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This article is the fourth in a five-part series that addresses the payment of legal fees by non-traditional means. Specifically, this article addresses the Maryland State Bar Association Committee on Ethics’ opinion regarding third-party financing of legal fees pre-arranged through an attorney.  It is designed to assist lawyers in determining whether to provide third-party financing for their legal fees with applicable reference to the Maryland Attorneys’ Rules of Professional Responsibility (“Maryland Rules”). Next week, the MSBA will conclude the series by summarizing all articles discussing non-traditional ways to pay legal fees.  

Ethics Docket 94-51

The Maryland State Bar Association Committee on Ethics (“Committee”) received an inquiry indicating that a firm was contemplating entering into a contract with an out-of-state finance company whose proposal included establishing an arrangement with the firm to finance the payment of legal fees owed by the clients which may include the advance payment of a retainer as well as periodic billings for work performed.  Essentially, the finance company offered to pay directly to the law firm eighty or ninety percent of the retainer fee or billing. Regardless, the money advanced to the law firm by the finance company is to be treated by the law firm as the full payment due and owing by the client.  However, the client is expected to pay the finance company one hundred percent of the retainer or billing plus finance charges.  In sum, the arrangement requires attorneys to accept less than the full value of the bill in exchange for up-front and non-contingency payments. The finance company ultimately collects from the client at the full value and, in the process, earns ten to twenty percent of the full fee.  

The request for an ethics opinion was followed by inquiry and entreaty by the finance company, disclosure of ongoing amendments to the plan, and offers of plan modification to meet bar rules. The Committee declined to collaborate with the company and issued instead an opinion specifically to advise Maryland attorneys of their ethical considerations based upon this financial structure.   

Rule 1.5, Maryland Rules

The Committee recited the ethical standards for fees, established in Rule 1.5, Maryland Rules. The Committee further stated that the attorney, knowing that they will be accepting less than the fee being charged, must not inflate the fee to cover the attorney’s basic costs paid to the finance company or the percentage in which the finance company will discount the fee as part of its consideration for providing financing.  Of course, any unearned fees paid to the attorney by the finance company must be kept in the attorney’s trust account. Finally, the Committee noted that if the attorney’s legal work is incomplete, the finance company should not be able to begin collection actions against the client for non-payment.

Rule 1.6, Maryland Rules

The Committee also recited the confidentiality requirements established in Rule 1.6, Maryland Rules. In order to avoid a violation of Rule 1.6(a), the attorney must have a full and detailed consultation with the client regarding disclosure of the client’s information and obtain the client’s written consent if the attorney wants to agree to the financing arrangement.

Rule 1.7, Maryland Rules

The Committee focused on Rule 1.7, governing conflicts of interest.  Rule 1.7(a) states that a “lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s own interests. . .”  Consequently, a lawyer must determine whether the representation of the client will be materially affected by the fact that the lawyer will receive eighty or ninety percent of the total fee.  If the representation will not be materially affected, then the lawyer is required to consult with the client, inform the client of the lawyer’s interest, the disadvantages, and alternatives to the lawyer and the client regarding the plan.  The client must fully consent before the financing plan can be pursued.  

Rule 1.8, Maryland Rules

Emphasis was placed on Rule 1.8, Conflict of Interest: Prohibited Transactions, Maryland Rules. The Committee characterized the financial arrangement as a “three-party transaction which has its primary purpose [of] arranging for the lawyer to be paid.”  Rule 1.8 would require the lawyer in this situation to affirmatively determine that the financing arrangement was fair and equitable to the client and to advise the client to seek the advice of independent counsel. Rule 1.8(f) may be triggered but will not be an issue so long as the lawyer determines there is no interference with the lawyer’s independence or lawyer-client relationship. 

Rule 5.4, Maryland Rules

The Committee concluded with Rule 5.4 regarding professional independence and the prohibition of sharing legal fees with a non-lawyer.  The opinion notes that the appearance of the proposed agreement is “an agreement to divide the fee.”  It noted this is consistent with the conclusion of the State Bar of Georgia and inconsistent with the Illinois State Bar Association. Georgia perceives fee sharing, and Illinois perceives the lawyer bearing some cost (10-20%) of a loan to the client. The Oregon State Bar analyzed this issue, went beyond the rule, and examined the purpose of the rules. It concluded the purpose was to prevent the unlicensed practice of law. Deciding that the loan did not encourage or allow that, Oregon concluded a lawyer there could enter such an agreement.

The Committee concluded that the agreement would be fee-sharing. It discounted arguments that lawyers expend income in various manners (*office rent”) and thereby essentially share their revenue (fees). The Committee noted that landlords charge some fixed sum for rent, and that is not fee sharing in the way that it would be if the landlord charged rent “20% of collected legal fees.” The emphasis is on the participation in risk and benefit, the percentage element that is critical.

Maryland Specifically Declined to Follow the Oregon Analysis

The Committee also distinguished the payment of transaction fees to such lenders as Visa and Mastercard, characterizing them not as interest or participation but as de minimus “for handling.” It distinguished the referral of fee collections to a company. It noted that in those instances, the lawyer making the referral was no longer responsible for the client’s representation. With the representation concluded, the Committee saw the distinction. This is focused on the lawyer’s independence of judgment and the post hoc nature of the judgment (case concluded) in the collection agency example.

The Committee ultimately concluded that the determination of when a particular contract may or may not comply with Maryland law, and this ethics opinion, is “a matter for the individual lawyer to determine.” Reference is provided to various opinions of other states, “some of which (they) do not agree.”

Join us next week as we conclude the series on payment of legal fees through non-traditional means.  

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This is the fourth article of a five-week series that discusses non-traditional payment of legal fees by third-party financing pre-arranged through an attorney. This series is designed to assist you in becoming aware of the ethical consideration a lawyer must consider before accepting payment of legal fees by credit card, payment apps or third-party financing, as well as providing guidance to mitigate risks.  

The first week the MSBA addressed payment of legal fees by credit card. The second week, we discussed the ethical considerations when accepting legal fees through a payment app. Last week, we briefed ABA Formal Opinion 484 addressing third-party financing for legal fees when a lawyer refers the client to a finance company. Next week, the MSBA will conclude the series with a summation of non-traditional payment of legal fees by credit card, payment apps, or through third-party financing.