Can a law firm let clients pay legal fees by borrowing from an independent finance company that pays the firm at least 90% of the amount borrowed?

Plain-English summary

A law firm proposed to participate in a program with a for-profit finance corporation that no participating lawyer owned. The firm would pay a non-refundable participation fee; the finance corporation would train the firm's staff and supply forms but would never recommend a participating lawyer to a client. Under the arrangement, the finance corporation would advance the agreed legal fee directly to the lawyer for services the lawyer represented in writing would be performed, paying the firm at least 90% of the agreed fee; if a fee dispute arose, the firm would repay the finance corporation and deal directly with the client. The question was whether this arrangement violated the Disciplinary Rules.

The Committee acknowledged the arrangement appears to involve dividing a legal fee between a lawyer and the finance corporation, which Rule 5.04(a) generally prohibits. But it relied on Comment 1 to Rule 5.04(a), which explains the limitation exists to prevent lay solicitation of clients and to avoid encouraging nonlawyers in the practice of law. Here the finance corporation neither solicits clients for any lawyer nor performs legal services, so the Committee viewed the finance corporation's retention of a reasonable portion of the amount borrowed as a finance arrangement rather than a fee-splitting arrangement subject to the prohibition. It distinguished its earlier treatment of credit cards (Opinion 349), barter exchanges (Opinion 435), and percentage-of-receipts office leases (Opinion 467).

The Committee then set the conditions. Under Rule 1.04(a), the fee must not be unconscionable, and there is a risk that the percentage retained by the finance corporation could make the client's total fee unconscionable; to police this, the firm must disclose to each client the percentage of the gross fee the finance corporation retains, and the Committee expressed no opinion on any arrangement in which the firm received less than 90% of the amount borrowed. Because information on legal fees may be confidential under Rule 1.05, the client must consent after consultation to the disclosures necessary under the arrangement (citing Opinion 464 on selling accounts receivable to a factoring company). And because the firm may be paid before completing the services, it must comply with Rule 1.14 and hold unearned amounts in a trust or escrow account. The Committee concluded the arrangement is not prohibited provided the finance corporation never recommends lawyers, the retained amount is disclosed, the gross amount is not an unconscionable fee, the client consents to necessary disclosure of confidential information, and the firm escrows all amounts not yet earned.

Currency note

This opinion was issued in 1994, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. 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: Is paying the finance corporation a portion of the fee considered fee-splitting with a nonlawyer?

A: The Committee concluded it is not, on these facts. Because the finance corporation neither solicits clients nor performs legal services, its retention of a reasonable portion is a finance arrangement, not a fee split barred by Rule 5.04(a).

Q: What must the firm disclose to the client?

A: Per the opinion, the firm must disclose the percentage of the gross fee the finance corporation retains, and the client must consent after consultation to the disclosures of confidential information necessary for the arrangement.

Q: Are there limits on how much the finance corporation can keep?

A: The total fee, including the finance corporation's retained amount, must not be unconscionable under Rule 1.04, and the Committee expressed no opinion on any arrangement in which the firm received less than 90% of the amount borrowed.

Q: How must the firm handle money received before the work is done?

A: Per the opinion, the firm must comply with Rule 1.14 and hold any amounts received that have not yet been earned in a trust or escrow account.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.04(a) (sharing legal fees with a nonlawyer; ABA Model Rule 5.4) and its Comment 1, Rule 1.04(a) (fees and the bar on unconscionable fees; Model Rule 1.5), Rule 1.05 (confidentiality of information, including fee information; Model Rule 1.6), and Rule 1.14 (safekeeping client funds in trust; Model Rule 1.15). It situates the arrangement against prior opinions on credit cards, barter exchanges, percentage-of-receipts leases, and the sale of accounts receivable.

Citations and references

Rules of Professional Conduct:

• MR 5.4 (professional independence), MR 1.5 (fees), MR 1.6 (confidentiality), MR 1.15 (safekeeping property)
• Texas Disciplinary Rules 5.04(a), 1.04(a), 1.05, 1.14

Other opinions cited:

• Tex. Ethics Op. 349 (1969): accepting payment by credit card is not unethical
• Tex. Ethics Op. 435 (1986): a barter-exchange arrangement is impermissible where the lawyer pays value and the exchange shares the lawyer's name
• Tex. Ethics Op. 467 (1991): an office lease tied to a percentage of gross receipts is impermissible fee-sharing
• Tex. Ethics Op. 464 (1989): a lawyer may not sell delinquent accounts receivable to a factoring company without the client's prior consent to disclosure

See also

• TX Ethics Op. 490: A Bank's Fee for Loan Documents Prepared by Its In-House Lawyer
• TX Ethics Op. 483: Charging Interest on Client Loans and Referrals to a Lawyer-Owned Loan Company
• TX Ethics Op. 485: A Contingent Fee for Collecting Child-Support Arrearage

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-481/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_481.pdf

Original opinion text

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

QUESTION PRESENTED

Under the Texas Disciplinary Rules of Professional Conduct, may a law firm participate in an arrangement under which clients are offered the opportunity to pay for part or all of legal services by borrowing from a for-profit finance corporation, not owned by any participating lawyer, which pays the lawyer at least 90% of the amount borrowed by the client?

STATEMENT OF FACTS

A law firm proposes to enter into the following arrangement with a for-profit finance corporation, which is not owned to any extent by any lawyer practicing with the firm: the law firm will pay a non-refundable fee to the finance corporation to allow the firm to participate in the program. The finance corporation will supply training to the law firm's staff and explanatory materials and agreement forms that may be used by the law firm and its clients. In no case will the finance corporation recommend any lawyer or law firm participating in the arrangement to any potential client. The arrangement offered to clients will be for the finance corporation to advance directly to the lawyer an amount in full payment of an agreed legal fee for services that the lawyer represents in writing to the finance corporation will be performed. The finance corporation will pay to the law firm at least 90% of the amount of the agreed legal fee. In the event of an unresolved dispute between the client and the lawyer relating to the services and the fee, the law firm is obligated under the agreement with the finance corporation to pay back to the finance corporation the amount received by the law firm with respect to the disputed fee and then to deal directly with the client as to the services and the fee.

DISCUSSION

This Committee in Opinion 349 (October 1969), 23 Baylor Law Review 891 (Winter 1972), ruled that it was not unethical for a lawyer to accept payment by means of a credit card. The opinion did not discuss the fact that, in any credit card payment, the lawyer receives an amount that is less than 100% of the amount paid by the client.

In Opinion 435 (October 1986 Texas Bar Journal 1015), the Committee ruled that an attorney's participation in a barter arrangement was not permissible if the attorney paid anything of value to an exchange and the exchange made the attorney's name available to other members of the exchange.

In Opinion 467 (May 1991 Texas Bar Journal 513), the Committee ruled that a law firm's office lease that provides for rent that might be a percentage of the law firm's gross receipts constitutes an impermissible sharing of legal fees with a nonlawyer.

In this case, the proposed arrangement with the finance corporation appears to involve the division of a legal fee between a lawyer and the finance corporation. Rule 5.04(a)[fn1] provides that, with exceptions not here relevant, "A lawyer or law firm shall not share or promise to share legal fees with a non-lawyer . . . ." However, provided the limitations specified below are respected, the Committee does not believe that this arrangement constitutes a fee-sharing arrangement that is subject to the prohibition. As stated in Comment 1 to Rule 5.04(a), "The principal reasons for these limitations are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law." In this case the finance corporation does not in any way solicit clients for any participating lawyer. Moreover the finance corporation does not perform any legal services. In these circumstances, the Committee believes that the retention by the finance corporation of a reasonable portion of the amount borrowed by the client is properly viewed as finance arrangement rather than a fee-splitting arrangement subject to the prohibition.

Any arrangement for the finance of legal services must comply with requirements of the Texas Disciplinary Rules of Professional Conduct concerning permissible levels of legal fees, disclosure of client confidences, and the safeguarding of client funds.

Under Rule 1.04(a), a fee for legal services must not be an "unconscionable fee," which term is defined to mean that "a competent lawyer could not form a reasonable belief that the fee is reasonable." In the financing arrangement at issue, there is a risk that an unconscionable fee might be charged to the client if the percentage (or the amount yielded by the percentage) retained by the finance corporation were so large as to make the total fee paid by the client, including the amount retained by the finance corporation, unconscionable.

To enforce this standard, the Committee believes that, in order for the proposed arrangement to be permissible, there must be disclosure to each client as to the percentage of the gross fee that is retained by the finance corporation. The client using the arrangement will thus be informed as to the extent to which the law firm is willing to receive "up front" a lesser amount for the legal service than the client is borrowing from the finance corporation. In addition, in view of the limits of Rule 1.04, the Committee expresses no opinion as to any arrangement under which a law firm would receive less than 90% of the total amount borrowed by a client under the arrangement.

Because information on legal fees paid by a client to a lawyer may constitute "confidential information" under Rule 1.05, the client must consent, after consultation with the law firm, to disclosures of client information to the finance corporation that will be necessary under the arrangement. See Opinion 464 (November 1989 Texas Bar Journal 1198), which holds that a lawyer may not sell delinquent accounts receivable to a factoring company unless the client has previously consented to the disclosure of confidential information incident to such sale of accounts receivable.

Since, under the arrangement, the law firm may receive payment from the finance corporation (based on the client's borrowing) before the completion of the services for which the payment is received, the law firm must comply with Rule 1.14 with respect to safeguarding, in a "trust" or "escrow" account, amounts that are received from the finance corporation and that have not yet been earned by the law firm.

An arrangement under which a client borrows from a finance corporation, not owned by any participating lawyer, to pay for a law firm's legal services and at least 90% of the amount borrowed is remitted by the finance corporation to the law firm is not prohibited by the Texas Disciplinary Rules of Professional Conduct provided that (1) the finance corporation in no case recommends lawyers to potential clients, (2) the amount retained by the finance corporation is disclosed to the client, (3) the gross amount borrowed by the client does not amount to an unconscionable fee for the law firm's services, (4) the client consents to necessary disclosure of confidential information in connection with the arrangement, and (5) the law firm places in a trust or escrow account all amounts received under the arrangement that have not yet been earned.

CONCLUSION

An arrangement under which a client borrows from a finance corporation, not owned by any participating lawyer, to pay for a law firm's legal services and at least 90% of the amount borrowed is remitted by the finance corporation to the law firm is not prohibited by the Texas Disciplinary Rules of Professional Conduct provided that (1) the finance corporation in no case recommends lawyers to potential clients, (2) the amount retained by the finance corporation is disclosed to the client, (3) the gross amount borrowed by the client does not amount to an unconscionable fee for the law firm's services, (4) the client consents to necessary disclosure of confidential information in connection with the arrangement, and (5) the law firm places in a trust or escrow account all amounts received under the arrangement that have not yet been earned.

Tex. Comm. On Professional Ethics, Op. 481 (1994)