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FORMAL OPINION 1997-1

ACTION: FORMAL OPINION

TOPIC: Interest charges on unreimbursed expenses

OPINION:

DIGEST: A lawyer may enter into a fee agreement under which the client will be charged interest on unreimbursed expenses of litigation to cover interest paid to the bank from which the lawyer borrows to pay the expenses

CODE: DRs 2-106(D), 5-103(B)(1), 5-104(A)

QUESTION

A lawyer represents plaintiffs in personal injury actions on a contingent fee basis. The lawyer advances funds to pay expenses of litigation (e.g., court costs, expert witness fees and other disbursements). The lawyer borrows from a bank to finance these disbursements. May the lawyer charge clients interest on funds advanced to pay litigation expenses at the rate charged by the bank?

OPINION

Loans from a lawyer to a client are generally restricted, see DR 5-104(A), and in litigation, loans for most purposes are flatly forbidden. As an exception, however, DR 5-103(B)(1) provides that "[a] lawyer may advance or guarantee the expenses of litigation . . . ." Although the exception does not explicitly address whether a lawyer may charge interest on funds advanced for this purpose, other ethics committees have uniformly concluded that, subject to limitations, a lawyer may do so. See Ala. RO-88-88 (1988); Fla. Op. 86-2 (1986); Ga. Op. 92-1 (1992); Haw. Op. 32 (1992); Ill. 94-6 (1994); Iowa Op. 81-7 (1981); Md. Op. 94-24 (1994); N.J. Op. 603 (1987); Va. Op. 1595 (1994).

We agree, subject to limitations recognized in the above-cited opinions. First, the interest charged may not exceed the interest charges actually incurred by the lawyer. Second, the provision must be explained clearly to the client in advance and agreed upon by the client. Finally, the method by which the rate of interest will be determined must be stated in a writing provided to the client. See DR 2-106(D) ("Promptly after a lawyer has been employed in a contingent fee matter, the lawyer shall provide the client with a writing stating the method by which the fee is to be determined, including . . expenses to be deducted from the recovery [ILLEGIBLE WORD]"): see also N.Y. City Bar Op. 1993-2 (1993).

Although this Committee does not address issues of substantive law, we note that Rules of Court adopted by the Appellate Divisions of the Supreme Court of the State of New York may further restrict the proposed practice of charging interest on disbursements in personal injury actions. Rules of Court governing contingent-fee representation in personal injury actions require the filing of retainer statements and prescribe their contents. Among other things, the Rules provide that the lawyer's percentage of the amount recovered "shall be computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert medical testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action." McKinney's 1996 Rules of Court, sec. 691.20 (22 NYCRR sec. 691.20). The lawyer should consider whether the proposed conduct is permissible under these Rules.

CONCLUSION

Subject to the limitations identified above and any applicable legal restrictions, the Committee answers the question in the affirmative. We conclude that a lawyer may charge clients interest on funds loaned to cover expenses of litigation.