A question we regularly receive on the Loss Prevention Hotline is, “Can I offer my clients third-party financing for their legal fees?” This article addresses consumer financing (or lines of credit) offered for legal fees. We will address civil litigation funding in a future article.

In some cases, clients may need financial assistance to pay for legal services. While there are lenders that offer loans or “buy now, pay later” options specifically for legal fees, this can pose ethical and practical challenges for attorneys. For example, how can you avoid conflicts of interest or confidentiality breaches when facilitating a transaction with a third-party lender? How can you protect your clients from high interest rates or predatory lending practices? How can you prevent the lender from interfering with your professional judgment or the attorney-client relationship? 

In 2018, the American Bar Association Standing Committee on Ethics and Professional Responsibility issued ABA Formal Opinion 484 which provides guidance on lawyers’ obligations when they are involved in litigation financing arrangements with their clients or third parties. Formal Opinion 484 specifically guides the following necessities when a lawyer is facilitating financing of their own legal fees:

• The lawyer must explain the arrangement to the client to the extent reasonably necessary to permit the client to make informed decisions about representation. The Formal Opinion identifies more than 11 considerations that a lawyer may need to discuss with the client.
• The fee, including the financing of that fee, must be reasonable.
• Lawyers must deposit unearned fees into a trust account, regardless of how they come into possession of them, except under limited circumstances. (See Ohio Board of Professional Conduct Opinion 2016-1.)
• The Rules of Professional Conduct require lawyers to protect confidential client information; communications with a third-party such as a lender or financer may not be protected by privilege. Lawyers should advise their clients of these limitations and risks.
• An attorney must be aware of potential conflicts of interest, whether through direct business interest in the financing company or due to personal interests of the lawyer. The Formal Opinion sagely opines, “Arguably, the greatest risk is that the lawyer will recommend the finance company or broker to the client even though fee financing is not in the client’s interests because the client’s arrangement of financing best assures payment or timely payment of the lawyer’s fee.”

As a result, we recommend that attorneys consider alternatives to having a direct relationship with a lender that could compromise integrity or reputation. Here are three viable options that may be more beneficial for both attorneys and clients:

1. Evergreen retainer. This is a type of retainer agreement that requires the client to replenish the trust account whenever it falls below a certain level. This ensures that the attorney has funds available to cover the legal fees and expenses, and the client can budget accordingly. The evergreen retainer should be clearly explained in the fee agreement, and the attorney should provide regular statements to the client showing the balance and activity of their funds in trust. As with any retainer funds, the attorney should also refund any unearned funds to the client at the end of the representation.
2. Recurring payment plan. This is a convenient way to automate the payment process using a cloud-based case management system like Clio, Practice Panther, or Smokeball or other payment processing and accounting software. These systems allow you to set up recurring payments that are automatically deposited and recorded into the client’s trust account. You should include the terms and conditions of the payment plan in the fee agreement. You should also communicate with the client about any adjustments to the payment amount or frequency based on factors like anticipated cost of litigation, client’s employment status, or other sources of income. As with the evergreen retainer, you should refund any excess funds to the client at the end of the case.
3. List of consumer lenders. Another way to service your clients is to offer a list of potential financing options, without endorsing or partnering with any lender. This could be a list of community banks that offer consumer loans or online platforms that connect borrowers and lenders, hopefully at rates lower than a typical credit card. You should inform the client that you are not endorsing or recommending any of these options, and that they are responsible for doing their own research and due diligence. You should also advise the client that certain debt may require court approval in divorce, bankruptcy, or other proceedings, and that you will charge for drafting, filing, and arguing the motion. By providing options, you are giving the client guidance, but leaving the decision and the transaction to them.

We strive to be open to solutions to provide more individuals with access to counsel to address legal issues and hope that this discussion offers ideas on how to manage the issue of client financing in an ethical and professional manner. If you have any questions or concerns, please feel free to contact us. We are here to help you with your malpractice insurance needs and risk management strategies.

Additional OBLIC resources:

Can I charge interest on past-due balances? (6/12/24)

Billing Ethically to Get Paid (7/25/22)

This information is made available solely for loss prevention purposes, which may include claim prevention techniques designed to minimize the likelihood of incurring a claim for legal malpractice. This information does not establish, report, or create the standard of care for attorneys. The material is not a complete analysis of the topic and should not be construed as providing legal advice. Please conduct your own appropriate legal research in this area. If you have questions about this email’s content and are an OBLIC policyholder, please contact us using the information above.