June 29, 2000
A lawyer who represents claimants in tort proceedings would have an irreconcilable conflict of interest if the lawyer entered into an agreement to refer existing and future clients to a venture capital company which would acquire an interest in the proceeds of the claimants' personal injury actions in exchange for immediate cash payments to meet the living needs of the tort claimants.
Draft documents prepared by a venture capital company and presented to the Ethics Committee contain a number of onerous conditions which would individually create ethical problems and which collectively make the proposed agreements unethical.
Regardless of the specific terms of the documentation, the proposed arrangement between the lawyer and the venture capital company would inevitably create a conflict of interest by significantly interfering with the lawyer's relationship with the clients, with the lawyer's ability to advise the clients, with the clients' control of the litigation, with the clients' power and right to terminate the lawyer and/or to settle or abandon the claims.
The depth of the conflicts of interest identified in this opinion makes it highly unlikely that consent or waiver by the client could resolve the conflicts.
References: MRPC 1.6, 1.7 and 1.8; Virginia Ethics Opinion 1155.
Inquiry has been made as to: (1) Whether a lawyer representing civil tort plaintiffs remains in compliance with the Michigan Rules of Professional Conduct if the lawyer refers his or her client to a venture capital corporation that have formed a business for the purpose of advancing funds to personal injury plaintiffs to satisfy their immediate needs for cash in return for a share of the tort judgment or settlement, enforced by lien on the proceeds and a number of conditions inherent in the agreement. (2) Whether a lawyer representing civil tort plaintiffs remains in compliance with the Michigan Rules of Professional Conduct if the lawyer receives payment for costs as part of plaintiffs' contract with the venture capital corporation in the event that the suit is not successful.
In the proposed agreement offered to the committee, there are many conditions placed upon the individual tort plaintiff who accepts funds from the venture capitalists. It is our view that these terms have the potential of becoming adverse and onerous in any dispute between the client and the venture capital corporation as the litigation unfolds. The lawyer agrees, for example, to hold all funds in trust for the venture capital corporation and to restrain the use of disbursed structured settlement funds until all "capital advances" paid to the individual plaintiff have been repaid. The monies paid by the venture capital corporation to the client create liens that while inferior to statutory liens, are obligations that are equal or superior to other nonstatutory liens. Both the individual plaintiff and the lawyer must agree to decline to terminate legal representation as to that lawyer or to make a change from present counsel without the express written consent of the venture capital corporation, so that any change of a new lawyer is restricted. In the event of a legal dispute, all settlement funds must be interpleaded in a case to be started in the Eighth District Court for Clark County, Las Vegas, Nevada, with the individual plaintiff agreeing to this out-of state venue without further objection to the forum selection as inconvenient or unlawful.
The agreement that the plaintiff has with the venture capital corporation also creates concerns. The sample agreement provided to the committee provides that the individual plaintiff waives all legal defenses to any of the payments from settlement proceeds that are required to be made to the venture capital corporation relating to the propriety of the agreement. In another paragraph of that agreement, the venture capital corporation represents that it is the "provider of funds of last resort" and it specifically advises the individual client that other financial services are available on terms that may be more favorable and available at better rates and conditions than this group allows. Furthermore, a representation that all other attempts to borrow money has been explored by the client and has failed whether this has actually been done or not. It is the plaintiff's tort counsel who has his or her own interests guaranteed who is under an individual obligation to review the agreement documents for a legal opinion to his or her client. Under all circumstances, all amounts advanced by the venture capital corporation must be repaid. The sample agreement provides that plaintiff's tort lawyer must warrant that he or she has reviewed the documents and has answered all of the questions of the client regarding the arrangement.
Under the sample agreement, the tort-claimant client is specifically advised that the venture capital corporation may make a "substantial profit" from the contractual arrangement. There is an adverse venue/forum selection claim, as all disputes must be litigated in the state of Nevada. In addition, the laws of Nevada, not Michigan, will control. There is a forum selection clause for all state and federal suits taking place in Las Vegas, Nevada, requiring all suits regarding disputes about the agreements take place there.
The document known as the Assignment of Proceeds also has a provision that causes concern. The individual tort plaintiff assigns all proceeds of the settlement or judgment to the venture capital corporation to the extent of the payments to be repaid. A paragraph of the Assignment of Proceeds Agreement specifically restrains the plaintiff from discharging his or her present lawyer and from selecting new counsel. Further, the selection of the lawyer in charge of the litigation requires the approval of the venture capital corporation that retains rights to refuse any change of counsel. Under this agreement, all disputes must be litigated in the remote sites of Clark County, Nevada, or the United States District Court for the Las Vegas District.
Among the various documents provided to the committee is a Security Agreement that makes the proceeds of the suit "collateral" for the advancement of the funds. The venture capital corporation is granted a specific "security interest" in the settlement or judgment proceeds of the case. The venture capital corporation, as the "secured party," is entitled to inspect all records, including all privileged attorney-client records, "relating to the collateral." Plaintiff must also agree to continue the case with his or her present lawyer and, if new counsel is selected, plaintiff is immediately liable for repayment in full of all monies advanced by the venture capital corporation. Plaintiff must agree to continue to litigate the case under all circumstances (despite possible contrary personal desires later) and must continue to "defend" the value of the collateral, i.e., the tort suit. Upon demand, plaintiff must sign all necessary documents that are demanded by the venture capital corporation, and must proceed to do all things demanded by the venture capital corporation in connection with maintenance of the litigation.
The Committee is aware that Virginia Ethics Opinion 1155 permit lawyers and law firms to refer clients to banks and finance companies to loan funds to clients whom, presumably or arguably, demand a "security interest" in the case. However, after examination of the documents provided to the committee, there are potential conflicts of interest and ethical perils that are also, a priori, evident from the contractual documents furnished.
The contractual documents specifically represent that tort counsel should give a legal opinion as to whether his or her client should enter into the agreement. This presents a potential for additional professional responsibilities on the part of counsel, as well as potential conflicts of interest. Under the terms of MRPC 1.7(a), a lawyer shall not represent a client if the representation of that client will be directly adverse to another client unless (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client and (2) each client consents after consultation. The contractual papers seem to subordinate the legal interests of the individual tort client to the venture capital corporation, as the latter becomes the decision making and controlling client. There are, in addition, substantial legal responsibilities owed to each other that certainly could conflict, as their interests appear. Given the course of litigation and settlement decisions to be made, continuance of the litigation, withdrawal of the litigation, change of counsel, etc., these differing contractual obligations have a serious potential for conflict that can only be resolved and made known if careful discussion takes place with both the individual tort client the venture capital corporation and counsel.
Under MRPC 1.7(b)(2), any consent to waive a conflict by a client must be given after full consultation. The consultation must include explanation of the implications of the common representation and the advantages and risks involved. After the agreements are signed, the venture capital corporation becomes, in real terms, a "client" with a co-equal, if not superior, decision making role.
Because of the complexities that this advancement of funds and the contract with the venture capital corporation bring to the litigation, and the fact that the lawyer becomes irrevocably appointed as counsel for all future litigation purposes, the termination of employment cannot be accomplished without disastrous financial consequences befalling the tort client. If the lawyer is replaced, the lawyer effectively enters into a business transaction with the tort client with the potential of a pecuniary interest that may be adverse to the client. This potential adverse interest must be clearly made known to the client in a fashion beforehand that can be reasonably understood by the tort client. See MRPC 1.8(a)(1). The tort client must by given a reasonable opportunity to seek the advice of independent counsel to evaluate the complicated transaction. Moreover, the bargain, taken as a whole, makes the lawyer not capable of being discharged for any reason and subject to the venture capital corporation's controlling the litigation. That may amount to a property interest in the case for both the lawyer and the venture capital corporation. MRPC 1.8(a)(2).
The Committee is also concerned that the arrangement specified by the contractual documents has the potential of running afoul of MRPC 1.8(g) that prohibits a lawyer from representing two or more clients in a conflicting position as that combination may relate to the making of "an aggregate settlement" that may be to the advantage of the venture capital corporation or to the disadvantage of the tort client, ". . . unless each client consents after consultation . . . ." Given the vagaries and difficulties of predicting the results of modern day tort litigation, together with the candid assessment by the venture capital corporation that it will make a "substantial profit" under the circumstances, the committee finds it difficult to ascertain how the early client consultation could effectively predict, with a reasonable degree of certainty, how these complicated contractual documents could work to the advantage or disadvantage of the parties at a later time, given the twists and turns that tort litigation sometimes takes.
Because the contract documents furnished make clear that the venture capital corporation has the superior right to conduct the litigation once the funds are paid as the venture capital corporation sees fit, it becomes obvious that the lawyer must guard against interference with his or her professional judgment for the tort client. See MRPC 1.8(f)(2); MRPC 1.7(b).
In addition, the contract documents give the venture capital corporation the right to inspect all legal documents, presumably, even if legally privileged, and this may violate MRPC 1.8(h)(3) that requires a lawyer to protect all information relative to the representations. See MRPC 1.6.
In light of the fact that original tort counsel is given an irrevocable commitment to continue in employment as counsel by virtue of the financial arrangement with the venture capital corporation, irrespective of the quality of relations with the client or his or her performance or the needs of the client to continue with the case or to terminate it, the committee is also concerned that MRPC 1.8(j), that prohibits a lawyer from acquiring a proprietary interest in the cause of action, may also be violated by this arrangement. The contractual documents virtually remove from the tort claimants any ability on their part to select new counsel, without risking disastrous legal consequences, i.e., the immediate requirement of the repayment of all sums to the venture capital corporation, termination of the case, conducting it as he or she see fit or protecting privileged materials. Severe financial penalties virtually assure the non-discharageable lawyer's having acquired a proprietary interest in the cause of action and the clients being bludgeoned to actions that may conflict with their interests.
The committee concludes that agreements such as those presented to the committee create an impermissible conflict of interest under MRPC 1.7(a)(2), 1.7(b)(2) and 1.8, because:
- The ultimate control of the litigation may be transferred to the venture capital corporation due to the fact that the lawyer is permanently appointed to the case;
- The original lawyer cannot be terminated without the venture capital corporation's consent in light of the fact that on demand of the venture capital corporation all documents and things must be demanded by that group; and
- Privileged materials may be disclosed.
Furthermore, given the employment status of tort counsel as irreplaceable and incapable of being substituted, except with the consent of the venture capital corporation, it remains our view that MRPC 1.8(a)(2) requires the consultation with independent counsel who has no relationship with either the tort counsel or the venture capital corporation as this is the only lawyer who can properly advise the tort claimant.
Finally, with respect to the inquiry by the lawyer as to whether the provision in the contractual documents of the venture capital corporation will not seek court costs and expenses of litigation advanced by the lawyer and reimbursed by the venture capital corporation from the individual tort client, it is our opinion that this could also be inappropriate. Under MRPC 1.8(e)(1), a lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client. There is no ethical objection to the venture capital corporation advancing these sums once adequate disclosure is made if the complicated transaction is fully explained to the tort client. The agreement must be ethically modified to have the tort client understand and agree that ultimate responsibility for all such advanced costs and fees will be borne by the individual client to meet these ethical strictures. Of course, if the client is truly indigent as contemplated by MRPC 1.8(e)(2), this modification would not be necessary.