Ethics Opinions

Opinion No. 83-7

Summary: A lawyer may borrow funds from a bank to assist him in bearing the expenses of litigation. A lawyer representing a client in litigation may not lend money to the client for purposes of helping the client defray non-litigation-related expenses, nor may the lawyer's firm do so, nor may the lawyer or his firm cosign or guarantee a bank loan to the client for such purposes or purchase a percentage of the client's claim. However, the lawyer or the firm may properly refer the client to unaffiliated third parties who would lend the client money or purchase a portion of the tort claim, at least so long as no commission, finder's fee, or the like is to be paid to the lawyer or the law firm for doing so.

Facts: The committee has received two inquiries. In the first, an attorney who represents the plaintiff in a personal injury case inquires if he may borrow funds from a chartered lending institution to help defray the costs and expenses of the litigation, supporting his application for the loan by describing the lawsuit to the prospective lender. The debt would be unsecured and the due date of the loan would not in any way depend upon the outcome of the litigation.
In the second inquiry, an attorney who represents the plaintiff in a tort suit inquires if, in view of the client's severe financial need, he or his law firm may lend money to the client, cosign, or guarantee a bank loan to her, purchase a percentage of her tort claim, or refer her to a third party who would lend her money or purchase a percentage of her claim.
Discussion: The first inquiry relates to the propriety of a lawyer's borrowing to defray the expenses of litigation. The committee assumes that these expenses are being carried by the lawyer in conformity with Disciplinary Rule 5-103(B), which is discussed infra. Borrowing to defray such expenses is not per se a violation of the Disciplinary Rules. However, DR 5-107(A)(2) provides that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not . . . [a]ccept from one other than his client anything of value related to his representation of or his employment by his client." Such consent is therefore required where, as here, the loan application is to be supported largely by a description of the particular case. See also DR 5-101(A), which provides that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial . . . interests." Thus, if the borrowing would be so large that it would or might reasonably affect the lawyer's judgment, full disclosure of this problem should precede consent. Finally, note that any description of the lawsuit made to the prospective lender must comply with Canon 4 ("A Lawyer Should Preserve the Confidences and Secrets of a Client") and the disciplinary rules thereunder.
The second inquiry asks, first, if a lawyer may lend money to "tide over" an indigent plaintiff whom he represents in a tort suit. Disciplinary Rule 5-103(B) provides:
While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to his client, except that a lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses.
Thus, if the funds would not be used to cover expenses of litigation in any sense--and there is nothing in the inquiry which indicates that they would--the lawyer could not advance them. See Embler, Professional Responsibility, Malpractice, and Competency, 32 So. Car. L. Rev. 165 (1980) and authorities cited. The rule may be harsh where the client is indigent, but in two recent South Carolina cases attorneys were disciplined for advancing funds to needy clients in violation of this rule. See In re Pusser, 273 S.C. 115, 254 S.E.2d 926 (1979); In re Leppard, 272 S.C. 414, 252 S.E.2d 143 (1979). An indigent client is likely to be less able than others to protect himself against the dangers of such transactions, such as the danger that the lawyer will settle the case for less than it is worth in order to assure repayment of the loan.
It is further asked if the attorney's firm may make the loan, or whether the attorney or the firm could properly cosign or guarantee a loan to the client from a bank. Under any of these approaches, the attorney would stand to lose if the debt were not repaid, and so be subject to pressures similar to those DR 5-103(B) was designed to prevent. Consequently the rule must be interpreted to reach those arrangements as well.
It is further asked if the firm or the attorney could properly "purchase a further percentage of [the client's] tort claim over and above the original contingency fee agreement." DR 5-103(A) prohibits a lawyer from acquiring "a proprietary interest in the cause of action ... of litigation he is conducting for a client." DR 5-103(A)(2) affords an exception for reasonable contingency fee arrangements, but where as in the proposed arrangement some of the monies contingently payable by the client are attributable not to legal services but to a purchase, they do not constitute a "fee."
Finally, it is asked whether the lawyer could properly refer the client to a third party who would lend money to the client or purchase a portion of the client's tort claim. We assume that the third party is one in no way affiliated with the attorney, that the attorney would obtain no fee or commission for the referral, that the attorney would give no assurances to the third party as to the conduct or likely outcome of the litigation and would not give the third party any right to control the conduct of the litigation, and that the attorney would conform to Canon 4 and the disciplinary rules thereunder relating to the confidences and secrets of the client. Under those circumstances, making such a referral would not violate the Disciplinary Rules.


Permission to publish granted by the Board of Delegates on May 12, 1983.
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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