Can a law firm agree to advance all collection costs for a lending-institution client and absorb them out of its percentage fee?

Plain-English summary

A lending institution proposed sending its delinquent accounts to a law firm for collection under a retainer in which the firm would advance all costs of collection and be paid a percentage fee. Costs advanced were to come out of the percentage fee, with a provision that, at year end, if total costs exceeded the total fees paid for the year, the lending institution would reimburse the firm for the difference. The reconciliation was to be on the full year's book of cases, not case by case. The inquiry asked whether this arrangement was ethically permissible.

The committee read the proposed wording as having the firm pay all costs out of fees earned rather than receiving reimbursement, so that the firm would not merely be advancing costs but acquiring a financial interest in the cases. It pointed to Rule 1.8(e)(1), which lets a lawyer advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome. To stay within that rule, the committee said the retainer should be reworded so that costs are advanced by the firm and reimbursed by the lending institution, with the fee based on the percentage less costs incurred. The committee added that there is no prohibition on a lawyer working for a minimal fee or for no fee, and cautioned that the lawyer should also comply with Rule 1.2(A) and Rule 1.4.

Currency note

This opinion was issued in 1992, 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 Treat this page as historical context, not current guidance.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: Can a law firm absorb all litigation costs out of its own fee for a client?

A: The committee said no, as proposed: paying costs out of the fee instead of being reimbursed turns the firm into the holder of a financial interest in the cases rather than a lawyer advancing costs under Rule 1.8(e)(1).

Q: How could the lender arrangement be fixed?

A: The committee said the retainer should be reworded so the firm advances costs and the lending institution reimburses them, with the fee figured as the percentage less the costs incurred.

Q: Can a lawyer advance litigation costs with repayment tied to the outcome?

A: Yes. The committee noted Rule 1.8(e)(1) permits advancing court costs and expenses of litigation, the repayment of which may be contingent on the outcome, and that a lawyer may also work for a minimal or no fee.

Background and rules framework

The opinion applied South Carolina Rule 1.8(e)(1), which corresponds to Model Rule 1.8(e), governing financial assistance to a client in connection with litigation. The committee's distinction turned on whether the firm was advancing costs (permitted) or acquiring a financial stake in the cases (not permitted). It also referenced Rule 1.2(A) (scope of representation) and Rule 1.4 (communication).

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.8(e)(1) / Model Rule 1.8(e): a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome.
• South Carolina RPC 1.2(A) / Model Rule 1.2(a): scope of representation.
• South Carolina RPC 1.4 / Model Rule 1.4: communication.

See also

• ABA Ethics Op. 04-432: Posting Bail for a Client
• Florida Bar Ethics Op. 70-8: Indemnifying a Client's Cost-Bond Surety

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-92-14/

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 92-14

A lending institution wishes to send its delinquent accounts to a law firm for collection. Pursuant to a proposed retainer agreement, the law firm is to advance all costs of collection. The law firm is to be paid a percentage fee. Costs advanced are to come out of the percentage fee with the provision that, at end of year, should costs exceed total fees paid to the law firm, then the lending institution will reimburse the law firm for the difference. As stated, this will not be on a case-by-case basis, but rather based on total cases handled by the law firm for the lending institution during the calendar year.

Question:
Would this arrangement be ethically permissible?

Summary:
If the retainer is re-worded to state that costs are to be advanced by the law firm with the reimbursement to be made by the lending institution upon submission of a bill and that the fee paid to the law firm is reimbursed, then there should be no ethical violation. A lawyer may advance costs of litigation for a client and these may even be contingent on the outcome. There is no restriction on a lawyer working for a minimal or no fee arrangement.

Opinion:
Rule 1.8(e)(1) states:

"A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; ..." The present proposed wording of the retainer agreement seems to indicate that the law firm will pay all costs out of fees earned, rather than receiving reimbursement. Under this practice, the law firm would not be merely advancing costs but would be acquiring a financial interest in the case. To avoid this problem, the retainer should be reworded to provide that costs will be advanced by the law firm and reimbursed by the lending institution and that the fee will be based on percentage less costs incurred. There is no prohibition for a lawyer working for a minimal fee or for no fee. Also, the lawyer should be careful to comply with Rule 1.2(A) and Rule 1.4.