The Ethics of Using Lines of Credit to Pay for Litigation Costs
Personal injury attorneys often struggle with managing their cash flow because of the burden of paying litigation costs upfront while waiting for settlement checks to come in. Most plaintiffs’ attorneys feel like the fees they earn when they settle a case go to covering costs for their clients on the next case and there is little or nothing left after settlement for the attorneys themselves. Although disbursements may be the client’s responsibility under a Retainer Agreement, often attorneys don’t recover the costs until their cases resolve, assuming they resolve successfully. That means attorneys are stuck giving their clients interest-free loans with after tax dollars because the Internal Revenue Service treats case expenses as an investment by the attorney or law firm. Fortunately, a line of credit can provide a way for attorneys to get the funding they need to front litigation costs. Attorneys can then pass through the interest on the line of credit to their clients on costs funded by the line of credit. The question then becomes, is that ethical? The answer in most states is yes.
For example, in New Jersey, in Ethics Opinion No. 603, the Supreme Court of New Jersey Advisory Committee on Professional Ethics was asked whether a firm could borrow funds from a third-party lending institution to cover disbursements and, on the favorable outcome of the matter, reimburse itself for both principal and interest charges related to the borrowed funds. The Committee concluded that interest charges are not unethical as long as they are made clear to the client at the outset of the retention and the client agrees to the same.
Other states have similarly found that there is nothing unethical about borrowing funds to cover disbursements and then deducting both the principal and interest charges relating to the borrowed funds from the total recovery. (See your local ethics rules for more information.)
If you have cash flow concerns, you should consider outside financing. To learn more about funding options for your law practice, check out our blog post – Credit Lines vs Post-Settlement Funding: Which One is Right for Your Law Firm? or contact Sherry Foley, Esq. at firstname.lastname@example.org for a consultation.