Virginia

Legal Ethics Opinion No. 1471

Zealous Representation–Trust Accounts: Disbursing Client’s
Proceeds to Creditor of Client

You have presented a hypothetical situation wherein X Corp., a
Virginia corporation, makes cash advances to plaintiffs involved
in personal injury tort actions. As security for these advances,
including accrued finance charges and related fees, X Corp.
receives a security interest in and an assignment of proceeds of
the claim under the terms of a Security Agreement and Assignment
executed by the plaintiff prior to receiving any funds. Receipt
of this Security Agreement and Assignment is acknowledged in
writing by plaintiff’s attorney who has no pecuniary interest in
X Corp. either as an investor or lender.

You further indicate that liens in excess of a stipulated amount
are further perfected by filing a financing statement. The
Credit Application and Credit Agreement, both of which are also
signed by the plaintiff prior to receiving funds from X Corp.,
direct the attorney to pay X Corp. in full upon resolution of the
claim. The Security Agreement and Assignment further contains a
provision that, in the event of any dispute between plaintiff and
X Corp., plaintiff’s attorney is to hold in escrow all funds due
plaintiff, after satisfying statutory liens, pending resolution
of the dispute.

Furthermore, you indicate that, although the plaintiff’s attorney
does not guarantee the repayment of the loan, nor does he make
any representation that the settlement proceeds will be
sufficient to repay the loan, X Corp. does rely on the
plaintiff’s authorization to his attorney to repay the loan, on
the direction to hold disputed amounts in escrow, and on the
attorney’s acknowledgment of that authorization.

Finally, in our telephone conversation of October l9, l992, you
asked that the committee assume that there is no dispute as to
the ownership of the funds or that any such dispute has been or
will be resolved presumably by judicial means. The committee
notes also that there is no indication that the cash advances
received by plaintiff from X Corp. are to be used for expenses of
litigation.

You have asked the committee to opine whether, under the facts of
the inquiry, if the client does not deny the debt to X Corp. but
nevertheless directs the attorney, after the settlement proceeds
are received, not to pay off X Corp.’s loan but to pay the
proceeds directly to the client, it is improper for the attorney
to comply with his client’s direction, or must he honor the lien
and the assignment of proceeds executed earlier by the client.
Additionally, you have asked whether the response would differ if
the client in good faith disputes the validity or amount of the
debt to X Corp.

The appropriate and controlling disciplinary rules relative to
your inquiry are DR 9-l02(B)(4), which states that a lawyer shall
promptly pay or deliver to client or another as requested by such
person the funds, securities, or other properties in possession
of the lawyer which such person is entitled to receive; and DR
7-l02(A)(7) which prohibits a lawyer from counseling or assisting
his client in conduct that the lawyer knows to be illegal or
fraudulent.

The committee has previously opined that it is not improper for
an attorney to persuade a finance company to agree to loan funds
to the lawyer’s personal injury clients who are unable to obtain
bank loans, where the loan would become due upon resolution of
the case either by settlement or trial and where the attorney
would not guarantee, cosign, or be responsible for the loan, but
would honor a lien on the case. LEO #ll55. The committee has
also opined that, while it may not be improper per se for an
attorney to enter into a contract with a health care provider for
the purpose of authorizing the attorney to pay the provider’s fee
from the client’s recovery, the more effective solution would be
to have the client execute a release or consent form authorizing
the attorney to pay or deliver the fees owed to the provider.
LEO #ll82. Furthermore, Legal Ethics Opinion #421, rendered on
August l4, l98l, found that, where a personal injury client has
authorized the attorney to pay a treating physician and hospital
from settlement proceeds, it is not improper for the attorney to
notify the physician and hospital of the receipt of such
proceeds. Finally, the committee has opined that “when an
attorney assumes the responsibility of acting as a fiduciary and
violates his or her duty in a manner that would justify
disciplinary action had the relationship been that of
attorney/client, the attorney may be properly disciplined
pursuant to the Code of Professional Responsibility”. LEO #l325.

In the facts you present, the committee is of the view that, by
virtue of having acknowledged receipt of the Security Agreement
and Assignment executed by the personal injury client, upon which
the Credit Application and Credit Agreement are based, the
attorney has accepted the fiduciary responsibility of disbursing
settlement proceeds to satisfy the loan. The committee is of the
further opinion that, where the client subsequently directs the
attorney, after settlement proceeds are received, not to pay off
the loan but to pay the proceeds directly to the client, it would
be improper for the attorney to unilaterally arbitrate such a
money dispute between lender and borrower/personal injury client.
In order to protect his client’s interests, however, the
committee believes it is incumbent upon the attorney to counsel
his client as to liabilities which may be incurred as a result of
the client’s failure to satisfy the Agreement. See Delaware
Ethics Op. l98l-3 (April 2l, l98l). Furthermore, although it is
beyond the committee’s purview to opine as to contractual
provisions such as the Security Agreement’s requirement that all
funds due plaintiff be held in escrow by the attorney, the
committee is of the opinion that it would not be improper for the
attorney to disburse the undisputed portion of the proceeds to
the borrower/personal injury client, while either holding in
escrow any disputed sums, i.e., those owed to X Corp., or
interpleading such sums to the appropriate court for
determination of the entitlement as articulated in DR
9-l02(B)(4).

It is the committee’s view that it is irrelevant to the propriety
of the attorney’s actions whether the client does not deny the
debt or has a good faith dispute as to the validity or amount of
the debt to X Corp.

In addition, the committee opines that should the attorney’s
release of the settlement proceeds to the client, irrespective of
the attorney’s recognition of the outstanding lien held by X
Corp., amount to his knowingly assisting the client in fraud,
such conduct would be improper and violative of DR 7-l02(A)(7).
See Cleveland Bar Ass’n Op. 87-3 (March 29, l988).

Committee Opinion
August 24, 1992

Virginia

Legal Ethics Opinion No. 1441

Acquiring an Interest in Client’s Matter–Conflict of Interest:
Attorney Making Loans to Finance Company Which Makes Loans to Attorney’s
Personal Injury Clients

You have presented a hypothetical situation in which an attorney
(A), who represents personal injury plaintiffs, occasionally
refers clients to Corporation X (X) which is a Virginia
corporation engaged in extending credit to injured persons while
they are awaiting resolution of their tort claims to recover
damages for their injuries. The credit line is evidenced by a
personal note from the plaintiff secured by an assignment of the
proceeds from the claim and is due and payable in full at the
time of settlement. The plaintiff’s attorney does not guarantee,
nor obligate himself or his firm in any way, for repayment of the
credit extended to his client, but he is obligated, however, to
acknowledge the assignment and disburse to X the funds to repay
the note from the proceeds of the settlement. You have
additionally indicated that plaintiff’s attorney may be asked to
oversee the execution by his client of the credit documents from
X. Attorney A also furnishes information to X relative to the
claim, with his client’s authorization, which information later
becomes the basis for the credit determination. Attorney A
receives no fee or other compensation from X for these
services, nor will he either provide any legal advice or services
to X or have any input into X’s decision with regard to the
establishment of the credit limit.

A desires to lend money to X and you have indicated that no
portion of those funds being loaned to X by A will be earmarked
for A’s clients, nor will A have any influence upon X’s decision
as to how any of the funds are utilized. Furthermore, none of
X’s receivables from A’s clients will be assigned to A as
security for his loan nor will A receive any corporate stock or
other form of ownership interest in X. You indicate that the
only benefit from the loan which A will receive is the payment of
interest which will be equal to that which X would pay to any
other lender under similar circumstances. Finally, A will not be
a member of X’s board of directors or advisory board. Finally,
you indicate that all such exclusions from any direct or indirect
management, control, or influence over the operations and
business decisions of X will also extend to A’s family, other
relatives, and members and employees of his firm.

You have asked the committee to opine whether, under the facts of
the inquiry, it would be proper for A to make such a loan to X
and whether such a loan to X made by A’s spouse or A’s employees
would be proper as to A.

The appropriate and controlling Disciplinary Rules related to
your inquiry are DR 5-l03(A) which mandates that a lawyer shall
not acquire a proprietary interest in the cause of action or
subject matter of litigation he is conducting for a client; DR
5-103(B), which provides that a lawyer representing a client in
contemplated or pending litigation shall not advance or guarantee
financial assistance to his client, except that the lawyer may
advance or guarantee the expenses of litigation, provided the
client remains ultimately liable for such expenses; and DR
5-l0l(A), which precludes a lawyer from accepting employment,
absent the consent of his client after full disclosure, if the
exercise of his professional judgment on behalf of his client may
be affected by his own financial, business, property, or personal
interests.

The committee has previously opined that an attorney may persuade
a finance company to loan funds to the attorney’s personal injury
client and may honor the finance company’s lien on the client’s
settlement proceeds, as long as the attorney did not guarantee or
cosign the loan. See LEO #ll55. The committee has also opined
that where an attorney has persuaded a finance company to loan
funds to the attorney’s personal injury client, it is not
improper for the attorney to receive completed but unsigned loan
documents, supervise his client’s execution of the documents, and
then return the documents to the finance company. See LEO #1379.

The committee believes that A’s loan to X is thus a means by
which A has provided indirectly what he may not provide directly,
i.e., financial assistance to his client in connection with
litigation. Furthermore, the committee views such an
arrangement as a means by which A has also acquired indirectly
what he may not acquire directly, i.e., an interest in the
client’s litigation matter. Thus, the committee is of the
opinion that, despite the controls you propose, it would be
improper and violative of Disciplinary Rules 5-l03(A) and (B) and
5-l0l(A) for
A, his spouse or employee, to make a loan to X Corporation unless
X agrees to make no loans to A’s clients during A’s
representations of those individuals or entities.

Committee Opinion
January 6, 1992

Virginia State Bar

LEO: Acquiring An Interest in the Litigation – Commingling – Trust
Accounts: Advancing Funds from Settlement Check Prior to
Clearing of Check.

July 25, 1989

You have advised that your firm has been adhering to the disciplinary rules
and prior legal ethics opinions which require that identifiable funds must
be irrevocably credited to a trust account before making disbursements of
insurance company personal injury settlement proceeds. You have indicated
that many personal injury clients do not understand the need to adhere to
the seven or ten day requisite period before disbursing to them from
“cleared” funds after they have already waited typically nine to twelve
months to obtain a settlement of their case. In addition, you believe that
it would be very unlikely for an insurance company check to “bounce.”

You wish to know whether establishing a line of credit with a commercial
bank would provide “identifiable funds, irrevocably credited,” to the firm’s
trust account in the event a check from an insurance company should be
returned for insufficient funds. You further believe that this arrangement
would not result in the disbursement of funds belonging to other clients.

You have indicated that at the time of such credit, the bank would notify
the firm that the line of credit has been utilized and that a loan in the
amount credited is then due and payable by the law firm. For checks in the
amount of $10,000.00 or more, the firm would only utilize this method for
those checks issued by insurance companies rated A+ by A.M. Best & Company.
In addition, the firm would make only partial payments to the clients
pending clearance of the insurance company’s check where larger settlements
are involved.

The appropriate and controlling rules relative to your inquiry are
DR:5-103(A),(B) and DR:9-102(A). Disciplinary Rule 5-103(A) and (B) provide
that a lawyer shall not acquire a proprietary interest in the client’s cause
of action or subject matter of the litigation, nor shall a lawyer advance or
guarantee financial assistance to his client except that the expenses of
litigation, including court costs, investigations, medical examinations, and
costs of obtaining and presenting evidence may be advanced or guaranteed by
the lawyer provided the client remains ultimately liable for such expenses.

Disciplinary Rule 9-102(A) provides that all funds of clients paid to a
lawyer or law firm, other than advances for costs and expenses, shall be
deposited in one or more identifiable bank accounts maintained in the state
in which the law office is situated and no funds belonging to the lawyer or
law firm shall be deposited therein, except that funds to pay bank charges
and funds belonging in part to the client and in part presently or
potentially to the lawyer or law firm may be deposited therein (emphasis
added). The committee believes that the funds provided by the line of credit
are, in fact, the law firm’s or attorney’s funds since it would be the law
firm or attorney who would become the obligor on the note payable to the
bank for such credit. Thus, the result of crediting attorney’s funds to the
clients’ trust account is commingling and is violative of DR:90-102(A).

The Committee would direct your attention to LE Op. 1219 in which the
Committee stated that the clear intention of DR:5-103(B) is to preclude an
attorney from acquiring an interest in the outcome of the litigation since
holding an interest would create a personal conflict and would compromise
his undivided loyalty to the client in order to protect his own financial
interests. The Committee believes that the terms of the line of credit
whereby the law firm would ultimately become responsible for any loans as a
result of advancing or disbursing funds to a client which have not “cleared”
is tantamount to acquiring an interest in the out come of the litigation and
could also constitute a breach of the attorney’s fiduciary relationship .
The Committee stated in LE Op. 183 :

A lawyer who receives funds not his own becomes a fiduciary for the person
or others entitled. A lawyer owes a duty to all who have entrusted him with
funds to preserve the same in such manner that it can, at all times, be
identified and recovered. The public trust and faith in the profession
impose a moral responsibility on every lawyer to so conduct the management
of funds not his own that not only is all question of impropriety removed,
but that there can be no basis for suspicion of misuse of client’s funds.

The Committee believed that the proposed arrangement is violative of
DR:5-103 in that the financial assistance contemplated under the facts of
the inquiry would not come under the definition of “expenses” which a lawyer
may advance or guarantee as prescribed in DR:5-103(B). In addition, the
potential for the law firm’s acquiring a personal interest in the outcome of
the client’s litigation is so overwhelming under the terms of the line of
credit that it may be violative of DR:5-103(A).

Finally, it is the view of the Committee that providing a line of credit to
the clients’ trust account when an insurance company’s settlement check has
been returned for insufficient funds would be improper and violative of the
Code of Professional Responsibility since it is a blatant form of
commingling attorney’s funds with that of a client’s. Furthermore, the
proposed line of credit arrangement with a bank is unethical if, in doing
so, it if the attorney’s or law firm’s purpose to circumvent a disciplinary
rule precluding disbursement on uncollected funds. (see DR:1-102(A)(2)).

Committee Opinion July 25, 1989

Virginia State Bar

LEO: Acquiring an Interest in Litigation – LE op. 1155

Acquiring an Interest in Litigation – Personal Injury
Representation: Assisting Clients to Obtain Loan
From Finance Company

November 15, 1988

You advise that you have represented personal injury clients for many years
and are confronted 90 percent of the time with an innocent victim of an
automobile accident who has incurred unanticipated medical bills and
injuries which have put him or her out of work. In almost half of these
cases, your clients do not have the benefit of health insurance or
disability insurance. You are also confronted daily with requests for a loan
from your clients in order to obtain proper medial treatment and medication
so they may continue to pay their mortgages as well as provide food and
other necessities for their families. On numerous occasion, you have
referred your clients to banks to obtain loans; however, due to the loss of
their jobs as a result of their injuries, they are poor credit risks and it
is virtually impossible for them to obtain loans. There being no other
alternative, you attempt to obtain liens against your client’s case to
provide them credit which, inmost cases, the landlords and hospitals simply
reject.

You have asked the Committee to consider the propriety of your persuading a
finance company to agree to loan funds ranging from $1,000 to $10,000 to
personal injury clients who cannot get bank loans. You have proposed that
the company would investigate the case to confirm the liability, damages,
and insurance coverage with the client’s written consent. If the
investigation revealed facts or evidence pertinent to the case which the
client’s attorney did not already know, said facts would be conveyed to that
attorney at no expense. If the loan is approved, the loan would become due
upon resolution of the case either by settlement or trial and the borrower
would be charged at a lawful interest, similar to that used by major credit
card companies. Upon obtaining a favorable settlement or verdict the client
would direct the attorney involved to repay the loan out of the case
proceeds. In no way would the attorney guarantee, cosign, or be responsible
for the loan, except that he would honor a lien on the case.

The Committee believes DR.5-103 (B) is the appropriate and controlling rule
relative to your inquiry, and it provides as follows:

While representing a client in connection with contemplated or pending
litigation a lawyer shall not advance or guarantee financial assistance to
his client, except that the 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 ( see also
LEO. 34).

The Committee would also direct your attention to Professional Guidance
Opinion no.86-36 from the Philadelphia Bar Association, which states that a
lawyer may not act as a guarantor for a bank loan for his client; however,
he may attempt to convince the bank to grant the loan and to take a security
interest in the client’s personal injury case.

Under the facts as you have presented them in you inquiry, the Committee
opines that there would not be a violation of Disciplinary Rule 5-103(B) as
long as the attorney does not guarantee or cosign for the loan.

Committee Opinions November 15, 1988

Virginia State Bar

LEO: Attorney/Client Relationship: Engaging LE Op. 1219

Attorney/Client Relationship: Engaging in Arrangement of
Champerty and Maintenance;Multiple Representation-
Conflict of Interest: Attorney Engaging in Making
A Loan to One Client Through Another Client/Lender.

April 3, 1989

Your firm has advised that it has a wealthy individual client who is willing
to make small loans to your personal injury clients for the purpose of
assisting those personal injury clients with their living expenses during
the pendency of their litigation. The prospective lender-client would make
such loans in return for 15% interest and a promissory note in which the
personal injury client would agree to repay the loan contingent upon his or
her receipt of settlement proceeds. Should there not be a settlement, the
lender-client would bear the loss. Your firm would obtain the promissory
note from the borrower-client for the benefit of the lender-client, and the
lender-client would establish a separate bank account in his own name while
designating your firm to draw upon it for the purpose of making the loans to
the borrower-client(s). You further indicated that the lender-client would
place approximately $10,000 into the account with the typical loan being
about $200; thus a possible total of some 50 such loans could be made. You
specify that the firm would not reimburse the lender-client for any losses
borne by him as a result of the borrow-client not receiving a settlement.

Your firm has inquired as to the feasibility of such an arrangement under
the requirements of the Virginia Code of Professional Responsibility.

It is well settled, and you have correctly identified the prohibition under
DR:5-103(B) against a lawyer’s advancing or guaranteeing financial
assistance of his client for expenses other than those directly related to
the expenses of litigation. The same rule permits the advancement of only
those specific litigation expenses provided the client remains ultimately
liable for such expenses. The clear intent of DR:5-103(B) is to preclude the
lawyer’s acquiring an interest in the outcome of the litigation, since
holding such an interest would create a personal conflict in the lawyer and
compromise his undivided loyalty to his client in order to protect the
lawyer’s own financial interest in the litigation. Furthermore, since the
lawyer is precluded from providing such assistance to his client, his
securing of another of his client to provide that assistance would be
improper under DR:1-102(A)(2) if his purpose in doing so was to circumvent
DR:5-103(B).

In the circumstances you have described, the lawyer’s undivided loyalty to
his individual lender-client and to his individual borrower-client(s) would
be great diluted, most particularly since the lender-client’s receipt of
repayment is expressly contingent on the outcome of the suit. Under
DR:5-105(B), a lawyer shall not continue multiple employment if the exercise
of his independent professional judgment in behalf of a client will be
likely to be adversely affected by his representation of another client,
unless permitted by DR:5-105(C). under those permissive provisions, the
lawyer may continue multiple representation if it is obvious that he can
adequately represent the interest of each and if each consents to the
representation after full disclosure of the possible effect of such
representation on the exercise of the lawyer’s independent professional
judgment on behalf of each. It is the opinions of the Committee, assuming
that your firm is representing the lender-client in his lender capacity,
that the arrangement you described clearly does not allow for obviously
adequate representation of both the lender-client and the
borrower-clients(s). Thus, the arrangement would be improper and violate
DR:5-105 (B) and (C).

Finally, since the arrangement provides the repayment of the principal to
the lender-client only on the contingency of the borrower-client receiving
settlement proceeds, the Committee is of the opinion that particular
attention must be paid to any common law or statutory prohibitions against
champerty and maintenance. The determination of whether or not the
arrangement you describe would be champertous or provide maintenance to the
litigant is a matter of law and thus beyond the purview of the Committee.
Should it be violative of those provisions, however, the Committee
recognizes that your firm’s role in creating such arrangement would be
violate of DR:7-102(A)(7), which prohibits a lawyer from counseling or
assisting his client in conduct that the lawyer knows to be illegal or
fraudulent.

Committee opinion April 3, 1999

Virginia State Bar

LEO: Acquiring AN Interest in Client’s Matter LE Op. 1269

Acquiring AN Interest in Client’s Matter – Business Transactions
Between Attorney and Client – Personal Interest: Attorney Making
Loans to Client.

October 3, 1989

You have advised that you represent an injured client whose medical bills
have been paid by his insurance carrier, but who has not been able to earn
significant income to meet his living expenses. You further indicate that
the client has no other source of income pending disposition on his claim.
Your client will probably lose an additional six weeks of income during
surgery and recuperation. You indicate that you have arranged for a third
party to loan your client up to $7,000 at 12% interest, under the terms of
which loan the lender will be designated as a beneficiary under your
client’s life insurance policy and the client agreed to have any remaining
outstanding debt act as a lien on any recovery made on the personal injury
matter. Finally, you advise that the loan will not be contingent on any
recovery but will remain the personal obligation of the client regardless of
the outcome of the cause of action.

You have inquired as to the propriety of the terms of the loan as outlined
and have further inquired as to the propriety of you loaning a client money
pursuant to the same terms.

With regard to your first question, the Committee believes that prior LE Op.
1155 is dispositive of the issue.

With regard to your second question, the appropriate and controlling
disciplinary rules are DR:5-103(A) and DR:5-104(A). Under DR:5-103(A), a
lawyer shall not acquire a proprietary interest in the cause of action or
subject matter of litigation he is conducting for a client. A lawyer may,
however, acquire a lien granted by law to secure his fee or expenses; and
may contract with the client for a reasonable contingent fee in a civil
case. Under Dr:5-104(A), a lawyer may not enter into a business transaction
with a client if they have differing interests therein and if the client
expects the lawyer to (continue to ) exercise his professional judgment
therein for the protection of the client, unless the client has consented
after full disclosure and provided that the transaction is not
unconscionable, unfair or inequitable when made.

The Committee is of the opinion that loans made to clients for assistance
with living expenses during the course of litigation constitute the
lawyer’s entering into employment and a business transaction that would
allow his professional judgment to be attached by his own financial
interest; thus such conduct would be improper and violative of both
DR:5-103(A) and DR:104(A). The rule against a lawyer acquiring an interest
in a client’s litigation is based on concerns about compromised loyalty to
the client in pursuing a result which should be in only the client’s best
interests. The lawyer’s acquisition of a personal interest in the outcome of
the litigation may result in the lawyer’s independent judgment on behalf of
his client becoming clouded by his interest in recouping his own funds.

In addition to the prohibition against a lawyer acquiring a proprietary
interest in the litigation through the making of a loan to a client, the
Committee is of the opinion that such a loan would create an improper
adverse relationship between the lawyer as creditor and the client as
debtor. The client’s consent as described in DR:5-104(A), which, in other
circumstances, might cure the conflict, would not suffice to alleviate the
Impropriety created by the violation of DR:5-103(A).