Make Money Mondays: Ethical Use of Law Firm Finance Companies

One of the best ways to make money for your law firm is to find money for your clients to pay your bills.  In a previous post,  I described a number of approaches to finding money including identifying fee-shifting statutes, available insurance policies, crowdfunding and third-party financing. 

Many lawyers confuse third-party financing with litigation financing in which the lender advances money in exchange for a stake in a client’s claim. Litigation financing may carry risks  — for example, forcing an attorney to take a case to trial because the terms of the agreement render a settlement uneconomic. But third-party financing is different – it’s essentially a loan for legal services, like a car loan or a finance plan for orthodontia. Whereas litigation financing arrangements are between the law firm and the finance company, third-party financing is a transaction between the loan company and the client. 

The benefits of third-party financing are self-evident. The client borrows the money from the third-party which is remitted directly to the attorney and put into a trust account just like any other advance payment. Meanwhile, if the client misses payments on the finance loan, the company can chase down the client instead of the law firm having to do so. This in turn avoids lawsuits for non-payment by the attorney which often invite malpractice claims.   

There’s a second reason that lawyers ought to consider learning more about third-party financing: competition. Companies like Court Buddy, which helps consumers find lawyers willing to work for reduced fees now offers micro loans for legal services. If lawyer-match platforms begin to make financing de rigeur, it’s an added incentive for clients to find lawyers through those sites. By contrast, if lawyers can help clients find third-party loans, the lawyer can retain the client and charge their customary fee instead of forking up a substantial discount to accept a case through a platform.

So are third-party financing arrangements ethical?  In many circumstances yes – and as of last month, the ABA has clarified the issue with its helpful ethics decision, FormalOpinion 484  on A Lawyer’s Obligations When Clients Use Companies or Brokers to Finance the Lawyer’s Fee. The opinion describes a number of different third-party financing scenarios and concludes that lawyers may ethically refer clients to these companies in which the lawyer does not have an ownership or financial interest. If a lawyer were to acquire an ownership or financial interest in a third-party finance company, the lawyer would be deemed to be entering into a business relationship with the client and would be required to comply with Model Rule 1.8 governing business transactions.

From my perspective, referring a client to a financing company in which the law firm has an interest can give rise to an appearance of impropriety or conflicts that simply aren’t worth it. There are so many third-party financing options available that lawyers should choose those services that offer the most favorable terms to clients.

I know that I’m often critical of the ABA and other ethics regulators for imposing unnecessarily onerous requirements on lawyers -particularly solos and smalls – that place them at a competitive disadvantage. But this ABA ruling is a welcome development for access to justice and solo and small firm practice by removing the ethical uncertainty surrounding a mechanism that helps clients come up with funds to pay lawyers.  Now that the ABA has given lawyers this gift, it’s up to you to take advantage of it by identifying third-party finance companies that can help your clients.

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