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The Professional Ethics Commission of the Board of Overseers of the Bar

Question

Bar Counsel presents the following scenario involving litigation financing by a third-party lending company and asks the Commission to render an opinion on whether a lawyer would violate the Bar Rules by aiding a client in obtaining a personal injury lawsuit advance.

Financing Company A provides what it calls pre-settlement lawsuit funding whereby it lends money to plaintiffs while they pursue personal injury litigation. In its promotional materials, Company A states: “You can get lawsuit funding on your personal injury claim NOW. Unlike a personal loan, you will not have to pay us back until your case settles.” It describes its loans as “Non-Recourse Financial Assistance,” meaning that if “you lose – we lose;” i.e., “if you lose your case you owe us absolutely nothing.”

Company A further explains in its materials that it “will purchase a portion of your future settlement, providing you with cash today for any worthwhile purpose, including essential living expenses.” It discloses that it invests in the plaintiff’s lawsuit by “literally buy[ing] a piece of the future settlement proceeds.”

The Company charges no application or closing fee, and represents that there are no hidden expenses. The plaintiff is not required to make any payments until the case is resolved. The Company states that there are no credit requirements and that it plays no part in the management of the case, explaining that “[w]hat you decide to settle for is up to you and your attorney.” The Company’s fees are fixed, and it does not take a percentage of the plaintiff’s recovery.

In order to participate, the plaintiff must be represented by an attorney. The plaintiff must complete an application disclosing case information such as how the accident occurred, the personal injuries sustained, medical treatment rendered, any insurance that would cover the claim and attorney information. The plaintiff must also sign a release authorizing the Company to obtain records from the plaintiff’s attorney. The release form includes a clause to the effect that the plaintiff “understand[s] the effects of disclosing the contents of my file, including waiver of the attorney-client and work product privileges.” The attorney must share with the Company her opinion on the merits of the case, and the Company periodically sends a follow-up questionnaire to the attorney to be filled out and returned.

The Company charges the plaintiff based on a monthly fee calculator with monthly financing rates ranging from 2.00% to 7.00%. As an example, in the case of a $1,000 advance, at 4.00% the fee would range from $120 if it took three months to resolve the case, to $1,200 if it took 30 months to resolve the case. The financing fees accrue each month and are paid at the end of the case only if there is a successful recovery. The Company does not compound fees, which it claims is contrary to the way some other companies charge.

Opinion

We understand that such advances are permitted in a number of other jurisdictions, but we are not aware whether any of these jurisdictions have a criminal champerty statute. For the Maine lawyer, the threshold question should be whether personal injury lawsuit advances are illegal because they violate Maine ’s criminal champerty statute, an issue on which we cannot opine.[1] Without an answer to this question, we cannot address whether it is per se unethical for a lawyer to assist in their creation. We caution, however, that the lawyer must be mindful of their potential criminality and the lawyer’s corresponding obligations under the Code of Professional Responsibility. See M. Bar R. 3.2(f)(2) (lawyer shall not engage in illegal conduct that adversely reflects on lawyer’s honesty, trustworthiness or fitness as lawyer); M. Bar R. 3.6(d) (lawyer shall not counsel or assist client in violation of any law, but lawyer may take steps in good faith to test validity of law). At a minimum, the lawyer must make an informed assessment of whether the proposed advance violates the statute and discuss the issue with the client. See M. Bar R. 3.6(a) (lawyer must employ reasonable care and skill and apply lawyer’s best judgment).

We also note that the scenario as posed leaves us many unanswered questions. For example, are the representations made in the advertisements borne out by the loan documents? What control, if any, does the financing company maintain over settlement decisions? Is the loan truly non-recourse, or is there any situation where the client might be obligated to repay a portion of the loan in the event of no recovery? Is the client’s obligation to repay capped by the amount of any settlement or verdict, or is it possible that the client could have a repayment obligation that exceeded that amount? Is the loan secured by the judgment, and if so, does that have a bearing on any issues? Additional questions arise if there are others to whom the plaintiff will be indebted and who expect to be paid out of a litigation recovery. For example, who gets paid first out of any settlement as between the financing company, lien holders (e.g., insurers and medical providers) and the attorney? What is the order of priority for payment? What amount is the client likely to net after case resolution and after the financing company and others have been paid? A final set of questions arise as we try to identify the nature of the relationship between the lawyer, client, and finance company. Is the finance company an agent of the client or the attorney with respect to the litigation? What duty of confidentiality does the financing company have and is its duty spelled out in the loan documents? Does the attorney take on any duties with respect to the financing company and, if so, what are they?

Irrespective of these unanswered questions, and while we cannot say that it is per se unethical for a lawyer to assist a client in obtaining personal injury lawsuit advances, we do find that the above scenario raises a number of potential ethical problems that should be of concern to the lawyer. The issues we identify are without limitation, meaning that any particular litigation scenario may present additional ethical concerns that are not evident from the facts presented here.

First, before assisting the client in a transaction like this, the lawyer must fulfill her obligation to provide the client with appropriate advice on whether the arrangement is in the client’s best interests. See M. Bar R. 3.6(a), supra. We express no view on whether personal injury advances in general are good or bad for clients. The wisdom, or lack thereof, of such an arrangement necessarily depends on the particular circumstances faced by the client. At a minimum, however, the client is sacrificing in interest payments a substantial portion of whatever final recovery may ultimately be received in the case. There may be other ways, such as letters of protection to medical providers or referral to a financial advisor, for the lawyer to assist the client in maintaining finances until a case is resolved. Whatever the circumstances and options, the lawyer must make sure that she fully explains the arrangement and the consequences to the client, and she must advise the client appropriately.

Second, the lawyer must guard against disclosure of client confidences or secrets without the client’s informed consent. See M. Bar R. 3.6(h). The scenario above involves a broad release to be signed by the client. The lawyer must make sure that the client understands the consequences of the release. The careful lawyer will keep the client timely informed on what she is sending to the lending company to ensure that she has the continuing informed consent of the client.

Third, the lawyer must assess and advise the client on the potential consequences of sending confidences and secrets to the financing company. Sending information to a third party may act as a waiver of the attorney-client work-product privileges, entitling the opposing side in the litigation access to the information. This risk requires the lawyer to take steps to avoid a waiver, if a waiver can be prevented at all. It also requires the lawyer to be careful about what she sends to the company, knowing that whatever is sent, including the lawyer’s evaluation of the case, may be discoverable to the other side no matter what steps are taken to avoid a waiver.

Fourth, the lawyer must guard against any risk that the financing company will attempt to control the litigation or otherwise interfere with the lawyer’s exercise of professional judgment. See M. Bar R. 3.6(a).

Fifth, the lawyer must be wary of conflicts of interest that may arise between the lawyer’s duty to the client and any obligation that the lawyer undertakes with respect to the finance company or between the lawyer and her client. See M. Bar. R. 3.4(e) and 3.4(f). For example, if the lawyer is obligated to describe to the finance company the likelihood of any recovery, the disclosure of any potential barriers to the client’s recovery might render the client a less likely candidate for a loan and might damage the client’s case if it becomes discoverable in litigation. Such a risk must be identified and the informed consent of the client must be obtained. As another example, if part of the reason the client is securing an advance is to pay litigation expenses that the lawyer will not advance, it may be necessary for the lawyer to advise the client that there may be other law firms willing to advance those expenses, which will alleviate the need for the loan.

As stated above, these are the more obvious issues posed by the limited facts of the scenario before us. There may be other ethical issues presented by any particular personal injury advance proposal, which we are unable to discern and address at this time.

[1] See 17-A M.R.S.A. § 516 (“A person is guilty of champerty, if with the intent to collect by a civil action a claim, account, note or other demand due, or to become due to another person, he gives or promises anything of value to such person.”) We cannot opine on this question because our jurisdiction extends only to interpreting the Code of Professional Responsibility. See M. Bar R. 11(c); see also Maine Professional Ethics Opinion #11, April 2, 1980.

Note: Since the issuance of Opinion 191, the Maine Legislature amended Title 9-A to permit, in certain circumstances, companies to make "cash payment[s] to a consumer in exchange for the right to receive" the proceeds of a civil claim or action. Title 9-A M.R.S.A. sec. 12-101 et seq. Despite the change to the Maine Consumer Credit Code, a Maine attorney who contemplates assisting a client in obtaining such a loan must nevertheless still undergo the analysis set forth in Opinion 191.

© 2006 Maine Board of Overseers of the Bar., All Rights Reserved.


Chapter 394
H.P. 1186 - L.D. 1703
An Act To Regulate Presettlement Lawsuit Funding

Be it enacted by the People of the State of Maine as follows:
Sec. 1. 9-A MRSA art. 12 is enacted to read:

ARTICLE 12
Legal Funding Practices

§ 12-101. Short title

This article may be known and cited as "the Maine Consumer Credit Code Legal Funding Practices."

§ 12-102. Definitions

As used in this article, unless the context otherwise indicates, the following terms have the following meanings.

  1. "Consumer" means a person or entity residing or domiciled in this State with a pending civil claim or action and represented by an attorney.
  2. "Legal funding" means a transaction in which a company makes a cash payment to a consumer in exchange for the right to receive an amount out of the potential proceeds of any realized settlement, judgment, award or verdict the consumer may receive in a civil claim or action. If no proceeds in the civil claim or action are received, the consumer is not required to pay the company.
  3. "Litigation funding provider" means a person or entity, wherever located, that provides legal funding to a consumer.

§ 12-103. Application of law

  1. This article does not apply to an advance made by a consumer's attorney to pay for expenses related to preparation for trial.
  2. Legal funding that is made pursuant to this article is not a consumer credit transaction as defined in section 1-301, subsection 12.
  3. An advance made to a consumer other than pursuant to the terms of this article is a supervised loan as defined in section 1-301, subsection 40.

§ 12-104. Requirements for legal funding contracts

The following provisions govern the legal funding contracts used by a litigation funding provider.

  1. All contracts must be written in a clear and coherent manner using words with common, everyday meanings to enable the average consumer who makes a reasonable effort under ordinary circumstances to read and understand the terms of the legal funding contract without having to obtain the assistance of a professional. The contract must have a meaningful arrangement that is appropriately divided and captioned by its various sections.
    This subsection applies to any agreement signed by the consumer in connection with a legal funding contract entered into in this State. This subsection does not apply to any acknowledgment or representation signed by an attorney. This subsection does not apply to legal funding contracts when an organization is the plaintiff; to language or arrangements that are specifically required by federal or state law, regulation or official agency interpretation; or to agreements, the form or any part of which is required by a governmental instrumentality as a condition of the assignability of the agreement.
  2. All contracts must be completely filled in and must contain a disclosure form on the front page in at least 12-point bold type, in the following format:

DISCLOSURE STATEMENT

  • Total amount of legal funding received by consumer under this contract: $
  • Itemized fees: $
    Application $
    Processing $
    Attorney review $
    Broker $
    Other () $
    Total fees: $
  • Annual percentage fee (rate of return) on advance, compounded semiannually: %
  • Total amount to be repaid by consumer
    if at 6 months: $
    if at 12 months: $
    if at 18 months: $
    if at 24 months: $
    if at 30 months: $
    if at 36 months: $
    if at 42 months: $

3. All contracts must provide that the consumer may cancel the contract within 5 business days following the consumer's receipt of funds without penalty or further obligation. The contract must contain the following notice written in a clear and conspicuous manner: "MAINE CONSUMER'S RIGHT TO CANCELLATION: YOU MAY CANCEL THIS CONTRACT WITHOUT PENALTY OR FURTHER OBLIGATION WITHIN FIVE BUSINESS DAYS FROM THE DATE YOU RECEIVE FUNDING FROM LAWYERS FUNDING GROUP." The contract must also specify that in order for the cancellation to be effective, the consumer must either return the full amount of disbursed funds to the company by delivering the litigation funding provider's uncashed check to the provider's offices in person within 5 business days of the disbursement of funds or mail a notice of cancellation and include in the mailing a return of the full amount of disbursed funds in the form of the provider's check, or a registered or certified check or money order, by insured, registered or certified United States mail postmarked within 5 business days of receiving funds from the litigation funding provider, at the address specified for such cancellation in the contract.

4. The consumer shall initial each page of the contract.

5. All contracts must contain a legend above the consumer's signature in at least 12-point bold type to read:
"NOTICE: LEGAL FUNDING PROVIDERS MUST REGISTER WITH MAINE REGULATORS. GO TO www.maine.gov/pfr/consumercredit AND SELECT THE "ROSTERS" LINK TO VERIFY A LITIGATION FUNDING PROVIDER'S REGISTRATION OR TO CONTACT PROVIDERS TO OBTAIN COMPARATIVE RATE QUOTES."

6. All contracts must contain a legend immediately above the consumer's signature in at least 12-point bold type to read:
"DO NOT SIGN THIS CONTRACT BEFORE YOU READ IT COMPLETELY OR IF IT CONTAINS ANY BLANK SPACES. BEFORE YOU SIGN THIS CONTRACT YOU SHOULD OBTAIN THE ADVICE OF YOUR ATTORNEY. YOU ARE ENTITLED TO A COMPLETELY FILLED-IN COPY OF THIS CONTRACT."

7. All contracts for legal funding must contain the following in at least 12-point bold type to read:
"THE LITIGATION FUNDING PROVIDER AGREES THAT IT HAS NO RIGHT TO AND WILL NOT MAKE ANY DECISIONS WITH RESPECT TO THE CONDUCT OF THE UNDERLYING CIVIL ACTION OR CLAIM OR ANY SETTLEMENT OR RESOLUTION THEREOF AND THAT THE RIGHT TO MAKE SUCH DECISIONS REMAINS SOLELY WITH THE CONSUMER AND THE CONSUMER'S ATTORNEY.

8. A contract may not require mandatory arbitration to resolve disputes under the contract.

9. All contracts for legal funding must contain a written acknowledgment by an attorney that states that:
a.  The attorney has reviewed the contract and all costs and fees have been disclosed, including the amount to be paid by the consumer;
b.  The attorney is being paid per a written fee agreement;
c.  All proceeds of the civil claim or action will be disbursed via the attorney's trust account; and
d.  The attorney is following written instructions of the consumer with regard to the legal funding.

10. For English-speaking, French-speaking and Spanish-speaking consumers, contracts must be written in the same language in which the oral negotiations are conducted between the company and the consumer. For consumers whose primary language is neither English, French nor Spanish, the principal terms of the contract must be translated by a certified translator in the consumer's native language and the translator must sign a notarized affirmation confirming that the principal terms have been presented to the consumer in the consumer's native language and acknowledged by the consumer in writing. Principal terms must include all of the items required to be disclosed by this section.

11. To the extent the contract provides for attorney's fees and costs in addition to the amount due and owing under the contract, the contract must provide that in case of a breach of the contract by either party attorney's fees and costs may be recoverable by the prevailing party and must be reasonable. Any contractual cap on such attorney's fees and costs must apply equally to both parties.

§ 12-105. Fee requirements

  1. A litigation funding provider may not assess fees for any period exceeding 42 months from the date of the contract with the civil litigant.
  2. Fees assessed by a litigation funding provider may compound semiannually but may not compound based on any lesser time period.
  3. In calculating the annual percentage fee or rate of return, a litigation funding provider must include all charges payable directly or indirectly by the consumer, and must compute the rate based only on amounts actually received and retained by a consumer.

§ 12-106. Registration of litigation funding provider; fees

  1. Unless a litigation funding provider has first registered pursuant to this article, the litigation funding provider may not engage in the business of legal funding.
  2. Registration must be filed in the manner prescribed by the administrator and must contain the information the administrator requires to make an evaluation of the character, fitness and financial responsibility of the applicant. The initial application must be accompanied by a $500 fee. A renewal registration must include a $200 fee. A registration must be renewed every 2 years and expires on September 30th.
  3. Registration may not be issued unless the administrator, upon investigation, finds that the character and fitness of the applicant, and of the members thereof if the applicant is a copartnership or association, and of the officers and directors thereof if the applicant is a corporation, are such as to warrant belief that the business will be operated honestly and fairly within the purposes of this article.
  4. For purposes of this section, an applicant demonstrates financial responsibility if:
    -  The applicant has available for the operation of the registered business net assets of at least $25,000; and
    -  Following the issuance of a registration under this section, the registrant maintains net assets of at least $25,000 that are either used or readily available for use in the conduct of the business of each office of the registrant in which a legal funding is made.
  5. Every applicant shall also, at the time of filing such an application, file with the administrator, if the administrator so requires, a bond satisfactory to the administrator in an amount not to exceed $50,000. In lieu of the bond at the option of the registrant, the registrant may post an irrevocable letter of credit. The terms of the bond must run concurrent with the period of time during which the registration will be in effect. The bond must run to the State for the use of the State and of any person who may have a cause of action against the registrant under this article. The bond must be conditional that the registrant will faithfully conform to this article and to all rules made by the administrator under this article and will pay to the State and to any person all money that may become due or owing to the State or to such a person from the registrant under and by virtue of this article during the period for which the bond is given.
  6. A separate registration is required for each place of business. A registration fee of $200 may be imposed for any registration issued for a place of business other than that of the first registered location of the registrant.
  7. A registrant may conduct the business of legal funding only at or from any place of business for which the registrant holds a license, including the names of other "doing business as" entities listed on the registration, and not under any other name than that on the registration.
  8. Upon written request, the applicant is entitled to a hearing on the question of the applicant's qualifications for a registration if:
    -  The administrator has notified the applicant in writing that the application has been denied; or
    -  The administrator has not issued a registration within 60 days after the application for the registration was filed.

A request for a hearing may not be made more than 15 days after the administrator has mailed a written notice to the applicant that the application has been denied and stating in substance the administrator's findings supporting denial of the application.

§ 12-107. Powers and functions of the administrator

  1. The powers and functions of the administrator are as set forth in Article 6, except that references to "consumer credit transactions" in Article 6 are considered to be references to advances made pursuant to legal funding.
  2. The administrator shall maintain a list of all registered companies and make that list available to consumers, attorneys and others on a publicly accessible website.
  3. The administrator shall require a litigation funding provider registered pursuant to section 12-106 to annually submit certain data, in a form and manner acceptable to the administrator, regarding the number of legal fundings, the amount of legal fundings, the number of legal fundings required to be repaid by the consumer and the amount charged to the consumer, including but not limited to the annual percentage fee charged to the consumer and the itemized fees charged to the consumer.
  4. Beginning March 1, 2009 and annually thereafter, the administrator shall prepare and submit a report on the status of legal funding activities in the State. The report must include aggregate information reported by litigation funding providers pursuant to subsection 3. The report must be submitted to the joint standing committee of the Legislature having jurisdiction over insurance and financial services matters.

Sec. 2. Report to Legislature. As part of the first annual report required pursuant to the Maine Revised Statutes, Title 9-A, section 12-107, subsection 4, the Director of the Office of Consumer Credit Regulation within the Department of Professional and Financial Regulation shall review and evaluate the annual percentage fee imposed by litigation funding providers on consumers who entered into contracts for legal funding and assess whether a cap on the maximum annual percentage fee is necessary. The report must be submitted to the joint standing committee of the Legislature having jurisdiction over insurance and financial services matters by March 1, 2009. The joint standing committee may submit legislation to implement a cap on the annual percentage fee on legal funding contracts to the First Regular Session of the 124th Legislature.

Sec. 3. Effective date. This Act takes effect January 1, 2008.

Public Laws, 123rd Legislature, First Regular Session

 

 

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