Tag Archives: fee-splitting

Avoiding the Risk of Fee-Splitting in a Litigation Finance Transaction

One of the most fundamental ethical rules governing law practice is that a lawyer may not share legal fees with a non-lawyer. The rule exists to protect the independence of the lawyer’s professional judgment and to assure that the lawyer serves only the interests of the client.  As with many other aspects of law practice, litigation funding can complicate the process of adhering to this rule.

The fee-splitting problem can arise when the lawyer has a contingent fee agreement with the client and when the funder has a right to share in the proceeds of the litigation.  This means that both the lawyer and the funder have a security interest in the proceeds of the litigation.  In this situation, there can be a question whether the lawyer may give the funder a share of his own security interest in the recovery, as back-up security for funder’s investment.

Authorities are split on how to answer this question. A few state ethics opinions have addressed the fee-splitting rule in connection with litigation financing transactions. These opinions state that a lawyer may not agree to give a funder a share of or a security interest in the fee the lawyer expects to receive under a contingency fee agreement with the client.  According to these authorities, such a transaction between the funder and the lawyer would be fee-splitting.

One court, however, has reached the conclusion that lawyers may pledge their interest in a client’s recovery as security for a loan intended to cover litigation costs. In Core Funding Group v. McDonald, a 2006 case from Ohio, a law firm took a loan to pay for the expenses associate d with a group of contingent fee cases.  The firm offered the expected fees as security for the loan.  The Ohio Court of Appeals held that this transaction was equivalent to a commercial contract in which accounts receivable are offered as security.  This analysis indicates that, at least in Ohio, there is no concern about fee-splitting in a transaction in which a lender gets a security interest in an as yet unearned fee.

Regardless of how any particular jurisdiction views this issue, there are guidelines that lawyers can follow to avoid the risk of being accused of fee-splitting in connection with a litigation financing transaction. Model Rule of Professional Conduct 1.8(f) prohibits lawyers from accepting compensation from a third party for the representation of a client unless the client gives informed consent, there is no interference with the lawyer’s exercise of independent professional judgment, and confidential information is protected as required by Model Rule 1.6.  As long as a lawyer conforms to these principles and assures that all of these conditions are present in the relationship among the funder, client, and himself, he should be well-positioned to avoid any fee-splitting problems.

Topics:  litigation finance, legal reform, third-party funding, fee-splitting, litigation finance best practices

 Works Cited:  Core Funding Group v. McDonald, No. L-05-1291, 2006 WL 832833 (Ohio Ct. App. Mar. 31, 2006)

Avoiding the Risk of Fee-Splitting in a Litigation Finance Transaction

One of the most fundamental ethical rules governing law practice is that a lawyer may not share legal fees with a non-lawyer. The rule exists to protect the independence of the lawyer’s professional judgment and to assure that the lawyer serves only the interests of the client.  As with many other aspects of law practice, litigation funding can complicate the process of adhering to this rule.

The fee-splitting problem can arise when the lawyer has a contingent fee agreement with the client and when the funder has a right to share in the proceeds of the litigation.  This means that both the lawyer and the funder have a security interest in the proceeds of the litigation.  In this situation, there can be a question whether the lawyer may give the funder a share of his own security interest in the recovery, as back-up security for funder’s investment.

Authorities are split on how to answer this question. A few state ethics opinions have addressed the fee-splitting rule in connection with litigation financing transactions. These opinions state that a lawyer may not agree to give a funder a share of or a security interest in the fee the lawyer expects to receive under a contingency fee agreement with the client.  According to these authorities, such a transaction between the funder and the lawyer would be fee-splitting.

One court, however, has reached the conclusion that lawyers may pledge their interest in a client’s recovery as security for a loan intended to cover litigation costs. In Core Funding Group v. McDonald, a 2006 case from Ohio, a law firm took a loan to pay for the expenses associate d with a group of contingent fee cases.  The firm offered the expected fees as security for the loan.  The Ohio Court of Appeals held that this transaction was equivalent to a commercial contract in which accounts receivable are offered as security.  This analysis indicates that, at least in Ohio, there is no concern about fee-splitting in a transaction in which a lender gets a security interest in an as yet unearned fee.

Regardless of how any particular jurisdiction views this issue, there are guidelines that lawyers can follow to avoid the risk of being accused of fee-splitting in connection with a litigation financing transaction. Model Rule of Professional Conduct 1.8(f) prohibits lawyers from accepting compensation from a third party for the representation of a client unless the client gives informed consent, there is no interference with the lawyer’s exercise of independent professional judgment, and confidential information is protected as required by Model Rule 1.6.  As long as a lawyer conforms to these principles and assures that all of these conditions are present in the relationship among the funder, client, and himself, he should be well-positioned to avoid any fee-splitting problems.

Topics:  litigation finance, legal reform, third-party funding, fee-splitting, litigation finance best practices

 Works Cited:  Core Funding Group v. McDonald, No. L-05-1291, 2006 WL 832833 (Ohio Ct. App. Mar. 31, 2006)

Litigation Finance: Providing Capital to Law Firms without the Risk of Fee-Splitting Problems

As litigation finance continues to grow, it is being used by law firms as a means of providing capital to fund operations.  A recent decision of the Second Circuit makes such financing even more attractive to law firms.  In that decision, the court rejected an attempt to loosen restrictions on private investment in law firms.  This means that law firms who need more capital have additional reasons to seek it in the form of lending rather than equity investment.

The case arose when the Los Angeles-based personal injury firm, Jacoby & Meyers, sought to obtain an infusion of capital from an equity investor, so that it could expand operations, hire new attorneys, and buy new technology.  The firm asserted that it needed the capital so that it could lower fees and improve its ability to represent lower-income clients.  But certain parts of New York’s code of professional conduct and associated state regulations prevent non-lawyers from investing in law firms.  New York’s rules on this point have been endorsed by the American Bar Association and are adopted nationwide.

Jacoby & Meyers sued in 2011, alleging that the ethics rules and state regulations were unconstitutional.  Specifically, it argued that those rules violated lawyers’ First Amendment rights.  The firm’s claim was eventually dismissed in 2015, and Jacoby & Meyers appealed to the Second Circuit, reiterating its First Amendment arguments.

The panel rejected those arguments and affirmed the district court decision dismissing the case.  The panel noted that “[a]ny law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer’s services.”  Nevertheless, the panel also noted that “these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer’s First Amendment right of association or access to the courts: the connection is simply too attenuated.”

With continuing restrictions on access to equity investment, litigation financing for law firms makes more sense now than ever.  As long as such financing is structured to avoid any suggestion that it is an equity investment or an exercise in fee-splitting, it can provide needed capital within the boundaries of existing ethics rules.  Jacoby & Meyers is right that infusions of capital can help law firms operate more efficiently and help more deserving clients.  But the Second Circuit’s decision means that litigation financing companies are an increasingly attractive source for such capital.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, law firm financing, fee-splitting

 Works Cited:

Andrew Denney & Ben Hancock, Second Circuit Upholds Ban on Private Investment in Law Firms, New York Law Journal (March 24, 2017) available at http://www.newyorklawjournal.com/id=1202782087106/Second-Circuit-Upholds-Ban-on-Private-Investment-in-Law-Firms?slreturn=20170431132435