INTEREST ON ATTORNEYS FEES
By
William J. Wernz, Director
Minnesota Office of Lawyers Professional Responsibility
Reprinted
from Bench & Bar of Minnesota (October
1989)
May an attorney charge
interest on legal fees? If so, how
much? Must the client agree in
advance? In writing? Does the attorney have to make federal
truth-in-lending disclosures? These
questions have been posed recently in advisory opinion inquiries and in private
disciplines.
Several Minnesota
attorneys have recently received admonitions for charging 18 percent interest
on unpaid legal fees.Ftn 1 These attorneys did not make required
truth-in-lending disclosures or obtain the client’s advance agreement to pay 18
percent interest. One attorney’s
retainer agreement stated that interest would be charged “at the highest legal
rate.” Two other attorneys merely
included on their fee statements an indication that monthly interest of 1.5
percent would be charged after 30 days.
Each of the attorneys
receiving admonitions violated Rule 1.5(a) of the Minnesota Rules of
Professional Conduct, which states in part: “A lawyer’s fee shall be
reasonable.” An illegal fee is
unreasonable. The Office of Lawyers
Professional Responsibility takes the position that the charging of interest on
attorney’s fees is unreasonable, and therefore a violation of Rule 1.5(a), if:
1) the rate of interest is usurious; or 2) Minnesota law requires that the
client agree in writing to the imposition of the interest charges, and there is
no such written agreement; or 3) federal truth-in-lending disclosures for
consumer credit sales are required and have not been made.
The Minnesota usury
statute states in part:
The interest for any legal
indebtedness shall be at the rate of $6 upon $100 for a year, unless a
different rate is contracted for in writing.
No person shall directly or indirectly take or receive in money, goods,
or things in action, or in any other way, any greater sum, or any greater
value, for the loan or forbearance of money, goods, or things in action, than
$8 on $100 for one year. Minn. Stat.
§334.01 (subd. 1) (1988).
Note that the statute
prescribes annual, not monthly, maximum interest rates. Interest cannot be compounded on a monthly
basis so as to exceed these amounts.
Note also that
interest in excess of 6 percent must be “contracted for in writing.”
Unless an exception
applies, the charging of interest in excess of the 6 percent or 8 percent rate
(whichever is applicable) is usurious.
There are, however, a number of exceptions. The three most likely to apply to interest on attorney’s fees are
the exceptions for corporate loans, business and agricultural loans, and
open-end consumer credit sales.Ftn 2
Generally, a consumer
credit sale pursuant to an open-end credit plan may include a finance charge of
18 percent annually. Minn. Stat.
§334.16 (1988). The open-end consumer
credit sale exception only applies, however, if (among other things): 1) the
client has agreed in advance, in writing, to the imposition of the finance
charge; 2) there is an “open-end credit” situation, as defined by federal
truth-in-lending law;Ftn 3
and 3) the attorney is a “creditor” as defined by federal truth-in-lending law.Ftn 4 Moreover, an attorney who is asserting the
open-end consumer credit sale exception must make the disclosures required by
federal truth-in-lending law. See 12
C.F.R. §226.5 et. seq. (1988).
Must an attorney who
is charging consumers 6 percent or (if there is a written agreement) 8 percent
interest make truth-in-lending disclosures?
It is unclear. At least one case
suggests that federal truth-in-lending disclosures may not be required. See Bright v. Ball Memorial Hospital
Association, 463 F. Supp. 152 (S.D. Ind. 1979). In any event, attorneys who charge consumers interest at an
annual rate of 6 percent or less, or 8 percent or less if there is a written
agreement, will not be disciplined for possible failure to comply with any
truth-in-lending disclosure requirements.
With respect to
corporations, Minnesota law provides that no corporation may interpose the
defense of usury. Minn. Stat. §334.021.
(1988). Also, loans for business or
agricultural purposes can generally include finance charges at a rate of up to
4.5 percent over the 90-day discount rate.
Id. §334.011. Does this
mean that an attorney may, without a written agreement, charge interest of over
6 percent to corporate clients or other clients consulting the attorney for
business or agricultural purposes? No.
All clients, including corporate, business, and agricultural clients, must
agree in writing to an interest rate over 6 percent.Ftn 5
Even when a written agreement is required, however, Minnesota courts
will sometimes honor an implicit agreement for the payment of interest.Ftn 6
May an attorney charge
a client annual interest of 6 percent or less if the client does not agree in
advance? No advance written agreement
is required. Is an advance oral
agreement necessary? For an
interpretation of whether an agreement is necessary or whether section 334.01
implies a 6 percent interest rate, see Lund v. Larsen, 222 Minn. 438,
441-42, 24 N.W.2d 827, 829 (1946); American Druggists Insurance v. Thompson
Lumber Co., 349 N.W.2d 569, 573 (Minn. App. 1984). Although the best practice is to obtain
clients’ advance agreement to pay any interest charges, attorneys who charge
annual interest of 6 percent or less will not be disciplined, even if the
clients have not agreed to pay interest.
This is an attempt to
summarize portions of usury and truth-in-lending law as they relate to attorney
discipline. It is not an exhaustive
description of relevant usury or truth-in-lending law, and is not an adequate
substitute for consulting the underlying statutes, regulations, and caselaw.
Usury and
truth-in-lending are complex areas of civil law that have implications for
attorney discipline. There are numerous
other areas of law that are related to attorney discipline — for example,
property law is relevant in determining the file “to which the client is
entitled” under Rule 1.16(d). Attorneys
who wish to charge interest on legal fees must keep abreast of developments in
the substantive law of usury and truth-in-lending to avoid running afoul not
only of those laws but also of the Rules of Professional Conduct.
NOTES
1 The
longstanding practice in Minnesota has been to discipline attorneys for
charging usurious interest. See Hoover, “Report . . . Lawyers Professional
Responsibility Board,” 36 Bench & Bar 29 (Jan. 1980) and Bench
& Bar Interim 15 (July, 1981).
There is no published Minnesota disciplinary case on the charging of
interest by attorneys. The only public
discipline cases on usurious interest charges involve Florida attorney Alan
Fields. The Florida Bar v. Fields,
520 So.2d 272 (Fla. 1988); The Florida Bar v. Fields, 482 So.2d 1354
(Fla. 1986).
2 In
addition to statutory exceptions, the “time price doctrine” is recognized in
Minnesota. See, e.g., Schauman v. Solmica Midwest, Inc., 283
Minn. 437, 168 N.W.2d 667 (1969). Under
the “time price doctrine,” a seller may charge a buyer a higher purchase price
if the buyer will pay over time rather than paying cash. This price differential is not considered
interest, and is therefore outside the scope of usury law.
3 See 12 C.F.R. §226.2(a)(20)(1988); Minn. Stat. §334.16 (subd.
2)(1988).
6 The
Minnesota Court of Appeals has held that a corporation agreed to pay 12 percent
annual interest when the corporation received monthly invoices showing the
interest charges and did not object to the invoices. Am. Druggists Ins. v. Thompson
Lumber Co., 349 N.W.2d 569, 573 (Minn. App. 1984). It was also held that a corporation was bound to pay annual
interest of approximately 16 percent because the corporation had acquiesced to
the interest charge by paying it previously.
Lampert Lumber Co. v. Ram Constr., 413 N.W.2d 878, 883 (Minn.
App. 1987).