Can a personal-injury lawyer charge interest on loans to clients, refer clients to his own loan company, and co-own medical facilities his clients use?

Plain-English summary

A professional corporation with a single shareholder, attorney X, ran an almost exclusively personal-injury and workers' compensation practice on contingent fees complying with Rule 1.04. The corporation made loans to clients (not currently to workers' compensation clients) for reasonably necessary medical and living expenses, referred many clients to doctors for examination, and attorney X also owned a regulated loan company lending to the general public. A doctor proposed that attorney X jointly purchase medical equipment and facilities that would serve some of X's clients, with X sharing the profits. The questions were whether the corporation could charge interest on client loans, refer clients to attorney X's loan company (and whether disclosure was required), and whether owning the medical equipment and facilities was a conflict requiring disclosure.

The Committee analyzed these against several rules. Rule 1.08(a) governs business transactions between a lawyer and client and requires compliance with its subparts; the standard-commercial-transaction exception in Rule 1.08(j) did not apply because here it is the attorney, not the client, marketing the service or product. Rule 1.08(d) permits advancing or guaranteeing court costs and reasonably necessary medical and living expenses, with repayment that may be contingent on the outcome, but does not specifically mention charging interest. The Committee distinguished Opinion 465, which allowed an attorney to pass through a lending institution's interest only on the assumption that the attorney did not own or control a lender making loans only to the attorney's clients; here, because the corporation makes loans only to its clients, Opinion 465 specifically excluded this inquiry, and the attorney would in effect become the lender, creating a potentially adversarial lender-borrower relationship with the client.

On conflicts, the Committee cited Rule 1.06(b)(2) (representation limited by the lawyer's own interest or duties to others) and 1.06(c) (the reasonable-belief-plus-consent-after-full-disclosure test), Rule 1.06 Comments 1 and 4 on loyalty, and Rule 2.01 Comment 5 on the lawyer's detached professional judgment, noting a lawyer should not refer clients to an enterprise in which the lawyer has an undisclosed interest. It cited Opinion 186 (improper to let a manager solicit collection business using the attorney's name, and improper to form a lawyer-nonlawyer partnership part of whose business is law) and Opinion 211 (a firm may invest in and refer clients to a loan company if not used to solicit business or as an aid to securing employment), and Rule 5.04(a)'s bar on sharing legal fees with a nonlawyer, whose thrust is to protect the lawyer's independent judgment. The Committee concluded that, on the simple and narrow facts, all questions and subparts are answered in the affirmative provided no rule, concept, comment, or cited opinion is violated; it expressly did not opine on legality, pointing to Archer v. Griffith (the lawyer's burden to establish the fairness of a transaction with a client) and to cases on the presumption of fraud attaching to acquisitions during the attorney-client relationship.

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: Can a lawyer charge interest on loans made to clients for medical and living expenses?

A: The Committee answered in the affirmative on the narrow facts, but cautioned that Rule 1.08(d) does not specifically mention interest and that the lawyer effectively becomes the lender, creating a potentially adversarial relationship; it required compliance with Rule 1.08 and the other cited rules.

Q: Can a lawyer refer clients to a loan company he owns, and is disclosure required?

A: The Committee answered in the affirmative on the narrow facts, subject to the rules; it cited Rule 2.01 Comment 5 that a lawyer should not refer clients to an enterprise in which the lawyer has an undisclosed interest, and Opinion 211 on referrals to a lawyer-owned loan company.

Q: Is co-owning medical facilities used by the lawyer's clients a conflict?

A: The Committee treated it under Rule 1.06(b)(2) (the lawyer's own interest) and 1.06(c) (consent after full disclosure), answering in the affirmative on the narrow facts provided the rules and the consent-and-disclosure conditions are met.

Q: Did the committee decide whether all of this is legal?

A: No. The committee expressly did not opine on the legality of the conduct and noted the lawyer bears the burden of establishing the fairness of any transaction with a client (Archer v. Griffith).

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.08 (prohibited transactions, including business transactions with a client under 1.08(a) and financial assistance to a client under 1.08(d); ABA Model Rule 1.8), Rule 1.06 (conflict of interest, including the personal-interest limitation of 1.06(b)(2) and the consent test of 1.06(c); Model Rule 1.7), Rule 2.01 (the lawyer as advisor exercising independent professional judgment; Model Rule 2.1), and Rule 5.04(a) (sharing legal fees with a nonlawyer), with the solicitation rules 7.02 and 7.03 referenced through Opinion 211.

Citations and references

Rules of Professional Conduct:

• MR 1.8 (current clients: specific rules), MR 1.7 (conflict of interest: current clients), MR 2.1 (advisor)
• Texas Disciplinary Rules 1.08 (including (a), (d), (j)), 1.06 (including (b)(2), (c)), 2.01, 5.04(a), 7.02, 7.03

Cases:

• Archer v. Griffith, 390 S.W.2d 735 (Tex. 1964), the lawyer's burden to establish the fairness of a transaction with a client
• Cole v. McCanlies, 6520 S.W.2d 713 (Tex. Civ. App.-Dallas 1981, writ ref'd n.r.e.), acquisition under a pre-existing employment agreement not tainted by the presumption of fraud
• Johnson v. Stickney, 152 S.W.2d 921 (Tex. Civ. App.-San Antonio 1941, no writ)

Other opinions cited:

• Tex. Ethics Op. 465 (1991): passing through a lender's interest, on the assumption the attorney does not own a lender making loans only to the attorney's clients
• Tex. Ethics Op. 186 (Oct. 1958): improper solicitation of collection business and lawyer-nonlawyer partnership in part practicing law
• Tex. Ethics Op. 211 (Dec. 1960): a firm may invest in and refer clients to a loan company if not used to solicit business

See also

• TX Ethics Op. 510: A Client's Contingent-Fee Arrangement With a Nonlawyer Investigator
• TX Ethics Op. 490: A Bank's Fee for Loan Documents Prepared by Its In-House Lawyer
• ABA Formal Op. 02-427: Taking a Security Interest to Secure a Fee

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-483/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_483.pdf

Original opinion text

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

QUESTION PRESENTED

Whether the professional corporation may charge interest on loans extended to client?
Whether the professional corporation may refer clients to the regulated loan company owned by attorney X to obtain loans; and, if so, is disclosure by the professional corporation or attorney X required?
Whether ownership of the medical equipment and facilities is a conflict of interest for attorney X?
If such ownership is a conflict of interest, is disclosure by the professional corporation or attorney X required?

STATEMENT OF FACTS

A professional corporation has one shareholder, attorney X. The law practice is almost exclusively personal injury and worker's compensation practice. The professional corporation enters into contingent fee contracts with the clients, which contracts comply with Rule 1.04. This professional corporation makes loans to clients, although not currently to workers compensation clients, for reasonably necessary medical and living expenses. Many of the attorney's clients are referred to medical doctors for examination and diagnostic work. Attorney X also owns a regulated loan company which makes loans to the general public.

A doctor approaches attorney X about jointly purchasing medical equipment and facilities. The equipment and facilities would be used in providing medical services to some of attorney X's law practice clients. Attorney X would receive a share of the profits earned by the use of the medical equipment and facilities.

DISCUSSION

The Texas Disciplinary Rules of Professional Conduct prohibits business transactions between an attorney and his/her client unless certain requirements are met. Supreme Court of Texas, Rules Governing The State of Texas, Art. X, Section 9, Rule 1.08(a)(1990). Paragraph (a) of the rule does not apply to standard commercial transactions between the attorney and client for services or products that the client generally markets to others, because in such transactions the attorney has no advantage in dealing with the client. (Id., Rule 1.08(j)) Rule 1.08, Comment 2. In this inquiry it is the attorney, not the client, who is marketing the services or product. Rule 1.08(a) is therefore applicable and requires compliance with its subparts if the conduct is otherwise permissible. However, if an attorney is permitted to enter into such a business transaction with a client, the transaction and terms thereof must comply with Rule 1.08(a)(1), (2) and (3).

In Ethics Opinion 465 one of the questions presented was could an attorney borrow money from a lending institution for case expenses (court costs, expenses of litigation, or administrative proceedings, or reasonably necessary medical and living expenses) for a personal injury client, and ethically charge, or pass on, to the client, as part of the case expense, the. out-of-pocket interests or finance charges of the lending institution. Although the question in that opinion was answered in the affirmative, it was posited on the assumption that no conduct by the attorney in the proposed transaction violated the provisions or concepts of several pertinent rules of the Texas Disciplinary Rules of Professional Conduct. Professional Ethics Committee Opinion 465 (1991). One of those assumptions was that "The attorney (and/or his firm) does not own or control the lending institution to the extent that the lending institution only makes loans to clients of the attorney, and no conflict of interest as prohibited by Rule 1.06 of the Texas Rules of Professional Conduct or its comments under such rule, exists." Because in our factual setting the professional corporation is assumed to make the loans only to its clients, Opinion 465 specifically excluded the inquiry posed here.

In Opinion 465 the situation concerned a relationship between the attorney and the lending institution on the loans. There was no relationship between the lending institution and the attorney's clients. Any problems between the attorney and the lending institution would not or should not affect the attorney's relationship with the clients. In our factual situation, the attorney would become, in effect, the lending institution and the relationship with the client would be between the client and the attorney/lending institution. Problems that might arise as a result of that lender-borrower relationship could definitely be adversarial.

An attorney is prohibited from providing financial assistance to a client in connection with pending or contemplated litigation or administrative proceedings, except that: an attorney may advance or guarantee court costs, expenses of litigation or administrative proceedings, and reasonably necessary medical and living expenses, the repayment of which may be contingent on the outcome of the matter. The rules provide how that repayment must be done if it is contingent on the outcome of the matter. Id., Rule 1.08(d). Neither of these rules specifically mentions the charging of interest.

The rules prohibit representation of a person if the representation of that person reasonably appears to be or becomes adversely limited by the attorney's responsibility to another client or to a third person, or by the attorney's own interest. Rule 1.06(b)(2). However, an attorney may still represent a client in such circumstances if (1) the attorney reasonably believes the representation of the client will not be materially affected, and (2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any. Id., Rule 1.06 (c)(1),(2). Loyalty is an essential element in the attorney's relationship to a client, and such loyalty is impaired when an attorney is not able to consider, recommend, or carry out an appropriate course of action for one client because of the attorney's own interests or his/her responsibilities to others. Id., Rule 1.06, Comments 1 and 4. While a potential possible conflict may not itself preclude the representation under paragraph (b)(2), it is critical that one consider the likelihood that a conflict exists or will eventuate and, if it does, whether it will materially and adversely affect the attorney's independent professional judgment in considering alternatives or foreclose course's of action that reasonably should be pursued on behalf of the client, Id., Comment 4. Moreover, an attorney's own interest should not be permitted to have adverse effects on representation of a client, even where paragraph (b)(2) is not violated. If the probability of the attorney's own conduct is in a transaction is in question, the attorney may not be able to give a client the detached advice required by the attorney-client relationship. Rule 2.01, Comment 5. Furthermore, an attorney should not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the attorney has an undisclosed interest. Id.

Opinion 186 (Oct. 1958) held it was improper for an attorney who has a credit and collection service independent of his law office, to permit solicitation of business for such service by the manager thereof through letters mentioning the attorney's status, activities and achievement in handling collections. The opinion further states that if the relationship between a non-attorney and an attorney in a collection service is that of a partnership in which part of the business is the practice of law, such association would be improper. See also, Rule 5.04 (b). Opinion 211 (Dec. 1960) held that it is permissible for a firm of attorneys to invest in the stock of a loan company which lends considerable money to persons who have pending damage suit claims and from which company the clients of said law firm have borrowed money in the past, if such connection between the company and the attorneys is not used for the solicitation of business; nor is it a violation for said law firm to continue to send its clients, who might have a need to borrow money, to a loan company in which it owns stock, provided such practice is not engaged in with sufficient notoriety or regularity to constitute an indirect solicitation of business or advertisement on behalf of the firm of attorneys, or if it is not done for the purpose of, or as an aid to, securing employment. See also, Rules 7.02 and 7.03.

An attorney or law firm is prohibited from sharing or promising to share legal fees with a non-lawyer unless it is done under certain prescribed circumstances. Rule 5.04(a). The principal reasons for the prohibition are to prevent solicitation by lay persons of clients for attorneys and to avoid encouraging or assisting non-lawyers in the practice of law. Id., Comment 1. The overall thrust of the rule, however, is to assure that the attorney's independent professional judgment is exercised only for the benefit of the client, free of compromising influences and loyalties. The fee is only the technical linkage between the attorney and the non-lawyer or entity. As such, any inducement that asserts the same undue influence as a fee may lead or result in violation of the policy or purpose behind the rule.

Therefore, based on the simple and narrow facts stated in the inquiries, all of the questions and their subparts are answered in the affirmative, provided that there is no violation of any of the rules, concepts, or comments to the rules, or opinions cited in either Opinion 465 or in this opinion. Although this committee does not express an opinion as to the legality of any conduct inquired about herein, it must point out that such conduct might have legal ramifications. For example, the burden of establishing prefect fairness, adequacy, and equity of transaction with a client is on the attorney. Archer v. Griffith, 390 S.W.2d 735 (Tex. 1964). Additionally, when an attorney acquires property under a pre-existing employment agreement with a client made at the inception of the attorney's prior employment by the client or at or before the inception of the attorney's present employment by the client, the acquisition is not tainted by the presumption of fraud that attaches to agreement made during the course of the attorney-client relationship. Cole v. McCanlies, 6520 S.W.2d 713 (Tex. Civ. App.-Dallas 1981, writ ref'd n.r.e.); Johnson v. Stickney, 152 S.W.2d. 921 (Tex. Civ. App.-San Antonio 1941, no writ).

CONCLUSION

Therefore, based on the simple and narrow facts stated in the inquiries, all of the questions and their subparts are answered in the affirmative, provided that there is no violation of any of the rules, concepts, or comments to the rules, or opinions cited in either Opinion 465 or in this opinion. Although this committee does not express an opinion as to the legality of any conduct inquired about herein, it must point out that such conduct might have legal ramifications. For example, the burden of establishing prefect fairness, adequacy, and equity of transaction with a client is on the attorney. Archer v. Griffith, 390 S.W.2d 735 (Tex. 1964). Additionally, when an attorney acquires property under a pre-existing employment agreement with a client made at the inception of the attorney's prior employment by the client or at or before the inception of the attorney's present employment by the client, the acquisition is not tainted by the presumption of fraud that attaches to agreement made during the course of the attorney-client relationship. Cole v. McCanlies, 6520 S.W.2d 713 (Tex. Civ. App.-Dallas 1981, writ ref'd n.r.e.); Johnson v. Stickney, 152 S.W.2d. 921 (Tex. Civ. App.-San Antonio 1941, no writ).

Tex. Comm. On Professional Ethics, Op. 483 (1994)