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Ethics Advisory Opinion 07-04

April 13, 2007

South Carolina Bar Ethics Advisory Opinion 07-04  

SC Rules of Professional Conduct: 1.8(a), 1.8(i)  

Date: July 19, 2007  

Facts

Lawyer(s) in a Law Firm are considering a business arrangement whereby Lawyer(s) would purchase, either directly or though an LLC with the Lawyer(s) as members, charged-off debts.

Questions  

  • May Lawyer(s) in a law firm purchase uncollected debts from a client, a former client, or a non-client?
  • May an LLC made up of members of the law firm hire the law firm to collect the debt?

Summary  

  • Yes, Lawyer(s) in a law firm may purchase uncollected debts from a client, a former client, or a non-client.
  • Yes, an LLC made up of members of the law firm, may hire the law firm to collect the debt, as long as the lawyers adhere to the Rules of Professional Conduct and applicable state laws.

Opinion  

Rule 1.8(i) of the Rules of Professional Conduct does not prohibit the arrangement in the first Question unless the debt is the "subject matter of litigation the lawyer is conducting for a client" (emphasis added). Since the matters in question involve debts which have already been charged off by the sellers on the notes, it is assumed for the purpose of this analysis that the lawyer was not actually representing the creditor as a lawyer in the collection matter for the client.

If the lawyer was already involved in attempting to collect the debt as a lawyer for the seller of the note, then it would be improper for the lawyer to purchase the debt. Similarly, if the seller of the note (creditor) had approached the lawyer in the attorney-client context, it would be improper for the lawyer to then purchase the debt. It does not matter if the lawyer is representing the client as to other matters, only if he has represented the client in regard to these particular accounts. Comment 1 to Rule 1.8 seems to contemplate this arrangement:

In addition, the Rule does not apply to standard commercial transactions between the lawyer and the client for products or services that the client generally markets to others. For example, banking or brokerage services. . . . In such transactions, the lawyer has no advantage in dealing with the client, and the restrictions in paragraph (a) are unnecessary and impracticable.

The above Comment references Rule 1.8(a), which is more applicable to the current situation.

Comment 17 of Rule 1.8 states in relevant part: "When a lawyer acquires by contract a security interest in property other than that recovered through the lawyer's efforts in the litigation, such an acquisition is a business or financial transaction with a client and is governed by the requirements of paragraph (a)." Additionally, "Like paragraph (e), the general rule has its basis in common law, champerty, and maintenance and is designed to avoid giving the lawyer too great an interest in the representation."

The proposed conduct does not involve the lawyer's acquiring any interest in the representation, because the debts were already charged off and there was no prior representation as to these accounts. The lawyer is not acting as a lawyer in this case, but as a businessman. All of the general conflict of interest rules involving lawyers who pursue business matters with their clients would be relevant.

The formation of an LLC does not relieve a lawyer of ethical ramifications and duties when entering this type of business arrangement. A lawyer cannot employ a subterfuge to carry on unethical conduct. Therefore, the lawyer should be mindful of Rule 1.7 regarding conflicts of interest with current clients.

However, as set out above, it is not unethical per se, pursuant to Rule 1.8, for a lawyer to enter the business arrangement proposed in Question two, as long as these guidelines are followed. While this committee does not offer advice on issues of substantive law, we strongly encourage the inquiring lawyer to review S.C. Code §40-5-340, which states:

If any attorney, solicitor or counsellor shall enter into any speculating practices, by purchasing or procuring to be purchased any note or other demand for the purpose of putting the same in suit, when otherwise the owner or holder thereof would not sue upon it, such attorney, solicitor or counsellor shall pay a fine of one hundred dollars and shall thereafter be incapable of practicing as such in any court until restored by the Supreme Court.

The Committee also directs the inquirer to Osprey v. Cabana Limited Partnership, 340 SC 367, 532 SE2d 269 (2000), discussing §40-5-340, as the lawyer makes both ethical and legal decisions regarding these business arrangements. If the proposed action does violate §40-5-340, it may also be a Rule 8.4 violation.

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