New York State Bar

New York State Bar Association
Committee on Professional Ethics

Opinion 666 (73-93) 6/3/94

Topic: Conflict of interest; maintenance; referring client to institution
that will lend money for living expenses contingent on resolution of
personal injury claim

Digest: Lawyer may refer client to institution that will lend money for
client’s living expenses contingent on the resolu-tion of personal injury
claim.

Code: DR 4-101(B), (C)(1); 5-103(B)

QUESTION

May a lawyer refer a client to a financial institution that will lend the
client money for living expenses, where the repayment of the loan is
contingent on the successful resolution of the client’s claim for personal
injuries?

OPINION

New York has long proscribed “maintenance.” The First Department, for
example, has a separate rule of court that expressly forbids, “any attorney,
directly or indirectly, as a consideration for [the placing of a] retainer,
[to] pay any expenses attending the prosecution or defense of any … claim
or action.” Rules of the Appellate Division, First Department, 22 N.Y.C.R.R.
¤603.18. The perceived evils addressed by the traditional prohibition are
the stirring up of unmeritorious litigation and the improper solicitation of
retainers to pursue it. Thus, prior to Bates v. State Bar of Arizona, 433
U.S. 350 (1977), when lawyer advertising was proscribed, condemnation of
maintenance often was combined with references to “barratry” and
“champerty.” Whether, or to what extent, those concerns continue to be
viable in an age of widespread lawyer advertising, and whether the proposed
conduct should be deemed “indirectly” paying a client for the placement of a
retainer in construing the rule against maintenance, are matters of law on
which this committee does not opine. Thus, in answering the question, we
express no opinion as to whether the proposed conduct would violate the
substantive law of New York. If what is proposed is illegal, then it would
perforce be unethical. See, e.g., N.Y. State 495 (1978).

Ethically, the principles underlying the traditional ban on maintenance
found their expression in DR 5-103 (B). That rule prohibits a lawyer from
advancing litigation expenses,
the repayment of which is contingent on the
outcome of the claim, because the client must remain “ultimately liable” for
the expenses. See, e.g., N.Y. State 553 (1983); N.Y. State 464 (1977). The
client must bear those expenses regardless of the outcome of the claim. The
rule was only recently eased in this State for “indigent” clients
“represented on a pro bono basis;” as of September 1990, lawyers are
permitted to pay the expenses of litigation without holding such clients
ultimately liable. DR 5-103(B)(2).

In the instant matter, the lawyer does not propose to “pay” or “advance” any
part of the loan.
The lawyer’s sole function would be to refer the client to
a lending institution that then would assess the value of the claim and take
a lien on its proceeds to secure the loan. Thus, a mere referral to the
lending institution would not be unethical per se. See Philadelphia Op. 91-9
(1991), indexed in ABA/BNA Lawyers’ Manual on Professional Conduct at
1001:7502 (not improper for lawyer to refer clients to finance company which
would make loans based on its assessment of the clients’ cases). Cf. Fla.
Op. 75-24 (1975), indexed in Maru’s Digest of Bar Association Ethics
Opinions at 10832 (1980 Supp.) (unethical for lawyer to recommend a client
to a lending institution that would loan client funds to cover living
expenses pending outcome of case where lawyer, in effect, guarantees payment
of loan).

The lawyer must be careful not to compromise confidentiality in disclosing
information to the lending institution. The client must be made aware of
such a possibility and any disclosures to the lending institution by the
lawyer should be made with the fully informed consent of the client. See DR
4-101(B), (C)(1); see also Philadelphia Op. 91-9. Furthermore, the lawyer
cannot own an interest in the lending institution, as that would indirectly
constitute a loan by the lawyer to the client. Finally, the lawyer cannot be
paid a fee or receive any other compensation from the lending institution.
Cf. S.C. Op. 92-06 (1992), indexed in ABA/BNA Lawyers’ Manual on
Professional Conduct at 1001:7909 (lawyer may form corporation to make
consumer loans to plaintiffs, secured by proceeds of a case, provided the
loans are not to clients of the lawyer); Md. Op. 84-11 (1983), indexed in
ABA/BNA Lawyers’ Manual on Professional Conduct at 801:4334 (lawyer may not
arrange for bank loan to pay for legal fees from litigation).

CONCLUSION

For the reasons stated and subject to the qualifications discussed above,
the question posed is answered in the affirmative.

Back to the Ethics Map