The following legal opinion was approved by The Florida Bar’s Board of Governors May 30, 1997. It deals with whether or not it’s permissible for a law firm to use a company it owns to collect delinquent fees from a client.
A law firm may assign delinquent accounts receivable to a corporation wholly owned by the firm and an attorney of the firm may represent the corporation in a lawsuit against the client to collect the delinquent funds.
A member of The Florida Bar has requested an advisory ethics opinion regarding the assignment of the accounts receivable representing fees owed to the attorney’s law firm by its former clients to a separately formed corporation whose stockholders are the law firm’s partners. The corporation would then retain the firm in its efforts to collect the receivables.
The inquiring attorney asks whether it would be ethically permissible to enter into the proposed arrangement.
Generally speaking, attorneys are ethically permitted to pursue fee collection actions against former clients, but may resort to lawsuits and other legal remedies only after other reasonable attempts to collect the delinquent sums have proven fruitless. See, e.g., The Florida Bar v. Fields, 482 So.2d 1354 (Fla. 1986). The Professional Ethics Committee previously has opined concerning the ethical propriety of several specific fee-collection methods. For example, in Opinion 72-43 the Committee stated that it was ethically permissible for an attorney to assign to a third party accounts receivable representing professional fees if the client agreed to the assignment and if the attorney retained the sole right to sue the client in event of default. The Committee concluded in Opinion 81-3 that it would not be unethical for an attorney, whose reasonable attempts at debt collection proved unsuccessful, to use a reputable independent collection agency in an attempt to collect past due fees. The Committee cautioned, however, that the attorney could disclose confidential client information about the client to the collection agency only to the extent that it was relevant to the debt-collection efforts. The Committee further stated that the attorney had a continuing duty to take steps to ensure that the activities of the collection agency were not contrary to the attorney’s ethical code. More recently, the Committee determined in Opinion 90-2 that, in an effort to collect delinquent fees, it would be permissible for an attorney to report a delinquent former client to a credit reporting service, provided that confidential information unrelated to the collection of the debt was not disclosed and that the debt was not in dispute.
The instant proposal, however, presents issues not addressed in earlier opinions. In order to properly consider these issues, it is helpful to review some of the arguments advanced by the inquiring attorney and others in support of the proposal. First, the inquiring attorney states that the law firm is a general partnership and states that, under Florida law, general partnerships may not sue or be sued in the name of the partnership; rather, each partner must be named individually. The inquirer’s firm asserts that assigning delinquent receivables to the firm’s wholly-owned collections corporation, which would then conduct any necessary litigation, would eliminate the need for the firm’s partners to individually be named in collection lawsuits.
Additionally, it has been argued that assigning receivables to a firm-owned collection corporation, rather than to an independent collection agency, would help preserve confidentiality because (at least prior to the filing of suit) no confidential client information would be disclosed to “outside” parties. A related argument in support of the proposal is that the chances of reaching a negotiated settlement with the delinquent former client are enhanced because law firm personnel will be directly involved throughout the process.
Another acknowledged reason underlying the firm’s advancement of the proposal is that, by bringing fee-collection suits in the name of the wholly-owned collection corporation rather than the law firm, public scrutiny of the law firm’s actions will be minimized or avoided.
The firm’s proposal presents several other questions that must be considered. There is a question whether the firm’s assignment of the debts to a wholly-owned corporation in an effort to keep the public from becoming aware that it sues delinquent clients should be considered “conduct involving dishonesty, fraud, deceit, or misrepresentation” in violation of Rule 4-8.4(c), Rules Regulating The Florida Bar. There is also a question whether the assignment to the corporation will be supported by consideration. Finally, there is a question whether the conflict of interest rules prohibit the law firm from representing the collection corporation in litigation concerning fees owed as a result of the firm’s representation of the debtor clients.
Although the practice of law is primarily a profession rather than a business, today’s practice environment requires the recognition of certain business realities. One of these realities is the fact that some clients simply do not pay their bills, regardless of the quality or value of the legal services that they have received. Accordingly, we are of the opinion that it is permissible for the inquiring attorney and his firm to participate in the specific arrangement proposed, under the conditions discussed below. We further conclude that the conditions of client consent and limitation on the right to sue imposed in Opinion 72-43 will not apply if the requirements set forth below are satisfied.
As noted above, subdivision (c) of Rule 4-8.4 prohibits an attorney from engaging in “conduct involving dishonesty, fraud, deceit, or misrepresentation[.]” In applying this provision, it is important to read it in the context of the entire rule, which prohibits a list of actions deemed to be misconduct. Viewed in this context, we do not believe that the conduct proposed by the inquirer rises to the level of the intentionally dishonest or deceitful conduct prohibited by Rule 4-8.4(c).
Although it is not clear whether the proposed assignment is to be supported by consideration, we consider this to be a question of law rather than ethics in this circumstance. Obviously, in effectuating any assignments all relevant legal requirements must be followed.
The conflict of interest rules governing representations adverse to former clients must also be addressed. Rule 4-1.9 provides:
A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation; or
(b) use information relating to the representation to the disadvantage of the former client except as rule 4-1.6 would permit with respect to a client or when the information has become generally known.
Applied literally in this situation, this rule would preclude the law firm from assigning its delinquent accounts receivable to a separate legal entity (i.e., the proposed collections corporation), and then representing that corporation in collection actions against the firm’s former clients. The collection matters would be considered “substantially related” to the firm’s original representations of the clients. As a practical matter, however, the policies underlying Rule 4-1.9 would not be thwarted by the proposed conduct because the assignee corporation is to be wholly owned by the firm’s partners. In this specific situation, we see little meaningful distinction between an attorney directly suing a former client for fees (action clearly authorized by prior opinions) and representing the wholly-owned assignee corporation in bringing suit against the delinquent former client. Accordingly, we believe that Rule 4-1.9 should not be construed to preclude the inquiring attorney from subsequently representing the corporation in a suit against the former client for fees.
Finally, we explicitly limit this opinion to the facts and circumstances presented. This opinion does not reach the questions of whether a law firm may assign delinquent accounts receivable to a collections corporation that is not wholly owned by the firm’s members, or whether the firm could then ethically represent that corporation in the collections matters. Nor does it reach the issue of a law firm assigning accounts receivable as security for a loan.