Opinion #191: Loan from Litigation Financing Co. to Personal Injury Plaintiff
Issued by the Professional Ethics Commission
Date Issued: December 21, 2006
Bar Counsel presents the following scenario involving litigation financing by a third-party lending company and asks the Commission to render an opinion on whether a lawyer would violate the Bar Rules by aiding a client in obtaining a personal injury lawsuit advance.
Financing Company A provides what it calls pre-settlement lawsuit funding whereby it lends money to plaintiffs while they pursue personal injury litigation. In its promotional materials, Company A states: “You can get lawsuit funding on your personal injury claim NOW. Unlike a personal loan, you will not have to pay us back until your case settles.” It describes its loans as “Non-Recourse Financial Assistance,” meaning that if “you lose – we lose;” i.e., “if you lose your case you owe us absolutely nothing.”
Company A further explains in its materials that it “will purchase a portion of your future settlement, providing you with cash today for any worthwhile purpose, including essential living expenses.” It discloses that it invests in the plaintiff’s lawsuit by “literally buy[ing] a piece of the future settlement proceeds.”
The Company charges no application or closing fee, and represents that there are no hidden expenses. The plaintiff is not required to make any payments until the case is resolved. The Company states that there are no credit requirements and that it plays no part in the management of the case, explaining that “[w]hat you decide to settle for is up to you and your attorney.” The Company’s fees are fixed, and it does not take a percentage of the plaintiff’s recovery.
In order to participate, the plaintiff must be represented by an attorney. The plaintiff must complete an application disclosing case information such as how the accident occurred, the personal injuries sustained, medical treatment rendered, any insurance that would cover the claim and attorney information. The plaintiff must also sign a release authorizing the Company to obtain records from the plaintiff’s attorney. The release form includes a clause to the effect that the plaintiff “understand[s] the effects of disclosing the contents of my file, including waiver of the attorney-client and work product privileges.” The attorney must share with the Company her opinion on the merits of the case, and the Company periodically sends a follow-up questionnaire to the attorney to be filled out and returned.
The Company charges the plaintiff based on a monthly fee calculator with monthly financing rates ranging from 2.00% to 7.00%. As an example, in the case of a $1,000 advance, at 4.00% the fee would range from $120 if it took three months to resolve the case, to $1,200 if it took 30 months to resolve the case. The financing fees accrue each month and are paid at the end of the case only if there is a successful recovery. The Company does not compound fees, which it claims is contrary to the way some other companies charge.
We understand that such advances are permitted in a number of other jurisdictions, but we are not aware whether any of these jurisdictions have a criminal champerty statute. For the Maine lawyer, the threshold question should be whether personal injury lawsuit advances are illegal because they violate Maine ’s criminal champerty statute, an issue on which we cannot opine. Without an answer to this question, we cannot address whether it is per se unethical for a lawyer to assist in their creation. We caution, however, that the lawyer must be mindful of their potential criminality and the lawyer’s corresponding obligations under the Code of Professional Responsibility. See M. Bar R. 3.2(f)(2) (lawyer shall not engage in illegal conduct that adversely reflects on lawyer’s honesty, trustworthiness or fitness as lawyer); M. Bar R. 3.6(d) (lawyer shall not counsel or assist client in violation of any law, but lawyer may take steps in good faith to test validity of law). At a minimum, the lawyer must make an informed assessment of whether the proposed advance violates the statute and discuss the issue with the client. See M. Bar R. 3.6(a) (lawyer must employ reasonable care and skill and apply lawyer’s best judgment).
We also note that the scenario as posed leaves us many unanswered questions. For example, are the representations made in the advertisements borne out by the loan documents? What control, if any, does the financing company maintain over settlement decisions? Is the loan truly non-recourse, or is there any situation where the client might be obligated to repay a portion of the loan in the event of no recovery? Is the client’s obligation to repay capped by the amount of any settlement or verdict, or is it possible that the client could have a repayment obligation that exceeded that amount? Is the loan secured by the judgment, and if so, does that have a bearing on any issues? Additional questions arise if there are others to whom the plaintiff will be indebted and who expect to be paid out of a litigation recovery. For example, who gets paid first out of any settlement as between the financing company, lien holders (e.g., insurers and medical providers) and the attorney? What is the order of priority for payment? What amount is the client likely to net after case resolution and after the financing company and others have been paid? A final set of questions arise as we try to identify the nature of the relationship between the lawyer, client, and finance company. Is the finance company an agent of the client or the attorney with respect to the litigation? What duty of confidentiality does the financing company have and is its duty spelled out in the loan documents? Does the attorney take on any duties with respect to the financing company and, if so, what are they?
Irrespective of these unanswered questions, and while we cannot say that it is per se unethical for a lawyer to assist a client in obtaining personal injury lawsuit advances, we do find that the above scenario raises a number of potential ethical problems that should be of concern to the lawyer. The issues we identify are without limitation, meaning that any particular litigation scenario may present additional ethical concerns that are not evident from the facts presented here.
First, before assisting the client in a transaction like this, the lawyer must fulfill her obligation to provide the client with appropriate advice on whether the arrangement is in the client’s best interests. See M. Bar R. 3.6(a), supra. We express no view on whether personal injury advances in general are good or bad for clients. The wisdom, or lack thereof, of such an arrangement necessarily depends on the particular circumstances faced by the client. At a minimum, however, the client is sacrificing in interest payments a substantial portion of whatever final recovery may ultimately be received in the case. There may be other ways, such as letters of protection to medical providers or referral to a financial advisor, for the lawyer to assist the client in maintaining finances until a case is resolved. Whatever the circumstances and options, the lawyer must make sure that she fully explains the arrangement and the consequences to the client, and she must advise the client appropriately.
Second, the lawyer must guard against disclosure of client confidences or secrets without the client’s informed consent. See M. Bar R. 3.6(h). The scenario above involves a broad release to be signed by the client. The lawyer must make sure that the client understands the consequences of the release. The careful lawyer will keep the client timely informed on what she is sending to the lending company to ensure that she has the continuing informed consent of the client.
Third, the lawyer must assess and advise the client on the potential consequences of sending confidences and secrets to the financing company. Sending information to a third party may act as a waiver of the attorney-client work-product privileges, entitling the opposing side in the litigation access to the information. This risk requires the lawyer to take steps to avoid a waiver, if a waiver can be prevented at all. It also requires the lawyer to be careful about what she sends to the company, knowing that whatever is sent, including the lawyer’s evaluation of the case, may be discoverable to the other side no matter what steps are taken to avoid a waiver.
Fourth, the lawyer must guard against any risk that the financing company will attempt to control the litigation or otherwise interfere with the lawyer’s exercise of professional judgment. See M. Bar R. 3.6(a).
Fifth, the lawyer must be wary of conflicts of interest that may arise between the lawyer’s duty to the client and any obligation that the lawyer undertakes with respect to the finance company or between the lawyer and her client. See M. Bar. R. 3.4(e) and 3.4(f). For example, if the lawyer is obligated to describe to the finance company the likelihood of any recovery, the disclosure of any potential barriers to the client’s recovery might render the client a less likely candidate for a loan and might damage the client’s case if it becomes discoverable in litigation. Such a risk must be identified and the informed consent of the client must be obtained. As another example, if part of the reason the client is securing an advance is to pay litigation expenses that the lawyer will not advance, it may be necessary for the lawyer to advise the client that there may be other law firms willing to advance those expenses, which will alleviate the need for the loan.
As stated above, these are the more obvious issues posed by the limited facts of the scenario before us. There may be other ethical issues presented by any particular personal injury advance proposal, which we are unable to discern and address at this time.
 See 17-A M.R.S.A. § 516 (“A person is guilty of champerty, if with the intent to collect by a civil action a claim, account, note or other demand due, or to become due to another person, he gives or promises anything of value to such person.”) We cannot opine on this question because our jurisdiction extends only to interpreting the Code of Professional Responsibility. See M. Bar R. 11(c); see also Maine Professional Ethics Opinion #11, April 2, 1980.