UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 92-06
An attorney desires to organize an independent corporation to make consumer loans. Although loans by the proposed corporation would be available to the general public, the attorney views the corporation's primary market as plaintiffs in pending personal injury actions who are in need of relatively short term financial assistance and are unable to obtain such assistance from traditional sources. The corporation would not make loans to the attorney's own clients.
Creditworthiness would be determined, at least in part, upon an evaluation of the borrower's potential recovery. The loan would be secured in whole of in part by a security interest in or assignment of a portion of the borrower's recovery in the pending legal action.
Referrals would be sought from plaintiff's attorneys who may be barred from lending money to their own clients because of Rule 1.8 (a) of the Rules of Professional Conduct. As a part of the loan application process, the prospective borrower would execute a written consent authorizing disclosure by his attorney of information concerning his case. This information would be used by the corporation to evaluate the security offered for the loan.
Questions:
1. Does the above situation violate Rule 7.2 (c), which prohibits paying someone to recommend a lawyer's services?
2. Does the above violate Rule 1.8 (e), which prohibits a lawyer from lending non-litigation-related expenses to a client?
3. Does the above violate Rules 1.6 or 2.3 relating to confidentiality of information?
Summary:
Since the attorneys have no financial interest in the cases at issue of the borrowers, Rule 1.8 and 7.2 have not been violated. Assuming the clients consent and do not withdraw consent at the time the personal injury case is settled, the attorneys may honor the assignments to the loan company, and may refer clients to the lender.
There would be no violation of Rules 1.6 or 2.3 because disclosure of client information would be made only after consent of the client.
Opinion:
In Advisory Opinion 91-15, a situation was approved wherein attorneys assisted in the establishment of a loan business, to which they then referred their own personal injury clients. Opinion 91-15 allowed such conduct since the attorney had no financial interest in the loan company. In the present case, the attorney would retain an interest in the loan company, but the company would not make loans to the attorney's own clients. This situation does not violate either Rules 1.8 or 7.2, since the attorney's own clients are not involved. To rule otherwise would essentially question the right of an attorney to own or operate any financial institution, where no clients of the attorney are borrowers.
The market for the lender would consist primarily of persons who may not otherwise be creditworthy absent their pending personal injury cases. Pawn shops and finance companies are examples of other lenders whose market consists of normally non-creditworthy persons, and lawyers are not forbidden to own pan shops and finance companies.
In order to analyze the worth of the borrower's only substantial asset, the lender will rely in part of information supplied by the borrowers' attorneys about the merits of the pending cases. Most lending institutions rely on third parties to check creditworthiness of a borrower, the only difference here is the nature of the asset, not the idea of disclosing data to third parties.
Rule 1.6(a) allows a lawyer to reveal information about a client if the client consents after consultation. Rule 2.3 allows such a disclosure if the client consents, and the disclosure does not otherwise conflict with the lawyer's representation.
If the client withdraws his consent, the lawyer would be prohibited form honoring the assignment at the time the funds are disbursed without complying with Advisory Opinion 91-10.