Can a lawyer refer a client to a financing company that buys notes or settlements, and can the lawyer take a finder's fee for the referral?

Plain-English summary

A lawyer received an unsolicited email from ABC Financial, a company that buys notes secured by deeds of trust, mortgages, and contracts, and that pays clients a lump sum for their interest in lottery winnings, structured insurance settlements, and rental income. The company asked the lawyer to refer his clients to it. The opinion addresses whether the lawyer may make such referrals and whether he may take a finder's fee.

On the referral, the opinion concludes the lawyer may do so only if certain conditions are met. Following 2000 FEO 4, a lawyer may refer a client in need of money for living expenses to a finance company if the lawyer is satisfied the company's financing arrangement is legal, the lawyer receives no consideration from the company for the referral, and, in the lawyer's opinion, the referral is in the client's best interest. The lawyer should in no event refer a client to the company merely as a way to get paid for legal services. The opinion adds that the committee cannot opine on the legality of any particular financing arrangement.

On the finder's fee, the opinion concludes no. Because one of the conditions for a permissible referral is that the lawyer receive no consideration from the financing company, the lawyer may not accept a finder's fee for the referral, even where the arrangement is legal and the referral is in the client's best interest.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on the legality of the arrangement, the client's interest, and the lawyer's freedom from any payment that could skew the referral. The opinion holds that a lawyer may refer a client to a financing company only on those conditions and may not take a finder's fee, which would give the lawyer a personal financial stake in the referral.

Per the opinion, a lawyer should never make such a referral as a means of getting paid for legal services, and the committee does not assess the legality of any specific financing arrangement.

Common questions

Q: Can a lawyer refer a client to a company that buys settlements or notes for cash?

A: Only on conditions. The opinion concludes the lawyer may refer a client to a financing company only if the lawyer is satisfied the arrangement is legal, receives no consideration for the referral, and believes the referral is in the client's best interest.

Q: Can the lawyer accept a finder's fee from the financing company?

A: No. The opinion concludes that because the lawyer may receive no consideration for the referral, the lawyer may not accept a finder's fee, even when the arrangement is legal and benefits the client.

Q: Can a lawyer steer a client to a financier to collect the lawyer's own fees?

A: No. The opinion concludes a lawyer should in no event refer a client to a financing company merely as a means to pay the lawyer for legal services.

Background and rules framework

The opinion follows 2000 FEO 4 on referring a client in need of funds to a finance company, applying the conditions that the arrangement be legal, that the lawyer take no consideration for the referral, and that the referral be in the client's best interest. The bar on accepting a finder's fee reflects the conflict-of-interest principle of Rule 1.7 (a lawyer's professional judgment for a client may not be materially limited by the lawyer's own financial interest). The committee declines to assess the legality of any specific financing arrangement.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / NC Rule 1.7 (a lawyer's own financial interest may not compromise the representation)

Other opinions cited:

• NC 2000 FEO 4: a lawyer may refer a client needing living-expense funds to a finance company only if the arrangement is legal, the lawyer takes no consideration for the referral, and the referral is in the client's best interest.

See also

• NC 2006 FEO 12: Obtaining a Loan to Fund Litigation Costs
• NC 2020 FEO 4: Investment in Litigation Financing

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2006-formal-ethics-opinion-2/

Original opinion text

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

Inquiry #1:

Lawyer receives an unsolicited email from a representative of ABC Financial, a company that purchases notes secured by deeds of trust, mortgages, and contracts. ABC Financial also will pay its clients a lump sum of cash in exchange for a client's interest in lottery winnings, structured insurance settlements, and rental income. ABC Financial would like Lawyer to refer his clients to them.

May Lawyer do so?

Opinion #1:

Lawyer may only make the referral if certain conditions are satisfied. Pursuant to 2000 Formal Ethics Opinion 4, a lawyer may refer a client in need of money for living expenses to a finance company if the lawyer is satisfied that the company's financing arrangement is legal, the lawyer receives no consideration from the financing company for making the referral, and, in the lawyer's opinion, the referral is in the best interest of the client. In no event should Lawyer refer a client to ABC Financial merely as a means to pay Lawyer for his legal services.

The Ethics Committee cannot opine as to the legality of any financing arrangement with ABC Financial.

Inquiry #2:

If Lawyer determines that the financing arrangement is legal and that the referral is in the best interest of the client, may Lawyer accept a "finder's fee" from ABC Financial in exchange for the referral?

Opinion #2:

No. See Opinion #1 above.