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  • April 17, 2019

    Ethical Dilemmas:
    May I Advance Settlement Funds to a Client Before the Case Resolves?

    When a client in a contingency-fee case may have to foreclose on their property before the case resolves, may a lawyer advance them a loan for living expenses to help them get by?
    money with question marks

    April 17, 2019 – May lawyers may make loans or advances to clients in contingency-fee cases?

    Question

    I represent a client in a personal injury action. I believe it’s a good case and there will be a recovery, but the defendant does not seem inclined to settle the case any time soon.

    My client (let’s call him “John”), who was not in good financial shape to begin with, tells me he is getting desperate for the money to meet his mortgage payments. John recently asked me for an “advance” on the settlement. John stated he would be willing to sign off on an agreement promising to repay the advance from his share of the settlement.

    I’m confident that there will be a recovery so I am not worried about being paid back, and I don’t want John to go into foreclosure.

    May I advance the funds as the client requests?

    Answer

    The ethics hotline regularly receives questions about whether lawyers may make loans or advances to clients in contingency fee cases.

    Tim PierceTim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by email or through the Ethics Hotline at (608) 229-2017 or (800) 254-9154.

    SCR 20:1.8(e) reads as follows:

    (e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

    (1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and

    (2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

    While it may not be clear from the language of the rule what constitutes prohibited “financial assistance,” the ABA Comment provides guidance:

    [10] Lawyers may not subsidize lawsuits or administrative proceedings brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so 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. These dangers do not warrant a prohibition on a lawyer lending a client court costs and litigation expenses, including the expenses of medical examination and the costs of obtaining and presenting evidence, because these advances are virtually indistinguishable from contingent fees and help ensure access to the courts. Similarly, an exception allowing lawyers representing indigent clients to pay court costs and litigation expenses regardless of whether these funds will be repaid is warranted.

    In this scenario, the client is asking for a loan to assist with living expenses, so it is clear that the advance in question violates the ban on financial assistance to clients on connection with litigation.

    There have been several examples of lawyers in Wisconsin being disciplined for similar conduct. For example, in OLR Public Reprimand 2003-9, the violation of SCR 20:1.8(e) was described as follows:

    On February 28, 1999, D.S. signed an affidavit wherein he stated that, as a condition of his representation, he was requesting that Carroll loan him money for living and other miscellaneous expenses. D.S. further agreed to repay Carroll from any amounts recovered from the lawsuit but also stated that he would repay the loans regardless of the outcome of the lawsuit. D.S. also stated that the loans were necessary for him to be able to effectively pursue his case.

    Beginning on February 29, 1999, and continuing through March 17, 2001, Carroll made loans to D.S., totaling $37,796.07, for living and other miscellaneous expenses. The loans were not for court costs or expenses of the litigation.

    In a letter to OLR dated June 25, 2001, Carroll admitted to having made the loans to D.S. and provided an itemized list of all loans made to D.S.

    In making loans to D.S. for the payment of living and other miscellaneous expenses, Carroll provided financial assistance to a client in connection with pending litigation, in violation of SCR 20:1.8(e).

    Another example is found in OLR Private Reprimand 2006-21:

    A Wisconsin lawyer was hired to represent a man in a personal injury action. The client was having financial problems and the lawyer assisted the client in applying for a loan from a company that loans funds against future settlement proceeds. The loan did not come through as quickly as the client anticipated and the client faulted his attorney for the delay.

    The lawyer, in order to help out his client, drew a check from his business account to pay the client’s mortgage payment. The check was returned for insufficient funds and the client was assessed a bad-check charge. The check was paid when presented a second time.

    By making a mortgage payment on behalf of his personal injury client, the lawyer violated SCR 20:1.8(e), which states, “A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation.”

    While questions about SCR 20:1.8(e) typically involve loans to clients, the scope of conduct prohibited by the rule is not limited to direct financial assistance.

    For example, a lawyer was disciplined for paying a claim of an estate creditor out of their own funds1, and ethics opinions from many jurisdictions forbid lawyers from agreeing to indemnify clients against third-party claims as part of a settlement.2

    Conclusion

    As the rules and guidance make clear, an attorney cannot provide financial assistance to a client beyond court costs and expenses of litigation. In this hypothetical situation, the attorney should not “advance” money to pay the client’s mortgage.

    Endnotes

    1 See Disciplinary Proceedings against Zajac, 2008 WI 42, 748 N.W.2d 744.

    2 See, e.g., Wisconsin Ethics Opinion E-87-11.




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