Washington Lawyer

Speaking of Ethics: Collection Agencies and Stocks in Kind

From Washington Lawyer, November 2000

By Susan D. Gilbert

ethicsThe Legal Ethics Committee provides advice on issues that are near and dear to the lawyer’s heart and, in some instances, near and dear to the lawyer’s wallet, too. The opinions reported below, numbers 298 and 300, fall into the latter category, as they concern use of collection agencies to collect fees and acceptance of stock in lieu of legal fees. The full text of each opinion can be found on the Bar’s Web site at www.dcbar.org, under the “Legal Ethics” caption.

In Opinion 298, the committee was asked if lawyers can use collection agencies to recover unpaid fees for legal services. At issue was a plan proposed by a particular collection agency whereby the inquiring law firm would sell and assign its receivables to the agency. The collection agency, acting under its own name, would collect the receivables, including filing suit against the firm’s clients “if necessary” to collect the debt. According to its brochure, the agency’s practices were designed to “[r]emove [the lawyer or law firm] completely from the debt collection practice… .”

Reaffirming its earlier Opinion 60, the committee noted that a law firm and a collection agency can agree to share a percentage of a legal fee as compensation for the agency’s services in collecting the fee. However, the outright sale or assignment of legal debts to a collection agency raises ethical issues. The committee concluded that where, as here, a collection agency accepts such debts as its own, the agency, when collecting these debts, is required to act in a manner consistent with a lawyer’s ethical obligations.

Opinion 298 outlines these obligations. First, lawyers in the District of Columbia must make all appropriate efforts to resolve a fee dispute before the debt is referred to a collection agency. These efforts include arbitration of fee disputes, which becomes mandatory when requested by the client. See D.C. Court of Appeals Rule XIII; see also Comment [15] to Rule 1.5 of the D.C. Rules of Professional Conduct. Consequently, a collection agency that is acting on a lawyer’s behalf to collect a debt for legal services would be equally bound to the fee arbitration process as the lawyer to whom the debt is owed.

Further, Rule 1.6(d)(5), an exception to the confidentiality rule, permits a lawyer in a fee dispute to disclose client confidences or secrets, but only “to the minimum extent necessary in an action instituted by the lawyer to establish or collect the lawyer’s fee.” (Emphasis added.) Comments to Rule 1.6 place additional responsibilities on a lawyer involved in fee litigation to ensure the continued protection of a client’s confidences and secrets.

Because of the added obligations imposed by Rule 1.6 and D.C.C.A. Rule XIII, the Legal Ethics Committee concluded that a lawyer cannot sell or assign a debt where the lawyer is completely removed from the collection process. “A lawyer,” the opinion states, “ethically may not remain indifferent to the means utilized to collect his or her debts. . . . The key consideration is whether the attorney retains sufficient control over the protection process . . . to satisfy her ethical obligations.” The committee thus concluded that because the lawyer or firm lacked any control over the collection agency’s conduct in collecting a debt, the proposed plan ran afoul of the rules.

In addition to addressing the particular plan, the committee also considered the types of information that can be disclosed to a third party in any debt collection action. The starting point is Comment [11] to Rule 1.6, which permits the limited release of information from a client’s file to various outside parties (e.g., bookkeepers and accountants). Assuming the lawyer ensures that the collection agency’s practices maintain the confidentiality of the information, Opinion 298 permits the lawyer to transmit, without client consent, information necessary to establish the debt, such as fee schedules, signed retainer agreements, and promissory notes. Revealing further information about the representation can fall outside the scope of Comment [11]. Detailed billing records describing the legal work that was performed is one such example.

Opinion 300 deals with another fee-related issue—acceptance of an ownership interest rather than payment of legal fees. In this instance, a corporate client proposed that the lawyer would serve as part-time general counsel to the client’s company, and in lieu of fees the lawyer would receive a 20 percent ownership interest in the company plus a percentage of any profits.

Noting that this opinion is one of only a few instances in which the Legal Ethics Committee has opined on a particular fee agreement, Opinion 300 examines three ethical considerations that are raised whenever a lawyer is asked to accept property in payment for his or her services: (1) reasonableness of the fee under Rule 1.5 (fees), (2) applicability of Rule 1.8 (business transaction with a client), and (3) applicability of Rule 1.7 (conflict of interest).

Rule 1.5(a) provides that “[a] lawyer’s fee shall be reasonable.” Far from prohibiting acceptance of an ownership interest, Comment [4] to the rule permits “ownership in an enterprise,” although it warns that such arrangements “may be subject to special scrutiny.” Whether an ownership interest is “reasonable” is determined not only by the factors listed in Rule 1.5(a), but also by “the disclosures and explanations made by the lawyer to the client concerning the proposed stock-for-fees arrangement.” In particular, where the client owns a start-up company and is unfamiliar with hiring legal counsel, the lawyer may need “to explain how the use of stock to pay for legal fees may provide significant near-term benefits to the client, but may result in a cost for legal services greatly in excess of what would have been paid under more traditional means.”

Agreeing with commentators who view stock-for-fees arrangements as business transactions that are governed by Rule 1.8(a), Opinion 300 observes that the rule emphasizes a lawyer’s fiduciary obligations, including the duty of fairness, that are owed to one’s client. Rule 1.8(a) places additional obligations on lawyers who are considering proposed stock-for-fees arrangements, including a fee arrangement that is “fair and reasonable” to the client; a written agreement that includes both terms of the agreement and disclosures; an opportunity for the client to seek advice of other counsel; and written consent from the client.

Opinion 300 concludes with a discussion of the conflict of interest that a stock-for-fees arrangement may create under Rule 1.7(b)(4), a provision that prohibits a representation where the lawyer’s financial, business, or property interests may adversely affect the client. The committee highlights a number of factors that are relevant when determining whether a particular stock-for-fees transaction violates the rule, but adds that Rule 1.7(b)(4) provides no bright lines in its application. Instead, its prohibition is “highly dependent on the circumstances of the representation and the lawyer’s own circumstances.” As with any conflict arising under Rule 1.7(b), the conflict is waivable by the client, on the basis of the lawyer’s full disclosure.

In addition to written opinions, the committee’s ethics counsel, Susan Gilbert, is available for informal guidance on issues arising under the D.C. Rules of Professional Conduct. Gilbert can be at 202-737-4700, ext. 232, or ethics@dcbar.org.