By David Majchrzak and Edward McIntyre
20.1.1 In the Matter of Rodriguez (2020) Not Published Case Nos. 16-O-11648, 16-O-16181, 16-O-17636 – State Bar Court of California Review Department (January 13, 2020)
Issue:
May a lawyer require clients to pay advance fees for valid litigation services in matters concerning loan modification?
Analysis:
No. In 2009, two safeguards went into effect to protect borrowers who would potentially employ somebody to assist with loan modification: (1) a requirement for a separate notice advising borrowers that it is not necessary to employ a third party to negotiate a loan modification (Civ. Code, § 2944.6, subd. (a)); and (2) a proscription against charging pre-performance compensation, i.e., restricting the collection of fees until all contracted-for services are completed (Civ. Code, § 2944.7, subd. (a)). Until January 1, 2017, Business and Professions Code section 6106.3 provided, “It shall constitute cause for the imposition of discipline of an attorney within the meaning of this chapter for an attorney to engage in any conduct in violation of Section 2944.6 or 2944.7 of the Civil Code.” Although the statute was amended effective January 1, 2017 to remove the reference to Civil Code section 2944.7, the conduct occurred before January 1, 2017. So, the former version of section 6106.3 applied.
Between 2014 and 2016, the respondent lawyer provided loan modification services in conjunction with foreclosure defense litigation in three client matters. She submitted loan modification applications in all three matters and collected a total of $48,750 in attorney fees. The record establishes that $14,750 of those fees were clearly pre-performance fees. Because such funds were proscribed by section 2944.7, they were illegal fees within the meaning of former Rule of Professional Conduct 4-200.
The lawyer argued that, because her agreement included litigation strategies, not all of which involved loan modification issues, sections 2944.6 and 2944.7 did not preclude her from collecting advance fees. But the Court concluded that the statute “plainly prohibits any person engaging in loan modifications from collecting any fees related to such modifications until each and every service contracted for has been completed.”
Additionally, the lawyer’s engagement agreement authorized her to engage in litigation that the clients deemed appropriate, but did not reference loan modification services or include the section 2944.6 disclaimer. Nonetheless, the lawyer acknowledged that she provided loan modification services to all three clients.
David Majchrzak and Edward McIntyre are co-editors of Ethics Quarterly.