Can a lawyer in a contingent fee case let a non-lawyer lending company fund litigation expenses in exchange for a funding fee that is a percentage of the recovery?
Texas Ethics Opinion 576: A Litigation-Funding Fee Tied to the Recovery
Short answer: Per the Committee, a lawyer in a contingent fee case may not agree to pay a non-lawyer lending company a funding fee equal to a percentage of the recovery in exchange for advancing litigation expenses, because that is fee sharing with a non-lawyer prohibited by 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 handling a personal injury case on contingency cannot afford to advance the litigation expenses, so a non-lawyer lending company offers to fund them. The agreement, solely between the lawyer and the company, would have the company reimburse expenses as incurred; if the client recovers, the lawyer repays the advances plus a "funding fee" equal to a fixed percentage of the recovery (net of expenses but not legal fees), capped at a multiple of the expenses. The client is not a party, owes the company nothing, and the company gets no lien on the recovery and no control over the case; the funding fee is the lawyer's general unsecured obligation and is not charged to the client.
The Committee frames the issue as whether this is fee sharing with a non-lawyer under Rule 5.04(a), which bars a lawyer from sharing or promising to share legal fees with a non-lawyer to prevent lay solicitation and non-lawyer practice (Comment 1). It contrasts two precedents. In Opinion 558 (2005), a lawyer's promise to pay a finance company a percentage of his contingent fee for an expense loan was prohibited fee sharing. In Opinion 481 (1994), a finance company that paid the lawyer 90 percent of funds a client borrowed and kept 10 percent was an acceptable finance arrangement, because the company did not solicit clients or perform legal services and its retained share was a reasonable portion of the client's borrowing.
The Committee holds this arrangement resembles the prohibited one in Opinion 558, not the permitted one in Opinion 481. The funding fee is tied directly to the recovery, and because the size of a recovery is largely determined by the lawyer's knowledge, skill, experience, and time (citing ABA Formal Opinion 94-389), tying the fee to a percentage of the recovery lets the lending company benefit directly from the lawyer's work, which is tantamount to fee splitting. The Committee adds that, consistent with the policy of Rule 5.04(a) (and its Opinion 467 ruling that percentage-of-receipts office rent to a non-lawyer landlord was prohibited fee sharing), this arrangement would create an incentive for the lending company to refer cases to lawyers using its services, the very result Rule 5.04(a) aims to prevent.
In practice
Under this opinion, and under the Texas rules as they stood at the time, a lawyer cannot structure litigation-expense funding so that the non-lawyer funder's compensation is a percentage of the case recovery. The Committee's dividing line is whether the funder's return is tied to the recovery: a fixed or reasonable finance charge can be a permissible finance arrangement (as in Opinion 481), but a recovery-based funding fee makes the non-lawyer a participant in the lawyer's fee, which Rule 5.04(a) forbids, and creates a referral incentive the rule is meant to prevent.
Common questions
Q: Can a litigation-funding company cover my case expenses in exchange for a percentage of the recovery?
A: Per Opinion 576, no, where the funding fee is a percentage of the recovery. The Committee says tying the non-lawyer funder's return to the recovery is fee sharing with a non-lawyer prohibited by Rule 5.04(a).
Q: Does it matter that the client is not a party to the funding agreement and the funder has no lien?
A: The Committee found those facts did not save the arrangement. Because the funding fee was a percentage of the recovery, it concluded the lending company would benefit directly from the lawyer's work, which is tantamount to fee splitting.
Q: Is any outside financing of litigation expenses allowed?
A: The Committee distinguished Opinion 481, where a finance company's reasonable retained portion of a client's borrowing was an acceptable finance arrangement because it was not tied to the recovery and the company did not solicit clients or perform legal services.
Background and rules framework
The opinion interprets Texas Disciplinary Rule 5.04(a) (a lawyer or law firm shall not share or promise to share legal fees with a non-lawyer), corresponding to ABA Model Rule 5.4(a), and references Rule 1.04(a) (fees). The Committee relies on Comment 1 to Rule 5.04(a) for the rule's purposes (preventing lay solicitation and non-lawyer practice).
Citations and references
Rules of Professional Conduct:
- MR 5.4(a) (sharing legal fees with a non-lawyer)
- Texas Disciplinary Rule 5.04(a), Comment 1
- Texas Disciplinary Rule 1.04(a)
Other opinions cited:
- Texas Professional Ethics Committee Opinion 558 (May 2005): paying a finance company a percentage of the contingent fee for an expense loan is prohibited fee sharing
- Texas Professional Ethics Committee Opinion 481 (January 1994): a finance company's reasonable retained portion of a client's borrowing is a permissible finance arrangement
- Texas Professional Ethics Committee Opinion 467 (November 1990): percentage-of-gross-receipts office rent to a non-lawyer landlord is prohibited fee sharing
- ABA Formal Opinion 94-389 (December 5, 1994): the size of a recovery reflects the lawyer's knowledge, skill, experience, and time
See also
- TX Ethics Op. 568: Sharing a Contingent Fee With a Suspended or Disbarred Lawyer
- TX Ethics Op. 566: A Lawyer/Receiver Paying Part of the Fee to the Parties' Lawyers
Source
- Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-576/
- Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_576.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
QUESTION PRESENTED
May a lawyer who represents a client in a contingent fee personal injury case enter into an agreement with a lending company owned by non-lawyers under the terms of which the lending company would agree to reimburse the lawyer for litigation expenses in the case as incurred and the lawyer would agree to repay, in the event of a recovery in the lawsuit, the amounts advanced plus a funding fee equal to a fixed percentage of any amount recovered in the case but subject to an agreed maximum?
STATEMENT OF FACTS
A lawyer represents a client on a contingent fee basis in a personal injury case. Because the client cannot afford to fund the litigation expenses necessary to prosecute the lawsuit, the lawyer must advance all such expenses. A lending company owned by non-lawyers has offered to fund the litigation expenses in the case for the promise of a funding fee contingent on the client’s recovery in the lawsuit. The agreement between the lending company and the lawyer would call for the lending company to reimburse the lawyer for litigation expenses actually incurred and for the lawyer to repay the amounts advanced for expenses plus a funding fee equal to a fixed percentage of any amount recovered (net of litigation expenses but not legal fees) when and if the client recovered in the lawsuit. The maximum amount of the funding fee would be limited by a cap equal to a specified multiple of the litigation expenses incurred in the case. For example, under an agreement where the funding fee percentage was 1% and the cap amount was equal to two times the litigation expenses, if the client’s recovery net of expenses was $1,000,000 and the litigation expenses were $50,000, then the funding fee that the lawyer would be obligated to pay to the lending company would be $10,000 (1% of $1,000,000) and the agreed cap would not limit the amount of the funding fee.
The agreement would be solely between the lawyer and the lending company. The client would not be a party to the contract and would not owe money or have any other obligations to the lending company. The agreement would provide that the lending company would have no special rights to any of the proceeds of the lawsuit, such as a lien or security interest in the client’s portion of the recovery or in the lawyer’s contingent fee. Instead, the agreement would provide that the obligation to pay the lending company would be merely the general unsecured obligation of the lawyer. The agreement would provide further that the funding fee would not be charged to the client as an expense. In the example above, the litigation expenses advanced would be repaid from the proceeds of the recovery, but the $10,000 funding fee would be paid by the lawyer (presumably, but not necessarily, from his portion of the contingent fee). Additionally, the agreement between the lawyer and the lending company would require full disclosure to the client of the agreement and consent from the client for the lawyer to enter into the agreement. The agreement would also require the lawyer to maintain independence of judgment as to all aspects of the lawsuit and control of the litigation. The lending company would not be permitted to have any control of the lawsuit or contact with the client and would not be permitted access to any confidential information except as was necessary to determine the expenses to be reimbursed and the amount of the client’s ultimate recovery.
DISCUSSION
Whether the proposed arrangement constitutes a fee-sharing agreement with a non-lawyer is the primary concern here. Rule 5.04(a) of the Texas Disciplinary Rules of Professional Conduct clearly prohibits lawyers from sharing legal fees with non-lawyers. Rule 5.04(a) 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 . . . .” The principal reasons for this prohibition are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting non-lawyers in the practice of law. See Comment 1 to Rule 5.04(a).
Recently, in a context similar to the one presented here, this Committee, citing Rule 5.04(a), determined that the Texas Disciplinary Rules would be violated by a lawyer who agreed, as a term of a loan agreement with a finance company that was loaning the lawyer money for litigation expenses in a contingent fee case, to pay to the finance company a percentage of his contingency fee in addition to the principal and interest on the loan. Professional Ethics Committee Opinion 558 (May 2005). There, the lawyer’s agreement with the non-lawyer finance company plainly called for paying to a non-lawyer a specific portion of the lawyer’s fee, unquestionably the very practice forbidden by Rule 5.04(a).
In a different context, this Committee approved in Opinion 481 (January 1994) an arrangement under which a client paid for legal services by borrowing monies equal to the legal fee from a for-profit finance company, which paid the lawyer directly 90% of the funds borrowed by the client. The finance company retained the remaining 10% and additionally charged lawyers a fee to participate in the program. Recognizing the principal reasons for the prohibition on fee splitting as set forth in Comment 1 to Rule 5.04(a) and noting that the finance company did not solicit clients for any participating lawyer and that it did not perform any legal services, the Committee expressed its belief that under these circumstances “. . . the retention by the finance corporation of a reasonable portion of the amount borrowed by the client is properly viewed as [a] finance arrangement rather than a fee-splitting arrangement subject to the prohibition.”
The proposed arrangement here is similar to the fee-splitting arrangement rejected in Opinion 558 rather than the finance arrangement approved in Opinion 481. The funding fee in the circumstances here addressed would be tied directly to the amount of the recovery in the underlying litigation just as was the payment to the finance company in Opinion 558. The amount of the recovery in a lawsuit is largely determined by the lawyer’s knowledge, skill, experience and time expended. See American Bar Association Standing Committee on Ethics and Professional Responsibility Formal Opinion 94-389 (December 5, 1994). By tying the proposed funding fee to a percentage of the recovery, the lending company would be directly benefiting from the lawyer’s knowledge, skill, experience and time expended to the detriment of the lawyer, who would be solely responsible for paying the funding fee. This would be tantamount to fee splitting.
Finally, this result is consistent with the policy considerations underlying Rule 5.04(a). In Opinion 467 (November 1990), this Committee ruled that a law firm’s office lease with a non- lawyer landlord that provided for rent that could be a percentage of the law firm’s gross receipts constituted an agreement to share legal fees with a non-lawyer in violation of Rule 5.04(a). The Committee reasoned that a percentage rental agreement is prohibited for lawyers because an arrangement under which a non-lawyer landlord could receive a percentage of legal fees earned by a law firm would create an incentive for the landlord to refer legal business to the law firm, a result that Rule 5.04(a) is intended to prevent. Similarly, the proposed arrangement here would create an incentive for the lending company to refer cases to lawyers using its services.
CONCLUSION
Under the Texas Disciplinary Rules of Professional Conduct, a lawyer who represents a client in a contingent fee personal injury case may not enter into an agreement with a lending company owned by non-lawyers under the terms of which the lending company would agree to reimburse the lawyer for litigation expenses in the case as incurred and the lawyer would agree, in the event of a recovery in the case, to repay the lending company the amount advanced by the lending company and to pay a funding fee equal to a specified percentage of the amount recovered in the case net of expenses but subject to an agreed maximum.
Tex. Comm. On Professional Ethics, Op. 576 (2006)