Can a law firm guarantee repayment of a loan its client takes out for living expenses during litigation?

Plain-English summary

A client of the inquiring firm was in dire financial need while his personal-injury case was pending, having lost his car and facing loss of his home. Another client of the firm offered to lend him $10,000 at 18% interest, due regardless of the case's outcome, but only if the firm guaranteed repayment. The firm asked whether it could ethically give that guarantee.

The committee concluded the guarantee would violate ER 1.8(e). The rule forbids a lawyer from providing financial assistance to a client in connection with litigation except for advancing costs (with the client ultimately liable) or paying an indigent client's costs. The committee noted that Arizona deliberately rejected the ABA Model Rule's allowance of contingent cost repayment and kept the former DR 5-103(B) "ultimately liable" requirement, citing Matter of Stewart and Matter of Carroll for the two underlying concerns: a lawyer's acquiring an interest in the litigation, and improper inducement of prospective clients.

Here, the loan would not be made without the firm's guarantee and creditworthiness, so the guarantee itself was the firm's financial assistance to the client. The committee identified two specific dangers: the firm might pressure the client into a settlement to avoid liability on the guarantee rather than doing what was best for the client, and news of the arrangement could improperly induce prospective clients to hire the firm. The humanitarian purpose was only a mitigating factor in any discipline, not a defense. The committee noted that Minnesota permits such loan guarantees by rule but concluded the Arizona Supreme Court had not gone that far, and that extending the rule was for the Court, not the committee. It held the guarantee would violate ER 1.8(e).

Currency note

This opinion was issued in 1991, before Arizona's 2003 adoption of the Ethics 2000 revisions to the Rules of Professional Conduct. ER 1.8 has since been amended. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a law firm guarantee a loan to help a client through litigation?

A: No, under this opinion. The committee concluded that guaranteeing a client's loan is financial assistance prohibited by ER 1.8(e), because the firm's guarantee and creditworthiness are what make the loan possible.

Q: Why is a guarantee treated like a loan from the firm?

A: The opinion concluded that because the lender required the guarantee, the firm's credit was the real source of the assistance, raising the same concerns ER 1.8(e) addresses: a lawyer's stake in the case and improper inducement.

Q: Does the client's desperate situation make the guarantee acceptable?

A: No. The opinion concluded the humanitarian motive is only a mitigating factor in any disciplinary proceeding and does not keep the guarantee from violating ER 1.8(e).

Background and rules framework

The opinion applies ER 1.8(e) (Model Rule 1.8), which prohibits financial assistance to a client in connection with pending or contemplated litigation outside two exceptions (advancing costs with the client ultimately liable, and paying an indigent client's costs). The committee emphasized that Arizona retained the stricter "ultimately liable" requirement of former DR 5-103(B), and that any expansion to permit loan guarantees (as Minnesota allows) would be for the Arizona Supreme Court.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / AZ ER 1.8(e) (financial assistance to clients in litigation)
• Former DR 5-103(B), Code of Professional Responsibility (predecessor)

Cases:

• Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (Ariz. 1979), advances to a client create a prohibited interest in the litigation
• Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (Ariz. 1979), cash payments to clients as improper inducement; humanitarian motive only mitigates

Other opinions cited:

• Arizona Opinion 89-03 (1989): charitable money gift to a client permitted under conditions
• Arizona Opinion 91-14 (1991): firm may not advance funds for a client's medical care, but may make a charitable gift

See also

• AZ Ethics Op. 91-14: Advancing Versus Gifting Funds to a Client
• AZ Ethics Op. 91-13: Waiving a Contingent Fee and Advanced Costs

Source

• Landing page: https://tools.dev.azbar.org/RulesofProfessionalConduct/ViewEthicsOpinion.aspx?id=634

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

6/1991

Law firm's proposed guaranteeing of repayment of a loan by one of its clients to another client (who is in dire financial need) held ethically improper as violative of ER 1.8.

FACTS

A client of the inquiring law firm is in dire financial need. The firm has represented this client in connection with injuries suffered in two different accidents which occurred in 1989 and 1990. For injuries sustained in the 1989 accident, an action has been filed and the action has been set for trial in the late summer of 1991. The client and his wife have lost their car and have been threatened with the loss of their home. They have tried unsuccessfully numerous methods to borrow money. Another client of the law firm has offered to loan the first client $10,000 at 18% annual interest. The lender is requesting that the law firm guarantee repayment of the loan should the client be unable to pay the debt. The loan would be due and owing to the lender regardless of the outcome of the case.

QUESTION

May the law firm ethically guarantee repayment of the loan to the client?

ETHICAL RULE INVOLVED

ER 1.8. Conflicts of Interest: Prohibited Transactions

(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) a lawyer may advance court costs and expenses of litigation, provided the client remains ultimately liable for such costs and expenses; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

OPINION

ER 1.8(e) specifically forbids a lawyer’s furnishing financial assistance to a client in connection with pending or contemplated litigation except for advanced costs and expenses for which a non-indigent client must be ultimately responsible. ER 1.8(e) (1). ER 1.8(e) (1) of the original A.B.A. version of the Model Rules of Professional Conduct provides:

"a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter"

This language clearly permits a lawyer to advance expenses of litigation for a client, with the repayment to be made from the amounts ultimately recovered in the litigation. The Arizona Supreme Court refused to adopt this language and instead followed the predecessor DR 5-103(B) which required that the client remain ultimately liable for such expenses. In Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (1979), the Supreme Court held that an attorney’s advances to a client for living expenses were improper, even though they were to be repaid out of the client’s temporary welfare stipends. The Court held this to be improper because: (1) it involved the attorney’s securing an interest in the underlying litigation which might result in his placing his interest before that of his client, and (2) the loaning of money to clients might constitute an improper inducement for prospective new clients to employ the attorney. In Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (1979), an attorney was disciplined, inter alia, for making cash payments to his client. The Court held that this violated DR 5-103 (A) and (B) because it could constitute an improper inducement to get clients to employ the attorney since it would involve a lesser financial obligation in case the litigation should be lost.

In our Opinion No. 89-03 (April 18, 1989), we held it ethically permissible for an attorney representing a pro bono client to make a monetary gift to the client for food and to pay bills. The basis of that opinion was that the attorney was not ethically prohibited from making the gift to a pro bono client. The gift of money was deemed permissible since the gift was not related in any way to the attorney’s representation nor dependent on the outcome of the pending action, and was made with no expectation of repayment. The gift must result entirely from a charitable motivation.

In our Opinion No. 91-14 (May 8, 1991) we found that it was not ethically permissible for a law firm to advance money to a client for her medical care while her case was pending. We stated that the firm could make a gift of money based upon charitable motivation if it had already been retained before there was any discussion of the gift. Also, there had to be no requirement nor expectation by the firm of any future repayment of the amount given.

In the present fact situation, the guarantee of repayment of the money loaned, along with the credit-worthiness of the law firm, are necessary before the loan will be made. It is the guarantee and the credit-worthiness of the law firm which constitute its financial assistance to its client.

While the guaranteeing of repayment of the money loaned is for humanitarian purposes, it would only be a mitigating factor in disciplinary proceedings, and does not detract from its being a violation of an Ethical Rule. Matter of Carroll, 124 Ariz. 80, 85, 86, 602 P. 2d 461, 466, 467 (1979).

The law firm’s guaranteeing of the proposed loan in the present case would violate the Ethical Rules because: (1) the guaranteeing of repayment of the loan to assist with the client’s living expenses might cause the firm to pressure the client into a settlement so as to assure that the firm would not be liable on the guarantee rather than doing what is best for the client; and (2) the news of this transaction might constitute an improper inducement for prospective clients to employ the law firm.

We are not unmindful of the fact that the State of Minnesota has adopted a rule which permits a lawyer to guarantee a loan to a client which is necessary to enable the client to withstand a litigation delay. Rule 1.8 (e) (3). This committee does not believe that the Arizona Supreme Court has yet gone this far, and feels that it is up to the Court, rather than this committee, to extend this Rule.

Accordingly, it is our opinion that the law firm’s guaranteeing of repayment of a loan to one of its clients would constitute a violation of ER 1.8(e).

©State Bar of Arizona 1991