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Opinion RI-14
Opinion RI-321
RI-14
January 26, 1989
SYLLABUS
The ethical prohibition against attorneys advancing living or medical
expenses to a client applies to lawyers employed by legal service
organizations.
References: MRPC 1.8(e)(1) and (2).
TEXT
A lawyer employed by a legal services agency and specializing in
domestic relations matters asks whether it is permissible to personally
give clients, during pending litigation, monetary or in-kind gifts
for living and medical expenses, such as (a) $150 to an indigent
to enable a client to comply with the court's custody order; (b)
the cost of transportation for a client in an abuse and neglect
matter to attend occasional therapy sessions when the social caseworker
is unavailable; (c) donation of furniture to an indigent and/or
solicitation of household items needed to establish a satisfactory
home environment to qualify for child visitation rights.
The lawyer proposes to donate the necessary funds from personal
resources and/or to solicit contributions from professional colleagues
and other persons.
MRPC 1.8(e)(1) and (2) state:
"(e) A lawyer shall not provide financial assistance to a client
in connection with pending or contemplated litigation, except that:
"(1) A lawyer may advance court costs and expenses of litigation,
the repayment of which shall ultimately be the responsibility of
the client; and "(2) A lawyer representing an indigent client may
pay court costs and expenses of litigation on behalf of the client."
MRPC 1.8(e)(1) permits a lawyer to advance court costs and litigation
expenses, provided the client remains ultimately liable for repayment
of all advances, regardless of the outcome of the litigation. MRPC
1.8(e)(2) is more liberal in the case of an indigent client, since
a lawyer is permitted to pay court costs and litigation expenses
on behalf of an indigent client without any requirement of client
reimbursement, but MRPC 1.8(e) applies only to costs associated
with litigation.
MRPC 1.8(e) is the result of the common law rules against champerty
and maintenance. Champerty is an investment in the cause of action
of another by purchasing a percentage of any recovery. Maintenance
is another form of investment by providing living or other expenses
to finance litigation. When a lawyer has a financial stake in the
outcome of a client's lawsuit, there is a legitimate concern that
the lawyer's undivided loyalty to the client may be compromised
in an effort to protect the lawyer's personal financial investment
in the outcome. Also financial support to a client could interfere
with settlement efforts, by enabling the client to prolong the dispute.
MRPC 1.8(e) makes no distinction between private practitioners and
legal aid staff attorneys. The Rule does not allow attorneys practicing
in Michigan to personally donate and/or solicit monetary or in-kind
gifts for clients to meet living expenses during pending litigation,
even when necessary to comply with court orders.
If an indigent person is unable to secure financial assistance needed
to comply with court orders, qualify for child visitation rights,
obtain necessary medical treatment incident to an abuse proceeding
or other similar necessities of life during pending litigation,
the client may be referred to the appropriate social services agencies,
and there is no ethical rule prohibiting the lawyer or the legal
services agency from assisting those agencies in securing resources
necessary to make social services available to needy members of
the community.
In conclusion, it is unethical for an attorney employed by a state-funded
legal services agency to personally donate and/or solicit monetary
or in-kind gifts to clients for living and medical expenses during
pending litigation.
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State Bar of Michigan
Ethics Committee
Opinion RI-321
June 29, 2000
SYLLABUS
A lawyer who represents claimants in tort proceedings would have
an irreconcilable conflict of interest if the lawyer entered into
an agreement to refer existing and future clients to a venture capital
company which would acquire an interest in the proceeds of the claimants’
personal injury actions in exchange for immediate cash payments
to meet the living needs of the tort claimants.
Draft documents prepared by a venture capital company and presented
to the Ethics Committee contain a number of onerous conditions which
would individually create ethical problems and which collectively
make the proposed agreements unethical.
Regardless of the specific terms of the documentation, the proposed
arrangement between the lawyer and the venture capital company would
inevitably create a conflict of interest by significantly interfering
with the lawyer’s relationship with the clients, with the lawyer’s
ability to advise the clients, with the clients’ control of the
litigation, with the clients’ power and right to terminate the lawyer
and/or to settle or abandon the claims.
The depth of the conflicts of interest identified in this opinion
makes it highly unlikely that consent or waiver by the client could
resolve the conflicts.
References: MRPC 1.6, 1.7 and 1.8; Virginia Ethics Opinion 1155.
TEXT
Inquiry has been made as to: (1) Whether a lawyer representing civil
tort plaintiffs remains in compliance with the Michigan Rules of
Professional Conduct if the lawyer refers his or her client to a
venture capital corporation that have formed a business for the
purpose of advancing funds to personal injury plaintiffs to satisfy
their immediate needs for cash in return for a share of the tort
judgment or settlement, enforced by lien on the proceeds and a number
of conditions inherent in the agreement. (2) Whether a lawyer representing
civil tort plaintiffs remains in compliance with the Michigan Rules
of Professional Conduct if the lawyer receives payment for costs
as part of plaintiffs’ contract with the venture capital corporation
in the event that the suit is not successful.
In the proposed agreement offered to the committee, there are many
conditions placed upon the individual tort plaintiff who accepts
funds from the venture capitalists. It is our view that these terms
have the potential of becoming adverse and onerous in any dispute
between the client and the venture capital corporation as the litigation
unfolds. The lawyer agrees, for example, to hold all funds in trust
for the venture capital corporation and to restrain the use of disbursed
structured settlement funds until all "capital advances" paid to
the individual plaintiff have been repaid. The monies paid by the
venture capital corporation to the client create liens that while
inferior to statutory liens, are obligations that are equal or superior
to other nonstatutory liens. Both the individual plaintiff and the
lawyer must agree to decline to terminate legal representation as
to that lawyer or to make a change from present counsel without
the express written consent of the venture capital corporation,
so that any change of a new lawyer is restricted. In the event of
a legal dispute, all settlement funds must be interpleaded in a
case to be started in the Eighth District Court for Clark County,
Las Vegas, Nevada, with the individual plaintiff agreeing to this
out-of state venue without further objection to the forum selection
as inconvenient or unlawful.
The agreement that the plaintiff has with the venture capital corporation
also creates concerns. The sample agreement provided to the committee
provides that the individual plaintiff waives all legal defenses
to any of the payments from settlement proceeds that are required
to be made to the venture capital corporation relating to the propriety
of the agreement. In another paragraph of that agreement, the venture
capital corporation represents that it is the "provider of funds
of last resort" and it specifically advises the individual client
that other financial services are available on terms that may be
more favorable and available at better rates and conditions than
this group allows. Furthermore, a representation that all other
attempts to borrow money has been explored by the client and has
failed whether this has actually been done or not. It is the plaintiff’s
tort counsel who has his or her own interests guaranteed who is
under an individual obligation to review the agreement documents
for a legal opinion to his or her client. Under all circumstances,
all amounts advanced by the venture capital corporation must be
repaid. The sample agreement provides that plaintiff’s tort lawyer
must warrant that he or she has reviewed the documents and has answered
all of the questions of the client regarding the arrangement.
Under the sample agreement, the tort-claimant client is specifically
advised that the venture capital corporation may make a "substantial
profit" from the contractual arrangement. There is an adverse venue/forum
selection claim, as all disputes must be litigated in the state
of Nevada. In addition, the laws of Nevada, not Michigan, will control.
There is a forum selection clause for all state and federal suits
taking place in Las Vegas, Nevada, requiring all suits regarding
disputes about the agreements take place there.
The document known as the Assignment of Proceeds also has a provision
that causes concern. The individual tort plaintiff assigns all proceeds
of the settlement or judgment to the venture capital corporation
to the extent of the payments to be repaid. A paragraph of the Assignment
of Proceeds Agreement specifically restrains the plaintiff from
discharging his or her present lawyer and from selecting new counsel.
Further, the selection of the lawyer in charge of the litigation
requires the approval of the venture capital corporation that retains
rights to refuse any change of counsel. Under this agreement, all
disputes must be litigated in the remote sites of Clark County,
Nevada, or the United States District Court for the Las Vegas District.
Among the various documents provided to the committee is a Security
Agreement that makes the proceeds of the suit "collateral" for the
advancement of the funds. The venture capital corporation is granted
a specific "security interest" in the settlement or judgment proceeds
of the case. The venture capital corporation, as the "secured party",
is entitled to inspect all records, including all privileged attorney-client
records, "relating to the collateral". Plaintiff must also agree
to continue the case with his or her present lawyer and, if new
counsel is selected, plaintiff is immediately liable for repayment
in full of all monies advanced by the venture capital corporation.
Plaintiff must agree to continue to litigate the case under all
circumstances (despite possible contrary personal desires later)
and must continue to "defend" the value of the collateral, i.e.,
the tort suit. Upon demand, plaintiff must sign all necessary documents
that are demanded by the venture capital corporation, and must proceed
to do all things demanded by the venture capital corporation in
connection with maintenance of the litigation.
The Committee is aware that Virginia Ethics Opinion 1155 permit
lawyers and law firms to refer clients to banks and finance companies
to loan funds to clients whom, presumably or arguably, demand a
"security interest" in the case. However, after examination of the
documents provided to the committee, there are potential conflicts
of interest and ethical perils that are also, a priori, evident
from the contractual documents furnished.
The contractual documents specifically represent that tort counsel
should give a legal opinion as to whether his or her client should
enter into the agreement. This presents a potential for additional
professional responsibilities on the part of counsel, as well as
potential conflicts of interest. Under the terms of MRPC 1.7(a),
a lawyer shall not represent a client if the representation of that
client will be directly adverse to another client unless (1) the
lawyer reasonably believes the representation will not adversely
affect the relationship with the other client and (2) each client
consents after consultation. The contractual papers seem to subordinate
the legal interests of the individual tort client to the venture
capital corporation, as the latter becomes the decision making and
controlling client. There are, in addition, substantial legal responsibilities
owed to each other that certainly could conflict, as their interests
appear. Given the course of litigation and settlement decisions
to be made, continuance of the litigation, withdrawal of the litigation,
change of counsel, etc., these differing contractual obligations
have a serious potential for conflict that can only be resolved
and made known if careful discussion takes place with both the individual
tort client the venture capital corporation and counsel.
Under MRPC 1.7(b)(2), any consent to waive a conflict by a client
must be given after full consultation. The consultation must include
explanation of the implications of the common representation and
the advantages and risks involved. After the agreements are signed,
the venture capital corporation becomes, in real terms, a "client"
with a co-equal, if not superior, decision making role.
Because of the complexities that this advancement of funds and the
contract with the venture capital corporation bring to the litigation,
and the fact that the lawyer becomes irrevocably appointed as counsel
for all future litigation purposes, the termination of employment
cannot be accomplished without disastrous financial consequences
befalling the tort client. If the lawyer is replaced, the lawyer
effectively enters into a business transaction with the tort client
with the potential of a pecuniary interest that may be adverse to
the client. This potential adverse interest must be clearly made
known to the client in a fashion beforehand that can be reasonably
understood by the tort client. See MRPC 1.8(a)(1). The tort client
must by given a reasonable opportunity to seek the advice of independent
counsel to evaluate the complicated transaction. Moreover, the bargain,
taken as a whole, makes the lawyer not capable of being discharged
for any reason and subject to the venture capital corporation’s
controlling the litigation. That may amount to a property interest
in the case for both the lawyer and the venture capital corporation.
MRPC 1.8(a)(2).
The Committee is also concerned that the arrangement specified by
the contractual documents has the potential of running afoul of
MRPC 1.8(g) that prohibits a lawyer from representing two or more
clients in a conflicting position as that combination may relate
to the making of "an aggregate settlement" that may be to the advantage
of the venture capital corporation or to the disadvantage of the
tort client, "… unless each client consents after consultation.
…" Given the vagaries and difficulties of predicting the results
of modern day tort litigation, together with the candid assessment
by the venture capital corporation that it will make a "substantial
profit" under the circumstances, the committee finds it difficult
to ascertain how the early client consultation could effectively
predict, with a reasonable degree of certainty, how these complicated
contractual documents could work to the advantage or disadvantage
of the parties at a later time, given the twists and turns that
tort litigation sometimes takes.
Because the contract documents furnished make clear that the venture
capital corporation has the superior right to conduct the litigation
once the funds are paid as the venture capital corporation sees
fit, it becomes obvious that the lawyer must guard against interference
with his or her professional judgment for the tort client. See MRPC
1.8(f)(2); MRPC 1.7(b).
In addition, the contract documents give the venture capital corporation
the right to inspect all legal documents, presumably, even if legally
privileged, and this may violate MRPC 1.8(h)(3) that requires a
lawyer to protect all information relative to the representations.
See MRPC 1.6.
In light of the fact that original tort counsel is given an irrevocable
commitment to continue in employment as counsel by virtue of the
financial arrangement with the venture capital corporation, irrespective
of the quality of relations with the client or his or her performance
or the needs of the client to continue with the case or to terminate
it, the committee is also concerned that MRPC 1.8(j), that prohibits
a lawyer from acquiring a proprietary interest in the cause of action,
may also be violated by this arrangement. The contractual documents
virtually remove from the tort claimants any ability on their part
to select new counsel, without risking disastrous legal consequences,
i.e., the immediate requirement of the repayment of all sums to
the venture capital corporation, termination of the case, conducting
it as he or she see fit or protecting privileged materials. Severe
financial penalties virtually assure the non-discharageable lawyer’s
having acquired a proprietary interest in the cause of action and
the clients being bludgeoned to actions that may conflict with their
interests.
The committee concludes that agreements such as those presented
to the committee create an impermissible conflict of interest under
MRPC 1.7(a)(2), 1.7(b)(2) and 1.8, because:
1. The ultimate control of the litigation may be transferred to
the venture capital corporation due to the fact that the lawyer
is permanently appointed to the case;
2. The original lawyer cannot be terminated without the venture
capital corporation’s consent in light of the fact that on demand
of the venture capital corporation all documents and things must
be demanded by that group; and
3. Privileged materials may be disclosed.
Furthermore, given the employment status of tort counsel as irreplaceable
and incapable of being substituted, except with the consent of the
venture capital corporation, it remains our view that MRPC 1.8(a)(2)
requires the consultation with independent counsel who has no relationship
with either the tort counsel or the venture capital corporation
as this is the only lawyer who can properly advise the tort claimant.
Finally, with respect to the inquiry by the lawyer as to whether
the provision in the contractual documents of the venture capital
corporation will not seek court costs and expenses of litigation
advanced by the lawyer and reimbursed by the venture capital corporation
from the individual tort client, it is our opinion that this could
also be inappropriate. Under MRPC 1.8(e)(1), a lawyer may advance
court costs and expenses of litigation, the repayment of which shall
ultimately be the responsibility of the client. There is no ethical
objection to the venture capital corporation advancing these sums
once adequate disclosure is made if the complicated transaction
is fully explained to the tort client. The agreement must be ethically
modified to have the tort client understand and agree that ultimate
responsibility for all such advanced costs and fees will be borne
by the individual client to meet these ethical strictures. Of course,
if the client is truly indigent as contemplated by MRPC 1.8(e)(2),
this modification would not be necessary.
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