Don’t Let Your Law Firm Get into the Client Funding Business
Your client has a solid personal injury case. His car was rear ended by a driver who was busy texting instead of watching the road. It’s just a matter of time before the case settles and the client is compensated for time off work while he recovers from injuries sustained from the accident.
Unfortunately, your client needs money now to pay for his mortgage payment, utilities, food—the necessities of life. When clients don’t have any other means of obtaining emergency cash, many ask their law firm for a loan or advance on the settlement.
The State Bar of California’s Rules of Professional Conduct, Rule 4-210 addresses the issue of attorneys paying a client’s personal or business expenses. It states, in part, “This rule shall not prohibit a member…after employment, from lending money to the client upon the client’s promise in writing to repay such loan.”
Although firms can advance funds to clients with the written understanding that money from the settlement will be used to repay the law firm, firms may want to think twice about doing so.
Advancing or lending funds to a plaintiff has its risks and costs. Resolving litigation can take much longer than expected. When a case drags on, the law firm’s funding commitment can put a financial strain on the firm. Another issue is that the client can lose the case. The client would be in no position to repay the advance. Moreover, if clients know that funds are coming from attorneys directly, they are likely to ask continually for more funds and refusing their request could compromise your relationship with them.
A more prudent option is to have clients consider using a plaintiff funding company. The funding company advances money to a client and assumes all the risk. By taking the financial burden off the law firm, the firm can make better use of its assets (i.e., add staff, cover overhead, invest in firm marketing) that actually result in a better return for the law firm. By taking this route, the firm avoids becoming a “lender” and clients are able to cover daily living costs until their case settles.