March 19, 1982
It is unethical to impose an interest or finance charge upon a recovery of costs advanced for litigation expenses in the absence of a prior specific detailed agreement between the client and lawyer providing for it.
Any agreement allowing for the charging of finance charges upon recovery of costs advanced must set forth the detailed conditions and circumstances of such charges.
It is not per se unethical to charge interest or finance charges upon recovery of costs advanced. However, the rate of interest allowable would be capped by and dependent upon current usury laws at the time of the charges.
References: DR 5-103; CI-77, CI-97, CI-191, CI-585.
Can a lawyer who has paid al litigation expenses up front and then demanded reimbursement for those expenses out of a settlement or judgment collect a reasonable rate of interest upon the monies the lawyer has lent to the client so that the litigation may be undertaken?
DR 5-103 Avoiding Acquisition of Interest in Litigation states:
"(A) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he or she is conducting for a client except that he or she may:
"(1) Acquire a lien granted by law to secure fees or expenses.
"(2) Contract with a client for a reasonable contingent fee in a civil case.
"(B) While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to clients, except that a lawyer ma advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses."
The Committee has recently opined that absent a specific contractual undertaking to the contrary, a lawyer has no obligation to advance any costs on behalf of the client. The lawyer does have an ethical duty to advise the client that he or she will not advance costs and the consequences for such refusal upon the client's interest. See CI-585.
Three Michigan Ethics Opinions CI-77, CI-97 and CI-191 specifically hold it unethical to impose an interest or finance charge on accounts receivable in the absence of a prior agreement.
By analogy, the charging of interest or finance charges upon costs advanced on litigation would not per se be prohibited with a specific prior detailed agreement between the lawyer and client allowing for it.
The inquiry does not spell out what would be considered a reasonable rate of interest. Certainly the current rate of usury laws would be determinative of the maximum interest which would be permitted.
In line with the earlier cited Ethics Opinions a very specifically detailed agreement would be required which allowed for the advancement of cost and the imposition of finance charges particularly setting forth the conditions and circumstances of such interest charges.