Bank of America Request for Legal Fee Credit Raises Ethical Questions
The Bank of America Corporation (BAC) is asking certain of its select outside law firms to give it a credit on its annual legal fees, based on the amount of customer businesssuch as loanssent to the law firms. Some experts say that practice is highly unusual and ethically suspect.
A form prepared by Bank of America and given to preferred provider law firms calls for a one-year deal between the bank and the firm. It states that the law firm will give BAC a credit equal to $_____ [blank] to be applied toward bank paid legal services provided to GBAM [global banking and markets division] during the one-year arrangement period.
The credit is on top of other discounts the bank already receives from its preferred providers.
One source who received the form and asked not to be named, said BAC indicated that the credit is calculated based on the total amount of legal fees passed on to third-party customers. For example, BAC may send a customers business, such as a large construction loan, to an outside law firm to handle, and the bank would pass on the legal fees to the borrower as part of the cost of the loan. But the credit BAC is requesting wouldnt go to the customer who pays the legal feesit would go to the bank.
Bank of America said as a general matter it doesnt comment on specific arrangements with its legal providers. A source familiar with the agreements said that in general, the credit being sought is relationship-based rather than based on a strict percentage of fees paid.
The bank has threatened to stop using law firms that refuse to sign the deal.
If based on the amount of fees paid by customers, such an arrangement would be outrageous, according to professor Cornelius Hurley, director of the Boston University Center for Finance, Policy, and Law. Its unethical. Its a kickback and a form of pay to play for the law firms.
Hurley served as general counsel of Shawmut National Corporation, a former New England banking company that merged with Fleet Financial Group in 1995, which subsequently merged with BAC in 2004. Hes also a former assistant general counsel for the Board of Governors of the Federal Reserve System in Washington D.C.
Hurley went even further, saying, In some states, such arrangements might even be considered illegal. If a client came to me with [such an arrangement], I would kick him out of my office.
Theres nothing unusual about a bank passing legal fees to a borrower as part of the cost of the loan.
What is unusual is here the bank appears to be asking for a credit on its own legal fees based on the business it sends.
The bank issued this statement to CorpCounsel.com: We do not require clients to retain particular law firms and we are committed to transparency in disclosing fee arrangements as well as potential benefits to our company. We are confident that our agreements with external legal service providers are appropriate.
Besides the credit language, the banks agreement contains other typical language about internal expenses, alternative billing, and such. The wording is followed by one sentence that says the law firm confirms that these fee arrangements are ethical.
One lawyer, a former in-house counsel who didnt want to be named, thought this sentence especially odd. That one line about ethics tells me that its a question mark in the bank executives minds, too, the lawyer said.
Noted ethics professor Geoffrey Hazard, of the University of Californias Hastings Law School, concurred. Hazard explained that the agreement seems to violate the American Bar Associations rules of professional conduct.
In effect, the bank is getting a reduction in legal fees, said Hazard, who co-authored The Law and Ethics of Lawyering (5th ed. Foundation Press 2010), and that is a referral in return for money. Thats a violation of the rules, I believe, in every jurisdiction in the United States.
The arrangement raises serious ethical concerns, said Eric Cooperstein, a legal ethics practitioner in Minneapolis. The rule clearly states that a lawyer cannot give anything of value to someone who sends him business, explained Cooperstein, a former assistant director of the Minnesota Office of Lawyers Professional Responsibility.
But Thomas Spahn, a commercial litigation partner at McGuireWoods in Tysons Corner, Virginia, said his law firm accepted the Bank of America deal, and he has no ethical qualms about it.
Spahn, who advises in-house counsel on ethics issues, has served on the ABA Standing Committee on Ethics and Professional Responsibility. He is currently chairman of the Virginia Bar Association Commission on Professionalism, and serves on the Virginia Judicial Ethics Advisory Committee.
Most law firms will give benefits to a company that sends them a lot of work, Spahn said, such as free legal seminars or cocktail parties. He said this agreement is no different, as long as the credit is not tied to a particular fee.
But BUs Hurley said most companies usually dont expect a financial benefit in return for work sent. When it is as explicit as this, it steps over the line, he noted.
Spahn said it is his understanding that the credit is tied to the overall relationship between the law firm and the client. He called it a volume discount.
Bank of America does offer some notice to its customers that it is receiving a benefit.
The bank recently revised the legal fee provision in its form loan commitment letter to include this sentence: You [borrower] acknowledge that we may receive a benefit, including without limitation, a discount, credit or other accommodation, from any of such counsel based on the fees such counsel may receive on account of their relationship with us including, without limitation, fees paid pursuant hereto.
Does that help with the ethical considerations?
No, replied Hurley. Its too vague and not a full-fledged disclosure of exactly what the bank is receiving, he said.
No, agreed UCs Hazard. Its getting the reduction (in legal fees) that matters, not who knows about it, he explained.
And ethics maven Cooperstein, concluded: The rule doesnt have an exception for client consent. Quite simply, a legal clients business cannot be bought and sold.