Can a law firm pledge its accounts receivable to a bank as collateral without violating its duty to protect client confidences?

Plain-English summary

Firm X was asked, as part of a bank credit arrangement, to grant a security interest in its accounts receivable. The proposed security agreement reached "all records and data relating to the accounts," let the bank require lists of receivables with names and addresses of account debtors, and, even with no event of default, let the bank collect the accounts, notify account debtors to pay the bank directly, sue or realize on the receivables, and receive and open the firm's mail. The Commission was asked whether the arrangement would require the firm to violate the Bar Rules.

The Commission identified three pressure points: the duty to preserve client confidences and secrets under Rule 3.6(h), the mandatory fee-arbitration obligation under Rule 3.3(c), and the related concern about excessive fees under Rule 3.3(a). On confidentiality, it concluded that granting a security interest does not itself violate the rules, but a lawyer must ensure performance of the contract would not. Specifically, a lawyer may not let a financing bank receive and open mail that might include client mail, may not disclose all client records and data, and, where the mere fact of representation may be a secret, may not disclose client names and addresses before the client defaults. The Commission emphasized that confidentiality is the "sine qua non" of the relationship, that Rule 3.6(h) has no exception for disclosure to a lawyer's lender, and that even a client's address or the bare fact of consulting a particular specialist (in bankruptcy or divorce, for example) may be a protected secret. A lawyer could in theory obtain a written waiver at the outset, but absent that, transmitting receivables information to the bank, and administering a blanket assignment that distinguishes waiving from non-waiving clients, would be difficult.

On fee arbitration, the Commission concluded that the arrangement does not by itself prevent compliance with Rule 3.3(c), but the bank could not participate in a Rule 9 arbitration in any capacity, since Rule 9(j) imposes continuing confidentiality on the parties. It noted the lawyer and bank cannot contract away a client's Bar Rule rights, and suggested it may suffice for the security agreement to provide for re-assignment of any receivable to the firm when the client initiates fee-grievance arbitration, preserving both the client's Rule 9 rights and the confidentiality of that process. The Commission concluded that receivables may be used as collateral, but the firm must take steps to preserve each client's confidences and secrets and to assure each client's right to demand and participate in fee arbitration, and should identify particularly sensitive accounts that ought not be pledged at all.

Currency note

This opinion was issued in 1995, before Maine's replacement of the former Maine Bar Rules with the Maine Rules of Professional Conduct (effective August 1, 2009). 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: Could a law firm pledge its accounts receivable to a bank?

A: The opinion concluded yes in principle. It held that granting a security interest in receivables does not by itself violate the Bar Rules, but the lawyer must ensure performance of the security agreement would not breach the duty of confidentiality or the client's fee-arbitration rights.

Q: What disclosures to the bank were off limits?

A: The opinion concluded the firm could not let the bank receive and open mail that might include client mail, could not disclose all client records and data, and, where the fact of representation may be a secret, could not disclose client names and addresses before the client defaulted on payment.

Q: Can the bank take part in a client's fee-arbitration dispute?

A: No. The opinion concluded the bank could not participate in a Rule 9 fee arbitration in any capacity, because Rule 9(j) imposes continuing confidentiality on the parties; it suggested re-assigning a receivable to the firm if the client invokes arbitration.

Q: Could a client waive these protections?

A: In theory. The opinion noted a lawyer could obtain a written waiver at the outset, but absent one, it would be difficult to transmit receivables information to the bank consistently with the rules or to administer a blanket assignment distinguishing waiving from non-waiving clients.

Background and rules framework

The opinion interprets Maine Bar Rule 3.6(h) (preservation of client confidences and secrets), Rule 3.3(c) (mandatory submission of fee disputes to arbitration under Rule 9), and Rule 3.3(a) (excessive fees). These correspond to ABA Model Rule 1.6 (confidentiality of information) and Model Rule 5.3 (responsibilities regarding nonlawyer assistance and third parties who handle client information). The Commission distinguished its earlier Opinion 138 (a client-facing charge-card arrangement) because here the financing was invisible to the client.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.6 (confidentiality of information)
• Model Rule 5.3 (responsibilities regarding nonlawyer assistance)
• Maine Bar Rule 3.6(h), 3.3(a), 3.3(c); Rule 9 and Rule 9(j) (fee arbitration)

Other opinions cited:

• Maine PEC Opinion 138 (charge-card financing); Opinion 143 (retirement); Opinion 20
• Florida Opinion 72-43 (1973); Illinois Opinion 347 (1971), per Maru's Digest

See also

• Maine Ethics Op. 213: Donating Old Client Files
• ABA Formal Op. 480: Confidentiality and Blogging

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89759

Original opinion text

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

Issued by the Professional Ethics Commission

Date Issued: October 6, 1995

Facts

Firm X has been asked, in conjunction with the establishment of a credit arrangement with a Bank (presumably for operating capital), to grant a security interest in Firm X?s accounts receivable. As described to the Commission, the proposed security agreement, which would extend by its terms to ?all records and data relating to the [accounts],? authorizes the Bank to require the filing by Firm X of lists of receivables, ?including names and addresses of account debtors,? and provides that the Bank ?[a]t any time and even though no Event of Default exists? may ?exercise its rights to collect the account and to notify account debtors to make payments directly to [Bank]?: it further authorizes the Bank to sue for ?...or realize on [ receivables], and to receive, open and dispose of mail? addressed to [Firm X].

Question

Does the arrangement proposed by Bank require Firm X to violate the requirements of the Bar Rules?

Discussion

This inquiry raises a number of issues relating to the proposed conduct including the obligation of the attorney to preserve the confidences and secrets of the client as required by Rule 3.6(h) the mandatory fee arbitration required of lawyers under Rule 3.3(c), and the related issue of the ability of the lawyer to comply with the requirements of Rule 3.3(a), regarding excessive fees.

In Opinion 138, this Commission expressed its concerns with respect to several of these issues in the context of a charge‑card device. In that context, these questions were reviewed in the light of a voluntary arrangement entered into by the client for the purpose of financing the client?s obligations to the lawyer or law firm. Here, by contrast, the financing arrangement is invisible to the client, and it is in this somewhat different light that the inquiry is to be evaluated. Other states have addressed related issues and have found the transactions to be authorized, but have not in all cases focused upon the specific mandates and prohibitions of the Codes they were interpreting.[1]

A. Confidential Information

Although the act of entering into a contract with a Bank will not itself violate the Bar Rules, a lawyer entering into any such contract should insure himself or herself that the performance of the obligations of the contract will not violate the Bar Rules.

While an attorney?s grant of a security interest in his or her accounts receivable clearly does not, in and of itself violate the Code of Professional Responsibility, it is just as clear that it is not proper for a lawyer (i) to permit a financing Bank to receive, open and dispose of mail which might include mail from clients; (ii) to disclose all records and data of the client; or (iii) in some cases, where the mere fact of the rendition of legal services to a client may constitute a secret, to disclose names and addresses of clients prior to the time a client defaults upon a payment obligation to the lawyer.

Beyond these obvious limitations, however, the granting of rights under the security agreement and the exercise of rights of a Secured Party under the Uniform Commercial Code, might pose further and unforeseeable questions under the Code of Professional Responsibility. Any security agreement must protect against the disclosure of confidential information or clients? secrets, and must not purport to abridge the procedural or substantive rights of a client with respect to excessive fees.

The preservation of both confidences and secrets of a client, required by Rule 3.6(h), is the sine qua non of the lawyer‑client relationship. While the Rule admits of several exceptions,[2] it provides no general exception authorizing the disclosure of addresses or other information concerning the attorney‑client relationship that may give rise to an account receivable, nor any exception for disclosure to the lawyer?s lending institution.[3] While the whereabouts or the addresses of a client may not rise to the level of a confidential communication, they may, under appropriate circumstances, constitute secrets of the client which are prohibited from disclosure by Rule 3.6(h). In some circumstances, particularly where an attorney?s reputation as a specialist in a field of practice such as bankruptcy or divorce is widespread, the very fact that a client consulted a particular lawyer may constitute a statement about a client and his or her private affairs. Under such circumstances, the mere disclosure of the identity of a client would violate the rule.

Although an attorney could conceivably, at the inception of the lawyer‑client relationship, obtain a written waiver from the client regarding such disclosures as the Bank may require, absent such authorization, the law firm is likely to find it difficult to transmit client receivables information to its financing bank in a manner consistent with the requirements of the Bar Rules. Also, it may, as a practical matter, be difficult to administer a blanket assignment of receivables so as to distinguish between records pertaining to clients who had elected to waive objections to such disclosures and those who had not.

Although the establishment of a debtor/creditor relationship between the lawyer and client presumably assumes the enforceability of the fee agreement including the right of the lawyer to bring suit upon non‑payment of the agreed upon fee, the right given to the Bank in the proposed security agreement to obtain the list of account debtors prior to default by the client, and the right to notify account clients to make payment directly to the Bank, may exceed the legitimate expectations of both the client and lawyer as to the timing of collection efforts and attendant publicity as to the client identity and the existence and terms of a lawyer‑client relationship.

Any lawyer or firm entering into this kind of financial relationship must give consideration to the timing of the rights of the Bank with respect to the exercise of its rights to realize upon the accounts receivable, and consideration must also be given to identifying certain individual accounts or classes of accounts that may be so ?sensitive? that they ought not to be pledged at all.

B. Fee Arbitration

Rule 3.3(c) requires that all lawyers must submit fee disputes to arbitration in accordance with the provisions of Rule 9. While the proposed relationship between the Firm X and its Bank does not of itself preclude the Firm?s compliance with the obligations of Rule 3.3(c), there are nonetheless provisions in Rule 9 which make clear that the Bank could not participate in this dispute resolution process on behalf of the Lawyer. For example, the provisions of Rule 9(j) impose a continuing obligation of confidentiality upon the parties to the dispute and prohibit any person from disseminating information regarding the matter in dispute to any person not involved in the dispute. Clearly, the Bank could not participate in this kind of proceeding in any capacity.

It hardly needs to be said that the lawyer and the Bank cannot by contract dispossess a client of his or her rights under the Bar Rules. It may nonetheless be sufficient to provide in the security agreement for a re‑assignment to the law firm of any account receivable in which the client initiates fee grievance arbitration. Under such circumstances, the rights of the client to invoke arbitration under Rule 9 as well as the preservation of the confidentiality of the fee grievance process would be preserved. as would the principal procedural mechanism for protecting clients against the imposition of excessive fees [ Rule 3.3(a)].

Conclusion

While the Bar Rules do not per se prohibit the use of receivables as collateral by a law firm, a lawyer or firm granting a security interest in receivables must take appropriate steps to preserve secrets and confidences of each client and to assure each client?s right to demand and participate in fee arbitration. Certain economic acts?even those as seemingly non-controversial as retirement[4]?when undertaken by a lawyer, impose obligations not present with respect to non‑lawyer participants in our economic life. The recognition of the changed economic environment in which lawyers and law firms now operate does not in any way relieve members of the Bar of the obligations owed to their clients under the Bar Rules and under their oaths as attorneys. The obligations discussed above are emblematic of the professional obligations which distinguish the practice of law from other varieties of commercial enterprises and which have justified characterizing the practice of law.

Footnotes

[1] See, for example, Fla. Ops. 61 (Opinion 72-43, February 23, 1973) and 59 Ill. B.J. 766 (Opinion 347, February 12, 1971), excerpted in Maru, 1975 Supplement to Digest of Bar Association Ethics Opinions, as Items 8183 and 8290, respectively.

[2] e.g., Rule 3.4(h)(1)(3),(4), Opinion No. 20

[3] Rule 3.6(h)(2) does contemplate that a lawyer may need to enlist the support of others from time to time and requires that the lawyer use reasonable care to assure that others so employed will preserve the confidences of the client. Although the drafters of the Rule probably did not foresee that such an obligation would need to be extended to such relationships as are discussed here, the same policies inherent in this Rule should inform all activities of a lawyer notwithstanding the context in which confidential information is necessarily shared with others.

[4] See, for instance, Opinion No. 143.