Ethics Hotline & Opinions

ETHICS DOCKET NO. 2009-07

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2009-07

Propriety of Lawyers Soliciting Clients, Paying Referral Fees and Operating “Legal Clinic” for Mortgage Restructuring


You state that you are in the process of establishing a legal clinic called “Mortgage Loan Corrective Services Legal Clinic, L.L.C.” You advise the firm will “assist homeowners in the current mortgage crisis to restructure their mortgage debt and retain ownership of their homes.” The operation you propose raises genuine concerns. At least one of its features, the referral fee, involves an act plainly prohibited by the Maryland Rules of Professional Conduct (hereinafter “Rules”). Moreover, our limited understanding of how your proposed “firm” would conduct itself raises a broader concern – whether this venture would mislead clients.

The Source of Clients

The firm will obtain clients through two methods. The firm intends to operate a remote dialing program that will randomly broadcast a voice recorded message via telephone offering assistance to those having difficulties with their mortgage payments. Those called will have the option of pressing “1” if interested, or “2” if not. Those pressing “1” will be connected to a call center that will obtain the person’s name and address so that a “package” with a retainer agreement can be mailed. You advise that you will not have further contact with these potential clients until you receive the signed retainer agreement. You also advise that the telephone solicitation operation will be supervised by a salaried employee of the firm.

The second method for obtaining clients involves referrals. You state that the attorneys’ employees have relationships with members of the real estate industry, “including loan officers and real estate agents.” You expect that when these loan officers and real estate agents have clients who need loan restructuring, the clients will be referred to your proposed firm. Upon signing a retainer agreement such individuals would become clients of your firm. Your firm would pay a referral fee to the person making the referral.

The Nature of the Work Performed

A client who has signed the retainer agreement will be preliminarily evaluated for restructuring. If they meet “your” standards, the “file” will be referred to a third party vendor. This third party vendor will prepare a restructuring package (i.e., proposed Note modification, comparative market analysis for the property, a foreclosure analysis, and a loss analysis). This proposed package is submitted to the lender and, you advise, your attorneys are not permitted to see the package because the third-party vendor’s system is “proprietary.” If the lender agrees to the proposed restructuring, the lender’s proposed transactional documentation (e.g. the revised Note, possibly a forbearance agreement, etc.) will be reviewed by your firm to ensure that they are consistent with the information provided by your client and that the documents protect your client’s interests. Your firm will also review the documentation with your client.

The costs for the loan restructuring will be divided between the legal clinic and the third party vendor. You advise that the cost will generally be in the range of$2,500 to $5,000. The legal clinic will be paid approximately $1,000 to $3,000 per transaction and this will cover both the attorney’s fees and the cost of having non-attorney staff make the initial eligibility determination. The third party vendor will earn a flat fee. You propose to clearly state the total fee and its breakdown in the representation agreement.

The Questions Posed By You

You state that you are seeking guidance as to whether any of the following aspects of this proposed venture run afoul of the Maryland Rules of Professional Conduct:

  1.  
  2. Paying an employee to operate a telephone solicitation marketing program for the firm or paying a third party to operate the telephone solicitation marketing program;
  3.  
  4. Receiving client referrals from third parties (specifically those in the real estate field) in return for a fee;
  5.  
  6. Having non-attorneys collect information from clients and put the information in a format that is acceptable to the third party vendor and perform a “pre qualification” to determine whether the potential client satisfies the criteria for a loan restructuring;
  7.  
  8. Using a third party vendor, comprised of non-attorneys, to submit information to mortgage companies in order to obtain a restructuring of the client’s loan.

We address these questions as presented. However, in our judgment, the questions you submit beg the ultimate question and an opinion that did not address that larger question could give you a false sense of security. Accordingly, we address that larger question as well.

Analysis

1. Paying Employees or Third Parties to Promote A Law Practice

First, as a general rule, it is permissible for a law firm to pay an employee or a third party vendor the “reasonable cost” of communicating about the lawyer’s services.

Rule 7.2 provides, in pertinent part:

 

(a) Subject to the requirements of Rules 7.1 and 7.3(b), a lawyer may advertise services through public media, such as a telephone directory, legal directory, newspaper or other periodical, outdoor, radio or television advertising, or through communications not involving in person contact.

 

* * *

 

(c) A lawyer shall not give anything of value to a person for recommending the lawyer’s services, except that a lawyer may

 

 

(l) pay the reasonable cost of advertising or written communication permitted by this Rule.

 

Thus, the mere fact that you pay an employee, or a third party vendor, to operate a telephone solicitation program does not offend the rules.

We stress that it is your duty, under Rule 5.3, to supervise non-attorney staff members to assure that any communications they have with potential clients comport with the requirements of the Rules of Professional Conduct. Rule 7.1 defines your obligation to avoid false or misleading communications about your services:

 

A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it:

 

(a) contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading;

 

(b) is likely to create an unjustified expectation about results the lawyer can achieve, or states or implies that the lawyer can achieve results by means that violate the Maryland Lawyers’ Rules of Professional Conduct or other law; or

 

(c) compares the lawyer’s services with other lawyers’ services, unless the comparison can be factually substantiated.

As discussed below, while the Committee does not find the mere payment of employees to advertise a law practice violative of the Rules, there are facets of your proposal that may violate the advertising Rules in other ways.

2. Paying for the Receipt of Client Referrals from Third Parties

You ask whether it is permissible for your firm to pay a referral fee to real estate agents or loan officers who refer clients. This is explicitly prohibited by Rule 5.4 which states that “[a J lawyer or law firm shall not share legal fees with a nonlawyer.” As the Comment to Rule 5.4 notes, the Rule is intended to express “traditional limitations on sharing fees.” There is nothing about your proposed arrangement that would exempt you from the Rule’s strictures.

3. Using Non-Attorneys and Third Party Vendors

Your final two questions are whether you can use non-attorney employees to collect information from your “clients” to submit to the third party vendor and whether you can use a third party vendor to submit information to mortgage companies to obtain restructuring. Non-attorney employees assist lawyers with information gathering routinely. Moreover, attorneys regularly use a host of third party vendors to meet client needs as varied as copying, accounting, engineering and tax planning. The use of employees and third party vendors is not subject to any per se prohibition, but the attorney who relies upon others to address client needs must recognize the burdens inherent in delegation.

Any delegation triggers a lawyer’s duty of supervision under Rule 5.3. Rule 5.3 provides, in pertinent part:

 

Rule 5.3. Responsibilities Regarding Nonlawyer Assistants

 

With respect to a nonlawyer employed or retained by or associated with a lawyer:

 

(a) a partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer;

 

(b) a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer;

 

(c) a lawyer shall be responsible for conduct of such a person that would be a violation of the Maryland Lawyers’ Rules of Professional Conduct if engaged in by a lawyer if:

 

 

(1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the conduct involved; or

 

(2) the lawyer is a partner or has comparable managerial authority in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action; and

 

In delegating functions to non-lawyers and third party vendors, a lawyer must take care to assure that these nonlawyer assistants do not compromise client interests. In an opinion recently issued by the ABA Standing Committee on Professional Ethics, the Committee addressed the question of outsourcing legal or nonlegal support services. SeeABA Formal Opinion 08-451. The Committee concluded that a lawyer’s duty of competence, set forth in Rule 1.1, and his duty to supervise nonlawyers, set forth in Rule 5.3, make lawyers “ultimately responsible” for the work performed by third parties. This extends to maintaining client confidences. The ABA Committee suggested that compliance with these duties can require significant efforts by counsel to acquire firsthand knowledge of the vendor’s operation and the safeguards employed by it.

 

At a minimum, a lawyer outsourcing services for ultimate provision to a client should consider conducting reference checks and investigating the background of the lawyer or nonlawyer providing the services as well as any nonlawyer intermediary involved, such as a placement agency or service provider. The lawyer also might consider interviewing the principal lawyers, if any, involved in the project, among other things assessing their educational background. When dealing with an intermediary, the lawyer may wish to inquire into its hiring practices to evaluate the quality and character of the employees likely to have access to client information. Depending on the sensitivity of the information being provided to the service provider, the lawyer should consider investigating the security of the provider’s premises, computer network, and perhaps even its recycling and refuse disposal procedures. In some instances, it may be prudent to pay a personal visit to the intermediary’s facility, regardless of its location or the difficulty of travel, to get a firsthand sense of its operation and the professionalism of the lawyers and nonlawyers it is procuring.

The ABA noted that Rule 5.3(b)’s requirement that a lawyer “make reasonable efforts to ensure that [a nonlawyer’s] conduct is compatible with the professional obligations of the lawyer” applied regardless of whether the nonlawyer is directly affiliated with the supervising lawyer’s firm. Finally, the ABA concluded that it “may be necessary for the lawyer to provide information concerning the outsourcing relationship to the client, and perhaps to obtain the client’s informed consent to the engagement of lawyers or nonlawyers who are not directly associated with the lawyer or law firm that the client retained.”

4. The Ostensible Purpose of the Venture, the Possible Reality and the Ethical Implications that Flow from That.

The Committee has concerns regarding your proposed venture that are far broader than the narrow questions posed by you. The Committee is concerned that your firm may only be engaged in the practice of law in a superficial or marginal way. The real purpose of the firm may be to “trade” on the respectability of the term “legal clinic,” and to suggest that the business is in some way superior to that of competitors not affiliated with a law practice.

The legal work that will be performed by the firm appears to be minimal. For example, you advise that in your opinion “the initial review of the information to determine whether the clients qualify for a loan restructuring and the preparation of that information for submission to the third party vendor is not’ legal work,’ and therefore will be performed by non-attorney employees of the firm.”1Your firm does not draft the transactional documents. It does not perform the actual restructuring. Apparently, the only legal work performed by your firm will be a review of the package before processing and a consultation with the client. The fact that the consultation comes at the end of the process, rather than the beginning, itself suggests that legal representation is an afterthought.

You do not quantify the percentage of the firm’s time that would be devoted to legal work and it is not the Committee’s function to engage in fact-finding. If, in fact, the firm is performing minimal legal work, its rationale as a “legal clinic” would be suspect. In reality, you may be operating not a “legal clinic,” but a mortgage restructuring referral service. There is nothing improper about a lawyer operating a business. This Committee has previously opined that the “operation of an ancillary business by a lawyer or a law firm is not on its face unethical.” See Ethics Docket 97-23. However, if the true purpose of this operation is not the practice of law but mortgage restructuring, characterizing it as a law practice or “legal clinic” would be improper.

First, the use of a trade name must not be misleading. Rule 7.5 addresses the use of firm names and letterheads. Rule 7.5(a) states, in relevant part:

 

A lawyer shall not use a firm name, letterhead or other professional designation that violates Rule 7.1.

Rule 7.1, as indicated above, prohibits lawyers from making “false or misleading communication[s]” about their services. The Comment to Rule 7.5 states that “any doubt regarding the misleading connotations of a name may be resolved against use of the name.” The use of the name “Mortgage Loan Corrective Services Legal Clinic, L.L.C.” may falsely and misleadingly imply that its principal mission is the rendering of legal services. If that is not, in fact, true, the use of the name would violate Rule 7.5.2  See Ethics Docket 2004-10; 2004-09; 2002-15.

Second, while the Committee has not found it per se  unethical to operate a law-related business, we have highlighted the ethical issues arising out of such situations, which include:

  1.  
  2. Risk of compromise of the lawyer’s independent judgment;
  3.  
  4. Conflict of interests;
  5.  
  6. Client confusion as to whether a professional, bound by ethical considerations, is serving a client;
  7.  
  8. Potential loss of confidentiality;
  9.  
  10. Compelling legal clients to use the business;
  11.  
  12. Directing clients of the business to the law firm for legal matters; and
  13.  
  14. Sharing of fees with non-lawyers.

See Ethics Docket 97 -23; 96-35. The risks, particularly the risk of client confusion, is all the greater when the business purports to operate as a “legal clinic.” Based on the facts supplied by you, the Committee is unable to conclude that your proposed operation complies with the Rules of Professional Conduct.

 

1  The Committee expresses no opinion regarding the correctness of this view, as it entails a legal conclusion, but simply notes that it is your own assessment of the proposed arrangement.


 

2  The Committee notes that the organization and naming of a law firm must also comply with the Maryland Professional Services Corporations Act. The Committee recommends that you consult the Act regarding the organization of a law firm as a LLC.

DISCLAIMER: Opinions of the Maryland State Bar Association (MSBA) Ethics Committee are an uncompensated service of the MSBA. This Committee’s opinions are not binding on the Maryland Court of Appeals, Maryland Attorney Grievance Commission, MSBA or this Committee. The reader is advised that subsequent judicial opinions, revisions to the rules of professional conduct, and future opinions of this Committee may render the Opinions stated herein outdated. As such, the Committee’s opinions are advisory only and neither the Committee nor the MSBA assumes any liability whatsoever with respect thereto. Accordingly, reliance upon the opinions of this Committee is solely at the risk of the user.