May a county bar association adopt a plan letting clients finance legal fees through a bank that buys the attorney's installment note?

Plain-English summary

A New Jersey county bar association asked whether it could adopt a legal-fee financing plan (modeled on one developed by the Bar Association of Erie County, New York) that contained any features rendering it unethical. The plan financed legal fees on an installment-credit basis. It excluded contingent-fee arrangements and was aimed not at indigent clients but at clients with insufficient cash but enough credit to pay a fee over time.

Under the plan, when such a client retained an attorney, the attorney would ask a participating bank to decide whether to finance the credit arrangement, submitting the information the bank needed to assess the credit risk. If approved, the client signed a "Retail Installment Obligation" stating the fee (less any down payment) plus a credit service charge, with the attorney as payee. The attorney would immediately assign the instrument to the bank and receive 96 percent of its face amount, with 4 percent held in a reserve account against losses; surplus reserve above 6 percent of outstanding loans would be paid to the county bar association. The loan was without recourse to the attorney for nonpayment.

The plan included safeguards: the bank would notify the assigning attorney and let him repurchase the obligation before suing; it could offer the attorney 20 percent of any recovery to sue on its behalf; it recognized the confidential, privileged nature of the lawyer-client relationship and agreed to honor reasonable confidentiality requests "to the extent consistent with its financial interests"; it offered optional arbitration of attorney-client disputes; and it agreed not to claim holder-in-due-course status, allowing the client all defenses available had the attorney sued.

The Committee disapproved the plan. It reasoned that the plan should not be approved, "not so much because it violates any particular Canon of Ethics, but because it connotes a commercialization of the practice of law." A lawyer is not a tradesman and should not be a retail seller of his services. The plan injected a third party, the bank, into the usual lawyer-client relationship, and no amount of safeguards could effectively prevent deterioration of that relationship if something went wrong, with the bank tempted to comment on the lawyer's performance or fee if payments lagged. The Committee concluded the plan might lower the standards of the legal profession and bring it into disrepute, and accordingly disapproved it.

Currency note

This opinion was issued in October 1967, before New Jersey's September 13, 1971 adoption of the Disciplinary Rules (Code of Professional Responsibility), and well before the 1984 Rules of Professional Conduct and all later revisions. The "commercialization of the practice of law" rationale it rested on reflects mid-1960s professional norms that later constitutional and rule developments substantially reshaped; modern questions about fee financing and third-party payers are addressed under RPC 1.5 (fees) and RPC 5.4 (professional independence and third-party involvement). Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific requirement mentioned here.

Common questions

Q: Could a county bar adopt this bank-financing plan for legal fees?

A: No. The Committee disapproved the plan, concluding that it connoted a commercialization of the practice of law and might lower professional standards and bring the profession into disrepute.

Q: Did the Committee find the plan violated a specific Canon?

A: No. It expressly said the plan should be disapproved "not so much because it violates any particular Canon of Ethics," but because of the commercialization concern and the injection of a third party into the lawyer-client relationship.

Q: What was the Committee's concern about the bank's role?

A: The Committee said no safeguards could effectively prevent deterioration of the lawyer-client relationship if something went wrong, because the bank would be tempted to comment on the lawyer's performance or the size of his fee if payments began to lag.

Background and rules framework

The opinion addressed the ethics of financing legal fees through a bank that purchases the attorney's installment note, a structure that interposes a third-party payer between lawyer and client. The Committee rested its disapproval on the commercialization rationale of the Canons-era profession rather than a specific Canon. In current New Jersey terms, the topics map to RPC 1.5 (fees) and RPC 5.4, which governs a lawyer's professional independence and the involvement of third parties in the lawyer-client relationship.

Citations and references

Other opinions cited:

• A.B.A. Standing Committee on Professional Ethics, Informal Decision No. 829 (Jan. 28, 1965): declined to pass on the plan absent full details

Other authorities:

• Canons of Professional Ethics (general commercialization principles; no particular Canon held violated)

See also

• NJ ACPE Op. 119: Borrower's Payment of the Lender's Legal Fees
• NJ ACPE Op. 120: Collecting Title-Company Charges at a Closing

Source

• Landing page: https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp115-1.html

Original opinion text

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

90 N.J.L.J. 681
October 19, 1967

OPINION 115

Legal Service Financing Plan

In 1965, the Bar Association of Erie County, New York, completed the preparation of a proposed plan for the financing of legal fees. The details of the plan are set forth below. The proposal was submitted to the Award of Merit Committee of the Section of Bar Activities of the American Bar Association and received an award on the basis of the entry's originality and thoroughness. We are told that similar plans are in operation in various parts of the country. In January 1965 the proposal was brought to the attention of the Standing Committee on Professional Ethics of the American Bar Association. It rendered its informal decision No. 829 on January 28, 1965, simply indicating that in order to pass upon the ethics of the proposal, it would be necessary that the details of the plan be submitted to it in full. Apparently this was never done.

A county bar association of this State is now considering the adoption of this or a similar plan and has asked the opinion of this Committee as to whether the proposal, as presented, contains any features which would render it unethical.

Essentially the plan envisions the financing of legal fees upon an installment credit arrangement. Contingent fee arrangements are specifically occluded, nor is it intended for the indigent client, but rather for a client with insufficient means to pay an appropriate fee in cash but with a credit standing such as to enable him to pay the fee over a period of time. It is proposed that when such a prospective client visits the attorney of his selection, the latter will communicate with a bank (the bank having already agreed to participate in the plan), and will request the bank to decide whether, with respect to this particular client, it is or is not willing to finance the proposed credit arrangement. The attorney will submit to the bank such information as the latter requires in order to determine the qualifications of the proposed credit risk. Within a very short time an answer will be received. If the answer is in the affirmative, the client will execute a document entitled "Retail Installment Obligations." This will set forth the original total amount of the fee less any payment made on account, plus the amount of the credit service charge. The arithmetical result is called the "unpaid time fee" and represents the actual amount of the obligation. The attorney will appear as the payee or obligee in this instrument and immediately following its execution will assign it to the bank, receiving an immediate payment of 96 percent of its face amount. The additional 4 percent will be held by the bank in a reserve account ultimately to be applied to any losses that may result from its general handling of claims of this sort. When the reserve fund amounts to more than 6 percent of the gross amount of the outstanding loans, the excess will be paid to the county bar association for its own purposes. The loan will be made without recourse to the attorney for nonpayment.

The bank agrees to employ its normal procedures to collect each obligation assigned to it. Before commencing any legal proceeding to collect the obligation, however, the bank will notify the assigning attorney and will give him the opportunity to repurchase the obligation for the then unpaid balance thereof. If the assigning attorney shall decline to repurchase the obligation and if the bank shall deem it appropriate to institute suit, it may, at its option, offer to permit the assigning attorney to act on the bank's behalf, in which case it will agree to pay the attorney for such services an amount equal to 20 percent of the sum recovered. In the agreement between the bank and the attorney there is explicit recognition of the confidential nature of the relationship between an attorney and client, it being specifically noted that communications incident to such relationship are privileged. In deference to this the bank agrees that it will "to the extent consistent with its financial interests" honor all reasonable requests of the assigning attorney with respect to his relationship with the client and avoid any disclosure of a confidential communication. The plan also makes available arbitration procedures to resolve any dispute between the attorney and his client, these arrangements being optional as far as the client is concerned. The bank further agrees that if any legal action is instituted against the client, it will not take the position that it is a holder in due course but will permit the client to introduce any and all defenses that might be available were the action instituted by the attorney rather than by the bank.

The Committee has given careful consideration to the plan and has concluded that it should not be approved, not so much because it violates any particular Canon of Ethics, but because it connotes a commercialization of the practice of law.

Lawyers have long prided themselves on being members of an honorable profession. While performance may not be universal surely relatively few clients can have been left without legal representation for want of funds to pay the entire fee at once. A lawyer is not a tradesman and therefore he should not be a retail seller of his services. The plan contemplates the injection of a third party - the bank - into the usual lawyer-client relationship. No amount of safeguards can effectively prevent a deterioration of this relationship if something goes wrong. The temptation of the third party to comment on the lawyer's performance or the size of his fee may be too great to withstand if payments begin to lag. In any event it tends to depict the lawyer as no longer practicing his profession, but selling his services in the marketplace. It is the opinion of this Committee that this plan may result in a lowering of the standards of the legal profession tending to bring the profession into disrepute and accordingly the plan is disapproved.