Ethics Opinion 319
Purchase by a Lawyer of a Legal Claim From a Nonlawyer
The D.C. Rules of Professional Conduct do not bar the purchase by a lawyer (not acting in the course of representing a client) of a legal claim (i.e., a chose in action) where the seller is not and has not been the lawyer’s client. However, if the seller is not represented by counsel or otherwise experienced in dealing in choses in action, the lawyer should be careful to avoid actions by which in the course of negotiation and sale the lawyer may be deemed to be providing legal advice to the seller. Such actions risk creation of a lawyer-client relationship between buyer and seller that would transform the transaction into one governed by Rule 1.8(a).
- Rule 1.8(a) (Business Transaction With a Client
- Rule 8.4(c) (Lawyer Misconduct)
This Committee has received an inquiry asking whether a lawyer may purchase a chose in action1 from a nonlawyer who is not the lawyer’s client, with the lawyer acting either on his or her own behalf or as an agent for a corporation created and controlled by the lawyer. In 1931, the ABA Committee on Professional Ethics (predecessor of the present ABA Standing Committee on Ethics and Professional Responsibility) concluded that a lawyer could not buy choses in action. ABA Formal Opinion 51 (Dec. 14, 1931). The precise question referred to that committee was whether a lawyer might ethically purchase “judgments, notes[, or] other choses in action . . . from bankrupt estates for much less than their face value and . . . then collect them at large profit [to the lawyer].” With one member dissenting, the ABA Committee concluded that this practice would violate Canon 28 of the Canons of Professional Ethics by stirring up strife and litigation.2 The ABA Committee thought that its result, though it deprived lawyers of the opportunity to “enter a speculative field which might be profitable and which is open to laymen,” was “entirely consonant” with the “dignity of the profession.”
It does not appear that the D.C. Bar has ever considered this issue, and the topic is not at least directly covered in the D.C. Rules of Professional Conduct or the ABA Model Rules of Professional Conduct. Under D.C. law, a chose in action can be assigned, and the assignee may sue in the assignee’s name. D.C. Code § 28-2304.3 The question is whether a lawyer may do what others may do under this D.C. law. Of course the ABA’s Canons of Ethics in effect in 1930 have long since been replaced, first by the ABA Model Code of Professional Responsibility and then by the Model Rules of Professional Conduct, a modified version of which is in force in the District of Columbia. We conclude that while prudence will often counsel lawyers strongly against such purchases, with some restrictions the D.C. Rules of Professional Conduct do not forbid a lawyer’s purchase of a chose in action.
If X has a chose in action, then X has a legal claim against another that might be pursued in court. Selling the chose in action is a way for X to obtain some value for this claim without having to bear the cost and risk of litigation. It thus may be a desirable goal for X. A lawyer with an understanding of litigation might be an apt purchaser for such a claim. Accordingly the sale transaction would appear to be potentially beneficial to both. With an important reservation that we discuss below, we do not see any ethical bar to an otherwise legal purchase by a lawyer from a nonlawyer of a chose in action, where the nonlawyer is not and has not been a client of the lawyer.
The concerns expressed in ABA Formal Opinion 51 do not support a conclusion under today’s rules that there is anything intrinsically wrong with the purchase of a chose in action by a lawyer from a nonlawyer who is not a client. As we noted above, the sale may be a positive good to the seller. In general, we do not see any concerns in a lawyer’s seeking out such a transaction, and there is certainly no concern expressed in our Rules about such a transaction where the seller is not the lawyer’s current or former client. Consistently with that view, comment b to § 36 of the Restatement of the Law Governing Lawyers (2000) specifically notes that the Restatement does not disapprove a lawyer’s purchase of a chose in action as long as the seller is not a current or former client of the lawyer.4
There is no equivalent in the D.C. Rules of Professional Conduct to the former Canon 28, which was originally adopted in 1908. Indeed that Canon may be said to have evidenced or reinforced an inequity that used to exist but, we believe, no longer exists in the District of Columbia and many other jurisdictions. Under Canon 28 “stirring up litigation” was not really an inherent evil on all sides. Under the terms of that Canon a lawyer was explicitly allowed to initiate a recommendation of litigation to a person with whom the lawyer was in a position of “trust”—that is to say, to an existing client. The Canon merely forbade lawyers from recommending litigation to a non-client (unless a family member by blood or marriage). Without offending Canon 28, therefore, a person or a corporation with the means to employ lawyers generally could be kept advised about such litigation opportunities by existing counsel without having to know enough to request that information. Under that Canon it was only a person without such means and without existing counsel who could not receive such advice from a lawyer—unless well-enough informed to ask for it.
Our Rules of Professional Conduct afford more consideration for persons who may have significant legal problems or opportunities but who do not have existing counsel and a lawyer may advise a prospective client of the possibility of litigation as long as the requirements of Rule 7.1 are met. Thus the concern expressed in ABA Opinion 51 that a lawyer buying a chose in action from a non-client was “stirring up litigation” does not resonate under our existing Rules, and the reasoning of ABA Formal Opinion 51 does not form any part of our opinion herein.
That does not mean that there are no provisions of the D.C. Rules of Professional Conduct that would bear on the action by a lawyer of purchasing a chose in action from a nonlawyer who was not a client. First, the provisions of Rule 8.4 govern all conduct of lawyers, whether client-related or not. Rule 8.4(c) declares it to be misconduct for a lawyer to engage in conduct “involving dishonesty, fraud, deceit, or misrepresentation.” This places obvious limits on the negotiation and execution of any transaction, including one with a non-client.5
A critical feature of the inquiry is the statement that the seller of the chose in action is not the lawyer’s client and that the lawyer is not acting on behalf of a client when engaged in the purchase.6 If the seller were a client, then the severe restrictions of Rule 1.8 would apply to any business transaction between the lawyer and client, including the purchase of a chose in action from the client. Under Rule 1.8(a), any business transaction between a lawyer and a client must be objectively fair and reasonable to the client and documented in a writing that can reasonably be understood by the client, and the client must consent in writing. Moreover, the client must be “given a reasonable opportunity to seek the advice of independent counsel” for the transaction.
Although the inquiry states that the seller would not be a client, we sound a note of caution on this point. There are many circumstances in which there would be no difficulty in accepting the assumption that the seller and the lawyer-purchaser would be at arms’ length and negotiating as equals. The seller may be engaged in business and advised by other counsel or be experienced in assessing the value of such assets as the chose in action. In such situations, the lack of a lawyer-client relationship between buyer and seller would be apparent.
On the other hand, where the seller is an ordinary person who has a chose in action that the lawyer views as potentially valuable, there may well be a significant disparity of knowledge between the lawyer as a prospective purchaser and the lay seller. Buying a chose in action is not like buying a used car; almost everything about the existence and worth of a chose in action involves a legal issue. The lawyer-purchaser of a chose in action is in a position of expertise in understanding and assessing the worth of the purchase. The seller, if an ordinary person not represented by counsel, presumably lacks this knowledge. In a negotiation between them the lawyer-purchaser may make (or appear to make), and the seller may rely on, representations concerning such matters as the worth of the chose in action, the difficulty of success, and so on.
In addition, there may be other factors further increasing the disparity of bargaining power between them. If the lawyer as buyer is confident enough of ultimate recovery on the chose in action to make a present, unconditional payment to purchase it, then the seller might very well also have the option, in addition to selling the claim, of finding a lawyer to represent the seller on a contingent fee basis and with the possibility (though not a certainty, of course) of obtaining a larger ultimate recovery at an indefinite point in the future.7 A seller contemplating selling the chose in action outright rather than becoming a plaintiff in contingent-fee litigation may be motivated by particularly pressing and immediate needs, such as for funds to meet other obligations.
In such potentially highly charged situations, the lawyer would face a grave risk in proceeding, and we think that lawyers would be well advised to avoid situations in which the seller is a person not represented by counsel, for the following reasons. Because a negotiating buyer typically urges the seller to accept, it would also be difficult in many circumstances to distinguish between such representations made in negotiating such a transaction and the provision of legal advice. The seller may not understand that the lawyer’s adversity in the sale transaction should be a warning that the lawyer may not have the buyer’s interests at heart in stating legal reasons or providing legal advice to the seller as to whether to agree to the transaction. In such circumstances—even if everything said by the lawyer-purchaser were absolutely correct—there would be a danger that representations as to legal questions made by the buyer and reasonably relied on by the seller would create ambiguity regarding the existence of a lawyer-client relationship between the two, converting the situation to one in which Rule 1.8 applied. In Opinion No. 313 we recently discussed the factors that may govern the creation of a lawyer-client relationship. We pointed out that no formal arrangement or retainer is necessary, and that the critical feature is the putative client’s reasonable expectation that the lawyer is providing legal advice on which the lawyer expects the putative client to rely, or gives the putative client reason to rely.
This doctrine was applied in circumstances similar to those we are discussing in Nelson v. Nationwide Mortgage Corporation, 659 F. Supp. 611, 617-18 (D.D.C. 1987). There, a borrower who had executed loan and mortgage documents asserted that in doing so she had relied on statements explaining the documents made by the lender’s attorney at the loan closing. The borrower later sued the attorney for legal malpractice in failing to explain the documents adequately. The lawyer moved to dismiss on the ground that he was not the borrower’s lawyer. Applying Virginia law, the District Court for the District of Columbia held that a claim for legal malpractice was stated because the plaintiff might be able to demonstrate that her “reliance [on the lawyer’s statements] was both reasonable and foreseeable.” Id. at 618; see Restatement of the Law Governing Lawyers, § 14 and comment f (1998). We can imagine that a similar result could well arise where the seller of a chose in action relied on statements of a lawyer-purchaser.
The question of what circumstances give rise to a lawyer-client relationship is one of substantive law rather than professional responsibility under the Rules of Professional Conduct, and accordingly we go no further than to suggest the significant possibility of such a result. But, as noted above, the existence of a lawyer-client relationship would trigger the applicability of Rule 1.8, which imposes strict substantive and procedural requirements on commercial transactions between a lawyer and a client.8 The lawyer-purchaser in such circumstances would find himself or herself in difficult circumstances, as Rule 1.8(a) requires a written waiver from the client, an opportunity for the client to obtain independent counsel, and that “the transaction [be] . . . fair and reasonable to the client and transmitted to the client in a manner which can be reasonably understood by the
client. . . .”
Therefore, while the D.C. Rules of Professional Conduct do not forbid a lawyer from purchasing a chose in action from a nonlawyer, the purchasing lawyer should be aware of the risk that, given the legal nature of the thing sold, the seller may rely on representations by the buyer as to legal matters and later claim that an attorney-client relationship resulted, imposing Rule 1.8 requirements. To avoid misunderstandings and to protect both the seller and the buyer, we recommend that if possible the would-be purchaser seek to deal only with sellers who are represented by counsel and that the purchaser strongly suggest representation by counsel for sellers who are not represented. In the absence of such independent representation, the risk is that Rule 1.8 will later be argued to have applied, with the consequences, among others, that the deal will be subject to examination (probably after the fact and perhaps when the deal has proven decidedly favorable to the lawyer-purchaser) as to whether it was objectively fair and reasonable to the seller pursuant to Rule 1.8(a)(1).
If the seller refuses to obtain independent representation, it may be possible for the purchasing lawyer to (1) convince the seller to disclaim any intention of relying on the purchaser for legal advice or (2) avoid the making of representations in negotiation concerning the legal questions underlying the valuation of the chose in action, and by either or a combination of these to avoid a later claim by the seller of a lawyer-client relationship. However, we cannot state with certainty what would or would not be sufficient to establish that an unrepresented person had disclaimed such a relationship (particularly in a situation where it would be most likely to be raised—namely, where the deal had turned out to be markedly unfavorable to the seller), because, as pointed out above, that is a question of substantive law rather than professional responsibility.
1. A chose in action is a right to recover personalty—money or other personal property—by a lawsuit.
2. Canon 28 provided in part:
It is unprofessional for a lawyer to volunteer advice to bring a lawsuit, except in rare cases where ties of blood, relationship or trust make it his duty to do so. Stirring up strife and litigation is not only unprofessional, but it is indictable at common law. It is disreputable to hunt up defects in titles or other causes of action and inform thereof [sic] in order to bring suit or collect judgment, or to breed litigation by seeking out those with claims for personal injuries or those having any other grounds of action to secure them as clients, or to employ agents or runners for like purposes. . . .
3. This provision states:
§ 28-2304. General assignments including choses in action.
In a general assignment which includes choses in action, it is not necessary to execute a separate assignment of each chose in action, but the assignee, by virtue of the general assignment, may sue in his own name on the several choses in action included therein.
4. Section 36 of the Restatement describes those financial transactions that a lawyer may not enter into with a client. Comment b thereto notes that this section "does not forbid a lawyer from taking an assignment of the whole [legal] claim [against another] and then pressing it in the lawyer’s own behalf, so long as the lawyer has not represented the claim’s original owner in asserting the claim."
5. This of course does not exhaust the prohibitions in Rule 8.4—other possibly relevant parts would include the ban on criminal activity that "reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects;" that on engaging in conduct that seriously interferes with the administration of justice, and that forbidding stating or implying an ability to influence improperly a government agency or official. See Rule 8.4(b), (d), and (e).
6. The second question asked by the inquirer is whether a lawyer could incorporate a business for the purpose of purchasing a chose in action from an individual and then, "identify[ing] himself as an attorney acting as an agent for a corporation," attempting to purchase the chose in action from the individual. We take this as an alternative question—that is, in the event that our conclusion is that the inquirer cannot purchase the chose in action directly from the seller, could he instead form a corporation to do that and then personally serve as the corporation’s agent. Because we answer the first question in the affirmative with limitations that would also apply to the second, we do not see any need to examine the second question in detail. Nonetheless we note that if such a corporation were formed and a lawyer served as its "agent" for this purpose, the lawyer would most likely be deemed to be acting as a lawyer with the corporation as client. See Rule 49(b)(2) of the Rules of the District of Columbia Court of Appeals. This would mean that in the lawyer’s dealings with the seller, those Rules of Professional Conduct that limit behavior of a lawyer serving a client would apply—most notably including Rule 4.1 (duty of truthfulness in statements to others when representing a client) and Rule 4.3 (preventing a lawyer who is representing a client from (a) giving advice to an unrepresented person adverse to his client other than the advice to secure counsel, and (b) stating or implying that the lawyer is disinterested in the matter while also requiring the lawyer to clarify the situation if the third person does not understand it). Rule 4.3 would severely constrict what the lawyer could say to an unrepresented person about the desirability of entering into the transaction.
The third question posed by the inquiry is, we take it, a further alternative: whether the lawyer could serve as an attorney to a corporation advising it whether a chose in action held by a third party might have value to the corporation. This seems to us to be a traditional attorney-client relationship and completely innocuous on the facts presented, as the lawyer in this case has no apparent contact with the owner of the chose in action (an issue might be presented if the lawyer used a nonlawyer to communicate the lawyer’s views to the seller, but we see no need to delve into that completely hypothetical situation).
7.See the discussion in comment b to § 36 of the Restatement, supra.
8. Interestingly, ABA Opinion 51 did not involve any issue concerning sale of a chose in action by an unsophisticated, unrepresented person. The inquiry there involved a lawyer purchasing choses in action "from bankrupt estates," which is to say not from ordinary persons but from trustees in bankruptcy, whose obligation was to raise as much money from the estates for creditors as possible. Presumably those trustees had both sophistication and access to independent legal advice and could not be gulled into taking much less than what the choses were worth. Moreover, because trustees in bankruptcy would be able to make the claims in court if they could not have sold them, the question of whether to sell the choses in action would appear to have been more one of efficiency to the bankrupt estate than whether the claim would be made or not. Thus the logic of the opinion, which accuses the purchasing lawyer of stirring up litigation, is somewhat impenetrable.