LEO: Attorney/Client Relationship: Engaging  LE Op. 1219

 

Attorney/Client Relationship: Engaging in Arrangement of

Champerty and Maintenance; Multiple Representation -

Conflict of Interest: Attorney Engaging in Making

a Loan to One Client Through Another

Client/Lender.

 

April 3, 1989

 

Your firm has advised that it has a wealthy individual client who is

willing to make small loans to your personal injury clients for the

purpose of assisting those personal injury clients with their living

expenses during the pendency of their litigation. The prospective lender-

client would make such loans in return for 15% interest and a promissory

note in which the personal injury client would agree to repay the loan

contingent upon his or her receipt of settlement proceeds. Should there

not be a settlement, the lender-client would bear the loss. Your firm

would obtain the promissory note from the borrower-client for the benefit

of the lender-client, and the lender-client would establish a separate

bank account in his own name while designating your firm to draw upon it

for the purpose of making the loans to the borrower-client(s). You further

indicated that the lender-client would place approximately $10,000 into

the account with the typical loan being about $200; thus a possible total

of some 50 such loans could be made. You specify that the firm would not

reimburse the lender-client for any losses borne by him as a result of the

borrow-client not receiving a settlement.

 

Your firm has inquired as to the feasibility of such an arrangement under

the requirements of the Virginia Code of Professional Responsibility.

 

It is well settled, and you have correctly identified the prohibition

under DR:5-103(B) against a lawyer's advancing or guaranteeing financial

assistance of his client for expenses other than those directly related to

the expenses of litigation. The same rule permits the advancement of only

those specific litigation expenses provided the client remains ultimately

liable for such expenses. The clear intent of DR:5-103(B) is to preclude

the lawyer's acquiring an interest in the outcome of the litigation, since

holding such an interest would create a personal conflict in the lawyer

and compromise his undivided loyalty to his client in order to protect the

lawyer's own financial interest in the litigation. Furthermore, since the

lawyer is precluded from providing such assistance to his client, his

securing of another of his clients to provide that assistance would be

improper under DR:1-102(A)(2) if his purpose in doing so was to

circumvent DR:5-103(B).

 

In the circumstances you have described, the lawyer's undivided loyalty

to his individual lender-client and to his individual borrower-client(s)

would be great diluted, most particularly since the lender-client's

receipt of repayment is expressly contingent on the outcome of the suit.

Under DR:5-105(B), a lawyer shall not continue multiple employment if

the exercise of his independent professional judgment in behalf of a

client will be or is likely to be adversely affected by his representation

of another client, unless permitted by DR:5-105(C). Under those

permissive provisions, the lawyer may continue multiple representation if

it is obvious that he can adequately represent the interest of each and if

each consents to the representation after full disclosure of the possible

effect of such representation on the exercise of the lawyer's independent

professional judgment on behalf of each. It is the opinion of the

Committee, assuming that your firm is representing the lender-client in

his lender capacity, that the arrangement you described clearly does not

allow for obviously adequate representation of both the lender-client and

the borrower-client(s). Thus, the arrangement would be improper and

violative of DR:5-105(B) and (C).

 

Finally, since the arrangement provides the repayment of the principal to

the lender-client only on the contingency of the borrower-client receiving

settlement proceeds, the Committee is of the opinion that particular

attention must be paid to any common law or statutory prohibitions against

champerty and maintenance. The determination of whether or not the

arrangement you describe would be champertous or provide maintenance to

the litigant is a matter of law and thus beyond the purview of the

Committee. Should it be violative of those provisions, however, the

Committee recognizes that your firm's role in creating such arrangement

would be violative of DR:7-102(A)(7), which prohibits a lawyer from

counseling or assisting his client in conduct that the lawyer knows to be

illegal or fraudulent.

 

Committee Opinion April 3, 1989