A Matter of Interest

Listen to this article

A while ago, a client of Madison’s Lawton & Cates SC told his lawyer that he pays his fees last, and sporadically, because, unlike many of his other creditors, the firm does not charge interest or late fees.

The conversation sparked frustration in Lori J. Kannenberg, the firm administrator, who knew that the lawyer had worked hard on that client’s behalf, and that, to the best of her knowledge, the client wasn’t dissatisfied with the legal services performed. It was just that that client had figured out the system, and how to manipulate it to his benefit and to the lawyer’s detriment.

Namely, she believes he’d figured out:

That lawyers generally don’t charge interest on their accounts receivable;

That many don’t sue to collect unpaid fees, fearing a counterclaim and/or that they’ll be dropped by their professional liability carrier; and,

That if a case is ongoing, the lawyer will need to ask for permission from the court to withdraw, when crowded court calendars make that an unlikely event.

“I think this happens to a lot of attorneys,” Kannenberg says, “and I’m not aware of any other line of work where people are forced to do work without any reasonable expectation of compensation. I think that’s wrong.”

So, it wasn’t difficult to convince her firm’s leaders that, on or about July 1, the firm will begin using retainer agreements that alert new clients to the possibility that a 1 percent per month or 12 percent per annum finance charge may be assessed if the client does not make a payment within a reasonable timeframe, most likely 30 days from receiving a statement. A client can avoid that additional charge by making timely payments, per the terms of the retainer agreement.

Kannenberg emphasizes that this won’t be used across the board, and that the attorneys may, at their discretion, waive that provision of the agreement in appropriate cases.

Legal and Ethical Dictates

The Lawton & Cates firm decided upon that rate for its finance charge, after taking a long look at the Web site of the State of Wisconsin Department of Financial institutions, at www.wdfi.org. Kannenberg says to click on “Office of Consumer Affairs,” then “Business Guidance,” then “creditors,” for an explanation of “Open Accounts: Late Charge or Finance Charge.”

In short, the site explains that the maximum rate for a late charge is 1 percent per month or 12 percent annually, and the account is considered past due. A finance charge, in contrast, is an additional charge made in exchange for allowing the client to make extended payments over time. There are no interest rate limitations for credit transactions in Wisconsin, but Kannenberg explains that the site goes on to provide an example of 1.5 percent per month, or 18 percent annually.

At her firm, they opted for the lower “suggested” amount from the two examples, to err on the side of caution and the consumer.

Lawton & Cates played a central role in the formation of the Consumer Law Clinical program at the University of Wisconsin Law School, and drew upon that expertise to ensure the practice will be in compliance with the law.

“If anything, we’re going to try to go above board to protect the consumer because of our ties to protecting consumer rights. But we can’t do that at the expense of maintaining a viable business,” Kannenberg says.

Registration with the Wisconsin Department of Financial Institutions is not required to charge interest, continues Kannenberg, per Wis. Stats. Ch. 426.201, “Registration.” Specifically, sec. 426.201(4) says, “The following persons shall not be subject to this section solely by reason of the debt collection activities unless they are licensed debt collectors under s.218.04…” On that list of exempt individuals and entities are, under sec. 426.201(4)(a), “Attorneys authorized to practice law in this state or professional service corporations composed of licensed attorneys formed pursuant to ss. 180.1901 to 180.1921.”

Four separate laws touch upon assessing interest or a finance charge: the Fair Debt Collection Practices Act; the Truth in Lending Act; the Fair Credit Reporting Act; and the Wisconsin Consumer Act. The WCA requires the firm to provide clients with a disclosure explaining the billing and credit policies, and outlining their rights to dispute a charge on a bill.

As for the ethical rules involved, Dean R. Dietrich, of Ruder Ware LLSC in Wausau, identifies a brand-new opinion from the Professional Ethics Committee of the State Bar of Wisconsin, which has language within it that’s directly on point. “E-09-03: Communications Concerning Attorneys Fees and Expenses,” hasn’t been published yet, and it provides in relevant part:

“The rules do not prohibit a lawyer from charging a reasonable rate of interest on outstanding balances. If the lawyer intends to charge interest on unpaid balances, that information must be part of the written communication to the client regarding fees or must be clearly communicated to the client at the beginning of the representation if a written communication is not required. A lawyer who imposes interest charges absent prior notification to the client runs the risk of being found to have violated SCR 20:1.5(b)(1), concerning communication as to the basis or rate of the fee, and to have charged an unreasonable fee in violation of SCR 20:1.5(a).”

Kannenberg notes that Wisconsin is taking a consumer-friendly approach. In conducting her research on her topic, she found an ethics opinion from the Washington D.C. Bar Association, No. 310, which gives a “qualified endorsement to a lawyer’s right to seek prospective interest charges, even absent such a provision in the initial agreement.” However, these charges would be subject to “strict scrutiny” to prevent “overreaching.”

Staying Afloat

Kannenberg stresses that implementation of the new policy was not because they’re all about money at Lawton & Cates.

“I’m not talking about pro bono and public service, which are different matters entirely and areas where our firm excels. I’m talking about people who sign fee agreements, who have resources, and who should understand the financial consequences of their agreements. They should pay their bills.”