By letter dated March 20, 1987, you asked the Professional Guidance Committee to reconsider Professional Guidance Opinion 86-8. That opinion concluded that it would be a violation of DR5-l03 for an attorney to advance funds to his client after a case had been settled. You have asked us to reconsider that ruling in light of your statement that “the established legal doctrine that once a case is settled, the litigation is terminated and the subject matter of the litigation is replaced in toto by the settlement contract.”
The Committee has reviewed your letter and the case law which is cited. We compliment you on the thoroughness of your presentation. Nevertheless, after discussion of the issue, the Committee voted not to revise Guidance Opinion 86-8 and to reaffirm its position within that opinion.
Disciplinary Rule 5-103(A) prohibits a lawyer from acquiring a proprietary interest in the cause of action or subject matter of litigation which he is undertaking on his client’s behalf. Disciplinary Rule 5-103(B) prohibits a lawyer from providing any financial assistance to his or her client, other than advancement of “expenses of litigation.” These disciplinary rules have been followed, in large part, in the Model Rules of Professional Conduct. See Rules 1.8(e) and 1.8(j).
The Committee noted that both the Code of Professional Responsibility and the Model Rules of Professional Conduct refer to “pending” litigation. In that regard, the Committee concluded that so long as litigation is “pending,” an attorney cannot advance funds in anticipation of expected settlement proceeds.
In your letter you state, based upon case law authority, that once a case is “settled,” it replaces the underlying litigation. That position assumes that a case is, in fact, “settled” because a settlement agreement is reached. However, as I am sure you can imagine, there are many reasons why a settlement agreement can be voided (e.g., lack of authority, etc.) and the parties directed to continue with the underlying litigation Accordingly, the Committee was unwilling to assume that litigation was no longer “pending” simply because a settlement agreement was reached. However, the Committee was of the view that once an order to settle, discontinue and end, or other such order is entered, the action is no longer “pending.” At that time, monies may be advanced to the client, so long as the procedure is ethically permissible.
The ABA/BNA Lawyers’ Manual on Professional Conduct recently issued a practice guide dealing with the issue on financial assistance to clients. It is a good overview of the issue [fn1].
The inquiry is whether it is permissible under the Pennsylvania Rules of Professional Conduct (the “Rules”) for an attorney to provide substantive information about a personal injury client’s claim to a third-party lender which is considering providing funds to the client during the pendency of the personal injury case. Repayment of the funds would be contingent upon the successful resolution of the client’s case, i.e., the loan would be repaid only if the client secured a recovery. The lender would compensate the lawyer for the time spent in providing the information about the strengths and weaknesses of the client’s case (and periodic updates) on an hourly basis, with a maximum aggregate fee of $250. As indicated below, assuming full disclosure to the client of the advantages and disadvantages of this transaction to the client including, in particular, the risk of waiver of the attorney-client privilege (and the potential ramifications thereof), as well as the attorney’s financial interest in the additional fee from the lender, the contemplated transaction does not violate the current Rules.
As an initial matter, the Committee directs the inquirer’s attention to Rule 1.6 which addresses issues relating to confidentiality of client information. This Rule, and the related concerns about the attorney-client privilege, presents the most serious ethical concern prompted by this inquiry. The importance of consultation with the client about the possible risk of loss of not only client confidentiality but also of the attorney-client privilege as a result of supplying assessment-type information to the potential lender cannot be underestimated. The inquirer is well advised to document carefully the client’s assent to the disclosure and, even then, to make it clear to the lender that the disclosures will be restricted as much as possible–perhaps even limited to only that information which would be discoverable without intrusion upon the privilege.
Rule 1.7(b), which prohibits a lawyer from representing a client if that representation may be materially limited by another client’s interests (i.e., if the lender is considered to be a client of the lawyer’s for this limited purpose) or the lawyer’s own interests, requires the attorney to disclose to the client any benefit that he/she may receive from the contemplated transaction. Thus, if the attorney is to receive a fee from the lender (however modest), this is a benefit to the attorney that must be adequately disclosed to the client. Additionally if on a regular basis, the attorney provides legal services or conducts business with the loan company, this fact should be disclosed pursuant to Rules 1.7 and 1.8. To the extent this arrangement may be considered to be one involving the lawyer’s multiple representation of the personal injury client and the lender, both clients must be fully informed of the scope of the lawyer’s responsibilities to the other client, as well as how they may conflict with each other (i.e., the impact on the personal injury client’s right to confidentiality), and waivers of the potential conflicts should be secured.
A lawyer shall not use information relating to representation(Rule 1.8(b) ( of a client to the disadvantage of the client unless the client consents after ) requires that the driving force and apparent result of this(consultation transaction be to place the client in an arguably better position than he/she would be without the loan arrangement for which the lawyer’s compensated input is a requisite. Any advantage to the attorney from such an arrangement must be secondary, and fully disclosed.
Rule 1.8 (f):
If the lender is not considered to be a client of the attorney for a limited purpose (thus triggering the Rule 1.7 analysis above), Rule 1.8(f) would require full disclosure to and knowledgeable consent of the client in order for the lender to pay the attorney for the services rendered in providing the loan to the client.
In view of the fact that the lawyer will be supplying information that a lender intends to use in evaluating whether to make a loan to the lawyer’s client, the lawyer’s liability risks to both the lender and the borrower are unmistakable. From an ethical standpoint, the Committee notes the lawyer’s Rule 4.1 obligations to refrain from making false statements of fact or law.
The Committee also notes, in conjunction with Rule 1.8(f), the possible role of Rule 5.4(c) and the importance of a lawyer maintaining his or her professional independence in representing the personal injury client. In closing, the Committee brings the inquirer’s attention to its recently issued Opinion 99-4 which addresses a somewhat similar tri-partite financial arrangement undertaken in connection with a client’s pending personal injury claim.
The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.