Utah State Bar
Ethics Advisory Opinion Committee
Opinion Number 13-05
Issued September 10, 2013
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?
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.)
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.
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. 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.