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Matter of Advisory Committee on Professional Ethics Docket No. 22-95

June 13, 1996

IN THE MATTER OF ADVISORY COMMITTEE ON PROFESSIONAL ETHICS DOCKET NO. 22-95


On review of a decision of the Advisory Committee on Professional Ethics.

Chief Justice Wilentz and Justices Handler, Pollock, O'hern, Garibaldi, Stein, and Coleman join in the Court's opinion.

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

In the Matter of Advisory Committee on Professional Ethics Docket No. 22-95 (A-121-95)

Argued March 11, 1996 -- Decided June 13, 1996

PER CURIAM

The Advisory Committee on Professional Ethics (ACPE) is a Supreme Court committee that receives inquiries from members of the bar and renders opinions on issues arising out of the Rules of Professional Conduct. In April 1995, the ACPE received such a request from the New Jersey State Bar Association, the Bar of the Special Civil Part, and the Commercial Collection Agency Section of the Commercial Law League of America (CLL). The inquirers wanted the ACPE's opinion on whether attorneys who concentrate on collections law practice may endorse checks they receive in their clients' names and deduct the attorney's contingent fee without the clients' express consent after full disclosure in each matter.

The ACPE applied a prior Supreme Court case involving Opinion 635 of the ACPE and a joint opinion of the ACPE and the Committee on Attorney Advertising to the question presented. As a result, the ACPE concluded that collections attorneys could not process and cash checks without the express consent of their clients.

The Supreme Court granted the inquirers' petition for review of the decision of the ACPE.

HELD: Under the extraordinary circumstances presented, lawyers or law firms that concentrate in debt collections may, at the request of an institutional client-creditor, use the power of attorney to endorse the client-creditor's name to drafts from debtors and may deduct their contingent fees for individual matters without the prior approval of the client-creditor.

1. RPC 1.15(c) says that a lawyer holding property in which another person claims an interest must keep that property separate until there is an accounting and a separation of interests. Prior decisions of the Supreme Court and its committees have made it clear that RPC 1.15(c) obliges an attorney to inform his or her client of the settlement or other resolution of the client's matter, the amount of the settlement or judgment, and the amount of the fee to be deducted by the attorney. (pp. 2-3)

2. Debt collection is a very large business. Companies will often retain law firms that concentrate in collections litigation to handle delinquent accounts. Most commonly, such attorneys operate on a contingent fee basis. Institutional clients will dictate the collection arrangements by drafting the retainer letter. Such letters typically authorize the law firms to endorse payment orders that list the client as payee. In addition, the clients generally authorize the law firms in advance to deduct the attorneys' contingent fees before disclosing the amount of fluids received or the precise amount of the fees earned. Most law firms remit payments to their clients once a month. A single check is sent with a list of all the debtors covered by the payment. (pp. 3-7)

3. In its prior decisions restricting the use of an attorney's power to endorse his or her client's name to a check, the Court noted that there might be "extraordinary circumstances" that would justify the use of such a power of attorney. The ACPE justifiably concluded in this case that it was bound by the Court's prior decisions. (pp. 7-12)

4. A persuasive case has been made by institutional client-creditors to have the Court permit the present system of endorsements and fee deductions to continue on the grounds of convenience and cost effectiveness. The tens of thousands of claims collections attorneys manage create an extraordinary circumstance that requires special treatment. Having a cost-effective system reduces the cost of credit. The public interest in this case demands that practical considerations and common sense prevail over technical restrictions. (pp. 12-14)

5. Collections attorneys may continue to deduct their contingent fees from payments to institutional client-creditors. The clients clearly want the existing practice to continue. The high volume of claims and the minimal risk of misappropriation support this Conclusion. (pp. 14-16)

6. The Court emphasizes that its decision does not excuse an attorney from otherwise complying with all the Rules of Professional Conduct. (p. 17)

The determination of the Advisory Committee on Professional Ethics is MODIFIED in accordance with the Court's opinion.

CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, O'HERN, GARIBALDI, STEIN, and COLEMAN join in the Court's opinion.

PER CURIAM

The issue raised in this appeal is whether a law firm that concentrates its practice in the field of collections law may, upon receiving checks payable to its clients, endorse the checks and deduct the firm's contingent fees where the client consents to that practice in the retainer agreement but does not thereafter expressly authorize the deductions with full knowledge of the total amounts collected.

In response to a formal inquiry, the Advisory Committee on Professional Ethics (ACPE) concluded that a law firm may not, upon receiving checks on behalf of its clients, endorse the checks in its clients' names or deduct its contingent fees without the clients' express consent after full disclosure without violating Rule of Professional Conduct (RPC) 1.15(c) as explicated in In re Advisory Committee on Professional Ethics Opinion 635, 125 N.J. 181, 592 A.2d 1210 (1991) (IMO Opinion 635), and Advisory Committee on Professional Ethics and Committee on Attorney Advertising Joint Opinion 666/14, 132 N.J.L.J. 210 (1992) (Joint Opinion 666/14). We granted a Petition for Review. N.J. (1995). We now modify the ACPE decision to permit the existing collections law practices to continue.

I

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