One of the biggest problems with the American legal system is that too many Americans are shut out from it. The courtroom has never been a strictly egalitarian place – wealth has always enabled certain individuals to gain crucial advantages, such as better representation.
However, many Americans of lesser means have been able to find justice in the courtroom, and it often represents the only avenue many people have for pursuing compensation for the injuries and harms they’ve suffered.
So it’s deeply problematic that so many Americans do not even have access to the legal system. Lawyer fees, court fees, fines – these can add up, especially for lower-income Americans who are always one emergency away from financial peril. These financial disadvantages prevent too many Americans from meeting their long-standing legal needs.
As a result, a system of financing companies has arisen to meet these needs. For many years, lawyers have had complicated relationships with these companies, and the precise ethical boundaries of these relationships have not been clearly drawn. Now, a November, 2018 opinion from the American Bar Association’s Standing Committee on Ethics and Professional Responsibility has weighed in, ruling that lawyers can refer clients to lending companies, even when the attorney has a stake in that company.
Why Lending Companies Have Taken Hold In the Legal World
Barbara Gillers, chair of the ABA’s standing committee, is quoted in the ABA Journal as saying, “By some estimates, more than 75 percent of low-income and middle-income Americans have legal needs that go unmet for financial reasons.”
Many personal injury lawyers famously work on a contingency fee payment system, which ensures that potential clients don’t pay unless they win a verdict or settlement. This system goes a long way toward making sure that even indigent victims of misconduct and negligence have the ability to pursue justice and compensation for their injuries.
However, many Americans still fall through the cracks. Lower-income Americans simply don’t have the financial resources necessary to pay even relatively small legal fees. To fill this gap, many financing companies have stepped in to provide these Americans with loans that enable them to meet their basic legal obligations when they otherwise could not.
What the ABA Opinion Says
The standing committee’s opinion is more a clarification than a response to any existing crisis or concern. The ABA elected to provide attorneys with some guidance as they help clients navigate the potentially confusing world of legal financing.
Generally speaking, the ABA’s opinion provides attorneys with significant freedom in this area. In a broad sense, lawyers are permitted to refer clients to financing companies in which they have no stake provided they comply with a series of model rules from the ABA’s rules of professional conduct – specifically, model rules 1.2(c), 1.4 (b), 1.5 (a) and (b), 1.6, 1.7 (a) (2) and 1.9.
The ABA’s statement provides a few specific examples of the kind of lending arrangements under consideration here. These examples include relatively straight-forward instances, such as a client directly applying for a loan from a financing company to cover their legal fees, and more complicated arrangements, such as one in which a lawyer pays a fee to a lending company and applies for a loan on behalf of a client.
The opinion doesn’t address litigation financing, in which clients take out a cash advance against a future verdict or settlement. This is often referred to as pre-settlement funding where a company advances money to a plaintiff to cover living expenses such as mortgage payments or car loans while the case is pending.
Still another option is available to law firms. Case expense financing allows a law firm borrows money to pay case expenses. In that situation, the money is paid back by the firm (typically out of the fees collected) when the case settles or after a verdict has been collected.
In addition, the ABA’s opinion holds that attorneys are allowed to refer a client to a financing company in which the attorney has a financial stake. In such a case, the attorney must disclose his or her relationship with the company, ensure the client receives fair and reasonable terms, obtain informed consent from the client and advise the client to seek independent legal advice on the transaction.
Of course, attorneys are not allowed to recommend a financing company in which he or she has a stake if that advice is not in the client’s best interests.