Can a New York lawyer pass on to a contingent-fee client the interest the lawyer pays on money borrowed to fund litigation expenses?
NY State Bar Ethics Opinion 754: Passing litigation-loan interest on to clients
Short answer: A lawyer who borrows money to advance the expenses of litigation in a contingent-fee matter may pass the interest cost on to the client, so long as the client remains ultimately liable for the expenses and the arrangement satisfies the conditions the committee set in N.Y. State 729.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
DR 5-103(B)(1) lets a lawyer advance or guarantee the expenses of litigation (court costs, investigation, medical examinations, the cost of obtaining and presenting evidence) so long as the client remains ultimately liable for those expenses. The inquiry asked whether a lawyer who borrows to fund those expenses may also charge the client the interest the lawyer pays on the borrowing.
The committee treated the question as already resolved by its disbursement-interest line of opinions. N.Y. State 399 (1975) permitted charging interest on a delinquent account with advance notice, consent, a reasonable rate, and total charges that are not excessive. N.Y. State 729 (2000) held it is not unethical to charge interest on unpaid disbursements in a contingent-fee matter where five conditions are met: the client is told in advance an interest charge will apply and consents before it takes effect; the client is billed promptly so the client can choose to pay or incur the charge; the time between the bill and the charge is reasonable; the disbursement itself is appropriate; and the interest rate is reasonable. N.Y. State 729 also observed it makes no economic difference whether the lawyer borrowed the funds or used cash on hand, because either way the lawyer "has incurred a cost and seeks to pass it on to the client."
Applying that reasoning, the committee concluded that if the five N.Y. State 729 conditions are met and the lawyer receives no benefit from the lender other than the loan itself, the lawyer may borrow to finance disbursements and pass the interest on to the client. The lawyer may not compromise client confidences in arranging the financing (N.Y. State 666), and in a contingent-fee matter the interest arrangement must be stated in the writing DR 2-106(D) requires. A footnote added that to satisfy the reasonable-rate requirement the lawyer must investigate alternative borrowing opportunities. Whether such an arrangement squares with the court rules that govern fee calculations in many contingent-fee cases (22 NYCRR sections 603.7, 691.20, 806.13, 1022.31) is a question of law outside the committee's jurisdiction.
In practice
The opinion holds that, under the New York Code as it stood in 2002, a contingent-fee lawyer who borrows to advance litigation expenses may charge the client the interest on that borrowing if the client stays ultimately liable for the expenses, the five N.Y. State 729 conditions are satisfied, the lawyer takes no other benefit from the lender, and the interest arrangement is set out in the DR 2-106(D) writing.
The committee also identified two outer limits it did not resolve: client confidences may not be compromised in arranging the financing, and whether the practice complies with the court rules on contingent-fee calculation is a legal question the committee did not reach.
Common questions
Q: Can a New York lawyer charge a contingent-fee client interest on money the lawyer borrowed to cover litigation costs?
A: Yes, with conditions. The opinion concludes the lawyer may pass on the interest where the five N.Y. State 729 conditions are met and the client remains ultimately liable for the expenses under DR 5-103(B)(1).
Q: Does it matter whether the lawyer borrowed the money or used cash on hand?
A: No. The opinion adopts N.Y. State 729's view that the analysis is the same either way, because in both cases the lawyer has incurred a cost and seeks to pass it on to the client.
Q: Does the interest arrangement have to be in writing?
A: Yes. The opinion holds that in a contingent-fee matter the arrangement must be set out in the writing required by DR 2-106(D), and that the lawyer must investigate alternative borrowing to show the rate is reasonable.
Background and rules framework
The opinion interprets New York's former Code of Professional Responsibility: DR 5-103(B)(1) (advancing the expenses of litigation with the client ultimately liable), DR 2-106(D) (the required writing for a contingent fee), and EC 5-8. The closest Model Rule analogues are Rule 1.8(e) (a lawyer may advance court costs and litigation expenses, repayment of which may be contingent on the outcome) and Rule 1.5 (fees). New York replaced this Code with the Rules of Professional Conduct in 2009; the DR and EC numbers cited here are historical.
Citations and references
Rules of Professional Conduct:
- MR 1.8(e) (advancing litigation expenses); MR 1.5 (fees)
- NY DR 5-103(B)(1), DR 2-106(D), EC 5-8
Other opinions cited:
- N.Y. State 729 (2000): five conditions for charging interest on unpaid disbursements
- N.Y. State 399 (1975): charging interest on a delinquent account
- N.Y. State 666 (1994): referring a client to a litigation lender without compromising confidences
See also
- NY State Bar Op. 1181: Charging interest on contingency-case disbursements
- NY State Bar Op. 1044: Advancing a client's transportation costs as a litigation expense
- NY State Bar Op. 1066: Guaranteeing a client's loan for legal fees
Source
- Landing page: https://nysba.org/ethics-opinion-754/