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 94-04
A number of attorneys in South Carolina have received communications from a company that is engaged in the business of financing litigation by purchasing or taking assignments of personal injury causes of action. The communications include a "green card" that provides the name, address, and telephone number of the financing entity. The card states: "We will purchase a percentage of the expected personal injury action (prior to the resolution of the case)." The card also states: "When Clients Ask You For A Cash Advance Give Them This Card." The Committee has also received copies of two form documents that the financing entity plans to use to carry out the proposed transaction. One document is entitled "Assignment and Sale." Under this document in exchange for an agreed-upon payment, the client transfers to the financing entity a specified percentage of the gross settlement amount of the client's personal injury action. The document provides that the assignment and sale may not be canceled without the express written consent of the financing entity. The second document is a letter from the client to the attorney informing the attorney of the sale/assignment and directing the attorney to pay a designated percentage of the gross settlement amount to the financing entity within 10 days after the attorney receives settlement funds.
The Committee has been asked whether an attorney may ethically participate in such a financing transaction.
The Committee does not express opinions on questions of law. An attorney considering participating in such a financing transaction, however, should review applicable statutory provisions and common law principles to determine whether such financing transactions are illegal under South Carolina law. In particular, the Committee notes the possible applicability of S.C. Code Ann. 16-17-10, prohibiting various practices that amount to barratry. If the transaction is illegal under South Carolina law, an attorney may not ethically participate. S.C. Rule of Prof. Cond. 1.2(d), 8.4(b).
Assuming that the transaction is not illegal under South Carolina law, an attorney may ethically counsel a client of the availability of opportunities to finance litigation when the client asks for such information or when the attorney in his professional judgment concludes that a client's legal and economic position warrants advice about such an opportunity. An attorney should render candid advice to the client about the advantages and disadvantages of the proposed transaction. S.C. Rule of Prof. Conduct 2.1.
If a client decides to proceed with a financing transaction, the attorney should inform both the client and the financing entity in writing that the client retains the right to control all aspects of the litigation and that the attorney will maintain confidentiality of client communications. Cf. S.C. Rule of Prof. Cond. 1.8(f), 5.4(c).
The Committee does not issue opinions on questions of law. An attorney who is considering participating in such a transaction, however, should review applicable statutory and common law to determine whether the proposed transaction is illegal under South Carolina. If the transaction is illegal, an attorney may not ethically participate in the transaction. S.C. Rule of Prof. Cond. 1.2(d), 8.4(b). In particular, the Committee notes the possible applicability of the South Carolina barratry statute, S.C. Code Ann. 16-17-10, which provides as follows:
Any person who shall:
(1) Willfully solicit or incite another to bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) thereby seeks to obtain employment for himself or for another to prosecute or defend such action, (b) has no direct and substantial interest in the relief thereby sought, (c) does so with intent to distress or harass any party to such action, (d) directly or indirectly pays or promises to pay any money or other thing of value to, or the obligations of, any party to such an action or (e) directly or indirectly pays or promises to pay any money or other thing of value to any other person to bring about the prosecution or maintenance of such an action; or (2) Willfully bring, prosecute or maintain an action, at law or in equity, in any court having jurisdiction within this State and (a) has no direct or substantial interest in the relief thereby sought, (b) thereby seeks to defraud or mislead the court, (c) brings such action with intent to distress or harass any party thereto or (d) directly or indirectly receives any money or other thing of value to induce the bringing of such action; shall be guilty of the crime of barratry. The crime of barratry shall be punishable by a fine of not more than five thousand dollars or by imprisonment of not more than two years, or both.
The Committee is also not passing on whether the financing transaction involves a "security" under either federal or state securities laws.
Assuming that the transaction is not illegal under South Carolina law, may a lawyer ethically participate in such a transaction? The Committee assumes that the attorney representing the client does not also have a financial interest in the financing entity. If so, the attorney could not ethically participate in the transaction because the attorney would be violating Rule 1.8(e) (providing financial assistance to a client other than litigation costs) and Rule 1.8(j) (acquiring a proprietary interest in the client's cause of action). See S. C.
Bar Advisory Opinions 92-06 (lawyer may have financial interest in business organized to make consumer loans so long as business does not make loans to lawyer's clients) and 91-15 (lawyer may participate in organization of loan business to which they referred their clients when lawyers did not have financial interest in business). The Committee also assumes that the attorney is not receiving a fee from the financing entity. If so, the attorney could not participate in the transaction without complying with the requirements of Rules 1.8(a) and 1.7(b). Cf. S.C. Bar Advisory Opinion 92-03 (permissible for lawyer to act as agent for title insurance company and receive commission provided lawyer complies with Rules 1.8(a) and 1.7(b)).
Rule 2.1, dealing with the lawyer's role as advisor, provides as follows:
In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the clients situation.
The Committee concludes that under this rule a lawyer may appropriately advise a client of the opportunity to finance the client's personal injury cause of action when the client asks about such a possibility, or when the attorney in his professional judgment concludes that the client's situation warrants such advice. See also Rules 1.2(a) (lawyer shall consult with client regarding means used in handling case); Rule 1.4(b) (lawyer shall explain matter to client so that client can make informed decisions).
As Rule 2.1 requires, in advising a client about financing options, the attorney should fully advise the client about the advantages and disadvantages of the transaction that the client is considering. It appears to the Committee that the principal advantage of the transaction is that the client obtains immediate cash rather than having to wait until the conclusion of the personal injury action to receive funds. Some clients may want or even have a desperate need for immediate funds. The transaction, however, may have a number of disadvantages that the attorney should bring to the client's attention. These include the following: The amount that the financing entity is offering to the client may be too low based on the attorney's evaluation of the case. If the client assigns a percentage of the gross settlement proceeds to the financing entity, the client may regret the transaction if the ultimate settlement or judgment turns out to be more favorable than client anticipates. Further, if the settlement or judgment of the client's case is insufficient to repay the financing entity, the client may have an obligation to repay the entity the difference, depending on the terms of the assignment. If the client has a specific, immediate financial need, the client may be better off considering other possible sources of funds, such as a credit union, an insurance policy, family or friends. Any communications between the attorney and the financing entity may not be subject to the attorney-client privilege. The terms of the financing arrangement may be discoverable and could adversely affect settlement negotiations.
If a client decides to proceed with the transaction after being fully advised by the attorney, the attorney may ethically participate in the financing transaction by recognizing the financing entity's interest and by paying any settlement proceeds to the financing entity in accordance with the terms of the assignment. Before accepting any assignment the attorney should clarify in writing to both the client and the financing entity that the attorney will still look to the client for all decisions regarding the litigation, and will maintain confidentiality of client communications. Cf. Rule 1.8(f) and 5.4(c) (prohibiting third party interference with lawyer's professional judgment).