“A lawyer’s time and advice are his stock and trade.”
There has been a shift in the public adopting new behaviors in how they transact and purchase goods and services. What’s becoming apparent is that clientele, in general, want the option of paying legal fees by nontraditional methods such as by credit card or other electronic means, including payment apps (Venmo) and third-party financing of legal fees. Many solo practitioners need to be nimble in the way clients pay their legal fees to make it simple for them to pay. However, a lawyer should proceed with caution and carefully consider the relevant ethical obligations before accepting payment through any one of these non-traditional methods.
ABA Formal Opinion 338 and the Maryland Committee on Ethics
Maryland, like all states, has adopted the ABA’s Model Rules of Professional Conduct. In 1974, the ABA overturned its longstanding position that payment of legal fees by credit cards was not permissive. In Formal Opinion 338, the ABA concluded that the use of credit cards for payment of legal services, expenses, and interest on delinquent accounts is allowed.
The Maryland Committee on Ethics has a long history of adjudicating multiple opinions associated with the ethical and fiduciary duties imposed by the Maryland Attorneys’ Rules of Professional Conduct (“Maryland Rules”) when accepting credit card payments for legal fees. The Ethics Committee has clearly taken the position that the “use of credit cards for the payment of legal expenses and services is permitted under the Code, provided that all of its provisions are fully and completely observed.” The Ethics Committee has also made it clear that caution should be exercised.
Most notably, the Ethics Committee has made it clear that any service fees associated with credit card payments must be made by the attorney out of their operating account unless the legal services fee agreement (contract) clearly enunciates that the client is responsible for the service fee related to the use of the credit card. Any chargebacks are also the responsibility of the lawyer unless the legal services fee agreement (contract) clearly states that the client is responsible for all chargebacks. If the attorney is responsible for the service fee or chargeback, then a lawyer must use their operating account to cover the fees. Any retainer fees paid by credit card and not yet earned by the lawyer should be held in the trust account. Any earned funds may be transferred to the operating account, but the lawyer is required to deposit and maintain sufficient funds to cover all potential account fees, chargebacks, and transaction rescissions. The onus of ensuring that all credit card payments for legal fees earned and unearned are compliant is solely on the attorney. Comprehension of the nuances associated with these payments should be carefully reviewed when deciding if and how credit card processing will work in your firm. See Dockets 78-19, 79-31, 89-52, 91-5, 97-14, 01-15, 02-23, 03-06.
Guidance to mitigate the risks associated with accepting credit card payments follows.
- Communicate, communicate, communicate! Ensure your fee agreement discloses who is responsible for paying the service fee and chargebacks for the credit card payments.
- Ensure your trust accounts are protected. Under no circumstances should a credit card company have access to your trust account. Ensure that a credit card company withdraws service fees or chargebacks only out of the attorney’s operating account. To stay compliant, all fees earned may be deposited into the attorney’s operating account, but all unearned fees must be placed into the attorney’s trust account to avoid commingling. If an attorney is responsible for all service charges related to the credit card payments, then the attorney shall designate an account the credit card company may use for withdrawal of those fees (not the trust account).
- Confidentiality. Protect your client’s confidentiality when processing credit card payments.
- Payment Card Industry Data Security Standard (“PCI DSS”). If your law firm is accepting credit card payments, then you are required under the law to protect the personal information of the credit card holder. A copy of the PCI DSS standards can be found here.
Credit Card Vendors
An attorney should strongly consider using a vendor versed in the ethical and fiduciary responsibilities of an attorney before accepting credit card payments. There are many companies that primarily serve the legal community by processing credit card payments for legal fees. They are well aware of an attorney’s trust accounting requirements and more suited for the type of transactions lawyers are involved in. LawPay, an endorsed vendor of the MSBA, offers financial services to lawyers accepting credit card payments for earned fees and retainer fees. LawPay ensures credit card fees are taken only from the operating account and that all chargebacks are taken from the operating account and not the trust account unless otherwise specified. Remember, the onus of ensuring these deposits and withdrawals are done properly is on the attorney.
Some payment apps are specifically designed for the legal profession, i.e., LawPay, LexCharge, or Headnote; others are not, i.e., Venmo, Paypal, and Zelle. These payment apps also operate in different ways. Regardless of which payment app a lawyer decides to use, they all create risk with an attorney’s obligation to protect all client funds and protect the confidentiality of client information.
The ABA has yet to issue guidance on accepting payment of legal fees through a payment app but has cautioned attorneys about using outside vendors and compliance with Model Rule 1.5 on record-keeping and safekeeping of property. The Ethics Committee has yet to issue an opinion, but conventional wisdom leans towards not using a payment app unless it is specifically designed for lawyers.
Payment apps specifically designed for lawyers will place a client’s retainer into the attorney’s trust account and take transaction fees from the operating account. In contrast, apps like Venmo and Paypal hold funds in a “digital wallet” until they are transferred to a bank account. Indeed, they are not bank accounts at all and cannot function as trust accounts. See Rules 19-401 to 19-412, Maryland Rules. There is also a commingling problem with using an app not geared toward lawyers.
The use of these payment apps creates enormous privacy risks. It is the lawyer who needs to take the responsibility of protecting the financial information. Again, caution should be taken if you are considering a payment app not designed for lawyers. For example, transactions on Venmo are published to a feed of each Venmo user although it does allow you to adjust the privacy settings. Payment apps specifically designed for lawyers are well-versed in a lawyer’s duty to maintain confidentiality and ensure that the confidentiality rules are satisfied for each transaction.
Guidance to Mitigate Risks
- Accept Payment Through a Payment App Only for Earned Fees. There is little risk of violating the prohibition of commingling funds if a lawyer accepts payments through a payment app for fees already earned to hold in a digital wallet until the lawyer transfers the money into their operating account. However, the opposite is true for the acceptance of a retainer fee (unearned fees) from one of the payment apps that are not specifically designed for legal services.
- Use A Payment App Specifically Designed for Lawyers for Earned and Unearned Fees. The Maryland Rules specifically mandate that all unearned fees must be placed into an attorney’s trust account. An attorney cannot accept payment of a retainer by first depositing the funds into the attorney’s operating account (via Venmo or PayPal) and then transferring it into their trust account. See Maryland Ethics Committee Docket 03-06. Using a legal-specific online payment app such as LawPay, LexCharge or Headnote will assist the attorney in maintaining their obligations to their trust account. These legal-specific services are designed to allow an attorney to accept online payments into both their operating and trust accounts while withdrawing the transactional fees and chargebacks from the operating account.
- Transactions Fees and Chargebacks. The lawyer must ensure that any transaction fees or chargebacks are paid by the lawyer unless the lawyer and client otherwise agree.
- Maintain confidentiality of the client’s financial transactions. The lawyer must ensure that the payment app maintains adequate encryption and other security features to protect the lawyer and client’s financial information and especially to preserve the confidentiality of any transactions.
- Communicate. Use of a payment app that is not specifically designed for lawyers to comply with their trust account obligations may not be worth the time unless the lawyer restricts the use of the app for earned fees. Nevertheless, it is important for the lawyer to communicate to the client the lawyer’s obligations in regard to legal fee payments.
Both the ABA and the Ethics Committee have addressed legal fee financing. In 2018, the ABA issued Formal Opinion 484, which addresses third-party financing for legal fees when a lawyer refers the client to a finance company. The ABA Opinion addressed the following scenarios between a lawyer, a client, and a third party that provides financing to the client:
- Traditional loan arrangement. The client applies for a loan directly from a financing company to cover the lawyer’s fees without the lawyer’s assistance and pays the loan back to the financing company with interest.
- The lawyer pays a fee to a financial company, and in return, the lawyer is allowed to submit loan applications from clients. If the client receives a loan, the lawyer receives the money minus a finance fee charged by the finance company. The lawyer has no financial interest in the finance company and the company makes all decisions about whether to loan funds to the client, in what amount, and on what terms.
- The lawyer gives the client information about a finance plan. If the client is approved, the lawyer will submit payment vouchers to the finance company for services rendered to the client, who must approve the vouchers. If the voucher is approved by the client, the finance company pays the lawyer the amount of the voucher minus a service charge.
- The lawyer pays a one-time registration or monthly subscription fee to a finance company. The lawyer gives the client a link to a finance company’s website or posts the link on the lawyer’s website, either of which directs clients to the finance company’s loan application forms. The finance company disburses the loan funds directly to the client but notifies the lawyer when disbursements are made to the client.
- A finance company offers a “same as cash” funding program for a lawyer’s fees or retainer in which the company provides a computer or other hardware necessary for the client to apply for financing in the lawyer’s office. If the finance company determines the client qualifies, then the lawyer provides the client with the loan documents and the finance company pays the lawyer directly, but the financial relationship remains between the lender and the client.
- A lawyer works with a financial brokerage company that helps clients obtain legal fee financing. The broker is not a lender; it locates banks willing to finance the client’s legal fees. The broker may charge the lawyer a fee to facilitate the transactions. The lending bank pays the loan amount to the client, who then pays the lawyer’s fee in accordance with their fee agreement.
The above factual scenarios are permissible only if the lawyer adheres to the following ABA Model Rules:
- Model Rule 1.2(c) Scope of Representation and Allocation of Authority Between Client and Lawyer. Rule 1.2(c) allows a lawyer to limit the scope of representation if the limitation is reasonable. The limitation on representation in these factual circumstances is necessary, so the client will not believe the lawyer is exercising his professional legal judgment by recommending financing, a particular financing company or has evaluated the terms of the loan on behalf of the client.
- Model Rule 1.4(b) Communications. The lawyer must communicate and explain to their client the financial arrangement to the extent reasonably necessary to permit the client to make informed decisions about the representation, including the lawyer’s relationship with the bank, financing company, or broker, how the lenders may pay the lawyer directly, the costs and benefits to the client, any payment terms the lawyer intends to impose if the finance company disburses the loan proceeds directly to the client, whether the lawyer will charge the client a service fee because of the financing, and any and all other factors.
- Model Rule 1.5 (a) and (b) Fees. Section (a) of Model Rule 1.5 prohibits the lawyer from collecting an unreasonable fee. Section (b) requires the lawyer to disclose the basis or rate of the fee and expenses for which the client will be responsible. In accordance with Rule 1.5, any service fee charged by the lawyer to the client because of a financing plan or transactional costs must be fully disclosed. Likewise, if a lawyer charges a higher base fee to reimburse himself for any transactional costs or subscription fees the lawyer must pay the lender, that fee must be reasonable and disclosed to the client. The ABA opined the service fees, subscription fees, and transactional costs the lawyer charges to their clients over and above their customary fee is “akin to a merchant fee that credit card companies charge.” Furthermore, the ABA stated these fees do not violate the prohibition on fee-sharing by Model Rule 5.4(a).
- Model Rule 1.6 (a) and (b) Confidentiality of Information. The lawyer may not reveal information regarding the client’s case to the bank, finance company, or broker except as permitted under Rule 1.6 (a) and (b).
- Model Rule 1.7 (a) and (b) Conflict of Interest. Current Clients. A possible conflict of interest may arise in any of the six scenarios considered. If a lawyer recommends fee financing to a client even though fee financing is not in their client’s best interests, then an obvious conflict will exist. In this instance, the ABA stated that the lawyer may avoid the conflict by not placing his own financial interests ahead of his client’s, e.g., the lawyer may not recommend financing. A conflict may also exist if the third-party financing company is also represented by or in a business relationship with the lawyer. The ABA specifically noted that a lawyer may resolve a concurrent conflict of interest in this situation if all the requirements of Rule 1.7(b) are satisfied. Rule 1.7(b) requires written informed consent by the client.
- Model Rule 1.9(a) Duties to Former Clients. Rule 1.9(a) prohibits a lawyer who has formerly represented a client in a matter from representing another person in which that person’s interests are materially adverse to the interests of the former client. There is an exception if the former client gives informed consent, confirmed in writing. Consequently, if a lawyer previously represented a bank, finance company, or broker and is now representing a current client in obtaining fee financing from the former client, the lawyer must do so in accordance with Rule 1.9(a) by obtaining written informed consent.
The ABA Opinion addressed an additional factual scenario where a lawyer might have an ownership interest in a bank, financing company, or broker. If a lawyer recommends financing to a client with a business entity in which the lawyer has an ownership or financial stake, then the lawyer must also comply with Rule 1.8(a) of the Model Rules. Rule 1.8(a) requires the lawyer to disclose the relationship, ensure fair and reasonable terms, advise the client to seek independent legal advice on the transaction, and obtain the client’s written informed consent of the transaction and the lawyer’s role.
The ABA Opinion only addressed scenarios where a client borrows funds to pay legal fees and did not address non-recourse cash advances that come directly out of any future settlement or judgment. “Lawyers may participate in the fee financing arrangements described” in all these factual scenarios, “provided they comply with Model Rules 1.2(c), 1.4(b), 1.5(a), 1.6, 1.7(a)(2), and 1.9(a). They may further acquire an interest in or form a finance company or brokerage and thereafter refer clients to that entity provided that they comply with Model Rule 1.8(a).”
The 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 clients wherein the finance company offered to pay directly to the law firm eighty or ninety percent of the retainer fee or billing but treated by the law firm as the full payment by the client. The client would be expected to pay the finance company one hundred percent of the retainer plus finance charges.
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.
The Committee also recited the following Maryland Rules for lawyers to consult before entering into this type of arrangement:
- 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. 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. Regardless, the client must fully consent before the financing plan can be pursued.
- Rule 1.8, 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 5.4, Maryland Rules.. The opinion concluded that the agreement would be fee sharing.
The Committee ultimately concluded that this type of arrangement would be fee-sharing. In doing so, it stated 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.”
“Convenience is huge in today’s world and credit cards and payment apps are a means to simplify our client’s lives. “Within five years, half of today’s smartphone users will be using their phones and mobile wallets as their preferred method for payments,” said Peter Olynick. As a lawyer, be smart in this ever changing financial environment, use a credit card company or payment app geared towards lawyers, and consult and structure any acceptance of legal fees by non-traditional methods in accordance with the Maryland Rules.
This is the fifth and final article of a five-week series that discussed non-traditional payment of legal fees by credit card, payment apps and third-party financing. This series was designed to assist lawyers in becoming aware of the ethical considerations a lawyer must consider before accepting payment of legal fees through non-traditional means, as well as providing guidance to mitigate risks.
LawPay is an endorsed vendor of the MSBA.