State Bar of Arizona Ethics Opinions
91-19: Financial Assistance to Client
Law firm's proposed guaranteeing of repayment of a loan by one of its clients to another client (who is in dire financial need) held ethically improper as violative of ER 1.8.
A client of the inquiring law firm is in dire financial need. The firm has represented this client in connection with injuries suffered in two different accidents which occurred in 1989 and 1990. For injuries sustained in the 1989 accident, an action has been filed and the action has been set for trial in the late summer of 1991. The client and his wife have lost their car and have been threatened with the loss of their home. They have tried unsuccessfully numerous methods to borrow money. Another client of the law firm has offered to loan the first client $10,000 at 18% annual interest. The lender is requesting that the law firm guarantee repayment of the loan should the client be unable to pay the debt. The loan would be due and owing to the lender regardless of the outcome of the case.
May the law firm ethically guarantee repayment of the loan to the client?
ETHICAL RULE INVOLVED
ER 1.8. Conflicts of Interest: Prohibited Transactions
(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 1.8(e) specifically forbids a lawyer’s furnishing financial assistance to a client in connection with pending or contemplated litigation except for advanced costs and expenses for which a non-indigent client must be ultimately responsible. ER 1.8(e) (1). ER 1.8(e) (1) of the original A.B.A. version of the Model Rules of Professional Conduct provides:
"a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter"
This language clearly permits a lawyer to advance expenses of litigation for a client, with the repayment to be made from the amounts ultimately recovered in the litigation. The Arizona Supreme Court refused to adopt this language and instead followed the predecessor DR 5-103(B) which required that the client remain ultimately liable for such expenses. In Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (1979), the Supreme Court held that an attorney’s advances to a client for living expenses were improper, even though they were to be repaid out of the client’s temporary welfare stipends. The Court held this to be improper because: (1) it involved the attorney’s securing an interest in the underlying litigation which might result in his placing his interest before that of his client, and (2) the loaning of money to clients might constitute an improper inducement for prospective new clients to employ the attorney. In Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (1979), an attorney was disciplined, inter alia, for making cash payments to his client. The Court held that this violated DR 5-103 (A) and (B) because it could constitute an improper inducement to get clients to employ the attorney since it would involve a lesser financial obligation in case the litigation should be lost.
In our Opinion No. 89-03 (April 18, 1989), we held it ethically permissible for an attorney representing a pro bono client to make a monetary gift to the client for food and to pay bills. The basis of that opinion was that the attorney was not ethically prohibited from making the gift to a pro bono client. The gift of money was deemed permissible since the gift was not related in any way to the attorney’s representation nor dependent on the outcome of the pending action, and was made with no expectation of repayment. The gift must result entirely from a charitable motivation.
In our Opinion No. 91-14 (May 8, 1991) we found that it was not ethically permissible for a law firm to advance money to a client for her medical care while her case was pending. We stated that the firm could make a gift of money based upon charitable motivation if it had already been retained before there was any discussion of the gift. Also, there had to be no requirement nor expectation by the firm of any future repayment of the amount given.
In the present fact situation, the guarantee of repayment of the money loaned, along with the credit-worthiness of the law firm, are necessary before the loan will be made. It is the guarantee and the credit-worthiness of the law firm which constitute its financial assistance to its client.
While the guaranteeing of repayment of the money loaned is for humanitarian purposes, it would only be a mitigating factor in disciplinary proceedings, and does not detract from its being a violation of an Ethical Rule. Matter of Carroll, 124 Ariz. 80, 85, 86, 602 P. 2d 461, 466, 467 (1979).
The law firm’s guaranteeing of the proposed loan in the present case would violate the Ethical Rules because: (1) the guaranteeing of repayment of the loan to assist with the client’s living expenses might cause the firm to pressure the client into a settlement so as to assure that the firm would not be liable on the guarantee rather than doing what is best for the client; and (2) the news of this transaction might constitute an improper inducement for prospective clients to employ the law firm.
We are not unmindful of the fact that the State of Minnesota has adopted a rule which permits a lawyer to guarantee a loan to a client which is necessary to enable the client to withstand a litigation delay. Rule 1.8 (e) (3). This committee does not believe that the Arizona Supreme Court has yet gone this far, and feels that it is up to the Court, rather than this committee, to extend this Rule.
Accordingly, it is our opinion that the law firm’s guaranteeing of repayment of a loan to one of its clients would constitute a violation of ER 1.8(e).
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.
©State Bar of Arizona 1991