Legal Ethics Opinion #1595
Fees: Interest Charges on Unreimbursed Costs and Expenses
You have presented a hypothetical situation in which a three-
attorney firm represents a large number of clients in litigation
on a contingent fee basis. The majority of the firm's practice
consists of representing plaintiffs in civil rights matters,
including discriminatory discharge from employment on the basis
of sex, race, religion, age, or disability.
You indicate that the standard written fee agreement used by the
firm provides, in pertinent part, that costs and expenses are
separate and distinct from the fee for professional services
charged by the firm, and that the client remains ultimately
responsible for costs and expenses regardless of the outcome of
the matter. The agreement also recites that "the recovery of
damages, whether at trial or through settlement, is an inherently
uncertain process, and no member or employee of the firm has
represented to me that any recovery, or any level of recovery, is
assured."
You also indicate that the firm routinely requests payment of a
modest advance against costs from each contingent fee client,
which funds are deposited in a trust account. In matters which
do not settle before filing, the advanced amount usually is
exhausted quickly, and additional costs and expenses are incurred
on behalf of the client. Further, the agreement executed by each
client also provides: "I understand that the amount of the
initial [funds] requested is not an estimate of the total amount
of costs and expenses which may be incurred in my case, which may
be substantially higher than the amount of the initial
[advance]." The hypothetical facts you provide also indicate
that these costs, including copying expenses, deposition
transcripts, and expert witness fees, are often substantial.
Furthermore, the fee agreement signed by each client also
contains the following provisions:
"I agree that I will replenish this...account, if necessary
and if requested by the Firm, to maintain a sufficient
balance in the account to cover projected costs and
expenses."
"I understand that the Firm may request payment and
reimbursement of costs and expenses in advance of any
recovery with respect to my claims."
You indicate that, despite these provisions, in the normal course
[of representing a client], the firm usually advances costs and
expenses on behalf of the client, whether or not the client
reimburses these costs on a current basis. In many cases,
despite request by the firm, the client does not replenish the
advance account and does not pay for costs and expenses on a
current basis. Where costs and expenses are outstanding at the
conclusion of the matter, reimbursement is made from the proceeds
of settlement or judgment.
Finally, you advise that the firm is relatively new and has
relatively limited resources. Clients currently owe this firm
approximately $150,000 in outstanding cost advances. Nonpayment
of this amount on a current basis has forced the firm to draw
down a line of credit, personally guaranteed by the principals of
the firm, at a certain rate of interest.
You have asked the committee to opine whether, under the facts of
the inquiry,
1. the firm may incorporate in its fee agreement offered
to new prospective clients the following provision:
For all costs and expenses not paid within 30
days of billing to the Client by the firm, the
Client hereby agrees to pay to the Firm
interest at the rate of 12% per annum on the
outstanding balance, accrued on a monthly
basis, until such costs, expenses and interest
are fully paid;
2. the firm may begin charging interest on unpaid cost and
expense balances to existing clients of the firm and,
if so, whether the written agreement of the existing
client is required prior to imposition of an interest
charge; and
3. if charging interest on overdue cost and expense
balances is permissible, what, if any, limit on the
rate of interest would be appropriate.
The appropriate and controlling Disciplinary Rules related to
your inquiry are DR 2-105(A), which provides that a lawyer's fees
shall be reasonable and adequately explained to the client; and
DR 5-103(B), which states that a lawyer shall not advance or
guarantee financial assistance to the client, except that the
lawyer may advance or guarantee the expenses of litigation,
provided the client remains ultimately liable for such expenses.
As applied to prospective clients, in response to your first
question, the committee is of the opinion that the provision as
articulated is not improper, provided that the costs and expenses
are reasonable and adequately explained to the client. The
committee also cautions that the firm must explain to the client
that, under DR 5-103(B), he is to remain ultimately liable for
such expenses. Additionally, as the committee has earlier
opined, any deferred payment must be for the client's
convenience; the interest rate must not be in violation of state
laws; and the client must have the unrestricted right to prepay
any balance of the costs, without penalty. See LEOs #642, #1247.
As applied to existing clients of the firm, in response to your
second question, the committee has previously opined that an
automatic (and unilateral) imposition of an interest or finance
charge on client's overdue accounts is improper. The committee
believes, then, that there must be an agreement between the firm
and client prior to imposition of an interest charge.
Furthermore, although not required by the Code of Professional
Responsibility, the committee suggests that a written agreement
is appropriate. See LEO #186-B.
Finally, in response to your third question as to the limit on
the rate of interest, the committee believes that this question
raises a legal issue requiring a determination which is beyond
the committee's purview. Similarly, the committee expresses no
opinion as to whether the imposition of interest, where
permissible, requires compliance with any consumer credit
protection laws.
Committee Opinion
June 14, 1994
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