THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 1993-1

COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

November 5, 1993

ACTION: FORMAL OPINION

OPINION:

TOPIC: Assignment by retired attorney of accounts receivable to another attorney.

DIGEST: A retired attorney may assign his or her accounts receivable to another attorney so long as full disclosure is made to the clients and all relevant ethical rules are followed by the assignor and the assignee.

CODE: DR 2-103, 2-104, 2-106, 2-107 and 4-101(C); EC 2-23.

QUESTION

May a retired attorney assign his or her accounts receivable to other lawyers?

OPINION

The inquirer has been practicing law for a number of years, but recently has been plagued with numerous medical problems that caused him to retire from the practice of law. The inquirer is still owed money by clients whom he represented while in practice. The inquirer wishes to assign these accounts receivable to other lawyers for consideration, and asks whether such an arrangement would be ethical. For purposes of this discussion, the Committee assumes that all of the accounts receivable have been fully earned, and that no additional legal services must be performed for the former clients. Subject to the caveats set forth below, the question is answered in the affirmative.

There is no per se ethical prohibition against a lawyer assigning his or her accounts receivable to another person. See generally N.Y. State 154 (1936) ("an attorney may furnish information as to the nature and extent of services rendered by him to clients for the purpose of aiding an assignee in the collection of his accounts receivable, unless such disclosures include matters communicated to the attorney in confidence") (cited with approval in ABA 320 (1968)); cf. N.Y. State 608 (1990) (if all other reasonable efforts short of litigation have been undertaken and have been unsuccessful, an attorney may employ the services of a collection agent to collect a legal fee). However, since accounts receivable owed by clients to their lawyers are not entirely analogous to ordinary business accounts receivable, care must be taken to ensure that all ethical obligations are adhered to by the assignees. Some of the ethical concerns raised by an assignment follow.

1. Reasonable Fees -- Regardless of whether an account receivable exists before collecting on the assigned account, the assignees will have to satisfy themselves that the fees they will be collecting were reasonable. This is because an attorney must prove "that the compensation was fair and reasonable for the services rendered and that the client had full knowledge of the nature and extent of the services rendered him as to be capable of exercising a fair judgment as to the reasonableness of the bill." Cooper v. Conklin, 197 A.D. 205, 208, 189 N.Y.S. 552 (2d Dep't 1921); see also DR 2-106 (prohibiting entering into an agreement for, charging or collecting an illegal or excessive fee). The obligation to ensure reasonableness passes to the assignee.

2. Confidences and Secrets of Clients -- In describing to the assignees the nature of the services rendered to the former clients, care should be taken not to disclose the confidences and secrets of those former clients. While DR 4-101(C) provides that a lawyer may reveal "confidences or secrets necessary to establish or collect the lawyer's fee . . .," only that information necessary for collection of the fee should be disclosed. N.Y. City 1986-7; N.Y. City 1986-8; N.Y. State 608 (1990).

3. Suing Client for Fee -- EC 2-23 provides that "a lawyer should be zealous in his efforts to avoid controversies over fees with clients and should attempt to resolve amicably any differences on the subject. A lawyer should not sue a client for a fee unless necessary to prevent fraud or gross imposition by the client." An attorney who assigns his accounts receivable to other lawyers remains responsible to the former clients to ensure that all relevant ethical rules are followed in the collection process. (Since the assignees will be lawyers, they would, in any case, have an obligation to abide by the ethical rules.) The assignment of the accounts to other lawyers does not mean that such assignees will represent the client. n1 Therefore, before an assignment is made, the assigning attorney should enter into an agreement with the assignees that they will not sue the client without the assigning attorney's consent.

n1 Obviously, no change of representation of the client from the attorney to the assignees could be effected without the consent of the clients.

In a somewhat analogous context, such an arrangement was approved by the ABA Committee on Professional Ethics in ABA 302 (1968). That opinion dealt with the ethics of financing plans for legal fees developed by bar associations in which fees would be financed by a bank. The clients signed notes payable to the bank. The question addressed was whether, by authorizing the bank to collect the fee on his behalf, a lawyer gave up his right to determine if and when to bring suit for its collection. The Committee determined that the plans in issue avoided that problem because they all provided that the attorney had the right to repurchase the loan before suit is brought. The Committee said:

This is a necessary provision, as it gives the attorney an effective means of preventing such suit if he wishes and still protects the bank against loss.

On the other hand, if the services have been or are to be performed and there is no reason why the fee should not be paid, the lawyer may refuse to repurchase the loan and permit the bank to sue upon it. This is his right and in some cases will no doubt be necessary.

ABA 320 (citation omitted). This Committee believes it would be advisable for the assigning attorney and the assignees to work out a similar arrangement to permit the assigning attorney to control over whether any of the former clients are sued for non-payment of fees. The assigning attorney should retain the right to determine, based on the existence and materiality of a dispute over the amount of the fee, and the principles set forth in EC 2-23, whether a fee litigation should be commenced with his client. n2

n2 We note in this regard Judiciary Law 488, a descendant of New York's champerty statute, which prohibits an attorney from, among other things, taking an assignment of a debt "with the intent and for the purpose of bringing an action thereon." Although the assignee is not prohibited from ultimately bringing suit to collect the receivable, if a client is in arrears at the time of the assignment, the assignee should be careful to provide sufficient notice to the client and opportunity to cure. See, e.g., 1015 Gerard Realty Corp. v. A & S Improv. Corp., 91 A.D.2d 927, 457 N.Y.S.2d 821 (1st Dep't 1983) (lawyer who accepted an assignment of a mortgage in default did not violate 488 because he afforded the debtor the opportunity to cure the defaults). The lawyers accepting the assignments should be mindful of these principles.

4. Division of Fees -- DR 2-107 provides that lawyers may not divide fees for legal services with other lawyers who are not their partners or associates except under certain circumstances and with client consent. The assignment of an attorney's accounts receivable to other lawyers does not constitute a prohibited division of fees so long as the fees assigned have already been fully earned by the assigning attorney. Cf. N.Y. State 608 (1990) ("fees referred to agents for collection should already be fully earned so as to avoid the pitfalls of fee splitting").

5. Disclosure to Clients -- Disclosure of the assignment to the former clients is necessary so as to avoid confusion on the part of the clients. The clients should be told to whom such assignments have been made and that the assignment does not mean that the assignees are now somehow their lawyers. Care should also be taken by the assignees not to give the clients the impression that they are the clients' lawyers, and, of course, they should abide by the ethical rules against solicitation. See DR 2-103; DR 2-104.

CONCLUSION

Subject to the foregoing caveats, the question is answered in the affirmative.