Medical malpractice litigation involves extraordinary expenses in most instances; including, but not limited to, the acquisition of thousands of pages of medical records and the retention of several medical experts, who frequently bill $500 to $1,000 per hour and must be compensated for their time. Further, if the matter goes to trial, the medical experts must testify in court at a cost of several thousand dollars per day.

Non-recourse alternative litigation financing (ALF) can offer infant and incompetent plaintiffs an opportunity to have their claims litigated without having to advance the costs of said litigation. Given that the many of the litigants are indigent, it follows that absent external financing options, attorneys are reluctant to undertake the more difficult cases.

Alternative litigation funding—known as "ALF" refers to litigation financing provided by entities other than the parties, their lawyers, or insurers. ALF is widely available to finance some medical malpractice actions commenced on behalf of an infant by his or her parent or guardian. This circumstance results from the reluctance of some courts, exercising their authority under Judiciary Law §474, to approve disbursement of settlement or judgment proceeds to the ALF funder in accordance with the terms of the ALF agreement.

The specific issue presented and briefed to the committee was:

In a medical malpractice action commenced on behalf of an infant, may a lawyer refer the legal guardian, in whose name the action is brought, to a litigation funding company owned by the lawyer's sibling, for a non-recourse loan to finance litigation expenses?

The Committee Based its Opinion on a Thorough and Detailed Analysis of Rules 1.8(e) and 1.8(i); and Rules 1.7(a)(2) and l.8(f).

Rules 1.8(e) and 1.8(i)

Rule 1.8(e) of the New York Rules of Professional Responsibility (Rules) prohibits an attorney from providing financial assistance to a client; Rule 1.8(i) prohibits an attorney from acquiring a proprietary interest in a litigation the lawyer is conducting for a client.

Rules l.8(e) and l .8(i) have exceptions that allow an attorney representing a client on a contingent fee basis to advance on behalf of the client, or to pay on the lawyer's account, only litigation expenses, which are to be recovered only out of the proceeds of the action. See Rules 1.8(e)(l) and (3), and l.8(i)(2).

In Opinion N.Y. State 855 (2011), relying on Rules 8.l(e) and 8.l(i), the committee opined that a lawyer may not permissibly refer a client to a company owned by the lawyer's spouse to secure ALF for client living expenses. The committee noted that its prior opinions had "frequently concluded that various rules relating to conflicts involving financial interests apply both to the lawyer and to the lawyer's business relationships with the lawyer's spouse"; the committee concluded that the lawyer could not cause a spouse to provide that same assistance, "essentially using the spouse as a front for advancing improper financial assistance to a client for whom the lawyer is conducting litigation." Id. ¶¶ 11, 13.

In Opinion N.Y. State 1145 (2018), again relying on Rules 8.l(e) and 8.l(i), the committee concluded that neither an attorney nor the lawyer's law firm could represent a client in a commercial litigation funded by an ALF company in exchange for a percentage of the prospective recovery in which one of the firm's lawyers was an investor.

In contrast to N.Y. State 855 and 1145, the committee opined that the ALF funding that is the subject of Opinion 1196, a referral to an ALF company to secure financing, would be permitted financial assistance for the inquiring lawyer to offer under the litigation expense/contingency fee exceptions of Rule 1.8(e), and would not constitute the prohibited acquisition of interest in litigation under Rule l.8(i).

Accordingly, the committee concluded that in a circumstance where the lawyer has no financial interest in the ALF company, neither Rule l.8(e) nor Rule l.8(i) presents an ethical bar to the inquirer's contemplated conduct.

Rules 1.7(a)(2) and Rule 1.8(f)

 Although the committee concluded that Rules 1.8(e) and 1.8(i) present no bar to the proposed referral of clients to an ALF company owned by lawyer's sibling, the committee noted that substantial questions remain about whether such a referral runs afoul of Rule 1.7(a)(2), which prohibits representations when a reasonable lawyer would conclude "there is a significant risk that the lawyer's professional judgment on behalf of a client will be adversely affected by the lawyer's own financial, business, property or other personal interests," or Rule l.8(f), which imposes conditions upon a lawyer accepting compensation "or anything of value" related to the lawyer's representation of the client.

Rule 1.7(a)(2). Under Rule 1.7(a)(2), strong filial bonds may cause the inquirer to favor a sibling's financial interests, consciously or not, over the client's interests with regard to advising the client (or, here, the guardian) on a number of issues that may arise in the course of the representation.

The committee observed that the interests of the inquirer's law firm and the sibling's ALF company are aligned with regards to the risks of trial and the benefits of a compromise settlement—because the inquirer earns a contingent fee and the loan by the sibling's company gets repaid only if there is a successful outcome—it is plausible that inquirer and the sibling are in dissimilar economic circumstances. One of them is, or could be, in greater need of cash and more willing to press the client to accept an early settlement that does not reflect the fair value of the case obtainable at a later stage of the litigation.

The committee noted that the kind of actions at issue here often require the expenditure of large sums to acquire medical records, retain medical experts who are each compensated at substantial hourly rates for their time consulting, preparing expert reports and being deposed, and for testimony at trial. The committee observed it is not hard to imagine a situation in which developments in a case indicate that the prospect of success at trial is less than assured, and the sibling-owned ALF company perceives its investment in jeopardy.

Potential Rule 1.7(a)(2) Conflict of Interest is Waivable. Based on these considerations alone, the committee opined that a reasonable lawyer could conclude that the inquirer's personal and financial interests might pose a risk that the lawyer's professional judgment on behalf of a client may be adversely affected by the ALF funding proposed to be provided by a sibling's ALF company, and that a Rule 1.7(a)(2) conflict of interest could exist.

The committee further opined that this conflict is subject to waiver under Rule 1.7(b) provided the lawyer satisfies the conditions that Rule imposes. Two of those conditions are relevant here: (1) that the inquirer "reasonably believes that the lawyer will be able to provide competent and diligent representation" to the client; and (2) that the client "gives informed consent, confirmed in writing."

In these circumstances, the committee noted that the attorney alone is in a position to assess whether the lawyer reasonably believes that the lawyer is able to provide the requisite and diligent representation to the client despite the conflict of interest. The standard of reasonable belief in Rule l.7(b) embeds both subjective and objective elements, meaning that the inquirer must make not only a personal judgment about the inquirer's capacity to satisfy the requirement but also an appraisal of how a disinterested lawyer would regard the situation. N.Y. State 1048, ¶ 20 (2015).

On the circumstances presented, the committee concluded there was no objective consideration that would disable the lawyer from proceeding, but only the lawyer may make this decision based on all the facts known to the inquirer.

Informed Consent

The committee opined that the second condition requires "informed consent," which the committee noted Rule 1.0(j) defines to mean "information adequate for the person to make an informed decision, and after the lawyer has adequately explained to the person the material risks of the proposed course of conduct and reasonably available alternatives." This means, at a minimum, disclosure of the above considerations led the committee to conclude that a Rule l.7(a)(2) conflict-of interest exists.

The client should certainly be made aware of the family relationship between the inquirer and the inquirer's sibling, and that the lawyer and the ALF company may differ substantially on the level of risk that each is willing to tolerate. In addition, to assure that the consent is fully informed, the committee noted that the lawyer should discuss with the client the desirability of retaining independent counsel to provide disinterested advice regarding the client's best interest.

The committee quoted the New York City Bar Association Committee on Professional Ethics, Opinion 2011-2, relating to informed consent and ALF:

In providing candid advice, a lawyer should advise the client to consider the costs and benefits of non-recourse financings, as well as possible alternatives. With respect to costs, a common criticism of non-recourse financing is that the fees charged to clients may be excessive relative to other financing options, such as bank loans, thereby significantly reducing the client's recovery. A lawyer thus should bear in mind the extent to which non-recourse financing will limit a client's recovery. And before recommending financing companies, a lawyer should conduct a reasonable investigation to determine whether particular providers are able and willing to offer financing on reasonable terms.

The committee pointed out items to be discussed with the client including: (a) why the lawyer has elected not to secure the ALF funding by the lawyer's firm itself, rather than have the client be the borrower, and (b) whether there are other competent lawyers or law firms who would be willing to represent the client and incur litigation expenses without the need for ALF funding to be secured by the client's recovery.

Rule l.8(f)

The committee deemed a sibling's willingness to provide a loan to the client to finance litigation expenses to be a "thing of value" indirectly provided to the inquirer because the inquirer's firm would otherwise need to secure financing of its own or forgo the opportunity to represent the client in the matter.

 Rule 1.8(f) allows a lawyer to accept "a "thing of value" from a non-party where three conditions are met: "(1) the client gives informed consent; (2) there is no interference with the lawyer's independent and professional judgment or with the client-lawyer relationship; and (3) the client's confidential information is protected as required by Rule 1.6."

The first and second conditions of Rule l.8(f) for the lawyer's indirect acceptance of litigation financing from a sibling-owned company will be satisfied if the standard for waiving a personal conflict interest under Rule l.7(a)(2) has been met. To comply with the third condition, however, that is, the protection of client confidentiality, the committee opined that a lawyer may disclose to the ALF funder for underwriting purposes only such information that is "confidential information" under Rule l.6(a)(l) to the extent that the client has consented to the disclosure after receiving from the inquirer, as Rule l.0(j) requires, "information adequate…to make an informed decision, and after adequately explain[ing]" to the client " the material risks" of disclosure and the "reasonably available alternatives."

Conclusion

In a medical malpractice action commenced on behalf of an infant, a lawyer may refer the parent or legal guardian in whose name the action is brought to a litigation funding company owned by the lawyer's sibling for a non-recourse loan to finance litigation expenses only if the parent or legal guardian gives informed consent, confirmed in writing, to waive personal­ interest conflicts in compliance with Rule l .7(b) and satisfies the conditions of Rule l.8(f) for accepting a thing of value from a non-client related to the client's representation.

 

James P. Fitzgerald is the managing partner of The Fitzgerald Law Firm in Yonkers, New York. The Fitzgerald Law Firm (by James P. Fitzgerald) is the inquirer cited by the Committee in Opinion 1196. John M. Daly is of counsel to The Fitzgerald Law Firm.