Under the Texas Disciplinary Rules of Professional Conduct, may a law firm participate in an arrangement under which clients are offered the opportunity to pay for part or all of legal services by borrowing from a for profit finance corporation, not owned by any participating lawyer, which pays the lawyer at least 90 percent of the amount borrowed by the client?
Statement of Facts
A law firm proposes to enter into the following arrangement with a for-profit finance corporation, which is not owned to any extent by any lawyer practicing with the firm: the law firm will pay a nonrefundable fee to the finance corporation to allow the firm to participate in the program. The finance corporation will supply training to the law firm's staff and explanatory materials and agreement forms that may be used by the law firm and its clients. In no case will the finance corporation recommend any lawyer or law firm participating in the arrangement to any potential client. The arrangement offered to clients will be for the finance corporation to advance directly to the lawyer an amount in full payment of an agreed legal fee for services that the lawyer represents in writing to the finance corporation will be performed. The finance corporation will pay to the law firm at least 90 percent of the amount of the agreed legal fee. In the event of an unresolved dispute between the client and the lawyer relating to the services and the fee, the law firm is obligated under the agreement with the finance corporation to pay back to the finance corporation the amount received by the law firm with respect to the disputed fee and then to deal directly with the client as to the services and the fee.
This committee in Opinion 349 (October 1969), 23 Baylor Law Review 891,Winter 1972, ruled that it was not unethical for a lawyer to accept payment by means of a credit card. The opinion did not discuss the fact that, in any credit card payment, the lawyer receives an amount that is less than 100 percent of the amount paid by the client.
In Opinion 435 (Texas Bar Journal, Vol. 49, p. 1015), the committee ruled that an attorney's participation in a barter arrangement was not permissible if the attorney paid anything of value to an exchange and the exchange made the attorney's name available to other members of the exchange.
In Opinion 467 (Texas Bar Journal, Vol. 54, p. 513), the committee ruled that a law firm's office lease that provides for rent that might be a percentage of the law firm's gross receipts constitutes an impermissible sharing of legal fees with a nonlawyer.
In this case, the proposed arrangement with the finance corporation appears to involve the division of a legal fee between a lawyer and the finance corporation. Rule 5.04(a) [FN1] provides that, with exceptions not here relevant, "A lawyer or law firm shall not share or promise to share legal fees with a non-lawyer...." However, provided the limitations specified below are respected, the committee does not believe that this arrangement constitutes a fee sharing arrangement that is subject to the prohibition. As stated in Comment 1 to Rule 5.04(a), "The principal reasons for these limitations are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting non-lawyers in the practice of law." In this case the finance corporation does not in any way solicit clients for any participating lawyer. Moreover the finance corporation does not perform any legal services. In these circumstances, the committee believes that the retention by the finance corporation of a reasonable portion of the amount borrowed by the client is properly viewed as finance arrangement rather than a fee splitting arrangement subject to the prohibition.
Any arrangement for the finance of legal services must comply with requirements of the Texas Disciplinary Rules of Professional Conduct concerning permissible levels of legal fees, disclosure of client confidences, and the safeguarding of client funds.
Under Rule 1.04(a), a fee for legal services must not be an "unconscionable fee," which term is defined to mean that "a competent lawyer could not form a reasonable belief that the fee is reasonable." In the financing arrangement at issue, there is a risk that an unconscionable fee might be charged to the client if the percentage (or the amount yielded by the percentage) retained by the finance corporation were so large as to make the total fee paid by the client, including the amount retained by the finance corporation, unconscionable. To enforce this standard, the committee believes that, in order for the proposed arrangement to be permissible, there must be disclosure to each client as to the percentage of the gross fee that is retained by the finance corporation. The client using the arrangement will thus be informed as to the extent to which the law firm is willing to receive "up front" a lesser amount for the legal service than the client is borrowing from the finance corporation. In addition, in view of the limits of Rule 1.04, the committee expresses no opinion as to any arrangement under which a law firm would receive less than 90 percent of the total amount borrowed by a client under the arrangement.
Because information on legal fees paid by a client to a lawyer may constitute "confidential information" under Rule 1.05, the client must consent, after consultation with the law firm, to disclosures of client information to the finance corporation that will be necessary under the arrangement. See Opinion 464 (Texas Bar Journal, Vol. 52, p. 1198), which holds that a lawyer may not sell delinquent accounts receivable to a factoring company unless the client has previously consented to the disclosure of confidential information incident to such sale of accounts receivable.
Since, under the arrangement, the law firm may receive payment from the finance corporation (based on the client's borrowing) before the completion of the services for which the payment is received, the law firm must comply with Rule 1.14 with respect to safeguarding, in a "trust" or "escrow" account, amounts that are received from the finance corporation and that have not yet been earned by the law firm.
An arrangement under which a client borrows from a finance corporation, not owned by any participating lawyer, to pay for a law firm's legal services ¾ and at least 90 percent of the amount borrowed is remitted by the finance corporation to the law firm ¾ is not prohibited by the Texas Disciplinary Rules of Professional Conduct provided that (1) the finance corporation in no case recommends lawyers to potential clients, (2) the amount retained by the finance corporation is disclosed to the client, (3) the gross amount borrowed by the client does not amount to an unconscionable fee for the law firm's services, (4) the client consents to necessary disclosure of confidential information in connection with the arrangement, and (5) the law firm places in a trust or escrow account all amounts received under the arrangement that have not yet been earned.