Ethics Opinion 345

Reimbursement of Interest Charges Incurred When a Lawyer Uses The Firm's Line of Credit to Advance the Costs of the Representation

A lawyer who uses the firm’s line of credit to advance to a client the costs of the representation will incur interest charges from the bank in doing so. The lawyer may pass these costs along to the client, so long as the client has been fully informed in advance of these charges, the client has agreed to pay them, the costs are reasonable, and the lawyer maintains a separate accounting of the interest charges incurred for that client. Finally, the costs of the line of credit must be directly attributable to the representation of that client; in other words, the lawyer may not pass on to individual clients the costs of maintaining a line of credit used to fund the firm’s general overhead expenses.

Applicable Rules

• Rule 1.5 (Fees)
• Rule 1.8 (d) (Conflict of Interest: Specific Rules)

Inquiry

In a personal injury case, costs are incurred for copying, for ordering deposition transcripts, for court costs, for expert witnesses, and for similar disbursements related to the prosecution of the case. The firm representing a party is contemplating using the firm’s line of credit to pay for such costs, but it will have to pay the bank interest for doing so. The firm has inquired whether it may pass on to the client at the end of the case the charges for the interest incurred.

Discussion

There are two alternatives to this proposed arrangement: either the client will have to pay for these disbursements as they are incurred or the firm will have to absorb these additional costs, likely passing them on to all clients through increases in fees. If the client must pay these expenses, the client may have to borrow funds to do so, in which case the client would pay interest charges directly. Rule 1.8(d) allows lawyers to advance the costs of litigation to clients, but they are not required to do so. Thus, neither of these alternatives is required by the Rules.

If a lawyer uses his or her credit line to operate a law office or to fund normal operating expenses, the lawyer cannot pass along the interest incurred to do so to individual clients. However, requiring a client to pay for the costs incurred in prosecuting his or her case is clearly allowed by the Rules. Comment [2] to D.C. Rule 1.5 specifies that a lawyer may seek payment from the client for expenses including filing fees, copying costs, and transcript costs. D.C. Rule 1.5(b) provides that when a lawyer has not regularly represented a client, these expenses “shall be communicated to the client, in writing, before or within a reasonable time after commencing the representation.” By setting forth the charges for which the lawyer or his or her firm will seek payment by the client, the lawyer provides the client with a clear understanding of the lawyer’s costs and allows for discussion of these terms at the outset of the attorney-client relationship.

Neither the Rules nor the Comments specifically mention reimbursement of interest costs. Some threshold concerns about seeking reimbursement of these charges from clients are not implicated here. For example, the inquirer has already specified that the firm will not be making a profit on the advancement of the payments for costs incurred. Rather, it will seek only to recover the costs of the interest the bank will charge the firm for using the firm’s line of credit to cover them.

This inquiry raises competing interests. On the one hand, allowing lawyers to pass on the carrying costs of such charges to individual clients ensures that the firm’s other clients are not paying these charges through increased fees. On the other hand, since many firms and lawyers maintain lines of credit to support their practices, it is not appropriate for some of a lawyer’s clients to bear indirectly certain overhead expenses that appropriately should be absorbed by the lawyer or spread fairly among all the lawyer’s clients.

Because a lawyer may only charge the client the amount of interest directly attributable to that client’s case, the lawyer must maintain detailed accounts of the amount of any advance and the interest charged by the lender and attributable to the client’s costs. Although not required by the Rules, a lawyer may wish to maintain a line of credit for the advancement of such costs that is separate and apart from the line of credit on which the lawyer regularly draws for purposes of paying overhead expenses.

In addition, any interest charged to the client must be reasonable, and the lawyer“ will have the burden of establishing the reasonableness” of such charges. Moreover, it is clearly improper for a lawyer to pass onto the client any late fees or account maintenance costs that result from the lawyer's inefficient or imprudent financial management of the line of credit.

Finally, any fee agreement with a client that would include interest costs should be made at the beginning of the representation. In Opinion 310, the Committee reviewed the question whether a lawyer could charge interest on its fees if the client did not pay them promptly. See D.C. Ethics Op. 310 (2002). The Committee noted that the payment of interest resulted in charges only to the client directly affected and thus allowed the lawyer to avoid “upward fee pressures” caused by spreading the additional costs associated with late payment of fees to all of his or her clients. In that Opinion, the Committee noted that changing the fee agreement in an ongoing representation in order to include these charges is subject to “strict scrutiny” because of the possibility of “overreaching” by the lawyer. Id. (citing Chase v. Gilbert, 499 A.2d 1203, 1209 (D.C. 1985)) (“What may constitute overreaching in particular circumstances is of course dependent on such factors as the resources and sophistication of the client, the presence or absence of such external factors as a favorable litigation schedule that would be lost if the client had to change counsel, and so on.”). So, wherever possible, the lawyer should specify at the outset of the representation that, should it be necessary for the lawyer to draw on a line of credit to pay for litigation expenses, the client is responsible for the applicable interest charges.

Published: July 2008