Can a lawyer borrow from a litigation funding company to cover the costs of a contingency case, and pass the financing cost to the client?

Plain-English summary

A litigation funding company offers non-recourse loans to personal-injury lawyers to cover expenses advanced in contingency cases. A lawyer who has already advanced costs in a large case and cannot finish it without help asks whether he may contract with such a company, on several variations of terms.

On the basic arrangement, the opinion concludes the lawyer may, provided the company's practices are lawful and the lawyer otherwise complies with the Rules. Rule 1.8(e) permits a lawyer to advance the costs and expenses of litigation. Before litigation funding companies existed, lawyers borrowed from banks or lines of credit for these costs; that does not violate the fee-sharing restrictions because the loan can be repaid from any source and the amount is unrelated to the lawyer's contingency fee. Financing that does not require repayment as a percentage of the fee in a given case, or restrict repayment to a specific source, is treated no differently than a bank loan. But the lawyer may never put a client's funds at risk to obtain a loan; he may pledge his own assets, including his contingent fee, as collateral.

On confidentiality, the opinion concludes the lawyer owes every client a duty of confidentiality under Rule 1.6 and may not give the funder confidential information (such as the nature and value of a case) without the client's informed consent, which requires a full and frank discussion of the advantages and risks, including the risk that disclosure waives the attorney-client privilege. On passing the cost to the client, the opinion concludes the lawyer may do so only if (1) he obtains the client's informed consent in a writing signed by the client before entering the financing agreement, (2) the financing expense is not clearly excessive, and (3) the borrowed funds are used only to pay expenses incurred on the client's behalf (Rule 1.5(a) and (c)). Informed consent requires the fee agreement to show the client understands and agrees to the borrowing, to the responsibility for the interest or fee if the case succeeds, and to the amount and terms of repayment, including what happens if the recovery is much less than sought or the client fires the lawyer; the lawyer must also discuss other financing options and their risks and advantages first (Rule 1.0(f)).

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on whether the financing operates like an ordinary loan, whether client funds or confidences are exposed, and whether the client has consented to bearing the cost. The opinion holds that a lawyer may use a litigation funding loan for case costs where repayment is not keyed to the fee or a specific fund, the lawyer pledges only his own assets, and the client's confidential information is protected.

Per the opinion, the lawyer may shift the financing expense to the client only with the client's written, informed consent given before the agreement, a charge that is not clearly excessive, and use of the funds solely for that client's expenses.

Common questions

Q: Can a lawyer take a loan from a litigation funding company to pay case expenses?

A: Yes, with conditions. The opinion concludes a lawyer may finance litigation costs this way if the company's practices are lawful and the loan does not tie repayment to a share of the fee or a specific fund, in which case it is treated like a bank loan.

Q: Can the loan be secured by a lien on the client's recovery?

A: No. The opinion concludes a lawyer may never put a client's funds at risk to obtain a loan; the lawyer may instead pledge his own assets, including his contingent fee, as collateral.

Q: Can the lawyer give the funder information about the client's case?

A: Only with informed consent. The opinion concludes the nature and value of a case is confidential under Rule 1.6, and the lawyer may not disclose it to the funder without the client's informed consent, including a discussion of the risk of waiving the attorney-client privilege.

Q: Can the lawyer charge the financing cost back to the client?

A: Only on strict conditions. The opinion concludes the lawyer may pass the financing expense to the client only with the client's written informed consent obtained before the agreement, a charge that is not clearly excessive, and funds used only for that client's expenses (Rule 1.5(a) and (c)).

Background and rules framework

The opinion applies North Carolina Rule 1.8(e) (advancing litigation costs and expenses), Rule 1.6 (confidentiality of information), and Rule 1.5(a) and (c) (reasonableness of fees and expenses; contingent-fee writings), with reference to Rule 1.0(f) (informed consent). These track Model Rules 1.8, 1.6, and 1.5. The opinion equates a properly structured litigation funding loan with a traditional bank loan and treats the client's case information as confidential.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / NC Rule 1.8(e) (advancing the costs and expenses of litigation)
• MR 1.6 / NC Rule 1.6 (confidentiality of information)
• MR 1.5 / NC Rule 1.5(a), (c) (reasonableness of fees and expenses; contingent-fee agreements)
• MR 1.0 / NC Rule 1.0(f) (definition of informed consent)

See also

• NC 2020 FEO 4: Investment in Litigation Financing
• NV Ethics Op. 36: Borrowing Funds to Finance Litigation Costs
• NY State Bar Op. 464: Contingent Reimbursement of Litigation Costs

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2006-formal-ethics-opinion-12/

Original opinion text

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

Inquiry #1:

ABC Litigation Funding (hereinafter "ABC") is a company that offers non-recourse loans to personal injury lawyers who need to borrow funds for expenses advanced in contingency cases. Lawyer is interested in obtaining financing for a large personal injury case for which he has already advanced some of the expenses. Lawyer will be unable to complete the matter unless he receives help with the costs.

Can a lawyer enter into a contract with a litigation funding company to finance the costs and expenses of a contingency fee case?

Opinion #1:

Yes, provided that the litigation funding company's practices are lawful and the lawyer otherwise complies with the Rules of Professional Conduct. Rule 1.8(e) specifically permits lawyers to advance the costs and expenses of litigation to clients. Before there were litigation funding companies, lawyers borrowed money from banks or drew from a line of credit to assist with costs associated with litigation. Such practices do not violate the fee sharing restrictions in the Rules because the lawyer could repay the loan with funds from any source and the amount to be repaid was unrelated to the lawyer's contingency fee in any given matter.

Financing arrangements that do not require that repayment be a percentage of the lawyer's fee in a given case or restrict repayment from a specific source of funds should be treated no differently than bank loans or lines of credit.

Inquiry #2:

Suppose that ABC's non-recourse loan is contingent upon Lawyer's willingness to give ABC a lien on the recovery in one or more of his pending personal injury cases.

May Lawyer obtain financing from ABC under these circumstances?

Opinion #2:

No. Lawyer may never put a client's funds at risk to obtain a loan. Lawyer, however, may put up his own assets, including his contingent fee in the case, as collateral to secure a loan.

Inquiry #3:

Suppose Lawyer puts up law firm assets as collateral for the loan from ABC. ABC now requires Lawyer to provide it with information about the nature and value of his clients' cases so that it can determine the amount to be loaned. ABC agrees not to be involved in any of Lawyer's cases and Lawyer has assumed that he will retain complete control of the matters.

May Lawyer contract with ABC under these circumstances?

Opinion #3:

Lawyer owes a duty of confidentiality to every client, and may not disclose information learned in the course of the representation without informed consent from the client. Rule 1.6. The nature and value of a case is certainly client confidential information, and Lawyer may not supply ABC with any confidential information without first seeking the client's informed consent. Consent will be informed only if Lawyer has had a full and frank discussion with the client concerning the advantages and risks of disclosure, including the risk that disclosure may result in a waiver of the attorney-client privilege.

Inquiry #4:

Assume ABC's financing agreement requires the lawyer to repay the amount borrowed plus a fee equivalent to 100% of the amount of funding ABC provided. So, for every dollar the lawyer borrows, he will have to repay two dollars if the case is successfully tried. If the lawyer is unsuccessful and there is no recovery, he will owe nothing to ABC Financial. ABC suggests that Lawyer can pass along the 100% financing charge to the client as an expense of litigation.

May Lawyer pass along the expense of obtaining litigation financing to the client?

Opinion #4:

Lawyer may pass along the expense of obtaining litigation financing to the client only if 1) the lawyer obtains informed consent, in a writing signed by the client, before Lawyer enters into the agreement with ABC, 2) the financing expense is not clearly excessive under the circumstances, and 3) the funds borrowed will be used only to pay expenses incurred on behalf of the client. Rule 1.5(a) and (c).

For consent to be fully informed, the fee agreement must evidence that the client understands and agrees that the lawyer will borrow funds to pay for litigation expenses incurred in the client's case, that the client will be responsible for the repayment of the interest or fee charged in the event the case is successfully tried (as defined by the financing company), and that the client agrees to the amount and terms of repayment. Disclosures about the terms of repayment must explain the client's responsibility in the event the ultimate recovery is substantially less than the damages sought or the client terminates the lawyer's services prior to completion of the matter. Furthermore, prior to asking the client to sign the fee agreement, a lawyer must discuss other financing arrangements, their availability, and the risks and advantages of each. See Rule 1.0(f).