Chittenden v. State Farm Mut. Auto Ins. Co.

• Decision Date: 15 May 2001
• Docket Number: No. 2000-C-0414.,2000-C-0414.
• Citation: 788 So.2d 1140
• Parties: George CHITTENDEN and Roberta Kay Chittenden v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, et al.
• Court: Louisiana Supreme Court

788 So.2d 1140

George CHITTENDEN and Roberta Kay Chittenden v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, et al.

No. 2000-C-0414.

Supreme Court of Louisiana.

May 15, 2001.

Dissenting Opinion from the Denial of Rehearing June 22, 2001.

Jacques F. Bezou, Robert H. Matthews, Bezou & Matthews, Covington, Pauline M. Warriner, Counsel for Applicant.

Jack M. Alltmont, New Orleans, Darryl J. Carimi, Metairie, Counsel for Respondent.

Harvey J. Lewis, New Orleans, John W. deGravelles, Baton Rouge, Counsel for Louisiana Trial Lawyers Assn. (Amicus Curiae).

Dissenting Opinion from the Denial of Rehearing of Judge Lemmon, June 22, 2001.

KNOLL, Justice.

We granted the writ application of George Chittenden and his wife, Roberta Kay Chittenden, to address the issue of whether Darryl J. Carimi ("Carimi"), the Chittendens' discharged attorney, can recover interest on funds he advanced to the Chittendens during the period of his representation. George Chittenden and Roberta Kay Chittenden v. State Farm Mut. Auto. Ins. Co., 00-0414 (La.6/16/00), 763 So.2d 610.

FACTS AND PROCEDURAL HISTORY

On June 19, 1992, George Chittenden ("Chittenden") retained Carimi¹ to handle a personal injury claim which arose from an automobile accident. The written retainer agreement Chittenden signed was fairly standard;² however, Chittenden also authorized Carimi to secure a loan at his discretion to "[pay] the costs and expenses necessary to prosecute" his tort claim; Roberta Kay Chittenden did not sign the written agreement. In connection with "costs," Chittenden agreed to reimburse Carimi for copy costs, mock jury and shadow jury costs, medical expenses, travel expenses, costs of medical records, depositions, expert fees, long distance telephone costs, court costs, advances to him or guarantees made on his behalf, and all expenses of litigation.³ Chittenden further agreed "that the full amount of the interest charged on such loans will be reimbursed to Attorneys ... out of the funds received on this claim." A specific interest rate was not written in the contract.

From the inception of the attorney-client relationship between Chittenden and Carimi until the dissolution of that relationship on January 3, 1994, Carimi advanced sums on Chittenden's behalf for medical expenses, court costs, postage, photocopying, and the like. Carimi also advanced living expenses to Chittenden. At the end of each month, Carimi would draw from his line of credit at the bank⁴ to meet the funds advanced and assessed an interest charge to Chittenden's account. According to Carimi, the law firm's accounting program charges interest monthly on each client's file based upon the client's daily balance during the month, i.e., from the date each payment was posted to the file. In the following month, interest was calculated on the new principal balance.

After Chittenden discharged Carimi and hired new counsel, Carimi intervened in the proceedings to protect his right to the legal fees he was owed,⁵ together with a claim for reimbursement for funds advanced and interest expended on loans Carimi made pursuant to his contract with Chittenden. In response to the intervention, Chittenden agreed to pay Carimi $46,162.54 in reimbursement for costs and funds advanced,⁶ but he refused to pay the $40,859.25 which represented interest charges.⁷

After conducting an evidentiary hearing, the trial court awarded Carimi interest in the sum of $40,859.25 and allowed him to remove this amount from funds which had been placed in the court registry. Carimi withdrew these funds and paid Chittenden's interest charges attributable to him on Carimi's line of credit.

Chittenden perfected a devolutive appeal from the trial court's ruling on Carimi's motion for reimbursement. The appellate court upheld the trial court and determined that Carimi was within the ethical constraints of the Rules of Professional Conduct ("RPC"). Chittenden v. State Farm Mut. Auto. Ins. Co., 98-2919 (La. App. 4 Cir. 12/15/99), 748 So.2d 641, 647. The court of appeal reasoned that under Edwins, 329 So.2d at 437, the action of advancing funds to a client was not illegal and was permitted by this Court. With regard to the interest charges on the advances made, the appellate court determined that because it was permissible to lend money to clients for litigation expenses and for minimal, necessary living expenses, it was not a violation of the RPC to pass "along that portion of the interest attributable to the plaintiffs on the line of credit with the banks." Chittenden, 748 So.2d at 647. The court of appeal stated:

We have reviewed the record and are in agreement with the trial court that neither Darryl J. Carimi nor his law firm has violated any rules of professional conduct in making advances to the plaintiffs and in passing along that portion of the interest attributable to the plaintiffs on the line of credit with the banks. This is in accord with the economic, legal and social realities that are part of the legal profession as we know it today. Additionally, after reviewing the record we do not agree with the appellants that Darryl J. Carimi charged usurious interest and neither can we find a hidden, improper motive on the part of Darryl J. Carimi or his law firm in advancing the sums of money claimed.

Chittenden, 748 So.2d at 647.

Because of the importance of Edwins, 329 So.2d at 437 to the analysis in the lower courts, we will briefly summarize our holding in that case and look at the RPC since we penned that decision.

EDWINS POLICY

In Edwins, a disciplinary proceeding against an attorney, we addressed, interalia, the propriety of an attorney advancing funds to his client in violation of Disciplinary Rule 5-103(B).⁸ With Justice Tate writing for the majority in Edwins, we concluded that while a part of the advanced expenses were seemingly prohibited by the disciplinary rules, we were "unwilling to hold that the spirit or the intent of the disciplinary rule is violated by the advance or guarantee by a lawyer to a client (who has already retained him) of minimal living expenses, of minor sums necessary to prevent foreclosures, or of necessary medical treatment." Edwins, 329 So.2d at 445. Thus, this Court set the policy that attorneys were permitted to advance funds to their clients for minimal, necessary living expenses and that clients would be responsible for reimbursing these funds. The theory behind the policy was that this Court did not want to force impoverished individuals into early settlements because they were unable to wait out the delays of litigation that are necessary to enforce a cause of action. Id. at 446.⁹

Clearly, Edwins set the policy in the State for attorney/client relationships where money was advanced by the attorney prior to the resolution of the litigation, which generally has been followed by the legal practitioners. The opinion set the limits on this privilege, including the following guidelines: (1) the advances cannot be promised as an inducement to obtain professional employment, nor made until after the relationship has commenced; (2) the advances were reasonably necessary under the facts; (3) the client remained liable for repayment of all funds, whatever the outcome of the litigation; and (4) the attorney did not encourage public knowledge of this practice as an inducement to secure the representation of others. Id. Nevertheless, the issue of charging interest on advanced sums was not covered in Edwins.

RPC POST-EDWINS

After Edwins, Disciplinary Rule 5-103(B) was replaced with RPC Rule 1.8(e) which states:

A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1) A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter, and

(2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

It is evident that although Rule 1.8(e) was promulgated after our decision in Edwins, it did not incorporate the gloss which that decision placed on former Disciplinary Rule 5-103(B).¹⁰ Rather, Rule 1.8(e) unambiguously prohibited the advancement of funds and financial assistance in connection with litigation except in the limited cases of court costs and actual litigation expenses. Notwithstanding the wording of Rule 1.8(e), the current practice of law in our State follows the Edwins policy of allowing an attorney to advance funds under the constraints enunciated in Edwins.¹¹

DISCUSSION

The Chittendens claim that they do not owe Carimi and his law firm interest for three reasons.¹² First, they contend that interest charges on advanced funds are in violation of Rule 1.8(e)¹³ and potentially in violation of Rule 1.4¹⁴ of the RPC. Secondly, because the agreement between Chittenden and Carimi fails to specify an exact interest rate, the charge of interest is unenforceable. Further, interest charges as to Mrs. Chittenden are unenforceable because she did not sign the agreement.

Carimi contends that the legal and ethical considerations of attorneys arranging interest-bearing financing for clients needs to be addressed in future regulation of the profession. However, he argues that because he and his law firm dealt fairly and reasonably with the Chittendens in obtaining financing for them at reasonable interest rates, the lower courts should be affirmed. Carimi further contends that neither he nor his law firm made money on the interest charges; rather, he stresses that interest was handled "merely [as] a pass-through transaction." Carimi points out that Mr. Chittenden admits that he knew he was being charged interest at the rate of 12% and further, that the Chittendens had paid 20% interest on a loan arranged by a previous attorney and 24%-38% on loans from a finance company without complaint.

The evidence shows that Darryl Breaux represented the Chittendens just prior to Carimi....