Can a lawyer guarantee a client's loan from an outside lender, to be repaid from settlement, instead of advancing the money directly?

Plain-English summary

The inquiry described a lawyer trying to get around the prohibition on advancing personal loans to clients by instead calling a lender (described as "usually a local loan shark"), telling the lender the client had a case pending, and promising to repay the loan at settlement. The question was whether that arrangement was unethical.

The committee concluded that it would be unethical for an attorney to stand as surety or guarantor of a client's debt, while noting that a lawyer could ethically give a legitimate lender a candid legal opinion on the relative merits of a client's case. It grounded the analysis in Canon 5 and the principle, drawn from S.C. Bar Advisory Opinion 79-4, that a lawyer should remain free of any interest in a client's affairs that might cloud the lawyer's judgment. The committee explained that advancing personal loans to a client with a contemplated or pending case is plainly unethical because it gives the lawyer a financial interest in the litigation, and that DR 5-103(B) forbade advancing or guaranteeing financial assistance to a client beyond the expenses of litigation. Guaranteeing a loan, it reasoned, creates the same conflict opportunity as a direct advance: by guaranteeing repayment the attorney incurs a legally binding, enforceable obligation, and depending on the guarantee terms the lender might pursue the guarantor without first looking to the client. The committee cited Grievance Committee v. Lempesis as illustrating how such financial entanglement can becloud a lawyer's judgment, and warned that a lawyer with a financial stake might be tempted to push a client toward a settlement the lawyer would otherwise advise against. It concluded the practice of guaranteeing financial assistance to clients with a contemplated or pending case should be prohibited as unethical.

Currency note

This opinion was issued in 1990, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. 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 Treat this page as historical context, not current guidance.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: Could a lawyer guarantee a client's loan from an outside lender?

A: The committee said no. Guaranteeing a client's loan to be repaid from settlement was improper for the same reasons a direct advance is, because it gives the lawyer a personal financial stake that can impair judgment.

Q: Why did a guarantee raise the same concern as a direct loan?

A: Because, the committee said, guaranteeing repayment creates a legally binding, enforceable obligation, and the lender might pursue the lawyer-guarantor directly, giving the lawyer a financial interest in the outcome.

Q: Could the lawyer do anything to help the client get a loan?

A: The committee said a lawyer could ethically provide a legitimate lender with a candid legal opinion on the relative merits of the client's case.

Citations and references

Rules of Professional Conduct (then in force):

• Code of Professional Responsibility DR 5-103(B): a lawyer shall not advance or guarantee financial assistance to a client beyond the expenses of litigation. (Now reflected in Model Rule 1.8(e) / South Carolina RPC 1.8(e).)

Cases:

• Grievance Committee, Charleston County Bar Ass'n v. Lempesis, 248 S.C. 47, 148 S.E.2d 869 (S.C. 1966).
• Brame v. Ray Bills Finance Corp., 85 F.R.D. 568 (1979); Tri-South Mortgage Investors v. Fountain, 266 S.C. 141, 221 S.E.2d 861 (S.C. 1976).

Other opinions cited:

• S.C. Bar Ethics Advisory Opinion 79-4 (4/79).

See also

• SC Bar Ethics Op. 90-24: A County Attorney Recruiting a Taxpayer Plaintiff
• SC Bar Ethics Op. 90-21: Lawyer as Executor and Trustee

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-90-02/

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 90-02

It would be unethical and therefore against the Code for an attorney to in any way stand as surety or as a guarantor of a debt belonging to the attorney's client. In the interest of being of service to a client, however, it would not be unethical for an attorney to provide his expert legal opinion as to the relative merits of the client's case to a legitimate lender who was considering a loan to that client.

Question:
It is clearly unethical for a lawyer to advance funds to clients as a personal loan. However, is it unethical to circumvent this rule by the attorney calling a lender, usually a local loan shark, and advising him that the client has a case pending and that the attorney will repay the loan at the time of settlement?

Opinion:
The general provisions of the South Carolina Code of Professional Responsibility provide that a "lawyer should exercise independent professional judgment on behalf of a client." S.C. Code of Professional Responsibility, Canon 5. See also EC 5- 1, EC 5-1, EC 5-7, EC 5-8. The "general rule is that an attorney should remain free of any interest in his clients' affairs which might cloud his judgment." S.C. Bar Ethics Advisory Opinion 79-4 (4/79). The advisory opinion recognized that an attorney has a dual role as an advocate and counselor; therefore, he "should avoid financial involvement with his client for its possible effect on his objectively [sic]." Id.

The advancement of personal loans from an attorney to his client with a case contemplated or pending is obviously unethical. An attorney, upon making such an advancement, is acquiring a financial interest in the litigation which may seriously interfere with his exercise of independent professional judgment on behalf of his client. See Brame v. Ray Bills Finance Corp., 85 F.R.D. 568 (1979). The drafters of the Code of Professional Responsibility, recognizing the potential problems this situation presents, forbid the practice of advancing personal loans to clients in DR 5-103(B), and extended the prohibition to the guaranteeing of financial assistance to clients:

While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to his client, except that a lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses.

Code of Professional Responsibility, DR 5-103(B). Plainly, financial assistance to a client beyond that for the expenses of litigation is strictly prohibited.

Guaranteeing financial assistance on behalf of the client, as in arranging a loan for the client through a lender and guaranteeing the loan's repayment from settlement proceeds, affords the same opportunity for conflicts of interest as does direct advancement of financial assistance. By guaranteeing repayment, the attorney has incurred a legally-binding obligation enforceable by the obligee. See generally McGee v. F.W. Poe Mfg. Co., 176 S.C. 288, 180 S.E. 48 (1935); Hudepohl Brewing Co. v. Bannister, 45 F. Supp. 201 (D.C.S.C. 1942). Moreover, depending on the terms of the guarantee agreement, the obligee may pursue the guarantor absolutely, without first looking to the primary obligor. See Tri-South Mortgage Investors v. Fountain, 266 S.C. 141, 221 S.E.2d 861 (1976). Hence, the attorney's guarantee is clearly a creation of a personal financial interest, one which might impair his independent professional judgment in handling the case. In accepting employment, an attorney should direct his focused attention and use his utmost ability in his representation of the client; neither may be possible when such a conflict of interest arises.

In Grievance Committee, Charleston County Bar Assoc. v. Lempesis, 248 S.C. 47, 148 S.E.2d 869 (1966), an attorney represented Illinois residents injured in a car accident in South Carolina. The clients had incurred bills from the collision, which the attorney "personally guaranteed" so that his clients could return to Illinois. Thereafter, the attorney forged his clients' signatures on a settlement agreement. While the Commissioners on Grievance and Discipline did not directly attribute the attorney's action on the prior guarantee agreement, it did find that the attorney had become "involved in a series of confused, complex, and disastrous financial ventures which adversely affected his practice, preoccupied his mind and beclouded his judgment to the detriment of those who had placed in him their trust and confidence." Lempesis, at 873. Though Lempesis does not address on point the propriety of an attorney guaranteeing repayment for a client's indebtedness, it is illustrative of the possible effect such an arrangement might have on the attorney's professional judgment reserved for his client. By obtaining a financial stake in the handling of a particular case, an attorney might be tempted to push his client into accepting a settlement offer which the attorney would ordinarily advise be turned down. Worse yet, the attorney might resort to fraud and deceit, as in Lempesis, for the purpose of meeting his own financial interests. While not all attorneys are incapable of separating their personal financial interests from their professional responsibilities in a given case, the possibility remains that numerous clients will be denied real representation if an attorney stands to be sued on a guaranty. Accordingly, the practice of guaranteeing financial assistance to clients with a case contemplated or pending should be prohibited as unethical and clearly beyond the scope of the Code of Professional Responsibility.