Practice Pointer: Neither a Borrower Nor a Lender Be
by Kate A. Toomey
You've known her for years, and in many respects the two of you have a great deal in common; she regards you as a friend. You've been around her young children a few times, and you like them a lot. She's a wonderful mother and she works hard, but she struggles to provide for the kids because she's been on her own since her husband died overseas. You've been helping her with a wrongful death action, but it's going to be awhile before the money comes through, and she may have to file a lawsuit to get everything she's entitled to. She hits a financial rough patch but doesn't qualify for a loan and can't borrow money from her extended family. Meantime, she's so behind on paying her bills that she could lose her house, and if she loses her car, too, she could lose her job as well. Then one of the boys gets sick. She can't stay at home to care for him, but she can't afford a babysitter, either. Finally, she asks you for a small loan, just until her money comes through. You're a generous person who cares about others, and besides, you know she'll do anything she can to pay you back. What can you do to help her?
The short answer is that she's your client, and you can't loan her money or provide financial assistance. Even under the compelling circumstances in this sad story, you can't cover her living expenses with the thought that she'll eventually try to pay you back. This strikes many attorneys as heartless nonsense, but the rule is explicit, and considering its rich historical roots and the policy reasons that spawned it, it is also sound.
Rule of Professional Conduct 1.8 governs prohibited transactions, such as the general proscription in 1.8(a) against attorneys and clients entering business transactions.1 Rule 1.8 also includes this subsection:
A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except:
(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.
This language has been characterized as "unambiguous." See e.g. In re K.A.H., 967 P.2d 91, 93 (Alaska 1998). It has also survived challenges to its constitutionality. Id. at 94-96. (subsection doesn't unconstitutionally infringe upon access to courts); Oklahoma Bar Ass'n v. Smolen, 17 P.3d 456, 463-64 (Okla. 2000) (subsection doesn't violate equal protection).
If you're like me, you've wondered what possible good can come of prohibiting attorneys from providing humanitarian aid to their clients. After all, we're encouraged to provide pro bono or reduced fee services and to contribute financially to organizations providing legal services for people of limited means. It's even codified in the Rules of Professional Conduct. See Rule 6.1, R. Pro. Con. So what's the big deal here?
Pro bono work and professional service donations are, essentially, gifts. In the former case, you have no expectation of being paid, and whereas this may stimulate you to work efficiently, you have no stake in the outcome. In the latter case, you provide financial assistance for legal services, but the clients aren't individually known to you.
Remember all those years ago in law school when we studied as though we were trying to learn a foreign language, including archaic terms such as "champerty," and "maintenance?" These are the conceptual predecessors of today's rule against providing financial assistance to a client. See e.g. Comment, Rule 1.8 (rule against attorney acquiring proprietary interest in litigation has basis in common law champerty and maintenance). As the Comment following Rule 1.8 notes, however, the rules provide for a few exceptions - most notably for reasonable contingent fees and for advances of costs of litigation as provided in Rule 1.8(e).
Does the amount of the loan matter? The Supreme Court of Alaska considered a disciplinary case that started with the lawyer loaning several hundred dollars over a six-month period. See In re K.A.H., 967 P.2d 91 (Alaska 1998). The client and her two daughters were evicted, homeless, and living in their car during the first summer. Eventually they moved to the lower forty-eight to be near family, but when pre-litigation negotiations failed, her presence in Alaska necessitated airfare and living expenses. Eventually the loan reached several thousand dollars, but the analysis would be the same regardless of the amount.
What if you provide a tangible thing, rather than money? The answer is still no. See e.g. Rubinstein v. Statewide Grievance Committee, 2003 Comm. Super. LEXIS 1727 (attorney sanctioned inter alia for providing bus tokens to client for transportation to medical appointments)
What about paying for medical costs, prescriptions, and medical supplies? Again, the answer is no, even if the client can't afford continuing treatment. Although Rule 1.8 doesn't define what counts as "court costs and expenses of litigation," medical treatment isn't included. See e.g., Rubinstein v. Statewide Grievance Committee, 2003 Comm. Super. LEXIS 1727, 28-29 (payment of ongoing medical treatment is closer to advancement of living expenses than it is to out-of-pocket court costs and litigation expenses). Note that the cases distinguish between advancing money for treatment and advancing it for diagnosis. See e.g. Attorney Grievance Comm'n v. Kandel, 563 A.2d 387, 389-90 (Md. 1989)
What if you don't charge interest? It's still not allowed. See e.g. Smolen, 17 P.3d at 457 (interest-free loan without penalty or cost violated rule). Does the timing of the loan matter? The rules "prevent lawyers from enticing clients with the promise of monetary advances." Rubinstein, 2003 Comm. Super. LEXIS 1727, 15 (quoting Lawyer's Manual). But it also applies to loans made after the representation starts. What if you loan the client money after settlement? The Maryland Court of Appeals concluded that this is permitted. See Kandel, 563 A.2d at 280-81. What if there's no pending litigation? Rule 1.8(a) still forbids business transactions between lawyers and clients, which would apply to loans, unless the conditions set forth in the rule are met.
The rule protects attorneys by subduing competition among lawyers willing to provide financial help as a means of enticing clients. See Rubinstein, 2003 Comm. Super. LEXIS 1727, 15. As the Mississippi Supreme Court put it, "Our concern is that unregulated lending to clients would generate unseemly bidding wars for cases and inevitably lead to further denigration of our civil justice system." Mississippi Bar v. Attorney HH, 671 So.2d 1293, 1298 (Miss. 1995). This echoes the view of courts such as the Maryland Court of Appeals, which wrote that, "An important public policy interest is to avoid unfair competition among lawyers on the basis of their expenditures to clients. Clients should not be influenced to seek representation based on the ease with which monies can be obtained, in the form of advancements, from certain law firms or attorneys." Kandel, 563 A.2d at 390. Arguably, the rule protects you, too, because it's so much easier to refuse a client's request for assistance by explaining that your ethical responsibilities forbid it. See Rubinstein, 2003 Comm. Super. LEXIS 1727, 15.
Some jurisdictions have relaxed the rules when it comes to loaning clients money. These include Alabama, California, Minnesota, Montana, North Dakota, Texas, and Vermont. See In re Maxwell, 783 So.2d 1244, 1249 n.6 (La. 2001) (e.g., permitting an attorney to guarantee a loan "for the sole purpose of providing basic living expenses" if it is "reasonably needed to enable the client to withstand delay in litigation"); In re: Ex Parte Application of G.M. for Approval of Payment of Personal Living Expenses and Reasonable and Necessary Medical. Expenses, 797 So.2d 931, 934 (Miss. 2001) (advances may be made 60 days after retention if attorney uses due diligence to determine client's financial position, provided attorney doesn't promise future payments and doesn't make willingness known to public). This is a minority position, however. See Smolen, 17 P.2d at 460 & n.13.
So, what if you have a hard luck client, there's no pending or contemplated litigation, and you've been asked to make a loan? You can loan the money if the transaction and terms are fair and reasonable to the client, transmitted in writing in terms the client can understand, and the client has a reasonable opportunity to seek the advice of independent counsel. See Rule 1.8(a)(1) & (2). Additionally, the client must consent in writing. Rule 1.8(a)(3). You can also make your humanitarian gesture in the form of a gift. Otherwise, the appropriate thing to do is decline the request.
1. See Rule 1.8(a), R. Pro. Con.