Can a lawyer turn past-due client accounts over to a collection agency, including paying the agency a percentage of what it collects?

Plain-English summary

A collection agency had approached several lawyers about collecting their uncollectible or past-due accounts for legal services. The inquiry asked whether a North Carolina lawyer could ethically turn delinquent accounts over to a collection agency on a straight-fee basis or a percentage of any amount collected.

The opinion concluded yes, subject to limits. A lawyer may employ an agency to collect a delinquent account only so long as: (1) the fee agreement was permitted by law and the Rules (Rule 2.6(a)-(d)); (2) the lawyer, when making the fee agreement, did not believe and had no reason to believe he was representing a client unable to afford his services; (3) the legal services are completed so the lawyer has no further responsibilities as the client's attorney (Rule 5.1(b)); (4) there is no genuine dispute between lawyer and client about the existence, amount, or delinquent status of the debt (Rule 2.6 comment); and (5) the lawyer has no reason to believe the agency will use illegal means, such as those prohibited by N.C. General Statutes Sections 66-49.43 through 49.47 (Rule 1.2). If these criteria are met, the lawyer may compensate the agency by any appropriate means, including a percentage of the amount collected. Although the Rules generally prohibit sharing legal fees with a nonlawyer (Rule 3.2) to protect the lawyer's independent judgment, once the services are completed and the fee has ripened into a delinquent account, no further professional judgment is required and the reason for the prohibition no longer exists. The opinion noted this was a change: prior opinions under the Code (CPRs 339, 71, and 1) had barred agency collection based on the aspirational, non-mandatory Ethical Consideration 2-23, and those CPRs were expressly overruled. The opinion observed it accords with the majority of state bars to consider the issue.

Currency note

This opinion was issued in 1986, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. The provisions it applies (Rule 2.6 on fees, Rule 3.2 on fee division with nonlawyers, Rule 5.1(b), and Rule 1.2 on misconduct) have since been renumbered and revised (the corresponding Model Rules are 1.5 and 5.4). 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 lawyer use a collection agency to collect unpaid legal fees?

A: Yes, within limits. The opinion concluded a lawyer may employ a collection agency for delinquent client accounts if the five conditions are met.

Q: Can the agency be paid a percentage of what it collects?

A: Yes. The opinion concluded that once the conditions are met, the lawyer may compensate the agency by any appropriate means, including a percentage of the amount collected.

Q: Doesn't paying a percentage violate the bar on fee-sharing with nonlawyers?

A: No, in this situation. The opinion concluded that once the services are completed and the fee is delinquent, no further professional judgment is required, so the reason for the Rule 3.2 prohibition no longer exists.

Background and rules framework

The opinion applied North Carolina Rule 2.6 on fees (corresponding to Model Rule 1.5) and Rule 3.2 on fee division with nonlawyers (corresponding to Model Rule 5.4), with Rule 5.1(b) and Rule 1.2. The analysis turned on the fact that a delinquent post-completion account no longer requires professional judgment, removing the rationale for the fee-sharing prohibition, and it expressly overruled the contrary CPRs 339, 71, and 1.

Citations and references

Rules of Professional Conduct:

• North Carolina Rule 2.6(a)-(d) (fees)
• North Carolina Rule 3.2 (fee division with nonlawyers)
• North Carolina Rule 5.1(b); Rule 1.2 (misconduct)
• MR 1.5 (fees); MR 5.4 (professional independence; fee sharing)

Statutes:

• N.C. General Statutes Sections 66-49.43 through 49.47 (prohibited debt-collection means, as cited in the opinion)

Other opinions cited:

• CPRs 339, 71, and 1 (North Carolina; overruled by this opinion)
• Georgia Opinion 49 (1985); Iowa Opinion 83-21 (1983); Arizona Opinion 82-2 (1982); Florida Opinion 81-3(M) (1981); Maryland Opinion 82-84 (1981); but see West Virginia Opinion 80-1 (1981)

See also

• NC Ethics Op. RPC 35: contingent fees for the collection of med-pay
• NC Ethics Op. RPC 10: for-profit lawyer referral service

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-7/

Original opinion text

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

Inquiry:

A collection agency has approached several lawyers about collecting the lawyer's uncollectible and/or past due accounts for legal services. May an attorney licensed and practicing in North Carolina ethically turn over past due and/or delinquent accounts for legal services to be collected by a collection agency either on a straight fee basis and/or a percentage of any amount collected?

Opinion:

Yes. However, there are limits on the circumstances under which a lawyer personally may undertake to collect a delinquent client account. Additional limits are imposed by the lawyer's employment of another to undertake that effort on his behalf. Accordingly, a lawyer may employ the services of an agency to collect a delinquent account only so long as -

• The fee agreement out of which the account arose was permitted by law and by the Canons and Rules of Professional Conduct. Rule 2.6(a), (b), (c), and (d), North Carolina Rules of Professional Conduct (NCRPC).

• The lawyer, at the time of making the fee agreement out of which the account arose, did not believe, and had no reason to believe, that he was undertaking to represent a client who was unable to afford his services. Cannon II; Preamble, Paragraph Five, NCRPC; Rule 7.1, comment, NCRPC.

• The legal services, giving rise to the fee out of which the account arose, have been completed so that the lawyer has no further responsibilities as the client's attorney. See Rule 5.1(b) and Rule 5.1, comment, Paragraph Five, NCRPC.

• 4. There is no genuine dispute between the lawyer and the client about the existence, amount, or delinquent status of the indebtedness. See Rule 2.6, comment, Paragraph Three, NCRPC.
• 5. The lawyer does not believe, and has no reason to believe, that the agency which he employs will use any illegal means, such as those prohibited by North Carolina General Statutes Sections 66-49.43 through 49.47, in its effort to collect the account. Rule 1.2, NCRPC; Preamble, Paragraph Four, NCRPC.

If these criteria are met, a lawyer may employ an agency to collect a delinquent client account, and he or she may agree to compensate the agency by any appropriate means, including compensation on the basis of a percentage of the amount collected.

It is true that the North Carolina Rules of Professional Conduct generally prohibit the sharing of legal fees with a nonlawyer. Rule 3.2, NCRPC. This general prohibition arises out of the requirement that a lawyer "assist in preventing the unauthorized practice of law." Canon III, NCRPC The purpose of the Rule is to further one of the principles underlying the Canon by "protect[ing] the lawyer's professional independence of judgment." Comment, Rule 3.2, NCRPC. The delinquent status of the account pre-supposes (as is made explicit in criterion (3), above) that the legal services have been completed and no further professional judgment is required of the lawyer on behalf of the client. Once services have been completed, and the fee has over-ripened into a delinquent account, the reason for the prohibition of Rule 3.2 no longer exists.

This opinion represents a change. Prior opinions, rendered under the Code of Professional Responsibility, CPRs 339, 71, and 1, prohibited the collection of delinquent client accounts by an agency. Those opinions were based on Ethical Consideration 2-23 which advised that lawyers "should avoid controversies over fees with clients and should attempt to resolve amicably any differences on the subject." Like other Ethical Considerations under the Code, however, E.C. 2-23 was "aspirational" and, unlike the Disciplinary Rules, not "mandatory." Preliminary Statement, Code of Professional Responsibility. The Code, including its Ethical Considerations, has been superseded by the Rules of Professional Conduct (Approved by the Supreme Court of North Carolina on October 7, 1985). The reasoning underlying E.C. 2-23 was sound before its repeal and remains sound today. A lawyer, however, was not required then, and is not required now, to heed its advice. Accordingly, CPRs 339, 71, and 1 are hereby expressly overruled.

This opinion is in accord with the conclusions of a majority of the Bar governing bodies in other states which have considered the issue in recent years. SeeGeorgia Opinion 49 (July 26, 1985); Iowa Opinion 83-21 (July 18, 1983); Arizona Opinion 82-2 (January 30, 1982); Florida Opinion 81-3(M) (1981); Maryland Opinion 82-84 (December 7, 1981); but see West Virginia Opinion 80-1 (January 16, 1981).