ETHICS DOCKET NO. 2004-08

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2004-08

Is there a conflict of interest where attorneys own a collection agency and that agency refers clients to those attorneys?

In your inquiry, you indicated that you represent a non-lawyer who is negotiating an agreement with a business that provides recovery services for healthcare customers (the "Recovery Business"). The Recovery Business is owned by two attorneys who are also partners in a local law firm (the "Law Firm"). The Law Firm provides legal services for clients of the Recovery Business who choose to institute a lawsuit to recover on their claims.

You have inquired whether the Recovery Business and the Law Firm can collect fees from the same clients, and whether the Recovery Business can pay the Law Firm for services rendered and/or may the Law Firm pay the Recovery Business, without violating Rule 1.8.

In an effort to comply with Rules of Professional Conduct, you have proposed that, in the event a client of the Recovery Business is referred to the Law Firm and the Law Firm collects on the debt, any recovery would be first be deposited into the Law Firm escrow account. The Law Firm would deduct its fee from the recovery in accordance with its retainer agreement with the client and transfer the balance to the Recovery Business. The Recovery Business would deduct its agreed upon fee and the remaining balance would then be sent to the client. The non-lawyer would subsequently be compensated by the Recovery Business in accordance with his/her agreement with the Recovery Business. In addition, you have inquired whether it would violate the Rules of Professional Conduct for the non-attorney to have an ownership interest in the Recovery Business.

Analysis

The affiliation of a Law Firm and a recovery businesscollection agency has been addressed by this Committee in Opinions 2002-05, and 2001-21. In addition, this Committee has issued several opinions on the propriety of lawyers in business with, or receiving referrals from, non-lawyers. See 1994-22, 1996-17, 2000-34, 2000-35  and 2000-40.

This Committee has expressed concerns that Rules 1.7, 1.8, and 5.4 would be violated if the lawyers did not disclose to their clients their relationship with the Recovery Business, including their ownership of that business. You have indicated that you intend to fully disclose the business relationship and have the client acknowledge and consent to the payment of fees as delineated in your inquiry.

The business relationship between the Recovery Business owned by the lawyers, still presents a concern with respect to Rule 5.4, which prohibits attorneys from sharing fees with non-attorneys except under narrow circumstances. The arrangement proposed in your inquiry indicates that the Law Firm would not share its fees with the Recovery Business and therefore would not directly violate Rule 5.4. However, the alternative arrangement that you proposed in your inquiry to whereby the non-lawyer would share in the profits as a co-owner of the Recovery Business would be problematic. This Committee has found that such an arrangement constitutes fee sharing with a non-attorney and therefore would be prohibited under Rule 5.4. See Opinion 2002-05; and 2001-21.

Even with full disclosure and the client's consent to the proposed disbursement of any recovery, the arrangement presents concerns regarding the lawyers' ability to independently exercise their professional judgment in compliance with Rules 1.7 and 1.8, without being influenced or constrained by their business relationships with the Recovery Business and the non-lawyer. Specifically, Rule 1.7 provides, in pertinent part, that:

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or a third person or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation;

This Law Firm must reasonably believe that its representation would not be constrained because of its financial interest in the Recovery Business. Given the lawyers' financial interest in the Recovery Business, it appears that the lawyers' representation would be adversely affected. By way of example, when negotiating a settlement with a debtor on behalf of a client, the lawyer's advice could be limited or adversely influenced by the lawyers' financial interest in the Recovery Business. Moreover, a conflict could develop if there was a dispute between the Recovery Business and the client with respect to its fee.

Therefore, your proposed arrangement presents a situation where the lawyers' ability to independently exercise their professional judgment in compliance with Rules 1.7 and 1.8 could be compromised.

Lastly, the Committee believes it is important to caution the Law Firm with regard to its responsibility to oversee the conduct of the non-lawyer. Although the non-lawyer works for the Recovery Business, not the Law Firm, he or she is still an employee of the attorney/owners of the Recovery Business and the attorneys are therefore responsible for the conduct of the non-lawyer and should make reasonable efforts to ensure that the non-lawyer does not engage in conduct to collect the debt that the attorneys ethically could not do.