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 ethically charge interest on past due receivables from clients and, if so, (i) what may the interest rate be and (ii) how may the rate be charged?
An attorney may ethically charge interest on past due receivables from client, provided the client gives his or her informed consent in advance of the charge. The interest charge may not thereafter be changed unless, at the time the agreement was entered into, the parties contemplated that interest rates would be affected by later events.
Rule 2-107 of the Rules of Professional Conduct of the State Bar.
The Committee has been asked whether an attorney may ethically charge interest on past due receivables from clients and, if so, (i) at what interest rate and (ii) how may the rate be changed?
In the past, it was determined that charging such interest was improper whether or not the client had agreed, either in advance or upon conclusion of service. (ABA Committee on Ethics and Prof. Responsibility, informal decision No. C-741 (1964).) The Committee condemned the practice as unsuited to the legal profession although it is sound, proper, and customary practice in business.
The Committee was concerned that claimed accrued interest might be used improperly by an attorney as a bargaining weapon as to amount of fee owed or as an inducement to pay promptly. The latter effect would be similar to offering a discount for prompt payment of attorney's fees, which practice has been disapproved in American Bar Association Committee on Professional Ethics, opinion No. 151 (1936). (See also, L.A. Co. Bar Assn., Committee on Legal Ethics, opn. No. 288 (1965).)
However, in the past, the American Bar Association Committee on Professional Ethics had approved an attorney taking from a client an interest-bearing promissory note (with right of prepayment without penalty) in the amount of an agreed fee. (See informal decision No. C-593 (1962).)
The rationale of this earlier decision seems to have been that the "undue commercial emphasis" arising from charging interest somehow undermined the "highly personal. relationship" of the attorney with the client. (See ABA Committee on Prof. Ethics, opn. No. 151 (1936).)
In its informal decision No. 593 (1962), the Committee of Professional Ethics of the American Bar Association felt there was "nothing inappropriate in a lawyer ... requiring payment of a fee in advance." The economic effect of such a procedure is to deprive the client of the use of his or her funds prior to services being rendered. These funds presumably could otherwise be used by the client to earn interest. By prepaying, the client loses the interest which could be earned.
The Board of Governors of the State Bar of California at first disfavored but then approved payment of legal fees by means of a financing or loan plan whereby the client may finance fees by executing an interest-bearing promissory note to be assigned or discounted to a lending agency. (Resolution of the Board adopted March 1966 and April 1967.)
The Commitee on Ethics and Professional Responsibility of the American Bar Association initially concluded that use of credit cards for payment of legal fees was unprofessional because it was "wrong" to put professional services in the same category as "sales of merchandise and sales of nonprofessional services," especially when all credit card publicity was directed to such sales. (ABA Committee on Ethics and Prof. Responsibility, informal opn. No. 1120 (1969).) The Committee reiterated that this conclusion applied even when the law firm agreed not to display promotional material and where collection of accounts by the banks was without recourse. (See ABA Committee on Ethics and Prof. Responsibility, informal opn. No. 1176 (1971).)
However, upon adoption of the Code of Professional Responsibility by virtually all fifty states, the American Bar Association Committee on Ethics and Professional Responsibility overruled the latter two decisions and approved use of credit cards subject to several conditions, only one of which is related to the instant question, to wit: Charges made to clients shall be only for services actually rendered. The Committee on Ethics and Professional Responsibility also stated:
"... that a lawyer can charge his client interest providing the client is advised that the lawyer intends to charge interest and agrees to the payment of interest on accounts that are delinquent for more than a stated period of time." (Emphasis added.) (ABA Committee on Ethics and Prof. Responsibility, opn. No. 388 (1974).)
This Committee has not previously rendered an opinion whether it is permissible to charge interest on past due receivables from clients. The Committee is of the opinion that such interest may be charged subject to the considerations which follow.
Rule 2-107(A) of the Rules of Professional Conduct provides:
"A member of the State Bar shall not enter into an agreement for, charge or collect an illegal or unconscionable fee."
As to what may constitute an "illegal" fee, attorneys should consider the November 6, 1979 amendment to article XV, section 1, of the California Constitution and to federal statutes relating to usury, as well as to federal and California truth-in-lending and consumer finance/protection laws.
Rule 2-107(B) of the Rules of Professional Conduct provides, in relevant part:
"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. Reasonableness shall be determined on the basis of circumstances existing at the time the agreement is entered into except where the parties contemplate that the fee will be affected by later events." (Emphasis added.)
The Committee assumes, without attempting to decide, that the word "fee" encompasses a proposed or existing interest charge for payments not made within a stated period of time. The initial question becomes whether imposition of such a charge (irrespective of its rate) would "shock the conscience of lawyers of ordinary prudence practicing in the same community."
It is the consensus of the Committee, which is composed of lawyers from many different communities, that, in their communities, imposition of interest charges would not today shock the conscience of lawyers of ordinary prudence.
For more than a century, large, prestigious and highly "professional" banks and stock brokerage firms have charged interest for money loaned or collection deferred. More recently, many medical practitioners and hospitals in larger communities have collected interest on past due accounts. High interest rates and inflation highlight the importance of both the value of money in hand and prompt payment of indebtedness. However, the Committee cannot determine whether, even in these circumstances, it might not shock the conscience of lawyers in some community to impose an interest charge. It does seem unlikely.
In the event that an attorney or the local bar or courts should determine that imposition of an interest charge was not shocking to the conscience of lawyers in the same community, other considerations must be addressed.
One factor which an attorney must consider in determining whether the interest charge is reasonable is whether the informed consent of the client to the fee agreement has been obtained. (Rule 2-107(B)(9), Rules Prof. Conduct.)
Under the emphasized language of American Bar Association Committee on Ethics and Professional Responsibility, opinion No. 338, supra, which we hereby approve, 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.
The procedural and evidentiary aspects respecting such advice and the client's consent are beyond the scope of this Committee's purview. The Committee cannot comment on areas of contract law which an attorney obviously must consider when contemplating a change in interest rate.
Referring to the language emphasized above in rule 2-107 of the Rules of Professional Conduct, the attorney must also determine whether, based on the circumstances which existed when he or she entered into the fee agreement with the client, it was contemplated that the fee--and interest on delinquent amounts--would be affected by later events. If no such contemplation then existed, the Committee is of the opinion that to charge interest charges as a result of unforeseen factors would be unreasonable.
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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