Opinion #177. Advancing Litigation Costs Through Lines of Credit

Issued by the Professional Ethics Commission

Date Issued: December 14, 2001

Facts and Question

An attorney has requested an opinion on whether it is ethically permissible under the Bar rules to advance litigation costs through the use of a bank line of credit, passing interest and other costs of financing onto the client. The attorney has provided written material suggesting two alternative ways for financing litigation costs. Each would allow for interest to be tracked to individual cases. The first involves the use of separate credit lines for individual cases. The second involves the use of a single line of credit for more than one case, with the financing institution tracking each draw to an individual case and separately calculating interest on each draw so that interest can also be tracked to individual cases.[1]

Opinion

In the view of the Professional Ethics Commission, it is permissible under the Bar Rules for an attorney to finance litigation costs, and pass the interest and other costs of financing onto the client, under certain conditions. The attorney’s inquiry calls into question Maine Bar Rule 3.7(d), which provides:

*Financial assistance.* While representing a client in connection with contemplated or pending litigation, a lawyer may not advance or guarantee financial assistance to the client, except that a lawyer may advance or guarantee the expenses of litigation, including court costs, expense of investigation, expenses of medical examination, and expenses of obtaining and presenting evidence.

This rule unambiguously permits a lawyer to advance funds on behalf of a client for litigation expenses. The question then becomes: If a lawyer arranges for financing of those client advances, can the lawyer’s costs associated with the financing be charged to the client?2 When the costs and interest associated with financing litigation expenses can be directly linked to a specific case, the Commission sees no basis in the Bar Rules for requiring the lawyer to absorb those costs. Several other jurisdictions have reached a similar conclusion. See e.g.Ariz. St. Bar Comm. On the Rules of Prof. Conduct, Op. 2001-07, (9/2001); Ohio Opinion 2001-3 (6/7/2001); Chittenden v. State Farm Mut. Auto. Ins. Co. La. Sup. Ct, 2000-C-414 (5/15/2001).

The Commission has previously opined about several financing arrangements involving lawyers and clients. In Opinion 138, the Commission concluded that Rule 3.3(b), allowing lawyers to accept payment by credit card, would permit other client financing arrangements for legal fees, provided certain safeguards were maintained. In Opinion 144, the Commission determined that a lawyer could, without violating the bar rules, insure the payment of legal fees through a promissory note secured by client property unrelated to the representation, provided certain safeguards were maintained. In Opinion 152, the Commission advised that it would be permissible for a lawyer to enter into a financing arrangement with a third-party financial institution with a security interest in accounts receivables from legal services, again provided certain safeguards were maintained.

These opinions suggest that certain measures are necessary to assure that the financing arrangement does not result in the violation of the lawyer’s obligations to the client. For example, to avoid a potentially excessive fee prohibited by Rule 3.3(a), the terms for the loan including costs and rate of interest should be reasonable. Further, the requirements of Rule 3.4(f)(2)(i), concerning the lawyer’s obligations to avoid acquiring an interest adverse to a client, guide ME. MAN. ON PROF. RESP. (2002) many of the other necessary safeguards. The lawyer should not profit from the financing arrangement, but should simply pass through to the client the expenses attributable to financing the litigation costs, like any other disbursement. The terms of the fee arrangement, identifying the litigation expenses including the financing arrangement and its terms, should be clearly explained to permit the client to make an informed decision.

In order to comply with Rule 3.6(h)(1), the security agreement for the financing must not require the lawyer to disclose client confidences or secrets without the client’s informed written consent. In addition, the prohibition of Rule 3.7(c) against a lawyer acquiring a proprietary interest in the subject matter of litigation would require that the lawyer not attempt to obtain any interest in the client’s settlement or judgment to secure the lawyer’s obligation to repay the financing institution. See also Opinion #144.

In light of the foregoing considerations, the Commission concludes that it is reasonable for a lawyer to charge financing expenses to the client as a cost of litigation so long as the following safeguards are maintained.

First, the financing arrangement must have the informed consent of the client. At a minimum, the client should be advised of how and when the attorney will finance advances, the name of the lending institution, and the expected costs associated with financing, including rate of interest.

Second, in a contingent fee or limited representation case, the client’s responsibility for interest and other financing costs should be spelled out in the written contingent fee or limited representation agreement.

Third, the attorney must use a financing arrangement that accurately allocates interest and other financing costs to specific clients. The attorney should not use a single line of credit to finance advances on behalf of numerous clients and estimate how interest will be allocated among those clients.

Fourth, the attorney may not allow the financing institution to acquire any lien or other security interest in the client’s claim without the informed consent of the client. Moreover, whatever the nature of the financing arrangement, the client may not be deprived of his/her rights to challenge the amount of interest and other costs through fee arbitration as provided under Maine Bar Rule 9.3

Fifth, any interest or other financing costs passed onto the client must be reasonable.

Sixth, the lawyer may not disclose any client confidences or secrets to the financial institution without the informed written consent of the client.


Footnotes

[1] We understand that most banks will not take on the burden of tracking individual draws and interest to specific cases. The written material provided by the inquiring attorney, however, suggests that at least one relatively new bank specializes in providing such a line of credit.

[2] This opinion does not address the situation of a lawyer making interest bearing loans to a client for litigation expenses which may raise issues under consumer credit laws as well as other ethical concerns.

[3] Under no circumstances may the attorney acquire any security in the client’s claim to secure repayment beyond a lien granted by law as referenced in Maine Bar Rule 3.7(c).


Enduring Ethics Opinion