Contingency Fees and Interest in Collecting Back Child Support and Alimony (March 2003)

Material for South Carolina Bar “Hot Tips” Lecture, September 2002, revised for publication in South Carolina Lawyer, March 2003

This article was actually cited by the South Carolina Supreme Court in the case of Edwards v. Campbell, 369 S.C. 572, 633 S.E.2d 514 (2006), ultimately deciding that judgment interest did not compound.  In 2005, South Carolina code § 34-31-20 was modified so that interest was compounded and fluctuated annually based upon “the prime rate as listed in the first edition of the Wall Street Journal published for each calendar year for which the damages are awarded, plus four percentage points…”

Child support and alimony collection are the only areas of family law that can be handled on a contingency fee basis. Further, through the collection of judgment interest, the amount of past due support can sometimes be turned into a judgment that is over double the amount of past due support.  Through the use of contingency fees and interest calculations, an attorney can handle a collection matter in the family court without charging the client an up-front fee, and can earn a very substantial fee while allowing the client to receive even more funds than the actual past due amount.

The Fee Agreement

Rule 1.5(d)(1) of the South Carolina Rules of Professional Conduct allows an attorney to represent a party to collect past due child support or alimony on a contingency fee basis.   Any contingency fee agreement must be in writing and signed by the client.  Rule 1.5(c), SRRPC. Since one’s fee still needs to meet the reasonableness requirement, it is good form to offer the client to either pay a set retainer for handling the collection action or allow the matter to be handled on a contingency fee basis.  However many potential clients may not want to go to the expense of paying a retainer or incur the risk of an uncollectible judgment so often they will chose the contingency fee agreement. Doing so allows for the client to have a support collection case brought without having to come up with his or her own funds (after all, the client may be cash strapped by not receiving court-ordered support). It also allows the attorney to earn a substantial fee if successful results are achieved.

The Interest Calculation

The lynchpin of this strategy is the addition of interest to the support arrearage.  The case of Thornton v. Thornton, 328 S.C. 96, 492 S.E.2d 86, 96 (1997), held that each past due support payment is a judgment and interest on arrears begins to accrue from time that each payment becomes due. Judgment interest is fourteen percent per annum prior to December 31, 2000 and twelve percent per year as of January 1, 2001. S.C. Code Ann. § 34-31-20.

There is an unresolved issue as to whether support payments due on or after January 1, 2001 for orders issued prior to December 31, 2000 accrue interest at 14% or 12%.  Because Thornton notes that each support payment becomes a judgment when due, my view is that support obligations after January 1, 2001 accrue interest at 12%, even if the order predates January 1, 2001.

There is another unresolved issue as to whether judgment interest is compound or simple.   The general thinking in Family Court was that judgement interest did not compound. See e.g., Gardner v. Gardner, 253 S.C. 296, 170 S.E.2d 372, 374 (1969).  However in Gardner the party awarded interest did not appeal the award of simple interest and no reported South Carolina case resolves the issue of whether interest under the statute is simple or compound. A couple of 19th century cases held that interest “per annum” or “annually” compounds. Carolina Sav. Bank v Parrott, 30 S.C. 61, 8 S.E. 199, 201 (1888); Bowen v Barksdale, 33 S.C. 142, 11 S.E. 640, 641 (1890).  No cases since 1890 have ruled on the issue of whether interest compounds or is simple.

I have successfully argued that the change in language to “twelve percent per year” (emphasis added) in the interest statute means that interest now compounds.  Further, if the courts merely award simple interest, the effective interest rate on the judgment declines each year the judgment is not paid.

Where support has been unpaid for a decade or more interest calculations can sometimes double the amount owed.   In one recent collection case, through the addition of interest, $19,870.00 in back child support was turned into a total amount owed of $42,270.61  This allowed me to handle the matter on a contingency fee without the client receiving less month than would have been received by simply receiving all past due support.

The only reasonable method for doing multiple interest calculations is through the use of a spreadsheet program. Because the period of non-payment often straddles the change in interest rates, two different calculations are needed. A spreadsheet I used in a recent case in which a husband was ordered to pay temporary support for a six month period that began approximately two years before the rule to show cause hearing follows this article.

The rows through December 29, 2000 calculate interest at 14% simple. The first column simply lists each weekly payment from the first due date until December 29, 2000. Most spreadsheet programs will do a data fill which fills data by a set iteration and this spreadsheet could do the data fill on monthly, weekly or bi-weekly payments (depending upon the frequency child support is owed).

The second column simply lists the amount of alimony owed each week. Again, a simple data fill is possible.  The third column simply lists the amount paid.  The fourth column, the amount past due, is simply the second column minus the third column. The fifth column is the weeks past due as of the date of the hearing.  Again, a simple data fill (with each subsequent row decreasing by one) eliminates the need to input the numbers individually.

The sixth column is the interest percentage calculation. The calculation for simple interest is I x n/p where I is the interest rate, n is the number of periods past due and p is the number of periods support is paid per year.  For 14% simple interest and a monthly payment the formula is .14 x n/12.  If payments are weekly (as in this example), the formula is .14 x n/52 (the formula could be made more accurate by dividing by 52.1785714 to reflect leap years and that each year is 52 weeks and a day long).

The seventh column is the amount of interest owed. It is simply column four multiplied by column six. For months in which the obligor overpaid, it would show an interest credit.  The eighth and final column is the total amount owed for the week. It simply sums the fourth and seventh columns.

The second part of the spreadsheet is for interest calculations after December 31, 2000, when the interest rate dropped to 12% but (I believe) began to compound.  With one exception the remaining data fill and formulas for each column remain the same as from the previous spreadsheet. The exception is the sixth column. The formula for compound interest is ((1+I)^(n/p))-1 where I is the interest rate, n is the number of periods past due and p is the number of periods support is paid per your.  For 12% compound interest the formula is (1.12^(n/52))-1 for weekly payments and (1.12^(n/12))-1 for monthly payments.  To calculate simple interest at 12% one would simply use the formulas for 14% interest above but substitute 12 for 14.

All major spreadsheet programs have a function which quickly sums up a column of numbers. Using that feature, one can sum up the total support owed, the total amount paid, the total past due support, the total interest owed and the total amount owed. In this case, the total amount owed is $19,118.45 of which over 27% represents interest.

Having the spreadsheet prepared allows the court to make an actual ruling on the total judgment at the time of trial. Having the spreadsheet available on a laptop also allows for quick adjustments during trial (e.g., if testimony shows that payments made were not actually credited).

Collecting the Judgment

Often the obligor will not have the ability to pay much or all of the judgment immediately. Thus, collecting the judgment becomes an issue.  Simply letting the obligor languish in jail does not help the attorney or the client.  However there are useful strategies for protecting the client and the judgment through the use of post-hearing consent orders.

When obligors face the prospect of substantial jail time due to an inability to immediately pay the judgment, they are often willing to enter consent orders that protect the payment of judgment and allow other benefits for the obligee.  For example, in addition to paying a lump sum partial payment toward the judgment up front, the obligee may be asked to agree: 1) to a favorable payment plan on the arrears; 2) to sign up for mandatory wage withholding; 3) to pay the arrears through the family court; 4) to increase ongoing support; 5) that failure to pay the arrears as agreed will be considered criminal contempt; 6) that failure to pay the arrears as agreed will result in judgment interest being added to the arrears. While these protections obviously do not guarantee payment, they increase the likelihood of payment and give the obligee immediate benefits.

Further, in handling the collection of the arrears, the family court will protect the attorney’s continency fee. With the consent of the obligee, a portion of the arrears collected can be sent to an alternate payee (i.e., the attorney).  The attorney will then receive a monthly check from the family court for his or her portion of the contingency fee on the arrears. The family court, in effect, acts as a collection agency for the obligee’s attorney.

Conclusion

Using spreadsheets to calculate interest on arrears and handling collection actions on a contingency fee basis can allow a client to receive substantially more money then expected while resulting in a nice payday for the attorney under circumstances in which the client does not have to pay any up front fee.