MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2001-21
Sharing of Fees With A Collection Agency Partially Owned By Non-Lawyers
You have stated that several lawyers and non-lawyers would like to create a corporation which would operate as a collection agency. The lawyers and non-lawyers would be co-owners of this newly created collection agency. The non-lawyer members of the collection agency would handle matters for its collection agency clients until litigation is required. At that point, the client would be referred to one of the co-owner lawyers whose separate legal practice, a professional corporation, would then handle the litigation.
The collection agency would pay its employees. However, those employees will also provide services to the separate legal practice. The legal practice will not contribute to the salary of the collection agency employees.
The lawyer co-owners of the collection agency will receive a salary from the collection agency, together with a share of its profits. The lawyer will also receive separate fees for doing legal work for the collection agency.
You have asked whether any elements of this relationship raise any ethical questions, and have asked for an opinion from the Committee.
Analysis
The issue of the propriety of lawyers engaging in business with, or receiving referrals from non-lawyers has been addressed in several Opinions of the Committee. See, 1994-22, 1996-17, 1999-18, 2000-34, 2000-35 and 2000-40.
In these opinions we expressed concern that such a business venture would be impermissible under Rules 1.5, 1.7, 1.8, 5.4 and 7.1.
Conflict of Interest:
First, we have expressed concern that Rules 1.7, 1.8, and 7.1 might be implicated if the nature of the relationship between your legal practice (the separate professional corporation) and the referring collection agency is not disclosed. You state in your letter that your legal practice would also receive fees directly from the collection agency; this suggests that the work of the collection agency would often lead directly to client referrals. Therefore, we believe that this is a relationship which should be disclosed to the client (including your part ownership in the collection agency).
However, we also noted in our earlier decisions, that even if you undertook such disclosure, or sought and received client consent, Rule 1.7 would still be violated as it provides that regardless of disclosure, the lawyer must reasonably believe that his representation of a client will not conflict with his or her own interests.
The fact that you have an ownership interest in the collection agency creates a direct financial incentive to refer the collection agency’s clients to your law practice, and creates a direct economic benefit to you for doing so. Hence, under these circumstances, the relationship you propose would surely compromise or interfere with your professional judgment.
Therefore, your proposed arrangement presents serious concerns about your ability to truly exercise your professional judgment in an independent manner, free of constraints placed on you by non-lawyers or by your business arrangement, and violates Rules 1.7 and 1.8.
Fee Arrangement:
In addition to the Conflict of Interest issues discussed above, the Committee also finds that the business venture you propose would also violate Rule 5.4. Rule 5.4 prohibits attorneys from sharing fees with non-lawyers except under certain narrow circumstances to ensure that financial incentives do no impinge upon an attorney’s duty of loyalty to his or her client, compromising the attorney’s legal judgment.
In the arrangement you propose, the lawyers would receive a salary from the collection agency, the collection agency would pay legal fees to the attorney, the clients would pay legal fees to the attorney, and the attorney would earn a percentage of the profits made by the collection agency. In addition, the employees of the collection agency would provide services to the separate legal practice, but their salary would be paid solely by the collection agency.
Clearly fee sharing is implicit in this arrangement. Therefore, the Committee concludes that the arrangement you propose would clearly violate Rule 5.4.
Reasonableness of Fee:
While this specific question has not been previously addressed by the Committee, the Committee is also concerned that the arrangement you propose might violate the provisions of Rule 1.5, which requires that a lawyer’s fee be reasonable.
As mentioned above, you have stated that the client would pay the collection agency for services rendered, the collection agency would pay some fees for legal services to the attorney, the clients would pay attorney fees to the attorney, and the attorney would earn a percentage of the profits made by the collection agency.
Therefore, your proposed arrangement raises some question as to whether or not the attorneys could be said to be paid more than a reasonable fee for the legal services provided; i.e., whether they could be said to be “double-dipping”. As such, your proposed arrangement also appears to violate Rule 1.5.
Conclusion
The Committee believes that your proposed business arrangement presents a situation which would prevent you from complying with all of the provisions of the Maryland Rules of Professional Conduct, and therefore concludes that the relationship you propose violates the Rules.
This opinion, 01-21 makes references to opinions 1994-22, 1996-17, 1999-18, 2000-34, 2000-35 and 2000-40.
REFERENCES:
Maryland Rules of Professional Conduct: 1.5, 1.7, 1.8, 5.4 and 7.1.