Ethics Advisory Opinion 90-40
Facts:
All facts provided with this inquiry are contained in the text of the questions.
Questions:
Summary:
Opinion:
Question 1. This question implies a quid pro quo with a physician referring patients with potential legal claims to an attorney who in turn guarantees in all instances where there is recovery and the client agrees to pay outstanding medical bills.
Rule 7.2(c) is explicit: A lawyer shall not give anything of value to a person for recommending the lawyer’s services,
Assurances of assistance in the collection of outstanding medical bills are questionably of value and therefore this arrangement is proscribed by the Rules. See also In Re Bloom, 217 S.E. 2d 143 (1975).
However, it is permissible for a lawyer on behalf of a client to assure a physician that their bills will be paid in order to obtain continued treatment for the client or reports necessary to pursue the client’s legal claims. The lawyers arrangement with the client should provide for reimbursement by the client for these costs. See ABA Informal Ethics Opinion 664 (1963) and 1084 (1969). The arrangement must be in the interest of an existing client rather than as a reward for soliciting business on behalf of an attorney. Question 2. The second question presented by the inquiry asks whether an attorney can escrow sales proceeds for a client on a regular basis. Nothing in the rules forbids this practice provided the attorney complies with Rule 1.15(b) which sets forth the conditions for an attorney holding funds for a client or third party. These include promptly notifying the client or third party of the deposit of such funds, providing a full accounting of the funds for the client or third party on request and promptly delivering funds to which a client or third party is entitled.
The third requirement of prompt delivery has the potential for placing the attorney in a position of conflict with his client should a dispute arise between the client and a customer about the disposition of funds. The commentary at Rule 1.15 discusses this situation:
“Third parties, such as client’s creditors, may have just claims against funds or other property in a lawyer custody. A lawyer may have a duty 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 may not unilaterally assume to arbitrate a dispute between the client and third party.” These considerations and the possible difficulties should be discussed thoroughly with the client prior to undertaking such an arrangement. Furthermore, the client should be informed that if the attorney became aware that the client was not escrowing all funds with him after such assertions were made, Rule 4.1 could require the attorney to unilaterally inform the client’s customers of this fact. While the rules do not prohibit such an arrangement, it would be fraught with difficulties if done on a wholesale basis and should only be undertaken after careful considerations by the attorney and client of the responsibilities and potential costs involved.
Ethics Advisory Opinion South Carolina
Ethics Advisory Opinions
Upon the request of a member of the South Carolina Bar, the Ethics Advisory Committee has rendered this opinion on the ethical propriety of the inquirer’s contemplated conduct. This Committee has no disciplinary authority. Lawyer discipline in South Carolina is administered solely by the South Carolina Supreme Court through its Commission on Lawyer Conduct.
Ethics Advisory Opinion 91-31
Facts:
Clients has sought Lawyer’s assistance in settling insurance claims arising out of an automobile accident. Prior to settlement, Client requires transportation, but cannot afford a rental car.
Question:
May the Lawyer advance money to Client prior to settlement of the insurance claim to pay for a rental car.
Summary:
Lawyer may not advance money to Client to pay the cost of a rental car prior to settlement since that is not a cost of litigation.
Opinion:
Whenever a lawyer advances money to a client during or prior to contemplated litigation, the lawyer acquires a proprietary interest in the matter, since repayment likely depends upon a successful resolution of the matter. See Ethical Consideration 5-8 under former S.C. Code of Prof. Resp. (repealed Sept. 1, 1990). Rule 1.8 (j) is general prohibition on a lawyer acquiring such proprietary interest. Rule 1.8 (e) more specifically prohibits a lawyer from providing any financial assistance to a client in connection with pending or contemplated litigation, with one specific, limited exception.
It may reasonably be assumed that a lawyer hired to settle an insurance claim in an accident case is representing the client in connection with at least contemplated litigation. The question here, then, is whether advances of the type described are permitted within the exception of 1.8 (e). Rule 1.8 (e) permits a lawyer to advance (or pay if the client is indigent) only “court costs and expenses of litigation.” This narrow exception recognizes that without an advance of costs of litigation clients might be unable to seek legal redress of injuries. The exception permits such advances as are needed to avoid that result.
The Rule makes no mention of permitting a lawyer to advance other expenses such as living expenses or transportation expenses. In the absence of any express exception for rental car or similar costs, we believe that any such advance would be improper under the general prohibition of Rule 1.8 (e). Prior Disciplinary Rule 5-103 under the old Code of Professional Responsibility did differ significantly from Rule 1.8 (e) with regard to the types of costs and expenses that could be advanced.1 Applying DR 5-103, the South Carolina Supreme Court indicated in 1978 that loans to clients were impermissible unless “confined to a permissible guarantee of the expenses of litigation including such items as court costs and expenses of preparing a case for trial.”In re Reaves, 250 S.E.2d 329, 330 (1978). Costs of a rental car would not appear to be of the type contemplated by the Court as permissible under old DR 5-103, and we find no language in the current Rules to suggest a different result following their adoption.
1 DR 5-103 provided in relevant part 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 a 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.
The main difference between DR 5-103 (B) and Rule 1.8 (e) is that Rule 1.8 (e) permits costs to be advanced on a contingent basis.
Ethics Advisory Opinion South Carolina
Ethics Advisory Opinion 92-06
Facts:
An attorney desires to organize an independent corporation to make consumer loans. Although loans by the proposed corporation would be available to the general public, the attorney views the corporation’s primary market as plaintiffs in pending personal injury actions who are in need of relatively short term financial assistance and are unable to obtain such assistance from traditional sources. The corporation would not make loans to the attorney’s own clients.
Creditworthiness would be determined, at least in part, upon an evaluation of the borrower’s potential recovery. The loan would be secured in whole of in part by a security interest in or assignment of a portion of the borrower’s recovery in the pending legal action.
Referrals would be sought from plaintiff’s attorneys who may be barred from lending money to their own clients because of Rule 1.8 (a) of the Rules of Professional Conduct. As a part of the loan application process, the prospective borrower would execute a written consent authorizing disclosure by his attorney of information concerning his case. This information would be used by the corporation to evaluate the security offered for the loan.
Questions:
Summary:
Since the attorneys have no financial interest in the cases at issue of the borrowers, Rule 1.8 and 7.2 have not been violated. Assuming the clients consent and do not withdraw consent at the time the personal injury case is settled, the attorneys may honor the assignments to the loan company, and may refer clients to the lender.
There would be no violation of Rules 1.6 or 2.3 because disclosure of client information would be made only after consent of the client.
Opinion:
In Advisory Opinion 91-15, a situation was approved wherein attorneys assisted in the establishment of a loan business, to which they then referred their own personal injury clients. Opinion 91-15 allowed such conduct since the attorney had no financial interest in the loan company. In the present case, the attorney would retain an interest in the loan company, but the company would not make loans to the attorney’s own clients. This situation does not violate either Rules 1.8 or 7.2, since the attorney’s own clients are not involved. To rule otherwise would essentially question the right of an attorney to own or operate any financial institution, where no clients of the attorney are borrowers.
The market for the lender would consist primarily of persons who may not otherwise be creditworthy absent their pending personal injury cases. Pawn shops and finance companies are examples of other lenders whose market consists of normally non-creditworthy persons, and lawyers are not forbidden to own pan shops and finance companies.
In order to analyze the worth of the borrower’s only substantial asset, the lender will rely in part of information supplied by the borrowers’ attorneys about the merits of the pending cases. Most lending institutions rely on third parties to check creditworthiness of a borrower, the only difference here is the nature of the asset, not the idea of disclosing data to third parties.
Rule 1.6(a) allows a lawyer to reveal information about a client if the client consents after consultation. Rule 2.3 allows such a disclosure if the client consents, and the disclosure does not otherwise conflict with the lawyer’s representation.
If the client withdraws his consent, the lawyer would be prohibited form honoring the assignment at the time the funds are disbursed without complying with Advisory Opinion 91-10.
Ethics Advisory Opinion South Carolina
Ethics Advisory Opinion 94-04
Facts:
A number of attorneys in South Carolina have received communications from a company that is engaged in the business of financing litigation by purchasing or taking assignments of personal injury causes of action. The communications include a “green card” that provides the name, address, and telephone number of the financing entity. The card states: “We will purchase a percentage of the expected personal injury action (prior to the resolution of the case).” The card also states: “When Clients Ask You For A Cash Advance Give Them This Card.” The Committee has also received copies of two form documents that the financing entity plans to use to carry out the proposed transaction. One document is entitled “Assignment and Sale.” Under this document in exchange for an agreed-upon payment, the client transfers to the financing entity a specified percentage of the gross settlement amount of the client’s personal injury action. The document provides that the assignment and sale may not be canceled without the express written consent of the financing entity. The second document is a letter from the client to the attorney informing the attorney of the sale/assignment and directing the attorney to pay a designated percentage of the gross settlement amount to the financing entity within 10 days after the attorney receives settlement funds.
The Committee has been asked whether an attorney may ethically participate in such a financing transaction.
Summary:
The Committee does not express opinions on questions of law. An attorney considering participating in such a financing transaction, however, should review applicable statutory provisions and common law principles to determine whether such financing transactions are illegal under South Carolina law. In particular, the Committee notes the possible applicability of S.C. Code Ann. 16-17-10, prohibiting various practices that amount to barratry. If the transaction is illegal under South Carolina law, an attorney may not ethically participate. S.C. Rule of Prof. Cond. 1.2(d), 8.4(b).
Assuming that the transaction is not illegal under South Carolina law, an attorney may ethically counsel a client of the availability of opportunities to finance litigation when the client asks for such information or when the attorney in his professional judgment concludes that a client’s legal and economic position warrants advice about such an opportunity. An attorney should render candid advice to the client about the advantages and disadvantages of the proposed transaction. S.C. Rule of Prof. Conduct 2.1.
If a client decides to proceed with a financing transaction, the attorney should inform both the client and the financing entity in writing that the client retains the right to control all aspects of the litigation and that the attorney will maintain confidentiality of client communications. Cf. S.C. Rule of Prof.
Cond. 1.8(f), 5.4(c).
Opinion:
The Committee does not issue opinions on questions of law. An attorney who is considering participating in such a transaction, however, should review applicable statutory and common law to determine whether the proposed transaction is illegal under South Carolina. If the transaction is illegal, an attorney may not ethically participate in the transaction. S.C.
Rule of Prof. Cond. 1.2(d), 8.4(b). In particular, the Committee notes the possible applicability of the South Carolina barratry statute, S.C. Code Ann. 16-17-10, which provides as follows:
Any person who shall:
(1) Willfully solicit or incite another to bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) thereby seeks to obtain employment for himself or for another to prosecute or defend such action, (b) has no direct and substantial interest in the relief thereby sought, (c) does so with intent to distress or harass any party to such action, (d) directly or indirectly pays or promises to pay any money or other thing of value to, or the obligations of, any party to such an action or (e) directly or indirectly pays or promises to pay any money or other thing of value to any other person to bring about the prosecution or maintenance of such an action; or (2) Willfully bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) has no direct or substantial interest in the relief thereby sought, (b) thereby seeks to defraud or mislead the court, (c) brings such action with intent to distress or harass any party thereto or (d) directly or indirectly receives any money or other thing of value to induce the bringing of such action; shall be guilty of the crime of barratry. The crime of barratry shall be punishable by a fine of not more than five thousand dollars or by imprisonment of not more than two years, or both.
The Committee is also not passing on whether the financing transaction involves a “security” under either federal or state securities laws.
Assuming that the transaction is not illegal under South Carolina law, may a lawyer ethically participate in such a transaction? The Committee assumes that the attorney representing the client does not also have a financial interest in the financing entity. If so, the attorney could not ethically participate in the transaction because the attorney would be violating Rule 1.8(e) (providing financial assistance to a client other than litigation costs) and Rule 1.8(j) (acquiring a proprietary interest in the client’s cause of action). See S. C.
Bar Advisory Opinions 92-06 (lawyer may have financial interest in business organized to make consumer loans so long as business does not make loans to lawyer’s clients) and 91-15 (lawyer may participate in organization of loan business to which they referred their clients when lawyers did not have financial interest in business). The Committee also assumes that the attorney is not receiving a fee from the financing entity. If so, the attorney could not participate in the transaction without complying with the requirements of Rules 1.8(a) and 1.7(b). Cf. S.C. Bar Advisory Opinion 92-03 (permissible for lawyer to act as agent for title insurance company and receive commission provided lawyer complies with Rules 1.8(a) and 1.7(b)).
Rule 2.1, dealing with the lawyer’s role as advisor, provides as follows:
In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the clients situation.
The Committee concludes that under this rule a lawyer may appropriately advise a client of the opportunity to finance the client’s personal injury cause of action when the client asks about such a possibility, or when the attorney in his professional judgment concludes that the client’s situation warrants such advice. See also Rules 1.2(a) (lawyer shall consult with client regarding means used in handling case); Rule 1.4(b) (lawyer shall explain matter to client so that client can make informed decisions).
As Rule 2.1 requires, in advising a client about financing options, the attorney should fully advise the client about the advantages and disadvantages of the transaction that the client is considering. It appears to the Committee that the principal advantage of the transaction is that the client obtains immediate cash rather than having to wait until the conclusion of the personal injury action to receive funds. Some clients may want or even have a desperate need for immediate funds. The transaction, however, may have a number of disadvantages that the attorney should bring to the client’s attention. These include the following: The amount that the financing entity is offering to the client may be too low based on the attorney’s evaluation of the case. If the client assigns a percentage of the gross settlement proceeds to the financing entity, the client may regret the transaction if the ultimate settlement or judgment turns out to be more favorable than client anticipates. Further, if the settlement or judgment of the client’s case is insufficient to repay the financing entity, the client may have an obligation to repay the entity the difference, depending on the terms of the assignment. If the client has a specific, immediate financial need, the client may be better off considering other possible sources of funds, such as a credit union, an insurance policy, family or friends. Any communications between the attorney and the financing entity may not be subject to the attorney-client privilege. The terms of the financing arrangement may be discoverable and could adversely affect settlement negotiations.
If a client decides to proceed with the transaction after being fully advised by the attorney, the attorney may ethically participate in the financing transaction by recognizing the financing entity’s interest and by paying any settlement proceeds to the financing entity in accordance with the terms of the assignment. Before accepting any assignment the attorney should clarify in writing to both the client and the financing entity that the attorney will still look to the client for all decisions regarding the litigation, and will maintain confidentiality of client communications. Cf. Rule 1.8(f) and 5.4(c) (prohibiting third party interference with lawyer’s professional judgment).
Ethics Advisory Opinion South Carolina