State Bar of Arizona Ethics Opinions

00-07: Collection of Legal Fees; Fee Agreements; Interest; Billing; Confidentiality
10/2000

Lawyers may charge interest on past due legal fees provided that the rate is reasonable and the client has given informed consent. Lawyers also may use collection agencies, as described in Ariz. Op. 94-11, to collect fees and interest charges, if the client has given informed consent and may charge the client for the collection fee. [ER 1.5]

FACTS[1]

 

The inquiring attorney wants to: 1) charge interest on a client's account receivable, at a reasonable rate, provided that the client has given informed consent in a written fee agreement; and 2) charge the client the cost of using a collection agency to collect the unpaid fees and costs from the client, again provided that the client has given informed consent in a written fee agreement.  Though the inquiring attorney has not identified the interest rate to be charged, the attorney represents that collection agencies typically charge a fee of one-third (33 1/3%) of any amount collected if no legal action is taken, and forty-five percent (45%) of the amount collected if the collection agency takes legal action on behalf of the assignor.

 

QUESTIONS PRESENTED

 

  1. Can a lawyer add to the amount of unpaid legal fees and costs the cost of the collection agency fees if the client consents to such an arrangement in a written fee agreement? 
  2. Can the lawyer also charge interest on the unpaid principal sum, in addition to the collection agency fees, provided that the client also consents in a written fee agreement and the rate of interest is reasonable? 

RELEVANT ETHICAL RULE

 

ER 1.5.            Fees

 

            (a)            A lawyer's fee shall be reasonable.  The factors to be considered in determining the reasonableness of a fee include the following:

 

(1)            the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

 

(2)            the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

 

(3)            the fee customarily charged in the locality for similar legal services;

 

(4)            the amount involved and the results obtained;

 

(5)            the time limitations imposed by the client or by the circumstances;

 

(6)            the nature and length of the professional relationship with the client;

 

(7)            the experience, reputation, and ability of the lawyer or lawyers performing the services; and

 

(8)            whether the fee is fixed or contingent.

 

            (b)            When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.

 

            (c)            A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law.  A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated.  Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

 

            (d)            A lawyer shall not enter into an arrangement for, charge, or collect:

 

(1)            any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or

 

(2)            a contingent fee for representing a defendant in a criminal case.

 

            (e)            A division of fee between lawyers who are not in the same firm may be made only if:

 

(1)            the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;

 

(2)            the client is advised of and does not object to the participation of all the lawyers involved; and

 

(3)            the total fee is reasonable.

 

OPINION

 

Charging Interest

 

As a general proposition, an attorney may ethically charge interest on a client's delinquent bill, provided that the rate is reasonable and the client has given informed consent.  See Ariz. Ops. 81-14 and 86-9.  See also ABA Formal Op. 338 (1974).  These Opinions require that the interest charge be disclosed in the written fee agreement.

 

Use of a Collection Agency to Collect Unpaid Fees

 

An attorney may use a collection agency to collect a client's delinquent bill, provided that the client has given informed consent.  See Ariz. Op. 94-11.  This Opinion requires that the use of collection agencies be disclosed in the written fee agreement and that the lawyer discloses to the agency only the minimum amount of client information necessary to collect the debt, pursuant to ER 1.6(d).  An attorney also may submit for collection an amount that includes the interest owed.

 

Pass-through of Collection Agency Fees

 

The question whether an attorney may pass to the client the cost of using a collection agency to collect the client's delinquent account is novel.  The inquiring attorney's question comprises two distinct issues.  First, may the cost of using a collection agency be charged to the client?  Second, if so, may this additional charge itself be submitted, together with the underlying account, to the collection agency for collection?

 

First, assuming that the client has given informed consent, the attorney may charge the client for the actual cost of using a collection agency, if the actual cost is reasonable.  The attorney should make clear to the client, however, how this additional charge will be computed.  Where, as often is the case, the lawyer is the more sophisticated party to the fee agreement, the lawyer needs to take special care to ensure that the resulting fee agreement is fair and reasonable to the client.  The mere fact that the client has agreed, in writing, to a particular term is not in itself sufficient reason to conclude that the term is fair or reasonable.

 

Whether the actual cost is reasonable in a given instance may depend on facts not presented by the inquiring attorney.  To meet the reasonableness requirement of ER 1.5, the attorney should endeavor to use a method of collection that does not unnecessarily increase the client's ultimate liability.  Where the amount of unpaid fees is high, the percentage-based fee charged by the collection agency might well exceed the reasonable cost of collection through traditional legal process.  On the other hand, smaller fee amounts could lend themselves to efficient collection by collection agencies.  (It merits note that the State Bar has established an arbitration procedure for the resolution of fee disputes, and this process might obviate the need for significant collection costs in some cases.)

 

Second, though it is not unethical to require the client to pay for the actual and reasonable cost of collection, it does not follow that adding to a client's principal balance an additional charge meant to cover the cost of collection itself would always be proper.  In the circumstances outlined by the inquiring attorney, such a measure could have the effect of charging the client for a cost not incurred.  Suppose, for example, that the client properly owes $3,000 for legal fees and costs.  To recover the full cost of collection via a pass-through (assuming a charge of 33%), the inquiring attorney would have to submit for collection an account showing $4,500 due.  From the client's perspective, this amount would be 50% of the amount due, not 33%.  Though some circumstances might conceivably warrant such a cost, a 50% collection fee cannot be viewed as reasonable in every case.  Moreover, at the time the attorney submits the bill to the collection agency, the client actually owes not $4,500, but $3,000.  If the collection agency fails to collect any amount from the client, the client's liability should continue to be only $3,000 - not a higher amount based on fees that the collection agency never collects.  The risk that a client might be charged for costs not actually incurred runs afoul of ER 1.5.  Compare ABA Formal Op. 93-379 (1993) (concluding that the ER 1.5 requirement of reasonableness applies to costs as well as fees, and requiring that discounts from third-party providers must be passed along to the client to avoid creating "profit centers").

 

CONCLUSION 

Attorneys may: 1) properly charge reasonable interest on outstanding balances if so disclosed in the written agreement; 2) use collection agencies to collect such balances as set forth in Ariz. Op. 94-11; and 3) charge their clients for the actual and reasonable costs of collection.  But the practice of adding a 33% charge to the original balance owed before assigning a balance to a collection agency risks: 1) imposing unreasonably high collection fees on clients; and 2) imposing prospective liability on clients for costs not actually incurred.  Accordingly, the practice proposed would violate ER 1.5.



[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 2000