Formal Opinion 1995-1: Attorneys’ fees; Billing; Credit cards and other financing

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.