State Bar of Arizona Ethics Opinions

96-11: Non Lawyer Referral Business; Lawyer Employed by Non Lawyer Business
12/1996

A lawyer may not have legal fees paid for a client through a referring business and the lawyer may not be employed part-time, by the nonlawyer referring business to provide legal services to clients of the business.  [ERs 1.8, 5.4, 7.1]

FACTS:[1]

 

The inquiring attorney represents a corporate client (the "Company") that employs enrolled agents ("EAs") to represent individual taxpayers ("Taxpayers") before the IRS.  When negotiations with the IRS are unsuccessful, the Taxpayers often file bankruptcy.  The Company desires to employ a bankruptcy attorney (the "Attorney") part time who will do the same job as an EA and represent Taxpayers before the IRS. However, when it is clear to the company and/or an EA or the Attorney, that a Taxpayer should file bankruptcy, the Company will refer the Taxpayer to the Attorney, who will operate a separate solo bankruptcy law practice part time.  In this way, the Company desires to offer "one-stop shopping" to its clients.  The Company would pay the attorney his going rate, but the Taxpayer, and not the Company, would be the Attorney's client.

 

QUESTION PRESENTED

 

May a lawyer provide legal services to a client when: 1) the legal fees are paid through a referring business; and 2) the lawyer is employed, part-time by the referring company?

 

Relevant Ethical Rules

 

ER 1.8  Conflict of Interest:  Prohibited Transactions

 

* * * * *

 

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

 

            (1)  the client consents after consultation;

 

            (2)  there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

 

            (3)  information relating to representation of a client is protected as required by ER 1.6.

 

* * * * *

 

ER 5.4  Professional Independence of a Lawyer

 

(a)  A lawyer or law firm shall not share legal fees with a nonlawyer [except in limited circumstances, none of which apply here];

 

(b)  A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law; and

 

(c)  A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services. . . .

 

* * * * *

 

ER 7.1  Communications and Advertising Concerning a Lawyer's Services

 

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(r)  A lawyer . . . may be recommended,  employed, or paid by, or may cooperate with, one of the following offices or organizations that promote the use of his services. . . if there is no interference with the exercise of his independent professional judgment in behalf of his client:

 

* * * * *

 

            (4)  any bona fide organization that recommends, furnishes or pays for legal services to its members or beneficiaries, provided the following conditions are satisfied:

 

                        (A)  such origination, including any affiliate, is so organized and operated that no profit is derived by it from the rendition of legal services by lawyers, and that, if the organization is organized for profit, the legal services are not rendered by lawyers employed, directed, supervised or selected by it, except in connection with matters where such organization bears ultimate liability of its members or beneficiary. . . .

 

OPINION

 

There are ethical problems with the Company's  proposed arrangement.  Several Ethical Rules are implicated, and there are prior opinions of the Committee on the Rules of Professional Conduct that are instructive.  The issues relate to the employment by the Company, the independence of the Attorney, the fee splitting with the Company, the referral by the Company, and the Attorney's relationship with nonlawyers.

 

ER 1.8  Conflict of Interest:  Prohibited Transactions

 

* * * * *

 

(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

 

            (1)  the client consents after consultation;

 

            (2)  there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

 

            (3)  information relating to representation of a client is protected as required by ER 1.6.

 

The issue under this rule is whether there is interference with the lawyer's independence of professional judgment.  In the proposed situation, the Company would be paying the Attorney's bankruptcy fees on behalf of the Taxpayer.  In addition, the Attorney would be an employee of the Company as part of his dual role.  This creates at least the appearance of a potential conflict.

 

In the proposed situation, the Attorney would share fees with the Company, or, more specifically, the Company would share with the Attorney the fee charged to the Taxpayer up front.  This appears strictly prohibited by ER 5.4(a), which prohibits a lawyer from sharing legal fees with a nonlawyer.

 

In addition, the Attorney would arguably have formed a "partnership' with the Company, which is owned and controlled by nonlawyers, when one of the activities of the Company consists of the practice of law.   The Committee on the Rules of Professional Conduct in the past has construed "partnership" very broadly, and despite the fact that the proposed arrangement contemplates an employer/employee arrangement, it seems to fit within the umbrella of the broad meaning of "partnership" in this context.  See Formal Opinion No. 93-01, discussed below.  Moreover, the Company wishes to hold itself out as supplying one-stop shopping for the Taxpayer, and wishes to represent that it will solve tax situations either through negotiation or through bankruptcy; solving tax issues through bankruptcy involves legal advice and legal services so the Company would be holding itself out as a provider of legal services.

 

Finally, ER 5.4(c) prohibits the Company from directing or regulating the Attorney's professional judgment in rendering legal services.  While perhaps the Company could comply with this rule by playing no role whatsoever in the Attorney's services to the client, the way the proposed arrangement is structured, EAs, who are nonlawyers and employees of the Company, would already have made some recommendations regarding bankruptcy services, which are legal services, prior to the time that the Taxpayer is referred to the Attorney.  Also, we cannot forget that the Company employs the Attorney in another capacity to negotiate with the IRS, and thus has control as an employer over the Attorney in that capacity.  Accordingly, the proposed arrangement may violate ER 5.4(c). 

 

ER 7.1(r) also applies to the proposed arrangement.  It concerns lawyer referral services.  The proposed arrangement involves the Company referring Taxpayers to the Attorney and paying the Attorney's fees for the Taxpayer, presumably out of funds collected from the Taxpayer up front as part of the one-stop shopping service.

 

Also, under ER 7.1(r)(4)(E), the beneficiary must have the option of selecting other counsel, among other rights, and the organization must file annual reports with the appropriate disciplinary authority describing the details of its arrangement.  While at first blush, it may appear that the proposed arrangement does not fit under ER 7.1, the rule has been interpreted broadly in the past.  Under the proposed arrangement, the Company operates for profit, refers the Taxpayers to the Attorney, the Attorney is the Company's employee, and the Company does not bear the ultimate liability.

 

In Formal Opinion No. 85-07, the Committee on the Rules of Professional Conduct considered a somewhat similar arrangement between a law firm (as opposed to a single attorney) and a company providing services related to employment compensation matters, including representation before DES.  In the opinion, the Committee explained the application of the predecessor to ER 7.1(r)(4)(A) to the situation and found that the situation violated ER 7.1 with regard to referral to and supervision of attorneys, and ER. 5.4(a) with regard to fee splitting. 

 

In Formal Opinion No. 93-01, the Committee on the Rules of Professional Conduct considered another somewhat analogous situation in which an attorney proposed to associate with a nonlawyer business that provided complete eviction services.  In that opinion, and other formal opinions referenced therein, the Committee explained that the proposed arrangement was governed by ER 5.3 with regard to a lawyer's responsibility for nonlawyer assistants, despite the fact that the company in the proposed arrangement contracted directly with the customers.   Formal Opinion 93-01 stated:

 

"[T]he lawyer would violate ER 5.3 in so cooperating in view of the fact that the consulting service was a completely independent entity, and that the lawyer had no means of ensuring that the consulting service's conduct was compatible with the lawyer's professional obligations. . . [A]n attorney may not provide legal services in association with a nonlawyer unless the nonlawyer's activities relating to the lawyer's representation of the client are subject to the attorney's supervision and control."

 

Formal Opinion 93-01 also cites to Matter of Galbasini, 163 Ariz. 120, 786 P.2d 971 (1990) (lawyer who accepts work from nonlawyer debt collection agency, and who fails to supervise nonlawyer assistants, violates ER  5.3).  Accordingly, under the logic of Formal Opinion No. 93-01 and Galbasini, the instant proposed arrangement may also violate ER 5.3 because the Attorney does not have supervision and control of the nonlawyer EAs. 

 

This opinion does not address the propriety of the arrangement in the unique context of bankruptcy, which would be governed by various sections of Tittle 11 of the U.S. code, including Sections 110, 327 and 330, and Bankruptcy Rules 2014 and 2016.  Application of these sections and rules to the proposed arrangement involves legal questions, as compared to ethics questions, which are outside of the Committee's jurisdiction.

 

CONCLUSION

 

On the facts presented and based on the foregoing, the arrangement proposed potentially violates Ethical Rules 1.8, 5.3, 5.4 and 7.1, as explained in  prior formal opinions regarding the association of lawyers with nonlawyers.

 



[1]Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.  © 1996 State Bar of Arizona.