Can I borrow money for case expenses from a finance company and agree to pay the lender a percentage of my contingency fee in the case?
Texas Ethics Opinion 558: Paying a Lender a Percentage of the Contingency Fee
Short answer: Per the Committee, a lawyer may not agree to pay a finance company or other lender a percentage of the lawyer's contingency fee in exchange for financing case expenses, because that is sharing legal fees with a non-lawyer in violation of Rule 5.04(a).
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Texas Disciplinary Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.
Plain-English summary
A lawyer proposed, with the client's informed consent, to borrow money from a non-lawyer-owned lending company to cover case expenses (court costs, litigation and expert-witness expenses, and reasonably necessary medical and living expenses). In addition to interest on the loan, the lawyer would pay the lender a percentage of the lawyer's contingency fee in the case. The contingency fee agreement with the client complied with all applicable rules, the lawyer's fee percentage was not influenced by the financing, and the lawyer would pay the lender so the client's recovery would not be reduced by the percentage paid.
The Committee concludes the arrangement is an agreement to share legal fees with a non-lawyer, which Rule 5.04(a) prohibits with limited exceptions: "A lawyer or law firm shall not share or promise to share legal fees with a non-lawyer." Comment 1 to Rule 5.04 explains the limitation exists to prevent lay solicitation of clients for lawyers and to avoid encouraging non-lawyers in the practice of law. The Committee finds the exceptions in Rule 5.04(a)(1) through (3) do not apply, so paying the lender a portion of the contingency fee would violate Rule 5.04(a).
The Committee notes the result is consistent with its prior opinions on Rule 5.04(a): Opinion 493 (a lawyer could not divide fees with non-lawyer professionals sharing office space and expenses), Opinion 510 (Rule 5.04(a) did not generally bar a lawyer from a contingency fee agreement with a client who also had a separate contingency contract with a non-lawyer investigator), and Opinion 552 (Rule 5.04(a) prohibits paying a third-party auditor a percentage of a legal fee).
In practice
Under this opinion, and under the Texas rule as it stood at the time, a lawyer cannot finance case expenses by promising a lender a percentage of the lawyer's contingency fee, because the Committee treats that as fee sharing with a non-lawyer barred by Rule 5.04(a), and the Rule 5.04(a)(1)-(3) exceptions do not reach it. The Committee's analysis addresses the fee-share structure itself; it does not turn on the client's consent or on whether the client's recovery is reduced.
Common questions
Q: Can I get litigation financing if I pay the lender a slice of my contingency fee?
A: Per Opinion 558, no. The Committee concludes that promising a finance company a percentage of your contingency fee is sharing legal fees with a non-lawyer in violation of Rule 5.04(a).
Q: Does it matter that the client consented and the client's recovery is not reduced?
A: The opinion does not rest on those facts. The Committee holds the fee-share structure itself violates Rule 5.04(a), and finds none of the Rule 5.04(a)(1)-(3) exceptions applies.
Q: Can I still borrow for case expenses?
A: The opinion addresses only the fee-percentage payment to the lender. The Committee concludes it is the percentage-of-fee arrangement, not borrowing as such, that violates Rule 5.04(a) for paying a non-lawyer a portion of a contingency fee.
Background and rules framework
The opinion interprets Texas Disciplinary Rule 5.04(a) (professional independence of a lawyer, ABA Model Rule 5.4), which bars a lawyer or law firm from sharing or promising to share legal fees with a non-lawyer, subject to limited exceptions in Rule 5.04(a)(1)-(3). Comment 1 to Rule 5.04 frames the limitation as preventing lay solicitation of clients and discouraging non-lawyer involvement in the practice of law.
Citations and references
Rules of Professional Conduct:
- MR 5.4 (professional independence of a lawyer)
- Texas Disciplinary Rule 5.04(a) and Comment 1 to Rule 5.04
Other opinions cited:
- Texas Ethics Opinion 493 (February 1994): no fee division with non-lawyer professionals sharing office space and expenses
- Texas Ethics Opinion 510 (December 1994): Rule 5.04(a) did not generally bar a separate client-investigator contingency contract
- Texas Ethics Opinion 552 (August 2004): Rule 5.04(a) prohibits paying a third-party auditor a percentage of a legal fee
See also
- TX Ethics Op. 576: Litigation-Funding Fee Tied to Recovery as Fee Sharing
- TX Ethics Op. 568: Sharing a Contingent Fee With a Suspended or Disbarred Lawyer
Source
- Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-558/
- Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_558.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
QUESTION PRESENTED
May a lawyer borrow money for case expenses from an independent lending company and agree to pay the lender a percentage of the lawyer's contingency fee?
STATEMENT OF FACTS
A lawyer proposes, with the client's informed consent, to borrow money from a lending company for case expenses (court costs, litigation and expert witness expenses, and reasonably necessary medical and living expenses). The lending company is owned by non-lawyers. In addition to interest on the loan, the lawyer proposes to pay the lender a percentage of the lawyer's contingency fee in the case. The contingency fee agreement between the lawyer and client complies with all applicable rules governing such agreements. The fee percentage paid the lawyer is not influenced by the financing arrangements secured by the lawyer. The lawyer will pay all amounts due to the lending company and the client's recovery will not be affected by the percentage of the contingency fee paid by the lawyer to the lender.
DISCUSSION
The proposed arrangement constitutes an agreement to share legal fees with a non-lawyer. Rule 5.04(a) of the Texas Disciplinary Rules of Professional Conduct specifically provides that, with limited exceptions, a lawyer may not agree to share legal fees with a non-lawyer:
"A lawyer or law firm shall not share or promise to share legal fees with a non-lawyer ...."
Comment 1 to Rule 5.04 notes that the principal reasons for the limitations on fee sharing are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting non-lawyers in the practice of law. The exceptions to the general prohibition on fee sharing that are recognized in subparagraphs (1), (2) and (3) of Rule 5.04(a) (following the statement of the general rule quoted above) are not applicable to the facts considered in this Opinion. Accordingly, the proposed arrangement for the lawyer to pay the lender a portion of a contingency fee would violate Rule 5.04(a).
The conclusion reached in this Opinion is consistent with other Opinions of the Committee that have considered the scope of Rule 5.04(a). In Opinion 493 (February 1994), the Committee determined that a lawyer could not divide legal fees with non-lawyer professionals with whom the lawyer shared office space and expenses. In Opinion 510 (December 1994), the Committee determined that Rule 5.04(a) did not generally prohibit a lawyer from participating in a contingency fee agreement with a client who also signed a contingency fee contract with a non-lawyer investigator. In Opinion 552 (August 2004), the Committee determined that Rule 5.04(a) prohibits payment of a percentage of a legal fee to a third-party auditor.
CONCLUSION
It is a violation of Rule 5.04(a) of the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree to pay a percentage of the lawyer's contingency fee to a finance company or other lender in connection with obtaining a loan.
Tex. Comm. On Professional Ethics, Op. 558 (2005)