Ethics Articles & Selected Orders

 Disbarment Order, Kenneth R. Sheehan. Nov. 1, 2006.*                                            *This public discipline order shall be posted for 6 months for public access due to its length and related space constraints in Nevada Lawyer and the public media.   

 Getting Involved in your Client's Money

Unauthorized Practice of Law Initiative

GETTING INVOLVED IN GETTING MONEY FOR YOUR CIVIL LITIGATION CLIENTS: AN ETHICAL QUAGMIRE
By Felicia Galati, Assistant Bar Counsel

The State Bar has been contacted by several attorneys about unsolicited advertisements from organizations offering funding to clients with claims or litigation pending. These organizations offer varied services, including arranging for your client to receive medical care through one of their service providers, paying your client's medical bills and providing a loan. For ease of reference, these organizations will be referred to as third-party lenders. For any attorney considering getting involved with these organizations, beware! Payment of the third-party lender's fees is usually required at the end of the case and can include exorbitant fees, one recently reported at four (4) times the original amount of the medical bills paid. The primary focus of this article is the ethical issues surrounding these situations.
 

Nevada attorneys need to be wary of such offers for both financial and ethical reasons. Consider a situation where a third-party lender contacts the medical service provider, offers an immediate payment at a reduced amount, seeks an assignment of the account and then collects on the lien at full (face value) or greater value from the client or attorney.
 

An attorney should be familiar with Nevada Revised Statute 108.590(1) which provides that whenever any person receiving hospitalization on account of any injury claims damages from the person responsible for causing the injury, the hospital has a lien upon any sum received by the injured person by award of judgment, settlement or compromise to the extent of the amount due the hospital for the reasonable value of the hospitalization rendered before the date of judgment, settlement or compromise. The lien is perfected by filing a notice of lien and serving it upon the party responsible and/or liable for the injury and upon any known insurance carrier. Any person or insurer who makes payments as compensation for the injury suffered without paying the hospital after notice of the lien is liable to the hospital to the extent of the lien for a period of 180 days after the date of that payment.
 

In the case of a third-party lender who obtains an assignment of the hospital's lien, the third-party lender assumes the priority position previously occupied by the hospital. An attorney should be aware of this situation, fully advise the client and carefully consider in what role, if any, the attorney will act given the attendant financial obligations. Furthermore, engaging medical services on undisclosed fee arrangements between a third-party lender and medical provider or at higher rates may not be in the client's best interests.
 

An attorney must carefully consider the ethical issues raised by acting in situations involving a client and third-party lender. The attorney may be involved on a referral basis, as a trustee of the funds or as a guarantor of the loan. The ethical issues raised include confidentiality, various conflicts of interest, safekeeping property and referral fees.
 

First, an attorney must consider the confidentiality rule, SCR 156 (Confidentiality of information). Typically, the third-party lender requires the attorney to provide information about the client's case sufficient to allow the organization to determine whether they will advance funds. The information often includes: client contact information (name, address, telephone number, e-mail address, best time to call the client), the name of the lawsuit, the date of filing, the case status, the type of case, the amount desired and the facts of the case.
 

Clearly the information required is "relating to the representation of a client." An attorney must obtain the "client['s] consent after consultation" before revealing that information. It would be advisable to obtain this consent in writing. An attorney should also consider the possibility that revealing such information may amount to a waiver of the attorney-client privilege and the client should be advised about all of the risks associated therewith.
 

Second, an attorney must consider the conflict of interest rules when considering to act as guarantor of the loan or trustee over any funds for the third-party lender. SCR 157 (Conflict of interest: General rule) and 158 (Conflict of interest: Prohibited transactions). This would include situations where an attorney co-signs a loan, separately guarantees a loan or otherwise acknowledges the lien. All kinds of issues are raised including whether the attorney's representation is materially limited by responsibilities owed to the third-party lender or by the attorney's own interest. To this same extent, the attorney should seriously consider whether he or she is entering into a business transaction with a client or knowingly acquiring a pecuniary interest adverse to the client under SCR 158. Each of the above requires certain advice to be given, various disclosures to be made and consent obtained. In some instances, the transaction must be memorialized in writing. A writing would be preferable in all instances. In agreeing to so act, an attorney may be placed in a position where his or her personal independent judgment is affected because of a financial stake assumed in so handling the case. Where a conflict arises, the attorney must then consider withdrawal. SCR 166 (Declining or terminating representation).
 

Third, an attorney must consider the safekeeping property rule. SCR 165 (Safekeeping property). This Rule requires an attorney to notify the third person upon receipt of funds in which an attorney's client or a third person has an interest. Certainly, where there is a lien and in other instances, where there is a loan agreement, this Rule is applicable. SCR 165 further obligates an attorney to promptly deliver such funds unless a dispute exists concerning respective interests. In the case of a dispute, an attorney may have to file an interpleader action to resolve the matter and/or hold funds in trust until the dispute is resolved. It is strongly advised that the attorney refrain from distributing disputed funds directly to the client during the pendency of such a dispute.
 

Fourth, an attorney must consider the prohibition against providing financial assistance to a client outside of advancing court costs and expenses of litigation. SCR 158(5). The question becomes whether an attorney, by arranging a loan, is providing prohibited financial assistance, at least, indirectly.
 

Before reviewing the various ethical opinions in this area, it is useful to review the impetus for the Rule. The concerns addressed by this Rule arise out of the law of maintenance, champerty and barratry. Maintenance is defined as "an officious intermeddling in a lawsuit by a non-party by maintaining, supporting or assisting either party, with money or otherwise, to prosecute or defend the litigation." Champerty is only one form of maintenance which is defined as "a bargain between a stranger and a party to a lawsuit by which the stranger pursues the party's claim in consideration of receiving a part of any judgment proceeds." Barratry is defined as "frequently exciting and stirring up quarrels and suits, either at law or otherwise." All three were common law offenses and grounds for discipline. Such conduct was said to have a "tendency to encourage unwanted and unmeritorious litigation, inflated damages, suppressed evidence, and suborned perjury."

Furthermore:
the practice of making advances to clients, if publicized, would constitute an improper inducement for clients to employ an attorney…It is obvious that as between a lawyer who offers such an agreement and a lawyer who does not, the client will choose the lawyer who offers the lesser financial obligation, regardless of the skill of the lawyers involved, and regardless of the other factors to be considered in the employment of legal counsel.
 

Previously, attorney advertising and contingency fees were prohibited for some of these very concerns.

Bearing in mind these concerns and in determining whether Nevada attorneys must avoid these situations, it is helpful to review the ethics opinions of other states. The opinions go both ways on whether an attorney may make referrals to a third-party lender and/or take a more active role in these types of situations without running afoul of the Rules of Professional Conduct. Most appear to allow an attorney to make referrals to or take a more active role in similar situations involving third-party lenders.
 

In Arizona, a lawyer may arrange for a client to obtain a loan secured by a lien on the proceeds of the client's personal injury claim provided: (1) the lawyer has no personal interest in the loan service, (2) the lawyer does not co-sign or guarantee repayment, and (3) the lawyer does not reveal client confidences to the lender without the client's informed consent.
 

In Maryland, a lawyer may refer a client to a company that loans money to personal injury victims for living or litigation expenses while they are awaiting settlement provided the lawyer fully discloses to the client the ramifications of such a transaction including the effect of any waiver of the attorney-client privilege, the relationship of the loan to the fee agreement and any other aspect of the transaction that may adversely affect the client. This conduct does not violate the prohibition against a lawyer making loans to clients because the lawyer is not the party providing the financial assistance. In order to make that referral, the lawyer must consider it to be in the client's best interests. A fee must not be paid to the lawyer and the corporation assumes the risk of no recovery.
 

In Pennsylvania, a lawyer handling a personal injury matter on a contingent fee basis may refer the client to a finance company in which the lawyer has no ownership or financial interest. The lawyer may not be compensated for the referral and must avoid revealing client confidences to the finance company without client consent.
 

In South Carolina, a lawyer who assisted a finance company by filing incorporation papers may refer a personal injury client in need of a loan to the lender provided that the lawyer does not have a financial interest in the company and the client consents. The lawyer may also repay the loan plus interest as an assignment from the settlement of the client's case if the client so directs. The acts of the third-party lender cannot be attributed to the lawyer.
 

In Florida, a lawyer may not participate in a financing arrangement that would offer loans to personal injury claimants based on the lawyer's role as trustee for the proceeds of the legal claim and his agreement to repay the loan from those proceeds. Regular referrals from the lawyer to the third-party lender amounts to providing financial assistance to clients, which is impermissible. The arrangement could also weaken the lawyer-client relationship if the client's share of the proceeds was already fully advanced before the conclusion of the case and the client declines to proceed, the lawyer would be placed in between the client and the financing company to the detriment of the relationship.
 

Recently, the American Bar Association's Commission on the Evaluation of the Rules of Professional Conduct in its November 2000 report proposed the addition of a comment ([10]) under a new heading of "Financial Assistance." It provides that:
 

Lawyers may not subsidize lawsuits…brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation.
 

Fifth, an attorney must consider the prohibition against referral fees. SCR 196(15) (Advertising). Some third-party lenders will refer clients to an attorney in exchange for the attorney's referral of clients to them. This could amount to an indirect receipt of a referral fee and a violation of this Rule.

Given the ethical ramifications of third-party lender arrangements, it is advisable to those who brave this territory to do so with extreme caution. Given the seemingly unavoidable pitfalls discussed above, the best course would be to refrain from these types of arrangements altogether.

Endnotes

1 NRS 108.610.
2 NRS 108.650.
3 In re Singer, 109 Nev. 1117, 865 P.2d 315 (1993).
4 Black's Law Dictionary 954 (6th ed. 1990).
5 Id. at 231.
6 Id. at 150.
7 Charles W. Wolfram, Modern Legal Ethics 489 (1986).
8 Id. at 490.
9 In re Carroll, 124 Ariz. 80, 602 P.2d 461, 467 (1979).
10 State Bar of Arizona Ethics Comm., Op. 91-22 (1991). Rule 1.8(e) is identical to SCR 158(5) except that a client must remain ultimately liable for costs and expenses advanced in the case of a nonindigent client.
11 Maryland State Bar Association Ethics Comm., Op. 92-25 (1991) and Op. 94-45 (1994). Rule 1.8(e).
12 Philadelphia Bar Association Professional Guidance Comm., Op. 91-9. Rule 1.8(e).
13 South Carolina Bar Ethics Advisory Comm., Op. 91-15 (1991). Rule 1.8(e) is identical to SCR 158(5).
14 Professional Ethics Comm. of the Florida Bar, Op. 1441 (1992) and 92-6 (1993). Rule 4-1.8(e) is identical to SCR 158(5).
15 A.B.A. Comm. on the Evaluation of the Rules of Professional Conduct Rep. (2000).

UNAUTHORIZED PRACTICE OF LAW
David A. Clark, Assistant Bar Counsel
September 20, 2001

As part of its initiative to address the unauthorized practice of law (UPL), the State Bar has investigated almost 200 complaints, issued numerous cease and desist notices, and obtained five civil injunctions over the past two years. The Bar has an Assistant Bar Counsel and paralegal assigned to UPL matters.

What traditionally comes to mind as UPL are the scrivener services, legal document preparation companies that go beyond mere typing or translation services and engage in the practice of law. While this remains the focus of the Bar's UPL initiative (all five of the injunctions involve such companies), the Bar also receives UPL complaints against lawyers, which are handled through attorney discipline. This aspect of the UPL question attorneys who either fail to supervise paralegals adequately, or who practice law without proper authority in a jurisdiction where they are not licensed.

NRS 7.285 makes it a crime to engage in the unauthorized practice of law, with penalties ranging from a misdemeanor for the first conviction to a class E felony for a third conviction within seven years. In addition, Supreme Court Rule 189 prohibits an attorney from engaging in or assisting another in the unauthorized practice of law.

Out-Of-State Licensed Counsel.
Attorneys licensed in other states run afoul of SCR 189 in pre-litigation cases. Typically, Bar Counsel will approach these matters as discipline cases. Under SCR 99, the Nevada Supreme Court has exclusive jurisdiction to discipline attorneys admitted to practice law in Nevada, specially admitted for a particular proceeding, or "practicing law here, whether specially admitted or not."
Nevada, like many jurisdictions, does not define "the practice of law," and each incident is considered on a case-by-case basis. Generally speaking, when another relies upon your judgment or opinion as to his legal rights, you are practicing law. Pioneer Title Ins. v. State Bar, 74 Nev. 186, 326 P.2d 408 (1958); Greenwell v. State Bar, 108 Nev. 602, 836 P.2d 70 (1992). While there is little Nevada case law on the subject, a recent California case addresses activities that are traditionally considered the practice of law.

In Birbrower, et al v. Superior Court, 949 P.2d 1 (Cal. 1998), the California Supreme Court invalidated a retainer agreement under which a New York law firm was seeking $1 million in fees from a California company. The New York lawyers, none of whom were licensed in California, had represented the client in a dispute with another California business.

The attorneys traveled to California, advised their clients of their legal rights, and made recommendations on legal strategy. They also met with the opposing party, made settlement demands, dickering over terms of a settlement agreement, and filed a demand for binding contractual arbitration and interviewed potential arbitrators. Although the case settled prior to formal action, the Court found the conduct to be the practice of law without any statutory or court authority.

A growing area where the Bar receives complaints of UPL is in construction defect cases. The Bar has received complaints of out-of-state counsel participating in the pre-litigation mediation procedures. Writing notification letters, engaging in discovery, and appearing at pre-litigation mediations in a representative capacity is generally the practice of law. In Nevada, there is no mechanism to obtain authority from the Supreme Court to appear in pre-litigation cases. Therefore, engaging in legal activities involving Nevada disputes and Nevada parties normally requires a licensed Nevada attorney.

In addition, the Bar has received inquiries and complaints of out-of-counsel participating in private arbitration hearings in Nevada. Acting as a mediator or arbitrator is permissible. Parties to private arbitration can choose anyone as the trier of fact. However, representing a Nevada client here or representing a client in a Nevada based dispute is practicing law, and requires a Nevada-licensed attorney.

Finally, merely holding yourself out as an attorney can constitutes the practice of law. This issue most often arises in correspondence from an attorney licensed in another state but not in Nevada. A licensed attorney who is not admitted to practice in Nevada must clearly designate that fact on letterhead. Nevada Standing Committee on Ethics and Professional Responsibility, Formal Opinion No. 20 (February 24, 1995). Further, an attorney licensed only in a foreign jurisdiction must indicate any jurisdictional limitations following his signature on firm stationery. See, i.e., New York Cty. Lawyer's Assn. Comm. On Prof. Ethics, Op. 682 (1990).

Ultimately, the test is whether or not under the circumstances the public would believe that the person is a licensed attorney. This can differ from state to state. For example, in Nevada attorneys almost always use "esquire" following their name and the community and the local bar deem it interchangeable with "attorney." As a general proposition, persons not admitted in any jurisdiction (i.e. law clerks or law school graduates) may not use "esquire" because it can be misleading to the public.

Attorney-Employed Nonlawyers.
SCR 187 charges a lawyer with responsibility for the conduct of any nonlawyer employed or retained by or associated with that lawyer. This would include paralegals, legal assistants, law clerks or attorneys not yet licensed in Nevada.

Being employed by a licensed attorney does not grant a paralegal or law clerk carte blanche to perform activities that constitute the practice of law. For example, conducting initial client interviews, executing retainer agreements, or advising a potential client of their legal rights should not be performed by nonlawyers. At least one state, South Carolina, has taken a firm view of nonlawyer activities. In Doe v. Condon, 2000 WL 718448 (S.C. 2000), the Supreme Court held that a paralegal cannot make unsupervised public presentations on estate planning and cannot conduct initial client interviews in which the paralegal answers general legal questions. The law firm in question had the practice of continuing the initial interview with an attorney once the paralegal obtained general information. This fact was of no moment with the Court, which reiterated that a paralegal may not give legal advice in any event.

Furthermore, sending settlement demand letters to insurance companies signed by nonlawyers can constitute UPL. It does not sanitize the activity if the signer designates "law clerk" or "J.D." under the signature. It is the activity that matters and demanding a sum of money from a third party to settle your client's legal claim is practicing law by almost anyone's definition.

The Bar is not trying to nitpick. The activities mentioned above are not just examples of UPL, they are also examples of unsound law practice management. The State Bar's discipline files overflow with examples of dedicated and well-intentioned attorneys hung out to dry by unscrupulous assistants. Attorneys allow their names to be signed to pleadings in their absence or allow a signature stamp to be used. Coupled with an assistant practicing law in relation to the client or an insurance company, numerous attorneys have faced discipline and civil liability for clients' cases getting settled and the assistant absconding with the proceeds.

Another example involved an attorney wanting to expand and hiring a paralegal to run a new practice area about which the attorney was not readily conversant. The paralegal mishandled cases and stole monies before the attorney discovered the problem. By allowing the nonlawyer to engage in such critical activities of client relations, settlement demands, and authorized signatures (aka the practice of law), the attorney exposes the client and the public to the potential of tremendous harm, not to mention jeopardizing that attorney's license to practice law and earn a living.

And this is the purpose behind the UPL proscriptions, to protect the public from unscrupulous and untrained persons. It is not, as cynics decry, merely a device to maintain lawyers' monopoly on legal services. It is to ensure that someone who handles a person's legal claims and rights is trained and qualified in the law, and is answerable to the State Bar for legal and ethical violations. Lawyers promote this public safeguard by ensuring that they, and not a nonlawyer, establish a strong attorney-client relationship and personally conduct (or closely supervise) those activities which affect the legal rights and obligations of their clients. Put another way, lawyers best serve their clients by following Supreme Court Rules 187 and 189 and not allowing the unauthorized practice of law.

David A. Clark is Assistant Bar Counsel for the State Bar of Nevada. Before joining the Office of Bar Counsel in November 2000, he represented both plaintiffs and defendants for 10 years in civil litigation in California and Nevada.

STATUS REPORT ON THE UNAUTHORIZED PRACTICE OF LAW INITIATIVE
David A. Clark, Assistant Bar Counsel
September 20, 2001

Over the past two years, the State Bar has actively pursued the unauthorized practice of law (UPL). In concert with the Consumer Protection Committee, a standing committee of the State Bar, the Office of Bar Counsel has investigated almost 200 complaints, issued numerous cease and desist notices, and obtained five civil injunctions. To further this initiative, the Bar hired yours truly as Assistant Bar Counsel with primary emphasis in UPL enforcement and assigned a full-time paralegal/investigator to this area.

NRS 7.285 makes it a crime to engage in the unauthorized practice of law, with penalties ranging from a misdemeanor for the first conviction to a class E felony for a third conviction within seven years. In addition, Supreme Court Rule 189 prohibits an attorney from engaging in or assisting another in the unauthorized practice of law.

The purpose of the law is to protect the public from untrained and unregulated persons who hold themselves out as qualified and authorized to offer advice and counsel on legal matters. Licensed attorneys are required to meet extensive and ongoing educational requirements, adhere to stringent ethical guidelines, and are subject to discipline which can include suspension and disbarment. The public has no such recourse against poor or negligent performance by nonlawyers.

What constitutes the "practice of law" differs in each jurisdiction. Although some states define it, many others, including Nevada, do not, preferring a case-by-case analysis. Going to court, filing pleadings, and preparing written instruments are just a part of the definition. Broadly speaking, when a person relies upon your judgment and opinion in relation to their legal rights or obligations, you are practicing law. In addition, simply holding yourself out as an attorney is engaging in the practice of law.

Attorneys generally run afoul by practicing in Nevada without authority in pre-litigation cases. One trap is under Chapter 40 of Nevada Revised Statutes, governing construction defect cases. The Bar has received complaints of out-of-state counsel participating in the pre-litigation mediation procedures.

In addition, out-of-counsel will participate in private arbitration hearings in Nevada, through AAA or similar private company. Acting as a mediator or arbitrator is permissible. However, representing a client in such proceedings is practicing law, which requires authority from the Nevada Supreme Court. Nevada, like many other states, provides no mechanism for allowing an appearance prior to the filing of a formal action. Both actions are generally UPL and should be avoided.

Still, the majority of public complaints the State Bar receives stem from scrivener services, which primarily involve family law and immigration. Such services sell legal forms to pro se litigants, typically in the form of kits or booklets. Where such services run afoul of the law is when the nonlawyer decides for the client which forms to use or which type of action to file, or deals with the court or other party on behalf of the client. This is the unauthorized practice of law. Moreover, typical fees in the cases generating complaints range from $250.00 to $1,000.00 for forms that are generally free or available for a nominal charge from various services, including the Court.
Critics of the UPL laws assert that they simply perpetuate the lawyers' monopoly on legal services. They contend that scrivener services provide low-cost access to the courts, a community need largely unmet by lawyers. This is certainly a valid part of the debate and the Bar has moved to address this need.

For example, the Clark County Family Court Self Help Center and Family Court Facilitator in Washoe County are tremendous assets for the pro se divorce litigant. Supervised by a licensed attorney, they offer forms pre-approved by the Family Court, relevant case law and statutes, and typing and notary services. Also, a number of attorneys are providing limited consultations (at a reduced hourly rate) with such litigants. Often such a brief meeting is all that is necessary for a person to pick the right forms and address the right issues.

As a rule, the Bar will generally reserve action for complaints involving public harm, since this is the main impetus for the prohibition. In addition, the Bar's best tool is a civil injunction, which effectively addresses the public harm or prohibited conduct. Given the burden the Bar must meet to obtain an injunction, it is imperative to have the support of actual victims to evidence an ongoing threat of public harm in order to warrant the drastic relief of shutting down someone's business.
 

The Bar's options in UPL matters are as follows:
(1) Issue a Cease and Desist notice that identifies the violative activity and which may be used in any subsequent litigation or prosecution. This puts the recipient on notice that the Bar has found activity which constitutes the unauthorized practice of law and provides an opportunity for the recipient to amend business practices to come into compliance with Nevada law. Further violations in the face of this notice provide additional support for injunctive relief.
(2) Refer UPL complaints directly to the District Attorney or the Attorney General for criminal prosecution.
(3) File a Civil Complaint for Permanent Injunction.
(4) Refer complaints to any other applicable agencies.
Additionally, if there is an attorney involved, Bar Counsel may proceed through the normal disciplinary process.

The State Bar is committed to this initiative, which has the full support of the Board of Governors. As members of the Bar, your active support is critical on both sides of this issue. If you report instances of UPL the Bar will pursue them. Conversely, your support of programs that increase low-cost access to the justice system will reduce the factors that foster UPL and the public misperception that lawyers are not accessible to those of limited means.

David A. Clark is Assistant Bar Counsel for the State Bar of Nevada. A 25-year resident of Las Vegas, he practiced for 10 years in civil litigation in California and Nevada before joining the Office of Bar Counsel in November 2000.

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