Opinion 2005-8
(June 2005)

The inquirer is an attorney admitted to practice in Pennsylvania. She is currently not with a law firm or in-house counsel for a company and has been offered an opportunity to do all of the Pennsylvania collections work for a collection agency in Pennsylvania. She is presently reviewing all the options available for the relationship and her compensation the refrom. She asks for guidance on two possible structures of that relationship in terms of what is and what is not permissible under the Pennsylvania Rules of Professional Conduct (the “Rules.”) The inquirer indicates that her goal, and that of the collection agency, is to offer/market a "one-stop-shop" to the creditor clients and to provide legal services at a competitive rate.

First Option: The inquirer would be an employee of the agency and would perform all of the legal collection work for the agency's clients (with full disclosure and consent of the clients) if/when a matter would get to that point. The inquirer would be compensated like an employee, including participating in a profit sharing plan.

Second Option: The inquirer would not be an employee of the collection agency, but the agency would forward all Pennsylvania collection matters to her should such matters require legal action. The client/creditor would be charged a contingent fee, most of which would go the inquirer, the balance going to the collection agency as part of its service fee as the agency would be providing administrative support through the legal process. The entire fee arrangement would be fully disclosed to the clients up front. The principals in the agency would not have any influence or control over the inquirer’s professional judgment or decision making.

Finally, the inquirer asks if there is any way, if she is not an employee of the commercial collection agency, for her to participate in the agency's bottom-line profit provided full disclosure is made to the clients.

Several Rules are implicated in the analysis of this inquiry.

Rule 1.0e Informed Consent provides that:

“Informed consent” denotes the consent by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

Rule 1.7. Conflict of Interest: Current Clients provides that:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; …

(4) each affected client gives informed consent.

Rule 1.8f Conflict of Interest: Current Clients: Specific Rules provides that.
(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client gives informed consent;

(2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

Rule 5.4 Professional Independence of a Lawyer_ provides in part that

(a) A lawyer or law firm shall not share legal fees with a nonlawyer…

(c) A lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.

Rule 5.5a Unauthorized Practice of Law, Multijurisdictional Practice of Law provides that:

(a) A lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so. [emphasis added]
Turning to the inquirer’s specific questions, there is a primary issue raised by the “First Option“ which makes it ethically impermissible, and thus obviates any need to look at the other questions arising in that context. For the attorney, as an employee of the collection agency (which by definition can not be licensed to practice law), to handle litigation for a client of the collection agency is in fact helping the collection agency to provide legal services and thus constitutes aiding and abetting the unauthorized practice of law by the collection agency thus placing the inquirer in direct violation of Rule 5.5a. Issues of consent and conflict of interest waivers do not impact this analysis since the prohibition under the Rule is absolute and is not subject to waiver.

The course of conduct suggested in the “Second Option”, while not unethical on its face, does pose several ethical issues which must be navigated by the inquirer and handled in accord with the applicable procedures in the Rules.

While there is nothing per se improper about the agency referring the creditor to the inquirer, it is essential for the inquirer to enter into an independent attorney client relationship with the actual creditor and the hiring of the inquirer must be with the informed consent of the creditor. As presented, the inquirer would be referred all of the agency’s collection litigation. Absent the agency itself having purchased a portfolio of bad debt (which this opinion assumes is not contemplated in this inquiry), in fact the creditor is the client, not the agency. The hiring of the inquirer by the creditor must be based on informed consent which disclosure must include the option of the client to hire any counsel it wishes, not just the inquirer. In addition, should the creditor choose to hire the inquirer, there are some conflicts of interests which could occur requiring waiver based upon informed consent as provided under Rules 1.7b and 1.0e.

As Rule 5.4c makes clear, the fact of the ongoing referrals from the collection agency and its value as a source of business to the inquirer can not impact the specific legal decisions that the inquirer makes in handling any case referred to her, even if the correct decision for the client might be against the interests of the collection agency, her referral source. For instance a situation could be envisioned where the collection agency expends significant time in attempting to collect a debt but is unsuccessful. The matter is referred to the inquirer who learns that the creditor, in providing the credit to the debtor violated federal or state consumer protection laws and is best served by abandoning the litigation and attempts at collection. This would clearly be against the financial interests of the agency in being reimbursed for its services and the inquirer’s obvious desire to make a good referral source “happy,” but it can not enter into any decision about how to proceed with the matter and the inquirer’s legal recommendations to her clients. Another scenario could be that it would be in the creditor’s best interests to contract with a different collection agency in an attempt to collect the debt.

Thus each referral and the creditor’s representation must be carefully reviewed under Rule 1.7a to determine if such a concurrent conflict exists, and if so, disclosure and informed waiver must be obtained in accord with Rules 1.7b1 and 4.
Turning to the issue of payment of part of the contingent fee to the agency, the inquiry states that as regards the legal fee charged to the client, most would go to the inquirer but, “the balance [would go] to the collection agency as part of its service fee as the agency would be providing administrative support through the legal process.” Providing the payment is for actual administrative costs related to the litigation, as invoiced by the agency, then it would be permissible. However, an unreasonably large payment, or one based on a percentage of the fee as opposed to specific services rendered for a specific fee, could in fact be considered and would at least be suspect as unethical fee splitting with the agency in violation of Rule 5.4a.The Committee hastens to point out that the issue of payment to the collection agency for its efforts that are not related to supporting the inquirer’s litigation on behalf of a creditor must be addressed between the creditor and the agency.

The Committee cautions that as with any referral source, the inquirer must always be sure to maintain client confidentiality as required by Rule 1.6, and may not share confidential information just because the creditor is referred from the agency or has a pre-existing relationship with the agency, absent the informed waiver of the client.

As regards the inquirer’s desire to participate in the bottom line profit of the agency, whether such participation is possible is a matter of substantive law about which the Committee will not comment. However, assuming such participation is achieved, it would in fact constitute payment for services rendered to the creditor/clients. As such this raises a conflict under Rule 1.8f which conflict must be waived after informed consent is provided by the client. The inquirer should note that Rule 1.8f (c) reiterates the obligation of client confidentiality noted above.

While this opinion addresses the concerns raised by the inquiry under the Rules of Professional Conduct, the Committee points out that there is also an applicable criminal statute in Pennsylvania and refers the inquirer to 18 Pa. C.S.A. §7311(c) and (e), which states, in pertinent part:

(c) Furnishing legal services - It unlawful for a collection agency to furnish, or offer to furnish legal services, directly or indirectly, or to offer to render or furnish such services within or without this Commonwealth. The forwarding of a claim by a collection agency to an attorney at law, for the purpose of collection, shall not constitute furnishing legal service for the purposes of this subsection....

(e) Running for attorneys. - It is unlawful for a collection agency to solicit employment for any attorney at law, whether practicing in this Commonwealth or elsewhere, or to receive from or divide with any such attorney at law any portion of any fee received by such attorney at law This subsection does not prohibit the established custom of sharing commissions at a commonly accepted rate upon collection of claims between a collection agency and an attorney at law.

Both the ethical constraints of the Rules as well as the criminal statute should be considered by the inquirer in structuring her potential relationship with the collection agency.