ABA-484
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| Clients who on their own or on their lawyers' advice arrange for a finance company, broker or bank [referred to in this LEO summary as "finance company"] to finance their legal fees may use one of several arrangements in which such finance companies provide money to the clients or directly to the lawyers, with various fees or charges deducted from such payments or paid by the lawyers. Lawyers participating in such financing arrangements: (1) must fully explain to their clients the lawyers' relationship with the finance companies (including whether the lawyer represents them); how the money arrangements will work; the finance companies' communications to the lawyers about the money flow; "the cost and benefits of the transaction to the client"; the lawyers' payment terms; whether the proceeds will go to the client; "whether the lawyer will charge a higher fee" resulting from the finance arrangement; the lawyers' confidentiality duty when dealing with the finance companies; the effect of the financing arrangement on clients' rights in any later disputes with the lawyers; "any other factor that the lawyer knows or reasonably should know to be material to the financing of the representation"; (2) may limit the representations' scope under Rule 1.2 so that the clients must make such arrangements; (3) "may wish to advise the client" that the finance company will not affect the lawyers' judgment (although such a lawyer "generally has no obligation to inform the client" of the lawyers' professional independence because "unlike litigation funding or financing, a legal fee lender in the scenarios described . . . has no direct financial interest in the outcome of the matter, and therefore no incentive to attempt to influence the lawyer's advice, strategy, or tactics"); (4) must assure that the fee is reasonable, including any fee that is increased by the finance arrangement, and must inform the clients of any higher fee resulting from the arrangement; (5) must deposit the flat fee loan proceeds as the pertinent state rules require (noting that some states permit lawyers to treat flat fees as earned upon receipt and therefore place them in operating accounts, while other states consider such flat fees advance payments that must be held in trust), and under either approach must refund any unearned funds if the representation ends before the lawyer has completed the work; (6) may reveal client confidential information to the funding company only as permitted by ABA Model Rule 1.6; (7) must consider any ABA Model Rule 1.7(a)(2) "material limitation" conflicts, such as conflicts between clients' interest and the lawyers' interest in being paid, or if the lawyers represent the finance company (lawyers may avoid such conflicts by not advising clients about such payment option to use, or may obtain clients' informed consent to the representation despite such a "material limitation" conflict; (8) must deal with any conflicts that could arise if the lawyers had previously represented the finance companies. Any finance companies' charges, deductions when paying the clients or the lawyers, etc. do not constitute fee sharing, but rather are "basically an administrative fee" similar to credit card companies' "merchant fee." Any such fee financing arrangements made with an entity in which lawyers have "an ownership or other financial interest" trigger lawyers' disclosure and consent requirements under ABA Model Rule 1.8. |