Ethics Opinions

Opinion No. 76-25

Summary: Provisions in the arrangements by which a lawyer receives for collection an account forwarded by a collection agency or other lay forwarder are not ethically proper if they: (a) Do not reserve to the creditor the right to choose the attorney, if he or she desires to do so; (b) Do not require the creditor to pay all filing fees and disbursements not satisfied from monies collected; (c) Do not separately determine the fees of the lawyer and of the collection agency by contract with the creditor; and (d) Do not permit the creditor, if he or she desires to do so, to require the lawyer to pay over to him or her the monies collected by the lawyer on his or her behalf, less filing fees, disbursements and fees for legal services.

Proper and ethical provisions pursuant to which a lawyer may properly receive for collection an account forwarded by a lay forwarder (normally a collection agency) are set out in Formal Opinion 294 of the American Bar Association's Committee on Professional Ethics, adopted June 21, 1958; in the "Declaration of Fair Practices of Collection Agencies" adopted February 18, 1968, by the American Bar Association's National Conference of Lawyers and Collection Agencies; and in the "Uniform Authorization Form" and "Uniform Forwarding Contract," also adopted by the Conference February 21, 1970.
Facts: A New York-based lay collection agency has asked a Massachusetts attorney "to join us" in an arrangement whereby the agency agrees "from time to time, on behalf of its plaintiff-clients, [to] refer collection matters" to him as counsel, channeling all matters in his territory through him. Filing fees and disbursements will be advanced or reimbursed by the collection agency, and counsel's contingent fee will be 20 percent of the net amount recovered in each case. Each plaintiff-client assigns the account to the collection agency; authorizes the agency to retain counsel of the agency's own choosing, at its own expense, "for the express purpose of instituting a legal action on behalf of and in the name of the plaintiff-client." The plaintiff-client assumes no liability for expenses, but agrees that, after deducting filing fees and disbursements, the agency may retain 15 percent of any monies recovered without suit, and 50 percent of the first $100 and 33-1/3 percent of the balance of all other monies recovered. The attorney is required to forward all monies collected (less his 20 percent fee) to the collection agency for it to deduct its share, even though the plaintiff is said to be the lawyer's client.
The attorney asks (1) whether the collection agency may be engaging in unauthorized practice of law, and (2) whether any relationship with it would amount to solicitation of business on his part, or permitting a lay intermediary to become involved in the lawyer/client relationship.

Discussion: The "assignment" by plaintiff-client of its cause of action to the collection agency is clearly not a purchase of the account receivable by the agency. It remains a lay agent for collection, as is shown by the fact that suit is to be brought in the name of the assignor (the plaintiff client) rather than the agency. Under real-party-in-interest provisions such as Massachusetts Rules of Civil Procedure 17(a), if the assignee agency had purchased the account receivable, it would have had to sue in its own name.
(1) We cannot undertake to decide whether the lawyer, under the arrangement, would be "aiding" a non-lawyer in the unauthorized practice of law in New York in violation of DR 3-101(A), as this is a question for the Committee on Unauthorized Practice. We would note, however, that in In re Lyon et al, 301 Mass. 30, 16 N.E.2d 74 (1938), our Supreme Judicial Court held that "To determine whether a lawsuit may properly be commenced ... requires special knowledge of the legal elements constituting a cause of action. To make a business of acting for or advising others in these matters partakes of the practice of law." In this connection, the facts state that the plaintiff-client merely authorizes suit; it is apparently left to the collection agency to decide whether or not to institute a legal action.
(2) The questions whether by the proposed arrangement the lawyer would be permitting the lay collection agency which recommended and employed him to render legal services for the plaintiff-client--or the creditor, as he or she is usually called--"to direct or regulate his professional judgment in rendering such legal services" in violation of DR 5-107(B), or would be agreeing "to share legal fees with a non-lawyer" in violation of DR 3-102(A) are properly before our committee.
DR 5-107(B) embodies the rule of the Lyon case that between the attorney and the creditor "the full and direct relationship of attorney and client shall exist." It carries forward the provisions of former Canon 35, which provided in part: "The professional services of a lawyer should not be controlled or exploited by any lay agency, personal or corporate, which intervenes between client and lawyer."
DR 3-102(A) carries forward the provisions of former Canon 34, which provided in part: "No division of fees for legal services is proper, except with another lawyer ... ."
The provisions of former Canons 34 and 35 were authoritatively construed by the ABA Committee on Professional Ethics on June 21, 1958, in Formal Opinion 294, which we deem to be still controlling. We find the following provisions of the proposed arrangement to be in violation of the above Disciplinary Rules:
(a) The collection agency's agreement with the lawyer to "channel all matters through our established associates in their respective territories" does not reserve to the creditor the right to choose the attorney, if he or she desires to do so.
(b) The collection agency's agreement with the lawyer that "filing fees and disbursements, as required, will be reimbursed as advanced" by it, but will not be paid by the creditor, except out of sums recovered, violates the provision in DR 5-103(B) that the client must remain "ultimately responsible for such expenses."
(c) There being no express agreement with the creditor to determine what part of the contingent fee is for the lawyer's legal services and what part is for the services of the collection agency, it is clear that the fee is being split between the lay collection agency and the lawyer, in violation of DR 3-102(A) providing that "A lawyer or a law firm shall not share legal fees with a non-lawyer ...," with exceptions not here relevant. The compensation of the lawyer should be "a matter of contract between the attorney and the creditor," as stated in ABA Formal Opinion 294, supra.
(d) The requirement that the lawyer forward to the collection agency all monies collected (less his fee for legal services) is inconsistent with the requirement in the Lyon case, supra, that "the full and direct relationship of attorney and client shall exist" between the lawyer and the creditor in whose name and on whose behalf he is acting. See also ABA Formal Opinion 294, supra, to the same effect. The creditor, as the sole client, if he so desires, is entitled to control the disposition of the net proceeds collected by the lawyer who is acting on his behalf.
We therefore conclude that several aspects of the proposed arrangement are ethically improper under the governing Disciplinary Rules. But the lawyer, by agreeing to a proper arrangement, would not be "requesting" the collection agency to recommend his employment in violation of DR 2-103(C), where as here the original offer to him or her came from the collection agency.
Following the issuance of ABA Formal Opinion 294, the American Bar Association's National Conference of Lawyers and Collection Agencies adopted a "Declaration of Fair Practices of Collection Agencies" on February 18, 1968. These were evidenced by the "Uniform Authorization Form" and "Uniform Forwarding Contract" adopted by the Conference on February 21, 1970. These forms (with the deletion of the clauses referring to the fee schedule recommended by the Commercial Law League of America) are now being used by the members of this league. We conclude that arrangements between a creditor and a collection agency, and between the collection agency and the lawyer, consistent with the above 1968 Declaration and 1970 Uniform Forms comply with the requirements of ABA Formal Opinion 294, supra, and are ethically proper under our Disciplinary Rules.
We believe our opinion in this matter is entirely consistent with the regulations adopted by the commissioner of banks, effective May 19, 1969, pursuant to authority granted him to license collection agencies under G.L. c.93, S24, as amended by chapter 180 of the Acts of 1967. Regulation No. 8 provides (inter alia) that "no collection agency shall (a) furnish legal advice or otherwise engage in the practice of law ... (e) demand or obtain in any manner a share of the compensation for services performed by a lawyer in the collection of a claim."
We have been informed that questions involved in the proper interpretation of the Lyon case and of Regulation No. 8 above are in process of resolution as a result of meetings of various segments of the collection industry and staff members of the Office of the Commissioner of Banks. It is our hope that this opinion may be of some assistance in the process.
We also believe our opinion to be consistent with the recent opinion of the New Jersey Advisory Committee on Professional Ethics No 338, July 1, 1976, 99 N.J.L. 588, which covers many of the same provisions.


Permission to publish granted by the Board of Delegates, 1976. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.
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