Neither a Borrower, nor a Lender Be
Alice L. Hageman
Lawyers calling the Office of Bar Counsel not infrequently inquire whether there are any situations in which an attorney may assist a client in obtaining financial assistance while the client's case is pending.
The circumstances that give rise to the question are usually compelling. The client has a "good" case, usually a personal injury case resulting from an accident in which the client was seriously injured. Because of the injuries, the client's earning capacity is very limited, and/or the client has been out of work for some time. The client is facing eviction, or mortgage foreclosure, or repossession of the family car. The client has no family resources, and is not sufficiently credit-worthy to obtain a loan from a commercial lender. Without financial assistance, the client may have to settle for short money, or drop the case altogether. Occasionally the issue even arises in circumstances in which the case has settled and the client has signed the agreement, but the insurer's check has not yet been received. Surely under those circumstances the caller could make a small advance from his law firm or personal funds to tide the client over.
No matter how compelling the client's situation, no matter how sympathetic the lawyer may be with that situation, any lawyer who advances funds to a client for anything other than court costs and expenses of litigation violates Mass. R. Prof. C. 1.8(e). This prohibition is absolute; it leaves no wiggle room.
Mass. R. Prof. C. 1.8(e) provides as follows:
A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
- a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
- a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
This rule continues the general common law prohibition against a lawyer's providing financial assistance to the client. Historically, the prohibition results from the concern that such assistance might encourage a client to pursue lawsuits that have dubious merit. The primary contemporary rationale for this rule is to avoid potential conflicts of interest. In addition, the prohibition eliminates advances as a way of attracting and keeping clients, thus removing a lawyer's "generosity" to clients as a factor in a client's choice of attorney.
By advancing funds against the client's portion of the settlement, the attorney has an even greater interest in assuring that there will be funds forthcoming from the defendant. If the lawyer later recommends settlement, the representation of the client could be perceived to be affected by the lawyer's own interest in insuring that the advances are recouped, a violation of the conflict-of-interest provisions of Mass. R. Prof. C. 1.7(b). In circumstances such as these, the attorney might be tempted to settle the case for less than fair value or, even more likely, the client will be suspicious if the client receives little or no additional money from the ultimate settlement. See Private Reprimand No. 87-15&16, 5 Mass. Att'y Disc. R 503 (1987), in which the lawyers' advances totaled over $9400 on a case that settled for $12,000.
Alternatively, the further question arises as to whether the lawyer can give the client information regarding loan companies that specialize in loans to persons in the client's situation. Although there is no advice or authority on this issue in Massachusetts, ethics committees in other jurisdictions have identified several main sources for such loans: a conventional commercial lender, a company which charges high interest on what is perceived to be a high risk loan, a non-recourse lender which makes pre-settlement loans to be repaid only in the event of recovery, and a non-recourse lender whose repayment is a percentage of the settlement. If the client requests such advice, nothing prohibits a lawyer from advising the client about possible sources of loans. However, the duty to represent a client with reasonable competence and diligence and to seek the lawful objectives of the client through reasonable means provided by law, Mass. R. Prof. C. 1.1-1.3, may include informing the client of the implications of the proposed loan transaction, especially if the terms of the loan are onerous or likely to substantially deplete the client's share of the recovery. A comprehensive discussion of the pitfalls of loans to clients for personal expenses from finance companies specializing in non-recourse advance funding, including a survey of opinions in other states, can be found in the Florida Bar's Professional Ethics Committee's Proposed Advisory Opinion 00-3, http://www.flabar.org/newflabar/memberservices/Ethics/pao.html1
If contacted by the lender, the lawyer cannot breach the client's confidentiality regarding the case without the client's specific consent. Nor can the lawyer assist the client in obtaining the loan by co-signing the loan with the client. In addition, some ethics committees in other jurisdictions have advised that the lawyer should not offer the lender an opinion regarding the value of the case, because doing so raises additional questions of conflict of interest between lawyer and client, as well as potential liability issues for the lawyer. At a minimum, attorneys should proceed with caution in deciding whether to offer a lender an opinion on value.
In addition, the lawyer cannot allow the lender to interfere with the attorney-client relationship or the lawyer's exercise of his independent professional judgment regarding the course of the case. Clearly also, the lawyer cannot have an ownership interest in a prospective lender or receive a referral fee from the lender without raising questions of serious conflict of interest.
As previously stated, the only financial assistance which an attorney is permitted to provide to a client in connection with pending or contemplated litigation is advancing court costs and expenses of litigation. An attorney may borrow money to cover expenses of litigation. However, if the attorney's liability on the loan may compromise her independent professional judgment, she may obtain the loan only after full consultation with the client. See MBA Advisory Opinion No. 83-7.
Finally, Mass. R. Prof. C. 1.8(e) now permits an attorney to make repayment of court costs and expenses of litigation contingent on the outcome of the litigation. This is a change from the rule in effect prior to January 1998, which required the client, whatever the circumstances, to repay the attorney regardless of the case's outcome. This new rule reflects the reality that many attorneys did not or could not realistically attempt to recover costs and expenses from clients when there was no recovery.
As noted at the outset of this article, the issue of financial advances is a recurring problem. For the protection of clients, for the integrity of the bar, and to avoid entanglements with the bar discipline process, attorneys are urged to observe the constraints contained in Mass. R. Prof. C. 1.8(e).
1. The opinion was approved by the Florida Bar of Governors on March 15, 2002.
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