December 14, 1989
A lawyer may not charge a usurious interest rate on amounts due for lawyer fees.
A lawyer may obtain a mortgage on a client's property to secure payment of lawyer fees if:
a. the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;
b. the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
c. the client consents in writing thereto.
It is not unethical to recover lawyer fees in a judicial foreclosure of a mortgage obtained to secure lawyer fees if the requirement to pay lawyer fees incurred in the foreclosure proceeding is made part of the mortgage, the mortgage is obtained in compliance with MRPC 1.8, and the amount of the lawyer fees are approved by the trial court.
References: MRPC 1.5(a), 1.8(a), 1.8(j); CI-77, CI-97, CI-191, CI-547, CI-1106; MCL 600.2431(2); MSA 27A.2431(2); United Growth Corp v Kelly Mortgage, 86 Mich App 82; 272 NW2d 340 (1978).
A lawyer was retained to act as defense counsel in an action to remove the client's children from the parental home. The retainer agreement provided for an 18% interest rate to be charged on the outstanding balance of lawyer fees. The agreement required that the balance be discharged by $100.00 per month payments, and gave the lawyer a mortgage on the client's home to secure payment of lawyer fees. The agreement also provided that the client would be responsible for costs and fees associated with foreclosure.
The action was settled with the clients retaining custody of their children. Lawyer fees and costs were approximately $10,600.00. Of that amount, the client paid $2,900 in unequal payments.
The lawyer made numerous attempts to collect his fee. Three years after conclusion of representation, the lawyer threatened foreclosure. By this time, the clients were not living at the mortgaged property and had placed the property on the market for sale. The lawyer then instituted a foreclosure proceeding. The foreclosure sale was held and the house sold for $20,100. From the proceeds, the clients received approximately $4,600 and the lawyer received approximately $15,500. The lawyer claimed this amount was due for fees (including fees earned in the foreclosure action), interest and costs.
The Committee is asked (1) whether lawyers may charge a "time-price differential" up to 18% interest; (2) whether 18% interest is usurious; (3) whether collection of usurious interest is ethical; and (4) whether a lawyer may ethically charge lawyer fees and costs associated with foreclosure on a mortgage given as security for payment of lawyer fees and costs for representation in a legal matter.
It is not within the jurisdiction of this Committee to answer legal questions. Clearly issues 1 & 2 are legal questions, and the Committee cannot render an opinion concerning them. In regard to these issues; see MCL 438.31 et seq; MSA 19.15(1) et seq; Op Atty Gen 1980, No 5809, p 1060 (11-3-80).
Interest may be charged on the unpaid balance of client's accounts if the client agrees to the interest in advance. See, CI-77, CI-97, CI-191, CI-547, CI-1106, ABA Op 338. These opinions do not sanction the charging of an usurious interest rate. MRPC 1.5(a) states in part:
"(a) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee . . . ." Emphasis added.
By definition, a usurious interest rate is illegal; if 18% interest is usurious, then offering or making a fee agreement charging that interest would violate MRPC 1.5(a).
There is no Michigan opinion permitting a lawyer to take a mortgage on a client's property in order to secure payment of anticipated legal fees. Other states have held that it is permissible for a lawyer to take a mortgage on a client's home to secure payment of legal fees and expenses, Vermont Op 1987-13; New York City Op 1988-7; California Op 1981-62. These opinions require that the transaction be fair to the client and that the lawyer obtain the client's consent, preferably in writing, after fully disclosing the facts to the client and allowing the client to retain independent legal counsel.
MRPC 1.8, prohibits lawyers from entering into a business transaction with a client, except under limited circumstances. MRPC 1.8(a) states:
"(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless:
"(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;
"(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
"(3) the client consents in writing thereto." Emphasis added.
A lawyer may obtain a mortgage on a client's property provided the lawyer complies with MRPC 1.8(a), and the property which the mortgage secures is not the subject matter of litigation the lawyer is conducting for the client, MRPC 1.8(j). If the interest charged is usurious, the terms of the transaction are not fair and reasonable to the client and violate MRPC 1.8(a)(1).
It is unclear whether the foreclosure proceeding referenced in this fact situation is a foreclosure by advertisement commenced under MCL 600.3201; MSA 27A.3201, or a judicial foreclosure commenced under MCL 600.3101; MSA 27A.3101. If it were a foreclosure by advertisement, lawyer fees are limited to nominal amounts by MCL 600.2431(2); MSA 27A.2431(2). If the action were a judicial foreclosure then reasonable lawyer fees could be permitted by the trial court where the mortgage provides for lawyer fees. United Growth Corp v Kelly Mortgage, 86 Mich App 82; 272 NW2d 340 (1978).
Therefore it is not unethical to recover lawyer fees in a judicial foreclosure of a mortgage obtained to secure lawyer fees if the requirement to pay lawyer fees incurred in the foreclosure proceeding is made part of the mortgage, the mortgage is obtained in compliance with MRPC 1.8 and the lawyer fees are approved by the trial court.