Ethics Opinon 1976-8

May 4, 1976

SUBJECT: Finance Charges on Legal Fees

I
QUESTIONS PRESENTED

An attorney has been carrying several accounts for many years. May the attorney ethically charge 1 1/2% interest on the unpaid balance of delinquent accounts which are not paid within 10 days of the billing date?

II
SUMMARY

No. The attorney may not ethically charge interest on accounts not paid within 10 days. However, it is not per se unethical for an attorney to suggest and accept an interest?bearing promissory note in the amount of the agreed fees, provided there is no prepayment penalty and the terms of the note are freely negotiated. Such cases would not be common to the attorney's practice.

III
STATUTES AND CANONS

Among the Canons of Professional Ethics of the American Bar Association relevant to an analysis of the above question are Canons 12, 27, 28, 29 and 42. Also relevant are Canons 1 and 5 of the Code of Professional Responsibility and Rules 2-101 and 5-104 of the Rules of Professional Conduct of the State Bar of California.

IV
OPINIONS

In Informal Decision C-741 (March 31, 1964) the Committee on Ethics and Professional Responsibility of the American Bar Association considered the question whether an attorney may, with propriety, include in his billing the notation that interest at the rate of 6% per annum will be charged on all accounts not paid within 30 days. That Committee cited the following improprieties of such a practice (1) the claimed accrual of interest on fees upon which clients have not agreed, either in advance or upon conclusion of the services, may constitute a bargaining weapon an attorney might use in reaching agreement as to the amount of his fees; and (2) the effect of such a practice would appear to be an inducement to pay promptly, analogous to a discount for prompt payment of attorneys fees, a practice which was specifically disapproved by such Committee on Opinion 151 (Feb. 15, 1936).

The Committee on Ethics and Professional Responsibility in Opinion 151 cited Canon 12 as the basis for its disapproval of offering a discount for prompt payment. Canon 12 provides that:

In fixing fees it should never be forgotten that the profession is a branch of the administration of justice and not a mere money-getting trade.

The Committee condemned the discount practices as unsuited to the legal profession although it is sound, proper and customary practice in business.

Similarly, in Opinion No. 288 (February 4, 1965) of the Ethics Opinions of the Los Angeles County Bar Association Committee on Legal Ethics it was held that it is ethically improper under certain conditions for a lawyer to enter into arrangements with banks or other lending institutions for financing legal fees. The Los Angeles Committee there stated:

"Although the proposed financing arrangement may be sound and proper practice in business, such practice is not suitable to the legal profession. In ABA Opinion 151 the Committee states that:

"'Although the giving of discounts (if the bill is paid within a stated time) may be an entirely sound and proper practice in business, we do not think it is suited to the legal profession. Business transactions are frankly impersonal and commercial in character. On the other hand, the professional relationship between an attorney and his client is highly personal, involving an intimate appreciation of each individual client's particular problem. Practices which . .. tend to an undue commercial emphasis are to be condemned.'

"In ABA Informal Decision No. C741, in passing on the propriety of including in small print on a lawyer's billhead form the legend: "Interest at the rate of 6% per annum will be charged on all accounts not paid within 30 days," the Committee condemns such practice as unsuited to the legal profession although sound, proper and customary practice in business. The Committee stated that where the amount of the fee had not been agreed upon in advance, the accrual of interest might constitute a bargaining weapon an attorney might use in reaching agreement as to the amount of the fee and, whether or not the fee had been agreed upon, the effect would constitute an inducement to pay promptly--the effect of which is similar to the practice condemned in ABA Opinion 151, above referred to, of offering a discount for prompt payment of attorneys fees.

"If the proposed financing plan were approved, and if such plan were to become common practice amongst attorneys, the profession unfortunately would be emulating the conduct of countless commercial establishments ranging from credit mercantile stores to such semi-professional operations as advertising-credit-dentists. Such conduct would appear to be in direct violation of Canon 12 which admonishes lawyers never to forget that their profession is not a mere money?getting trade. Surely this admonition is applicable not only to the fixing of fees but also in the collection thereof.

"The proposed plan for financing payment of attorney's fees may be a factor in influencing the employment of one lawyer rather than another--in effect a means of soliciting business and consequently a violation of Canon 27. New York City Opinion 319 holds that the practice of making loans to destitute clients, to be deducted from moneys recovered for such clients in negligence actions and compensation claims, is improper as a method of soliciting business for the attorney, and the inducing cause of his employment. In New York City Opinions 779 and 781, an attorney inquired as to the propriety either of a loan to an indigent client in whose behalf the attorney had commenced a legal action, or the endorsement of the client's note so that funds could be obtained from other sources. The Committee held that the conduct would be improper in both instances on the grounds that the loan or the endorsement might be the reason inducing the employment of the attorney in violation of Canon 27, would impair the dignity of the profession in violation of Canon 28, and would be a means of financing litigation in violation of Canon 42."

The above-quoted language was set forth and approved in Opinion 320 (February 19, 1968) of the American Bar Association Committee on Ethics and Professional Responsibility. The factors considered in the Opinion of the Los Angeles Committee appear to apply with equal force to the charging of interest on unpaid accounts. Such a practice appears to be the financing of legal fees. See also Ethics Opinion 1974-6 (March 14, 1974) of the San Diego County Bar Association disapproving use of credit cards to pay legal fees unless pursuant to an approved local or State Bar plan.

The inquirer also states that he has been carrying several unpaid accounts for many years. Therefore, it may be of interest to the inquirer to note that Informal Decision C-741 approved the use of a promissory note as follows:

"[I]n a special case where it is clear that the client has agreed as to the amount of the fee and is able to pay it, but desires that payment be deferred for his convenience, it would not per se be unethical for his attorney to accept from the client or even suggest a promissory note in the amount of the agreed fee, with interest to accrue from a specified date and the note to mature at an agreed date and with the client having a right of prepayment without penalty. Such cases would not be common in a lawyer's practice, and in each the interest rate and maturity date of the note would have to be a matter of special agreement between the attorney and his client."

As a further caveat to the use of an interest-bearing promissory note, it should be noted that if it becomes necessary for the attorney to discount the note with a bank, as a result of circumstances arising after receiving the note, the arrangement should be that the bank will have recourse only against the lawyer or only against the client. In Opinion 288, the Los Angeles Committee noted that:

"Under the proposed plan if the client should fail to fulfill his obligation on his note and if the attorney should be called upon to reimburse the financial institution to which the attorney was obligated, the attorney then might find himself in a position where his representation of the client would be adversely affected by the fact that he was out-of-pocket in the amount of the reimbursement. In New York County Opinion 161, the Committee stated: 'Attorneys . . . should not voluntarily put themselves into positions where the condition of their compensation may interfere with their full discharge of their duty to their client.'"

The Los Angeles Committee therefore went on to conclude that arrangements should be made such that the financial institution to whom the note is discounted would have recourse only against the lawyer.

The American Bar Association Committee, however, in Opinion 320 concluded that "If the recourse of the bank is limited to the client (as it is by endorsement by the attorney without recourse), then the same result is obtained and any possible conflict of interest is avoided." This Committee believes that provided the fee is fully agreed upon the suggestion of the American Bar Association Committee that recourse be limited to the client is the better approach since it would more clearly eliminate the possible conflict of interest and eliminate the possibility of the attorney placing himself in a position where his representation of the client would be adversely affected by the fact that he was out-of-pocket in the amount of the reimbursement.

V
ANALYSIS

Informal Decision C-741 has disapproved the practice of charging interest on accounts not paid within a specified time. Opinion 288 of the Los Angeles County Bar Association had disapproved the practice of entering into arrangements with lenders for financing legal fees. Opinion 320 has approved a fee financing plan only where the plan is approved and established by a local or state bar association. The reasoning in Opinion 320 was adopted by this Committee in Ethics Opinion 1974-6. Canons 1 and 5 of the Code of Professional Responsibility and Rules 2-101 and 5-104 of the Rules of Professional Conduct comprehend the reasoning of these decisions. Although the concept of the legal profession as a commercial enterprise is currently in a state of flux tending toward increased commercialization, we believe that the preferable rule remains that such interest may not be charged.

The inquirer may wish to consider the use of a promissory note under the special circumstances outlined in this Opinion.

Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.