Can a Texas lawyer sell delinquent client accounts receivable (unpaid earned fees) to a collection or factoring company for a percentage of the amount owed?

Plain-English summary

The opinion considers a lawyer who wants to sell delinquent client accounts receivable (earned but unpaid fees) to a collection company for a percentage of the amount owed, transferring ownership so the lawyer keeps no interest. The central issue is the lawyer's duty under Rule 1.05 to protect confidential client information from disclosure.

The Committee builds directly on two prior opinions. Opinion 464 (1989) addressed selling delinquent receivables to a factoring company; Opinion 652 (January 2016) addressed using a collection agency to collect delinquent receivables. The opinion repeats Opinion 464's observation that the amount due from a client typically involves confidential information to some degree: the fact of the engagement, the nature of the services, and the fact and amount of an unpaid fee may all be confidential.

The Committee works through Rule 1.05(c)'s exceptions. Rule 1.05(c)(5) lets a lawyer reveal confidential information "to the extent reasonably necessary to enforce a claim" in a controversy between the lawyer and the client, for example in a fee-collection lawsuit, or, under the conditions set in Opinion 652, by revealing to a collection agency the minimum client information necessary to collect the debt. But the Committee holds, consistent with Opinion 464, that disclosure as part of an outright sale of the receivables is not reasonably necessary to enforce the fee claim. That leaves Rule 1.05(c)(2), client consent after consultation, as the only permissible basis for the disclosure incident to a sale.

In practice

Under this opinion, and under the Texas rule as it stood at the time of the opinion, a lawyer may not sell or transfer delinquent client accounts receivable to a collection company unless the client consents, after consultation, to the disclosure of confidential information the sale entails. The opinion distinguishes this from suing to collect a fee or using a collection agency under the limited conditions of Opinion 652, both of which can fall within Rule 1.05(c)(5)'s "reasonably necessary to enforce a claim" exception; an outright sale of the receivable does not.

Common questions

Q: Can I sell my unpaid client invoices to a collection or factoring company?

A: Per Opinion 655, only if the client consents after consultation to the disclosure of confidential information involved in the sale; without consent the sale is not permitted.

Q: Why is consent required when I can sue a client to collect a fee without consent?

A: The opinion explains that suing to collect a fee falls within Rule 1.05(c)(5)'s "reasonably necessary to enforce a claim" exception, but an outright sale of the receivable is not reasonably necessary to enforce the fee claim, so that exception does not apply and consent under Rule 1.05(c)(2) is required.

Q: Is selling the receivable treated the same as using a collection agency?

A: No. The opinion notes that under Opinion 652 a lawyer may reveal to a collection agency the minimum client information necessary to collect the debt, but holds that disclosure incident to a sale of the receivable is different and requires client consent.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.05 (confidentiality of information), which corresponds to ABA Model Rule 1.6. The analysis turns on Rule 1.05(b)'s general prohibition on revealing or using confidential information and on two exceptions in Rule 1.05(c): subsection (c)(2) (client consent after consultation) and subsection (c)(5) (disclosure reasonably necessary to enforce a claim or establish a defense in a controversy between the lawyer and the client).

Citations and references

Rules of Professional Conduct:

• MR 1.6 (confidentiality of information)
• Texas Disciplinary Rules 1.05(b), 1.05(c)(2), 1.05(c)(5)

Other opinions cited:

• Texas Professional Ethics Committee Opinion 464 (August 1989): sale of delinquent accounts receivable to a factoring company
• Texas Professional Ethics Committee Opinion 652 (January 2016): use of a collection agency to collect delinquent accounts receivable

See also

• TX Ethics Op. 652: Using a Collection Agency for Past-Due Fees
• ABA Formal Op. 00-416: Sale of Accounts Receivable by a Law Firm
• TX Ethics Op. 648: Sending Confidential Information by Email

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-655/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_655.pdf

Original opinion text

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

QUESTION PRESENTED

Is it permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to sell accounts receivable owing by the lawyer's clients to a collection company?

STATEMENT OF FACTS

A Texas lawyer has clients (or former clients) who are delinquent in paying fees that have been earned. The lawyer proposes to sell those accounts receivable to a collection company for the payment of a percentage of the amount owed on the accounts receivable. The sale would involve the transfer or assignment of the ownership of the accounts receivable to the collection company after which the lawyer would no longer have any interest in the accounts receivable.

DISCUSSION

A critical issue presented in this circumstance is the extent of a lawyer's obligation to protect her client's confidential information from disclosure or use adverse to the client. This issue was the subject of Professional Ethics Committee Opinion 464 (August 1989), which considered a lawyer's sale of delinquent accounts receivable to a third party factoring company, and Opinion 652 (January 2016), which considered a lawyer's use of a collection agency to collect delinquent accounts receivable. Those opinions were based on Rule 1.05 of the Texas Disciplinary Rules of Professional Conduct. Rule 1.05(b) provides as follows:

"Except as permitted by paragraphs (c) and (d), or as required by paragraphs (e) and (f), a lawyer shall not knowingly:

(1) Reveal confidential information of a client or a former client to:

(i) a person that the client has instructed is not to receive the information; or
(ii) anyone else, other than the client, the client's representatives, or the members, associates, or employees of the lawyer's law firm.
(2) Use confidential information of a client to the disadvantage of the client unless the client consents after consultations.
(3) Use confidential information of a former client to the disadvantage of the former client after the representation is concluded unless the former client consents after consultation or the confidential information has become generally known.
(4) Use privileged information of a client for the advantage of the lawyer or of a third person, unless the client consents after consultation."

In the circumstance here considered, the only possible exceptions to the general requirements of Rule 1.05(b) set forth above are certain provisions of Rule 1.05(c) that permit a lawyer to reveal confidential information relating to a client in the following circumstances:

"(2) When the client consents after consultation.
. . . .
(5) To the extent reasonably necessary to enforce a claim or establish a defense on behalf of the lawyer in a controversy between the lawyer and the client.
. . . ."

As recognized in Opinion 464, 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: "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 will be confidential; in most cases, the amount of the fee owing and the fact that the fee has not been paid would be confidential."

Opinion 464 held that consent of the client is the only permissible basis for the disclosure of confidential client information incident to a sale of delinquent accounts receivable. Under Rule 1.05(c)(5), a lawyer may disclose confidential client information "[t]o the extent reasonably necessary to enforce a claim or establish a defense on behalf of the lawyer in a controversy between the lawyer and the client", for example in a legal proceeding that is brought by the lawyer to collect a fee, or under the conditions provided in Opinion 652, a lawyer may reveal to a collection agency the minimum amount of client information necessary for the collection agency to assist the lawyer in collecting the debt. However, in accordance with Opinion 464, it is still the opinion of the Committee that disclosure of confidential client information as part of the sale of delinquent accounts receivable to another person or entity is not reasonably necessary for the enforcement of a claim for the lawyer's fee. Therefore, as discussed in Opinion 464, obtaining consent from the client is "the only permissible basis for the disclosure of confidential client information incident to a sale of delinquent accounts receivable" to a collection company.

CONCLUSION

Under the Texas Disciplinary Rules of Professional Conduct, a lawyer may not sell or transfer to a collection company accounts receivable owing by the lawyer's clients or former clients except with the clients' consent, after consultation with the lawyer, to the disclosure of confidential information incident to such sale or transfer.

Tex. Comm. On Professional Ethics, Op. 655 (2016)