The inquirer represents a lender in commercial real estate development and advises that within the industry, standard practice is that the borrower pays the lender's counsel fees. The inquirer proposes an arrangement under which he would offer to the borrower the opportunity to use a title company with which the inquirer does business. In exchange for the referral, the inquirer would receive 50 percent of the basic title insurance premium (less endorsements, the request of which is in lender’s counsel's discretion). The inquirer would then apply 50 percent of the amount he receives from the title company as a credit against his legal fees, thereby reducing the amount owing from the borrower. The inquirer would retain the remaining 50 percent. The arrangement would be disclosed in a writing signed by the inquirer, the lender, the borrower, and the title company. The inquirer asks if this proposed conduct poses any ethical problems.
Pennsylvania Rule of Professional Conduct (the "Rules") 1.0e Terminology provides as follows:
"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(b) Conflict of Interest: Current Clients provides that:
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;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent.
Rule 1.8 Conflict of Interest: Current Clients: Specific Rules provides in pertinent part that:
(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
Rule 4.3 Dealing with Unrepresented Person provides in pertinent part that:
(c) When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer should make reasonable efforts to correct the misunderstanding.
The starting point for analysis of this inquiry is the Philadelphia Bar Association's Professional Guidance and the Pennsylvania Bar Association's Legal Ethics and Professional Responsibility Committees' Joint Opinion 2000-100, which addressed an attorney's receipt of referral fees from non-lawyer professionals. That opinion concluded as follows:
"The Committee believes that the strict letter of the [Pennsylvania] rules [of Professional Conduct] permit a lawyer to accept a referral fee from a service provider, provided that the lawyer is scrupulous in determining under the particular circumstances that payment of the referral fee will not impact the lawyer client relationship or the lawyer's exercise of independent professional judgment and that the client consents to the arrangement on the basis of full disclosure and consultation."
This inquiry is different from the situation addressed in 2000-100 because the attorney’s fee being adjusted is being paid by a third person, the borrower, rather than by the client directly. Nevertheless, the following issues raised in that opinion are worthy of consideration and restatement in connection with this inquiry.
Under both Rules 1.7(b) and 1.8(f), the lawyer must make an independent judgment that any potential conflict arising out of the arrangement will not affect the lawyer's professional judgment or the lawyer client relationship. In evaluating the potential conflict, the lawyer must consider the possibility that the client will not be satisfied with the service provider and how the lawyer would respond in such a situation. In such instances, it is clear that the lawyer's loyalty must lie with the client, that the lawyer must advise the client that the service provider was negligent or providing poor service, and that the client, therefore, should consider switching service providers. If the lawyer concludes that the representation, the lawyer client relationship, and the lawyer’s professional judgment will not be adversely affected, the lawyer must then obtain the client's consent to the lawyer's acceptance of the referral fee after full disclosure.
In considering whether the client’s informed consent can be obtained, the Committee recommended that the following factors be considered:
1. Fullness of the disclosure and whether the disclosure and the consent of all interested parties including the client are obtained in writing;
2. The client's (and in this case, the borrower's) level of sophistication, experience and judgment; and
3. Whether the client and the borrower sought independent advice or were advised by the lawyer to seek independent advice with regard to the lawyer’s acceptance of the referral fee.
Not having seen the proposed disclosures, the Committee expresses no view as to their adequacy under the circumstances.
In Joint Opinion 2000-100, this Committee observed that the preferred practice in the event of a referral fee of this type was to negotiate a reduction in the service provider’s charge or to give the client a credit on the attorney’s fee charge. In this case, as a matter of contract the lender has provided for the counsel fee to be paid by the borrower, as a result of which the sharing of benefit of the referral fee through a reduction of the counsel fee charged actually inures to the benefit of the borrower, not the client.
The Committee feels the rationale of Joint Opinion 2000-100 leads to the same conclusion here, namely that the proposed arrangement is not precluded so long as there is scrupulous adherence to other requirements of the Rules of Professional Conduct that may bear on the issues. The Committee feels that, in addition to the considerations outlined in Joint Opinion 2000-100, the arrangement proposed in this inquiry also implicates Rule 4.31.
Given that the lawyer's fees are being paid by the borrower and that the lawyer will be discussing with the borrower a referral arrangement that can impact both those fees and provision of title services being provided in connection with the transaction, there exists a potential for confusion in the mind of the borrower regarding whom the lawyer is representing. This potential for confusion is further increased by the likelihood that, in a situation where the borrower does not have his own counsel, the lawyer may find himself or herself in the position of explaining generally the lawyer’s view as to the purpose of certain documents presented for signature and or the underlying legal obligations represented by those documents.
In order to ensure compliance with this requirement, at a minimum, the written disclosure which is made by the lawyer should include a clear statement that the lawyer is acting as counsel for the lender, not the borrower, and that the borrower should consider consulting his own counsel with respect to the matters set forth.
This opinion does not address other state or federal laws or ethical rules that may deal with the question whether a lawyer may accept a referral fee from a real estate broker, insurance agent, investment manager, or other service provider.
1See explanatory comment (2) to Rule 4.3, which provides:
This Rule does not prohibit a lawyer from negotiating the terms of a transaction or settling a dispute with an unrepresented person. So long as the lawyer has explained that the lawyer represents an adverse party and is not representing the person, the lawyer may . . . explain the lawyer’s own view of the meaning of the document or the lawyer's view of the underlying legal obligations.
CAVEAT: The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.