Things to consider before advancing money to clients
By Sylvia E. Stevens
Lawyers often ask whether it is permissible to advance money to a client against the client’s anticipated recovery in a lawsuit. As will be seen, the disciplinary rules (and the proposed OPRC) do not provide complete guidance on this question. Not surprisingly, the answer depends upon the circumstances.
The disciplinary rules prohibiting lawyers from acquiring a financial interest in a client’s matter have their origins in the common-law prohibitions against champerty and maintenance. Champerty was the investment, by purchase, in all or part of another’s claim. Maintenance was the provision of living and other expenses so that another person could carry on litigation. The prohibitions were designed to prevent plaintiffs from bringing suits they otherwise would not, thereby imposing burdens on the justice system and defendants, while enriching lawyers. If a lawyer acquired an interest in the outcome of a lawsuit, the risk was even greater: the lawyer’s representation of the client could be impaired if the lawyer was overly concerned with protecting his investment and, for instance, urged the client to accept an inadequate settlement. It is thus not surprising that the ban on champerty and maintenance by lawyers found its way into the disciplinary codes as a conflict rule aimed at ensuring the exercise of independent judgment.
The prohibition against champerty by lawyers was carried forward into the ABA Model Code in DR 5-103(A) and later into ABA Model Rule 1.8(i), which forbid the acquisition of a financial interest in a cause of action or the subject matter of litigation. The rule has two specific exceptions: a lien to secure payment of fees and expenses, and a contingent fee agreement. Although each of these exceptions actually allows what the rule purports to prohibit — acquiring an interest in the client’s case — they are historically recognized and justified by the countervailing policy of encouraging lawyers to represent clients who cannot afford to prepay the costs of litigation. Moreover, each is subject to other regulations that protect the clients’ interests. Liens are governed by statute; contingent fees are limited by the provisions of DR 2-106.
The modern prohibition against "maintenance" was expressed in the Model Code in DR 5-103(B) and later in Model Rule 1.8(e), both of which prohibit a lawyer from advancing or guaranteeing financial assistance to a client. Here, too, the prohibition is not absolute. In recognition that indigent and even middle-class clients should not be required to forego claims because they cannot afford the costs of modern-day litigation and that an unqualified ban would be overly protective of defendants, lawyers are permitted to advance the expenses of litigation.
The Model Code formulation of DR 5-103(B) specifically identified many of the expenses of litigation that could be advanced to the client without violating the rule: court costs, expenses of investigation, expenses for medical examinations and the cost of obtaining and presenting evidence. When Model Rule 1.8(e) was adopted, the itemization of those specific expenses was moved from the black-letter rule to Comment (10), which explains that such advances are "virtually indistinguishable from contingent fees and help ensure access to the court." Oregon’s current version of DR 5-103(B) is similar to the model rule, in that it does not detail the types of expenses that can be advanced, but refers only to "expenses of litigation."1 The cost of travel relating to the litigation may be advanced as an expense of litigation,2 but the cost of transportation to a medical center for treatment,3 the cost of surgical treatment,4 and the cost of a rental car or insurance premiums5 are not.
As originally formulated, DR 5-103(B) allowed lawyers to advance the expenses of litigation, "provided the client remain(ed) ultimately liable for such expenses." The DRs, of course, did not provide any mechanism for enforcing the client’s obligation.
Moreover, anecdotal evidence suggests that few lawyers insisted on repayment when the case was unsuccessful, especially since they advanced the costs precisely because of the client’s inability to do so. The adoption of ABA Model Rule 1.8(e) in 1983 brought the rule into conformity with practice, permitting the client’s repayment of the costs of litigation to be contingent on the outcome of the matter. Oregon adopted a similar approach in 1986, amending DR 5-103(B) so that the client must be liable for the expenses of litigation, but only "to the extent of the client’s ability to pay." While Oregon lawyers cannot agree at the beginning of a case that the recovery of costs will be contingent upon a successful outcome, we are not required to insist upon repayment of the advanced costs if, at the conclusion of the case, the client is not financially able to pay.
Unlike the relaxation of the bans against champerty and maintenance to permit lawyers to advance litigation expenses, the historical prohibition against advancing the client’s living expenses remains. A proposal to allow advancement of living expenses was rejected when the ABA adopted Model Rule 1.8(e) in 1983. Comment (10) to Rule 1.8 explains that allowing lawyers to advance living expense "would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation." This is the rule in the majority of jurisdictions including Oregon. In re Brown, 298 Or 285, 692 P2d 107 (1985) (lawyer suspended for two years for advancing living expenses to personal injury client; no defense that repayment came from PIP payments rather than the pending litigation); OSB Formal Op. No. 1991-4.
In some jurisdictions, however, the broad language of the rules would appear to permit the advancement of living expenses. California allows lawyers to advance the costs of prosecuting or defending a claim "or otherwise protecting or promoting the client’s interests." Minnesota permits payment of costs "reasonably necessary for the client to withstand delay in litigation that would otherwise put substantial pressure on the client to settle because of financial hardship rather than on the merits." The District of Columbia allows financial assistance that is "reasonably necessary to permit the client to institute or maintain" the case. Alabama allows "emergency" financial assistance of any kind. Texas expressly permits advancing "reasonably necessary medical and living expenses." Mississippi permits loans to clients of up to $1,500 for medical expenses and for living expenses under "dire and necessitous circumstances."
In a couple of instances, courts have interpreted the rule to allow the provision of living expenses in limited circumstances and for humanitarian purposes. In Louisiana State Bar Assoc. v. Edwins, 329 So2d 437 (La. 1976), the court held that neither the spirit nor the intent of the rule was violated by a loan for minimal living expenses to prevent foreclosure of the client’s home and to assure necessary medical treatment; the court added that a stricter approach placed an unreasonable burden on the client’s right to enforce claims and might interfere with the constitutional guarantee of access to the courts. The Ohio Supreme Court rejected the bar’s request for a six-month suspension and publicly reprimanded two lawyers who advanced living expenses to a client in Toledo Bar Ass’n. v. McGill, 597 NE2d 1004 (1992); the court suggested that DR5-103(B) may need to be re-examined.6 Similarly, in In re Minor Child KAH, 967 P2d 91(Alaska 1998), after permitting a lawyer to recover the cost of flying the client to trial, but not a loan for living expenses, the court indicated a willingness to consider a future amendment to the rules to give relief to clients so desperately poor that they might have to accept an inadequate offer of settlement.7
The term "advance" as used in DR 5-103(B) and MR 1.8(e) seems clearly to refer to loans or other financial assistance provided by the lawyer with the expectation of repayment. As noted, MR 1.8(e) expressly allows for contingent recovery of advanced costs and Oregon’s DR 5-103(B) makes clients liable for advanced costs only to the extent of their ability to pay. Both rules thus clearly allow lawyers to essentially make a gift of the advanced costs in the event an unfavorable result in the case renders the client unable to repay.
Nothing in either rule suggests that a lawyer is prohibited from making a gift to a needy client of living expenses and other costs not directly related to the expenses of litigation. At least one jurisdiction has approved gifts to clients for payment of medical expenses so long as the gift is truly charitable and the lawyer had no expectation of repayment. Arizona Ethics Op. 91-14. The concern with gifts, of course, is that they may be an inducement to attract business, and not motivated solely by humanitarian concerns. While it might be argued that nothing in DR 5-103(B) prohibits such gifts from lawyers to clients, in the absence of clear direction from our court, a lawyer who does so is swimming in uncharted waters.
1. Proposed ORPC 1.8(e) retains the exact language of DR 5-103(B)
2. OSB Formal Op. No. 1991-4; Conn. Ethics Op. 00-21 (2000) (lawyer may pay for indigent client’s travel to and lodging for deposition).
3. Grievance Comm. of Maryland v. Kandel, 563 A2d 387 (1989).
4. SD Ethics Op. 2000-3 (2000).
5. Arizona Ethics Op. 95-01
6. As of this writing, Ohio’s DR 5-103(B) remains nearly identical to Oregon’s, but Ohio’s EC 5-8 provides that "A financial interest in the outcome of litigation…generally is not encouraged, (but) there are instances when it is not improper to make loans to a client.
7. It does not appear that any such amendment was presented to, or approved by the court, since this decision was issued.
© 2004 Sylvia E. Stevens
ABOUT THE AUTHOR
Sylvia E. Stevens is assistant general counsel for the Oregon State Bar. Reach her at (503) 620-0222 or toll-free in Oregon at (800) 452-8260, ext. 359, or by e-mail at email@example.com.