Fee Financing: Avoiding Pitfalls

• Author: Jason Tashea
• Pages: 24-25

LAWYERS MAY REFER CLIENTS to fee financing

companies, even if they own a fi nancial interest

in the lender or broker, according to a November

opinion from the ABA Stand ing Committee on

Ethics and Professional Re sponsibility.

Formal Opinion 484 intends to cla rify attor-

ney-fee financing used to help close the ac cess-

to-justice gap. While some in t he business of

facilitating loan s welcome the opinion, others see it as

nothing new.

“By some estimates, more tha n 75 percent of low-

income and middle-income individua ls have legal needs

that go unmet for financia l reasons,” says Barbara S.

Gillers, chair of the A BA Standing Committee on Ethics

and Professional Responsibil ity. “Formal Opinion 484 is

important becau se it addresses a way to increase acce ss

to legal serv ices for those persons who may wish to or

need to finance legal fee s in order to retain counsel. The

opinion protects clients by identif ying lawyers’ obliga-

tions when they refer clients to fina ncing companies or

brok ers .”

The opinion lays out various ways that fee fina ncing

services a re already being used by attorneys. For exam-

ple, clients can apply for a loan direct ly from a financ-

ing company to cover their lawyer’s fees, wh ich the client

then pays back to the lender with intere st rates between

5 and 15 percent.

In another instance, a l awyer will pay an initial fee to

a finance company so he or she can submit loan applica-

tions from clients. If a client receives a loa n in this sce-

nario, the lawyer rec eives the money minus a 10 percent

finance fee. Simila rly, a lawyer can help a client set up

what is essentially a re tainer or voucher through a lender

minus a service ch arge.

In other arrangements, the loaned money may go

directly to the cl ient, and the attorney will be notified,

often through an onl ine portal—a service the attorney

pays for. There are also “same as cash” progra ms, where

the attorney has the t ools in her oce to help

the client apply for the loan. If a loan is created,

the financial relationsh ip remains between the

lender and the client.

Lastly, the opinion says that a lawyer may

work with a financial brokera ge company that

helps find legal fee financing options.

In the above examples, the attor ney mak-

ing the referral does not have an ow nership or financial

interest in the loan and ha s explained the arrangement

so the client can make an i nformed decision.

Additionally, the opinion makes clear th at these

arrangements are per missible only if other Model Rules

of Professional Conduct are met, i ncluding:

• Model Rule 1.2(c) (Scope of Representation and

Allocation of Authorit y Between Client and Lawyer)

• Model Rule 1.4(b) (Communications)

• Model Rule 1.5(a) and (b) (Fees)

• Model Rule 1.6 (Confidentiality of Information)

• Model Rule 1.7(a)(2) (Conflict of Interest: Current

Cl ie nts)

• Model Rule 1.9(a) (Duties to Former Clients)

The opinion does not touch on nonrecourse loans like

litigation financing, which is a c ash advance to a liti-

gant in exchange for a percentage of the judg ment or set-

tlement. Being that this opinion only covers in stances

where a lawyer is being paid by money a client bor-

rowed, the committee not es that Rule 5.4(c) (Professional

Independence of a Lawyer), does not apply.

ARMS-LENGTH TR ANSACTIONS

Nonrecourse financing, wh ich often falls outside of

state regulat ions on consumer loans and may have rates

of 44 percent or higher annually, has led to litigat ion

and divergent outcomes in recent year s. In Colorado, the

state supreme court in 2015 found the stat e’s Uniform

Consumer Credit Code applied to t hese types of loans.

In 2018, the Supreme Court of Georgia found that t he

ILLUSTRATION BY BRENAN SHARP/SHUTTERSTOCK

24 || ABA JOURNAL MARCH 2019

Ethics

Fee Financing: Avoiding Pitfalls

LAWYERS CAN REFER CLIENTS TO LENDING COMPANIES IN WHICH THEY HAVE A STAKE, ETHICS OPINION SAYS

By Jason Tashea

Practice