Texas Ethics Opinion Allows Lawyers to Use Collection Agencies: Should You Use Them?
Ethics, Fees, Firm ManagementA recent Texas ethics opinion addresses two issues concerning collection of unpaid fees from clients. In Opinion 652, the Professional Ethics Committee addresses whether a lawyer may use a collection agency to collect overdue fees, and whether nonpaying clients may be reported to a credit bureau.
Prior opinions of the committee created significant obstacles to use of collection agencies and credit bureaus. Both opinions concluded that, under Rule 1.05, confidential information of the client are inappropriately turned over to third parties when collection agencies are used. Opinion 652 overrules those opinions, deciding that lawyers can use collections agencies under certain circumstances, as the collection agencies are acting as agents of the lawyers, much as an accountant might do. Using collection agencies is acceptable under the following circumstances according to the opinion:
1) Representation of the client must have concluded.
2) The fee cannot unconscionable.
3) Other reasonable means of collection other than a collection agency must be tried first. These reasonable means include written notice of unpaid amounts and services performed, consideration of arbitration and mediation first, and at least one demand letter which notes the consequences of nonpayment including that the matter may be turned over to a collection agency.
4) The lawyer must retain control over the collection process.
5) The lawyer must assure that the collection agency will maintain the confidences disclosed in order to collect the debt
6) Only the minimum information necessary to collect the debt is provided to the agency.
While the opinion relaxed objections to the use of collection agencies, lawyers are expressly prohibited from directly, or indirectly through a collection agency, reporting to a client to a credit bureau. The rationale for this conclusion was that reporting to a credit bureau is not necessary to collect debt and risks unauthorized disclosure of client information.
Opinion 652 brings Texas in line with other states on the use of collection agencies. However, the opinion only addresses how confidentiality rules apply to use of collection agencies and credit bureaus. A number of other practical and legal issues should be considered by lawyers who may consider the use of collection agencies.
Lawyers using collection agencies should bind the collection agency contractually to keep client confidences and to avoid providing information to credit bureaus about the debt. In addition, care must be used in what information is provided to the agency. At times, documents supporting the lawyer’s bill may include very sensitive information.
Debt collectors such as collection agencies are required to validate debts if asked by the debtor to do so by the Fair Debt Collection Practices Act. Most courts have required only confirming the amount of the debt, who owes the debt, and whether or not it has been paid. The leading case, Chaudhry v. Gallerizzo, held that “(t)here is no concomitant obligation to forward copies of bills or other detailed evidence of the debt.” On occasion, courts have required more extensive verification of debt. The best course for lawyers who do choose to use collection agencies would be to provide only the name and contact information for client and the amount owed. At times, however, the mere fact that someone has contacted a lawyer is extremely sensitive information that can damage the client.
Third party debt collection agencies typically are paid a percentage of what they collect. The opinion does not address whether such an arrangement constitutes unauthorized fee sharing under the rules. Rule 5.04(a) states that “(a) lawyer or law firm shall not share or promise to share fees with a non-lawyer” with exceptions that do not apply to collection agencies. While there are many opinions permitting use of collection agencies, none address the fact that agencies are often paid by commission.
In any event, collection agencies should be viewed as distinct from factors, which buy debt and then pursue collection as they see fit. When a debt is sold to a factor, the seller loses control of collection of the debt in return for a cash payment. Selling debt to a factor is thus probably not permitted under the rules. Collection agencies and factoring operations are sometimes part of the same entity. Lawyers should make sure they are not selling the debt when working with what appears to be a collection agency, losing control of the collection efforts.
Previous Texas Opinion 464 determined that from a confidentiality perspective, a lawyer could sell a client debt to a third party if the client consented after consultation with the lawyer. This fails to address the lawyer’s obvious conflict of interest in advising the client on the sale of the debt. It is difficult to imagine how the proper advice to a client could be anything other than a refusal to consent to such a sale. A 2008 DC opinion concluded that lawyers could not sell debt to third parties, and could only assign debt if the lawyer retains control.
From a practical perspective, TLIE discourages aggressive debt collection practices against clients. Fee disagreements frequently lead to malpractice claims, whether directly asserted or asserted in counterclaims to fee suits. With the uncertainties and limitations arising from the ethical implications of common collection agency arrangements, as well as the potential for provoking a malpractice claim, TLIE discourages use of collection agencies by lawyers to collect client debts.
