Can a lawyer take a revolving credit line from a financing company using the value of the firm's contingent cases as collateral?

Plain-English summary

A lawyer asked whether a company's financing arrangements with lawyers comply with the rules. The company advertised that it provides litigators with flexible revolving credit lines up to $15 million using the value of their contingent cases as collateral. The committee noted it had researched the inquiry extensively but, as a matter of policy, does not approve or certify specific commercial ventures, and so it gave a brief generic answer keyed to the governing principles.

The committee identified three principles for any third-party firm financing arrangement. First, under RPC 5.4(c) and RPC 1.7(a)(2), the lawyer cannot let the financing company direct or regulate the lawyer's professional judgment in rendering legal services, or materially limit the lawyer's duties to clients. Second, under RPC 5.4(a), the lawyer cannot share legal fees with the financing company. Third, under RPC 1.6, the lawyer cannot share confidential information relating to the representation of clients with the financing company.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee did not bless or condemn the particular lender, consistent with its policy against certifying commercial ventures. Instead it set out the boundaries any such arrangement must respect. The financing relationship is permissible only if it leaves the lawyer's independent professional judgment intact (RPC 5.4(c), RPC 1.7(a)(2)), keeps legal fees from being shared with the financier (RPC 5.4(a)), and protects client confidences from disclosure to the financier (RPC 1.6). The committee framed these as the lines that separate ordinary borrowing from arrangements that would compromise the lawyer's duties.

Common questions

Q: Can a lawyer borrow against the firm's contingent cases?

A: The committee did not approve the specific product but did not prohibit third-party financing outright; it set three conditions the arrangement must satisfy under RPC 5.4(c), 1.7(a)(2), 5.4(a), and 1.6.

Q: What can the financing company not do?

A: Per the committee, it cannot direct or regulate the lawyer's professional judgment or materially limit the lawyer's duties to clients, and the lawyer cannot share legal fees or client confidences with it.

Q: Did the committee evaluate the specific lender?

A: No. The committee said it does not, as a matter of policy, approve or certify specific commercial ventures that market to lawyers.

Background and rules framework

The opinion applied Washington RPC 5.4 (Model Rule 5.4, professional independence of a lawyer), specifically RPC 5.4(c) on third parties directing professional judgment and RPC 5.4(a) on sharing legal fees with nonlawyers, together with RPC 1.7(a)(2) (Model Rule 1.7, material limitation by the lawyer's own interests or third parties) and RPC 1.6 (Model Rule 1.6, confidentiality). The committee used these rules to mark the limits of any firm-financing arrangement.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4 / Washington RPC 5.4, 5.4(a), 5.4(c) (professional independence; sharing fees with nonlawyers; third-party direction of judgment)
• Model Rule 1.7 / Washington RPC 1.7, 1.7(a)(2) (material limitation conflicts)
• Model Rule 1.6 / Washington RPC 1.6 (confidentiality of information)

See also

• ABA Formal Op. 484: client fee-financing companies
• ABA Formal Op. 464: fee division and sharing with nonlawyers
• ABA Formal Op. 499: passive investment in an alternative business structure

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1620

Original opinion text

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

Advisory Opinion: 2157
Year Issued: 2008
RPC(s): RPC 5.4(c), 1.7(a)(2), 5.4(a), 1.6
Subject: Lawyer borrowing money using the value of contingent cases as collateral

BACKGROUND

This inquiry concerns a company that advertises that it “provide[s] litigators with flexible revolving credit lines up to $15 million using the value of your contingent cases as collateral.” The inquiry was sent by a lawyer who asked the Committee to determine whether the company`s financing arrangements with lawyers comport with the Rules of Professional Conduct. The inquiry was extensively researched by two former Committee members and was discussed over several Committee meetings during its last term. Those materials are included in the background packet and we will not repeat that discussion here; rather, we simply incorporate them by reference.

ANALYSIS

Because the Committee as a matter of policy does not “approve” or “certify” specific commercial ventures, we recommend following that course here and providing the lawyer with a brief generic answer that points the lawyer to what the Committee has already identified as the key ethical precepts in this situation. Our brief suggested response follows.

RESPONSE

The Committee as matter of policy does not approve specific commercial ventures that market their services to lawyers. With any law firm financing arrangement with a third party, however, three general principles should guide the lawyer’s conduct. First, the lawyer cannot, under RPC 5.4(c) and RPC 1.7(a)(2), allow the company providing financing to the law firm “to direct or regulate the lawyer’s professional judgment in rendering such legal services” (RPC 5.4(c)) or “materially limit” (RPC 1.7(a)(2)) the lawyer’s duties to the lawyer’s clients. Second, the lawyer cannot, under RPC 5.4(a), share the lawyer’s legal fees with the financing company. Third, the lawyer cannot, under RPC 1.6, share confidential information relating to the representation of clients with the financing company.