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MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 1989-40
Lawyer co-signing or guaranteeing client's loan for litigation costs and expenses
Your letter poses the question of the ethical propriety of a lawyer advising a client to borrow the costs and expenses of litigation from a bank or other lending institution with the lawyer co-signing or guaranteeing repayment of the loan. You have also noted that the repayment of the loan by the client may be contingent upon the outcome of the matter, however, have advised that the client would be, in the event of settlement or verdict in favor of the client, required to repay the loan plus the interest charged by the bank or lending institution.
As you appropriately point out in your inquiry, Rule 1.8(e) (1) of the Maryland Rules of Professional Conduct permits a lawyer to advance court costs and the expenses of litigation on behalf of his client, the repayment of which may be contingent upon the outcome of the case. None of the annotations to this rule or to the Model Rules of Professional Conduct, collected by the American Association, specifically address the precise question raised by you.
The annotations to the Model Rules, published and collected by the American Bar Association, indicate that a lawyer is permitted to assist a client in obtaining loans from a bank of which the lawyer is a director and a loan made after the establishment of the lawyer/client relationship is not improper because the fact of the loan formed no basis for the inducement for forming the relationship or for the initiation of the litigation. In re Ratner, 194 Kan. 362, 399 P.2d 865 (1965); People ex rel. Chicago Bar Association v. McCallum, 341 Ill. 578, 173 N.E. 827 (1930).
A lawyer would be permitted to obtain his or her own loan in order to enable the lawyer to advance the court costs and expenses of litigation tot he client. It would not be improper for the client, on his own, to obtain a loan for the same purposes. The repayment of the advanced expenses and costs may be, under either scenario, contingent upon the outcome of the litigation. The only difference between a lawyer or client obtaining his own loan and the lawyer advising the client to do so with the lawyer offering to co-sign on the client's behalf is one of form rather than substance.
The rationale for the prohibition against the lawyer from becoming involved in the pecuniary aspects of the client's case is to disassociate the lawyer from any potential conflict which would exist if the lawyer had some stake in the outcome of the case. This rationale is weakened, however, by the province of the rule that permits the payment of the costs and expenses of litigation and permits the optional repayment by the client. Even though the scenario of co-signing a loan with a client creates the appearance of an impermissible stake in the outcome in the litigation, the fact of the co-signing doesn't render the lawyer any more financially entrenched in the client's case than he would be if he advanced significant sums of money from his own funds. Accordingly, it is the Committee's belief that such a transaction is not per se improper.
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