Lawyer Loans to Clients, Don't Do It!

When I was a young lawyer I was asked by an attorney to work on his defense to ethics charges that in part stemmed from his practice of loaning money to clients that he represented in tort cases.  I wrote a thesis on the subject that became part of a relatively effective Supreme Court brief..

The rule against loaning money to clients in personal injury is based in the widely-held suspicion, um, fact that the practice is nothing more than lawyers buying personal injury business.  You don't have to look too long at my archive of Bad Lawyer Advertising to see how lucrative the personal injury business is, to understand why lawyers who practice in this area would look for any edge.  The practice of loaning money falls under the general rubric champerty.  In true champerty, a third person buys a hidden interest in the outcome of litigation, this is a species of maintenance.  The rules against these legal lending practices were championed by nineteenth century rail corporations who found it profitable to delay, buy judges, juries, and otherwise reduce the risk/cost of being the country's largest tortfeasor of the industrial age.  In those days, lawyers lent living expenses to clients so they could hold out to get a decent settlement which as you can imagine was a slightly less nefarious motivation.  Unfortunately as with all wealth transfer, abuses follow, including confiscatory interest rates and gross dishonesty.

Shortly before I did my early work on this issue, there was a jaw-dropping case in a nearby town where the lawyers, two brothers were essentially running a savings and loan out of their personal injury practice.  After I began practicing, I was actually surprised when clients would call and request loans "against my case," assuring me that So-and-So Lawyer would do it. 

The Coloradoan reports on a local attorney who lent money and discovered that the client's gratitude went only so far (with acknowledgement to the ABAJournal.com:)

A longtime Fort Collins defense attorney was reprimanded by an office of the Colorado Supreme Court and placed on probation for a year for violating professional conduct rules.  Erik Fischer (pic) was given a 90-day suspension by the Office of the Presiding Disciplinary Judge but won't actually have to serve it if he stays out of trouble for the next 12 months.  The ruling came after one of Fischer's clients complained about the circumstances under which he loaned her money.

'She was facing foreclosure. I loaned her money. It's that simple,' Fischer said.

The ruling was issued in May and published this month in The Colorado Lawyer, a publication of the Colorado Bar Association.

According to the ruling, Fischer was representing the woman in a personal-injury claim. The woman had lost her job and was facing the loss of her house. Fischer, through a separate company he co-owns, Real Estate Recovery, initially loaned her more than $10,000 with the money to be repaid when she won her lawsuit. Fischer and business partner Dr. Rocci Trumper made the loan at 18 percent interest.

As required by the rules of professional conduct, Fischer disclosed to the woman the risks of entering into such an agreement with her lawyer. But attorney regulators say, and Fischer admitted, that he didn't give her additional disclosures when she borrowed more and more money, eventually signing over the deed to her house after borrowing more than $23,000 from the business he co-owns.

Fischer argued that he thought the first disclosure had been enough.  Regulators concluded he should have known better - but wasn't acting in bad faith.

"The hearing board finds respondent acted with an absence of dishonest motive, having considered and accepted respondent's testimony that his client ... was very worried about losing her home and that he attempted to help her regain this asset in the face of foreclosure," the regulators wrote in their decision. "Respondent felt remorse for his misconduct in his dealings. ..."

The board also noted that Fischer had no prior disciplinary record.

Fischer said his client ultimately declared bankruptcy and refused to pay his legal fees or repay the loan. When she found out that the loan couldn't be "discharged" like many other debts during bankruptcy, he said, she filed a complaint against him.

"In hindsight, I'm just livid. I was doing the right thing in saving the house," he said.

John Gleason, head of the Colorado Office of Attorney Regulation Counsel, said every lawyer learns in law school the pitfalls of having business relationships with clients. He said OAR considers Fischer's punishment "serious discipline" that will remain on his permanent public record.

Gleason said: "Anytime a lawyer is involved in a business transaction with a client, it's perilous. Clients view their lawyer as a friend and confidante. That creates a dangerous mix of business and personal interests. It's a position of trust. What we worry about is a lawyer taking advantage of that."

Fischer said he believes he might have been singled out due to his connection with Tim Masters. Fischer was one of Masters' original defense lawyers during the 1999 trial that saw Masters convicted for murder. That verdict has been overturned. The two prosecutors who presented the case against Masters were censured by the same office that reprimanded Fischer.

Gleason said there was no connection.

"The rules regarding business relationships haven't changed over the years. The playing field is not level. The rules try the best they can to level that playing field," he said.

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I love that this Paradigm of the law, Fischer, was filled with remorse at the time of his disciplinary proceeding but is now "livid."  What a "prince" lending money at loan shark rates, then shocked when the vict..., er, client complains. He's livid, give me a break.