NEW YORK COUNTY LAWYERS ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 670 (89-3)
TOPIC: LEGAL FEES; CHARGING FOR LEGAL EXPENSES OF IN-HOUSE LAWYERS
DIGEST: A salaried lawyer employed by a lending institution may participate in an arrangement whereby the institution charges its borrower/customer a legal fee for services rendered to the institution on the matter by its in-house counsel, including allocable overhead, as well as the reasonable expenses on the matter incurred by the in-house legal staff, if the fee charged does not exceed the institution’s actual costs reasonably incurred, and appropriate disclosure of such charges has been made to the borrower/customer.
CODE: DR 1-102(A), DR 2-106, DR 3-101(A), DR 3-102, DR 5-107(A), DR 7- 102(A)(7), EC 3-5, EC 3-7
QUESTION: May a salaried lawyer employed by a lending institution participate in an arrangement whereby the institution charges its borrower/customer a legal fee for services rendered to the institution, including allocable overhead, as well as the reasonable expenses on the matter incurred by the in house legal staff?
It is not uncommon for a lending institution, for example, one that makes residential mortgage loans, to be represented by an outside attorney whose fees are paid for by the customer/borrower as an additional closing cost. The customer/borrower is represented by his or her own counsel. The question presented in this opinion is whether the sane arrangement is permissible when the lending institution is represented by a staff attorney.
There is nothing per se improper about a fee arrangement whereby the borrower is asked to pay the lender’s legal expenses in connection with a loan transaction. Under DR 5-107(A), a lawyer may, with the consent of the client after full disclosure, “accept compensation for his legal services from one other than his client”. This provision has often been held to authorize fee arrangements in which a borrower is asked to pay the lender’s legal expenses in connection with a loan transaction. See ABA Inf. 837 (1965); N.Y. State 438 (1976); N.Y. City 787 (1954); N.Y. City 695 (1946). Moreover, because a lawyer is entitled to charge a “reasonable fee” (DR 2-106), it has been held that the lawyer’s fee may include office overhead. See N.Y. City 79-31 (1980); Chicago Bar Ass’n Op. 77-9 (Indexed in Maru’s Digest No. 11046 (1982) (Many items go into computation of a fee, including office rent, utility bills and staff salaries).
Lending institutions often use staff attorneys rather than outside lawyers to perform their legal work. In these cases, the institution may wish to have the remuneration and expenses of its in-house lawyers paid for by the customer/borrower as an additional closing cost. So long as the amount charged a customer by a lending institution is limited to the institution’s reasonable costs incurred for legal representation, we see nothing improper with a charge that includes, in addition to the cost of an attorney’s services, an allocation for overhead. Accord, ABA Inf. 1402 (1977)(liability insurer may use full-time, salaried staff lawyers to defend insured and, where judgment is within the deductible, may seek reimbursement from the insured of its actual cost of providing the staff lawyers’ services “based upon hourly rates assigned to the staff lawyers, with a multiplier that reflects supporting secretarial cost, rent, office supplies and related costs”), Pennsylvania Opin. 87-93 (1987)(indexed in ABA/BNA 901:7307 (the charge to the customer must reflect the actual hourly rate of the bank lawyer performing the service with an allocation of reasonable overhead expenses).
Numerous opinions of this and other ethics committees condemn the practice whereby a salaried staff attorney participates in an arrangement in which the lay employer charges a third party for services rendered by the staff attorney an amount that exceeds the employer’s own cost for the services of the staff attorney. The practice has been censured on at least three separate grounds: (i) it constitutes sharing a legal fee with a lay person in violation of DR 3-l02(A), (ii) it constitutes aiding a lay person in the unauthorized practice of law in violation of DR 3-101(A); and (iii) it constitutes a misrepresentation in violation of DR 1-102(A)(4) to label as “attorneys’ fees” an amount which has no necessary relationship to the compensation of the attorneys involved.
All of these opinions assert a slightly different rationale for condemning the practice of a lending institution charging a borrower a greater amount than it pays a lawyer for legal services. Regardless of the Code provision violated — be it fee splitting, aiding the unauthorized practice of law, or misrepresentation — the evil arises only when a lay agency earns a profit from the rendition of legal services by its salaried employee. As was first stated by the American Bar Association in 1926, a lawyer “may not properly accept employment from a lay intermediary with the knowledge that such lay intermediary is profiting, or expecting to profit, from his professional services.” ABA 10 (1926). However, the same rationale does not apply where the charge is no greater than the institution’s cost for the services and overhead of the staff attorney.
When the lending institution is represented by outside counsel, counsel normally sends a statement of fees and disbursements which is either paid directly by the borrower or paid by the institution and reimbursed by the borrower. Where the lending institution is represented by a staff attorney, it is extremely rare for the lawyer to bill the customer directly for his or her fees and expenses. The more usual practice is for the lending institution to prepare a bill for its legal fees and expenses. Several cases and ethics opinions have addressed the amount of “fees” of inside counsel that may appropriately be charged to customers. In Thompson, supra, the Court held that the “fee” should not be an aliquot portion of the attorney’s annual wage nor of the cost of running the corporate legal department, but rather the actual sum of money paid to the lawyer for the necessary services rendered in processing the particular case, including his overhead expenses. ABA 1402 (1977) approved a procedure whereby, in order to determine the actual cost (no more) to the company of the staff lawyers’ services in connection with the claim, the corporate employer assigned hourly rates to its staff lawyers.
There are undoubtedly several methods for determining the actual cost of the lawyer’s services, and we do not mean to imply that the Code requires a single method. We believe that one proper method is to determine an hourly billing rate for each staff attorney by dividing the attorney’s salary by the average number of hours per year that the attorney is reasonably expected to work, and to charge the customer at that rate (plus overhead as described below) for the actual number of hours spent on the matter.
With respect to expenses such as overhead, we see no basis to discriminate between in-house and outside lawyers. We believe that, in either case, “legal fees” include such customary overhead items as salaries of secretaries and clerks, rent, heat, utilities, library, depreciation on building and furnishings, and similar expenses. See Thompson, supra (“An attorney’s fee is presumed to encompass his overhead expenses”); ABA Inf. 1402 (1977); Chicago Bar Opin. 77-6; C. Wolfram, Modern Legal Ethics 505 and n. 61 (West 1986). Thus it would be proper to add to the lawyer’s hourly billing rate a figure that represents the amount of overhead expenses attributable to the lawyer, determined in a manner similar to that for the hourly billing rate.
Whether the institution is represented by inside or outside attorneys, if reimbursement of its legal costs is to be charged to the borrower, appropriate disclosure must be provided indicating that the borrower is responsible for the lender’s attorneys fees and expenses and describing how the amount of such fees and expenses will be calculated. Cf. DR 7-102(A)(7)(prohibiting the lawyer from assisting in conduct the lawyer knows to be fraudulent). Such information is particularly important where the borrower is an individual. For that reason, a good faith estimate of closing costs, including any attorneys fees, is required by law in the case of real estate closings. See Real Estate Settlement Procedures Act, 12 U.S.C. § 2607(b).
In summary, it would not be improper for a lawyer employed by a lending institution to participate in an arrangement whereby the institution charges its borrower/customer a legal fee for services rendered to the institution by its in-house counsel, including allocable overhead, as well as the reasonable expenses on the matter, provided that the fee charged does not exceed the institution’s actual costs reasonably incurred and appropriate disclosure of the charges has been made to the borrower/customer.
May 19, 1989