Is Bank of America requiring its outside counsel to engage in unethical “channeling”?

Corporate Counsel reported in the article Bank of America Request for Legal Fee Credit Raises Ethical Questions that the bank allegedly is asking some of its law firms to further discount the bank’s legal fee based on the amount of customer business—such as loans— that the bank sends to those law firms.  In an egregious example, the bank would require its customer to pay the legal fees as part of a loan transaction costs, but the bank would not give the customer the benefit of any credit or discount that the bank received for referring the transaction to the law firm. In effect, therefore, either (a) the bank was marking up the legal fees by failing to pass through to its customer the discounted rate or (b) the law firm was over-charging the client and paying the bank an undisclosed referral fee.

This sort or arrangement implicates ethics concerns under the ABA Model Rules of Professional Conduct:

• Model Rule 1.5 prohibits lawyers from making an agreement for, charging or collecting an unreasonable fee. It also requires the lawyer to communicate to the client the basis or rate of the fee.
• Model Rule 7.2 prohibits lawyers from giving anything of value to a person in exchange for recommending the lawyer’s services, except in limited circumstances. Any referral arrangements require that “the client is informed of the existence and nature of the agreement.”

Neither rule would seem to be satisfied in a case where a third party (e.g., a bank) is receiving any credit, discount or kick-back for referring clients to a lawyer or law firm and that arrangement was not fully disclosed to those clients.

Higher ethical standards are needed.