Under what circumstances may a lawyer sell outright his delinquent accounts receivable to a third party factoring company?
The Texas Disciplinary Rules of Professional Conduct contain no provisions specifically addressing an attorney's sale of delinquent accounts receivable to an unrelated third party. Under Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct, [FN1] a lawyer may not charge or collect an illegal or unconscionable fee, [FN2] and such limitation would apply to a lawyer's fees regardless of whether the lawyer collects such fees directly or sells accounts receivable to a factor. For purposes of the remainder of this opinion it is assumed that accounts receivable that are proposed to be sold to a factor are for legal fees that are permitted under Rule 1.04.
In most cases, the amount due from a client to a lawyer for legal services will involve to some degree confidential information relating to the client. This confidential information, to the extent not subject to the attorney-client privilege, will be "unprivileged client information" which is defined in Rule 1.05(a) as "all information relating to a client or furnished by the client, other than privileged information, acquired by the lawyer during the course of or by reason of the representation of the client." In some cases, the fact that the lawyer was engaged by the client may be confidential; in many cases, the nature of the legal services resulting in the fee statement would be confidential; in most cases, the amount of the fee owing and the fact that the fee has not been paid would be confidential.
Under Rule 1.05(b) a lawyer is required to protect from disclosure confidential information regarding the lawyer's clients unless a specified exception applies. There are two principal exceptions that may apply to permit the disclosure of confidential information with respect to a client's legal fees: First, under Rule 1.05(c)(5), the lawyer may disclose confidential information to the extent "reasonably necessary" to collect the fee due in a controversy between the lawyer and the client. Second, under Rule 1.05(c)(2), the lawyer may disclose confidential information if the client consents after consultation. [FN3]
Although under Rule 1.05(c)(5) a lawyer may disclose confidential client information to the extent reasonably necessary in a legal proceeding that is brought by the lawyer to collect a fee, disclosure of confidential client information as part of the sale of a delinquent account receivable to a factor is not necessary for the enforcement of the claim for the lawyer's fee. Accordingly, consent of the client is the only permissible basis for the disclosure of confidential client information incident to a sale of delinquent accounts receivable to a factor.
A client's consent to the disclosure of confidential information is effective only if such consent is informed and uncoerced. Although consent "after consultation" is required by Rule 1.05(c)(2), such consultation may occur at the outset of the lawyer-client relationship rather than only after an account receivable has arisen and has become delinquent. Hence such consent could be obtained at the time the lawyer accepts employment from the client and could be made part of an engagement letter. Alternatively, such consent might be obtained at a later time. In either case, to be effective the consent would have to be obtained after the lawyer had consulted with the client as to the consequences for the client's interests of the disclosure of confidential information involved in the sale of accounts receivable to a factor. The lawyer could make the client's consent on this matter a condition to the lawyer's accepting employment, but after commencing representation the lawyer could not try to coerce a client's consent by threatening to withdraw from representation or to take some other action adverse to the client's interest if the consent was not given. In addition, the consent would have to be based on an affirmative communication from the client and could not be based merely on a client's inaction in response to a request sent to the client.
A lawyer may not sell accounts receivable to a third party factoring company unless each client involved has previously given consent, after consultation with the lawyer, to the disclosure of confidential information incident to such sale of accounts receivable.
FN1 All references to "Rules" are to the Texas Disciplinary Rules of Professional Conduct that will become effective January 1, 1990.
FN2 Disciplinary Rule 2-106(A) of the Texas Code of Professional Responsibility prohibits charging or collecting an illegal or clearly excessive fee.
FN3 Similar rules are found in Disciplinary Rule 4-101(C)(4) and 4-101(C)(1) of the Texas Code of Professional Responsibility.