New York State Bar Association
Committee on Professional Ethics
Opinion
1181 (01/17/2020)
Topic:
Charging interest on expenses
Digest: A New York contingency-fee attorney may
impose an interest charge on unpaid disbursements if a written agreement signed
by the client fully discloses the terms on which interest may be charged and
the terms are reasonable.
FACTS
1. The
inquirer is a New York lawyer whose practice includes matters done on a
contingency fee basis. We are told that recent changes in the law
concerning contingency fee cases have sowed some confusion about our prior
opinions on a lawyer’s ability to charge interest on disbursements. This confusion, we are told, stems from the
laws allowing a lawyer to fund disbursements rather than seeking immediate
reimbursement from the client.
QUESTIONS
2. The
inquirer asks the following:
(a) May a lawyer impose a flat interest charge
on lawyer-funded disbursements?
(b) Must the lawyer advise the client of each
individual expense and be offered the chance to pay the expense as incurred?
(c) May the lawyer use the statutory interest
rate of 9% set forth in CPLR § 5004 as guidance for a reasonable interest rate
or may the lawyer charge a higher rate based either on the lawyer’s cost of
money from the lawyer’s bank or other factors?
OPINION
3.
Assorted laws and court rules govern
a lawyer’s obligations in contingency fee cases. We address questions arising solely under the
N.Y. Rules of Professional Conduct (the “Rules”), so nothing in this opinion
should be construed as overriding or interpreting the laws and regulations that
govern the practices of contingency fees as set forth by the legislature and
the courts, including those statutes and rules that mandate the disclosures a
lawyer must provide a client. See,
e.g., 22 NYCRR 806.27(c)(2) (3d Dept.) (in certain
actions, “[I]n the event that the attorney agrees to pay
costs and expenses of the action pursuant to Judiciary Law section 488(2)(d),
on the gross sum recovered before deducting expenses and disbursements, [then] [t]he
retainer agreement or letter of engagement shall
describe these alternative methods, explain the financial consequences of each,
and clearly indicate the client's selection”); see also 22 NYCRR
603.25 (e)(3)(ii) [Schedule B] [1st Dept.]; 691.20 (e)(3)(ii) [Schedule B] [2d Dept.]) Here, our focus is only on the
lawyer’s ethical responsibilities.
4.
Whether a lawyer may charge interest
on disbursements in a contingency fee case is not a new issue for us. In N. Y. State 729 (2000), which
was issued under a substantially identical rule in the prior Code of
Professional Responsibility (the “Code”), we said that a lawyer may do so
provided certain conditions are met. These
conditions were: (a) that the client is
clearly advised in writing that disbursements not paid within an expressly
stated time period would be subject to an interest charge; (b) that the client
is billed for the disbursement promptly after the disbursement is incurred so
that the client may pay the disbursement, if the client so chooses, before the
client incurs an interest charge; (c) that the period of time between the bill and
the imposition of the interest charge is reasonable; (d) that the disbursement
is itself appropriate (
see, e.g., ABA 93-379 (1993) (citing appropriate
disbursements); (e) that the interest rate is reasonable; and (f) that the
client gives informed consent in writing to the arrangement before the
arrangement goes into effect. We believe
that the conditions set forth in Opinion 729 are equally applicable under the
Rules, and we thus continue to endorse them as appropriate conditions when a
lawyer seeks to charge interest on disbursements in a contingency fee case,
whether the interest rate is flat or fluctuating.
5.
Our
adherence to Opinion 729 answers the inquirer’s first two questions, namely,
that a lawyer may charge interest on disbursements but must offer the client a
reasonable chance to pay the expense before the interest charge is
incurred. This leaves only the
inquirer’s question about whether the statutory provision for 9% interest on
pre- and post-judgments may (or must) serve as a yardstick for the amount of
interest a lawyer may charge for unpaid disbursements.
6.
In
Opinion 729, we declined to opine on the amount of interest a lawyer may charge
other than to conclude that the amount must be reasonable. We adhere to that view. Nothing in the Rules dictates a particular
amount as reasonable, and this Committee interprets the Rules, it does not make
them. That said, we see no obvious
relationship between, on the one hand, a legislative policy on the interest
that must be paid on judgments (that is, 9%) and, on the other, the ethical reasonableness
of an interest charge on unpaid disbursements in a contingency case. It is
possible that one may bear on the other, but the connection is not
ineluctable. We believe, instead, that
the reasonableness of an interest rate varies with the facts and circumstances
of a particular lawyer-client relationship. It follows that, in our view, a lawyer is not
required to use the statutory interest rate as an interest charge, and that
whether a lawyer may do so depends on the facts and circumstances.
7.
For
example, we have previously opined that a lawyer may pass on to a client the
interest rate (but no more) that the lawyer actually incurs if the lawyer
borrows from a bank to fund the disbursements.
N.Y. State 754 (2002); see N.Y.C. 1997-1 (1997). In our Opinions 729 and 754, we said, too, that
whether the lawyer uses the lawyer’s own funds to finance the disbursements
rather than borrowing those funds should not matter; in each instance, there is
an economic cost to the lawyer which the lawyer may ethically pass on to the
client provided the conditions set forth above are satisfied. The factors comprising the lawyer’s cost of
money in the absence of bank financing are impossible to identify to any useful
effect, except to note that laws exist (such as usury laws) that regulate these
matters and hence apply.
CONCLUSION
8.
A
New York contingency fee attorney may impose an interest charge on unpaid
disbursements as long as (a) the
agreement describes the
alternative methods of payment of such disbursements, explains the financial
consequences of each, and clearly indicates the client's selection, (b) the
client is clearly advised, indicating that an interest charge will be imposed
on disbursements that are not paid within a stated period of time, and the
client consents to that arrangement before it goes into effect, (c) the client
is billed for the disbursements promptly after they have been incurred so the
client may decide whether to pay the disbursements or incur the interest
charge, (d) the period of time between the bill and the imposition of the
interest charge is reasonable, (e) the disbursement itself is appropriate, and
(f) the interest rate is reasonable. The
reasonableness of the interest rate depends on the facts and circumstances of
the case.
(12-19)
