FACTS[1]
A law firm is advancing court costs and litigation expenses on behalf of its clients in two large lawsuits. The firm is considering setting up a line of credit with a third-party lender to advance those costs and would like to pass on the interest charges to the client as a client cost.
May the firm charge the interest on the line of credit as a client cost?
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(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, provided the client remains ultimately liable for such costs and expenses; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
Ariz. Ops. 86-9, 91-22, 94-10
ER 1.8(e) allows a lawyer to advance court costs and litigation expenses if: (i) the client is ultimately responsible for their payment, irrespective of the outcome of the case; or (ii) the client is indigent. It also is settled that if a lawyer advances costs and expenses out of his or her own pocket and the client is delinquent in reimbursing the lawyer for those expenditures, it is ethically permissible for the lawyer to charge the client interest on delinquent amounts so long as the client consents in advance and certain other conditions are met. Ariz. Op. 94-10 (July 20, 1994) (citing Ariz. Op. 81-14 (May 18, 1981) and Ariz. Op. 86-9 (August 1, 1986)). It follows from that rule that it would be ethically permissible for a lawyer under certain conditions to pass on to the client any interest charges on money the lawyer has borrowed to fund advanced costs and expenses. Such an arrangement, however, would be subject to the following conditions and limitations:
First, the lawyer must not have any financial interest in the lender. See ER 1.8(e); Ariz. Op. 91-22 at 1-2 (Sept. 30, 1991) (under certain conditions, a lawyer may assist a client in locating a third-party loan service, but the lawyer must not have any interest in the lender: "As long as the inquiring attorney has no interest in the . . . loan service that would affect his independent judgment on behalf of his client, it would not violate ER 1.8(e)"). To the extent the lawyer has a past or on-going business relationship with the lender, the lawyer also must be satisfied that his or her representation of the client will not be "materially limited" by the lawyer's responsibilities to the lender. If it is, the lawyer may not proceed unless he or she "reasonably believes the representation will not be adversely affected" and "the client consents after consultation." ER 1.7; see also Ariz. Op. 91-22 at 2 (Sept. 30, 1991) (under ER 1.7(b) the lawyer must make an independent judgment "whether his representation of his client will be 'materially limited' by any responsibilities he may have to the . . . loan service").
Second, the interest charged to the client may not exceed the interest charges actually incurred by the lawyer. ER 1.8(e) allows a lawyer to advance costs and expenses; it does not authorize a lawyer to charge a premium on such advances. The lawyer's cost of borrowing should be treated like any other disbursement, and, as such, it should reflect the lawyer's "actual expense[] associated with such cost[]." Ariz. Op. 94-10 (July 20, 1994) (practice of billing clients for costs on a percentage of total fee basis permissible if, inter alia, the percentage approximates actual expenses); see also New York City Bar Ass'n Op. 1997-1 (March 1997) (under Model Code provision, a lawyer may charge clients interest on funds borrowed to pay litigation expenses so long as, inter alia, the interest does not "exceed the interest charges actually incurred by the lawyer"). The lawyer also has an obligation to make sure that the interest charges are commercially reasonable. See Ariz. Op. 94-10 (July 20, 1994) (interest charge on delinquent account must be reasonable (citing Ariz. Op. 81-14 (May 18, 1981)); Illinois State Bar Ass'n Op. 94-6 (July 1994) (under Model Rules, lawyer who borrowed money on a line of credit to advance costs could pass interest charges on to client if, inter alia, the interest rate was reasonable).
Third, before passing on any interest charges to the client, the arrangement must be explained clearly to the client in writing and be agreed upon by the client in writing. See Ariz. Op. 94-10 (July 20, 1994) (ethically permissible to charge interest on a delinquent account only if, before services are rendered, the client is advised in writing that interest will be charged on delinquent accounts, the interest and delinquency period are reasonable, and the client consents in writing (citing Ariz. Op. 81-14 (May 18, 1981) and Ariz. Op. 86-9 (August 1, 1986)); New York City Bar Ass'n Op. 1997-1 (March 1997) (under Model Code provision, a lawyer may charge clients interest on funds borrowed to pay litigation expenses so long as, inter alia, "the provision [is] explained clearly to the client in advance and agreed upon by the client"); Illinois State Bar Ass'n Op. 94-6 (July 1994) (under Model Rules, lawyer who borrowed money on a line of credit to advance costs could pass interest charges on to the client if, inter alia, client consents in a written agreement entered before the accrual of any interest). The lawyer also must advise the client regarding any legal obligations the client may have to the lender or the lawyer under the letter of credit arrangement. ER 1.4(b).
Fourth, to the extent the lender requires information regarding the lawyer's representation of the client, such information may not be disclosed unless the client consents to the disclosure after consultation. ER 1.6; Ariz. Op. 91-22 at 3 (Sept. 30, 1991) (without informed client consent, attorney may not disclose information regarding representation to loan service making loan to client secured by anticipated proceeds of claim).
Subject to client agreement and the guidelines set forth above, a lawyer may ethically set up a line of credit with a third-party lender to advance a client's court costs and litigation expenses and pass on the line of credit's interest charges to the client as a client cost.
[1] Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. Ó State Bar of Arizona 2001