MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2002-05
Propriety of Affiliation of Law Firm and Collection Agency Partially Owned by Lawyers and Partially by Non-Lawyers
The Proposal
You have proposed a business relationship between a law firm and a collection agency and have asked that we opine as to whether or not the relationship you propose complies with the applicable ethical standards.
You propose that a new business, a collection agency, be formed. That collection agency would be owned by at least one lawyer and at least one non-lawyer. That lawyer-owner would also be a member of a separate law firm which will perform legal services for the collection agency.
Clients of the collection agency will be informed of the identity of the owners of the collection agency and will be told that the lawyer of the collection agency would handle any litigation which is necessary. Clients who retain the services of the collection agency would be paying a single all-inclusive fee for collection and legal services, and would not be charged any additional fees for legal services performed by the separate law firm.
The collection agency will retain the law firm to handle its legal work and will pay the firm on a contractual basis. The law firm will not be paid on a contingency basis. The law firm would not be paid directly by any of the collection agency's clients.
In addition the law firm will operate as a professional corporation in which no non-lawyer will have an interest, either directly or indirectly. The law firm will also conduct a traditional legal practice representing other clients in a variety of other areas, in addition to its representation of the collection agency. None of the fees collected from the law firm's other clients would be shared with the collection agency.
The lawyer-owner of the collection agency will receive a salary from the collection agency and a share of its profits. The lawyer-owner's share of the collection agency's profits would be based on the collection agency's income.
Your goal in establishing the proposed relationship would be to provide your clients with an efficient collection organization which would include legal services, if required, at no additional cost to them. Your clients would then pay a single price for collection services, with the assurance that the price would include all necessary collection and related legal services. You believe that such an arrangement would well serve the collection agency's clients, and would comply with the required ethical standards for a Maryland lawyer.
Analysis
The formation of a collection agency with a relationship to a law firm has recently been addressed by this Committee in Opinion 2001-21. In addition, the propriety of lawyers engaging in business with, or receiving referrals from non-lawyers has been addressed in several Opinions of the Committee. See, 1994-18, 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.
Fee Arrangement:
The Committee finds that the business venture you propose would violate Rule 5.4; Rule 5.4 prohibits attorneys from sharing fees with non-lawyers except under certain narrow circumstances.
In the arrangement you propose, clients of the collection agency would pay the agency a single all-inclusive fee for collection and legal services and both the lawyer-owner and non-lawyer owner of the collection agency would receive a salary from the collection agency and a share of its profits.
While not every collection matter would necessarily generate legal services, you would not be able to predict, at the time the client paid the all-inclusive fee, whether or not legal services would be rendered. However, in those cases where both collection and legal services were provided, the fee paid by the collection agency's clients would include a fee for legal work, and the fee would be paid to an agency jointly owned by a lawyer and non-lawyer; the possibility of fee sharing with a non-lawyer is implicit in this arrangement. Therefore, the Committee concludes that the arrangement you propose would clearly violate Rule 5.4.
Conflict of Interest:
The business arrangement you have proposed clearly violates Rule 5.4, thus our response to your inquiry could end there. However, we are also concerned that Rules 1.7, 1.8, and 7.1 might be implicated if the nature of the relationship between the law firm and the collection agency is unclear. In response to that concern, you state that you would disclose the relationship to clients and/or potential clients.
However, as we clearly specified in 2001-21, even if you disclose the relationship and receive client consent, Rule 1.7 may 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.
We find it hard to believe that the lawyer's representation of a client of the collection agency would not conflict with the lawyer's interests under the circumstances you have described. Since the lawyer-owner would have an interest in the collection agency, you have proposed an arrangement that would create a potential benefit which might prevent the lawyer from exercising his independent judgment in the best interests of his client.
Therefore, your proposed arrangement presents serious concerns about compliance with Rules 1.7 and 1.8, and about the lawyer's ability to truly exercise professional judgment in an independent manner, free of constraints by non-lawyers or by the proposed business arrangement.
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.