(Inquiry No. )
“Factoring” fees for legal services”
It is not per se impermissible for an attorney to “factor” (i.e., to finance) earned legal fees to another attorney, provided adequate precautionary measures are taken for the protection of the client.
Attorney “A” completes legal services for “the County” and thereafter completes a voucher regarding legal fees and submits a claim form, for $1,000, to the County. It typically takes the County several months to pay a claim; however, Attorney “A” needs funds immediately. Attorney “B” is willing to “factor,” the claim by paying $750 up front, with subsequent payments based upon set percentages to follow (depending upon the amount of time it takes the County to make payment).
Pursuant to the proposed factoring agreement, Attorney “B” will be the sole factor with respect to the voucher’s, referred to by the agreement as “receivables,” and Attorney “A” warrants that the receivables, at the time of assignment to Attorney “B”, are bona fide obligations of either Nassau County or New York State which arose out of the rendition of legal services in the course of ordinary business, and are free and clear of all liens and encumbrances. At the time of assignment, Attorney “B” may, at his or her discretion, advance a lump sum equal to 75% of the net amount of the receivables, with an additional 15% to be forwarded if the client pays the bill within 75 days of submission, or 12 1/2% if the client pays after 75 days. Total payment by Attorney “B” to Attorney “All will not exceed 90%.
The agreement further provides that Attorney “B” or his or her designee has the right to notify the governmental entity responsible for payment that the receivables have been assigned, and that Attorney “B” has a security interest in them. Consent of the payor does not appear to be required by the agreement. If the payor files for bankruptcy or becomes insolvent, Attorney “B” has the right to deem the receivables unacceptable, and Attorney “A” agrees to repay Attorney “B” promptly, although Attorney “B” retains title to the receivables until the obligations have been fully satisfied. Attorney “A” will settle all disputes with the County or State, but no discount, credit, or allowance is to be granted without consent of Attorney “B”.
If a dispute arises in connection with any cf the fees, Attorney “A” agrees to charge back, or reimburse Attorney “B” for those amounts and settle the dispute. Should Attorney “A” breach this agreement to charge back disputed fees, Attorney “B” has the right to sell or assign the receivables at his or her sole discretion, free from any right of redemption which Attorney “A” expressly waives.
Is there an ethical problem in “factoring” a fee owed by a governmental entity for legal services, if Attorney “A” executes a notarized assignment form in favor of Attorney “B” and submits it to the governmental entity with the claim for services? Can legal fees be considered “receivables”?
In situations in which the County or other governmental entity is the payor of fees for services to individual clients, it is not per se impermissible for Attorney “A” to assign his or her accounts receivable to another attorney, so long as appropriate precautionary measures are taken to protect the individual client and payor, and all relevant ethical rules are followed by both attorneys. The proposed agreement as described, however, raises some ethical concerns and should be modified, for the reasons set forth below.
This issue, limited to whether an attorney may factor to another attorney fees owed by the County or other governmental entity as the payor of fees for services to individual clients, has not been addressed by the Nassau County or New York State Bar Associations. As a general matter, this Committee has opined that an attorney whose client has manifested an unwillingness to pay the outstanding balance of an account may refer the clients account to a collection agency (Opinion No. 90-25) ; 1/ that the division of fees between attorneys is permissible as long as the client consents and each attorney assumes responsibility for the representation in writing (opinion No. 93-36), 2/ that an attorney may not purchase the portfolio of delinquent receivables from a bank even though the purchasing attorney was initially retained to make recoveries and had not solicited the purchase (Opinion No. 92-13); 3/ and, in the context of charging interest on installment payments, that the commercialization of the practice of law should be avoided (Opinion No. 81-8) .
In a circumstance somewhat analogous to the inquiry here, the New York City Bar Association Committee on Professional and Judicial Ethics has held that a retiring attorney may assign his accounts receivable to another attorney, assuming all of the accounts have been fully earned, and no additional legal services need to be performed for the former clients. N.Y. City 1993-1. There, the Committee cited to N.Y. State Opinion No. 6019 (1990) and noted by way of analogy that the use of collection agencies in collecting legal fees is permitted when other reasonable efforts short of litigation had been undertaken and had been unsuccessful. However, because fees owed to an attorney are not “entirely analogous” to regular business accounts receivable, certain concerns are raised.
First, the fees charged must remain reasonable as required under DR 2-106 (“a lawyer shall not enter into an agreement for, charge or collect an illegal or excessive fee”) , so that the obligation to ensure reasonableness of the fee passes from the assigning attorney to the assignee. N.Y. City 1993-1.
Second, any client confidences and secrets must be protected, and only information necessary for the collection of the fee may be disclosed, in accordance with DR 4-101(C) (4), which permits an attorney to reveal “confidences or secrets necessary to establish or collect the lawyer’s fee or to defend the lawyer or his or her employees or associates against an accusation of wrongful conduct.”
Third, the Attorney “A” must maintain control over whether the County is sued in connection with the fees. EC 2-23 provides:
a lawyer should be zealous in his efforts to avoid controversies over fees with clients and should attempt to resolve amicably any differences on the subject. The lawyer should not sue a client for a fee unless necessary to prevent fraud or gross imposition by the client.
Because an attorney should make all reasonable attempts at settling a fee dispute before a lawsuit is commenced under any circumstance, we believe that at a minimum, (i) the factoring agreement in this instance should contain a provision reserving the right to Attorney “A” to repurchase the account if necessary; and (ii) Attorney “A” should not surrender control over whether a lawsuit is commenced against the County. See, N.Y. City 1995-1, regarding the payment of legal fees with credit cards. There, the proposed credit agreement provided, among other considerations, that: (i) once a card member had been approved for financing by the financing company, the attorney would periodically send vouchers (including retainers) to the financing company; (ii) the financing company could require the attorney to repurchase the account in the event of a fee dispute (although the attorney did not maintain the unilateral right to repurchase); and (iii) the financing company could assign its interests and duties to third parties without the attorney’s consent. The Committee held the agreement must clearly provide “that the lawyer retains control over whether the client is ultimately sued for a fee,” and that the financing company could only assign the accounts to a third party if the assignee assumed all of the financing company’s duties and accepted the assignment subject to all defenses available to the client. See, also, ABA 320 (1968) in which the ABA Committee on Professional Ethics held the right to repurchase the loan before suit is brought
… is a necessary provision, as it gives the attorney an effective means of preventing such suit if he wishes and still protects the bank against loss. On the other hand, if the services have been or are to be performed and there is no reason why the fee should not be paid, the lawyer may refuse to repurchase the loan and permit the bank to sue upon it. This is his right and in some cases will no doubt be necessary.
(citation omitted). Although Attorney “All must control at all times whether the County is sued, however, we note he or she need not necessarily be the plaintiff in that litigation.
Fourth, no impermissible division of fees is to take place. DR 2-107 states, in relevant part:
A. A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of the lawyer’s law 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 a reasonable compensation for all legal services they rendered the client.
DR 3-102 prohibits, with certain exceptions, the sharing of fees with non-lawyers, so that (among other reasons) the non-lawyer will have no incentive to interfere with the attorney’s professional judgment in handling legal matters. In this instance, the factor is also an attorney, and it is further assumed that the legal fees will not be factored until the services for which the County is being billed have been fully rendered by Attorney “A”. If this is the case, it has been held that no prohibited division of fees is taking place, since no services are being performed by
the attorney accepting the assignment, 4/ and the assignment is, therefore, permissible. 5/ On the other hand, the factoring of retainer fees, which have not, by definition, as yet been earned, is not permitted.
While consent of the payor or individual client is not required since no services are performed by the factor, full disclosure must be made in order to avoid confusion. The County should be told to whom the assignment has been made, and it should further be made clear that the assignment does not mean Attorney “B” has taken an representation of the individual client. In addition, all ethical rules regarding solicitation of clients should be followed. See DR 2-103; DR 2-104.
Other concerns include: (i) whether the debt is justly owed for services properly rendered (N.Y. State 608 (1990)); (ii) that the County be provided with copies of all vouchers sent to Attorney “B”; and (iii) that both attorneys avoid conditions which could erode public confidence. As a corollary, the attorney acting as factor should take care not to violate Judiciary Law § 488, which prohibits attorneys from accepting assignment of a debt “when the intent and for the purpose of bringing an action thereon.” While it is permissible for the assignee to bring suit subject to the caveats set forth above, that party should provide the County with sufficient opportunity to make payment prior to any litigation.
In this instance, the factoring agreement that has been proposed fails to meet certain criteria as set forth above. First, the agreement merely provides that the factor has the right to notify the County of the assignment, although as previously noted, full disclosure is required. In addition, Attorney “B” has maintained the right to withhold consent to any settlement or discount by Attorney “A” in the event of a fee dispute, which risks violation of EC 2-23. Rather, the agreement should provide for a “charge back,” or reimbursement by Attorney “A” to Attorney “B” of the disputed amount, with the ultimate decision as to settlements or discounts to the County to remain with Attorney “A”. Most significantly, under the proposed agreement, Attorney “A” waives the right of redemption in the event of a breach of the agreement by Attorney “A,” which further risks violation of EC 2-23.
This committee does not opine on the legality of the interest rate involved in the transaction.
(Approved by Executive Committee on 5/21/96; Approved by Full Committee on 5/29/96)
1/ The attorney may not, however, report the delinquent account to a credit bureau.
2/ Faced with cash-flow problems, inquiring counsel in that opinion wished to pay an outside attorney on a percentage basis, regardless of the work performed.
3/ The bank that originally retained the attorney planned to recall all accounts unless the law firm wished to purchase the portfolio.
4/ N.Y. City 1993-1; N.Y. State 608 (1990).
5/ For this reason, it further appears consent of the payor is unnecessary.