Can a Utah lawyer take part in an on-site program that finances client retainers through a third-party lender?

Plain-English summary

Opinion 13-05 addresses a lawyer who wants to use an on-site "same as cash" funding program run by a finance company called "Instant Legal Fee Funding." The finance company places equipment in the lawyer's office: the client swipes a financial-identification item and the company scans the client's check, then qualifies the client for a loan of up to $5,000 (at transaction fees ranging from 9.95% to 28.95%) so the client can pay the lawyer's retainer. The finance company collects repayment directly from the client's bank account and has no recourse against the lawyer if the client defaults.

The Committee concludes that, even assuming the lawyer has no ownership stake in the finance company, the necessarily close relationship between the lawyer and the lender creates a significant risk that the lawyer's representation will be materially limited by a personal interest, which is a concurrent conflict under Rule 1.7(a)(2), and that the arrangement is also sufficiently adverse to the client to implicate Rule 1.8(a). The Committee reasons that the lawyer will want to keep the finance company satisfied to perpetuate the relationship, may feel pressure to assure repayment, and could be tempted to favor this funding source or shade advice about the merits of a case to keep the program running.

The opinion holds that such conflicts may be resolved under Rule 1.7(b) or Rule 1.8(a) by obtaining the client's informed consent confirmed in writing, after disclosing the lawyer's interests, the loan terms, the finance company's enforcement rights, and the available alternatives. The Committee notes that getting a valid waiver may be difficult because repayment of the loan could complicate settlement, but it does not say a waiver is impossible. In all events, under Rule 5.4(c) the lawyer may not let the finance company direct or regulate the lawyer's professional judgment.

In practice

Under this opinion, a Utah lawyer who participates in the on-site retainer-financing arrangement described, under the Utah rules as they stood in 2013, has a concurrent conflict of interest under Rules 1.7(a) and 1.8(a) arising from the lawyer's personal and financial interest in maintaining the lender relationship. The opinion holds that the lawyer may take part only after full disclosure and the client's informed consent confirmed in writing, and only if the lawyer guards against any direction or regulation of professional judgment by the finance company under Rule 5.4(c). Per the opinion, the analysis turns on whether the lawyer's interest in perpetuating the funding relationship creates a significant risk of materially limiting the representation. Confirm the current text of Utah Rules 1.7, 1.8, and 5.4 before relying on the specifics here.

Common questions

Q: Can a Utah lawyer let a finance company put loan equipment in the office to fund client retainers?

A: Only with a written waiver. The opinion concludes the arrangement creates a conflict under Rules 1.7(a) and 1.8(a) because of the close lawyer-lender relationship, but the lawyer may proceed after full disclosure and the client's informed consent confirmed in writing (paragraphs 2, 6, 13).

Q: Does it matter that the finance company has no recourse against the lawyer if the client defaults?

A: No, that does not resolve the conflict. The Committee reasons that the lawyer will still want to keep the finance company satisfied to continue the relationship and may feel pressure to assure repayment, creating a personal interest adverse to the client (paragraph 7).

Q: What must the lawyer disclose to get a valid waiver?

A: At a minimum the lawyer must disclose any interest in the financing arrangement, the loan terms and the finance company's enforcement rights, the available alternatives, and the fact that repayment could complicate settlement of the client's case (paragraph 11).

Q: Can the finance company influence how the lawyer handles the case?

A: No. Under Rule 5.4(c) the lawyer may not permit the lending company to direct or regulate the lawyer's professional judgment in advising the client on the underlying matter (paragraph 12).

Background and rules framework

The opinion interprets the Utah Rules of Professional Conduct, principally Rule 1.7 (concurrent conflicts of interest, including a personal-interest conflict, Model Rule 1.7) and Rule 1.8(a) (acquiring a pecuniary interest adverse to a client through a business transaction, Model Rule 1.8(a)). It applies Rule 1.0(f)'s definition of "informed consent" and Rule 5.4(c) (a third party who pays for or arranges a lawyer's services may not direct or regulate the lawyer's professional judgment, Model Rule 5.4). The footnotes also reference Rule 1.8(f) (accepting compensation from a third party), Rule 3.1 (meritorious claims), and Rule 1.7(b)(1) (the lawyer's reasonable belief in competent and diligent representation).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.7 / Utah Rule 1.7(a), (b) (concurrent conflicts; personal-interest conflicts)
• Model Rule 1.8(a) / Utah Rule 1.8(a) (business transaction or pecuniary interest adverse to a client)
• Model Rule 5.4 / Utah Rule 5.4(c) (third party may not direct or regulate professional judgment)
• Utah Rule 1.0(f) (definition of "informed consent")
• Utah Rule 1.8(f) (compensation from a third party; cited in footnote 1)
• Utah Rule 3.1 (meritorious claims and contentions; cited in footnote 2)

See also

• Utah Ethics Op. 06-03: Financing a Client's Cause of Action or the Lawyer's Fees
• Utah Ethics Op. 02-01: Recourse Loans to Finance Litigation Costs
• ABA Formal Op. 484: Client Fee-Financing Companies
• CA COPRAC Op. 2020-204: Third-Party Litigation Funding

Source

• Landing page: https://www.utahbar.org/ethics-opinions/2013-05/
• Original PDF: https://www.utahbar.org/wp-content/uploads/2022/12/2013-05.pdf

Original opinion text

Reproduced from the official source for research purposes. The two-column PDF has been reassembled into reading order by paragraph; the linked source is authoritative.

Opinion No. 13-05

Utah Ethics Opinion

Utah State Bar Ethics Advisory Opinion Committee

November 12, 2013

Issued September 10, 2013

ISSUE

1. To what extent may an attorney participate in an "on-site" fee/ retainer funding program to obtain and finance attorney retainer or litigation funds?

OPINION

2. A lawyer may not participate in an "on-site" fee/retainer funding program, under the circumstances set forth herein, as such would violate the provisions of Rules of Professional Conduct 1.7(a) (Conflict of Interest: Current Clients), Rule 1.8(a) (Acquire a pecuniary interest adverse to the client). The lawyer may, however, obtain a waiver of the conflict by complying with the terms of Rules 1.7(b) and 1.8(a), including making full disclosure and obtaining "informed consent" confirmed in writing. Adequate measures must also be taken to safeguard the lawyer's independent judgment under Rule 5.4(c) (A third party may not direct or regulate the lawyer's professional judgment.)

BACKGROUND

3. A financing company, "Instant Legal Fee Funding" (the "finance company"), offers a same as cash funding program for law firm retainers and fees. The finance company provides the physical equipment necessary to carry out the mechanics of the arrangement on site at the lawyer's office. To initiate the process at the lawyer's office, the client swipes an item of personal financial identification through the finance company's identifying device. The finance company also provides the law firm with an imaging machine that scans the client's personal check in order to facilitate the finance company's collection of periodic loan repayments directly from the client s banking account.

4. The finance company then may qualify the client for a loan of up to $5000. The finance company charges a transaction fee ranging from 9.95% interest to 28.95% depending on risk factors it considers, including the repayment period. If the client qualifies, the law firm provides the client with the finance company's contractual agreement to repay the finance company. The finance company has no recourse against the lawyer if the client does not pay the money.

ANALYSIS

5. Rule 1.7(a)(2) requires an attorney to refrain from representation if "There is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to ...a third person or by a personal interest of the lawyer." Comment 10 to that section provides:

The lawyer's own interests should not be permitted to have an adverse effect on representation of a client... In addition, a lawyer may not allow related business interests to affect representation, for example, referring clients to an enterprise in which the lawyer has an undisclosed interest.

6. Because of the necessarily close relationship which must exist between the finance company and the lawyer, it is apparent that a conflict exists under 1.7(a) which may create a "significant risk" that the lawyer's representation of the client would be "materially limited." Additionally, Rule 1.8(a) prohibits a business transaction or other pecuniary interests adverse to a client.[1] For the reasons set forth herein, the arrangement contemplated is sufficiently adverse to the client so that a conflict appears to exist under 1.8(a) as well.

7. Under both rules, the material question concerns the involvement of the attorney in both the attorney obtaining the retainer by this method and the finance company's ability to collect the retainer fee back from the client. We presume from the stated facts that the attorney has no direct interest in the finance company. That, however, does not resolve all issues. The question that must be answered is whether the financial arrangement, albeit indirect, between the lawyer and the finance company, may adversely affect the representation of the client. Although, the finance company has no recourse against the lawyer if a client defaults on a loan, it is only natural that the lawyer will want to keep the finance company happy in order to assure perpetuation of the relationship between the lawyer and finance company. The lawyer will be under pressure to assure that the finance company is repaid. The lawyer may very well feel obliged in litigation to make certain the client achieves a recovery, even if it requires settlement at a lesser amount than would otherwise be accomplished, in order to avoid the risk that the finance company would go unpaid. Thus, the lawyer obviously has a financial and personal interest adverse to the client in continuing the advancement of fees program solely for the benefit of the lawyer in future cases. This places both Rules 1.7(b) and 1.8(a) in issue.

8. The lawyer receives a financial benefit in the advancement of fees by the finance company. She gets her retainer paid in cash with no recourse, which may very well influence the lawyer to "market" this source of funding to the exclusion of others. The interest of the lawyer in perpetuating this benefit could cloud the lawyer's judgment as to the merits of the case, for example by influencing the lawyer to advise the client that the case had greater merit than were actually the case.[2] Further, the lawyer must give disinterested and truthful advice as to the merits of funding through this program as opposed to other funding options. The lawyer's advice as to the merits of proceeding with the finance company would require the disclosure of the material aspects of the financing contract, which necessarily involves a fairly intimate relationship between the lawyer and the finance company, irrespective of whether the lawyer has an equity interest, financial or otherwise, in the company. Additionally, although the request does not so state, there must, of necessity, be some contractual agreement between the finance company and the lawyer. The conclusion is difficult to escape that the lawyer's desire to stay on the good side of the finance company may cause the lawyer to be less candid than otherwise regarding many of these facets both as to the merits of the client's case and the basics of the funding program.

9. Because of the obvious interest of the lawyer in maintaining and continuing the arrangement with the finance company, and the close interrelationship between the means of providing funding through the finance company and the role of the lawyer and the lawyer's office in the selection of the finance company and the method and means of the client's procurement of the loan through the finance company's "on site" equipment and the finance company's contract provided funding contract provided to the client through the lawyer, it is the opinion of the Committee that there is a conflict under Rules 1.7(a) and 1.8(a).

10. Such conflicts may be resolved under either Rule 1.7(b) or Rule 1.8(a) by obtaining informed consent from the client confirmed in writing. Rule 1.0 (f) defines 'informed consent" as denoting "the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonable alternatives to the proposed cause of action."[3]

11. At a minimum, "informed consent" would require disclosure of any and all interests the lawyer might have in the financing arrangement, including the interest in continuing the relationship with the finance company by making certain clients repay the agreement. The lawyer would have to disclose the terms of the agreement and any rights the finance company would obtain in enforcing the agreement. The lawyer would have to explore alternatives to the financing arrangements. The lawyer would have to explain that while she would not take direction from the finance company, repayment of the loan might complicate the settlement of the dispute as a dispute may arise between the lawyer and the client as to whether to settle the case for less than he might be entitled if repayment to the finance company were not a factor. This may make obtaining a client's waiver of the conflicts of interest posed by the financing arrangement problematic. That is not to say however, that such a waiver with informed consent manifested in writing could not be obtained.

12. Of course, the lawyer may not permit the lending company to have any direction or regulation of the lawyer's professional judgment in rendering candid advice to the client in the underlying litigation.[4]

CONCLUSION

13. Such a financing arrangement is sufficiently close to the lawyer's own personal and financial interests as to be a conflict under Rules of Professional Conduct 1.7(a) and 1.8(e). Given these conflicts, such a financing arrangement will be proper only if the attorney obtains informed consent, confirmed in writing by the client.

Notes:

[1] Rule 1.8(f) would preclude the lawyer from accepting compensation for representing the client from another entity unless the client gives informed consent to the representation and the lawyer's relationship with the funding company does not interfere with the lawyer's independent judgment.

[2] The lawyer is always obligated to follow Rule 3.1 (Meritorious Claims and Contentions.) She may not bring or defend a claim unless there is a basis in law or fact. The temptation to bring a frivolous case or present a frivolous defense in order to obtain a prepaid retainer is per se a violation of the rules.

[3] Additionally, the lawyer must comply with Rule 1.7(b)(1) which requires a reasonable belief that the lawyer will be able to provide competent and diligent representation to the client given the existence of the funding company.

[4] The lawyer must comply with Rules of Professional Conduct 5.4 (c). The lawyer must guard against allowing the finance company to exercise any direction or regulation of the lawyer's legal services.