Ethics Opinions

 
NASSAU COUNTY BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
Archive of Ethics Opinions
Opinion No.: 1994-11
Topics: Payment of a "packaging fee" to an out-of-state attorney or corporation wholly owned by an out-of-state attorney.
Digest: With certain limitations, an attorney engaged in collections may pay a "packaging fee" to an out-of-state attorney who has requested the New York attorney to render legal services in this state on behalf of a lending institution. The New York attorney may not pay a similar packaging fee to a corporation wholly owned by an out-of-state attorney.
Code Provisions: DR 2-107
DR 3-102
EC 2-22
EC 3-3
EC 3-8
Facts Presented: Inquiring counsel (the "Attorney") is engaged in collections on behalf of a certain lending institution (the "Institution"). There is no written agreement between the Attorney and the Institution. Periodically, the Institution sends the Attorney a file containing all pertinent documents and loan default information. The file is "packaged" by an employee of the Institution at its sole cost and expense. The "packaging" involves locating and transmitting relevant loan documents and account histories.

 

The Attorney has been requested by a corporation (the "Corporation"), wholly owned by an attorney admitted to practice in another state, to perform collection services for the same Institution. The corporation has advised the Attorney that it has entered into an agreement with the Institution to "package" loans and send them to attorneys of the Corporation's choice. While the Attorney's fee for the legal services would be exactly the same as was paid by the institution prior to engaging the Corporation to package loans, the Corporation has advised the Attorney that he will be required to pay a packaging fee to the Corporation.

 

The Attorney has also been approached by an out-of-state attorney (the "Foreign Attorney") who is performing similar packaging services for another lending institution and who has requested the Attorney to render legal services in New York. The Foreign Attorney also requests a packaging fee.

 

The packaging fee of both the Corporation and the Foreign Attorney range from $30.00 to $150.00. Responsibility for the Attorney's legal fees rests ultimately with the respective lending institutions. In some instances, the Attorney is to be paid directly by the lending institution while, in other instances, he is to be paid by the Corporation or Foreign Attorney, who would then be reimbursed by the lending institution. At all times, however, the Attorney would maintain professional responsibility directly to the lending institutions.
Inquiry: Would the payment of a packaging fee to either the Corporation or the Foreign Attorney be violative of the Code of Professional Responsibility?
Determination: The payment of a packaging fee to an out-of-state attorney as contemplated herein may, under certain circumstances, be permissible. The payment of a packaging fee to a Corporation wholly owned by an out-of-state attorney is not permissible.
Analysis: Initially, the Committee notes that it is unclear whether the packaging fee is properly characterized as a legal fee or a disbursement. As more fully set forth infra, this requires a legal determination beyond the purview of this Committee. This opinion addresses the ethical issues raised if the packaging fee is properly characterized as a legal fee. However the payment is characterized, however -- as legal fee or disbursement -- it is the opinion of this Committee that the client must be notified and apprized of the arrangement in order to safeguard the client's interests.

 

The payment of a packaging fee to an out-of-state attorney will not violate the Code of Professional Responsibility, provided that the attorney who is to pay the packaging fee complies with the directives of DR 2-107(A). That disciplinary rule provides in relevant part, that:

 

A.
A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or an associate of the lawyer's firm or law office unless:

 

1. The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made.
2. The division is in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation.

 

3. The total fee of the lawyers does not exceed reasonable compensation for all legal services they rendered the client.
EC 2-22 similarly provides that:

 

Without the consent of the client, a lawyer should not associate in a particular matter another lawyer outside the lawyer's firm. A fee may properly be divided between lawyers properly associated if the division is in proportion to the services performed by each lawyer or, by writing given to the client, each lawyer assumes joint responsibility of the representation and if the total fee is reasonable.

 

Thus, a forwarding attorney "must be an active participant in the case in order to receive a portion of the fees; his or her share of the fee must be based upon his or her share of responsibility in the case, and the work actually performed. Where no responsibility is assumed or work performed, any fee sharing would be improper." N.Y. State Opinion #408 (1975). The Code prohibits a division of fees among lawyers "where the division is not is proportion to the work performed and responsibility assumed." Matter of E.W.C., 89 Misc.2d 64, 77, 389 N.Y.S.2d 743, 752 (Surr.Ct., Nassau County 1976).

 

The described facts do not address whether the lending institution for which the Foreign Attorney is performing packaging services has consented to the employment of the Attorney herein after disclosure that there will be a division of fees. Such consent is required by DR 2-107 prior to any division of fees between the Attorney and the Foreign Attorney.

 

Moreover, the described facts indicate that the packaging fees requested by the Foreign Attorney range from $30.00 to $150.00. The described facts do not indicate, however, the method used to calculate the amount of such fee. As noted by this Committee previously, "(a) division of fees among lawyers may only be made in proportion to the services performed and responsibility assumed by each." Nassau County opinion #88-42. The inquiry presented in that opinion was whether a law firm to which a personal injury case was referred may remit one-third of its fee as a legal fee to the referring out-of-state law firm, regardless of the amount of services rendered and responsibility assumed by the ref erring law firm. This Committee acknowledged that in some instances, one-third of the total attorneys fee would be an appropriate fee for the forwarding attorneys; '[h]owever, a blanket requirement to remit one-third of the legal fee, regardless of the services performed by forwarding counsel or the total amount recovered, is impermissible."

 

If, in the scenario posited by Inquiring Counsel, the actual packaging fee remitted to the Foreign Attorney fairly represents the amount of such services performed by such attorney, the amount of such fee in the range specified herein would not be impermissible, provided that the total attorneys fee sought from the client "does not exceed reasonable compensation for all legal services they rendered the client." Furthermore, the fact that the Foreign Attorney herein is just that, an out-of-state attorney, does not require any consideration other than that required if the fee division was proposed between two unassociated New York attorneys. See N.Y. State Opinion #134 (1970).

 

With respect to either division of fees with the Corporation proposed herein, a distinct question is presented. With respect to the division of legal fees with a non-lawyer, the general rules is that such conduct is prohibited. As provided by DR 3-102:

 

A.
A lawyer or law firm shall not share legal fees with a non-lawyer, except that:

 

1. An agreement by a lawyer with his or her firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons.

 

2. A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer.

 

3. A lawyer or law firm may include non-lawyer employees in the retirement plan, even though the plan is based in whole or in part on a profit-sharing agreement.

 

As stated in EC 3-8, the theory underlying DR 3-102 is the prevention of the unauthorized practice of law: "Since a lawyer should not aid or encourage a layman to practice law, he should not practice law in association with a layman or otherwise share legal fees with a layman." The exceptions sets forth in DR 3-102(A)(1), (2) and (3) are permissible, however, "since they do not aide or encourage layman to practice law." EC 3-8. The rationale underlying the Code's abhorrence of the practice of law by laymen is found in EC 3-3: "A non-lawyer who undertakes to handle legal matters is not governed as to the integrity or legal competence by the same rules that govern the conduct of a lawyer. A lawyer is not only subject to that regulation, but also is committed to high standards of ethical conduct. The public interest is best served in legal matters by a regulated profession committed to such standards."

 

It does not appear from the described facts that the Corporation is anything other than an ordinary business corporation. A business corporation, whether owned entirely by one or more attorneys, laymen or any combination thereof, is not bound by the rules which govern the conduct of a lawyer. Moreover, under § 495 of the Judiciary Law, corporations (other than duly organized or authorized professional corporations) and voluntary associations are prohibited from practicing law, giving legal advice, holding themselves out as being entitled to practice law, and from issuing certain types of advertisements. See N.Y.Jud.L. § 495 (McKinney 1983 and Supp.); Nassau County Opinion 184-1 (1984). Under Subsection (5) of Judiciary Law § 495, however, a corporation or association is not prohibited "from furnishing to any person lawfully engaged in the practice of law, such information or such clerical services in and about his professional work as, except for the provisions of this section, may be lawful, provided that at all times the lawyer receiving such information or such services shall maintain full professional and direct responsibility to his clients for the information and services so received." N.Y.Jud.L. § 495(5), supra. Whether the packaging services to be provided by the Corporation constitute information, clerical services or legal services under Judiciary Law § 495 is a question beyond the purview of this Committee. As an ethical matter, however, the Committee feels that if categorized as a legal fee, under the facts presented the transaction proposed would result in an impermissible division of legal fees.

 

First, it is the Corporation which initiated the proposed transaction, whereby the Attorney would provide legal services to the Institution, which had already entered into an Agreement with the Corporation governing this matter. This arrangement leads to a conclusion that the transaction proposed is nothing more than a referral of the collection matter by the Corporation to the Attorney, rather than the Corporation's furnishing of clerical services. Secondly, the Attorney has no option as to which corporation or other entity would package the loan.

 

Finally, under the proposed fee arrangement, the Attorney would be paid the same fee by the Institution as it had received when the packaging was performed "in house", although, under the proposed transaction, the Attorney would be required to pay a packaging fee. This supports the position that the payment of such packaging fee is, in f act, a division of legal fees. The effect of the proposed method of compensation to the Corporation is a division of fees, whether or not it is denominated as such. See N.Y. State Opinion #565 (1984). As the Corporation is undoubtedly a "non-lawyer", and the exceptions set out in DR 3-102 do not apply, the division of fees with the corporation is proscribed by the Code.

 

[Approved by the Executive Subcommittee on 3/11/94; approved by the Full Committee on 3/30/94]

 

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