State Bar of Arizona Ethics Opinions
06-05: Conflict of Interest; Advancing Cost and Expenses; Security Bond
Because it is a court cost or expense of litigation under ER 1.8(e)(1), a lawyer may advance, contingent on the successful outcome of a case, the cost of a security bond ordered posted by the court pursuant to its authority under Rule 67(d), Ariz.R.Civ.P. Similarly, if the client is indigent, a lawyer may pay for the cost of such a bond as permitted under ER 1.8(e)(2).
The inquiring lawyer represents civil plaintiffs in Arizona Superior Court. Rule 67(d), Ariz.R.Civ.P., authorizes the court, upon a defendant’s motion, to order a plaintiff to post security for the defendant’s “costs of the action” if the “plaintiff is not the owner of property within the state out of which costs could be made by execution sale.” Unless the plaintiff proves an “inability to give the security,” see Rule 67(e), Ariz.R.Civ.P., the plaintiff’s failure to post the security bond is cause for dismissal of the action without notice. Rule 67(d), Ariz.R.Civ.P. Sometimes the inquiring lawyer’s clients cannot afford to post the security bond and the inquiring lawyer wishes to advance the costs of the security bond on the client’s behalf to prevent the action from being dismissed.
Consistent with ER 1.8(e), may a lawyer representing a civil plaintiff advance the cost of a security bond for the defendant’s costs if the court orders the plaintiff to post security as authorized by Rule 67(d), Ariz.R.Civ.P.?
RELEVANT ETHICAL RULES
ER 1.7 Conflict of Interest: Current Clients
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
. . . .
(2) there is a significant risk that the representation of one or more clients will be materially limited by . . . a personal interest of the lawyer.
. . . .
ER 1.8 Conflict of Interest: Current Clients: Specific Rules
. . . .
(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, the repayment of which may be contingent on the outcome of the matter; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
. . . .
RELEVANT ARIZONA ETHICS OPINIONS
Arizona Ethics Ops. 87-7, 89-03, 91-13, 95-01, 01-07
The general rule is that a lawyer may not represent a client under circumstances that could lead to a conflict between the lawyer’s own interests and that of the client. ER 1.7(a)(2). These types of conflicts can arise when a lawyer’s financial interests compete with the client’s interest in the litigation. Thus, the Rules of Professional Conduct set forth specific rules governing the intertwining of the lawyer’s financial interests with those of the client.
Under ER 1.8(e), a lawyer may not provide financial assistance to a client in connection with pending or contemplated litigation except in two narrow circumstances. First, a lawyer may “advance court costs and expenses of litigation” and be reimbursed on a contingent basis; second, a lawyer may pay those costs and expenses on behalf of an indigent client. ER 1.8(e)(1), (2). Thus, the answer to the inquiring lawyer’s question depends on whether paying the cost of any security under Rule 67(d), Ariz.R.Civ.P., is a “court cost” or “expense of litigation.”
The Ethical Rules do not define “court costs” or “expenses of litigation.” An Arizona statute, however, defines “court costs” with some degree of specificity. See A.R.S. § 12-332 (listing various taxable costs, including those made pursuant to court order). For purposes of ER 1.8(e), Ariz. Op. 95-01 defined “costs” with reference to those charges recoverable by the successful litigant and included in the court’s judgment. The same opinion defined “expenses” with respect to those charges incurred during the course of the litigation necessary to obtain and present evidence. Id.
Reasons for restricting a lawyer’s ability to advance monies to a client generally include the avoidance of conflicts of interest that could arise when the lawyer also becomes a general creditor of the client; the avoidance of improper inducements for a client to retain a particular lawyer; and to discourage the bringing of lawsuits that otherwise could not be brought. Id. See also Ariz. Op. 91-13; ER 1.8, cmt 10. Thus, a lawyer may not advance or pay a client’s “living expenses” during the course of litigation. Ariz. Op. 95-01 (lawyer is ethically prohibited from advancing car rental expenses and car repair costs because such charges are not court costs or expenses of litigation but are merely living expenses). Similarly, a lawyer may not give a client money to pay for food and utility bills unless the client is indigent, the lawyer represents the client in a pro bono matter, and the lawyer is truly making a gift to the client with no expectation of repayment. Ariz. Op. 89-03. See also Ariz. Op. 91-14 (lawyer may pay client’s substantial medical expenses if the payment is truly a gift and the lawyer has no expectation of repayment).
On the other hand, the Ethical Rules accommodate the advancing of court costs and expenses of litigation “because these advances are virtually indistinguishable from contingent fees and help ensure access to the courts.” ER 1.8, cmt. 10.
No Arizona case or ethics opinion directly address whether the costs of security is a court cost or expense of litigation as used in ER 1.8(e). The Michigan State Bar, however, has addressed this question and concluded that
[m]oney needed to post security for costs of the opposing side in order to proceed with the claim which otherwise would be dismissed is clearly an “expense of litigation.”
Mich. Op. RI-091 (available at http://michbar.org/opinions/ethics/numbered_opinions/ri-091.htm, last visited September 13, 2006).
This opinion similarly concludes that the cost of a security bond under Rule 67(d), Ariz.R.Civ.P., is more akin to court costs and expenses of litigation than living expenses. The cost of a security bond differs from car rental, food, utility, and medical expenses, as discussed in the cited Arizona opinions, because the cost of a security bond covers taxable court costs as defined in A.R.S. § 12-332. Further, Ariz. Op. 95-01 previously defined “costs” as used in ER 1.8(e) with respect to court costs taxable at the end of litigation and included in the court’s judgment.
Even if the cost of a security bond is not a taxable cost as defined by statute, the cost of a security bond resembles an expense of litigation more than a living expense. Without the posting of the security bond and unless excused by the court, the failure to post the security bond would normally result in the dismissal of the action. Thus, the cost of the security bond is an essential litigation expense, because without it the case would normally be dismissed.
Equating the cost of a security bond with court costs and expenses of litigation is consistent with the policy of ER 1.8(e). Just as contingent fees are permitted because they facilitate access to the courts, allowing a lawyer to advance, on a contingent basis, the costs of a security bond also facilitates such access. There seems to be no substantive difference between allowing a lawyer to proceed by a contingent fee and allowing a lawyer to advance the cost of a security bond.
Because it is more like a court cost or expense of litigation than a living expense, a lawyer may advance the cost of security for a client on a contingent basis as permitted by ER 1.8(e)(1). Similarly, if the client is indigent, the lawyer may pay the cost of a security bond as permitted by ER 1.8(e)(2).
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 2006