The inquiry was submitted by letter and reviewed by the Committee at the September 1993 meeting.
The inquirer has submitted six hypothetical cases which raise questions regarding referral fees, fee-splitting, financial assistance to a client and the unauthorized practice of law. The hypotheticals are closely related, but each presents a slightly different issue.
HYPOTHETICAL: A national mortgage service company which services loans in Pennsylvania hires an out-of-state law firm to send foreclosure packages to Pennsylvania lawyers for foreclosure on Pennsylvania properties. As a condition to obtaining the business from the forwarding law firm, the Pennsylvania lawyer must agree to pay a nominal sum of approximately $35 to the forwarding law firm to reimburse it for costs. The forwarding law firm performs no services, and merely acts as a conduit to forward the foreclosure package in a given case to a Pennsylvania lawyer.
DISCUSSION: The Philadelphia Professional Guidance Committee has concluded that if the payment of $35 to the forwarding law firm is a reimbursement for actual costs incurred, there is nothing improper about the payment. Even if there are no actual costs involved, the payment is proper as a fee-splitting or referral fee arrangement so long as there is compliance with Rule 1.5(e) of the Rules of Professional Conduct. That Rule provides, in part, as follows:
(e) A lawyer shall not divide a fee for legal services with another lawyer who is not in the same firm unless:
(1) the client is advised of and does not object to the participation of the lawyers involved, and
(2) the total fee of the lawyers is not illegal or clearly excessive for all legal services they rendered the client.
Pursuant to the rule, fee-splitting is permissible if the client is aware of the arrangement and does not object and the total fee is not clearly excessive or illegal. The rule has been interpreted to mean that a client need not be informed of the amount of the referral fee. Opinion 90-139 (ll/25/90) Division of fees with lawyer; Referral fees.
A Pennsylvania lawyer can pay a referral fee to or split a fee with an out-of-state lawyer. In doing so, the Pennsylvania lawyer is bound by the Rules of Professional Conduct as they apply in Pennsylvania. The out-of-state lawyer is bound by the ethics requirements of his own jurisdiction.
HYPOTHETICAL: The facts are the same, except that the forwarding firm is a corporation, not a law firm.
DISCUSSION: The committee has concluded that payment of $35 to the referring corporation is permissible if that amount represents actual costs incurred by the company in connection with forwarding the foreclosure package to the law firm. If the $35 payment is considered only as a referral fee or a fee-split, it is not permitted under the rules. Rule 5.4(a) prohibits a lawyer from sharing legal fees with a non-lawyer except in certain circumstances that are clearly not applicable here. In addition, Rule 7.2 prohibits a lawyer from giving "anything of value" to a person for recommending the lawyer's services. A lawyer is not permitted to pay another persons for "channeling professional work." Comment to Rule 7.2. It has specifically been held, that a lawyer can not share a fee or pay a referral fee to a nonlawyer. Matter of Weinroth, 100 N.J. 343, 495 A.2d 417 (N.J. 1985) See also National Treasury Employees Union v. U.S. Dept. of Treasury, 656 F.2d 848 (D.C. Cir. 1981) (A business may not be paid for supplying a lawyer to a client, except only to compensate for actual expenses in providing the lawyer's representation.)
HYPOTHETICAL: A national mortgage service company with Pennsylvania loans, hires an out-of-state law firm to send foreclosure packages to Pennsylvania lawyers. As a condition to obtaining the business from the forwarding law firm, the Pennsylvania lawyer must agree to pay a sum of approximately $100 to the forwarding law firm to reimburse it for costs and fees. The forwarding law firm also acts as a liaison between the Pennsylvania lawyer and the mortgage company during the course of the foreclosure action.
DISCUSSION: The committee has concluded thatbecause the proposed $100 payment involves a fee, Rule 1.5 is involved. As in Hypothetical 1, the fee referral is proper so long as the client is advised and the total fee is not illegal or clearly excessive. The receiving law firm should continue to follow Rule 1.5 during the entire time that the forwarding law firm intends to act as a liaison counsel.
HYPOTHETICAL: Same factual situation above, but substituting a corporation for the forwarding law firm.
DISCUSSION: The committee has concluded that if a corporation charges $100 and acts as a liaison, Rules 5.4 and 5.5 could be involved. Rule 5.4 not only prohibits fee-sharing between lawyers and non-lawyers, but it also restricts lawyers from engaging in a partnership with a non-lawyer if the activities of the partnership consists of the practice of law. Rule 5.5 prohibits a lawyer from aiding a non-lawyer in the practice of law.
If the $100 is a legitimate cost reimbursement and fee for non-legal services rendered, then Rules 5.4 and 5.5 would not apply.
HYPOTHETICAL: A multi-state law firm having an office in Pennsylvania supplies a number of employees who are not lawyers, at its own expense to work at a national mortgage service company to send out foreclosure packages. These employees perform their work at a location owned or leased by the national mortgage service Company. The services of the employees are provided by the national law firm at no expense to the mortgage company. Implicit in the arrangement is the understanding that most or all of the foreclosure packages sent out will be forwarded to the local offices of the national law firm.
DISCUSSION: The committee has concluded that there is nothing improper about this procedure. Having law firm employees provide assistance to a client in sending out foreclosures packages, is standard operating procedure for high volume mortgage collection work. Since most or all of the foreclosure cases are being sent to the law firm providing the employees, there is no violation of the Rules. However, Rule 1.8 must be kept in mind. That Rule prohibits a law firm from rendering financial assistance to a client. It states, in pertinent part, as follows:
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter....
The engagement letter with the client should be specific in describing the scope of the employees' work relating to the foreclosure packages. If the employees do work beyond that scope, Rule 1.8 might be violated.
HYPOTHETICAL: Same facts as Case 5, except that the employees who are sent to work at the national mortgage company are employed with a corporation owned by the principals of the national law firm, as opposed to being employees of the national law firm itself.
DISCUSSION: The propriety of this arrangement depends on who pays the employees. If the corporation pays the employees, there is no violation of the Rules. If the national law firm pays the employees, then Rule 5.4 is violated because the relationship between the corporation and the law firm could be viewed as a subterfuge for a fee-sharing arrangement with a non-lawyer.