Advancing Client Portion of Settlement
Adopted: January 15, 2021
Opinion rules that a lawyer may not advance a client’s portion of settlement proceeds while a matter is pending or litigation is contemplated but may advance a client’s portion of settlement proceeds under other circumstance if the lawyer complies with Rule 1.8(a).
Inquiry #1:
Lawyer represents Client in a civil dispute. On behalf of Client, Lawyer filed a civil lawsuit against the defendant claiming damages. Prior to trial, Lawyer settles Client’s matter with the defendant. Client has executed the necessary release to resolve the claim, and Lawyer has received a check from the defendant representing the settlement proceeds. The check is not one that would permit disbursement on provisional credit pursuant to the Good Funds Settlement Act. Prior to the settlement proceeds check clearing Lawyer’s trust account, Client informs Lawyer about a significant and pressing financial need and asks Lawyer to advance to him his share of the settlement proceeds. Lawyer will make the advancement to Client out of Lawyer’s personal or operating account. Lawyer will reimburse himself by deducting the amount advanced to Client from the settlement proceeds once defendant’s check clears Lawyer’s trust account.
May Lawyer advance settlement proceeds to Client?
Opinion #1:
No. Rule 1.8(e)(1) prohibits a lawyer from providing financial assistance to a client in connection with pending or contemplated litigation, except that the lawyer may advance court costs and expenses of litigation.
The term “pending” is not defined in the terminology section of the Rules of Professional Conduct. However, citing a 1941 case, the North Carolina Court of Appeals opined that, “an action is deemed to be pending from the time it is commenced until its final determination[.]” Brannock v. Brannock, 135 N.C. App. 635, 523 S.E.2nd 110 (1999) (internal citations omitted). See also Black's Law Dictionary 1021 (5th ed. 1979) (“an action or suit is 'pending' from its inception until the rendition of final judgment”).
Until the release is signed, the settlement funds are paid to Lawyer or Client, and an order dismissing the lawsuit is filed with the court, the matter is pending, and Lawyer cannot advance settlement proceeds to Client.
Inquiry #2:
Lawyer represents Client in a civil dispute. Lawyer settles Client’s matter with the defendant prior to filing a lawsuit against the defendant. Client has executed the necessary release to resolve the claim, and Lawyer has received a check from the defendant representing the settlement proceeds. The check is not one that would permit disbursement on provisional credit pursuant to the Good Funds Settlement Act. Prior to the settlement proceeds check clearing Lawyer’s trust account, Client informs Lawyer about a significant and pressing financial need and asks Lawyer to advance to him his share of the settlement proceeds. Lawyer will make the advancement to Client out of Lawyer’s personal or operating account. Lawyer will reimburse himself by deducting the amount advanced to Client from the settlement proceeds once defendant’s check clears Lawyer’s trust account.
May Lawyer advance settlement proceeds to Client?
Opinion #2:
Yes, provided Lawyer satisfies himself that the potential litigation against the defendant is no longer contemplated and Lawyer complies with Rule 1.8(a) as set out in Opinion #3 below. Rule 1.8(e)(1) prohibits a lawyer from providing financial assistance to a client in connection with pending or contemplated litigation, except that the lawyer may advance court costs and expenses of litigation. The scenario in this inquiry differs from that in Inquiry #1 in that the litigation is not pending (see Opinion #1) and litigation is no longer contemplated under Rule 1.8(e). Merriam-Webster Dictionary defines “contemplate” as, “To view or consider with continued attention; meditate on; to view as likely or probable or as an end or intention.” Contemplate, Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/ contemplate. With the release signed, the parties have effectively resolved their dispute, and the litigation is reasonably presumed to be both concluded and no longer contemplated for purposes of Rule 1.8(e).
However, although execution of a settlement agreement and/or releases related to the action express the parties’ collective desire to resolve the matter and serve as a significant step in carrying out that desire, the parties may continue to contemplate the continued pursuit of litigation to resolve the dispute until the actual exchange of consideration between the parties occurs and is final. For example, checks representing settlement funds can be dishonored, and clients who previously signed a release can withdraw their agreement with the resolution. Therefore, whether a matter is no longer contemplated under Rule 1.8(e) must be determined individually by the lawyer based upon the circumstances. Considerations for making this determination can include the financial stability and reliability of the defendant, the legitimacy of the check or instrument conveying the settlement funds, the lawyer’s prior dealings with the defendant, and the client’s certainty and satisfaction with the resolution. It is incumbent upon the lawyer to reasonably determine whether litigation remains or should remain contemplated. If a lawyer reasonably concludes that litigation remains contemplated despite steps taken to act upon a settlement agreement, the lawyer is prohibited from providing the advancement pursuant to Rule 1.8(e).
Inquiry #3:
Lawyer represents Client in a civil dispute. Lawyer settles Client’s matter with the defendant, and the litigation is no longer pending and/or no longer contemplated per Rule 1.8(e). Client has executed the necessary release to resolve the dispute, and Lawyer has received a check from the defendant representing the settlement proceeds. The check is not one that would permit disbursement on provisional credit pursuant to the Good Funds Settlement Act. Prior to the settlement proceeds check clearing Lawyer’s trust account, Client informs Lawyer about a significant and pressing financial need and asks Lawyer to advance to him his share of the settlement proceeds. Lawyer will make the advancement to Client out of Lawyer’s personal or operating account. Lawyer will reimburse himself by deducting the amount advanced to Client from the settlement proceeds once defendant’s check clears Lawyer’s trust account.
May Lawyer advance settlement proceeds to Client under these circumstances?
Opinion #3:
Yes, if the lawyer complies with Rule 1.8(a). Presuming the lawyer concludes that the litigation is no longer pending nor contemplated, a lawyer may advance the client’s portion of settlement proceeds to the client without violating Rule 1.8(e). However, the advancement provided by the lawyer to his client is a business transaction made with the client subject to Rule 1.8(a). Rule 1.8(a) prohibits a lawyer from entering into a business transaction with a client unless the following provisions are met:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.
Rule 1.8(a)(1) – (3). In considering what terms are “fair and reasonable” to a client in this scenario, the Ethics Committee considered the purpose for the advancement and the need to protect clients from potential disputes with their lawyer as a result of this advancement. Accordingly, any advancement of settlement proceeds made by a lawyer to his client in this scenario must contain at least the following “fair and reasonable” terms:
- Lawyer will not attempt to recover from Client any funds provided to Client as part of this advancement should the instrument conveying settlement proceeds be dishonored;
- Lawyer will not initiate or threaten to initiate legal action to recover from Client any funds provided to Client as part of this advancement should Lawyer’s calculation of funds result in an over-disbursement to Client;
- Lawyer will provide to Client any and all remaining settlement funds not previously provided to Client via the advancement; and
- Lawyer will not charge Client any interest on the advancement made and will not charge an administrative fee associated with the advancement to Client.
If Lawyer complies with the entirety of Rule 1.8(a), including inclusion of the above terms into the signed agreement with Client, Lawyer may provide Client’s portion of settlement proceeds to Client as described in the inquiry.
Lastly, the Ethics Committee notes that, in making the eventual reimbursement to Lawyer from Client’s settlement proceeds once the instrument conveying the funds clears Lawyer’s trust account, Lawyer must keep detailed records of the transaction to justify the reimbursement. As a result of the advancement, Lawyer’s trust account will reflect disbursements made to himself/his practice, and no disbursements made to Client in the settlement. Every disbursement from a trust account must be accounted for and justified by client directive. See Rule 1.15-2. Accordingly, if Lawyer advances Client’s portion of settlement proceeds as described in this inquiry, Lawyer must retain all records necessary to support the disbursements made, including but not limited to copies of bank records for the advancement and Client’s executed agreement consenting to the transaction pursuant to Rule 1.8(a).
Inquiry #4:
May Lawyer advertise to the public or otherwise inform potential clients that Lawyer may consider advancing Client’s portion of any settlement proceeds prior to the settlement proceeds check clearing his trust account?
Opinion #4:
No. Rule 7.1(a) prohibits a lawyer from making false or misleading communications about the lawyer or lawyer’s services. Rule 7.1(a)(2) states that a communication is false or misleading if the communication “is likely to create an unjustified expectation about results the lawyer can achieve[.]” As noted in Opinion #2, a lawyer must individually and thoroughly evaluate his client’s case and circumstances as well as the lawyer’s own circumstances to determine whether advancing settlement proceeds prior to the actual receipt of proceeds is appropriate and something the lawyer is willing to do. Each case and each client is different, and circumstances surrounding the case, the client, and the lawyer have the potential to change during the course of the representation. Accordingly, a lawyer cannot communicate with requisite certainty his willingness to offer an advancement of the client’s settlement proceeds prior to actually receiving the proceeds at the outset of litigation. Making such a communication creates an unjustified expectation about the lawyer’s service and the results the client can expect through the lawyer’s services in violation of Rule 7.1(a). Accordingly, because of the potential for unjustified expectations in violation of Rule 7.1(a), the possibility of advancement may not be used as an inducement by the lawyer to obtain employment, and the possibility of advancement may not be advertised or publicized by the lawyer.