MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2000-45
Ethical Implications of Loans by Private Entity to Personal Injury Plaintiffs
You have requested an opinion through the Attorney Grievance Commission of Maryland that has been forwarded to our Committee for a response. You advised that you received a letter from a company soliciting your assistance in referring clients to them who are in need of financial assistance during the litigation of a personal injury case. The Investor wishes to purchase an interest in the case as opposed to "lending" the money to the client/plaintiff. The Investor wishes to make this purchase on a contingency basis and as such, will lose its investment if there is no recovery. You ask whether it is ethical for any attorney to seek the Investor's services on behalf of a client.
This Committee has not deemed it inappropriate for attorney to help clients obtain loans when the loan is secured by a potential recovery in a personal injury action. The distinction between your proposal and the loan activities reviewed by the Committee in the past rests with the distinction between acquiring an interest in the suit, on the one hand, and with lending money based upon a secured interest in the suit's outcome, on the other hand. In one, the investor acquires an interest in the lawsuit, while in the other, the investor acquires a lien on the recovery. We perceive the distinction to be material. It gives rise to issues concerning the common law concepts of maintenance and champerty. The term "maintenance" has been defined as "an officious intermeddling in a suit, which in no way belongs to one, by maintaining or assisting either party with money or otherwise to prosecute or defend it."1 "Champerty," a form of maintenance, occurs when a stranger makes "a bargain with a plaintiff or defendant to divide the land or other matter sued for between them if they prevail at law, whereupon the champertor is to carry on the party's suit at his own expense."2 Champerty and maintenance will not be found "unless the interference is clearly officious and for the purpose of stirring up 'strife and continuing litigation.'"3
As long ago as 1868, the Court of Appeals of Maryland recognized that the common law prohibitions of champerty and maintenance were eroding in the United States while warning that under exceptional circumstances each might still survive:
We are not aware of any case in the judicial history of this State, where the provisions of the statute of Henry VIII, have been enforced - without meaning to assert that there might not be such exceptionable conduct savoring of champerty and maintenance, as to be punishable, yet there can be no doubt that this statute is, in a great measure, now obsolete.4
While the Court's admonition that prohibitions against champerty and maintenance might be obsolete was issued over a century ago, the Court in its most recent decision discussing these common law prohibitions, implied that champertous agreements might violate public policy.5 In that case, the Court determined that public policy was not offended by an assignment of personal injury litigation proceeds to a hospital to pay for its treatment of injuries the plaintiff incurred as a result of the incident causing those personal injuries:
As to public policy consideration, at least in the setting now before us, we see no danger of champerty or maintenance, nor any other public policy reason to preclude the assignment of expected personal injury claim benefits to secure hospital or medical expenses actually incurred. Indeed, there is good reason to enforce such assignments.6 (Emphasis supplied.)
We believe that the Court, in Hernandez, perceived a relationship between the treating hospital and its patient existed that distinguished the relationship from that of "strangers" so that the transaction did not fall within the definition of champerty. Furthermore, in other cases where the Court has been asked to find a relationship champertous, the Court has declined to do so because of a relationship that could not be described as that of "strangers." Indeed, when asked to construe a Mary Carter Agreement7, the Court held that the agreement did not violate public policy, nor was it champertous.
We do not go so far as to proclaim such an agreement void as against public policy. The public policy is to encourage settlements. We do not believe the agreement here amounts to champerty, one of the factors that led the court in Lum v. Stinnett, 87 Nev. 402, 488 P.2d 347 (1971), to declare the agreement there void. See Wheeler v. Harrison, 94 Md. 147, 158, 50 A. 523 (1901). We do agree with the Nevada court that use by the parties of the "inherent advantages (of the agreement are) inimical to true adversary process." Lum, 488 P.2d at 352.8
Consistently, in each of these cases, the Court leaves open the question of whether a particular arrangement might be champertous or void for public policy. Clearly, the Court recognizes that an unliquidated tort claim for money damages is a "chose in action" that can be assigned in Maryland:
In Maryland, "[a]n unliquidated tort claim for money damages for personal injuries is encompassed within the definition of a chose in action." Unkle v. Unkle, 305 Md. 587, 594, 505 A.2d 849 (1986). In Summers v. Freishtat, 274 Md. 404, 409, 335 A.2d 89 (1975), we recognized the modern rule that "a chose in action in tort is generally assignable, in the absence of a statutory prohibition, if it is a right which would survive the assignor and could be enforced by his personal representative." In this regard, Maryland Code (1989 Repl. Vol.), § 6-401 of the Courts and Judicial Proceedings Article provides that, except for slander, causes or rights of action survive the death of either party.9
Nevertheless, neither the Court, nor the Legislature has given its authorization to a proposal that allows investment in lawsuits by strangers to the suit.
If the transaction in question violates public policy or is champertous, the lawyer who assists a client in entering such a transaction violates Rule 8.4(d) by engaging in conduct that prejudices the administration of justice and Rule 1.2(d) by counseling or assisting in conduct which is criminal. However, the Committee makes no determination on these underlying legal issues.
For these reasons outlined above, the Committee has substantial concerns about the structure of the Agreement. Moreover, even if Maryland Courts were to determine that champerty or maintenance no longer survive, we nevertheless have a number of concerns about the structure you proposed. First, one must address the issues outlined in Ethics Docket 2000-37, 91-31 and 92-25 regarding loans to plaintiffs prior to the settlement of a personal injury case. Although these opinions do not find a per se violation of the Rules of Professional Conduct, please be cognizant of the responsibilities and obligations of the attorney in such a matter. These responsibilities and obligations are clearly enumerated in the opinions.
There is a distinct difference between the former opinions and your inquiry wherein the Investor would like to buy a "partial interest in a claim." Clearly, one issue is the proposed term of the arrangement which requires the consent of the Investor before the client can change attorneys. This clause may violate Rule 1.16 of the Maryland Rules of Professional Conduct. The comment to Rule 1.16 clearly states that a client has a right to discharge an attorney with or without cause. A significant issue would arise if a client wishes to terminate your services but the company does not allow such termination. You must abide by your client's wishes and ethically, you could no longer represent said client. There may be a breach of contract between the client and the Investor, but you could not continue your representation. Thus, entering into such an agreement with the knowledge that it is non-binding on you would be unethical in and of itself.
Of most importance, you must be cognizant of who has control of the matter. The client must keep control with the attorney-client privilege held intact. You must determine for yourself, after reviewing the case, the contract between the Investor and the client, and the applicable opinions referenced herein, as to whether such control remains with your client and not the Investor. Lastly, one must question who is the client when one purchases an interest in a claim. At what point does the Investor become the client and own the case? Depending on the answer to that question you will need to analyze issues of privilege, confidentiality, conflicts between your original client and the Investor, and who will have the authority to direct the course of the case so that you can advise your client with respect to the client's contract with the Investor.
In conclusion, the proposed transaction may violate Maryland law and if it does would be unethical. If the transaction does not violate Maryland law, a lawyer must endeavor to protect against (i) conflicts between the investor and the original client, (ii) losing the lawyer's independence of judgment, and (iii) disclosing client information without fully informing the client of the complications of doing so. All courses of action must have the client's consent.
1 American Hotel Management Associates, Inc. v. Jones, 768 F.2d 562, 570-1 (C.A.4 (N.C.) (1985). This case involves North Carolina law and these quotes are from cases from that state. The definitions seem consistent with other definitions from around the country. See: Ari Dobner, Litigation for Sale, 144 U. Pa. L. R. 1529 (1996).
2 Id.
3 Id.
4 Schaferman v. O'Brien, 28 Md. 565 (1868).
5 Hernandez v. Suburban Hosp. Ass'n, Inc., 319 Md. 226 (Md. 1990).
6 Ibid. at p. 234
7 A Mary Carter Agreement is an agreement to settle a case involving a number of defendants where one defendant agrees to pay no more than a set amount and no less than a set amount, but the settling defendant remains in the case as an ally to the plaintiff by seeking to reduce the amount of exposure to the higher amount by pursuing the other defendants to help show their responsibility for a greater share of the liability to the plaintiff. The name "Mary Carter Agreement" comes from the leading case which this type of agreement was discussed: Booth v. Mary Carter Paint Company, 202 So.2d 8 (Fla.Dist.Ct.App.1967).
8 General Motors Corp. v. Lahocki, 286 Md. 714, 727 (1980). The court determined, however, that the jury should have been apprized of the agreement. Following, the precedent of Lahocki, an attorney handling a case in which the plaintiff had assigned all or part of its value must inform the judge and jury. Similarly, Rule 2-201 requires the real party in interest in a lawsuit to be identified.
9 Hernandez, supra.