Hey, Lawyer – Can You Spare a Dime?

Allie Avocat is representing Carl Clint in his claims arising out of a car accident in which he was seriously injured. Clint has been out of work for nine months. Liability has been conceded and all that remains is litigation over his damages. There is a defense offer of $150,000 but Avocat believes the case is worth well in excess of $750,000. Clint’s savings have been exhausted and he is two months behind on his rent. He is concerned that he and his two children will be evicted from his apartment. He asks Avocat if she can advance him $4,500 against his settlement to cover his rent for the next three months.

Sorry, Mr. Clint. Despite the fact that it is clear that you will get a substantial recovery on your case, your lawyer can not lend you a comparatively small amount to help you avoid eviction. In fact, she could not even give you $50 to fill your gas tank. The Minnesota Rules of Professional Conduct, specifically Rule 1.8(e), say that would be a conflict of interest. Huh?

Rule 1.8(e) prohibits lawyers from providing “financial assistance” to a client in “pending or contemplated litigation” except in three situations. If a client is indigent, the lawyer may pay court costs and expenses on behalf of the client. There is no limit to the amount which can be paid. A lawyer may also advance, on behalf of any client, court costs and expenses, and can opt that repayment of those expenses will be contingent on the outcome. Again, there is no dollar limit in the rule. The lawyer can advance thousands of dollars in expert fees, accident-reconstruction fees, deposition costs, jury consultant fees, etc. The lawyer can require that her attorneys fees and those expenses are paid before the client gets any money out of the case.

The third exception provides that a lawyer may guarantee a loan that is “reasonably needed” to help a client like Clint “withstand delay in litigation” so that the client’s financial situation does not pressure him to settle prematurely. Repayment of the loan cannot be contingent on the outcome of the case. So, the lawyer cannot lend the client money herself but she can sign a guarantee that essentially allocates the same risk to the lawyer as making a loan.

The philosophy behind the restriction on financial assistance is neither immediately obvious nor is it clarified by the comment to Rule 1.8.  Comment 10 states that “Lawyers may not subsidize lawsuits brought on behalf of their clients,” because doing so “would encourage clients to pursue lawsuits that might not otherwise be brought” and because the assistance would give the lawyer “too great a financial stake in the litigation.” Paying or advancing litigation expenses “are virtually indistinguishable from contingent fees” (although the rule does not limit the practice to contingent fees) and “help[s] ensure access to the courts.” So, advancing thousands of dollars in litigation expenses is okay, but $50 for gas or a couple of months of rent is forbidden.

Yeah, it doesn’t make any sense to me either.

Also, if it’s a transactional matter, no worries. A lawyer may lend a client money for any purpose as long as it’s not related to litigation. Rule 1.8(a) governs such transactions, which include that the terms must be fair and reasonable, that the client have the opportunity to consult with independent counsel about the transaction, and that the required disclosures be confirmed in writing.

It is not clear from Rule 1.8(e) or the comment why reasonableness, the opportunity to consult with independent counsel, and written disclosure are sufficient for other loans to clients, even multi-million dollar transactions, but not when litigation is involved. And why would guaranteeing a loan that must be repaid not cause a lawyer to have “too great a financial stake” in the case when the expenses advanced by the lawyer could easily be more substantial than a loan to the client for living expenses?

Where does this leave Mr. Clint? Well, if Avocat has a wealthy friend with a big heart, she can arrange for the friend to make a loan to Mr. Clint and guarantee it. That’s right – the rule doesn’t say the loan has to come from a bank or other financial institution.

If Avocat has no wealthy friends or connections, Mr. Clint can get a loan from a “litigation funding” company. These companies have spread like Creeping Charlie over the past ten years. They offer loans, contingent on the client recovering funds, at interest rates of 20%, 25%, or higher, and a few fees thrown in for good measure. Most lawyers discourage clients from taking these abusive loans but the decision ultimately belongs to the client. Who, as we know, may be facing eviction or other desperate circumstances.

The conflict of interest rules are usually designed to protect clients from overreaching by lawyers. With Rule 1.8(e), the rule may hurt clients more than it helps them.
(Originally published in the Hennepin Lawyer, March 2019)

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