The New York City Bar Association opined that: “A lawyer may not enter into a financing agreement with a litigation funder, a non-lawyer, under which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters.”
Distinguishing from arrangements in which the Client, (as opposed to the Attorney), receives funding, the opinion notes that: “Under typical client-funder arrangements, the funder agrees directly with the lawyer’s client to provide funding for a specific matter and the client agrees to make future payments if the client prevails. When the client is the plaintiff in a civil lawsuit, the amount of the client’s future payments to the funder may depend on the amount of the client’s recovery. Client-funder arrangements of this nature do not implicate Rule 5.4, which forbids a lawyer from sharing legal fees with a non-lawyer, because the lawyer is not a party to the arrangement and payments are made by the client out of the client’s recovery and do not affect the amount of the lawyer’s fee. See NYCBA Formal Op. 2011-2 (2011) (“It is not unethical per se for a lawyer to represent a client who enters into a non-recourse litigation financing arrangement with a third party lender”); see also NYSBA Ethics Op. 666 (1994) (lawyer may refer client to lender who will commit to provide financial support during pendency of case).
The opinion also notes that: “Lawyer-funder arrangements do not necessarily involve impermissible fee sharing under Rule 5.4(a). The rule is not implicated simply because the lawyer’s payments to a funder come from income derived from legal fees.”
However: “Rule 5.4(a) forbids a funding arrangement in which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters. That is true whether the arrangement is a non-recourse loan secured by legal fees or it involves financing in which the amount of the lawyer’s payments varies with the amount of legal fees in one or more matters.”
The opinion further noted that “we see no meaningful difference between payments for financing, on the one hand, and payments for goods and services, on the other, that would call for a different interpretation of ‘fee sharing’ when a lawyer’s payments to a provider of funding, rather than a provider of goods or services, are contingent on the lawyer’s receipt of fees in a particular matter. Rule 5.4(a) must therefore be read to foreclose a financing arrangement whereby payments to the funder are contingent on the lawyer’s receipt of legal fees. A non-recourse financing agreement secured by legal fees in a matter – i.e., an arrangement in which it is contemplated that the lawyer will make future payments only if the lawyer recovers fees – constitutes an impermissible fee-sharing arrangement regardless of how the lawyer’s payments are calculated. Likewise, a financing arrangement constitutes impermissible fee sharing if the amount of the lawyer’s payment is contingent on the amount of legal fees earned or recovered. Further, Rule 5.4 is equally applicable when the lawyer’s payment to the funder is based on the recovery of legal fees in multiple matters (e.g., a portfolio of lawsuits against the same defendant or involving the same subject matter) as opposed to a single matter.”
New York City Bar Association Formal Opinion No. 2018-5 (July 30, 2018).