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163 N.J.L.J. 220
January 15, 2001
10 N.J.L. 154
January 22, 2001
ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the New Jersey Supreme Court
OPINION 691
Referral of Personal Injury Client
to Third-Party Factor Which Will
Purchase an Interest in the Case
The Advisory Committee on Professional Ethics has been asked whether an attorney
may advise a client of the possibility of assigning to an independent factor a predetermined
amount of the client's portion of a potential personal injury settlement or judgement in
exchange for a present lump sum payment.
We have previously held that there is no impropriety in advising a client of the
possibility of factoring an already acquired JUA judgement as long as the factor is totally
independent of counsel. Opinion 670, 132 N.J.L.J. 978, 1 N.J.L. 1921 (1992). The
Committee there emphasized that the litigation “has been fully and finally concluded with
the litigant's and attorney's fees components of the judgement established and agreed upon
by both client and counsel.” Id. In such circumstances, it was held that counsel could advise
a client of the possibility of factoring a judgment, but only after “satisfy[ing] himself or
herself as to all currently available alternatives and the reasonableness of the proposed
discounts under each alternative and present those alternatives to the client ... .” Id.
While we now extend the holding of Opinion 670 to the present inquiry, we also add
the requirement that counsel's participation in cases where litigation is ongoing be much
more circumscribed than in those circumstances where a final judgment has been obtained.
In the case of an in-hand final judgment, the client is dealing only with the question
of what the present value may be of a fixed fund over an unknown period of time. Under the
present inquiry, both the amount of the fund, if any, and the time for collection are unknown.
And although by reason of experience the attorney may be able to estimate value in such
circumstances somewhat better than many clients, it is nevertheless beyond the reach of
counsel's usual professional expertise, and the client should be clearly so advised. See,
generally, RPC 1.2 (Scope of Representation).
As with all advisory opinions, we address only the ethical considerations of the
contemplated conduct and not any substantive or regulatory considerations which may exist.
Therefore, the Committee's opinion should not in any way be construed as sanctioning this
or any other related business activity.
It is well settled that an attorney is prohibited from advancing funds to a client for
living expenses. This prohibition is expressed in RPC 1.8(e) which states:
(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.
However, RPC 1.8 does not expressly or impliedly prohibit a lawyer from helping a client
to obtain financial assistance from another, as long as the lawyer has no financial interest in
the individual or entity which secures or provides that funding.
Clients in tort cases frequently approach their attorneys seeking financial advice or
even an actual advance of monies to be collected from an anticipated personal injury
settlement or judgment. On occasion, the client's need is great and the funds are necessary
to forestall an eviction or to put food on the table. Faced with such pressures, the client may
feel compelled to accept a settlement offer not in the client's best interests simply in order
to survive financially. Nevertheless, an attorney may not provide those funds.
As related by the inquirer, however, the factor here will be totally independent of the
attorney, and shall not be factoring or financing any portion of the as yet unrealized
attorney's fee. The attorney will not otherwise profit or benefit from the business of the
factor. Further, the factor will neither provide legal advice nor seek to control the direction
of the litigation. These are conditions precedent to this Committee's approval of the
proposal. Counsel must refrain from any relationship with or responsibilities to the factor
which could in any way impair his or her duty of undivided fidelity to the client.
The assignment documents executed by the client will contain an acknowledgment
of the lien by the attorney, who agrees to escrow the assigned amount and forward that
amount to the factor out of the net proceeds, if any. There should be a clear understanding
of what items will be subtracted from the proceeds to arrive at the net figure. Of particular
importance to the Committee, the inquirer makes clear that the risk of there being
insufficient net proceeds to satisfy the lien falls solely on the factor. Once the transaction has
been completed, the factor will have a lien on the net proceeds of any settlement or judgment
for the assigned amount.
An attorney who informs a client with limited resources that financial assistance may
be available through established financial institutions can obviously be of material help to
the client. This is particularly true when the anticipated settlement or judgment may not be
realized, if at all, for an extended period of time simply because of the nature of the litigation
process. Nevertheless, the attorney must not in any way dilute his primary responsibility to
the client.
In his recitation of the facts, the inquirer also stated that “it is to be assumed that
counsel is satisfied with the proposed discounts.” The Committee disagrees with that
assumption. Counsel's competence and duty lie in the litigation of the client's cause and, as
circumstances may arise, to advise the client as to the possible settlement value of the case.
As previously noted, counsel's relationship with the factor should not ordinarily extend
materially beyond calling to the client's attention that there exist factors who may assist the
client with financial matters. The appropriateness of a factor's proposal calls for a client's
business decision as to which, as previously stated, the lawyer's experience and expertise
may be of limited assistance. The Committee understands that the ability of the client to
reach a reasonable business decision on such matters may depend heavily upon the client's
financial sophistication. If the attorney believes that sophisticated financial advice is
warranted, the attorney should recommend an appropriate professional for consultative
advice.
An additional important issue raised by this inquiry is that of confidentiality of
information. RPC 1.6(a) provides that “A lawyer shall not reveal information relating to the
representation of a client unless the client consents after consultation, except for disclosures
that are impliedly authorized in order to carry out the representation ... .” The attorney must
ensure that the client fully understands the risks of disclosure of such information, including
the possible loss of the attorney-client privilege, before securing the client's authorization
to disclose information the financial institution may require in order to assess the risk of the
transaction. Upon securing such authorization, the attorney should still endeavor to limit, to
the extent possible, the amount of information provided to the institution. For example, the
attorney should provide the institution with only that information which would be
discoverable by the attorney's adversary. Philadelphia Bar Association Opinion 99-8
(February 2000). Under no circumstances should the attorney consider additional disclosures
as impliedly authorized in order to carry out the transaction.
The inquirer further stated that “the role of the factor would be passive in the sense
that it would neither provide legal advice nor seek to control the direction of the litigation.”
There is no other role the factor may play. Pursuant to RPC 2.1, “In representing a client, a
lawyer shall exercise independent professional judgment.” Under no circumstances may an
attorney allow a lay individual or entity to direct or regulate the lawyer's professional
judgment in rendering legal services, and this is true even if the individual or entity is
compensating the attorney for the legal services performed for the client pursuant to RPC
1.8(f). Cf. RPC 5.4(c). Consequently, the attorney must, pursuant to RPC 1.2(a), exercise
independent judgment in deciding whether and when to accept an offer of settlement, or
whether to proceed to trial, and not allow the factor's interests or attempted input to affect
the exercise of that judgment.
In conclusion, the Committee holds that a lawyer may ethically refer a client to a
factor concerning a possible advance against an anticipated personal injury judgment or
settlement, provided that the standards and limitations set forth above are followed.
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