly, a lawyer may not sell accounts receivable to a factor unless each client has previously given consent, after consultation, to the disclosure involved.

Currency note

This opinion was issued in 1989, interpreting the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990 (the opinion applied those Rules prospectively and noted their predecessor, the Texas Code of Professional Responsibility). Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since, including the comprehensive 2021 revisions adopted by Texas Supreme Court order. 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: Can a lawyer sell unpaid legal bills to a factoring company?

A: The Committee concluded only with the client's prior consent. A lawyer may not sell delinquent accounts receivable to a factor unless each affected client has already consented, after consultation, to the disclosure of confidential information the sale involves.

Q: Why isn't the fee-collection exception enough to allow the sale?

A: Per the opinion, Rule 1.05(c)(5) permits disclosure only as reasonably necessary to collect a fee in a controversy with the client, and the Committee concluded that disclosing confidential information to a factor is not necessary to enforce the fee claim.

Q: When can the client's consent be obtained?

A: The Committee said consent may be obtained at the outset (for example, in an engagement letter) or later, but only after consultation about the consequences, must be affirmative rather than based on the client's inaction, and may not be coerced once the representation is underway.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04 (fees; analogous to ABA Model Rule 1.5) and, centrally, Rule 1.05 on confidentiality (analogous to ABA Model Rule 1.6), including the definition of unprivileged client information in 1.05(a), the general duty in 1.05(b), the fee-collection exception in 1.05(c)(5), and the consent exception in 1.05(c)(2). The opinion treats the unpaid-fee information as confidential and turns on whether an exception permits disclosing it to a factor.

Citations and references

Rules of Professional Conduct:

• MR 1.6 (confidentiality of information)
• MR 1.5 (fees)
• Texas Disciplinary Rule 1.04(a) (illegal or unconscionable fee)
• Texas Disciplinary Rule 1.05(a), (b), (c)(2), (c)(5) (confidentiality and exceptions)

See also

• TX Ethics Op. 479: Disclosing Client Names and Amounts Owed to a Firm Lender
• TX Ethics Op. 495: Disclosing Confidential Client Information to a Collection Agency

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-464/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_464.pdf

Original opinion text

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

QUESTION PRESENTED

Under what circumstances may a lawyer sell outright his delinquent accounts receivable to a third party factoring company?

DISCUSSION

The Texas Disciplinary Rules of Professional Conduct contain no provisions specifically addressing an attorney's sale of delinquent accounts receivable to an unrelated third party. Under Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct, [FN1] a lawyer may not charge or collect an illegal or unconscionable fee, [FN2] and such limitation would apply to a lawyer's fees regardless of whether the lawyer collects such fees directly or sells accounts receivable to a factor. For purposes of the remainder of this opinion it is assumed that accounts receivable that are proposed to be sold to a factor are for legal fees that are permitted under Rule 1.04.

In most cases, the amount due from a client to a lawyer for legal services will involve to some degree confidential information relating to the client. This confidential information, to the extent not subject to the attorney-client privilege, will be "unprivileged client information" which is defined in Rule 1.05(a) as "all information relating to a client or furnished by the client, other than privileged information, acquired by the lawyer during the course of or by reason of the representation of the client." In some cases, the fact that the lawyer was engaged by the client may be confidential; in many cases, the nature of the legal services resulting in the fee statement would be confidential; in most cases, the amount of the fee owing and the fact that the fee has not been paid would be confidential.

Under Rule 1.05(b) a lawyer is required to protect from disclosure confidential information regarding the lawyer's clients unless a specified exception applies. There are two principal exceptions that may apply to permit the disclosure of confidential information with respect to a client's legal fees: First, under Rule 1.05(c)(5), the lawyer may disclose confidential information to the extent "reasonably necessary" to collect the fee due in a controversy between the lawyer and the client. Second, under Rule 1.05(c)(2), the lawyer may disclose confidential information if the client consents after consultation. [FN3]

Although under Rule 1.05(c)(5) a lawyer may disclose confidential client information to the extent reasonably necessary in a legal proceeding that is brought by the lawyer to collect a fee, disclosure of confidential client information as part of the sale of a delinquent account receivable to a factor is not necessary for the enforcement of the claim for the lawyer's fee. Accordingly, consent of the client is the only permissible basis for the disclosure of confidential client information incident to a sale of delinquent accounts receivable to a factor.

A client's consent to the disclosure of confidential information is effective only if such consent is informed and uncoerced. Although consent "after consultation" is required by Rule 1.05(c)(2), such consultation may occur at the outset of the lawyer-client relationship rather than only after an account receivable has arisen and has become delinquent. Hence such consent could be obtained at the time the lawyer accepts employment from the client and could be made part of an engagement letter. Alternatively, such consent might be obtained at a later time. In either case, [to be effective the consent would have to be obtained after the lawyer had consulted with the client as to the consequences for the client's interests of the disclosure of confidential information involved in the sale of accounts receivable to a factor. The lawyer could make the client's consent on this matter a condition to the lawyer's accepting employment, but after commencing representation the lawyer could not try to coerce a client's consent by threatening to withdraw from representation or to take some other action adverse to the client's interest if the consent was not given. In addition, the consent would have to be based on an affirmative communication from the client and could not be based merely on a client's inaction in response to a request sent to the client.

CONCLUSION

A lawyer may not sell accounts receivable to a third party factoring company unless each client involved has previously given consent, after consultation with the lawyer, to the disclosure of confidential information incident to such sale of accounts receivable.

FN1 All references to "Rules" are to the Texas Disciplinary Rules of Professional Conduct that will become effective January 1, 1990.

FN2 Disciplinary Rule 2-106(A) of the Texas Code of Professional Responsibility prohibits charging or collecting an illegal or clearly excessive fee.

FN3 Similar rules are found in Disciplinary Rule 4-101(C)(4) and 4-101(C)(1) of the Texas Code of Professional Responsibility.

Tex. Comm. On Professional Ethics, Op. 464 (1989)