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2012 Formal Ethics Opinion 3

July 20, 2012

Imposition of Finance Charges on Delinquent Client Account in Absence of Advance Agreement

Opinion rules that a lawyer may charge interest on a delinquent client account, without an advance agreement with the client, to the extent and in the manner permitted by law.


Inquiry:


A law firm would like to impose finance charges on delinquent client accounts pursuant to N.C. Gen. Stat. § 24-11. N.C. Gen. Stat. § 24-11(a) provides in part:


On the extension of credit under an open-end credit or similar plan...under which no service charge shall be imposed upon the consumer or debtor if the account is paid within 25 days from the billing date, there may be charged and collected interest, finance charges, or other fees at a rate in the aggregate not to exceed one and one-half percent (1 1/2%) per month on the unpaid balance of the previous month...


May the law firm impose finance charges pursuant to N.C. Gen. Stat. § 24-11 although a client has not agreed to such finance charges in advance?


Opinion:


Yes. 98 FEO 3 provides that if a lawyer wants to charge up to one and one-half percent per month interest on the unpaid portion of a client’s balance from the previous month, the lawyer must comply with N.C. Gen. Stat. §24-11, conform his conduct as a creditor to the requirements of any other applicable consumer credit laws, and have an agreement to this effect with the client.


In contrast to 98 FEO 3, case law has interpreted N.C. Gen. Stat. § 24-11 to allow a service provider to impose a monthly finance charge upon an overdue open-credit account without an advance agreement so long as the service provider gives advance notice of the intention to impose the finance charges. See, e.g., Hydes Ins. Agency Inc. v. Nolan, 30 N.C. App. 503 (1976), 227 S.E.2d 169; Inco v. Planters Oil Mill, 63 N.C. App. 374, 304 S.E.2d 782 (1983); Hedgecock Builders Supply Co. v. White, 92 N.C. App. 535, 375 S.E.2d 164 (1989). The finance charges may only be collected on amounts that become due after initial notice by the creditor that it is going to collect the charges.


Case law further provides that such notification is sufficient if it occurs at the time the credit is initially extended, or if it occurs at any point prior to the time when the amounts on which the finance charges are applied become due. Hedgecock Builders Supply Co. v. White, 92 N.C. App. 535, 375 S.E.2d 164 (1989); Harrell Oil Co. v. Case, 543 S.E.2d 522 (2001). N.C. Gen. Stat. §24-11 requires that a bill for the balance due on an account must be mailed to the customer at least 14 days prior to the date specified in the statement as being the date by which payment of the new balance must be made to avoid the imposition of any finance charge. N.C. Gen. Stat. §24-11(d).


The Ethics Committee has concluded that the notice required by law is sufficient to protect the interests of clients with delinquent accounts. Therefore, a lawyer may charge interest on unpaid balances for legal services to the extent and in the manner permitted by law. To the extent that the case law on the issue of notice is unclear, the Ethics Committee requires that any such notice must be in writing. See Rule 1.5 (recommending written fee agreements).


98 FEO 3 is overruled to the extent that it conflicts with this opinion.

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