Opinion ID: 1231670
Heading Depth: 2
Heading Rank: 2

Heading: Collection of Fees.

Text: Attorneys should avoid fee disputes with clients as much as possible because the collection of fees by attorneys from clients can give rise to a host of problems and pitfalls. See Wolfram, § 9.6.1, at 553-54. Attorneys should aspire to resolve fee disputes amicably, and sue clients only when necessary to prevent fraud or gross imposition by the client. Iowa Code of Prof'l Responsibility EC 2-25; Heninger & Heninger, P.C. v. Davenport Bank & Trust Co., 341 N.W.2d 43, 51 (Iowa 1983). While it is not unethical for a lawyer to engage in fee collection practices against a former client, the practices employed to enforce collection should be carefully scrutinized. See generally Debra T. Landis, Annotation, Attorneys at Law: Fee Collection Practices as Ground for Disciplinary Action, 91 A.L.R.3d 583 (1979) (collecting and discussing cases on attorney fee collection practices). Illegal, aggressive, and improper collection practices can lead to disciplinary actions against attorneys, as can the use of attorney liens and confessions of judgment. See id. Additionally, an attorney who imposes an unlawful finance charge and improperly calculates the amount of interest on a fee can violate the rules of professional ethics. Fla. Bar v. Fields, 520 So.2d 272, 272-73 (Fla.1988).
We first consider the Board's claim that McKittrick violated the Iowa usury statutes. The Board maintains that McKittrick was not permitted to charge interest in excess of the maximum amount set forth in Iowa Code section 535.2(3) (2003), without complying with the notice and disclosure provisions of the state and federal laws governing consumer credit transactions. Iowa usury law limits the rate of interest that may be charged in a written agreement for the payment of interest to a variable amount based on the rates of government notes and bonds. [1] Id. § 535.3( a ). At the time relevant to this action, the maximum rate of interest was 8.75%. See July 19, 1995 Iowa Admin. Bull. at 93. The usury law, however, does not apply to finance charges on accounts receivable. Under section 535.11, a creditor may impose a finance charge on the unpaid balance of an account receivable, not exceeding certain rates permitted under the consumer credit code, if the creditor gives notice as provided under the statute. Iowa Code § 535.11(1). If the transaction is subject to the Truth in Lending Act (TILA), written notice must be given as required under the Act. Id. § 535.11(2)( a ). If the transaction is not subject to the TILA, notice must be given when the debt arises and must be contained in the invoice or bill of sale. Id. § 535.11(2)( b ). For an open account, this notice must be given when credit is initially extended. Id. Notwithstanding, section 535.11 exempts parties who have agreed in writing for a different finance charge or rate of interest. Id. § 535.11(1). The Board claims McKittrick was not permitted to impose a finance charge in excess of 8.75% because she failed to give notice to Walker as required under the statute. However, the written fee agreement entered into between McKittrick and Walker, providing for a finance charge on accounts receivable, satisfied the statute and made further notice unnecessary. Moreover, although lawyers are not necessarily exempt from the provisions of the consumer credit code and the TILA, the requirements of those provisions did not apply under the circumstances of this case. See Riethman v. Berry, 287 F.3d 274, 277-79 (3d Cir.2002) (law firm not subject to the TILA where client had no right to defer payment of the bill); Ault v. Gen. Prop. Mgmt. Co., 683 P.2d 988, 991 (Okla.Ct.App.1984) (Uniform Consumer Credit Code applies to credit sales of legal services by an attorney who regularly extends credit). However, the record supports a finding that McKittrick compounded interest and, at times, imposed interest on charges for services performed before those charges were billed or before they were due. Compound interest is interest on interest. 47 C.J.S. Interest & Usury § 3, at 21 (1982). The accrued interest is added to the principal sum, which is then considered the new principal for the calculation of interest for the next period. Id. Compound interest was disfavored at common law as harsh and oppressive because it has the effect of unduly accelerating the accumulation of debt. Henderson v. Camden County Mun. Util. Auth., 176 N.J. 554, 826 A.2d 615, 619 (2003). Consequently, compound interest is not permitted absent an agreement between the parties. See Power Equip., Inc. v. Tschiggfrie, 460 N.W.2d 861, 863 (Iowa 1990). Moreover, our legislature does not permit a finance charge on accounts receivable to be compounded. Iowa Code § 535.11(6). The Board established that McKittrick compounded the finance charge imposed in this case. This resulted in the imposition of an illegal finance charge, in violation of DR 1-102(A)(6).
Generally, an attorney is permitted to secure a claim for fees by two methods. See Feaker v. Bulicek, 538 N.W.2d 662, 663 (Iowa Ct.App.1995). The first form of security is a retaining lien. Id. This gives an attorney the right to hold client property or funds in the possession of the attorney until the fee is paid. Id.; see also Wolfram, § 9.6.3, at 558. The second form of security is the charging lien. This gives an attorney the right to a portion of money or property obtained or recovered in litigation through the efforts of the attorney. Feaker, 538 N.W.2d at 663; see also Wolfram, § 9.6.3, at 558. These liens are an exception to the rule of professional conduct that prohibits an attorney from acquiring a proprietary interest in the client's case. See Iowa Code of Prof'l Responsibility DR 5-103(A)(1) (a lawyer may [a]cquire a lien granted by law to secure a fee). Nevertheless, this exception applies only to liens granted by law. Id. The use of attorney liens not authorized by statute can constitute a violation of the rules of professional conduct. See Wolfram, § 9.6.3, at 558. See generally Thomas G. Fischer, Annotation, Attorney's Assertion of Retaining Lien as Violation of Ethical Code or Rules Governing Professional Conduct, 69 A.L.R.4th 974 (1989) (collecting and discussing cases considering ethical issues raised by the use of attorney liens). Thus, we turn to the Iowa statute governing attorney liens. Iowa Code section 602.10116 provides: An attorney has a lien for a general balance of compensation upon: 1. Any papers belonging to a client which have come into the attorney's hands in the course of professional employment. 2. Money in the attorney's hands belonging to a client. 3. Money due a client in the hands of the adverse party, or attorney of such party, in an action or proceeding in which the attorney claiming the lien was employed, from the time of giving notice in writing to such adverse party, or attorney of such party, if the money is in the possession or under the control of such attorney, which notice shall state the amount claimed, and, in general terms, for what services. 4. After judgment in any court of record, such notice may be given, and the lien made effective against the judgment debtor, by entering the same in the judgment or combination docket, opposite the entry of the judgment. The first two subsections establish retaining liens, which are possessory in nature. See id. § 602.10116(1), (2). The second two subsections are in the nature of nonpossessory liens. See id. § 602.10116(3), (4). In particular, subsection (4) recognizes a charging lien upon a judgment obtained for the client as a result of the legal services rendered by the attorney to secure compensation for the services. See id. § 602.10116(4). We have previously indicated that the charging lien recognized under the statute is only on the judgment and does not reach real property, even when the real property was the subject of the litigation. Keehn v. Keehn, 115 Iowa 467, 471-72, 88 N.W. 957, 958 (1902); see also Note, Nature of the Attorney's Lien in Iowa, 26 Iowa L.Rev. 840, 845 (1941) ([T]he Iowa lien has been held not to extend to real property involved in the litigation....) (footnote omitted). While this approach is based on the language of the statute, the underlying rationale appears to be tied to the potential dangers of allowing attorney liens to attach to real property based on unliquidated, unadjudicated claims. [2] One court observed the pitfalls of permitting attorney liens on real property as follows: [t]he result of our approving the practice would allow members of the Bar to cloud title to real property with claims of attorney lien without resort to any adjudication of such claims. The potential for economic coercion by attorneys is obvious. In today's economic setting a client may well be forced to settle the attorney's claim for fees, no matter how unfounded, simply to gain the ability to convey, lease, or otherwise utilize the liened property. Ross v. Scannell, 97 Wash.2d 598, 647 P.2d 1004, 1008-09 (1982). These potential dangers were clearly exposed in this case. McKittrick was able to cloud title to Walker's property without any adjudication of the fee claim, and during a time period that made the former client very vulnerable to pressures of settlement. Clearly, the lien placed McKittrick in a superior position, which enabled her to obtain a portion of Walker's refinancing proceeds as well as a confession of judgment. We conclude the lien was not authorized by law and resulted in a form of economic coercion. It violated DR 1-102(5) and (6).
We next consider McKittrick's use of a confession of judgment to collect legal fees. At least one jurisdiction has concluded that the use of a confession of judgment by an attorney to collect a legal fee is improper. Hulland v. State Bar, 8 Cal.3d 440, 105 Cal.Rptr. 152, 503 P.2d 608, 613-14 (1972). The court focused on the imbalance created by clients who likely lack any real understanding of the character and effect of a confession of judgment and found the practice presented opportunities for overreaching with no judicial scrutiny. Id. Another court has determined that there is no per se rule against the use of a confession of judgment to collect legal fees, but requires attorneys to carefully ensure that the client fully understands and appreciates the process. See Katlowitz v. Halberstam, 284 A.D.2d 306, 726 N.Y.S.2d 438, 439 (App.Div.2001). Although we have never established a per se rule against the use of confessions of judgment to collect legal fees, we agree such collection methods are a source of potential problems and should be used by attorneys with care and caution. Nevertheless, the use of the confession of judgment in this case became part of a greater overall pattern of aggressive and forceful collection conduct that adversely reflected on McKittrick's fitness to practice law. See Iowa Code of Prof'l Responsibility DR 1-102(A)(6). She placed an illegal lien on Walker's property and then offered the confession of judgment as a way out, without explaining the full consequences of the procedure and without involving Walker's new attorney. Additionally, McKittrick promptly filed the confession of judgment and commenced garnishment proceedings without making any effort to discover the understandable confusion concerning the date the second payment was due. See id. EC 2-25. The use of a confession of judgment in this manner was oppressive and adversely reflected on the fitness of an attorney to practice law.
We have identified several separate instances of conduct engaged in by McKittrick during the course of her collection of the fee that violated our rules of professional conduct. Moreover, the overall nature of her conduct reflected a general indifference to some of the core responsibilities that an attorney owes a client, and the legal system as a whole. See People v. Smith, 773 P.2d 522, 528 (Colo.1989). McKittrick chose to pursue a fee claim that was tainted by her own professional neglect. McKittrick then waited to pursue the collection of the fee until the imposition of an illegal interest doubled the amount owed. She then used aggressive tactics and procedures over an extensive period of time that were both illegal and unprofessional and eventually contributed to a financial burden for the client that forced her into bankruptcy. This conduct, as a whole, adversely reflects on McKittrick's judgment and fitness to practice law. See Iowa Code of Prof'l Responsibility DR 1-102(A)(6). It was also prejudicial to the administration of justice. Id. DR 1-102(A)(5).