By Valerie Silverman Massey
Imagine this scenario: Attorney is retained by Financier to represent Party. Attorney’s client is Party, but Attorney also has a financial relationship with Financier (who may be funding the representation and/or also funding any settlement or judgment).
These situations can (and do) occur in any type of legal representation. A criminal defendant’s defense or a transactional engagement may be funded by a family member or friend. A plaintiff’s case may be funded by a third-party financier or a line of credit. A civil defense may be funded through an insurance company or a contractual relationship with another party (or a non-party) to the case. Although the financing for the legal representation is through a third party, the Attorney must maintain its ethical obligations to the client.
Many California Rules of Professional Conduct are significant in this tri-party relationship. Specifically, Rule 1.8.6; requires a lawyer’s independence from the financier in the Attorney-Client relationship and informed written consent of the client to proceed with the financial arrangement. Rule 1.8.6, see also Sharp v. Next Entertainment, Inc. (2008) 163 Cal.App.4th 410, 428–429. It is through the requirement of informed written consent that the attorney and the client can clearly identify the expectations and application of the attorney’s ethical obligations to the client. The requirement for informed written consent is also necessary to negate violation under the conflict-of-interest rules (Rules 1.7). With a third-party financing the representation, the attorney may have unintentionally created its own personal financial interest in the matter. Rule 1.7(b).
The application of certain Rules may present challenges that are not typically present when the client is funding their own representation, such as who is the attorney obligated to inform of case developments and who directs the objectives of the representation. The Rules state these obligations are owed to the client, not the financier. It is imperative to maintain open communication with the client as necessary to the representation. Rule 1.4. While there may be a separate duty to also keep the financier informed of case developments (i.e. in the instance where there is an insurance agreement between the financier and the client), failure to communicate significant case developments and settlements with the client is a violation of the Rules. Rule 1.4 and 1.4.1. The client, not the financier, remains the decision maker in the relationship. Moreover, there are certain issues, liabilities, and damages that may be outside the financier’s obligations to the client, i.e. punitive damages, defense/indemnification of other parties, etc. The client, not the financier, must be advised of these developments. Id.
Similarly, the client is the holder of the attorney-client communication privilege. HLC Properties, Ltd. v. Superior Court (2005) 35 Cal.4th 54, 62. This privilege not only encompasses information obtained from client meetings or contained in periodic legal updates to the client, but can also include the attorney’s legal invoices (in whole or in part). Los Angeles County Bd. of Supervisors v. Superior Court (2016) 2 Cal.5th 282, 297-298. When a third party is funding the representation, release of the legal invoices to a financier can be disclosure of information protected by the privilege. As such, a limited waiver of the attorney-client communication privilege may be necessary to allow the attorney to forward the legal invoice to a third-party for payment.
While financing one’s legal representation by a third party may be necessary, it adds another dimension and layer to the attorney-client relationship. Each representation requires a clearly written engagement agreement, informed written consent, and possibly waivers to identify the scope, expectations, and roles of all three parties in the engagement. Without clearly written and understood documentation, the attorney may face discipline and inadvertently create a disqualifying conflict of interest.
Valerie Silverman Massey is a Chief Deputy City Attorney and the Chief Ethics & Compliance Officer at the Office of the San Diego City Attorney.