Must a lawyer personally pay the fee of a Special Referee the trial judge effectively compelled the parties to use, and must the lawyer try to persuade the insolvent corporate client's principals to pay?

Plain-English summary

An attorney brought two collection lawsuits for a corporate client. When the cases reached the trial roster, the Circuit Judge strongly "suggested" they be referred to a Special Referee (not the Master in Equity) for trial, and all parties consented. The plaintiff lost one case, and the Special Referee ordered the plaintiff to pay the balance of the referee's fee, $1,125, within 30 days. The plaintiff corporation is insolvent. The attorney asked whether he must pay the Special Referee and whether he must try to persuade the corporation's principals to pay the corporate debt.

The committee concluded the attorney is not obligated to pay the Special Referee's fee. A Special Referee is a court of record and part of the judicial process, unlike an arbitrator, so it differs from a privately retained neutral. The committee also declined the second question, holding it lacks jurisdiction to decide when a corporation's principals are liable for the entity's debt because that is a question of substantive law; it follows that the attorney has no per se obligation to try to persuade the principals.

The committee reasoned that while courts have held a lawyer must pay costs of depositions the lawyer ordered, no Rule of Professional Conduct requires payment of a Special Referee's fee. Rule 9 of the Alternative Dispute Resolution Rules splits a neutral's cost between the parties, but it would not apply here because the trial judge ordered the appointment, and in any event Rule 9 obligates the parties, not the lawyer; Rule 11 of the ADR Rules lists attorney duties, none involving paying the neutral. The committee's own FAQ 11 says that if an attorney hires a mediator the attorney must ensure timely payment, but if the court orders a mediator the attorney should look to the courts for help determining payment; that FAQ implied attorney responsibility only where the neutral is hired for the parties' convenience. Because a Special Referee is a court of record from which appeals may be taken as of right (unlike arbitration), and because the referee ordered the parties (not the lawyers) to pay, the attorney is not liable for the costs. The committee added that Rule 1.15(d) applies only when a lawyer holds funds in which a third party or client has an interest, and Rule 8.4(e) (conduct prejudicial to the administration of justice) is not violated here, noting Comment [4]'s recognition that a lawyer may refuse to comply with a legal obligation on a good-faith belief that no valid obligation exists, and that filing an appeal of any order directing the lawyer to pay would itself violate no ethical rule.

In practice

The opinion holds that, under the South Carolina rules and ADR Rules as they stood at the time, no Rule of Professional Conduct requires a lawyer to pay a Special Referee's fee, and that where the trial judge compelled the referral the Special Referee stands in the judge's shoes as a court of record. The committee distinguished court-compelled referees from privately hired mediators (for whom its FAQ 11 places payment responsibility on the hiring attorney), noted the referee here ordered the parties rather than the lawyers to pay, and concluded neither Rule 1.15(d) nor Rule 8.4(e) is implicated. It declined to decide the principals' liability for the corporate debt as a substantive-law question, so the lawyer has no per se duty to persuade them.

Common questions

Q: Must a lawyer personally pay a court-appointed Special Referee's fee?

A: No. The committee concluded no Rule of Professional Conduct requires a lawyer to pay a Special Referee's fee, particularly where the trial judge compelled the referral.

Q: Is this different from paying a privately hired mediator?

A: Yes. The committee said its FAQ 11 places responsibility for payment on the attorney who hires a mediator for the parties' convenience, but a court-compelled Special Referee is a court of record standing in the judge's shoes.

Q: Does refusing to pay violate Rule 8.4(e)?

A: No on these facts. The committee said the referee ordered the parties, not the lawyers, to pay, and Comment [4] to Rule 8.4 recognizes a lawyer may refuse a legal obligation on a good-faith belief that none validly exists; filing an appeal would violate no ethical rule.

Q: Must the lawyer try to make the corporation's principals pay?

A: No per se obligation. The committee said whether principals are liable for a corporate debt is a question of substantive law outside its jurisdiction.

Background and rules framework

The opinion interprets South Carolina Rule 8.4(e) (conduct prejudicial to the administration of justice) and Rule 1.15(d) (handling funds in which a third party or client has an interest), which correspond to the like-numbered Model Rule provisions, against the South Carolina Alternative Dispute Resolution Rules (Rules 9 and 11) and the committee's FAQ 11. The analysis turns on the distinction between a court-compelled Special Referee (a court of record) and a privately retained neutral.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / SC Rule 8.4(e), Comment [4] (conduct prejudicial to the administration of justice; good-faith refusal of an obligation)
• MR 1.15 / SC Rule 1.15(d) (funds in which a third party or client has an interest)

Other authority:

• South Carolina Alternative Dispute Resolution Rules 9 and 11 (cost-sharing of the neutral; attorney duties)
• S.C. Bar Ethics Advisory Committee FAQ 11 (responsibility for paying a hired versus court-ordered mediator)
• Rule 7(a)(5) of Rule 14, Rules for Lawyer Disciplinary Enforcement

See also

• SC Bar Ethics Op. 06-02: Recording-Fee Markups
• SC Bar Ethics Op. 05-07: Charging Lien on Support Checks

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-09-08/
• Original PDF: https://www.scbar.org/media/hxip1nfa/09-08.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 09-08

SC Rules of Professional Conduct: 8.4(e), 1.15(d)

Summary

A Special Referee is a court of record and is part of the judicial process, unlike an arbitrator. Therefore, attorney is not obligated to pay the fee of the Special Referee.

This Committee does not have jurisdiction to discuss under what circumstances the principals of a corporation are liable for the corporate entity’s debt, as this is a question of substantive law. It therefore follows that the attorney has no per se obligation to try to persuade the principals of the corporation.

Facts

Attorney brought two collection lawsuits on behalf of a corporate client. When the cases came up for trial on the roster, the Circuit Judge strongly “suggested” that the cases be referred to a Special Referee (not the Master in Equity) for trial. All parties consented. The plaintiff lost one of these cases, and the Special Referee rendered an order which stated:

Plaintiff shall pay the balance of the special referee’s fee in the amount of $1,125 within 30 days of filing this order.

The plaintiff is insolvent.

Questions

Is the attorney required to pay this Special Referee?

Is the attorney obligated to try to persuade the principals to pay the corporate debt?

Opinion

Numerous court opinions have held that a lawyer has the duty to pay costs of depositions which he has ordered and things of this nature. However, there is no rule within the South Carolina Rules of Professional Conduct which requires payment of fees of Special Referees.

Rule 9 of the Alternative Dispute Resolution Rules states that each party shall equally split the costs of the neutral unless other arrangements are made.It would appear that this particular case would not implicate Rule 9 because the trial judge ordered appointment of the Special Referee. However, even if Rule 9 were applicable, the parties are required to pay the neutral; there is no mention of an obligation upon the lawyer. Rule 11 of the ADR Rules identifies certain duties of attorneys, none of which involve payment of the neutral. The above begs the question, because this situation is not truly “Alternative Dispute Resolution,” as it was compelled by the Circuit Judge.

The South Carolina Bar Ethics Advisory Committee has addressed this issue in the form of a “Frequently Asked Question,” Question 11. This opinion states:

...[I]f an attorney hires a mediator, the attorney is responsible for ensuring timely payment. If the Court orders a mediator, the attorney should look to the Courts for assistance in determination of how the payment will be rendered.

This FAQ did not attempt to discuss what constitutes court compulsion in appointing a Special Referee. Instead, it was implied in the FAQ that the attorney is responsible for payment of a mediator if the mediator is hired for the convenience of the parties, such as avoiding a long wait for trial, etc. The fact that a Special Referee is a Court of Record from which appeals may be filed as a matter of right adds further support to this conclusion. By contrast, arbitration is not subject to appeal as a matter of right absent impropriety in selection or gross abuse, etc.

FAQ 11 also cited the line of cases which state that the failure to pay a court reporter’s fee in a timely fashion has been held by the Supreme Court to be conduct prejudicial to the administration of justice. It is not contrary to the administration of justice for a lawyer to assume that the courts hear cases. If a judge in essence forces a lawyer to agree to a Special Referee, the Special Referee stands in the shoes of the Circuit Judge. Therefore, the attorney is not liable to pay any costs for the Special Referee. Further support for this conclusion is the statement in the facts that the Special Referee ordered the parties to pay the Special Referee’s fees, and did not order the lawyers to do so.

The statement in FAQ 11 that if the court orders a mediator, the attorney should look to the courts for assistance in determination of how the payment will be rendered, is essentially a truism in this situation. The Special Referee is a court of record, so if the Special Referee ordered the attorneys to pay the fee directly, such an order would be subject to appeal. In theory the case could be appealed all the way to the Supreme Court, which would have the ultimate authority to decide the issue.

This conclusion is not altered by any applicable Rules of Professional Conduct. Rule 1.15(d) only applies to cases wherein a lawyer receives a fund in which a 3 rd party or client has an interest. Rule 8.4(e) involves the somewhat vague statement that a lawyer should not “engage in conduct that is prejudicial to the administration of justice.” Comment [4] to Rule 8.4 states that a lawyer may refuse to comply with an obligation imposed by law upon a good faith belief that no valid obligation exists. If the Special Referee ordered the lawyer himself to pay the Special Referee’s fees, the case could, as discussed above, be appealed all the way to the Supreme Court, which of course would have the final authority in the case. The filing of an appeal itself would violate no ethical rule. This same analysis would apply to Rule 7(a)(5) of Rule 14 of the Rules for Lawyer Disciplinary Enforcement, which is similar to Rule 8.4(e) of the Rules of Professional Conduct.