Editor's Note:
State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
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May an attorney act as guarantor on a client's cost bond?
An attorney is not ethically prohibited from acting as a surety for his or her client and guaranteeing his or her client's obligation to a surety on a litigation bond. If the bond is relatively large, however, the attorney may thereby be acquiring a pecuniary interest adverse to his or her client, and the client should therefore consent in writing in advance.
Rules 5-101 and 5-104 of the Rules of Professional Conduct of the State Bar.
An attorney sought to provide the United States Court of Appeals for the Ninth Circuit with a $250 cost bond on behalf of his or her client. The corporate surety requested that the attorney or his or her law firm act as indemnitor for the client on the bond. The Committee has been asked whether the attorney or his or her law firm may do so. It is the Committee's conclusion that they may.
In the inquiry addressed here, the corporate surety requested that the attorney act as "indemnitor." An indemnity contract is ordinarily an original contract which requires the indemnitor to protect his or her promisee against loss or damage resulting from a liability on the part of the promisee to a third party. In contrast, a surety or guarantor undertakes to protect the promisee against loss or damage through the failure of a third person to carry out his or her obligations to the promisee. (Somers v. United States Fidelity and Guaranty Co. (1923) 191 Cal. 542, 545; Civ. Code, 2787.) For the purposes of this opinion, we take the corporate surety to be requesting that, should it have to pay under the cost bond, and should the client be unable to reimburse it, it may look to the attorney to recover.
Rules 242(b) (superior court) and 530(b) (municipal court) of the California Rules of Court prohibit an attorney from acting as a surety. It is not clear whether this prohibits an attorney from guaranteeing his or her client's obligation to a bonding company, or whether it merely prohibits an attorney from acting as a surety directly to the court, as contemplated in California Code of Civil Procedure section 1041. (See also Local Rules of Practice for the United States District Court for the Southern District of California, L.R. 290-3.) Determination of this issue is beyond the scope of the Committee's authority.
Aside from the question of whether court rules prohibit an attorney from guaranteeing his or her client's obligations to a corporate surety for a bond incident to litigation, the Committee has considered whether doing so is ethically proscribed.
Rule 5-104(A) of the Rules of Professional Conduct states, in part:
"A member of the State Bar should not directly or indirectly . . . guarantee . . . that he will pay personal or business expenses incurred by or for a client . . .; provided this rule shall not prohibit a member:
. . .
"(3) from advancing the costs of prosecuting or defending a claim of action or otherwise protecting or promoting client's interests. Such costs within the meaning of this subparagraph (3) shall be limited to all reasonable expenses of litigation in providing any legal services to the client."
It is the Committee's view that guaranteeing a cost bond is similar to advancing an expense of litigation within the provisions of rule 5-104(A)(3) of the Rules of Professional Conduct and is not prohibited.
The inquiry directed to the Committee concerns a cost bona of only $250. If the bond were relatively large, however, the Committee can foresee that an attorney guaranteeing such a bond might acquire an interest adverse to his or her client. We can imagine situations where the lawyer's concern that the client maintain the wherewithal to meet his or her bond obligations might interfere with the attorney's judgment with respect both to the particular case for which the bond is required, and to other matters. This is prohibited by rule 5-101 of the Rules of Professional Conduct, which provides that:
"A member of the State Bar shall not enter into a business transaction with a client, or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless (1) the transaction and terms in which the member of the State Bar acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in manner and terms which should have reasonably been understood by the client, (2) the client is given a reasonable opportunity to seek the advice of independent counsel of the client's choice on the transaction, and (3) the client consents in writing thereto."
The Committee believes, however, that where the bond is needed for litigation purposes, having the bond issue is in the client's best interest because it permits the litigation to go forward. Therefore the Committee feels that, in the instance of a relatively large bond, the attorney or his or her firm may act as guarantor, provided the client consents in accordance with the provisions of rule 5-104 (A)(1)-(3) of the Rules of Professional Conduct. In light of the potential for acquiring an adverse interest, however, it is the Committee's view that a prudent lawyer will seek to avoid guaranteeing a client's relatively large litigation bond.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of The State Bar of California. It is advisory only. It is not binding upon the courts, The State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.
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