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The New York County Lawyers’ Association
NYCLA ETHICS OPINION NO. 719 (Issued 5/14/99)
UNAUTHORIZED PRACTICE OF LAW; DISBARRED LAWYERS; SHARING OF FEES; BUSINESS TRANSACTIONS WITH CLIENTS; PERSONAL INTERESTS OF LAWYERS.
AN ATTORNEY MAY ARRANGE FOR A DISBARRED ATTORNEY, ATTORNEY’S PARTNER’S SPOUSE, TO LOAN FUNDS AND RECEIVE AN ASSIGNMENT OF A RIGHT TO CONTRIBUTION FROM A JUDGMENT DEBTOR, SO THAT ATTORNEY’S CLIENT MAY OBTAIN SATISFACTION OF JUDGMENT, WHERE DISBARRED ATTORNEY IS MERELY A LENDER AND DOES NOT RECEIVE ANY LEGAL FEE AND WHERE CLIENT CONSENTS TO THE TRANSACTION AFTER FULL DISCLOSURE.
DR 3-101(A); DR 3-102(A); EC3-8; DR 5-104; DR 5-101; DR 5-103(A) and (A)(2)
An inquirer (“Attorney”) represents a personal injury plaintiff (“Plaintiff’), who was awarded at trial $1.2 million. Liability was apportioned 40% against the main defendant (‘‘Defendant 1”) and 60% against third party defendants (‘‘Defendant 2”). Defendant 1 can pay only $100,000 and therefore cannot satisfy even its share of liability and Defendant 2, because it is not a direct defendant, will not pay its share of liability to Plaintiff. Defendant 2 would be required to pay contribution to Defendant 1 if Defendant 1 paid greater than its share of liability. Plaintiff could not make Defendant 2 a direct defendant because of the Worker’s Compensation bar.
In an effort to obtain satisfaction of the judgment from Defendant 2 of its share of liability, Attorney wishes to arrange a series of transactions, whereby a disbarred attorney (“Lender”) would lend Defendant 1 $ 1.1 million in consideration for the assignment to Lender by Defendant 1 of his right of contribution from Defendant 2. Defendant 1 would pay funds to Plaintiff and Attorney would maintain these funds in an escrow account. Lender would then seek contribution from Defendant 2. Lender would tender funds obtained from Defendant 2 to Plaintiff less a fee for the loan. Lender then presumably will collect on the note from Plaintiff. Lender’s loan is secured by a demand promissory note and a guaranty of payment by Plaintiff. Under the guaranty, Lender can (and presumably would) collect on the note directly from Plaintiff without first having to proceed against Defendant 1.
Lender is also Attorney’s law partner’s spouse. The loan would come from Lender’s private account. Attorney asks whether he may arrange for this Lender to effectuate the transactions.
Attorney advises that the basic transactions Attorney wishes to arrange were discussed in Feldman v. New York City Health & Hosps. Corp., 56 N.Y.2d 1011 (1982), rev’g, 84 A.D.2d 166, 445 N.Y.s.2d 555 (2d Dep’t. 1981), for reasons set forth in, 107 Misc. 2d 145, 437 N.Y.S.2d 491 (Sup. Ct. 1981). The validity of the transactions is a legal, not an ethical question, that is beyond the jurisdiction of this Committee. We offer no opinion as to whether the transactions contemplated are permissible under Feldman, Klinger v. Dudley, 41 N.Y.2d 362, the State Worker’s Compensation statute or any other statute.
If the Committee assumes that Attorney may arrange these transactions, then the ethical issue arises whether Attorney may effectuate the transactions utilizing Lender. The Code of Professional Responsibility (“Code”) provides in Disciplinary Rule 3-101 (A) that “[a] lawyer shall not aid a non-lawyer in the unauthorized practice of law,” and in Disciplinary Rule 3-102(A) that “[a] lawyer or law firm shall not share legal fees with a non-lawyer . . . .” Lender, a disbarred attorney, is a non-lawyer within the meaning of the Code. See N.Y. State 609 (1990).
The ethical issues therefore are whether Attorney would be assisting Lender (a) in the practice of law or (b) sharing a legal fee with Lender. Whether a particular activity constitutes the unauthorized practice of law is a question of law addressed by Section 484 of the New York State Judiciary Law. While the Committee takes no position what constitutes the practice of law under the statute, the Committee does not believe that Attorney, by arranging the transactions, would be assisting Lender in the “practice of law” within the meaning of the Code. Under the facts provided by Attorney, Lender’s role in the transactions would relate solely to loaning funds and obtaining assignment of the right of Defendant 1 to contribution.
The next issue is whether Attorney’s provision of a lending fee to Lender would be improper fee-splitting with a non-lawyer. Disciplinary Rule 3-102(A) is designed to bar financial arrangements in which a non-lawyer’s profit or loss is directly related to the success of a lawyer’s legal business. N.Y. State 679 (1996). “The purposes of the rule are to prevent the unauthorized practice of law, and to assume professional control over and prevent any lay interference with, the representation of a client.” Id.; EC 3-8. Attorney advises that Lender will not receive a legal fee, only a lending fee, for his participation in the transactions. If the fee is excessive and not reasonable for acting as financing agent, the fee may in reality be a legal fee. Thus, so long as the lending fee is not a proxy for an attorney’s fee, but rather a genuine fee for Lender being the financing agent, Lender’s receipt of a lending fee would not constitute the sharing of legal fees with a non-lawyer, which is prohibited by the Code. 1/
The provision of the lending fee, which presumably would be charged to Plaintiff, raises other ethical issues which Attorney must consider because Lender is the spouse of Attorney’s law partner. Disciplinary Rule 5-104 prohibits lawyers from entering into business transactions with clients “if they have differing interests therein and if the client expects the lawyer to exercise professional judgment therein for the protection of the client, unless the client has consented after full disclosure.” Moreover, Disciplinary Rule 5-101 provides that “[e]xcept with the consent of the client after full disclosure, a lawyer shall not accept employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property or personal interests.” Here, Attorney would be negotiating the lending fee for Plaintiff and would be expected to exercise independent judgment on behalf of Plaintiff. However, Lender, the spouse of Attorney’s law partner, is an adverse party in this transaction involving the negotiation of the loan. So Attorney may have differing interests than Plaintiff in this transaction in that Attorney may not have an interest in negotiating the lowest possible lending fee for Plaintiff. Therefore Disciplinary Rule 5-101 is implicated. Attorney must consider whether it is possible for Attorney to exercise independent professional judgment so that he may represent Plaintiff in this transaction. If Attorney determines that he is able, then Attorney must fully disclose the facts and circumstances of the transaction with Plaintiff, especially the identity of Lender and the reasonableness of the proposed lending fee. Only after Plaintiff consents after full disclosure may Attorney go forward with the transaction.
The fact that Lender is the spouse of Attorney’s law partner also raises the ethical issue whether Attorney or Attorney’s law firm would acquire a proprietary interest through the transactions involving Lender. Disciplinary Rule 5-103(A) provides that “[a] lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he or she is conducting for a client . . . .” Under the facts provided, neither Attorney, Attorney’s law firm nor Attorney’s partner (Lender’s spouse) would acquire any proprietary interest from the transactions. The funds would come from Lender’s private account; the assignment would accrue to the sole benefit of Lender; and the lending fee would be paid to Lender. Therefore, there would be no violation of this Disciplinary Rule.
Assuming the legal validity of the transactions, Attorney may arrange the transactions utilizing Lender, where Attorney does not assist Lender in the practice of law or share legal fees with Lender, and where Plaintiff consents to the transactions after full disclosure.