The inquiry is whether it is permissible, under the Pennsylvania Rules of Professional Conduct (the "Rules"), for an attorney to borrow funds on behalf of his/her client (rather than borrowing only the amount of his/her fee) on a short term basis, i.e. 14 to 30 days, from a third-party funding facilitator, pending receipt of settlement funds from an insurance company. It is presumed that the loan company would provide a short term loan, the amount of which would be a percentage of the settlement amount and that, when the settlement is paid by the insurance company, these funds would be turned over to the loan company. The proposed arrangement is ethical providing that two conditions are met. First, the advantages and disadvantages, including the financial ramifications to both the client and the attorney, must be fully disclosed to the client. Second, the Rules regarding attorney-client confidentiality must be followed.
In view of Rule 1.8's general prohibition against a lawyer entering into a business transaction with a client, the contemplated transaction (in which the attorney acts as a type of "broker" with the lending company on the client's behalf) would not be permissible unless the attorney complied with Rule 1.8(a). Rule 1.8 requires, inter alia, that the attorney fully disclose the nature and terms of the transaction, and transmits such disclosure in writing in a manner that can be easily understood by the client. Critical to this disclosure is an explanation of the terms of the discount of the total payment sum the client would receive under such an arrangement. In light of the issues raised in Philadelphia Bar Association Opinion 95-7 (May 1995), to the extent that the contemplated arrangement consists of terms less favorable to the client than would result from simply waiting for the settlement pay-out from the insurance company (or from making a similar loan arrangement with another company), the attorney may have to establish that there was full disclosure to the client. Therefore, the attorney should fully document all such disclosures along with the client's written acknowledgment and consent.
Rule 1.8(b) ("A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation") underscores the need to place the client in an arguably better position than he/she would be if he/she had to wait the 14 to 30 days it would take the insurance company to pay out settlement funds. Any advantage to the attorney from such an arrangement must be secondary, and fully disclosed.
This transaction does not appear to run afoul of either Rule 1.8(e) (prohibiting an attorney from providing financial assistance to a client in connection with pending or contemplating litigation) or Rule 1.8(j) (prohibiting a lawyer from acquiring a proprietary interest in a cause of action that a lawyer is conducting for a client) because, as contemplated, by the time the transaction is entered, the litigation has been concluded.
Rule 1.7(b), which prohibits a lawyer from representing a client if that representation may be materially limited by the lawyer's own interests, requires the attorney to disclose any benefit he/she may receive from the contemplated transaction. Thus, if the attorney is to receive his or her fee out of the short-term loan sum, this is a benefit to the attorney that must be adequately disclosed to the client. Similarly, if the attorney has any interest in the funding company, this fact must be disclosed pursuant to both Rules 1.7 and 1.8. Additionally, if the attorney transacts business on a regular basis with the loan company, he or she may receive more favorable treatment in subsequent transactions causing a potential loss of objectivity on behalf of the current client. This and the other necessary disclosures will allow the client to assess the attorney's objectivity as to the advantages of the contemplated transaction.
Depending upon the terms of the fee agreement, which is governed by Rule 1.5, the attorney may not be able to recover his or her fee out of the short-term loan. That is, if the fee agreement specifically provides that the attorney will recover out of "settlement proceeds", he/she may have to wait until the insurance company pays the settlement sum. Otherwise, the attorney and client will need to change the fee agreement to permit the lawyer to receive funds directly from the short term lender.
If the attorney and client decide to allow the attorney to recover his/her fee from the short-term loan, the attorney will need to ensure that the contemplated transaction does not alter his/her fee such that it would now appear to be unreasonable. Presumably, the money that the client will receive immediately from the loan company will be less than the amount he/she would have received if he/she waited for the settlement payment from the insurance company. In contingent fee cases, as pointed out in Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility, Opinion 93-145 (October 11, 1993), an attorney should be wary of taking the percentage of the final settlement award originally contracted for out of a short term loan. If, for example, the attorney contracted to take as a fee 30% of the settlement amount and subtracts this sum from the amount of the short-term loan, the attorney will necessarily receive greater than thirty percent of the final amount recovered by his/her client. Such a result may not be consistent with Rule 1.5, and may also give rise to negative inferences concerning a conflict of interest on the attorney's part.
Pursuant to Rule 1.6(a), an attorney may not reveal confidential client information unless one of the exceptions to that Rule applies. The exception pertinent here would be where the client gives consent. Thus, the attorney could not begin to enter into negotiations with the loan company without his/her client's consent because, only after obtaining such consent would the attorney be allowed to inform the loan company of the existence and scope of the client's settlement.
Obviously, if the company pays the short-term loan money directly to the attorney, the attorney would be bound by Rule 1.15, which requires, inter alia, that proceeds of the loan be kept in an account separate from the attorney's own funds.
Except for three exceptions not applicable here, Rule 5.4(a) prohibits an attorney from sharing fees with a nonlawyer. Under a strict application of this rule, if the contemplated transaction is structured such that the settlement funds paid by the insurance company are divided between the loan company (as a repayment of its loan) and the attorney (who takes a percentage of the settlement funds as his fees), it may appear as though the attorney is sharing fees with the loan company. On the other hand, if the attorney takes his fee out of the short-term loan money and, if he takes a discounted amount in return for receiving his fee immediately, he could still be deemed as having shared a percentage of his fee with the loan company. The more reasonable approach is, however, to view the matter as a mere financing arrangement rather than as a sharing of fees with the loan company. See Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility, Inquiry 93-145, at 3 (October 11, 1993) ("I do not think Rule 5.4 is violated if the lawyer receives proceeds from the lender which represent a discounted value of the lawyer's future fees which will be paid. Assuming that client consent is given as stated above, then I would view this as a financial transaction in which the lawyer's future fees are collateral for a loan, rather than as a sharing of fees with nonlawyers.")