Lawyers can refer clients to a finance company to help cover legal costs, but lawyers that hold an ownership stake in such a business must tell clients and direct them to independent advice before they take a loan, the American Bar Association said in a new ethics opinion.
The ABA Standing Committee on Ethics and Professional Responsibility published a formal opinion Tuesday that lays out a series of ethical concerns related to outside financing of legal work. The ABA’s opinions typically interpret how the bar association’s model rules of professional responsibility apply to issues that may affect a large swath of lawyers across the country.
The ABA model rules and opinions are not binding, but state ethics bodies often consider them when determining how to apply or amend their own local professional responsibility rules. One of those bodies, the District of Columbia Bar, recently issued an ethics statement of its own that dealt with a separate type of outside funding for legal expenses—namely, crowdfunding efforts in which a client solicits donations to pay for lawyers.
In each case, ethics obligations differ depending on the lawyer’s level of involvement with the funding efforts, according to the recent opinions.
Tuesday’s opinion explains how the ABA’s model rules apply to situations in which a client turns to a finance company or brokerage in search of a loan that could help cover legal expenses. Lawyers are generally allowed to refer clients to an outside finance company, the ABA said, but the lawyer’s ethical obligations depend in part on whether the lawyer has any sort of ownership stake in the finance company.
“It is conceivable that a lawyer might acquire an ownership or other financial interest in a finance company or brokerage, or wish to form such a business,” the ABA wrote in Tuesday’s opinion. “If a lawyer did so and referred a client to that entity, the lawyer would be entering into a business transaction with the client or would be acquiring a security or pecuniary interest adverse to the client, or both.”
In light of potential conflicts, a lawyer who holds a stake in a finance company and wants to refer clients there would have to make sure the transaction has fair and reasonable terms and that those terms are explained in a way the client can understand, the ABA said. A lawyer in that position should also advise their client that they might want to seek independent legal advice before taking out a loan. Finally, the client would have to agree in writing to the terms of the transaction and the lawyer’s role in it, the ABA added.
Even if the lawyer does not have a stake in the finance company or brokerage, the ABA opinion still lays out ethical obligations, including that the lawyer should explain to clients what the financing arrangement will entail, how it will work, and the costs and benefits of the transaction. But lawyers also have to exercise caution to avoid giving their clients the impression that they’re using their professional judgment if they provide input to a client on a possible financing arrangement, the ABA added.
Much like the ABA’s ethics opinion, the D.C. Bar’s take on the separate issue of crowdfunding for legal expenses also calls for stricter limitations on lawyers if they’re directly involved in the fundraising effort.
“When the lawyer directs the crowdfunding, the lawyer must comply with the rules governing a lawyer’s receipt of money from third parties. Further, a lawyer who directs the crowdfunding should be cognizant of ethical obligations regarding fee agreements, communications with donors, and the management of the funds raised,” the D.C. Bar wrote in its November opinion.
The D.C. Bar opinion also runs through risks that can come along with crowdfunding, where a person typically turns to social media or other online platforms to raise small amounts of money from a large number of people. Specifically, the opinion said those kinds of fundraising efforts are susceptible to fraud, money laundering or other illegal and unethical activities. In light of those concerns, they should take steps “to avoid unwittingly engaging or assisting in unethical or illegal conduct.”
For situations in which crowdfunding is handled solely by a client and the lawyer is “merely aware” of that effort, the D.C. Bar wrote, “The lawyer incurs no specific ethical obligations.” But, the bar cautioned that even in those situations, lawyers would be well served to consider risks that might come along with funding a lawsuit through crowdsourcing. One specific concern relates to confidential information and legal strategy.
“While lawyers should always be mindful of their duty of confidentiality, the informal nature of communications made through social media platforms warrants a reminder of this duty when using these platforms for crowdfunding,” the D.C. Bar wrote.