Ethics Opinions

 
NASSAU COUNTY BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
Archive of Ethics Opinions
Opinion No.: 1999-1
Topics: Attorney’s acceptance of all referrals made by fee-collection company organized by attorney and subsequent fee-splitting between attorney and collection company
Digest: An attorney may not organize, and then accept referrals of all legal business from, a fee-collection company organized, in part, for the purpose of indirectly soliciting business for the attorney. Assuming a nonlegal business has legitimate nonlegal functions, an attorney may accept referrals of legal work from that business, provided the client consents after full disclosure and if the attorney may adequately represent both the client and the business. An attorney may not split fees with a non-legal entity.
Code Provisions: DR 2-101
DR 2-102
DR 2-103(A), (C), (D), (E)
DR 2-104
DR 2-106
EC 3-8
DR 3- 10 1 (A)
DR 3-102(A)
DR 3-103(A)
DR 4- 101
DR 5-101(A)
DR 5-104(A)
Facts Presented: An inquiring attorney wishes to form a fee-collection business concentrating in the collection of unpaid attorney's fees and other professional fees. This organization would refer all of its legal work to a law partnership comprised of inquiring counsel and a partner. Furthermore, the nonlegal organization would have a non-attorney shareholder who would share equally in any matters that are referred to the law firm for legal action.
Inquiry:
(1) May an attorney organize a fee-collection company which would refer all matters in which legal action is necessary to the attorney's law firm?
(2) May this company be organized with a non-attorney as a shareholder, who would share equally in any matters that are referred to the law firm for legal action?
Determination:
(1) No. The proposed arrangement for the organization and ownership by an attorney of an independent nonlegal business with the purpose of referring all of the organization's legal business to that same attorney would violate a disciplinary rule barring indirect solicitation of prospective clients through laypersons; if the entity is not organized for that purpose, the attorney and company must (a) obtain the client's consent after full disclosure of the attorney's ownership of the company and (b) the attorney must be certain he or she may adequately represent the client and company.
(2) No. The attorney is barred from sharing legal fees with laypersons or nonlegal entities; however, a legitimate nonlegal entity referring its customers to lawyers for related legal services may share its compensation with the lawyer, subject to applicable Disciplinary Rules and other court rules regulating attorney's fees.
Analysis:
I. Legal Employment Referrals


 

This Committee notes at the outset that it cannot pass on strictly legal issues, which are beyond the purview of a professional ethics committee, see BANC Ops. ## 90-28, 90-24, although we will occasionally indicate our views on legal issues where they parallel, contradict, or modify or are interpreted under the Disciplinary Rules and other professional ethics principles.

 

Solicitation and recommendation of professional employment are governed by DR 2-103 of the N.Y. Lawyer's Code of Professional Responsibility. Under DR 2 - 103 (C) I " A lawyer shall not request a person or organization to recommend or promote the use of the lawyer's services or those of the lawyer's partner or associate, or any other affiliated lawyer as a private practitioner, other than by advertising or publicity not proscribed by DR 2-101," subject to certain other specified circumstances.

 

Because none of these specified circumstances apply to the described facts, the inquiring counsel would not be permitted to organize and own a nonlegal business established for the purpose of obtaining referrals of all of the legal business to that same attorney.

 

We would reach a different conclusion, however, if we assumed that the proposed fee-collection company has a legitimate nonlegal function and purpose as a debt-collection agency, performing administrative, clerical and other debt- collection functions, which may be subject to the federal Fair Debt Collection Practices Act, 15 U.S.C.A. § 1692-to- 1692o (1998 & 1998 Cum. Ann. P.P.), and N.Y. Penal Law § 190.50, regulating unfair debt collection practices. If this independent nonlegal business has a legitimate purpose other than referring all of its legal business to the inquiring attorney, our prior opinions on an attorney's cross-referrals to and from self-owned nonlegal businesses would then apply. BANC Ops. ## 94-15 and 93-2 (relating to the strictures on resolving conflicts of interest under DRs 5-101 (A) and 5-104(A).

 

In BANC # 94-15, after a lengthy analysis of various opinions on an attorney's duty to make full disclosure of the attorney's referral activities, we determined:

 

"An attorney can make referrals to or accept referrals from a non-legal business in which he has an interest with respect to the same transaction in which he renders services as an attorney, provided that (i) the client consents after full disclosure, and (ii) it is obvious that the lawyer can adequately represent the interests of [the client despite the lawyer's interest in the non-legal business]. "

 

This Committee has considered many other professional and ethical aspects of an attorney organizing or owning, and taking client referrals from, an independent nonlegal business. For example, in 1997 we considered two such business plans, one for a ?budget planning service? and the second a ?for-profit? enterprise offering nonlegal and legal services for senior citizens in a central location. BANC Ops. ## 97-6, 97-2. In # 97-6 we disapproved this integrated approach of combining legal and nonlegal services in a centralized location because "the lawyer would be permitting the advertising of his or her name and availability for legal services by a for-profit enterprise acting on the lawyer's behalf in combination with a commercial arrangement under which the lawyer and the for- profit enterprise would be exchanging items of value to each other. . . ." BANC # 97-6. We otherwise advised that the lawyer and nonlegal business must render services and fees independently and must not share the lawyer's fees.

 

In BANC # 97-2 we disapproved a plan for a 'budget planning service' operated by and out of a law firm's offices. The peculiar legally circumscribed circumstances of #97-2 in which by statute only lawyers (or certain not-for-profit corporations) may own a 'budget referral service' while also practicing law for clients referred by that service led us to conclude that practicing lawyers could not actively participate in that business, but they must closely supervise the activities of its non lawyer employees and agents.

 

 

In BANC # 96-2, we opined that a lawyer must not form a partnership with a nonlawyer to operate a "business" of "negotiating out-of-court settlements with creditors" even if the lawyer-partner disclaims acting as a lawyer in that business. There we opined that many of the activities of this "business" necessarily constitute " the practice of law," which combination would directly violate DR 3-103(A): " A lawyer shall not form a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law." We similarly opined for basically the same reason in BANC # 95-3 that a lawyer may not actively render legal services in corporate form with a real estate broker for the purpose of filing residential tax certiorari cases. We also opined:

 

 

"On the other hand, if the attorney were not proposing to render the services at issue [for the corporation], but rather was merely a passive investor in the corporation (and does not hold himself or herself out as providing services), . . . there could be no conduct considered to be the practice of law. "

We expressly did not address the issue of accepting referrals "from that corporation to render legal services in a small claims assessment review procedure," an issue which was conditionally approved in BANC # 94-15. In BANC # 94-15 we opined that an attorney may ethically accept such referrals, and we again approve acceptance of such referrals here.

 

We also expressed the opinion in BANC # 93-6 that a lawyer may not participate in a tax return preparation service that advertises "Tax Attorney-C.P.A. - Registered Rep on Staff." As violating DR3-101(A): "A lawyer shall not aid anon- lawyer in the unauthorized practice of law, " and DR 2-103(E), that a lawyer not accept legal employment resulting from violations of law or the court-enforced Disciplinary Rules, including Judiciary Law § 479, quoted in n.2.supra.

 

Our opinion is further supported, most recently, by NYSBA # 705 (1998), opining that an attorney " is not necessarily barred from accepting an engagement by the tax reduction company to represent an owner in Supreme Court proceedings where the property owner has authorized the company to engage counsel to represent it," as long as the attorney is not thereby aiding the company in " the unauthorized practice of law," i.e., it performs no services for its customers other than referring clients' matters to lawyers.

 

To the extent the proposed fee-collection agency contracts, or is assigned the right, to collect legal fees for attorneys, the attorneys-creditors remain subject to professional ethical standards in dealing with their clients-debtors, including DR 4- 101 on maintaining the clients' "confidences and secrets" and DR 2-106 on fees. The attorney-creditor still has the professional responsibility for the agency's fee- collection activities, which responsibility cannot be wholly delegated to third parties. In BANC#96-9 we approved a proposed practice of an attorney "factoring" fees owed to other attorneys by governmental agencies as "receivables" under certain conditions. These same conditions would apply to the proposed fee- collection company: (1) "the fees charged must remain reasonable as required under DR 2-106"; (2) "any client confidences and secrets must be protected, and only information necessary to the collection of the fee may be disclosed, in accordance with DR 4-101(C)(4)"; (3) the creditor-attorney " must maintain control over whether [the client] is sued in connection with the fees " and other supplemental protections; and (4) " no impermissible division of fees is to take place."

 

 

II.. Fee-Splitting with a Nonlegal Organization


 

Turning to the fee-splitting issue, under DR 3-102(A), a lawyer or a law firm may not share legal fees with a non-lawyer or nonlegal entity, except under certain specified exceptions.3/ None of these specified exceptions are satisfied by the described facts. Disciplinary Rule 3-102(A) is violated whenever a non-lawyer's income depends on the lawyer's receipt of legal fees in a specific case or cases. If the non-attorney shareholder's income from the contemplated collection company would be contingent upon the lawyer's receipt of legal fees, this would violate DR 3-102(A).4/ On the other hand, if the fee collection company directly makes its own compensation arrangement with its creditor customers, it may agree to divide this compensation with the law firm; however, the law firm's fee arrangements with its clients and the fee-collection company must comply with applicable Disciplinary Rules and other court rules regulating fees. This is confirmed by NYSBA # 705 (1998), concluding "that the lawyer may enter into an agreement to represent the property owner [client] for a fee that is paid by the [tax reduction] agency from funds obtained from the client if the lawyer's fee is allocable to the lawyer's services."

 

Based upon the foregoing, we are of the opinion that the contemplated actions are improper and may not be undertaken, unless modified in accordance with this opinion and unless the activities comply with the New York Judiciary Law and other laws, as to which we cannot render any opinion.

 

(Approved by Exec. Subcomm. 1/9/99; Approved subject to revisions by Full Committee 1/27/99; Revised by Exec. Subcomm. 2/9/99.)

 


 

1/ Cf. DR 2-103 (D)(4) relating to other types of "bona fide organizations" which may recommend or provide legal services to its members or beneficiaries under various limitations. Also, an attorney may advertise in public advertising media or by private written communications, professional notices, letterheads and signs, as prescribed in DRs 2- 1 01 and 2-102, and may engage in informational activities, as provided in DR 2-104. The excepted referral agencies include bar associations' legal referral services and other specified organizations under certain conditions, DR 2-103(C)(1), (2); also, a lawyer " may request such a recommendation from another lawyer or an organization performing legal services."

 

2/ In addition, under § 479 of the N.Y. Judiciary Law,

"It shall be unlawful for any person or his agent, employee or any person acting on his behalf, to solicit or procure through solicitation either directly or indirectly legal business, or to solicit or procure through solicitation a retainer, written or oral, or any agreement authorizing an attorney to perform or render legal services, or to make it a business so to solicit or procure such business, retainers or agreements. "

Under the described facts, it could be assumed that the fee-collection company is organized for the purpose of soliciting for, and referring all of its legal business to, the inquiring attorney's law firm. Although it is not within the purview of this Committee to render opinions on matters of law, the contemplated collection company apparently might violate Judiciary Law § 479.

 

3/ For example, under DR 3-102(A) a lawyer may share legal fees with non-lawyer distributees after the lawyer's death over a period of time under an agreement with a law firm, its partners or associates; or with a deceased lawyer's estate in completing that lawyer's legal business in proportion to the legal services to be performed; or with non-lawyer employees in a retirement plan that may be based on profit-sharing.

 

4/ Fee-sharing between an attorney or a law firm and a layperson or nonlegal entity is a misdemeanor under Judiciary. Law § 491, subds. (1) and (2). Section 49 1 (1) provides in relevant part:

 

"It shall be unlawful for any person, partnership, corporation ... to divide with or receive from ... any attorney-at-law ... any portion of any fee or compensation, charged or received by such attorney-at-law or any valuable consideration or reward, as an inducement for placing, or in consideration of having placed, in the hands of such attorney-at-law ... a claim or demand of any kind for the purpose of collecting such claim, or bringing an action thereon, . . ."
Therefore, careful consideration should be given to potential violations of Judiciary Law § 491.

 

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