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QUESTION:

At the outset of a contingent fee representation, you realize that the litigation costs will be more than you can comfortably cover out-of-pocket. To assist with these costs, you plan to take out a bank loan to advance the fees for your client.

Funding litigation costs via private bank loan is:

A. Impermissible if the loan does not have the most beneficial terms available.

B. Permissible so long as the client approves the loan after being fully advised of the loan term, risks, other possible financing sources, and any other materially relevant information.

C. Impermissible if obtaining the loan requires revealing confidential information which client will not consent to disclose.

D. All of the above.

CORRECT ANSWER: D.

All of the above.

According to a recent Ohio Supreme Court Board of Professional Conduct Opinion, attorneys can use private bank loans to advance expenses relating to litigation for a client in a contingency fee representation. See Ohio Supreme Court Bd. Of Prof’l Conduct, Op. 2021-02, 4/9/21. The opinion indicates that there is little difference in an attorney funding litigation out of his or her own pocket and the attorney obtaining a loan to fund that litigation, but does caution that certain steps are required to do so within the bounds of the attorney’s ethical duties.

So long as the loan is not secured by the client’s settlement or judgment and the attorney does not personally have any ownership or financial interest in the lending institution, the attorney will not be taking an ownership or pecuniary interest adverse to the client which would implicate the relevant provisions of Rule 1.8. Additionally, presuming repayment of the loan is not in any way tied to a percentage of the legal fee generated by the attorney or secured by client’s ultimate recovery, the loan is not considered fee sharing with a nonlawyer in violation of Rule 5.4.

It is permissible for the lawyer in this situation to deduct interests, fees and other loan costs from the client’s settlement. But, the opinion notes that a lawyer is a fiduciary for the client, and, therefore, the lawyer “must be mindful to borrow only the amount reasonably necessary to fund the litigation” and “must use diligence in searching for the loan terms most beneficial to the client.” A Philadelphia Ethics Opinion on this issue also notes that lawyers should first offer the client the opportunity to avoid interest by paying the expenses directly, and should ensure that the loan terms allow the client to prepay any balances without penalty. Phila. Ethics Op. 2003-15 (2003).

Lawyers obtaining bank loans to finance litigation costs must also make “robust” disclosures to the client regarding the terms of the loan arrangement in order to comply with the attorney’s duties under Rule 1.4: Communication and Rule 1.5: Fees. The opinion explicitly sets out that a lawyer must do the following to allow the client to make an informed decision regarding the loan:

1) Inform the client about the loan terms, including the identity of the lender, the rate of interest, and any expected costs associated with financing;
2) Disclose the material risks and possible disadvantages to the client;
3) Identify any reasonable alternatives available to the client;
4) Explain to the client what the lawyer’s role is in the transaction; and
5) Explain any potential conflict of interest issues that may arise.

The opinion also notes that written fee agreements are required in contingency fee cases, and notes that the loan and its repayment terms will naturally become part of the information required to be included in the fee agreement. From a risk management perspective, even non-contingent fee arrangements should be confirmed in writing, particularly where numerous disclosures are required to the client as would be the case with a litigation funding loan. The opinion also reminds attorneys of the duty of confidentiality and warns against providing confidential client information to the lending institution without the client’s consent.

Numerous states have issued similar ethics opinions noting that litigation financing via private bank loan is ethically permissible so long as appropriate disclosures are made to the client, the client consents to the loan, and the loan terms are reasonable. See Phila. Ethics Op. 2003-15 (2003); Az. Ethics Op. 01-07 (2001); Ga. St. Bar Op. 05-5 (2007); Il. St. Bar Assn., Op. 94-6 (aff’d 2010); Mich. St. Bar Op. RI-336 (2005) (amended 2008); Nev. St. Bar, Formal Op. 36 (2007); N.Y. St. Bar Op. 754 (2002); Utah St. Bar Op., 02-01 (2002); and W.Va. Op. 2016-01 (2016). (The Missouri Supreme Court Advisory Committee & Office of Legal Ethics Counsel has, over the years, issued several opinions on this topic for consideration, e.g., 20050062; 20030022; 20000229; 970066 and 940122.)

However, the existence of numerous opinions approving of this course of conduct should not lull attorneys into falsely believing that loans for litigation financing are easy or risk-free. Every opinion looking at this issue sets out long lists of information that must be provided to the client and numerous requirements for loan terms to ensure the loans are permissible. Any attorney considering obtaining a loan to finance litigation costs on behalf of a client should carefully review the opinions cited here and the rules of professional conduct in that attorney’s home state. It may also be prudent to seek ethics and risk management guidance from an appropriate ethics authority and the attorney’s malpractice insurer.

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