Kentucky State Bar

SCR 3.130 KENTUCKY RULES OF PROFESSIONAL CONDUCT COUNSELORĀ Current with amendments received through 6/30/99 SCR 3.130(2.3) EVALUATION FOR USE BY THIRD PERSONS

(a) A lawyer may undertake an evaluation of a matter affecting a client for the use of someone other than the client if:

(1) The lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer’s relationship with the client; and (2) The client consents after consultation.

(b) Except as disclosure is required in connection with a report of an evaluation, information relating to the evaluation is otherwise protected by Rule 1.6.

Adopted by Order 89-1, eff. 1-1-90
COMMENTARY
Supreme Court 1989:

Definition

[1] An evaluation may be performed at the client’s direction but for the primary purpose of establishing information for the benefit of third parties; for example, an opinion concerning the title of property rendered at the behest of a vendor for the information of a prospective purchaser, or at the behest of a borrower for the information of a prospective lender. In some situations, the evaluation may be required by a government agency; for example, an opinion concerning the legality of the securities registered for sale under the securities laws. In other instances, the evaluation may be required by a third person, such as a purchaser of a business.

[2] Lawyers for the government may be called upon to give a formal opinion on the legality of contemplated government agency action. In making such an evaluation, the government lawyer acts at the behest of the government as the client but for the purpose of establishing the limits of the agency’s authorized activity. Such an opinion is to be distinguished from confidential legal advice given agency officials. The critical question is whether the opinion is to be made public.

[3] A legal evaluation should be distinguished from an investigation of a person with whom the lawyer does not have a client-lawyer relationship. For example, a lawyer retained by a purchaser to analyze a vendor’s title to property does not have a client-lawyer relationship with the vendor. So also, an investigation into a person’s affairs by a government lawyer, or by special counsel employed by the government, is not an evaluation as that term is used in this Rule. The question is whether the lawyer is retained by the person whose affairs are being examined. When the lawyer is retained by that person, the general rules concerning loyalty to client and preservation of confidences apply, which is not the case if the lawyer is retained by someone else. For this reason, it is essential to identify the person by whom the lawyer is retained. This should be made clear not only to the person under examination, but also to others to whom the results are to be made available.

Duty to Third Person

[4] When the evaluation is intended for the information or use of a third person, a legal duty to that person may or may not arise. That legal question is beyond the scope of this Rule. However, since such an evaluation involves a departure from the normal client-lawyer relationship, careful analysis of the situation is required. The lawyer must be satisfied as a matter of professional judgment that making the evaluation is compatible with other functions undertaken in behalf of the client. For example, if the lawyer is acting as advocate in defending the client against charges of fraud, it would normally be incompatible with that responsibility for the lawyer to perform an evaluation for others concerning the same or a related transaction. Assuming no such impediment is apparent, however, the lawyer should advise the client of the implications of the evaluation, particularly the lawyer’s responsibilities to third persons and the duty to disseminate the findings.

Access to and Disclosure of Information

[5] The quality of an evaluation depends on the freedom and extent of the investigation upon which it is based. Ordinarily a lawyer should have whatever latitude of investigation seems necessary as a matter of professional judgment. Under some circumstances, however, the terms of the evaluation may be limited. For example, certain issues or sources may be categorically excluded, or the scope of search may be limited by time constraints or the noncooperation of persons having relevant information. Any such limitations which are material to the evaluation should be described in the report. If after a lawyer has commenced an evaluation, the client refuses to comply with the terms upon which it was understood the evaluation was to have been made, the lawyer’s obligations are determined by law, having reference to the terms of the client’s agreement and the surrounding circumstances.

Financial Auditors’ Requests for Information

[6] When a question concerning the legal situation of a client arises at the instance of the client’s financial auditor and the question is referred to the lawyer, the lawyer’s response may be made in accordance with procedures recognized in the legal profession. Such a procedure is set forth in the American Bar Association Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information, adopted in 1975.

KBA E-383

Question 1:

Does a lawyer have an ethical obligation to ensure payment to an individual who has provided services to, or on behalf of the lawyers client, or in the furtherance of the clients case:

  1. a) if the lawyer hired the individual provider?
    b) if the lawyer did not hire the individual provider?
    c) if, under the same circumstances as 1(a) and 1(b) above, no recovery is had, or the recovery is insufficient?
    d) if the client directs the lawyer not to pay the third person, and instead directs the lawyer to deliver all funds or property to the client?

Question 2:

Do the Rules of Professional Conduct require a lawyer to recognize and comply with a third person’s claim of ownership to the client’s property that is in the lawyer’s possession?

Answers: 1(a). Yes. l(b), l(c), l(d), and 2. See Opinion.

References: KBA E-297; Leon v. Martinez, 614 N.Y.S.2d 972 (N.Y. 1994); Rule(s) 1.2(d) & (e), 1.15(b) and 4.1; Unigard Ins. Co. v. Tremont, 430 A.2d 30 (Conn. 1981); KBA/KMA Interprofessional Code, Minnesota Op. 7 (1983). Dist. of Col. Op. 251 (1995).

OPINION

The inquiry presents mixed questions of law and ethics and this committee is limited to responding based upon matters of ethics. See KBA E-297.

Regarding Question 1(a):

An attorney has an ethical as well as a legal obligation to ensure payment to a third party employed by the attorney to provide services in furtherance of the client’s claim where there is no valid dispute that the services were performed in accordance with the employment.

Under certain circumstances an attorney is required by the applicable law of the case to ensure payment to a third party. See Rule 1.15(b); Interprofessional Code, para VI and VII. Reference is also made to Minnesota Op. 7 (1983), which provides:

Opinion 7 Costs of litigation; Fees.

An attorney may not deny responsibility for the compensation of services rendered by doctors, engineers, accountants, attorneys or other persons, when the attorney requested the services without explicitly stating that the provider should not look to the attorney for payment. Lawyers should expressly disclaim liability in writing at the time the services are requested. A lawyer ordering services is liable as a principal for those services absent an express disclaimer. A lawyer may not, by deceitful or fraudulent means, seek to avoid financial obligations. DRs 102 (A) (4) (5). 7-101(A)(1)(2)(7). (Adopted 1/26/74, amended 10/26/79, repealed 1/7/83).

In those situations where the attorney ordered the performance of services for the client, participated in obtaining services for the benefit of the client, obtained services for the benefit of the client without making it clear to the provider of such services that the provider should look solely to the client, or where the lawyer conferred with a third party, with the client’s knowledge, to take no present action against the client, for example, a third person’s pursuing a collection action against the client until the settlement of the client’s claims which is the basis of the lawyer’s representation of the client, the lawyer has an obligation under the Rules of Professional Conduct to ensure payment of those services. However, absent these circumstances, an attorney is under no ethical obligation to assume the role of an insurer of third party claims. When an attorney accepts such a role at the direction of the attorney’s client or where such a role is imposed on an attorney as a result of representing the client, then the attorney is bound by the Rules of Professional Conduct to fulfill the responsibility as part of the lawyer’s duty to the client.

Regarding Question 1(b):
See above.

Regarding Question 1(c):
See above.

Regarding Question 1(d):

If an attorney is under a duty imposed by law, then the attorney is required to comply with the law. Where prior actions of the client or the circumstances of the representation place the attorney in the position of a surety, then the attorney’s conduct must comply with the law of surety. If a dispute should arise between the client and the third party, concerning a properly asserted claim, then the attorney should protect the funds and property until the dispute is settled or until ordered to distribute the funds or property. See Leon v. Martinez (citing DR 9-102, the predecessor to Rule 1.15(b); Unigard Ins. Co. v. Tremont (lawyer who ignored insurer’s statutory lien committed conversion); Rule(s) 1.2(d) & (e) and Rule 4.1.

In this regard the following Comments to Rule 1.15 provide guidance that has applicability here.

(2) Lawyers often receive funds from third parties from which the lawyer’s fee will be paid. If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The disputed portion of the funds should be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration.

(3) Third parties, such as a client’s creditors, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

Regarding Question 2:

In the circumstances stated above, an attorney may refuse to surrender the property to the client, but the attorney is not under an ethical obligation, under the Rules of Professional Conduct, to protect the interests of third parties. See comments at page 262 of the American Bar Association’s text, Annotated Model Rules of Professional Conduct, Second Edition (1992).

RICHARD H. UNDERWOOD
ETHICS COMMITTEE CHAIR
7/95

KBA E-375

Question: During the course of the representation, may a lawyer loan money to his or her client for financial assistance other than the expenses of litigation.

Answer: No.

References: Rule 1.8(e); Model Code DR 5-103(A) and EC 5-8; KBA E-51 (1971); selected state versions of ABA Rule 1.8(e); Charles Wolfram, Modern Legal Ethics (St. Paul: West, 1986); KBA v. Mills, 808 S.W.2d 804 1991.

OPINION

Advancing or lending money to the client for medical and living expenses, to be repaid from the proceeds of the litigation, may seem to some a decent and humanitarian thing to do. However, this was punishable at common law as criminal maintenance and champerty. These old crimes have been “defanged”, but the notion that the lawyer should not acquire an interest in the litigation was carried forward in DR 5-103(B) and now in Rule 1.8(e). See Wolfram at pp. 489-490, 507-509. “Both the Code and the Model Rules [and the Kentucky Rules] – implicitly but clearly – prohibit a lawyer from making any other financial assistance available to a client.” Id at 509. The answer to the question is still “no.” The Rule makes an exception for the “expenses of litigation.”

A few jurisdictions have amended Rule 1.8 to allow for some advances along these lines, which would be prohibited by the Model Rule and by Kentucky Rule 1.8(e). See, e.g., District of Columbia Rule 1.8(d)(2); Minnesota Rule 1.8(e)(3); Texas Rule 1.08(d). The thought behind these amendments is obvious. The argument is that poor clients may need help to sustain the burden of litigation, and litigation delay that otherwise favors their opponent. Critics contend that dropping the time-honored rule will invite bidding by lawyers for clients, and investment in the cause of action.

A majority of the Committee is persuaded that the Rule is, for the most part, well understood, and generally accepted. See KBA E-51 (1971). Any change should come by way of an amendment to Rule 1.8(e).

RICHARD H. UNDERWOOD
ETHICS COMMITTEE CHAIR
3/17/95