You have presented a hypothetical situation in which a law firm
does extensive work related to mortgage loans which are insured or
guaranteed by state and federal agencies.  The law firm bills the
client directly for its services, approximately $500 for each case,
and receives compensation directly from the client, who is
eventually reimbursed pursuant to that specific loan guarantor's
policies regarding legal services.

You indicate that, while involved with negotiations with a large
national lending institution regarding that lender's distressed
real estate business, the law firm received a proposal from an out-
of-state institution which identified itself as a "lender service
bureau".  The bureau is run by or associated with attorneys. It is
responsible for assigning all legal work to firms in a locality,
but does no legal work in connection with the case nor does it bear
any responsibility for the work.  The bureau indicated that no
cases would be referred to the firm from the prospective
client/lender unless the firm altered its billing practices as
follows: (l) the firm pays a $75 or $l00 fee to the bureau,
pursuant to a bill sent by the bureau to the firm, as a "service
fee" before a case is assigned or immediately upon assignment; (2)
the firm does the work assigned; (3) the firm then bills the
client/lender for the full amount allowed by the loan guarantor,
usually approximately $500; and (4) the client applies to the
guarantor for compensation for the full "legal" fees incurred,
which includes the "service fee".  At no point would the guarantor
be informed about the "service fee".  You indicate that the service
bureaus maintain that they are charging a legitimate fee for their
non-legal, non-referral services such as loan tracking, document
handling, preparation and mailing of referrals, and so forth.

You have asked the committee to opine whether, under the facts of
the inquiry, it is proper for the law firm to participate in the
fee arrangement as described.  In addition, you have asked that the
committee opine as to whether the firm should disclose the
transactions described to the proper authorities.

The appropriate and controlling disciplinary rules relative to your
inquiry are DR 2-103(D) which in pertinent part prohibits a lawyer
from compensating a person or organization to recommend or secure
his employment by a client excerpt for usual and reasonable fees or
dues charged by a lawyer referral service; DR 3-102 which precludes
a lawyer from sharing legal fees with a non-lawyer except in
certain limited circumstances, none of which are applicable to the
facts presented; DR 1-102(A)(4) which prohibits a lawyer from
engaging in conduct involving dishonesty, fraud, deceit or
misrepresentation; and DR 7-102(B)(l) which requires that a lawyer
who receives information clearly establishing that a person other
than his client has perpetrated a fraud upon a tribunal shall
promptly reveal the fraud to the tribunal. 

The committee has previously opined that, although voluntary
recommendations of a particular law firm made by an individual who
is acquainted with the firm are not improper, the plain language of
DR 2-l03(D) precludes a lawyer from offering or paying any
compensation to that person.  See LEOs #l295, #1501.  The committee
has also opined that an attorney may not share legal fees with an
advertising agency since that agency is not an employee of the
lawyer or law firm.  See LEO #l438.  Furthermore, the committee has
opined that legal fees may not 
be divided between lawyers in different firms merely in exchange
for referral of cases, when no meaningful legal services were
performed by the referring lawyer.  See LEO #l488.  In addition,
the committee has previously opined that, although an attorney has
an affirmative duty to report a fraud perpetrated by an individual,
not his client, upon a tribunal, no such duty exists when the fraud
has been perpetrated upon a person other than a tribunal.  See LEO

In the facts you present, the committee interprets the "service
fee" to be a mere referral fee in exchange for which lawyer will
receive legal employment.  Thus, the committee opines that such an
arrangement would be improper and violative of DR 2-l03(D). 
Similarly, the committee is of the opinion that the service fee
would constitute an improper sharing of fees with non-lawyers in
violation of DR 3-l02.  As to your inquiries regarding whether such
a fee is contrary to public policy or fraudulent, the committee
believes that such determinations are questions of law beyond the
committee's purview.  See, however, Va. Code 38.2-4614.

Furthermore, the committee believes that the lawyer's involvement
in the arrangement described would be tantamount to the lawyer's
engaging in subterfuge against his own client and therefore
violative of DR l-l02(A)(4).  

Finally, the committee opines that, since the third party service
bureau is not apparently engaging in fraud against a tribunal, nor
is it a lawyer or law firm, despite possible ownership by
attorneys, the law firm is under no ethical obligation to disclose
the bureau's operations to the proper authorities under DR 7-
l02(B)(l).  However, the committee cautions that should the law
firm determine that the activities of the attorneys holding an
ownership or management interest in the service bureau constitute
misconduct which raises a substantial question as to those
attorneys' honesty, trustworthiness, or fitness to practice law, an
obligation to report that misconduct would arise under DR l-l03. 
See LEO #l522.

DRs 1-102(A)(4), 1-103, 2-103(D), 3-102, 7-102(B)(1); LEOs 376,
1295, 1438, 1488, 1501, 1522; Va. Code Ann.  38.2-4614]

Committee Opinion
February 7, 1995