Personal injury lawyer L.D. Sledge often arranges high-interest loans for his clients, He doesn't like doing it but says he has to.
"I have a client right now who was making $40,000 a year. lie was injured on the job. He's getting worker's compensation, but he can't live on worker's compensation."
Sledge arranged a loan for his client through Advocate Financial in Baton Rouge. The loan, which has an interest rate of around 17 percent, will be paid off when Sledge's client gets his settlement.
Louisiana is one of 10 states in the country in which attorneys can lend money directly to their clients or cosign for loans that will cover basic living expenses, medical bills and trial-related costs.
If clients win their lawsuits, they pay-off the loans, plus interest, from their legal winnings. Sometimes, if a court judgment is small, there's virtually nothing. left for the client after the lawyers and lenders take their cuts.
Now the Louisiana Supreme Court is considering putting a clamp on the practice of lending money to clients. If a committee appointed by the court has its way, lawyers will no longer be able to charge interest on loans made directly to clients.
The committee also has proposed that interest rates, fees and charges on third-party loans arranged by attorneys not exceed 3 percentage points above the prime rate, 7.75 percent.
The recommendation has whipped up controversy in legal circles.
While most attorneys agree there ought to be limits placed on financial agreements between lawyers and their clients, some worry the changes will hurt business.
"At some point, you must draw the line for the client's sake," counters John deGravelles, a member of the committee and a Baton Rouge trial attorney who regularly advances money to his clients but doesn't charge interest.
"The thing we're struggling with right now is to find where that line is."
In 1976, Louisiana became the first state to allow attorneys to advance money to clients for necessary living expenses--rent, utilities and the like. Lawyers used to list such advances as losses on their tax forms. But in 1983, the Internal Revenue Service ruled that as long as lawyers had a reasonable chance of being paid back, they had to list such loans as accounts receivable.
Attorneys could no longer reap tax benefits for the loans, so they started going to finance companies for backing, at interest rates that can go as high as 36 percent.
The biggest point of contention today is the proposed interest rate cap. Finance companies say a relatively high interest rate is justified because the loans are risky. Usually, when a client loses his or her case, the loan is never paid back.
"You can't buy a car for that interest," says Sledge about the committee's proposed rate cap of 3 percentage points over prime.
Members of the court committee insist the interest rate is fair.
E. Eric Guirard, a personal injury lawyer in Baton Rouge who finances loans to clients through Themis Capital Corp. of Dallas, isn't so sure.
"The banks don't appreciate this business very well," he says. "They don't understand that cases are, in essence, collateral."
Most of the clients Guirard sees live paycheck to paycheck and need help making it to settlement day. In Louisiana, they have the option of getting a loan. He's glad for it.
"I have friends who practice in other states and I ask them, 'What do y'all do with a client who can't work, who needs money to support his family, but can't go to his lawyer for an advance on his settlement?'
"They just shrug their shoulders. They don't have an answer. What probably happens in other states--and this state, if the limits happen here--the poorer clients will just be forced to go to higher rate lending companies or loan sharks."
Yet Guirard admits he'd welcome some regulations on loans.
Clients often abuse the loan privilege, he says. Every day, he and his staff wade through piles of applications for financial help. Some clients ask for upward of $10,000.
"I tell clients all the time, 'Look. I'm not the Bank of E.'"
The Supreme Court committee is proposing that lawyers be banned from offering loans as incentives to clients, a problem that is rampant, Guirard adds.
"We'll be representing a client that has what we call a good claim, where the compensation is going to be very high. The client starts making demands for advances on his settlement. We'll give him loans to some extent, but then they start getting unreasonable.
"At some point, we say, 'No. It's not justifiable.' And then, the next day or sometimes that day, we'll get a letter or a fax saying, 'You're discharged from the case.' And, all of a sudden, there's another lawyer on the case."
Draw the line
The Supreme Court committee, made up of a broad spectrum of legal professionals including trial and defense lawyers, will receive comments on the possible changes through Jan. 21.
Committee members say they're open to increasing the proposed rate cap, but not to the degree that some would like.
Sledge plans to submit a comment protesting the changes. He fears losing his business if he can't help clients finance their medical care, diagnostic tests and living expenses.
If the changes go through, he says, "only the well-heeled, rich law firms will be in a position to represent their clients properly. It will cut out the small practices."
AMY ALEXANDER covers management, media and workplace issues. Reach her at firstname.lastname@example.org.
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