State Bar of Arizona Ethics Opinions

98-05: Confidentiality; Billing; Collection of Legal Fees; Client Files
3/1998

This opinion discusses a lawyer's ethical obligations when he/she desires to sell his client accounts receivable to a factor with the consent of each client after consultation. [ERs 1.6, 1.7, 1.8, 5.4]

FACTS[1]

 

A lawyer desires to sell his client accounts receivable to a factor with the consent of each client after consultation.  The factoring agreement between the lawyer and the factor would also permit the factor to: 1) resell the client accounts receivable to additional persons at the sole discretion of the factor; 2) directly contact each client to request or demand payment; and 3) have sole or joint access to a lock box into which mail from particular clients to the lawyer containing or possibly containing checks would be received.

 

Questions Presented

 

1.  Whether a lawyer may sell his client accounts receivable toa  factor with the consent of each client involved after consultation?

2.  Whether a lawyer may enter into a factoring agreement that permits the factor to resell the client accounts receivable to third persons at the sole discretion of the factor?

3.  Whether a lawyer may enter into a factoring agreement that permits the factor to directly contact each client to request and demand payment?

4.  Whether a lawyer may enter into a factoring agreement that provides for the creation of a "lock box" into which mail from particular clients to the lawyer containing or possibly containing checks would be received and to which the factor would have sole access or joint access with the lawyer?

 

Relevant Ethical Rules

 

ER 1.6             Confidentiality of Information

 

(a)  A lawyer shall  not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation. . .

 

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(d)  A lawyer may reveal such information to the extent the lawyer reasonably believes necessary to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceedings concerning the lawyer’s representation of the client.

 

ER 1.7            Conflict of Interest:  General Rule

 

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(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities. . . to a third person, or by the lawyer’s own interests, unless:

 

(1) the lawyer reasonably believes the representation will not be adversely affected; and

 

(2) the client consents after consultation...

 

ER 1.8             Conflict of Interest:  Prohibited Transactions

 

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(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.

 

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ER 5.4             Professional Independence of a Lawyer

 

(a) A lawyer or law firm shall not share legal fees with a nonlawyer . . . .

 

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

 

Opinion

 

The inquiring lawyer desires to enter into a factoring agreement calling for the outright sale of client accounts receivable to a factor, with the consent of each client involved after consultation.[2]  The lawyer suggests that this is a common financial relationship in modern commercial practice outside the practice of law.[3]

 

A typical factoring agreement of this sort would require the factor to buy from the lawyer only certain of his client accounts receivable – a receivable that only the factor deems acceptable.  Before client accounts receivable could be sold in the secondary market, the factoring agreement would probably call for the lawyer to transfer and to sell to the factor all of the lawyer’s right, title, and interest in and to the client accounts receivable as well as the proceeds to be received therefrom.  The factoring agreement may insist that the lawyer assign the right to the factor to any possessory attorney’s lien, and to sue in the lawyer’s name for any balance due on any account purchased.  The lawyer may be required to appoint the factor with the lawyer’s irrevocable power of attorney coupled with an interest.  This then would permit the factor to resell the client accounts receivable to additional persons at the sole discretion of the factor and to permit the factor to directly contact  each client to demand payment of the receivable.  The creation of a lock box would be typical of a factoring agreement into which mail from particular clients to the attorney containing or possibly containing checks would be received.  Significantly, the purchase price or factoring charge for the sale of the client accounts receivable would be at a discount.  In some factoring agreements there is a provision for a remittance of a percentage of amounts collected in excess of the discount from the factor to the lawyer.

 

The lawyer probably will be required to indemnify the factor against any dispute relating to the quality of the legal services rendered and to warrant that each client receivable represents an actual existing bona fide indebtedness to the lawyer and that there are no disputes, offsets, counter claims, deductions, conditions or discounts of any kind against the accounts shown.  The lawyer shall in effect be required to warrant that each client receivable is fixed, liquidated, and undisputed, and that the fees reflected in the accounts are reasonable.  The lawyer may well have to warrant that he has no information or reason to suspect that any of the clients of the lawyer is other than a good financial risk.

 

Relevant Prior Ethics Opinions

 

Given these assumptions, the Committee reviews its prior opinions.  In Opinion No. 89-10, the Committee stated that it was ethically proper for a lawyer to accept credit cards for the payment of legal fees and retainers.  The Committee held that the acceptance of credit cards does not infringe upon the confidential nature of communications between a lawyer and a client, nor does it represent a conflict of interest or interference with the lawyer’s professional independence.  The lawyer and the client must enter into an agreement as to which party will bear the lender’s discount and the client must fully understand the terms of this agreement.  The Opinion did not, however, require client consent after consultation respecting disclosure by the lawyer to a credit card company of the client’s account balance.  This type of disclosure was apparently deemed for the client’s benefit and therefore impliedly authorized under ER 1.6(a).  The Opinion did state that the arrangement should be without recourse to the lawyer.

 

Under the credit card financing plan, the lawyer would receive at least part of his payment directly from the card issuing lender rather than from the client, who would then be obligated to pay the lender.  Ethical Rules 5.4(c), 1.7(b), and 1.8(f) allow third-party payment of fees so long as (1) the client consents, (2) there is no interference with the lawyer’s professional judgment, and (3) confidential information is protected.  Opinion No. 89-10, page 6.

 

In Opinion No. 92-04, the Committee opined that it was ethically proper for a lawyer to furnish his bank, as part of his line of credit and other financial arrangements, with a list of his accounts receivable, identifying the name of the client owing the account, the account balance and the age of the account, so long as consent of each client after consultation was obtained in advance of any such disclosure.  The opinion did not discuss whether the lawyer’s underlying time records in support of the account could be disclosed.

 

Opinion Nos. 70-20 and 71-34 required that agreements between law firms and lenders be without recourse against the attorney.

 

In Opinion No. 94-11, the Committee concluded that under Ethical Rules 1.6 and 1.8,  client confidences may be disclosed only after consultation and consent, and thus a lawyer may only give information to a credit reporting agency or engage a collection agency that uses a credit reporting agency when the lawyer has the prior consent of the client.

 

Discussion

 

Consideration of whether the proposed factoring agreement would violate ER 5.4(a) and its proscription against a lawyer sharing legal fees with a non-lawyer, may be found In the Matter of Struthers, 179 Ariz. 216, 988 P.2d 789, 796, 797 (Ariz. 1994).  The Supreme Court of Arizona held that it is improper for a lawyer to transfer all fees from the lawyer’s trust account to an operating account of a child support debt collection agency, and, thereafter, for the lawyer to divide the fees with the agency after paying expenses of the agency.

 

At first blush, (i) if a lawyer can ethically receive credit cards for payment of legal fees and retainers pursuant to an agreement with his client as to which party shall bear the lender’s discount, and (ii) if a lawyer can ethically furnish to his bank as part of his line of credit a list of client accounts receivable, identifying the name of the client, the account balance, and the age of the account, so long as the lawyer receives prior client consent after consultation, and (iii) if a lawyer can ethically give information to a credit reporting agency and engage a collection agency that uses the credit reporting agency when the lawyer has the prior informed consent of the client, it would appear ethical for a lawyer to sell his client accounts receivable to a factor with the consent of each client after consultation.

 

But here, in order to implement the factoring agreement, the lawyer shall be forced to provide the factor with more information about the client than in the credit card, the bank line of credit, and even the collection agency contexts.

 

It is inconceivable that a lawyer could “sell” a client accounts receivable to a factor without disclosing time records (and probably the entire lawyer file of the client) in support of the amount of the receivable being sold.  In Opinion No. 92-04, the Committee did not expressly allow disclosure of time records (or the file) to a bank for line of credit purposes.

 

In furnishing time records (or the file) in support of the sale of a client account receivable, the lawyer not only falls within the purview of ER 1.6 and the confidentiality requirement of “information relating to representation of a client”, but also within the body of law involving the rules of evidence and the attorney-client privilege.

 

The attorney-client privilege applies in judicial and other proceedings in which a lawyer may be called as a witness or otherwise required to produce evidence concerning a client.  The rule of client-lawyer confidentiality applies to situations other than those when evidence is sought from the lawyer through compulsion of law.  The confidentiality rule applies not merely to matters communicated in confidence by the client but also to all information relating to the representation, whatever its source.  Comment to ER 1.6.

 

The term “consultation” is defined as “communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.”  Rules of Professional Conduct, Preamble-Terminology.  In accordance with this definition, and prior to the sale of a client account receivable by a lawyer to a factor, the lawyer is obliged to communicate information to the client that would include the desire of the lawyer to sell the client account receivable to a factor, the name of the factor, the amount of the discount the lawyer is taking, the portion of the discount that the client must nevertheless pay to the factor, and verification that the account is fixed, liquidated, and undisputed by the client.  It would appear improper to sell a client account receivable to a factor where the account is work in progress, where the ultimate amount of the fees for the legal services to be performed is unknown, the result is unknown, and the time of completion is unknown.  The client should be informed that the factor may resell the client account receivable to additional persons who may be known or unknown at the sole discretion of the factor, and that the factor may well directly contact the client to request and demand payment.  The client must be informed that the sale is without recourse to the lawyer.

 

The client would also be asked to waive the attorney-client privilege and give permission for the factor to review time records and the entire client file.  The client must also be informed that the factoring agreement provides for the creation of a “lock box” into which mail from the client to the lawyer containing or possibly containing checks would be received and the factor would have sole access or joint access with the lawyer.

 

The lawyer could not conceivably anticipate and communicate to the client all of the factual permutations and legal implications of such a sale to a factor. It is unlikely any lawyer could assess the uncertainty of client accounts receivable being sold into the secondary market replete with the time cards, file, correspondence, legal memoranda, and all other confidential matters relating to the client, sufficiently, for the client to appreciate the significance of what he is being asked to do.  There can be no benefit to the client.  Moreover, the client account receivable being sold most likely is problematic.  Would a lawyer sell at a steep discount a 30-day client account receivable from a Fortune 500 Company?  The temptation would be to sell client accounts receivable that are 90 plus days.  Other tempting client accounts receivable to sell would be in the personal injury or bankruptcy contexts.  In the personal injury context, however, that work is not completed.  The receivable is not fixed or liquidated and the client would be asked to give consent when he could not know whether the work being performed could be disputed.  In the bankruptcy context, the attorney may well run afoul of the requirement of prior approval by the Bankruptcy Court of any fee payment to a professional.

 

In sum, the proposal would be unethical because the outright sale of client accounts receivable would involve the wholesale disclosure by a lawyer of confidential information relating to representation of a client to the vagaries of the marketplace.

 

Moreover, the proposed sale would be unethical because the lawyer would be sharing fees with a non-lawyer in violation of ER 5.4(a).  Unlike the bank line of credit situation, where the bank charges interest only to the lawyer in consideration of money advanced, the factor, in effect, would share in the fee itself where the factoring agreement contemplates that the factor shall recoup the discounted fee portion of the client’s account receivable.

 

Conclusion

 

It is unethical for a lawyer to sell his client accounts receivable to a factor, even with the consent of each client involved after consultation, because the client cannot have received from the lawyer sufficient information regarding the effects of disclosure.

 

It is unethical for a lawyer to enter into a factoring agreement that permits the factor to resell the client accounts receivable to additional persons at the sole discretion of the factor because neither the lawyer nor the client may reasonably contemplate the significance of releasing confidential information in support of the client accounts receivable to unknown persons.

 

It is unethical for a lawyer to enter into a factoring agreement that permits the factor to directly contact each client to request and demand payment because the factor could rely on otherwise confidential and privileged information in enforcing payment of the client accounts receivable.

 

It is unethical for a lawyer to enter into a factoring agreement that provides for the creation of a lock box into which mail from particular clients to the lawyer containing or possibly containing checks would be received and to which the factor would have sole access or joint access with the lawyer because the lawyer could not sufficiently inform the client of the repercussions of all communications from the client to the lawyer being furnished to a factor.

 

It is unethical for a lawyer to enter into a factoring agreement calling for the outright sale of client accounts receivable because the agreement constitutes a sharing of legal fees by a lawyer with a non-lawyer. 

This opinion should not be interpreted as disturbing, in any respect, this Committee’s Opinion No. 89-10 (it is ethically proper to accept credit cards for the payment of legal fees and retainers); Opinion No. 92-04 (it is ethically proper for a lawyer to furnish his bank as part of his line of credit and other financial arrangements with a list of his accounts receivable, identifying the name of the client owing the account, the account balance and the age of the account, so long as consent of each client after consultation is obtained in advance of any such disclosure); and Opinion No. 94-11 ( a lawyer may ethically give information to a credit reporting agency or engage a collection agency that uses a credit reporting agency when the lawyer has the prior consent of the client).



[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.  ã State Bar of Arizona 1998