Can a Kentucky lawyer take payment from a third party for legal work, or take a fee from a bank or business just for referring clients to it?

Plain-English summary

The committee took up the question after an attorney asked whether he could join a bank plan that would pay attorneys a percentage of amounts their referred clients deposited in Individual Retirement Accounts, payments the bank called a "commission or professional consulting fee." The committee split the question in two.

On the first question, whether a lawyer may be paid by someone other than the client for legal services, the answer was a qualified yes. Under DR 5-107 a lawyer may accept such compensation only with the client's consent after full disclosure, and may not let the payor direct his professional judgment. The committee listed settled examples (prepaid legal services plans, title-insurance commissions disclosed or credited to the client per ABA Opinion 237, statutory appointments such as guardian ad litem or public defender, and insurer-paid defense where no conflict exists) and distilled the common elements: full disclosure to the client, the client's consent, independent professional judgment despite the source of payment, and the absence of any appearance of impropriety.

On the second question, payment for merely referring a client to a lay person or organization, the answer was a qualified no. Whether called a referral fee, commission, or kickback, such a payment lets the other party profit from the client and raises a strong presumption of an appearance of impropriety. The committee framed the public's natural questions (did the client really need the product, was it the best option, could the client have obtained it more cheaply without the fee) and concluded that such referral fees are presumed unethical even with disclosure and consent. A lawyer who accepts one bears the burden of showing there was no appearance of impropriety.

Currency note

This opinion was issued in 1982 under Kentucky's former Code of Professional Responsibility (in effect 1971 to 1990), before the Kentucky Bar Association's 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a Kentucky lawyer be paid by a third party for legal work done for the client?

A: Yes, with conditions. Under DR 5-107 the opinion required full disclosure to the client, the client's consent, preservation of the lawyer's independent professional judgment, and no appearance of impropriety.

Q: Could a lawyer accept a fee from a bank or business just for referring clients to it?

A: The committee said no in the ordinary case. It held that such referral fees are presumed unethical, even with disclosure and consent, because they create an appearance that the lawyer profited from steering the client.

Q: Did the opinion treat a title-insurance commission the same as a referral kickback?

A: No. Citing ABA Opinion 237, the committee accepted a title-insurance commission so long as the lawyer fully discloses the financial interest or credits the client's bill with the amount of the commission.

Q: Who bears the burden if a referral fee is questioned?

A: The opinion placed the burden on the lawyer who accepted the fee to show there was no appearance of professional impropriety.

Background and rules framework

The opinion applies DR 5-107 of the former Code, which barred a lawyer from accepting compensation from one other than the client except with the client's consent after full disclosure, and forbade a payor from directing the lawyer's professional judgment. The modern analogs are Model Rule 1.8(f) (compensation from a third party) and Model Rule 5.4(c) (a third party who pays may not direct the lawyer's judgment). The committee also invoked Canon 5 (independent professional judgment) and Canon 9 (avoiding the appearance of impropriety).

Citations and references

Rules of Professional Conduct:

• DR 5-107 (compensation from one other than the client; payor not to direct judgment); modern analogs Model Rule 1.8(f) and Model Rule 5.4(c)
• Canon 5 (independent professional judgment); Canon 9 (appearance of impropriety)
• SCR 3.475 (prepaid legal services plans)

Other opinions cited:

• ABA Opinion 237: title-insurance commission permissible with disclosure or credit to the client.
• ABA Opinions 332 and 333; KBA E-69, E-101: participation in prepaid legal services plans.

See also

• KBA Ethics Op. E-288: Funding a Referral Service by Percentage of Fees
• KBA Ethics Op. E-295: Lawyer as Title Insurance Agent and Commission Splitting
• ABA Formal Op. 474: Referral Fees and Conflicts of Interest

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-264.pdf

Original opinion text

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

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-264
Issued: November 1982

This opinion was decided under the Code of Professional Responsibility, which was in effect from 1971 to 1990. Lawyers should consult the current version of the Rules of Professional Conduct and Comments, SCR 3.130 (available at http://www.kybar.org), before relying on this opinion.

Question 1:

May a lawyer receive compensation from one other than his client for services rendered to the client?

Answer 1:

Qualified yes.

Question 2:

May a lawyer receive compensation from a lay person or lay organization other than a client for merely referring the client to that person or organization?

Answer 2:

Qualified no.

References:

Canon 5; DR 5-107; Canon 9; KBA E-69; KBA E-101; SCR 3.475; ABA Opinion 237; ABA Opinion 332; ABA Opinion 333

OPINION

A question has arisen about whether an attorney may ethically participate in a plan sponsored by a bank to promote its Individual Retirement Accounts. The bank has proposed to pay attorneys a percentage of the amounts deposited in IRA accounts by clients referred by the attorneys. The bank has termed these payments "a commission or professional consulting fee. There are two questions to be considered:

1. May a lawyer receive compensation from one other than his client for services rendered to the client?

2. May a lawyer receive compensation from a lay person or lay organization other than his client for merely referring his client to that person or organization

Lawyers must exercise independent professional judgment on behalf of their clients. (Canon 5.) Lawyers must avoid even the appearance of professional impropriety. (Canon 9.) DR 5-107 states:

(A) Except with the consent of his client after full disclosure, a lawyer shall not:

(1) Accept compensation for his legal services from one other than his client.
(2) Accept from one other than his client anything or value related to his representation of or his employment by his client.

(B) A lawyer shall not permit a person who recommends, employs, or pays him to render legal services for another to direct or regulate his professional judgment in rendering such legal services.

Previous opinions as well as a Supreme Court Rule have held that an attorney may ethically participate in prepaid legal services plans (See KBA E-69, KBA E-101, ABA Opinion 332, ABA Opinion 333 and SCR 3.475) and that he may receive a commission from a title insurance company (See ABA Opinion 237, which holds that the attorney must fully disclose his financial interest in the transaction or credit the client's bill with the amount of the commission).

Additionally, it is unquestioned that attorneys may ethically receive payments from one other than his client where this is provided by statute or by court rules. Such is the case when an attorney is appointed guardian ad litem or warning order attorney or is employed as a public defender or by the Legal Services Corporation.

Likewise, it is generally accepted that, where there is no conflict of interest between an insurance company and its policy holder, an attorney paid by the insurance company may represent both.

Certainly there are other instances where attorneys may ethically receive compensation for their legal services from ones other than their clients. The essential elements of each of these situations are:

(1) full disclosure to the client,
(2) the client's consent,
(3) the independent exercise of the attorney's professional judgment in spite of the source of payment, and the absence of any appearance of professional impropriety.

Turning next to the situation where an attorney seeks to receive compensation from a person or organization other than his client for merely referring his client to that person or organization, we run full force into the dual questions of whether the attorney has his client's best interests at heart and the problem of an appearance of impropriety.

Most payments in this sort of situation would be in the nature of referral fees. But, whether they are called referral fee or commissions or even kickbacks, they have one common characteristic, they are payments to an attorney for allowing that person or organization to make a profit from his client. While it may be that the client needs the product or service being sold by the other person or organization, such a referral in the average case would raise a strong presumption of at least an appearance of professional impropriety.

The questions which the public can be legitimately expected to raise in even the most innocent transaction include the following:

1. Did the client really need the product or service?
2. Is the product or service the best to which the attorney could have directed the client?
3. Could the client have obtained the product or service more cheaply absent the fee paid to the attorney?

It is impossible for us to say there are no situations where such a referral fee would be proper, but attorneys are cautioned that a presumption exists that such referral fees are, even with full disclosure to the client and with his consent, unethical because they lend themselves to the appearance of impropriety. Should an attorney acting in a professional capacity accept such a fee and a question ever arise about it, the attorney involved will have the burden of showing that there was no such appearance of impropriety.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor rule). The Rule provides that formal opinions are advisory only.