Can a law firm borrow money to advance litigation costs and recover the interest from the client's recovery in a contingent-fee case?

Plain-English summary

The inquirer asked whether a contingent-fee retainer in a tort matter could include a provision under which the firm borrows the funds to cover disbursements from a third-party lender at the most favorable available interest rate, then, on a favorable outcome, reimburses itself for principal and interest and deducts that total from the recovery before computing the contingent fee under R. 1:21-7. The provision would be explained to the client at the outset and used only with the client's agreement.

The Committee found nothing unethical or contrary to the letter or spirit of the rules or the Rules of Professional Conduct in the proposed provision. It pointed to Opinions 446 and 582 and the 1978 Notice to the Bar authorizing credit-card payment of legal fees as evidence of a recognized liberalization: appropriate and reasonable interest or credit charges are not unethical where they are made clear to the client at the outset of the retention and the client agrees.

Currency note

This opinion was issued in 1987, before New Jersey's adoption of the 2004 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 Treat this page as historical context, not current guidance.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 pass the interest on borrowed case-cost funds to the client in a contingent-fee matter?

A: Per the opinion, yes. The Committee found nothing unethical in recovering principal and interest on borrowed disbursements, provided the client is told at the outset and agrees.

Q: What conditions did the Committee attach?

A: The arrangement had to be made clear to the client at the outset of the retention, and the client had to agree to it.

Background and rules framework

The opinion reads RPC 1.8(e) (advancing litigation expenses) together with RPC 1.5(c) and Rule 1:21-7 (contingent-fee accounting) to permit the proposed interest provision. It relied on the Committee's own prior opinions (446, 582) and the 1978 Notice to the Bar on credit-card fee payment as showing that reasonable, disclosed interest and credit charges are acceptable.

Citations and references

Rules of Professional Conduct:

• MR 1.8(e) / NJ RPC 1.8(e) (advancing litigation expenses)
• MR 1.5(c) / NJ RPC 1.5(c) (contingent-fee agreements)

Court rules:

• R. 1:21-7(c), (d) (contingent-fee computation and deduction of disbursements)

Other opinions cited:

• ACPE Opinion 446, 105 N.J.L.J. 105 (1980)
• ACPE Opinion 582, 117 N.J.L.J. 394 (1986)
• Notice to the Bar, 101 N.J.L.J. 265 (1978) (credit-card payment of legal fees)

See also

No sibling opinions yet indexed.

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp603-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

120 N.J.L.J. 252, July 30, 1987

OPINION 603

Advancing the Costs of Litigation Through Bank Loans

The inquirer asks our opinion concerning the ethical propriety of the below described provision in a contingency fee arrangement in a tortious conduct matter, where it is appropriate for the firm to advance disbursements, pursuant to RPC 1.8(e), to be reimbursed pursuant to RPC 1.5(c) and R. 1:21-7(d). The proposed provision would be made clear to the client at the outset of the litigation and would be instituted only if the client agreed to the same.

Under the proposed provision, the inquirer's law firm would borrow the funds to cover the disbursements in the matter from a third party lending institution at the most favorable available interest rate. Upon the favorable outcome of the matter, the firm would reimburse itself for both the principal and interest charges relating to the borrowed funds and presumably would deduct the total from the recovery before computing the net sum subject to the contingency fee arrangement pursuant to R. 1:21-7(c) and (d).

We find nothing unethical or contrary to the letter or spirit of the rules of the Court, or Rules of Professional Conduct in the proposed provision. This Committee's Opinions 446, 105 N.J.L.J. 105 (1980), and 582, 117 N.J.L.J. 394 (1986) and the Notice to the Bar published in 101 N.J.L.J. 265 (1978) authorizing credit card use for legal fees attest to the recent liberalization of the attitude of the courts and the bar, recognizing that appropriate and reasonable interest charges or credits in various situations are not unethical as long as they are made clear to the client at the outset of the retention and the client agrees to the same.