Legal Ethics Opinion No. 1379
Conflict of Interest–Multiple Clients: Attorney Persuading Finance Company to Loan Funds to Client; Client Executing Lender’s Documents in Attorney’s Office
You have directed the committee’s attention to the conclusions of prior Legal Ethics Opinion #ll55 indicating that it would not be improper for an attorney to persuade a finance company to loan funds to the attorney’s personal injury client, or to honor the finance company’s lien on the client’s settlement proceeds, so long as the attorney does not guarantee or co-sign the loan. Based upon those conclusions, you have requested that the committee opine as to the propriety of the attorney receiving the completed but unsigned loan documents from the finance company, having the client execute the documents in the attorney’s office, and then returning the documents to the finance company so long as the attorney undertakes no legal services for the finance company.
The committee is of the opinion that, since the attorney is providing no legal services or advice to the lender, no attorney-client relationship with the lender arises out of the circumstances you describe since the committee is of the opinion that the tasks you describe, when performed by the attorney for the lender, are merely those of a ministerial nature. The committee cautions that, although the attorney is providing no legal services to the lender, the circumstances of the transaction and the attorney’s performance of ministerial tasks for the lender may give rise to certain contractual obligations owed by the attorney to the finance company. Thus, the committee is of the opinion that it would not be improper for the attorney to supervise his client’s execution of the documents and then return the documents to the finance company.
November 30, 1990
Legal Ethics Opinion No. 1471
Zealous Representation–Trust Accounts: Disbursing Client’s Proceeds to Creditor of Client
You have presented a hypothetical situation wherein X Corp., a Virginia corporation, makes cash advances to plaintiffs involved in personal injury tort actions. As security for these advances, including accrued finance charges and related fees, X Corp. receives a security interest in and an assignment of proceeds of the claim under the terms of a Security Agreement and Assignment executed by the plaintiff prior to receiving any funds. Receipt of this Security Agreement and Assignment is acknowledged in writing by plaintiff’s attorney who has no pecuniary interest in X Corp. either as an investor or lender.
You further indicate that liens in excess of a stipulated amount are further perfected by filing a financing statement. The Credit Application and Credit Agreement, both of which are also signed by the plaintiff prior to receiving funds from X Corp., direct the attorney to pay X Corp. in full upon resolution of the claim. The Security Agreement and Assignment further contains a provision that, in the event of any dispute between plaintiff and X Corp., plaintiff’s attorney is to hold in escrow all funds due plaintiff, after satisfying statutory liens, pending resolution of the dispute.
Furthermore, you indicate that, although the plaintiff’s attorney does not guarantee the repayment of the loan, nor does he make any representation that the settlement proceeds will be sufficient to repay the loan, X Corp. does rely on the plaintiff’s authorization to his attorney to repay the loan, on the direction to hold disputed amounts in escrow, and on the attorney’s acknowledgment of that authorization.
Finally, in our telephone conversation of October l9, l992, you asked that the committee assume that there is no dispute as to the ownership of the funds or that any such dispute has been or will be resolved presumably by judicial means. The committee notes also that there is no indication that the cash advances received by plaintiff from X Corp. are to be used for expenses of litigation.
You have asked the committee to opine whether, under the facts of the inquiry, if the client does not deny the debt to X Corp. but nevertheless directs the attorney, after the settlement proceeds are received, not to pay off X Corp.’s loan but to pay the proceeds directly to the client, it is improper for the attorney to comply with his client’s direction, or must he honor the lien and the assignment of proceeds executed earlier by the client. Additionally, you have asked whether the response would differ if the client in good faith disputes the validity or amount of the debt to X Corp.
The appropriate and controlling disciplinary rules relative to your inquiry are DR 9-l02(B)(4), which states that a lawyer shall promptly pay or deliver to client or another as requested by such person the funds, securities, or other properties in possession of the lawyer which such person is entitled to receive; and DR 7-l02(A)(7) which prohibits a lawyer from counseling or assisting his client in conduct that the lawyer knows to be illegal or fraudulent.
The committee has previously opined that it is not improper for an attorney to persuade a finance company to agree to loan funds to the lawyer’s personal injury clients who are unable to obtain bank loans, where the loan would become due upon resolution of the case either by settlement or trial and where the attorney would not guarantee, cosign, or be responsible for the loan, but would honor a lien on the case. LEO #ll55. The committee has also opined that, while it may not be improper per se for an attorney to enter into a contract with a health care provider for the purpose of authorizing the attorney to pay the provider’s fee from the client’s recovery, the more effective solution would be to have the client execute a release or consent form authorizing the attorney to pay or deliver the fees owed to the provider. LEO #ll82. Furthermore, Legal Ethics Opinion #421, rendered on August l4, l98l, found that, where a personal injury client has authorized the attorney to pay a treating physician and hospital from settlement proceeds, it is not improper for the attorney to notify the physician and hospital of the receipt of such proceeds. Finally, the committee has opined that “when an attorney assumes the responsibility of acting as a fiduciary and violates his or her duty in a manner that would justify disciplinary action had the relationship been that of attorney/client, the attorney may be properly disciplined pursuant to the Code of Professional Responsibility”. LEO #l325.
In the facts you present, the committee is of the view that, by virtue of having acknowledged receipt of the Security Agreement and Assignment executed by the personal injury client, upon which the Credit Application and Credit Agreement are based, the attorney has accepted the fiduciary responsibility of disbursing settlement proceeds to satisfy the loan. The committee is of the further opinion that, where the client subsequently directs the attorney, after settlement proceeds are received, not to pay off the loan but to pay the proceeds directly to the client, it would be improper for the attorney to unilaterally arbitrate such a money dispute between lender and borrower/personal injury client. In order to protect his client’s interests, however, the committee believes it is incumbent upon the attorney to counsel his client as to liabilities which may be incurred as a result of the client’s failure to satisfy the Agreement. See Delaware Ethics Op. l98l-3 (April 2l, l98l). Furthermore, although it is beyond the committee’s purview to opine as to contractual provisions such as the Security Agreement’s requirement that all funds due plaintiff be held in escrow by the attorney, the committee is of the opinion that it would not be improper for the attorney to disburse the undisputed portion of the proceeds to the borrower/personal injury client, while either holding in escrow any disputed sums, i.e., those owed to X Corp., or interpleading such sums to the appropriate court for determination of the entitlement as articulated in DR 9-l02(B)(4).
It is the committee’s view that it is irrelevant to the propriety of the attorney’s actions whether the client does not deny the debt or has a good faith dispute as to the validity or amount of the debt to X Corp.
In addition, the committee opines that should the attorney’s release of the settlement proceeds to the client, irrespective of the attorney’s recognition of the outstanding lien held by X Corp., amount to his knowingly assisting the client in fraud, such conduct would be improper and violative of DR 7-l02(A)(7). See Cleveland Bar Ass’n Op. 87-3 (March 29, l988).
August 24, 1992
Legal Ethics Opinion No. 1441
Acquiring an Interest in Client’s Matter–Conflict of Interest: Attorney Making Loans to Finance Company Which Makes Loans to Attorney’s Personal Injury Clients
You have presented a hypothetical situation in which an attorney (A), who represents personal injury plaintiffs, occasionally refers clients to Corporation X (X) which is a Virginia corporation engaged in extending credit to injured persons while they are awaiting resolution of their tort claims to recover damages for their injuries. The credit line is evidenced by a personal note from the plaintiff secured by an assignment of the proceeds from the claim and is due and payable in full at the time of settlement. The plaintiff’s attorney does not guarantee, nor obligate himself or his firm in any way, for repayment of the credit extended to his client, but he is obligated, however, to acknowledge the assignment and disburse to X the funds to repay the note from the proceeds of the settlement. You have additionally indicated that plaintiff’s attorney may be asked to oversee the execution by his client of the credit documents from X. Attorney A also furnishes information to X relative to the claim, with his client’s authorization, which information later becomes the basis for the credit determination. Attorney A receives no fee or other compensation from X for these services, nor will he either provide any legal advice or services to X or have any input into X’s decision with regard to the establishment of the credit limit.
A desires to lend money to X and you have indicated that no portion of those funds being loaned to X by A will be earmarked for A’s clients, nor will A have any influence upon X’s decision as to how any of the funds are utilized. Furthermore, none of X’s receivables from A’s clients will be assigned to A as security for his loan nor will A receive any corporate stock or other form of ownership interest in X. You indicate that the only benefit from the loan which A will receive is the payment of interest which will be equal to that which X would pay to any other lender under similar circumstances. Finally, A will not be a member of X’s board of directors or advisory board. Finally, you indicate that all such exclusions from any direct or indirect management, control, or influence over the operations and business decisions of X will also extend to A’s family, other relatives, and members and employees of his firm.
You have asked the committee to opine whether, under the facts of the inquiry, it would be proper for A to make such a loan to X and whether such a loan to X made by A’s spouse or A’s employees would be proper as to A.
The appropriate and controlling Disciplinary Rules related to your inquiry are DR 5-l03(A) which mandates that a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client; DR 5-103(B), which provides that a lawyer representing a client in contemplated or pending litigation shall not advance or guarantee financial assistance to his client, except that the lawyer may advance or guarantee the expenses of litigation, provided the client remains ultimately liable for such expenses; and DR 5-l0l(A), which precludes a lawyer from accepting employment, absent the consent of his client after full disclosure, if the exercise of his professional judgment on behalf of his client may be affected by his own financial, business, property, or personal interests.
The committee has previously opined that an attorney may persuade a finance company to loan funds to the attorney’s personal injury client and may honor the finance company’s lien on the client’s settlement proceeds, as long as the attorney did not guarantee or cosign the loan. See LEO #ll55. The committee has also opined that where an attorney has persuaded a finance company to loan funds to the attorney’s personal injury client, it is not improper for the attorney to receive completed but unsigned loan documents, supervise his client’s execution of the documents, and then return the documents to the finance company. See LEO #1379.
The committee believes that A’s loan to X is thus a means by which A has provided indirectly what he may not provide directly, i.e., financial assistance to his client in connection with litigation. Furthermore, the committee views such an arrangement as a means by which A has also acquired indirectly what he may not acquire directly, i.e., an interest in the client’s litigation matter. Thus, the committee is of the opinion that, despite the controls you propose, it would be improper and violative of Disciplinary Rules 5-l03(A) and (B) and 5-l0l(A) for A, his spouse or employee, to make a loan to X Corporation unless X agrees to make no loans to A’s clients during A’s representations of those individuals or entities.
January 6, 1992
Virginia State Bar
LEO: Acquiring An Interest in the Litigation – Commingling – Trust Accounts: Advancing Funds from Settlement Check Prior to Clearing of Check.
July 25, 1989
You have advised that your firm has been adhering to the disciplinary rules and prior legal ethics opinions which require that identifiable funds must be irrevocably credited to a trust account before making disbursements of insurance company personal injury settlement proceeds. You have indicated that many personal injury clients do not understand the need to adhere to the seven or ten day requisite period before disbursing to them from “cleared” funds after they have already waited typically nine to twelve months to obtain a settlement of their case. In addition, you believe that it would be very unlikely for an insurance company check to “bounce.”
You wish to know whether establishing a line of credit with a commercial bank would provide “identifiable funds, irrevocably credited,” to the firm’s trust account in the event a check from an insurance company should be returned for insufficient funds. You further believe that this arrangement would not result in the disbursement of funds belonging to other clients.
You have indicated that at the time of such credit, the bank would notify the firm that the line of credit has been utilized and that a loan in the amount credited is then due and payable by the law firm. For checks in the amount of $10,000.00 or more, the firm would only utilize this method for those checks issued by insurance companies rated A+ by A.M. Best & Company. In addition, the firm would make only partial payments to the clients pending clearance of the insurance company’s check where larger settlements are involved.
The appropriate and controlling rules relative to your inquiry are DR:5-103(A),(B) and DR:9-102(A). Disciplinary Rule 5-103(A) and (B) provide that a lawyer shall not acquire a proprietary interest in the client’s cause of action or subject matter of the litigation, nor shall a lawyer advance or guarantee financial assistance to his client except that the expenses of litigation, including court costs, investigations, medical examinations, and costs of obtaining and presenting evidence may be advanced or guaranteed by the lawyer provided the client remains ultimately liable for such expenses.
Disciplinary Rule 9-102(A) provides that all funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein, except that funds to pay bank charges and funds belonging in part to the client and in part presently or potentially to the lawyer or law firm may be deposited therein (emphasis added). The committee believes that the funds provided by the line of credit are, in fact, the law firm’s or attorney’s funds since it would be the law firm or attorney who would become the obligor on the note payable to the bank for such credit. Thus, the result of crediting attorney’s funds to the clients’ trust account is commingling and is violative of DR:90-102(A).
The Committee would direct your attention to LE Op. 1219 in which the Committee stated that the clear intention of DR:5-103(B) is to preclude an attorney from acquiring an interest in the outcome of the litigation since holding an interest would create a personal conflict and would compromise his undivided loyalty to the client in order to protect his own financial interests. The Committee believes that the terms of the line of credit whereby the law firm would ultimately become responsible for any loans as a result of advancing or disbursing funds to a client which have not “cleared” is tantamount to acquiring an interest in the out come of the litigation and could also constitute a breach of the attorney’s fiduciary relationship . The Committee stated in LE Op. 183:
A lawyer who receives funds not his own becomes a fiduciary for the person or others entitled. A lawyer owes a duty to all who have entrusted him with funds to preserve the same in such manner that it can, at all times, be identified and recovered. The public trust and faith in the profession impose a moral responsibility on every lawyer to so conduct the management of funds not his own that not only is all question of impropriety removed, but that there can be no basis for suspicion of misuse of client’s funds.
The Committee believed that the proposed arrangement is violative of DR:5-103 in that the financial assistance contemplated under the facts of the inquiry would not come under the definition of “expenses” which a lawyer may advance or guarantee as prescribed in DR:5-103(B). In addition, the potential for the law firm’s acquiring a personal interest in the outcome of the client’s litigation is so overwhelming under the terms of the line of credit that it may be violative of DR:5-103(A).
Finally, it is the view of the Committee that providing a line of credit to the clients’ trust account when an insurance company’s settlement check has been returned for insufficient funds would be improper and violative of the Code of Professional Responsibility since it is a blatant form of commingling attorney’s funds with that of a client’s. Furthermore, the proposed line of credit arrangement with a bank is unethical if, in doing so, it if the attorney’s or law firm’s purpose to circumvent a disciplinary rule precluding disbursement on uncollected funds. (see DR:1-102(A)(2)).
Committee Opinion July 25, 1989
Virginia State Bar
LEO: Acquiring an Interest in Litigation – LE op. 1155
Acquiring an Interest in Litigation – Personal Injury Representation: Assisting Clients to Obtain Loan From Finance Company
November 15, 1988
You advise that you have represented personal injury clients for many years and are confronted 90 percent of the time with an innocent victim of an automobile accident who has incurred unanticipated medical bills and injuries which have put him or her out of work. In almost half of these cases, your clients do not have the benefit of health insurance or disability insurance. You are also confronted daily with requests for a loan from your clients in order to obtain proper medial treatment and medication so they may continue to pay their mortgages as well as provide food and other necessities for their families. On numerous occasion, you have referred your clients to banks to obtain loans; however, due to the loss of their jobs as a result of their injuries, they are poor credit risks and it is virtually impossible for them to obtain loans. There being no other alternative, you attempt to obtain liens against your client’s case to provide them credit which, inmost cases, the landlords and hospitals simply reject.
You have asked the Committee to consider the propriety of your persuading a finance company to agree to loan funds ranging from $1,000 to $10,000 to personal injury clients who cannot get bank loans. You have proposed that the company would investigate the case to confirm the liability, damages, and insurance coverage with the client’s written consent. If the investigation revealed facts or evidence pertinent to the case which the client’s attorney did not already know, said facts would be conveyed to that attorney at no expense. If the loan is approved, the loan would become due upon resolution of the case either by settlement or trial and the borrower would be charged at a lawful interest, similar to that used by major credit card companies. Upon obtaining a favorable settlement or verdict the client would direct the attorney involved to repay the loan out of the case proceeds. In no way would the attorney guarantee, cosign, or be responsible for the loan, except that he would honor a lien on the case.
The Committee believes DR.5-103 (B) is the appropriate and controlling rule relative to your inquiry, and it provides as follows:
While representing a client in connection with contemplated or pending litigation a lawyer shall not advance or guarantee financial assistance to his client, except that the lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses ( see also LEO. 34).
The Committee would also direct your attention to Professional Guidance Opinion no.86-36 from the Philadelphia Bar Association, which states that a lawyer may not act as a guarantor for a bank loan for his client; however, he may attempt to convince the bank to grant the loan and to take a security interest in the client’s personal injury case.
Under the facts as you have presented them in you inquiry, the Committee opines that there would not be a violation of Disciplinary Rule 5-103(B) as long as the attorney does not guarantee or cosign for the loan.
Committee Opinions November 15, 1988
Virginia State Bar
LEO: Attorney/Client Relationship: Engaging LE Op. 1219
Attorney/Client Relationship: Engaging in Arrangement of Champerty and Maintenance;Multiple Representation- Conflict of Interest: Attorney Engaging in Making A Loan to One Client Through Another Client/Lender.
April 3, 1989
Your firm has advised that it has a wealthy individual client who is willing to make small loans to your personal injury clients for the purpose of assisting those personal injury clients with their living expenses during the pendency of their litigation. The prospective lender-client would make such loans in return for 15% interest and a promissory note in which the personal injury client would agree to repay the loan contingent upon his or her receipt of settlement proceeds. Should there not be a settlement, the lender-client would bear the loss. Your firm would obtain the promissory note from the borrower-client for the benefit of the lender-client, and the lender-client would establish a separate bank account in his own name while designating your firm to draw upon it for the purpose of making the loans to the borrower-client(s). You further indicated that the lender-client would place approximately $10,000 into the account with the typical loan being about $200; thus a possible total of some 50 such loans could be made. You specify that the firm would not reimburse the lender-client for any losses borne by him as a result of the borrow-client not receiving a settlement.
Your firm has inquired as to the feasibility of such an arrangement under the requirements of the Virginia Code of Professional Responsibility.
It is well settled, and you have correctly identified the prohibition under DR:5-103(B) against a lawyer’s advancing or guaranteeing financial assistance of his client for expenses other than those directly related to the expenses of litigation. The same rule permits the advancement of only those specific litigation expenses provided the client remains ultimately liable for such expenses. The clear intent of DR:5-103(B) is to preclude the lawyer’s acquiring an interest in the outcome of the litigation, since holding such an interest would create a personal conflict in the lawyer and compromise his undivided loyalty to his client in order to protect the lawyer’s own financial interest in the litigation. Furthermore, since the lawyer is precluded from providing such assistance to his client, his securing of another of his client to provide that assistance would be improper under DR:1-102(A)(2) if his purpose in doing so was to circumvent DR:5-103(B).
In the circumstances you have described, the lawyer’s undivided loyalty to his individual lender-client and to his individual borrower-client(s) would be great diluted, most particularly since the lender-client’s receipt of repayment is expressly contingent on the outcome of the suit. Under DR:5-105(B), a lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be likely to be adversely affected by his representation of another client, unless permitted by DR:5-105(C). under those permissive provisions, the lawyer may continue multiple representation if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each. It is the opinions of the Committee, assuming that your firm is representing the lender-client in his lender capacity, that the arrangement you described clearly does not allow for obviously adequate representation of both the lender-client and the borrower-clients(s). Thus, the arrangement would be improper and violate DR:5-105 (B) and (C).
Finally, since the arrangement provides the repayment of the principal to the lender-client only on the contingency of the borrower-client receiving settlement proceeds, the Committee is of the opinion that particular attention must be paid to any common law or statutory prohibitions against champerty and maintenance. The determination of whether or not the arrangement you describe would be champertous or provide maintenance to the litigant is a matter of law and thus beyond the purview of the Committee. Should it be violative of those provisions, however, the Committee recognizes that your firm’s role in creating such arrangement would be violate of DR:7-102(A)(7), which prohibits a lawyer from counseling or assisting his client in conduct that the lawyer knows to be illegal or fraudulent.
Committee opinion April 3, 1999
Virginia State Bar
LEO: Acquiring AN Interest in Client’s Matter LE Op. 1269
Acquiring AN Interest in Client’s Matter – Business Transactions Between Attorney and Client – Personal Interest: Attorney Making Loans to Client.
October 3, 1989
You have advised that you represent an injured client whose medical bills have been paid by his insurance carrier, but who has not been able to earn significant income to meet his living expenses. You further indicate that the client has no other source of income pending disposition on his claim. Your client will probably lose an additional six weeks of income during surgery and recuperation. You indicate that you have arranged for a third party to loan your client up to $7,000 at 12% interest, under the terms of which loan the lender will be designated as a beneficiary under your client’s life insurance policy and the client agreed to have any remaining outstanding debt act as a lien on any recovery made on the personal injury matter. Finally, you advise that the loan will not be contingent on any recovery but will remain the personal obligation of the client regardless of the outcome of the cause of action.
You have inquired as to the propriety of the terms of the loan as outlined and have further inquired as to the propriety of you loaning a client money pursuant to the same terms.
With regard to your first question, the Committee believes that prior LE Op. 1155 is dispositive of the issue.
With regard to your second question, the appropriate and controlling disciplinary rules are DR:5-103(A) and DR:5-104(A). Under DR:5-103(A), a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client. A lawyer may, however, acquire a lien granted by law to secure his fee or expenses; and may contract with the client for a reasonable contingent fee in a civil case. Under Dr:5-104(A), a lawyer may not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to (continue to ) exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure and provided that the transaction is not unconscionable, unfair or inequitable when made.
The Committee is of the opinion that loans made to clients for assistance with living expenses during the course of litigation constitute the lawyer’s entering into employment and a business transaction that would allow his professional judgment to be attached by his own financial interest; thus such conduct would be improper and violative of both DR:5-103(A) and DR:104(A). The rule against a lawyer acquiring an interest in a client’s litigation is based on concerns about compromised loyalty to the client in pursuing a result which should be in only the client’s best interests. The lawyer’s acquisition of a personal interest in the outcome of the litigation may result in the lawyer’s independent judgment on behalf of his client becoming clouded by his interest in recouping his own funds.
In addition to the prohibition against a lawyer acquiring a proprietary interest in the litigation through the making of a loan to a client, the Committee is of the opinion that such a loan would create an improper adverse relationship between the lawyer as creditor and the client as debtor. The client’s consent as described in DR:5-104(A), which, in other circumstances, might cure the conflict, would not suffice to alleviate the Impropriety created by the violation of DR:5-103(A).
Committee Opinion October 3, 1989