Ethics Opinon 1983-1

I
QUESTION PRESENTED

1. May an attorney ethically collect finance charges on past due receivables from clients?

2. May an attorney ethically participate in a credit card plan providing financing of legal fees?

II
SUMMARY

The answer to both questions is yes. Recent ethics opinions issued by both the ABA Committee on Ethics and Professional Responsibility and the Committee on Professional Responsibility and Conduct of the State Bar of California hold that an attorney may collect interest on delinquent accounts, if the client gives informed consent in advance of the charge. Moreover, subject to protective limitations, an attorney may provide legal fee financing through participation in a credit card plan. Contrary decisions of the Ethics Committee of the San Diego County Bar Association are hereby overruled.

III
DISCUSSION

Bar associations have traditionally held that attorneys cannot ethically charge interest on past due receivables from clients. Most of the decisions derive from two opinions of the ABA Committee on Ethics and Professional Responsibility, ABA Formal Opinion 151 (1936) and ABA Informal Opinion C-741 (1964). Both decisions involved interpretation of Canon 12 of the old ABA Canons of Professional Ethics, which provided 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 . . . ."

For example, ABA Opinion 151 disallowed an attorney's regularly offered discount for payment within a limited time. The ABA Committee observed:

"Although the giving of discounts 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 overlook the personal element in the attorney's relationship with his client and which tend toward an undue commercial emphasis are to be condemned."

The ABA Committee found the discount practice in question to be unethical both because it placed undue emphasis on the commercial aspects of the attorney-client relationship, and because the offering of a standard discount precluded consideration of the circumstances of each individual case in the fee setting process.

ABA Opinion C-741 considered the propriety of an attorney's attempt to charge six percent interest on accounts not paid within thirty days. The committee held this practice to be unethical, whether or not the attorney and client agreed on fee amounts in advance of the services rendered. If the amount of fees is not set in advance, the ABA Committee reasoned, attorneys might use the accrual of interest as a bargaining tool in reaching agreement concerning the amount of fees. Even where fees are pre-established, the ABA Committee viewed interest charges as an inducement to pay promptly, a practice disapproved by ABA Opinion 151.

The ABA Committee agreed that where it is clear that a client is willing and able to pay an agreed fee but desires to defer payment for his convenience, an attorney might ethically accept or suggest a promissory note in the amount of the fee. Such a note must mature at an agreed date, provide for interest to accrue from a specific date, and grant the client a right of prepayment without penalty. The ABA Committee warned in ABA Opinion C-741 that circumstances justifying acceptance of a promissory note are uncommon. See also ABA Informal Opinion 593 (1962) (not per se improper to take security, in form of promissory note or property mortgage, on payment of fee earned or to be earned).

Not surprisingly, early decisions also disallowed credit card financing of legal fees. ABA Opinion 1120 (1969) rejected as "unprofessional" a credit card plan including a recourse provision under which participating attorneys could be called upon to buy back the sales drafts of unsatisfied clients. Citing the principle that "lawyers should not voluntarily put themselves into positions where the condition of their compensation may interfere with the full discharge of their duty to the client," the ABA Committee found that lawyers' relationships with their clients would be adversely affected by out-of-pocket expenditures on "buy-backs." The ABA Committee also noted that credit card plans are primarily aimed at facilitating sales of merchandise and non-professional services. Finally, the ABA Committee expressed concern that since all qualified attorneys would not necessarily participate in a credit card plan, adoption of such a plan might improperly channel business toward those who did. See also ABA Informal Opinion 1176 (1969) (rejecting on similar grounds a non-recourse credit card plan).

The restrictive view of the early decisions did not preclude all fee financing arrangements, though. ABA Formal Opinion 320 (1968) declared that non-recourse financing plans adopted on a bar-wide basis by several state and local associations were not per se unethical.

Opinions of the Legal Ethics and Unauthorized Practice Committee of the San Diego County Bar Association followed the early ABA decisions. In Ethics Opinion 1974-6, the local committee, citing ABA Opinions 1120 and 1176, held that an attorney could not ethically participate in a credit card plan as a means of enabling clients to pay legal fees. In Ethics Opinion 1976-8, the local committee held, in language taken from ABA Opinion C-741, that an attorney could not ethically charge interest on delinquent accounts.

However, recent ABA and state bar decisions indicate that these local opinions, as well as the earlier ABA opinions from which they derive, are no longer valid. ABA Formal Opinion 338 (1974) held that the Model Code of Professional Responsibility, which became effective January 1, 1970, overrules ABA Opinions 1120 and 1176. Thus, the new code conditionally permits the use of credit cards to pay legal fees.

In order to guard against abuse, ABA Opinion 338 imposed several restrictions upon the use of credit card plans. First, all publicity relating to such plans is subject to state or local bar ethics committee approval. Second, publication of a directory indicating participating attorneys is prohibited. Third, credit card companies may not issue promotional material to attorneys, "except possibly a small insignia to be tactfully displayed in the attorney's office . . . ." Fourth, lawyers may accept credit card plans as a client convenience, but must not encourage participation; nor may attorneys increase fees due to participation. Fifth, charges made by lawyers pursuant to a credit card plan may only be for services actually rendered or cash actually disbursed on behalf of a client. Finally, participating attorneys must scrupulously observe their obligation to preserve the confidences and secrets of their clients.

As a necessary incident to its decision concerning use of credit cards, the ABA Committee held that lawyers can charge clients interest on past due receivables. However, lawyers have to advise clients that they intend to charge interest, and must secure the clients' approval.

The Committee on Professional Responsibility and Conduct of the State Bar of California has adopted a similar position. In Formal Opinion No. 1980-53, the state committee, citing ABA Opinion 338, held that attorneys may charge interest on delinquent accounts, but ". . . the attorney must advise the client in advance of any interest charge to be imposed on delinquent fees and the client must render an informed consent to such a charge."

Although ABA Opinion 338 and Opinion 1980-53 both require a client's informed consent to finance charges, neither opinion specifies the time at which consent must be given. Opinion 1980-53 simply states that the attorney must advise the client "in advance" of any finance charge to be imposed; ABA Opinion 338 provides even less guidance. The failure to execute a specific fee agreement before providing legal services might allow attorneys to utilize the uncertainty of the arrangement as a bargaining tool in settlement of the client's account. Therefore, to maintain professional integrity, attorneys should advise clients of their intent to impose finance charges and obtain consent to such charges before beginning substantial work on the client's behalf.

Opinion 1980-53 could be read to leave final determination of the propriety of finance charges to local bar associations. The state bar committee concluded that interest charges are not barred by California Rule of Professional Conduct 2-107(A), which provides that, "A member of the State Bar shall not enter into an agreement for, charge or collect an illegal or unconscionable fee." The committee read Rule 2-107(A) in light of Rule 2-107(B), which defines an "unconscionable" fee:

"A fee is unconscionable when it is so exorbitant and wholly disproportionate to the services performed as to shock the conscience of lawyers of ordinary prudence practicing in the same community."

The state bar committee determined that interest charges would not shock lawyers' consciences on a statewide basis, but declined to say whether, in some local community, lawyers might be shocked by such charges; however, the committee noted, "It does seem unlikely."

Ethics Opinion 1976-8 of the San Diego County bar committee disallowing interest charges might be characterized as a manifestation of local belief that such charges are unconscionable, but the opinion was based on cased decided under a rule (old ABA Ethical Canon 12) no longer in effect. Neither the new ABA Code of Professional Responsibility nor the Rules of Professional Conduct of the State Bar of California prohibits lawyers from charging interest on late accounts. Moreover, a practice viewed by some as unseemly is not necessarily "unconscionable." See J. L'Etange and B. Tucker, Fee Arrangements sections 7.1-7.2 (1982).

Therefore, to the extent they are inconsistent with ABA Opinion 338 and State Bar Opinion 1980-53, local opinions 1974-6 and 1976-8 are overruled. An attorney may collect finance charges on delinquent accounts if the client gives informed consent before the attorney completes substantial work on his behalf. In addition, a lawyer may, subject to the limitations of ABA Opinion 338, participate in a credit card plan providing financing arrangements for legal fees.

This opinion is advisory only, and is not binding upon the State Bar, the Board of Governors of the State Bar, its agents or employees.

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.