Engagement by Collection Agency Suing Debtors of Its Customers

99 N.J.L.J. 588
July 1, 1976

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
 
Appointed by the New Jersey Supreme Court
 

OPINION 338

Engagement by Collection Agency
Suing Debtors of Its Customers

The inquirer asks whether it is permissible for an attorney to be engaged by a commercial collection agency to institute suit against debtors of the customers of the agency if the customers consent to the arrangement. He indicates that the firm of which he is a member would accept matters on a case-by-case basis from the collection agency which for a fee solicits customers who are in need of its services and attempts to effectuate collections of debts without the necessity of litigation. Where litigation is necessary, the collection agency refers the matter to an attorney to institute legal action against the debtor. Most significantly the inquirer indicates that all arrangements for the attorney's retention, payment of fees, etc., would be through the collection agency.
This Committee in Opinion 17, 87 N.J.L.J. 113 (1964), stated that it "would be improper for an attorney to be engaged by a commercial collection agency for the purpose of instituting suit against debtors of the customers of such agency." That opinion was based at least in part on the "Statement of Principles in Reference to Collection Agencies" made by the Committee on Unauthorized Practice of the Law of the American Bar Association during its 1937 annual meeting. That statement included certain prohibitions involving collection agencies among which were "to assume authority on behalf of creditors to retain or discharge an attorney or arrange this compensation, to intervene between attorney and client so as to control or exploit the services of the attorney in the interest of the agency," and to otherwise obtain a share in the attorney's fees earned in the collection of a claim.
Our Opinion 66, 88 N.J.L.J. 49 (1965), made a distinction between claims which are purchased by a collection agency and those which are merely assigned, holding that it would not be improper for a collection agency purchasing a claim to engage an attorney to represent the collection agency, whereas Opinion 17, supra, was controlling with respect to claims which are merely assigned to the collection agency. Opinion 264, 96 N.J.L.J. 1239 (1973), while dealing with a different subject, nonetheless did discuss the general prohibition of the present Code of Professional Responsibility against intermediaries between an attorney and his client and cited with approval Opinion 17, supra.
As pointed out in Opinion 264, the Canons of Professional Ethics, which were in effect at the time of the issuance of Opinions 17 and 66, were superseded by the Disciplinary Rules of the Code of Professional Responsibility. DR 5-107 (A) and (B) must be interpreted in light of the present inquiry. On the assumption that the collection agency engaging the attorney is merely the assignee of the claim, the "client" referred to in DR 5-107(A) must be the creditor and not the collection agency. Thus it is clear that it would be unethical for an attorney to be engaged by such agency without the consent of the creditor after full disclosure and unless the public interest is not adversely affected. Secondly, as pointed out in section (B) of DR 5-107, under no circumstances may the collection agency direct or regulate the professional judgment of the attorney rendering the legal services. Assuming that it would not be difficult for appropriate consent to be obtained from a creditor engaging a collection agency after appropriate full disclosure, the essential question to be decided
would be whether or not it would adversely affect the public interest to permit the collection agency to retain the services of the attorney. Wise, Legal Ethics, 103 (1966) lists several opinions of the American Bar Association Committee on Professional Ethics, holding that a collection agency may properly engage an attorney if:
1. the agency is authorized as an agent by the creditor to employ the attorney,
 
2. the attorney represents the creditor and not the agency;
 
3. there is no sharing of fees between the attorney and the agency;
 
4. the lawyer deals directly with the creditor unless the creditor has expressly authorized the agency to act in his place in dealing with the lawyer; (It is incumbent upon the lawyer to be sure of the nature and extent of the agency's authority in this regard.)
 
5. the attorney remits directly to the client but may deduct his own fee unless he is satisfied the creditor has authorized the agency to receive the remittance less the attorney's fee.
 

Likewise, Drinker, Legal Ethics (1961) indicates that an attorney may accept employment from a collection agency which he is satisfied was authorized by the client to employ him provided that the fees are not filed by the collection agency, that his relations with the client are direct and that he is always free to deal with
the client and further provided that the agency receives no share of the lawyer's fees.
This Committee is of the opinion that under the prescribed circumstances set forth above and under those circumstances only, it is not a violation of DR 5-107 for a collection agency to engage an attorney for the purpose of instituting suit against debtors of the customers of such agency. To this extent, Opinion 17, 87 N.J.L.J. 113 (1964), is modified.
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