AB 2039 and the cost of carrying a case: California's new interest ban raises novel ethics questions

Recently, Gov. Gavin Newsom signed Assembly Bill 2039 into law, significantly reinforcing California's prohibition on capping and broadening regulation of financial advances between lawyers and clients. The legislation followed years of significant public scrutiny surrounding improper solicitation and financial arrangements in high-value claims. The statutory fix, however, may come with unexpected costs of implementation.

Business and Professions Code section 6149.6, enacted by AB 2039, now regulates attorney-client loans and advances. Among other things, it prohibits an attorney from charging a client interest on any loan or funds advanced "for any purpose." At the same time, California has long permitted lawyers to advance litigation costs and, under certain circumstances, to provide financial assistance to existing clients.

The impacts of the new statute will be particularly significant in litigated contingency matters. Experts, depositions, investigations, testing and trial preparation often require substantial expenditures long before there is any contemplated recovery. Many firms may presently finance those advanced costs through lines of credit or other third-party borrowing mechanisms. Section 6149.6 will now clearly prevent a lawyer from charging interest to reflect the time value of the money that they provide before it is earned. The statute is less than clear, however, as to what happens when a lawyer is simply seeking to recover the financing cost the lawyer actually incurred to fund the case.

The rules already on the books

California Rules of Professional Conduct, rule 1.8.5 provides a detailed framework for financial assistance to clients. It provides that, after retention, a lawyer may agree to lend money to a client without limitation as to purpose for the loan, so long as the client provides a written promise to repay and the lawyer complies with rules 1.7 (Conflicts) and 1.8.1 (Business Transactions with a Client).

Rule 1.8.5 separately permits lawyers to advance the costs of prosecuting or defending a claim, with repayment potentially contingent on the outcome. "Costs" are not limited to taxable costs and may include reasonable litigation expenses and expenses incurred in providing legal services.

Section 6149.6 now sits alongside those requirements. Notably, its definition of an "attorney-client loan or advance" excludes payment of ordinary litigation costs expressly permitted by law. Yet subdivision (c) separately states that a lawyer may not charge a client interest on funds advanced for case expenses. That distinction is likely to require further guidance for lawyers and firms facing these new changes.

Pass through or prohibited?

The simplest application of the new statute is straightforward: A lawyer who lends a client money may no longer charge interest on it. The same appears true when a lawyer advances case expenses from the lawyer's own funds and imposes an interest charge on the client.

A more unsettled situation arises, however, when the firm itself borrows money. Assume, for example, that a firm advances $500,000 for experts, depositions, investigators and trial preparation. The firm obtains these funds through a bank line of credit and pays interest to the bank. The firm does not mark up the interest and earns nothing from the transaction.

May the client be required to reimburse that actual financing expense?

The statute does not expressly distinguish between interest retained by the lawyer and interest paid by the lawyer to a third party. One could argue that a dollar-for-dollar third-party financing expense is economically different from a lawyer earning interest on money advanced to a client. The distinction matters because the cost of financing litigation remains regardless of whether the lawyer is permitted to pass it through. But there is at least an equal, if not greater, chance that a regulator would conclude that describing an interest charge as a "cost" should not permit a lawyer to avoid a statutory prohibition on charging clients interest costs. Indeed, that could theoretically lead to firms setting up a straw man to lend money to the firms so they could then earn interest indirectly. For that reason, lawyers should use heavy caution if they want to test that limit.

But the concept is not unique to third parties who provide pure financial assistance for the litigation. Some vendors who provide law-related services agree with lawyers to permit payments to be made only after the litigation resolves. In exchange, they either charge interest as part of their costs or charge higher rates that likewise account for the time value of money. In these cases, it would seem unusual to require the lawyer to pay out of pocket the differences between this pricing model and one employed by vendors who require immediate payments for goods and services, with no ability to ask the client to pay for these out-of-pocket expenses on a dollar-for-dollar basis.

Carrying the case: Contingency risk and the cost of capital

The new statute also raises practical questions about its interaction with California law governing contingency fees and quantum meruit fee calculations.

California courts have long recognized that the value of contingency representation cannot always be measured by hours alone. In cases such as Cazares v. Saenz (1989) 208 Cal.App.3d 279 and Mardirossian & Associates, Inc. v. Ersoff (2007) 153 Cal.App.4th 257, courts have considered factors including contingency risk, delay in payment, difficulty, skill and the result obtained when assessing the reasonable value of legal services.

Such a framework is necessary because contingency lawyers assume more than one kind of risk. Those lawyers may spend years working on a case without receiving a fee, and they may also advance substantial litigation costs that are never recovered. If those costs are financed through outside borrowing, there is an additional expense associated with carrying the case.

Section 6149.6 does not appear, on its face, to permit a lawyer to recover prohibited interest indirectly through a later quantum meruit claim. The statute may nevertheless change the economics of contingency practice by requiring lawyers to absorb an expense that previously could, depending on the arrangement, be allocated to the matter. The new restrictions may impact even larger operating decisions such as fee-setting and case selection.

Who pays the price?

The practical consequences of section 6149.6 are unlikely to fall evenly across the profession. For example, well-capitalized national firms may be able to fund expensive litigation internally. Smaller and midsize contingency firms, newer firms, firms carrying several expert-intensive matters, or even larger firms that have narrow margins may be more dependent on lines of credit or other outside financing.

That may lead firms to become more selective, associate with better-capitalized co-counsel or direct clients toward independent litigation funding companies. None of these outcomes is the intended result of the legislation, but each could affect which clients and cases can obtain representation.

And what happens if interest accrued in 2026 is not billed until 2027?

AB 2039 does not specifically address this situation, and without further guidance from the Legislature, one cannot be 100% certain how delayed billing should be handled. However, interest lawfully accrued before the new law takes effect, in theory, should remain collectible. California law generally disfavors retroactive application of statutes, and issuing an invoice in 2027 should not erase an obligation that already existed in 2026. The critical distinction is between collecting interest already owed and imposing new interest after the law takes effect. Simply put, the timing of an invoice should not determine whether an otherwise lawful debt remains enforceable.

Practice tips until guidance arrives

Until there is further guidance on section 6149.6, lawyers should be cautious about assuming that a financing charge may be passed through simply because it reflects an actual third-party expense. The better approach is to analyze the arrangement under the new statute together with California's existing ethics rules.

This includes rule 1.5 and, in contingency matters, Business and Professions Code section 6147, both of which remain relevant to how fees and costs are described and allocated. Arrangements should clearly distinguish ordinary litigation costs from loans or advances, and lawyers should be careful about characterizing an interest charge as a "cost" merely to avoid scrutiny under section 6149.6.

Rule 1.8.5 also remains an important guide, as it governs financial assistance to clients and expressly permits certain litigation cost advances. Where the advance goes beyond a routine cost advance and creates a financial transaction between the lawyer and the client, rule 1.8.1 also requires that the terms be fair and reasonable, fully disclosed in writing, and accompanied by an opportunity to seek independent legal advice.

Lawyers should also be wary of conflicts that may arise because of this. A firm carrying substantial debt on a particular matter should consider whether its own financial exposure could materially limit its advice regarding litigation strategy or settlement.

The unanswered question

In sum, while AB 2039 addresses legitimate concerns about improper solicitation, financial exploitation and the use of loans or advances in the attorney-client relationship, its effect is likely to extend beyond the conduct that prompted the legislation.

For California lawyers, the harder questions will arise in ordinary practice: how to finance expert-heavy litigation, how to structure client advances, and how to navigate third-party funding without creating new conflicts or confidentiality problems. Section 6149.6 makes clear that lawyers may not charge interest on funds advanced to clients. What remains less clear is how that prohibition applies when the lawyer is instead incurring a genuine cost to obtain the capital needed to litigate the case, not profiting from it.

To address this, lawyers may wish to consider whether there is a change in who money is lent to. If the clients will ultimately be responsible for repayment, it may make sense to consider whether they should be the ones taking out loans. The net result should be the same distribution of funds that go to the funder, but directly from the clients' proceeds, as with other liens, rather than being paid by the lawyers' funds.

Further guidance will likely be needed. In the meantime, lawyers should treat AB 2039 as part of the broader California ethics framework governing fees, financial assistance, conflicts, confidentiality and client funds.