California Ethics Opinion

State of California

Comments

The Committee interprets the inquiry to ask not about the ethicality of charging interest on costs advanced when they have already been billed to the client and become past due, but, rather, about the ethicality of charging interest from the time they are paid by the lawyer until the time they are billed. As to the former query, the Committee has previously stated that it is not improper for a lawyer, with the prior agreement of the client, to impose a reasonable interest charge on delinquent balances of fees and costs. Los Angeles County Bar Association Formal Opinions 370 (January 17, 1978) and 374 (April 28, 1978); see also State Bar Formal Opinion 1980-53 (stating that attorney may ethically charge client interest on past due receivables provided that client has given informed written consent in advance of charge); San Diego Formal Opinion 1983-1 (same); Legal Ethics Committee of the Bar Association of San Francisco Informal Opinion 1970-1 (noting absence of ethical prohibition against imposing service charge or interest charge to clients whose bills have not been paid within thirty days).

The California Rules of Professional Conduct are silent on the subject of this inquiry. Rule 4-210 of the California Rules of Professional Conduct specifically permits a lawyer to advance costs on behalf of a client (even in non-litigation contexts) where such costs may be recoverable by the client in the future. But, in limiting the definition of costs advanced to all reasonable expenses of litigation or reasonable expenses in preparation for litigation or in providing any legal services to the client, subsection (A)(3) of that rule makes no mention of a lawyer charging interest on such costs. The omission is inconclusive.

Nevertheless, section 6147 of the California Business & Professions Code requires that – at least in most cases taken on a contingency fee basis – a lawyer’s agreement with his or her client include “[a] statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.” Cal. Bus. & Prof. Code Section 6147 (A)(2). Notably, a lawyer’s failure to include such terms in the agreement with the client renders the agreement voidable at the option of the client and leaves the lawyer with the ability to collect only a reasonable fee. Id. In essence, the issue of whether a lawyer may charge interest on costs advanced is a simple matter of substantive law. Unless specifically provided for in a written agreement, then, a lawyer will be hard-pressed to make a lawful demand of interest on any costs advanced on behalf of his or her client. See Alderman v. Hamilton, 205 Cal. App. 3d 1033, 1038, 252 Cal. Rptr. 845, 848 (2d Dist. 1988) (noting voidability by client of fee agreement that did not include provisions concerning disbursements). This is consistent with the policy that lawyer-client fee agreements should be strictly construed against the lawyer. Alderman, 205 Cal. App. 3d at 1037, 252 Cal. Rptr. at 847-48.

The Committee is of the opinion that Rule 3-300 of the Rules of Professional Conduct has no application in the resolution of this inquiry. Indeed, the discussion of Rule 3-300 specifically states that it is not intended to apply to the agreement by which the lawyer is retained by the client unless the agreement gives the attorney an adverse pecuniary interest. Recognizing that formal loans between lawyers and clients have in certain cases been held to implicate Rule 3-300 (or its predecessor, Rule 5-101), see, e.g., Hawk v. State Bar of California, 45 Cal. 3d 589, 247 Cal. Rptr. 599 (1988) (collecting cases), the Committee believes that the mere imposition of interest charges on costs advanced neither is a business transaction nor rises to the level of an adverse pecuniary interest within the meaning of that rule. Cf. Hunniecutt v. State Bar of California, 44 Cal. 3d 362, 243 Cal. Rptr. 699 (1988) (requiring compliance with predecessor rule to Rule 3-300 where lawyer solicited investment loan of settlement proceeds from client for real estate venture).

Because the collection of interest on costs advanced must be made part of the fee agreement, a lawyer may not as a matter of course, i.e., absent specific language in the agreement, unilaterally impose interest on a client once the representation is underway. In this respect, it is helpful to treat changes to the terms of the reimbursement of costs, such as the attempted imposition of interest thereon, in the same manner as changes to the lawyer’s fee itself. See, e.g., Kroff v. Larson, 167 Cal. App. 3d 857, 213 Cal. Rptr. 526 (6th Dist. 1985) (noting concern about burden on client of paying fees or costs prior to occurrence of stated contingency and holding costs payable only upon recovery, where agreement so provided). In Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569, 1 Cal. Rptr. 2d 531 (1st Dist. 1991), the Court of Appeal held that, where the fee agreement did not address changes in the attorneys’ billing rates during the course of the representation but referred only to the firm’s regular hourly rates, and where the client was never notified of any such rate changes, the attorneys could not collect fees higher than those initially disclosed to the client.

Implicit in a lawyer’s acceptance of a case on a contingency basis, is his or her calculation of the time value of money. After all, pursuant to such an agreement, the lawyer may spend many hours working on such a case with only a possibility of later receiving a payment that is obviously worth more to the lawyer the sooner it is received. Costs advanced on behalf of a client are admittedly a slightly different creature, for they involve out-of-pocket outlays by the lawyer of funds that could have otherwise been earning interest or expended elsewhere. Absent a fee agreement with the client that specifically addresses the accrual of interest on such expenses, the Committee believes that a lawyer may not ethically (not to mention lawfully, under the Business & Professions Code) impose interest charges on those costs. See Ojeda v. Sharp Cabrillo Hosp., 8 Cal. App. 4th 1, 22, 10 Cal. Rptr. 2d 230, 244 (4th Dist. 1992) (noting that advance of costs in contingency cases effectively provides client with an interest-free loan which may never have to be repaid). Of course, when an interest charge is proper, the rate in any instance must not be illegal or unconscionable.

This opinion is advisory only. The Committee acts on specific questions submitted ex parte, and its opinion is based only on such facts as are set forth in the questions submitted.

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