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98 Formal Ethics Opinion 3

January 15, 1998

Adding Finance Charges to Past Due Client Accounts

 

Opinion rules that, subject to the requirements of law, a lawyer may add a finance charge to a client's account if the client fails to pay the balance when due as agreed with the client.

 

Inquiry #1:

 

Law Firm does not have a written fee agreement with its clients; however, all bills for services rendered to clients state that payment is due in full upon receipt. To date, Law Firm has not added a finance charge to any past due client accounts. Law Firm would like to begin assessing finance charges on the outstanding past-due accounts of selected clients. Law Firm plans to send each of these clients a notice stating that the client's past due account balance will be charged a finance charge of 1.5% per month effective 60 days from the date of notice if the account balance is not paid in full by that time.

 

There are two groups of clients who will be affected by the decision to add finance charges. The first group consists of clients who have outstanding account balances because they have never paid anything on their accounts and clients who, without obtaining the consent of Law Firm, send partial payments to Law Firm each month. The second group consists of clients who have made arrangements with Law Firm to make monthly partial payments on their accounts. Law Firm agreed to represent these clients knowing that the clients would not be able to pay their accounts in full each month.

 

May Law Firm add finance charges to the accounts of clients with past due balances who have not made partial payment arrangements with the firm?

 

Opinion #1:

 

Yes, provided Law Firm complies with Revised Rule 1.5(a) of the Revised Rules of Professional Conduct which prohibits a lawyer from entering into an agreement for, charging, or collecting an illegal fee. This means that finance charges on legal fees must comply with usury laws and any other applicable consumer credit laws.

 

N.C. Gen. Stat. §24-5(a) permits a creditor to charge simple interest at the legal rate on the principal owed after an account is contractually due. If a lawyer and a client did not agree in the oral or written fee contract at the beginning of the representation that interest on past due legal fees would be charged at a contract rate upon default, then interest may only be charged at the legal rate. Id. Similarly, if the lawyer and the client did not agree at the beginning of the representation when the account balance would be due and payable, the law provides that the account becomes due and payable in a reasonable time under the circumstances. No prior notice of the election to charge interest appears to be required under N.C. Gen. Stat. §24-5(a).

 

If a lawyer wants to charge up to 1.5% per month on the unpaid portion of the balance of the previous month, the lawyer must have an agreement to this effect with the client (whether the agreement is express, implied, or through course of dealing with the client), must comply with N.C. Gen. Stat. §24-11 which governs open-ended revolving credit charges, and must conform his or her conduct as a creditor to the requirements of any other applicable consumer credit laws.

 

Although not required by the Rules of Professional Conduct, it is preferable to put fee agreements with clients in writing at the beginning of the representation to resolve any misunderstanding about when the fees may be owed and to specify to a contractual certainty any finance charges that may be charged in the event that the client is delinquent in payments.

 

Inquiry #2:

 

Are there formal notice requirements before a law firm may add a finance charge to a past due client account?

 

Opinion #2:

 

The lawyer should comply with all legal requirements regarding notice of finance charges. In situations where the lawyer seeks only the interest permitted under N.C. Gen. Stat. §24-5(a), the answer is "no." In situations where there is an express agreement, implied agreement, or agreement by course of dealing between the lawyer and the client which gives the lawyer the right to charge a contract rate of interest, the answer is "no" unless the agreement otherwise provides for a notice requirement. See Opinion #1. The State Bar has no formal requirements for notice in this situation.

 

Inquiry #3:

 

May Law Firm assess a finance charge on the account balance of a client who made prior arrangements with the firm to pay less than the full amount due each month?

 

Opinion #3:

 

If the agreement (express, implied, or through course of dealing) with the client is interpreted as a comprehensive resolution of all outstanding amounts owed by the client (e.g., the law firm has elected to waive interest or finance charges to obtain payments on account), the answer is "no." Otherwise, finance charges may be assessed on the amount that is past due pursuant to (a) the legal rate under N.C. Gen. Stat. §24-5(a), or (b) any agreement between the client and Law Firm that has not been waived by prior conduct. Furthermore, subject to the laws on consumer credit and usury, Law Firm may seek to renegotiate the fee agreement and obtain the client's consent to add finance charges provided

 

"the attorney may not abandon or threaten to abandon the client to cut the attorney's losses or to coerce an additional or higher fee. Any fee contract made or remade during the existence of the attorney-client relationship must be reasonable and freely and fairly made by the client having full knowledge of all material circumstances incident to the agreement."

 

Comment [3], Revised Rule 1.5.

 

Inquiry #4:

 

May Law Firm selectively assess late payment fees to some clients and not to others?

 

Opinion #4:

 

Yes, if such selectivity is not motivated by unlawful intent (e.g., racial or gender-based discrimination).

 

Inquiry #5:

 

Do clients with long-standing relationships with Law Firm, without past due account balances at present, require notice before Law Firm may begin assessing finance charges on their account balances when past due?

 

Opinion #5:

 

Unless there has been a course of dealing that creates an agreement between Law Firm and its long-standing clients that waives finance charges on the clients' past-due balances, Law Firm may seek interest as permitted by N.C. Gen. Stat. §24-5. See Opinion #1.

 

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