|
Printer Friendly Version >>
THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 1995-1
COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
February 22, 1995
ACTION: FORMAL OPINION
OPINION:
TOPIC: Attorneys' fees; Billing; Credit cards and other financing.
DIGEST: A lawyer may enter into a relationship with, and use the services
of, a company that finances the payment of legal fees and provides certain
record-keeping services for attorneys, provided the attorney observes and complies
with the caveats and restrictions set forth in the opinion.
CODE: DRs 2-101, 2-103, 2-106, 2-106(A), 2-110(A)(3), 3-102, 4-101, 4-101(C)(4),
5-107(A)(1), 5-107(B); EC 2-23.
QUESTION
May a law firm enter into a relationship with and use the services of a company,
known as "Credit," n1 which finances the payment of legal fees and
provides certain record-keeping services for attorneys?
n1 As is our standard practice with respect to formal opinions based on actual
inquiries submitted to the Committee, all names and identifying references
have been changed or eliminated prior to publication.
OPINION
A. Overview of the Credit Plan
The basic procedures of the Credit plan, as proposed, are as follows:
* The attorney signs a Credit-Lawyer Agreement with Credit. Thereafter, the
attorney submits applications completed by clients to open accounts pursuant
to a "Credit Cardmember Agreement" with Credit.
* Credit, in its sole discretion, decides whether it will open an account
for the client, and makes its own assessment of the client's credit rating.
Based on that rating and the nature of the services to be provided by the attorney,
Credit determines what level of financing (if any) it will approve for that
client.
* Once the client has signed a Cardmember Agreement and has been approved
for financing by Credit, the attorney periodically sends vouchers to Credit
evidencing the legal services rendered by the attorney to the client. Credit
will also pay the attorney any retainer agreed to be paid by the client.
* Upon receipt of the voucher, Credit pays 70-90% of the face amount of each
voucher, depending upon the credit rating of the particular client. Credit
then has the right to collect 100% of the fees owed by the clients. Credit
allows the client to make periodic payments as low as 5% of the outstanding
balance; the client generally has three to five years to pay for the attorney's
services.
* For clients who do not qualify for credit, or where certain types of legal
services are contemplated (e.g., bankruptcy, felonies, immigration or juvenile
law), Credit will only provide record-keeping, periodic account statement and
depository services to the attorney (who remains the creditor) for a fee. On
these accounts, if the clients choose to use Credit's services at all, Credit
charges the clients 18% interest on outstanding balances. When payment is received
from the clients, Credit retains the interest as its fee and remits the principal
amount to the attorney. The attorney theoretically retains responsibility for
all collection activity and Credit simply provides administrative services.
Other pertinent provisions of the Credit-Lawyer Agreement and Cardmember Agreement
include the following:
1. Lawyers' Representations and Warranties -- Among other things, the participating
attorney must represent that: (1) the services performed are not subject to
any dispute, claim, offset, reduction, counterclaim or defense of any kind;
(2) the client will not be charged for any amounts charged the attorney by
Credit; (3) the attorney is fully entitled to receive the amounts specified
in vouchers submitted for payment, either as payment for services performed
or, where permitted, as a retainer, deposit or fixed fee for the payment of
future legal services, all in accordance with any agreement between the attorney
and the client and any ethical duty owed by the attorney to the client; and
(4) the attorney shall offer the program to clients only as a payment option
and a convenience to the client, and shall not require any client to obtain
financing for legal services from any particular source, including Credit.
2. Ethical Duties -- Except with the permission of the client, the attorney
agrees not to reveal any client confidences or secrets in the course of submitting
any applications or vouchers. The attorney agrees to avoid any conflict between
the attorney's own financial and business interests and those of the client,
and to fully disclose any potential conflict to the client.
3. Repurchase of Accounts -- In the event a client does not pay Credit based
upon a circumstance that constitutes a breach of an attorney representation
or warranty, Credit may require the attorney to repurchase the account. (It
does not appear that the attorney also has the unilateral right to repurchase
the account.) Billing inquiries or cardholder disputes are referred to the
attorney.
4. Indemnity -- The attorney indemnifies Credit for any claims or defenses
asserted by the client with respect to the attorney's services, and Credit
has the right to assign to the lawyer any client account with respect to which
such a claim has been made.
5. Assignment -- Credit may assign its interest and duties under the Credit-Lawyer
Agreement to third parties without the attorney's consent.
6. Defenses -- The Cardmember Agreement provides that the client retains all
defenses he/she has against the lawyer as against Credit or any assignee.
B. Precedents Outside of New York
In its promotional materials, Credit represents to potential customers that
Ethics Committees in a number of other jurisdictions have approved the use
by lawyers of credit card arrangements, and that such arrangements are ethical.
For example, ABA 338 (1974) held:
The use of credit cards for the payment of legal services and expenses is
permitted under the Code of Professional Responsibility if specified guidelines
are followed. Interest may be charged on delinquent accounts with the client's
agreement.
The ABA Committee continued, opining that lawyers may participate in a credit
card plan if it requires that:
1. All publicity and advertising relating to a credit card plan shall be subject
to the prior approval in writing of the state or local bar committee having
jurisdiction of the professional ethics of the attorneys involved.
2. No directory of any kind shall be printed or published of the names of
individual attorney members who subscribe to the credit card plan.
3. No promotional materials of any kind will be supplied by the credit card
company to a participating attorney except possibly a small insignia to be
tactfully displayed in the attorney's office indicating the attorney's participation
in the use of the credit card.
4. A lawyer shall not encourage participation in the plan, but the lawyer's
position must be that the lawyer accepts the plan as a convenience for clients
who desire it and the lawyer may not because of his or her participation increase
the fee for legal services rendered to the client.
5. Charges made by lawyers to clients pursuant to a credit card plan shall
be only for services actually rendered or cash actually paid on behalf of a
client.
6. In participating in a credit card program the attorney shall scrupulously
observe his/her obligation to preserve the confidences and secrets of the client.
Id. See also Policy Statement of Board of Governors of State Bar of California
(February 11, 1975) (use of credit cards for payment of legal fees and expenses
not per se unethical); San Diego County 1983-1 (attorney may participate in
credit card financing plan). The ABA Committee also concluded that a lawyer
(and in turn a credit card company) may charge interest on delinquent client
accounts provided that clients are advised that the lawyer intends to charge
interest and agree to such an arrangement. See also ABA 320 (1968) (approving,
with certain caveats, financing plans for legal fees developed by various bar
associations in which fees were financed by banks).
It has been reported that "while raising concerns about conflicts of
interest, legal ethicists of varying authority in 10 states, including California,
Alabama, Michigan and Missouri have approved lawyers' participation" in
the Credit program. Jan Hoffman, The Credit Card that Pays Legal Bills, N.Y.
Times, July 29, 1994, at B7. However, it was also reported that an advisory
board of the Georgia State Bar postponed issuance of an opinion regarding the
program, the board chairman observing:
I put the Credit in the category of small loan companies and pawnshops. .
. . It encourages the lawyer to have his client go into debt at 18% a year.
It's just another additional cost of being a poor person.
Id.
Although we do not believe that credit card arrangements for the financing
of legal fees are per se unethical, we conclude that the requirements set forth
in ABA 338 do not address all of the ethical concerns raised by the proposed
arrangement with Credit.
B. Prior New York Opinions
The payment of legal fees through credit card plans has been considered by
other ethics committees in New York State. See N.Y. State 117 (1969); N.Y.
County 601 (1972). Both Committees concluded that, while not every plan for
financing legal fees necessarily would violate the Code of Professional Responsibility,
the specific plans considered by such Committees were improper.
The plans under consideration in the above two opinions were relatively straightforward
credit card arrangements, one with Master Charge (N.Y. County 602) and one
with a bank (N.Y. State 117). Under both plans, the financing party was to
pay the lawyer, deduct a percentage of the legal fees as compensation, and
pursue the claim against the client. Both opinions identified several problems
with the plans, particularly that they failed to provide a mechanism whereby
the lawyer could retain control over whether the client was sued by the financing
party. See EC 2-23 ("A lawyer should be zealous in efforts to avoid controversies
over fees with clients and should attempt to resolve amicably any differences
on the subject. A lawyer should not sue a client for a fee unless necessary
to prevent fraud or gross imposition by the client."). We agree that lawyers
may not as part of a financing plan surrender control over whether their clients
are sued for the fee by the lender. See also ABA 320 (1968) (provision allowing
attorney to repurchase loan to avoid bank suing client was necessary in legal
fee financing plan sponsored by Bar Association); cf. N.Y. City 1993-1 (attorney
may assign his accounts receivable only if a mechanism is established whereby
attorney retains control over whether client is sued by assignee).
Other concerns raised by N.Y. State 117 and N.Y. County 602 were:
1. Whether the plan required the lawyer to divulge confidences or secrets
of the client;
2. Whether the plan required the lawyer to participate in advertising the
credit service;
3. Whether all defenses to a claim that the client would have against the
lawyer would be preserved in a lawsuit brought by the financing party;
4. Whether the plan provided for "arbitration before a Bar Committee
. . . in order to protect the client against an improper fee"; and
5. Whether the client retained the right to take his case to court if he/she
chooses not to arbitrate.
Both Committees concluded that the plans at issue were more suitable to the
provision of commercial goods and services rather than legal services, and
both Committees found the plans at issue improper. n2
n2 In the promotional materials received by the Committee is a statement that
says: "Is the use of credit cards acceptable for the payment of legal
services and expenses?" The materials answer that question in the affirmative.
The materials proceed to cite various ethical opinions from a number of jurisdictions
without discussing any of the caveats that may be relevant to whether a particular
plan is proper or not. In our view, the details of each financing plan must
be carefully considered before a conclusion on the propriety of the plan can
be reached. An unqualified "yes" can never be given to the question
are all credit card arrangements for legal fees proper.
The financing of legal fees through a bank charge card system sponsored by
a bar association was considered and approved in N.Y. State 362 (1974). In
the bank card arrangement, if the client disputed the fee, the bank had the
right to seek to recover the disputed charge from the lawyer, and the lawyer
could then decide whether to sue the client. After noting that a number of
other ethics committees had approved the use of credit cards for legal fees
(with various caveats), the Opinion concluded that the plan at issue was proper
so long as it expressly provided:
(1) that the bank in any possible suit against the client waives all defenses
a holder in due course might have [and] (2) that the attorney shall fully and
fairly disclose to the client, both orally and in writing prior to the consummation
of each credit card transaction, that any defenses the client may have regarding
the professional transaction may be asserted against the bank as well as the
attorney and that any dispute between the lawyer and client may, at the option
of the client, be submitted to arbitration. . . .
Id. n3 See also N.Y. State 399 (1975) (lawyers may participate in a credit
card plan which charges interest on delinquent accounts and may themselves
charge interest on delinquent accounts).
n3 A third condition, "that there be no display of an emblem or window
decal in the lawyer's office relating to the credit card," was also imposed
by the State Bar Committee in this 1974 opinion on the ground that "[s]uch
display is undignified and may be a form of improper solicitation." Subsequent
judicial decisions, however, make it clear that the use of emblems or window
decals is not improper. See, e.g., Matter of Von Wiegen, 63 N.Y.2d 163, 168
n.2 (1984), modifying, 101 A.D.2d 627 (3d Dep't 1983) (lawyer could use caricatures
of Abraham Lincoln and George Washington in advertising materials); Zauderer
v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), (lawyers may use non-deceptive
illustrations in their advertisements); Dallas Op. 1981-6 (lawyer may embellish
business card with an embossed five-point star); Kentucky Op. E-286 (1984)
(scales of justice may be used on business cards).
C. Propriety of Credit Plan
The Credit arrangement appears to avoid some of the problems with credit card
arrangements that have been identified in the past. However, based on the facts
available to the Committee, we still have the following eight concerns.
1. Confidences and Secrets -- DR 4-101 requires a lawyer to preserve client
confidences and secrets. Disclosure of confidences and secrets that are strictly "necessary
to establish or collect the lawyer's fee or to defend the lawyer or his or
her employees or associates against an accusation of wrongful conduct" are
permitted under DR 4-101(C)(4) (emphasis supplied). See N.Y. City 1986-8. While
the Credit-Lawyer Agreement does provide that the lawyer should not reveal
confidences and secrets "in the course of submitting applications or vouchers," the
agreement also requires that "in the event any client asserts a claim
or right not to pay an account in full, [the attorney . . . shall cooperate
fully with Credit in the investigation of the claim." It is not clear
what such cooperation would entail. While we believe it would be proper for
an attorney to cooperate in resolving or collecting the claim, the attorney
should remain in control of the extent to which confidences or secrets are
deemed "necessary" to establish a claim or defense, and Credit should
not be in a position (without the attorney's consent) to require the disclosure
of confidences or secrets in the context of a dispute about the fee.
2. Division of Fees -- DR 3-102 provides that a lawyer shall not share fees
with a non-lawyer. Under this plan, the attorney relinquishes 10%-30% of his
fee to Credit as a fee for their financing services. The Credit-Lawyer Agreement
does provide that the lawyer represent that the "client shall not be charged
for any amounts charged [the attorney] under the Agreement." (Presumably
this provision means that the lawyer shall not charge the client for such amounts,
not that Credit will not collect its 10%-30% from the client.) In other words,
the client pays 100% of the fee for legal services, 70%-90% of which goes to
the lawyer and 10%-30% goes to Credit, depending upon the client's credit rating
as discussed above.
We have previously opined in the context of considering whether a lawyer may
assign accounts receivable to another lawyer that such an assignment "would
not constitute a prohibited division of fees so long as the fees assigned have
already been fully earned by the assigning attorney." N.Y. City 1993-1.
Cf. N.Y. State 608 (1990) ("fees referred to agents for collection should
already be fully earned so as to avoid the pitfalls of fee splitting");
see also Matter of Cooperman, 83 N.Y.2d 465 (1994) (unearned portion of retainer
fee must be refunded upon demand). By analogy, the Committee believes that
it is appropriate for Credit to collect its 10%-30% financing fee, but only
with respect to amounts that have already been fully earned by the attorney.
The Credit-Lawyer Agreement contemplates that Credit will pay the attorney
(and presumably hold back the financing fee) with respect to vouchers submitted
for payment "either as payment for services performed or, where permitted,
as a retainer, deposit or fixed fee for the payment of future legal services,
all in accordance with any agreement between [the attorney] and client and
any ethical duty owed by [the attorney] to client." It is unclear from
this provision whether the legal fees with respect to which Credit will receive
its 10%-30% will have been earned or unearned at the time the voucher is submitted.
Also potentially problematic are circumstances in which an attorney becomes
obligated to refund part of an advance fee payment. DR 2-110(A)(3) requires
a lawyer who withdraws from employment promptly to refund any part of a fee
paid in advance that has not been "earned." Obviously this requirement
cannot be abrogated by assigning the claim to Credit, and some arrangement
would have to be in place to permit the attorney to refund any retainer that
was not earned to Credit and, if Credit had already collected from the client,
to the client. Based on the materials in the possession of the Committee, the
Credit plan does not currently include provisions for that situation except
insofar as it permits Credit to require the lawyer to repurchase an account
in the event of a breach of a representation or warranty. The Credit-Lawyer
Agreement does not, however, appear to permit the lawyer to repurchase the
account unilaterally.
3. Publicity/Advertising -- The Credit materials do not appear to require
the attorney to participate in any advertising of Credit's services, and nothing
in such materials suggests that Credit publishes the names of lawyers using
its services. Nevertheless, care should be taken by any lawyer contemplating
using Credit's services to avoid any advertisement of the lawyer's services
through Credit (except as permitted in DRs 2-101 and 2-103) or of Credit's
services through the lawyer. See ABA 338.
4. Control Over Suits Against Clients -- As discussed above, this Committee
believes an essential part of any plan providing for the financing or collection
of legal fees by assignees of lawyers must be that the lawyer retains control
of whether the client is ultimately sued for the fee. The Credit-Lawyer Agreement
provides that "upon the request of Credit, [the attorney] shall accept
(i) an immediate assignment of any client account with respect to which any
claim or defense has been made by the client, and/or (ii) a tender-of-defense
with respect to any proceeding which has been instituted." As noted, the
Agreement also provides that Credit may require the attorney to repurchase
the account in the event the client does not pay Credit based on a claim that
would constitute a breach of the lawyer's representations and warranties to
Credit. n4
n4 It should be noted that, while the Credit-Lawyer Agreement provides that
the lawyer shall be solely responsible for collection of fees with respect
to clients who are not given financing by Credit, there is no such provision
for fees to be collected by Credit from clients who have received financing.
We do not believe these provisions are adequate to ensure that the attorney
retains control of whether the client is sued for the fee. In a situation in
which Credit wishes to sue the client for the fee, these provisions do not
appear to permit the lawyer to repurchase the account unilaterally in order
to prevent a suit against his client. In the absence of further provisions
making it clear that the lawyer retains complete control over lawsuits against
clients, we conclude that the Credit arrangement is improper in this respect.
5. Conflicts of Interest -- The Code generally admonishes lawyers to avoid
influence by persons or entities other than the client and says:
Except with the consent of the client after full disclosure a lawyer shall
not: accept compensation for legal services from one other than the client.
* * *
A lawyer shall not permit a person who recommends, employs, or pays the lawyer
to render legal service for another to direct or regulate his or her professional
judgment in rendering such legal services.
DR 5-107(A)(1); DR 5-107(B). While the Credit service does not on its face
violate these precepts (it contemplates disclosure to the client of the arrangement
and requires the client to sign an agreement), any lawyer using the services
of Credit should be scrupulous to avoid having his or her judgment regarding
the legal services to be provided to clients influenced in any way by Credit.
Among other things, a lawyer should not permit the level of financing available
from Credit (which level is in part based on the nature of the services to
be rendered to the client) to influence what advice he or she gives the client.
For instance, a lawyer's advice to a client about whether or not to institute
such proceedings, or when to do so, should not be influenced by Credit's policy
against financing legal fees in the context of bankruptcy proceedings.
6. Interest on Legal Fees -- It appears that ethics committees of various
jurisdictions (including New York, as discussed above) have concluded that
arrangements whereby legal fees are financed by third parties either by way
of credit card plans or otherwise are not per se improper. This Committee agrees.
Implicit in any financing plan is the charging of interest. We conclude that
if a financing plan such as Credit otherwise complies with all ethical rules,
the fact the client is charged interest is not in and of itself improper so
long as full disclosure of that arrangement is made in advance to the client
and the client agrees. See ABA 338; California 1980-53 (an attorney may ethically
charge interest on past due receivables provided the client gives his or her
informed consent in advance of the charge); San Diego County 1983-1 (attorney
may collect finance charges on past due receivables and may participate in
a credit card financing plan); Los Angeles County 370 (1978) (attorney may
charge interest on delinquent accounts with prior agreement of client).
7. Reasonableness of Fees -- DR 2-106 provides that a lawyer "shall not
enter into an agreement for, charge or collect an illegal or excessive fee.
DR 2-106(A) (emphasis supplied). A fee that was originally thought to be reasonable
could become excessive by the time of collection, depending on intervening
events. It is not clear from the materials received by the Committee what would
happen if Credit had financed a fee that the attorney for some reason believed
was inappropriate to collect because it had become excessive in light of all
the circumstances. For reasons somewhat similar to those we expressed above
in Part C(4) above, this Committee believes any financing plan for legal services
should include a mechanism pursuant to which the attorney can prevent the credit
company from collecting a fee that has become excessive or otherwise improper.
It does not appear that the Credit arrangement includes such a mechanism. As
one ethics committee has said:
The acceptance of credit cards as a form of payment of legal fees is permissible
so long as various safeguards are built into the credit card arrangement between
the lawyer and the card issuer. Such safeguards include, without limitation,
the following:
1. Arbitration before a Bar Committee must be permitted in order to protect
the client against an improper fee. N.Y. State 117 (1969); see EC 2-23 ('a
lawyer should "attempt to resolve amicably" any differences over
fees').
2. The client must retain the right to take his or her case to court if the
client chooses not to arbitrate. N.Y. State 117.
N.Y. County 690.
While this Committee agrees that arbitration before a "Bar Committee" would
be one way to avoid the problem identified here, we do not believe it is the
exclusive way. Any alternative dispute resolution mechanism whereby the attorney
can, consistent with his or her ethical duties, prevent Credit from collecting
an excessive fee would be acceptable. It does not appear that any such mechanism
currently exists in Credit's plan.
Lastly, as a safeguard, the Committee recommends that unless the client is
required to sign the voucher as a precondition to payment, the client at a
minimum be sent a copy of the voucher submitted to Credit at the time the attorney
requests that Credit bill the client. Sending the client a copy of the voucher
would ensure that the client is aware of the services being rendered and the
charges associated with those services, thereby decreasing the potential for
a subsequent fee dispute.
8. Assignment -- The Credit-Lawyer Agreement provides that Credit may assign
its interest and duties to third parties without the attorney's consent. This
provision would be proper only if Credit's assignee assumed all of the duties
of Credit, including the duty to permit the attorney to repurchase the account
as discussed above. Also, if the attorney decides that fee litigation against
the client is appropriate, the client should be entitled to raise against Credit
or its assignees all defenses that the client might have had against the attorney.
Thus, the assignment must be effected in a way that assures that the assignee
accepts the assignment subject to any defenses available to the client.
D. Conclusion
We do not believe that financing arrangements of the type contemplated by
Credit's plan are per se improper. However, we conclude that participation
in Credit's plan would be improper unless the modifications suggested above
were made. In addition, even assuming such modifications were made, any attorney
participating in the plan would need to take into consideration all the concerns
expressed above in the course of that participation.
Furthermore, a lawyer participating in any financing arrangement should make
full disclosure to the client of all aspects of the arrangement to the client
(including specific disclosure that the client retains all defenses against
the financing company that he or she would have against the lawyer), and should
not rely on the financing company to do so.
CONCLUSION
Subject to the caveats and restrictions set forth in the foregoing opinion,
the question is answered in the affirmative.
|
