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Rules, Procedure, Comments

All opinions of the Ethics Committee are predicated upon the North Carolina Rules of Professional Conduct. Any interested person or group may submit a written comment – including comments in support of or against the proposed opinion – or request to be heard concerning a proposed opinion. The Ethics Committee welcomes and encourages the submission of comments, and all comments are considered by the committee at the next quarterly meeting. Any comment or request should be directed to the Ethics Committee at ethicscomments@ncbar.gov no later than October 2, 2020.

Council Actions

The State Bar Council did not adopt any ethics opinions this quarter. Following a favorable vote by the Ethics Committee, the State Bar Council voted to publish two proposed amendments to the Rules of Professional Conduct for comment. The first proposal is an amendment to the Preamble identifying the avoidance of discriminatory conduct while employed or engaged in a professional capacity as a fundamental value of the profession. The second proposal is an amendment to Rule 1.5 (Fees), clarifying that a lawyer may not charge anything of value for responding to an inquiry by a disciplinary authority regarding allegations concerning the lawyer’s own conduct. Both proposed amendments are included in this Journal

Ethics Committee Actions

At its meeting on July 23, 2020, the Ethics Committee considered a total of four proposed amendments to the Rules of Professional Conduct, including the two proposed Rule amendments published for comment by the State Bar Council listed above. The other two proposed Rule amendments concern the adoption of anti-discrimination language in the text of the Rules of Professional Conduct and the adoption of language to the comments of Rule 1.1 (Competency) recognizing a lawyer’s responsibility to be aware of how implicit bias and cultural differences can impact the representation of a client. These two proposals were sent to separate subcommittees for further study.

In addition to the proposed Rule amendments, the Ethics Committee considered a total of ten ethics inquiries. Seven inquiries were sent or returned to subcommittee for further study, including inquiries addressing a lawyer’s duty of confidentiality regarding information from a public hearing, a lawyer’s permissibility of certain communications with judges, and a lawyer’s professional responsibility in utilizing machine learning/artificial intelligence in a law practice. The committee approved the publication of proposed opinions for the remaining three inquiries, which appear below.

Proposed 2020 Formal Ethics Opinion 2
Advancing Client Portion of Settlement 
July 23, 2020

Proposed 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). The 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.” 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 release related to the action expresses 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:

1. 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;

2. Lawyer will not attempt 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;

3. Lawyer will provide to Client any and all remaining settlement funds not previously provided to Client via the advancement; and

4. 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.

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Proposed 2020 Formal Ethics Opinion 3
Solo Practitioner as Witness/Litigant
July 23, 2020

Proposed opinion rules that a solo practitioner/owner of a PLLC is not prohibited from representing the PLLC and testifying in a dispute with a former client.

Facts:

Lawyer is a solo practitioner and the sole owner of his practice, Lawyer Firm PLLC. Lawyer, through Lawyer Firm PLLC, represented Client in an intellectual property matter. Client did not pay the entirety of the invoices submitted by Lawyer Firm PLLC to Client for services rendered. Lawyer, on behalf of Lawyer Firm PLLC, subsequently filed a lawsuit against Client seeking to recover the sums Lawyer contends Client owes to Lawyer Firm PLLC. Lawyer is the sole counsel representing Lawyer Firm PLLC. Because Lawyer performed the legal services that resulted in the dispute over legal fees owed, Lawyer will be a necessary witness in the litigation.

Lawyer, on behalf of Lawyer Firm PLLC, moved for summary judgment against Client. Prior to the court’s ruling on the motion, opposing counsel alleged to the court that Lawyer should be disqualified from representing Lawyer Firm PLLC because Lawyer—a necessary witness to the dispute—is prohibited from serving as both advocate and witness in the matter pursuant to Rule 3.7 of the North Carolina Rules of Professional Conduct.

Inquiry #1:

Is Lawyer prohibited from representing Lawyer Firm PLLC in the dispute between Lawyer Firm PLLC and Client?

Opinion #1:

No. With some limited exceptions, Rule 3.7 provides that a lawyer may not act as advocate at a trial in which the lawyer is likely to be a necessary witness. The underlying reason for the prohibition is to avoid confusion regarding the lawyer’s role. Rule 3.7, cmt. [2]. The rationale does not apply when the lawyer is also a litigant. See 2011 FEO 1. The same analysis applies in this scenario where the lawyer-litigant is the sole owner of his own law practice.

It is the sole prerogative of a court to determine advocate/witness issues when raised in a motion to disqualify. Id. For example, considering the underlying concerns about confusion regarding the lawyer’s role in a particular proceeding, a court may find it necessary to disqualify a lawyer from representing his solo practice in a trial before a jury, but not in a trial before the bench. This ethics opinion merely holds that a lawyer/litigant in this scenario is not required to find alternative counsel prior to a court’s ruling on a motion to disqualify.

The Ethics Committee is aware of the North Carolina Court of Appeals’ decisions in Cunningham v. Sams, 161 N.C. App. 295 (2003) and Harris & Hilton v. Rassette, __ N.C. App. __, 798 S.E.2d 154 (2017). The committee is also aware that different jurisdictions have reached different conclusions on the issue of whether a lawyer may represent his or her solely owned law practice in a dispute against the law practice where the lawyer is a necessary witness. Compare Nat’l Child Care, Inc. v. Dickinson, 446 N.W.2d 810 (Iowa 1989) and Mt. Rushmore Broad., Inc. v. Statewide Collections, 42 P.3d 478 (Wyo. 2002). Despite their differing outcomes, these cases illustrate the overarching principle that a trial court can rationally reach different conclusions based upon the circumstances of each case, and that the trial court appropriately retains discretion in determining whether disqualification is appropriate in these matters.

Inquiry #2:

Should the court determine that Lawyer is disqualified from representing Lawyer Firm PLLC at trial, is Lawyer prohibited from representing Lawyer Firm PLLC in the motion for summary judgment?

Opinion #2:

No. Rule 3.7(a) states, “A lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a necessary witness...” (emphasis added). Rule 3.7’s prohibition on a lawyer acting as both advocate and witness in a particular matter is confined to a lawyer’s representation of a client at trial and does not automatically extend to the lawyer’s representation of a client in pretrial proceedings. Absent a conflict created by the lawyer’s representation in the matter or court order disqualifying the lawyer, a lawyer may represent a client in pretrial proceedings even if the lawyer is likely to be a necessary witness at trial. However, the Ethics Committee notes that some courts would disqualify a lawyer under Rule 3.7 from participating in pretrial activities if the pretrial activities involve evidence that, if admitted at trial, would reveal the lawyer’s dual role. See, e.g., Williams v. Borden Chem. Inc., 501 F. Supp. 2d 1219 (S.D. Iowa 2007) (lawyer, who was to serve as a fact witness, was disqualified from acting as trial counsel but was permitted to engage in pretrial activities other than taking or appearing at depositions); Lowe v. Experian, 328 F. Supp. 2d 1122 (D. Kan. 2004) (disqualification was not required for lawyer’s pretrial activities, “such as participating in strategy sessions, pretrial hearings or conferences, settlement conferences, or motions practice,” but may be necessary if pretrial activities include “obtaining evidence which, if admitted at trial, would reveal the attorney’s dual role[.]”).

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Proposed 2020 Formal Ethics Opinion 4
Investment in Litigation Financing
July 23, 2020

Proposed opinion rules that a lawyer may not invest in a fund that provides litigation financing if the lawyer’s practice accepts clients who obtain litigation financing.

Facts:

Lawyer is an associate at Law Firm. Lawyer has no control over Law Firm’s selection of clients or matters. Fund is an investment vehicle that provides litigation financing. Fund advances money to plaintiffs or law firms in commercial litigation in exchange for a share of any recovery. The money advanced by Fund is used to pay litigation expenses and attorney fees. Fund makes numerous investments on behalf of its partners, with the goal of turning a profit. Fund’s profits are passed through to investors pro rata.

Lawyer would like to invest in a “feeder fund” that aggregates smaller investments and invests the larger total in Fund in order to meet Fund’s investment minimums. Lawyer will not refer clients to Fund and will have no control over Fund’s investment decisions. Fund does not disclose the identity of their clients to their investors (if at all) until the litigation matter is concluded.

It is possible that Fund would advance money to Law Firm to support litigation that Firm is handling on behalf of a plaintiff or directly to a plaintiff that is represented by Law firm. It is also possible that Fund would advance money to support a plaintiff or law firm in litigation where Firm is representing the defendant. If Law Firm represents a plaintiff that has obtained money from Fund to pursue particular litigation, Law Firm’s litigation team for the case will likely be aware of the client’s transaction with Fund. If a client’s opponent obtains money from Fund, it is unlikely that Lawyer or Law Firm would learn about the transaction. However, if a court ordered disclosure in discovery of litigation finance agreements, Firm’s litigation team on the particular matter would learn of the transaction with Fund.

Inquiry #1:

May Lawyer invest in Fund?

Opinion #1:

No.

Several prior ethics opinions have approved alternative litigation financing arrangements. In 2000 FEO 4, the Ethics Committee concluded that a lawyer may refer a personal injury client to a finance company that would advance funds to the client in exchange for an interest in any recovery the client might obtain. In 2005 FEO 12, the Ethics Committee concluded that a lawyer may obtain litigation funding from a financing company. In 2018 FEO 4, the Ethics Committee concluded that a lawyer may offer clients on-site access to a financial brokerage company as a payment option for legal fees.

Although an alternative litigation financing arrangement may be permissible, a lawyer may never allow the financing arrangement to interfere with his duty to act in the best interests of his client. See Rule 1.7, cmt. [10]. In that regard, the Ethics Committee concluded in 2006 FEO 2 that a lawyer may not refer a client to a company that pays a lump sum to a client in exchange for the client’s interest in a structured settlement if the lawyer receives a “finder’s fee” from the company in exchange for the referral. Furthermore, the opinion rules that the lawyer may not refer a client to the company merely as a means of paying the lawyer for his legal services. The lawyer’s interest in obtaining a finder’s fee or in getting paid from the lump sum could interfere with the lawyer’s duty to act in the client’s best interest.

So too, Lawyer may not invest in Fund if the investment will compromise his professional responsibilities to Lawyer’s current or future clients. Rule 1.7(a)(2). Fund advances money to plaintiffs or law firms in commercial litigation in exchange for a share of any recovery. Fund’s goal of turning a profit may not align with the best interests of a particular recipient of money from Fund. If a firm client, or an opposing party to a firm client, independently contracts with Fund to obtain litigation financing, and Lawyer has no knowledge of the arrangement, it is unlikely that Lawyer’s independent professional judgment will be affected by the financial arrangement. However, if Lawyer learns during the representation that a client or opposing party has received money from Fund, Lawyer would then have a duty to disclose the conflict to Firm’s client and seek consent. Rule 1.7(b). The possibility of a conflict arising in the midst of litigation based on Lawyer’s investment in Fund necessarily means that Lawyer is putting his own interest in receiving a return from Fund over a potential client’s interest to be represented by a lawyer without conflict. Comment [3] to Rule 1.7 states that when a conflict of interest exists before representation is undertaken, the representation much be declined, unless the lawyer obtains the informed consent of the client. The potential latent conflict that exists, to which Lawyer is unable to obtain informed consent, prohibits Lawyer from investing in Fund.

In addition to the prohibitions set out in Rule 1.7, Lawyer is also prohibited from investing in Fund due to prohibitions set out in Rule 1.8. Rule 1.8(e) prohibits lawyers from providing clients with financial assistance in connection with pending or contemplated litigation with limited exceptions. A violation of Rule 1.8(e) arises because the payments from Fund would constitute financial assistance to Lawyer’s client. While Lawyers may advance court costs and expenses of litigation, money advanced by Fund is used to pay litigation expenses and attorney fees. Lawyers are not permitted to advance financial assistance that includes lawyer’s fees billed on a non-contingency basis. N.Y. State Bar Ass’n Comm. on Prof’l Ethics, Op. 1145 (2018); see also Rule 8.4(a) (lawyer may not violate Rules of Professional Conduct through the acts of another.)

Lawyer is also prohibited from investing in Fund by Rule 1.8(i), which provides that a lawyer may not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except for a lien authorized by law or a reasonable contingent fee in a civil case. Rule 1.8(i) is designed to avoid giving a lawyer too great an interest in the representation. By providing money to Lawyer’s client in exchange for a share of any recovery, Fund would acquire a prohibited proprietary interest in the client’s claim. As an investor in Fund, Lawyer would also acquire a prohibited proprietary interest. 

There are no informed consent exceptions to Rules 1.8(e) and 1.8(i). Furthermore, the conflict issues raised by Rule 1.8 in relation to Lawyer’s investment in Fund would be imputed to all lawyers associated with Law Firm. See Rule 1.8(j) (while lawyers are associated in a firm, a prohibition in paragraphs (a) through (i), that applies to any one of them applies to all of them). Therefore, neither Lawyer nor any lawyer in Lawyer’s firm may represent a client who obtains advanced litigation financing from a financing company—or is opposed to a party who obtains such financing—if any lawyer in the firm is an investor in Fund.

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