Ethics Opinion 298

Sale or Assignment of Accounts Receivable to a Collection Agency

Lawyers may utilize collection agencies to recover unpaid fees for legal services rendered only to the extent that debt collection efforts by such agencies are consistent with the lawyer’s ethical obligations. Because the outright sale of client accounts receivable to a collection agency would prevent a lawyer from fully complying with the D.C. Rules of Professional Conduct and District of Columbia Bar Rules, such sales are not permitted. Assignments of accounts receivable must be carefully reviewed on a case-by-case basis and are permitted only when the assignment conforms to a lawyer’s ethical obligations. In utilizing the services of a collection agency, disclosure of specific details relating to the representation should be limited to the minimal information necessary to collect the debt unless client consent is obtained. Even in such situations, the lawyer must ensure that the collection agency treats such information confidentially.

Applicable Rules

• Rule 1.5 (Fees)
• Rule 1.6 (Confidentiality of Information)
• Rule 5.3 (Responsibilities Regarding Non-Lawyer Assistants)
• Rule 5.4 (Professional Independence of a Lawyer)

Inquiry

The inquirer, a private law firm, has been approached by a collection agency which has proposed that the inquirer sell and assign its receivables (including open accounts, closed accounts, promissory notes per contracts, and judgments) to the agency for collection purposes. According to the inquirer, the collection agency operates by purchasing receivables from creditor companies and then collecting the receivable in its own name, not in the name of the creditor company.

The collection agency’s brochure, provided by the inquirer, states that part of the agency’s operating philosophy is to “[r]emove our client [i.e., the lawyer or law firm] completely from the debt collection practice by purchasing the debt—[the collection agency] is now the creditor, not the client.” The brochure also states that the agency will “[r]esolve cases rapidly,” has the [a]bility to litigate,” and will “use litigation if necessary” with the agency as the plaintiff. The brochure implies that the decision whether to bring litigation will be solely in the discretion of the collection agency.

The inquirer asks whether it may sell its client account receivables to the collection agency under these conditions. The inquirer further asks whether it may provide the following types of information to the collection agency as evidence of the receivable: (a) billing files, (b) signed retainer agreements/contracts, (c) signed fee schedules, and (d) signed promissory notes.

Discussion

1. The sale of debts for the provision of legal services to a collection agency is not permitted under the applicable provisions of the D.C. Rules; assignment of debts may be permitted only if the lawyer retains sufficient control over the collection process to ensure compliance with the lawyer’s ethical obligations.

This Committee previously addressed the use of collection agencies to recover unpaid fees for legal services in Opinion 60 (undated), rendered under our prior rules. While DR 3-102(a) declared that “a lawyer or law firm shall not share legal fees with a nonlawyer,” the Committee found that this rule did not prohibit agreements with collection agencies to share a percentage of a legal fee as compensation for the agency’s services in attempting to collect that fee. The Committee based its conclusion on D.C. Bar Op. 23 (1976) and ABA Formal Op. 338, which “represent an implicit acknowledgment of the propriety of lawyers referring fee collection matters to an agency, part of whose practices may involve fee collection.”

DR 3-102(a) has been superseded by D.C. Rules of Professional Conduct (Rule) 5.4, which, like DR 3-102(a), states “[A] lawyer or law firm shall not share legal fees with a nonlawyer.” Nothing in the language of Rule 5.4 or its accompanying comments are contrary to the conclusions of Opinion 60, and we see no reason to reach a different result here. In affirming the conclusion of Opinion 60, we note that the use of collection agencies by lawyers has been deemed consistent with ethical requirements in the vast majority of jurisdictions to consider the question.¹ The sale or assignment of legal debts to a collection agency raises more difficult questions. Because a lawyer cannot transfer more than he owns, sale or assignment of a debt owed to a lawyer for legal services rendered is encumbered by ethical requirements that would apply to the lawyer’s own collection efforts. Thus, a debt owed to a lawyer may be collected by third parties only in a fashion consistent with ethical principles applicable to members of the Bar.

Our Rules require in the first instance that disputes over fees should be avoided to the extent possible. In Opinion 60, this Committee observed that “[Fee] litigation should only be a last resort to collect a delinquent fee where an lawyer has made every effort to settle amicably with his client any differences concerning either the amount or the timing of collection of fees.” See also Ohio Bd. of Comm’rs on Grievance & Disc. Op. 91-16 (June 14, 1991) (lawyer may use collection agency only if he first determines that the fee is reasonable and not illegal, makes personal and amicable attempts to collect the legal fee owed, and reveals only confidences and secrets necessary to establish or collect the fee). Thus, all appropriate efforts to resolve the matter should be pursued by the lawyer before referral to a collection agency. See, e.g., New York State Bar Ass’n Comm. Prof. Ethics Op. 608 (May 10, 1990) (only if all other reasonable efforts short of litigation have been undertaken and have been unsuccessful may a lawyer employ the services of a collection agency).

In particular, District of Columbia Court of Appeals Rule XIII requires that when requested by the client, lawyers arbitrate fee disputes with present or former clients.² See also Comment [15] to Rule 1.5 (“If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the Bar, the lawyer should conscientiously consider submitting to it.”). This arbitration procedure binds both the lawyer and any collection agency acting on the lawyer’s behalf in connection with a debt for legal services.

Further, Rule 1.6(d)(5) addresses fee litigation, and specifies that a lawyer may disclose client confidences or secrets only “to the minimum extent necessary in an action instituted by the lawyer to establish or collect the lawyer’s fee.” This obligation continues after the termination of the lawyer’s employment. Rule 1.6(f). A lawyer may not avoid his duties under this Rule by selling or assigning a debt to a collection agency and allowing it to institute litigation in the agency’s name against a former client. Comment [24] to Rule 1.6 imposes upon a lawyer engaged in fee litigation a continuing duty to “evaluate the necessity for disclosure of information at each stage of the action.” Comment [25] to the same Rule provides that the “lawyer should continue, throughout the action, to make every effort to avoid unnecessary disclosure of the client’s confidences and secrets and to limit the disclosure to those having a need to know it.” These comments suggest several possible methods (use of John Doe pleadings, entry of protective orders and in camera proceedings) to avoid disclosure of confidential information during fee litigation

To the extent that a collection agency is acting in the lawyer’s name for the lawyer’s benefit pursuant to an assignment, any services provided by the agency must be consistent with the ethical rules that directly bind the lawyer. Rule 1.6 and D.C. Bar Rule XIII are inconsistent with sale or assignment of a debt by which a lawyer steps entirely out of the collection process and the collection agency controls the debt collection process.³ A lawyer ethically may not remain indifferent to the means utilized to collect his or her debts.

The Committee therefore has little difficulty concluding that the proposed sale to the collection agency described in the inquiry would run afoul of the D.C. Rules of Professional Conduct.⁴ As indicated in the collection agency’s brochure, the proposed arrangement removes the lawyer-creditor “completely” from the debt collection process. In such circumstances, the lawyer-creditor apparently has no say whether a lawsuit is to be brought, whether the suit is to be compromised or settled, whether a client’s demand to arbitrate should be honored, and whether and how confidences and secrets may be disclosed during the course of arbitration or litigation. This type of arrangement is not permissible under our Rules.

The Committee does not believe our Rules impose insuperable ethical barriers to the use by lawyers of collection agencies to assist in recovery of accounts receivable. Thus, there may be types of assignments of accounts receivable that can be made consistent with a lawyer’s ethical obligations. The key consideration is whether the lawyer retains sufficient control over the collection process (including any fee litigation that may arise) to satisfy her ethical responsibilities. See, e.g., Bar Ass’n of City of New York Comm. Prof. Jud. Ethics Op. No. 1993-1 (Nov. 5, 1993) (“A lawyer who assigns his accounts receivable . . . remains responsible to the former clients to ensure that all relevant ethical rules are followed in the collection process”). Sufficient control would require, at a minimum, that the lawyer remain informed about efforts to collect the debt, and be able to veto activities that are inconsistent with the lawyer’s legal or ethical requirements. In addition, disclosure of the assignment should be made to the client to avoid confusion. Id. These issues must be addressed in each case of assignments of accounts receivable.⁵

2. The lawyer may disclose confidences or secrets about a client to a collection agency without the client’s consent only if the information is reasonably necessary to recover the debt and the lawyer assures confidentiality on the part of the collection agency.

A related but equally important issue that arises with respect to the use of collection agencies or the assignment of accounts receivable is the need to preserve client confidences and secrets. Rule 1.6, which prohibits a lawyer from knowingly revealing a client confidence or secret, using a confidence or secret to the client’s disadvantage, or using a confidence or secret for the advantage of the lawyer or a third person, applies to questions of client fee disputes. We reiterate the broad scope of Rule 1.6, which protects both “confidences”—information protected by the lawyer-client privilege—and “secrets”—other information gained in the professional relationship that the client has requested be held inviolate, or the disclosure of which would be embarrassing, or would be likely to be detrimental, to the client.”

The inquirer has asked the Committee to opine on the propriety of disclosing billing files, signed retainer agreements, fee schedules, and signed promissory notes to a third party to aid in the collection of a client debt. A preliminary question, however, must be addressed—whether it would be permissible even to disclose the client’s identity, contact information, and debt to the collection agency. The existence of a client debt as well as client contact information arguably is a “secret,” assuming it was obtained in the course of the professional relationship, and its disclosure arguably would be detrimental to the client’s interest. Indeed, under some circumstances, the client’s identity could constitute a “secret.” For the reasons discussed below, however, the Committee believes that disclosure of the client’s name, address, and debt amount to a collection agency does not violate Rule 1.6, provided the lawyer complies with the requirements of Rule 5.3 and ensures that the collection agency and its personnel maintain the confidentiality of that information.

Comment [11] to Rule 1.6 explains that “it is not improper for a lawyer to give limited information from client files to an outside agency necessary for statistical, bookkeeping, accounting, data processing, banking, printing, or other legitimate purposes, provided the lawyer exercises due care in the selection of the agency and warns the agency that the information must be kept confidential.” A collection agency acting on the lawyer’s behalf is performing a service akin to a bookkeeping or accounting function by attempting to recover delinquent debts on the lawyer’s books. It would be within the scope of the duties of an accountant or bookkeeper employee to collect a debt; the lawyer simply has made a business decision to delegate this duty to a collection agency. See Fla. State Bar Ass’n Op. 81-3 (Apr. 15, 1981) (collection agency should be viewed as “nonlawyer personnel” under the Florida counterpart to D.C. Rule 5.3). Moreover, a contrary conclusion would preclude the use of collection agencies or similar third party entities, because a client simply could refuse consent to sending any information about the debt to a collection agency. Assuming the lawyer takes steps to ensure that the agency keeps the client’s name, contact information, and debt amount confidential, the mere transmission of this limited information to a collection agency does not require the client’s prior consent. Signed retainer agreements, fee schedules, and signed promissory notes reflecting the client’s debt may be disclosed to the collection agency under these same principles.

Revealing further information concerning the representation—including detailed billing information and other details concerning the representation—involves different considerations, identified in Comments [24] and [25] to Rule 1.6, discussed above. In our recent Opinion 290, we concluded that disclosure of detailed client billing statements and other confidential information to an insurer (and to the insurer’s auditor) that was funding the client’s litigation could not be made absent client consent. The Committee found Comment [11] to Rule 1.6 inapplicable to that situation because “the information sought is substantive and the lawyer neither selects the auditor nor controls its use of the information.” We also were concerned that such disclosure during the course of a representation might allow discovery of such information, to the client’s detriment.

These same considerations apply to some extent in the instant situation, although the lawyer has selected the collection agency and, for reasons explored above, must ensure that the collection agency not disclose the information beyond what is necessary to carry out its debt collection practices. Detailed billing records reflecting descriptions of legal work undertaken are “substantive” in nature, and therefore, their non-consensual disclosure generally does not fit within the bounds of Comment [11]. Moreover, detailed billing information normally is not reasonably necessary to the collection agency’s efforts to recover the debt. See Ohio Bd. of Comm’rs on Grievances & Disc. Op. 91-16 (“information regarding the nature of the legal services would not always be necessary to establish or collect the fee, [so] it should not be revealed to the collection agency unless necessary”).

Where the former client has contested the debt by claiming that the lawyer has engaged in professional misconduct, we conclude the lawyer may disclose details of the representation to the collection agency sufficient to respond to that claim on the lawyer’s behalf, provided the lawyer ensures that the agency maintains the information confidentially.⁶ Moreover, Rule 1.6(d)(5) allows limited disclosure of such information in fee litigation instituted by the lawyer.⁷ Rule 5.3 again requires that such disclosure be accompanied by the collection agency’s agreement to maintain the confidentiality of the information revealed, and steps must be taken to ensure that any form of public disclosure be kept to a strict minimum. See also Comment [23] to Rule 1.6 (such disclosure “should be made in a manner that limits access to the information to the tribunal or other persons having a need to know it, and appropriate protective orders or other arrangements should be sought by the lawyer to the fullest extent practicable”); Florida State Bar Ass’n Comm. on Prof. Ethics Op. 81-3 (Apr. 15, 1981) (lawyer must be “careful to divulge to the collection agency no details regarding the representation of the client that are not relevant to the debt owed”).

But where the client has disputed all or portions of the debt on more general grounds, see Comment [23] to Rule 1.6, or the lawyer reasonably believes that only such a general objection to the fee will arise, this exception to Rule 1.6 does not apply. In such circumstances, the limited disclosure to accountants, bookkeepers and the like authorized by Comment [11] to Rule 1.6 does not extend to information in excess of that necessary to establish the fact of a debt. Nor can Rule 1.6(d)(3)’s specific authorization of limited disclosure in response to certain claims of misconduct be extended to permit disclosure. Disclosure of confidential information, even to a collection agency under orders to maintain such information confidential, may raise questions of waiver of privileges and open the door to subsequent disclosure of such information to the client’s detriment.⁸ Informed client consent to such disclosure therefore is required under Rule 1.6 before this information can be shared with the collection agency.⁹

Inquiry No. 98-2-6
May 2000

1. See generally Ala. Ethics Op. RO-86-126 (Feb. 25, 1987); Ariz. Ethics Op. No. 82-2 (Jan. 30, 1982); Fla. State Bar Ass’n Comm. on Prof. Ethics Op. 81-3 (Apr. 15, 1981); State Bar of Ga. State Disc. Bd. Adv. Op. 49 (July 26, 1985); Ill. Ethics Op. 632 (1978); Iowa Ethics Op. 83-21 (1983); State Bar of Me. Op. 47 (Jan. 27, 1977); Md. Ethics Op. 82-24 (1981); Mo. Informal Ethics Op. 4 (Dec. 3, 1982); State Bar of N. M. Adv. Ops. Comm. Adv. Op. 1988-7 (July 16, 1988); N.Y. State Bar Ass’n Comm. on Prof. Ethics Op. 608 (May 10, 1990); N.C. St. Bar Op. RPC 7 (July 25, 1986); Sup. Ct. of Ohio Bd. of Comm’rs. on Grievances and Discipline Op. No. 91-16 (June 14, 1991); Or. State Bar Op. 225 (Mar. 3, 1972); Pa. Ethics Op. 90-23 (1991); Utah Ethics Op. 8 (1972); Va. Ethics Op. No. 946 (June 25, 1987). But see W. Va. State Bar Op. 80-1 (Jan. 16, 1981) (prohibiting use of collection agencies by lawyers).
2. Rule XIII (a) provides: “A lawyer subject to the disciplinary jurisdiction of this Court shall be deemed to have agreed to arbitrate disputes over fees for legal services and disbursements related thereto when such arbitration is requested by a present or former client, if such client was a resident of the District of Columbia when the services of the lawyer were engaged, or if a substantial portion of the services were performed by the lawyer in the District of Columbia, or if the services included representation before a District of Columbia court or a District of Columbia government agency.”
3. The Committee also notes that debt collection practices are heavily regulated at the federal and state levels by statutes such as the Federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692. While interpreting such statutes is beyond the role of this Committee, lawyers should ensure that their actions, and the actions of anyone providing services on their behalf, comply fully with these statutes and regulations.
4. The small number of states that have permitted sales of client accounts receivables have required that the client expressly consent to the sale. See, e.g., Iowa Sup. Ct. Bd. of Prof. Ethics & Conduct Op. No. 81-37 (Nov. 24, 1981); Tex. Prof. Ethics Comm. Op. 464 (Nov. 1989). We do not consider in this Opinion whether there is some form of client consent that would completely address the ethical concerns described above.
5. Somewhat different issues are raised when a client debt to lawyer has been pursued through litigation or arbitration and reflected in an enforceable judgment against the client entered by a tribunal with appropriate jurisdiction. Because the ethical issues discussed above are unlikely to be presented by such judgments, an lawyer who chooses not to enforce the judgment may, consistent with our Rules, sell or otherwise monetize the judgment by transferring it to a third party.
6. A lawyer also could disclose such information if the client formally instituted a civil, criminal or disciplinary claim against the lawyer (which would include a demand for arbitration under D.C. Bar Rule XIII) under the exception for revelation of client secrets “to the extent reasonably necessary to respond to specific allegations by the client concerning the lawyer’s representation of the client” contained in Rule 1.6(d)(3).
7. However, unlike Rule 1.6(d)(5), which applies to fee litigation instituted by the lawyer, Rule 1.6(d)(3) is not limited to formal debt collection actions instituted by the lawyer or someone acting on her behalf. Moreover, Comment [23] to Rule 1.6 states that “[i]f a lawyer’s client, or former client, has made specific allegations against the lawyer, the lawyer may disclose the client’s confidences and secrets in establishing a defense, without waiting for formal proceedings to be commenced.” (emphasis supplied).
8. This Committee normally does not interpret substantive law and thus is not in a position to opine upon the applicability of the lawyer-client or other privileges in situations such as this. Nonetheless, we note that broad disclosure of information to a collection agency creates the risk of waiver of an applicable privilege, and that such disclosure may be substantively detrimental to the client independent of the mere fact of debt collection.
9. In Op. 289 (1999), we set forth the general standard applicable for prospective waivers. The permissibility of advance waivers of disclosure of confidential information to collection agencies (e.g., in an initial engagement letter) is beyond the scope of this opinion. We note that in cases where disclosure of the fact of representation could be independently detrimental to the client, informed consent also would be required under our Rules.