Attorney Authority & Client Funding: Ethical Boundaries and Best-Practice Letters of Protection

In the world of pre settlement funding, attorneys often play a central role—not in deciding whether a client should borrow, but in facilitating the flow of information between the lender and the plaintiff. This position carries significant ethical responsibilities under ABA opinions, state bar guidance, and court rulings. A misstep in handling funding-related communication can have professional consequences, making it essential for attorneys to know the boundaries and use well-drafted letters of protection (LOPs) to safeguard both the client and themselves.

ABA Opinions on Attorney Involvement

The American Bar Association has repeatedly clarified that attorneys must act in the client’s best interests when cooperating with funding companies. This means avoiding any undisclosed financial interest in a lender, ensuring the client fully understands the agreement, and never allowing the funding arrangement to dictate litigation strategy.

The ABA’s stance also reinforces that while an attorney can confirm case status or lien priority, they cannot ethically authorize funding without the client’s informed consent. Just as careful balancing is needed when weighing case expenses, fee caps, and risk allocation in funding decisions—much like the evaluation process in selecting terms beyond simply the lowest cost—an attorney’s role is advisory, not directive.

State Bar Guidance and Jurisdictional Variations

State bars add another layer of guidance, and these rules can vary widely. Some jurisdictions require attorneys to sign the funding agreement itself, while others limit their role to acknowledging a lien and promising repayment from settlement proceeds.

In multi-jurisdictional matters—especially in class-action contexts—the ethical rules of each state where clients reside can come into play, much like the jurisdiction-specific compliance considerations that arise in multi-claimant settlement funding. A law firm managing plaintiffs in multiple states must ensure that its funding practices meet every applicable rule, not just those of the primary jurisdiction.

Best-Practice Letters of Protection

A well-drafted LOP protects the client’s rights, documents the attorney’s limited role, and confirms repayment terms to the funding company. It should clearly state:

• That the attorney is not a guarantor of repayment.
  
• That repayment is contingent on a recovery in the case.
  
• That the attorney agrees to honor the lien from settlement funds.
  
• That the client has authorized the attorney to disburse repayment.
  

A properly worded LOP is particularly critical in preventing disputes when multiple funding arrangements exist. Without clarity, lienholders may compete for priority, creating the type of repayment conflict common in multi-lender advance situations.

Sanctions Case Studies

Several court decisions highlight the risks of poor documentation or overstepping ethical boundaries. In some instances, attorneys have been sanctioned for withholding funds owed to a lienholder or for misrepresenting the client’s agreement to a funding arrangement. In others, failure to follow state-specific disclosure rules led to fee disputes and bar complaints.

These cases reinforce why attorneys should treat funding communications with the same diligence as any other financial transaction in litigation. Just as understanding risk-based funding formulas can shape the size and terms of a lawsuit loan, recognizing the potential legal exposure can guide an attorney toward more transparent, defensible practices.

Client Communication and Informed Consent

Beyond the technicalities of drafting, attorneys have an ethical duty to ensure clients understand the financial implications of a funding agreement. That includes explaining repayment scenarios, clarifying that funding is non-recourse (subject to exceptions), and outlining situations where “no win, no repay” clauses might not apply—such as fraud, appeals, or case transfers, as seen in the carve-outs described in repayment-waiver agreements.

Attorneys should also advise clients on the cumulative cost of borrowing, particularly if multiple advances are being considered. Educating clients on this front mirrors the risk-awareness strategies applied when estimating maximum funding eligibility, helping them avoid overextending their future settlement.

Protecting the Client’s Net Recovery

Ultimately, funding arrangements must be structured to leave the client with a meaningful portion of their settlement after all liens, legal fees, and costs are paid. An attorney’s involvement in the funding process is an opportunity to safeguard that outcome by:

• Coordinating with one reputable funder to avoid stacking complications.
  
• Ensuring the advance amount is proportionate to expected recovery.
  
• Aligning repayment terms with case resolution timelines.
  

These measures help prevent scenarios where the client’s recovery is drained by unnecessary borrowing costs, preserving the financial purpose of the lawsuit itself.

The Bottom Line

Attorney involvement in legal funding is both necessary and highly regulated. By following ABA and state bar guidance, using clear letters of protection, and maintaining open communication with clients, attorneys can fulfill their ethical duties while facilitating timely, fair funding.

In the end, the safest and most ethical approach is to partner with a single, transparent funding provider who respects attorney boundaries and keeps the client’s best interests at the forefront. This ensures that funding supports the litigation without introducing conflicts, ethical risks, or repayment surprises—and that both attorney and client can focus on securing the best possible resolution.

Disclaimer: These materials have been prepared for general informational purposes only and are not intended and should not be construed as legal advice or legal opinion on any specific facts or circumstances.