State Bar of Arizona Ethics Opinions
95-09: Fees; Gifts; Conflicts of Interest; Personal Injury
An attorney may make a gift of all or a portion of the fees where the motive is charitable unless a medical provider specifically agreed to a reduced amount conditioned on the client not receiving any money. [ERs 1.8, 4.1]
The inquiring attorney represents a woman who was injured in a motor vehicle collision with an uninsured driver. The inquiring attorney accepted the case pursuant to a written contingent fee agreement of 30%. The claim was settled with the client's uninsured motorist carrier for policy limits of $15,000.00; there is no other available coverage and any additional recovery against the uninsured driver is unlikely. The medical bills for treatment of the client's injuries exceeded $19,000.00.
Because the client's medical bills exceed the amount of the settlement, the inquiring attorney contacted the medical providers in an attempt to obtain a discount so that the client would receive some compensation out of the settlement. The inquiring attorney advised the providers that if he took his fee the remaining settlement monies would only pay approximately 50% of the medical bills. The attorney requested each provider to accept 50% of their outstanding bills and indicated that he would reduce his fee so there would be some monies available to the client. The three most significant care providers have agreed to reduce their billed fees by 50%. One of those providers, however, indicated that she believed that the client had already received something for the claim--treatment for her injuries and the payment of her bills. This provider is willing to reduce her charges so that the claim can be resolved but not so that the client can receive any settlement funds.
May an attorney in a personal injury case make a gift to his client from the attorney's share of the proceeds?
RELEVANT ETHICAL RULES
ER 1.8 Conflict of Interest: Prohibited Transactions
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(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, provided the client remains ultimately liable for such costs and expenses; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
ER 4.1 Truthfulness in Statements to Others
In the course of representing a client, a lawyer shall not knowingly:
(a) Make a false statement of material fact or law to a third person . . . .
RELEVANT PRIOR ETHICS OPINIONS
Three prior formal opinions by the Committee are relevant. In Opinion 89-03 (April 18, 1989) the Committee addressed whether an attorney handling a case through the Volunteer Lawyers Program on a pro bono basis could make a monetary gift to the client to help her buy food ad pay bills. The opinion noted that the money was not in any way related to the lawyer's representation of the client in the litigation, was given without regard to the outcome of the matter the lawyer was handling for the client, and was given with no expectation of repayment. Under these circumstances, the Committee held that the attorney was ethically permitted to make a gift of money to the pro bono client.
In Opinion 91-13 (May 8, 1991) the inquiring attorney was representing a client in a medical malpractice case on a contingency fee basis. Litigation had been filed and the attorney had advanced litigation costs for which the client was ultimately responsible under the terms of the contingency fee contract. The opposing party then made an offer to settle the case and the inquiring attorney offered to waive his fees and all costs advanced by him if the client accepted the pending offer. The opinion noted that under ER 1.8(e) an attorney may not advance costs and litigation expenses for a non-indigent client unless the client remains ultimately liable therefore. The Committee concluded that the inquiring attorney would not violate ER 1.8(e) by waiving all of his fees and costs at the conclusion of the case irrespective of whether the client is indigent. By waiving all fees and costs, the attorney has avoided any possibility that his independent judgment would be colored by his expectation of repayment for funds which he might have advanced. Similarly, the Committee found that there was little likelihood of improper publicity being generated by the attorney's waiver of fees and costs and noted that he was not offering the waiver as an inducement to a prospective client to retain him.
Finally, in Opinion 91-14 (May 8, 1991) the inquiring attorney represented a mother who brought a personal injury action for her fifteen-year-old daughter who was seriously injured in a motor vehicle accident. The daughter needed specialized neurological care that would have cost approximately $20,000.00. The Committee held that under ER 1.8 the attorney could not advance or guarantee financial assistance to his client to cover the daughter's needed medical treatment, but found there was no prohibition against him making a gift to the client to cover the medical expenses. In so doing, the Committee expanded on the holding in Opinion 89-03, refusing to restrict it exclusively to pro bono clients. The inquiring attorney ethically was permitted to make a gift of money to the client to allow the daughter to receive necessary medical care so long as; 1) the transfer was the result of a truly charitable motive by the attorney, 2) the client had already been retained by the attorney prior to any discussions about the possibility of making such a gift, and 3) there was no expectation of any repayment by the client.
A fair reading of the previously cited ethical opinions indicates that, as a general rule, an attorney can make a gift of part of her fee to the client to ensure that the client receives some proceeds out of the personal injury settlement. Obviously, since under Opinion 91-13 an attorney can entirely waive his fee, and since under Opinion 91-14 an attorney can make an independent gift to the client, there is no ethical prohibition on counsel receiving her agreed upon fee and then giving a portion of that amount to the client as an outright gift. The three requirements set forth in Opinion 91-14 must be met, however; 1) the attorney must have been retained prior to his decision to make a gift, 2) the client must not be obligated to repay the gift, and 3) the attorney must be proceeding from charitable and not pecuniary motives.
In the circumstances in this inquiry, the client retained the attorney prior to the attorney's decision to make a gift, and the attorney did not intend to request that the client repay the amount that he gave to her. Assuming then that the attorney's motive in making the gift is charitable, he can accept his full fee (or whatever reduced fee he takes pursuant to his negotiations with the providers) and then make a gift to the client of part of that fee. On the other hand, if he is donating part of the fee simply to keep the client happy, to induce the client to refer future clients to him, to improve his firm's goodwill, or for other business considerations, the gift would no longer be charitable in nature and the requirements of Opinion 91-14 would not be satisfied.
Having determined that the proposed gift is otherwise permissible, assuming a charitable motive, the issue now is whether the attorney can make the gift where one of the providers has conditioned her acceptance of a discounted payment on the client not receiving any settlement proceeds. ER 4.1(a) thus is implicated. Under that Rule, the inquiring attorney may not ethically tell the provider that his client will not be receiving any funds and yet in reality reduce his fee in order to provide settlement proceeds to the client. For example, the attorney cannot tell the provider that he is taking a fee of $5,000.00 but show a fee of $3,000.00 on the disbursement sheet with the remaining $2,000.00 of his fee paid to the client. Doing so would clearly constitute making a false statement of material fact to a third person in violation of ER 4.1(a). In order to comply with the express demands of the provider who has attached conditions, the attorney's settlement disbursement sheet must reflect his fee and costs with no disbursement to the client, and the attorney may not thereafter make a gift to the client out of his fee. The attorney, of course, can continue to negotiate on this issue with the provider, but absent a change in the condition imposed by the provider, the attorney cannot make a gift to the client out of the settlement proceeds.
An attorney may make a gift to the client of all or a portion of the attorney's fees where the attorney's motives are charitable. However, where a provider has agreed to accept a discounted amount conditioned on the client not receiving any settlement funds, the attorney cannot thereafter make a gift to the client of a portion of his fee since doing so would constitute a misstatement of material fact to a third party in violation of ER 4.1(a).
Formal Opinions of the Committee on the Rules of Professional Conduct are only advisory; they are not binding in any disciplinary or other legal proceeding.
This conclusion also is supported by the recent Arizona Supreme Court opinion In Re Fee, 194 Az. Adv. Rep. 3 (7/6/95). Although the Court in that case found a violation of ER 3.3(a)(1), its language is identical to ER 4.1(a) and the facts of the case are functionally identical to those presented by the present inquiry.
Obviously, the information as to the attorney's fee and how much the client will clear on the case is confidential information, but under ER 1.6, disclosure of that information is permitted if the client consents. As a practical matter, the provider who has attached conditions to her agreement to discount her bill, and indeed the other providers as well, may require that the inquiring attorney disclose the details of the distribution of the settlement proceeds as a condition to agreeing to accept a discounted amount.