Opinion 2016

The committee has been asked to determine whether Informal Opinion Nos. 1044 (1986) and 1691 (1997) are in conflict and irreconcilable. Upon close analysis, these informal ethics opinions are not in conflict and can be reconciled.

In Informal Opinion No. 1044 (1986), a law firm received a deed of trust and promissory note to secure legal fees for future representation. The deed of trust was in foreclosure, and the grantor had declared bankruptcy. The Committee opined that if the assignment of the promissory note and deed of trust gave the attorney a security interest in the property, rather than a proprietary interest, there would be no conflict with RPC 1.8(j).

In Informal Opinion No. 1691, the inquiring attorney asked if RPC 1.8(e) would preclude him or her from loaning money to his/her client who was in Chapter 13 bankruptcy. The purpose of the loan was to fund a settlement between the client and a secured creditor. In the process, the creditor’s secured position would be assigned to the inquiring attorney with the modification of the note reducing the principal amounts to reflect the amount lent to the client. This would result in the lawyer becoming a secured creditor in the client’s Chapter 13 plan. The Committee opined that it would be a violation of RPC 1.8(e) and 1.8(j) for the attorney to loan the money to the clients to fund the settlement.

RPC 1.8 addresses conflicts of interests and prohibited transactions regarding current clients. RPC 1.8(j) states that a lawyer who is representing a client in a matter:

Shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for client, except that the lawyer may:
(1) Acquire a lien granted by law to secure the lawyer’s fees or expenses; and
(2) Contract with the client for a reasonable contingent fee in a civil case.

RPC 1.8(j)(1) explicitly carves out an exception to the general rule that a lawyer representing a client in a matter shall not acquire proprietary interest in a cause of action or subject matter of the litigation.

In Informal Opinion No. 1044 (1986), the law firm received a deed of trust and promissory note to secure legal fees for future representation. This constitutes a lien granted by law to secure the lawyer’s fees or expenses, and falls squarely under the exception carved out in RPC 1.8(j)(1). Therefore, the transaction does not appear to violate RPC 1.8.

The confusion between Informal Opinion Nos. 1044 (1986) and 1691 (1997) arises from the fact that the permissible lien granted by law to secure the lawyer’s fees or expenses does not apply to the factual situation in Informal Opinion No. 1691 (1997) because lawyers’ fees or expenses do not necessarily include loaning a client money to facilitate a settlement.

The key issue concerns what constitutes the permissible fees and expenses that a lawyer may advance to his or her client. RPC 1.8(e) states that a lawyer who is representing a client in a matter:

Shall not, while representing a client in connection with contemplated or pending litigation, advance or guarantee financial assistance to his or her client, except that:
(1) 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; and
(2) In matters maintained as class actions only, repayment of expenses of litigation may be contingent on the outcome of the matter.

Under the plain language of RPC 1.8(e)(1), the advance or guarantee of the expenses of litigation includes court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence. The express permissible fees and expenses do not include the advancing of costs to fund a settlement agreement. Thus, in Informal Opinion No. 1691 (1997), the loaning of money to a client to fund a settlement agreement was determined by this Committee to be prohibited by RPC 1.8(e). Therefore, such a loan cannot not fall under the exception carved out by RPC 1.8(j)(1). Accordingly, there is no actual conflict or irreconcilable difference between Informal Opinion No. 1044 and Informal Opinion No. 1691.

[Editor’s note: See Informal Opinion 1044 and 1691.]