Can a firm agree to stop billing its association client on uncollected collection cases and make up the loss by charging higher fees to the debtors from whom fees are recovered?

Plain-English summary

The opinion addressed a firm that handled collection work (liens, foreclosures, bankruptcy) for community-association clients and had set fees it determined were reasonable based on the usual reasonableness factors. Where the law allowed, the firm recovered its fees and expenses from the responsible debtor; otherwise the client association paid. A client's manager proposed that the firm substantially increase the fees it charged to debtors from whom fees were recovered and stop billing the association on cases where fees were not recovered, with the association continuing to pay expenses and no part of the recovery going to the firm as a contingent fee. The question was whether this arrangement was ethical.

The opinion concluded that it was not. In substance, the arrangement required the firm to offset losses on uncollectible cases by inflating fees in cases where it could recover from the debtor. Rule 2.6(a) prohibits charging or collecting a clearly excessive fee, and Rule 2.6(b) lists the reasonableness factors. If the firm collected more than the fee it had already determined to be reasonable for the services rendered, it would be charging and collecting an unethical excessive fee, whether collected from the association or from the opposing party. In addition, if the firm inflated its fee in a request to a court or a demand to a debtor, it would be misrepresenting the actual fees incurred for that collection action, in violation of Rule 1.2(c)'s bar on dishonesty, deceit, or misrepresentation.

Currency note

This opinion was issued in 1995, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm raise the fees it recovers from debtors to cover cases where it collects nothing?

A: No. The opinion concluded that inflating recovered fees to offset uncollectible cases produces a clearly excessive fee under Rule 2.6(a), whether the money comes from the client or the opposing party.

Q: Why is charging the debtor more than the firm's reasonable fee a problem?

A: Because it exceeds the reasonable fee. The opinion concluded that collecting more than the fee already determined reasonable for the services rendered is an unethical excessive fee regardless of who pays it.

Q: What is the additional problem with inflating the fee in a court request or demand?

A: It is a misrepresentation. The opinion concluded that inflating the fee in a request to a court or a demand to a debtor misrepresents the actual fee incurred, violating Rule 1.2(c).

Background and rules framework

The opinion applied North Carolina's then-current Rule 2.6(a) and Rule 2.6(b), the fee-reasonableness provisions corresponding to Model Rule 1.5, and Rule 1.2(c), barring dishonesty, deceit, or misrepresentation, corresponding to Model Rule 8.4(c). It measured the proposed arrangement against the firm's own prior determination of a reasonable fee.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees; reasonableness)
• MR 8.4 (misconduct; dishonesty, deceit, or misrepresentation)
• North Carolina Rule 2.6(a), Rule 2.6(b), Rule 1.2(c)

See also

• NC Ethics Op. RPC 222: confession of judgment to secure a fee
• NC Ethics Op. RPC 205: referral fees

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-196/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Law Firm has considerable experience in the practice of community association and planned community law. Over time, Law Firm has established certain fees for collection activities provided to its association clients. These collection activities include the prosecution of liens, foreclosures, and bankruptcy proceedings. Law Firm has determined that the fees it charges for these collection activities are reasonable based upon the time and labor required; the difficulty of the questions involved; the skill required to perform the legal service; the experience, reputation, and ability of the lawyers providing the services; and the customary fee for like work in the same locality. Where possible and permitted by law, Law Firm recovers attorney's fees and expenses incurred in connection with these collection activities from the responsible debtor. All fees not recovered are paid by the client association that retained Law Firm to pursue the action.

Manager of Association X has requested that Law Firm agree to substantially increase the legal fees it charges to debtors from whom fees are recovered and to agree not to bill Association X on cases where fees are not recovered from the debtor. Association X would continue to pay expenses incurred by Law Firm in connection with the collection activity. No part of the monies recovered by Law Firm for Association X would be paid to Law Firm as a contingent fee. Is this fee arrangement ethical?

Opinion:

No. Essentially, the fee arrangement requires Law Firm to offset the losses it may realize on cases where legal fees cannot be collected from the debtor by inflating fees in the cases where it is able to recover fees from the debtor. Rule 2.6(a) prohibits a lawyer from charging or collecting a clearly excessive fee. Subsection (b) of Rule 2.6 sets forth certain factors to be taken into consideration in determining the reasonableness of a fee including, but not limited to, the following: (1) the time and labor required and the skill involved; (2) whether the acceptance of particular employment will preclude other employment; (3) fees customarily charged in the same locality; (4) the results obtained; (5) time limitations; and (6) whether the fee is fixed or contingent. If Law Firm collects more than the fee that it has already determined to be reasonable for the services rendered to Association X after taking into account the factors set forth in Rule 2.6(b), Law Firm would be charging and collecting an unethical excessive fee whether the fee is collected from Association X or an opposing party. In addition, if Law Firm inflates its fee in a request to a court and/or a demand to a debtor for recovery of legal fees, Law Firm would be engaging in misrepresentation of the actual fees incurred for that particular collection action in violation of Rule 1.2(c) which prohibits a lawyer from engaging in conduct involving dishonesty, deceit, or misrepresentation.