Ethics and Professionalism: Attorney Trust Accounts · PDF fileEthics and Professionalism:...

Ethics and Professionalism:Attorney Trust Accounts and Law OfficeRecord Keeping for New York Lawyers

Appendix of CLE Materials

Prepared by Michael J. Knight

New York Lawyers’ Fund for Client Protection119 Washington Avenue • Albany, New York 12210

September 2012

Attorney Trust Accounts, Escrow and Record Keeping*

Table of Contents

Fiduciary and Law Office Record Keeping RuleA Practical Guide to Attorney Trust Accounting and Recordkeeping

Attorney RegistrationNew York Lawyers’ Fund for Client ProtectionInterest On Lawyer Account (IOLA) Program

Dishonored Check Reporting Rule (22 NYCRR Part 1300.1)Escrow Funds of Missing Clients and Deceased Lawyers (22 NYCRR 1.15 (f), (g))

New York State Bar Association Selected Ethics OpinionsOpinion 90 - 10/7/68 (17-68) (Deposit of escrow funds in interest bearing account)Opinion 532 - 5/27/81 (39-80) (Compensation of interest for acting as escrow agent)Opinion 554 - 11/21/83 (22-83) (Particiation in IOLA) (Updated by 764, infra)Opinion 570 - 6/7/85 (37-84) (Deposit of advance fees; remission of interest) (Updated by 816, infra)Opinion 575 - 4/18/86 (46-85) (Duties of attorney acting as realty escrow agent)Opinion 582 - 5/4/87 (13-87) (Retention of interest on settlement recovery)Opinion 600 - 5/16/89 (2-88) (Use of credit line & ‘attorney exchange account)Opinion 680 - 1/10/96 (57-95)(Use of electronic/computer-generated records)(Updated by 758, infra)Opinion 693 - 8/22/97 (68-96) (Use of signature stamp by paralegal)Opinion 697 - 12/30/97 (41-97) (Combination hourly and contingency fee arrangements)Opinion 710 - 11/6/98 (35-98) (Lawyer acting as escrow agent)Opinion 717 - 4/15/99 (43-98) (Medical liens and duty to pay third-party)Opinion 737 - 02/01/01 (22-00)(Prohibition against drawing escrow check on uncollected funds)Opinion 758 - 12/10/02 (24-02) (Retention of Original Trust Documents)Opinion 759 - 12/10/02 (27-02) (ATM deposits into special account)Opinion 760 - 01/27/03 (25-02) (Use of power-of-attorney in retainer agreement)Opinion 764 - 07/23/03 (25-02) (Acceptance of IOLA account earnings with consent of client)Opinion 816 - 10/26/07 (14-07) (Deposit of advance retainer)

The Association of the Bar of the City of New York Selected Ethics OpinionsOpinion No. 1986-5 - (7/14/86) (Lawyer as escrow agent)Opinion No. 1991-3 - (5/16/91) (Prohibition against non-refundable retainers)Opinion No. 1995-6 - (4/5/95) (Holding escrow funds in an interest-bearing account)Opinion No. 1997-1 - (3/97) (Interest charges on unreimbursed expenses)Opinion No. 2002-2 - (3/ 2002) (Duty to Pay Interest on Client Funds)Opinion No. 2008-1 - (7/ 2008) (Obligation to Retain & Provide Client with Electronic Documents)

New York Lawyers’ Fund, Twenty-Ninth Annual Report

*The Fund gratefully acknowledges the research assistance of Albany Law School students Cheyenne James and Keith Cronin.

© 1999, 2012 New York Lawyers’ Fund for Client Protection

Attorney Trust Accounts, Escrow and Record Keeping 3

Fiduciary and Law Office Record Keeping Rule

Effective April 1, 2009, the Rules of Professional Conduct were promulgated as joint rulesof the Appellate Divisions of the Supreme Court, and superseded Part 1200 (Disciplinary Rules of theCode of Professional Responsibility). Rule 1.15 of the Rules of Professional Conduct is a uniform rule ofcourt adopted by the four Appellate Divisions of the Supreme Court in the exercise of their authority toregulate members of the bar and the practice of law, principally pursuant to section 90 of the JudiciaryLaw. Rule 1.15 is published at 22 NYCRR Part 1200.

Rule 1.15 contains the basic fiduciary standards set forth in Rule 1.15 of the American BarAssociation’s Model Rules of Professional Conduct. But the New York rule is much more comprehensivethan the ABA rule in its detail and practical scope in the day-to-day management of a private lawpractice.

RULE 1.15:Preserving Identity of Funds and Property ofOthers; Fiduciary Responsibility; Comminglingand Misappropriation of Client Funds orProperty; Maintenance of Bank Accounts;Record Keeping; Examination of Records

(a) Prohibition Against Commingling andMisappropriation of Client Funds or Property.

A lawyer in possession of any funds or otherproperty belonging to another person, where suchpossession is incident to his or her practice of law,is a fiduciary, and must not misappropriate suchfunds or property or commingle such funds orproperty with his or her own.

(b) Separate Accounts. (1) A lawyer who is inpossession of funds belonging to another personincident to the lawyer’s practice of law shallmaintain such funds in a banking institution withinNew York State that agrees to provide dishonoredcheck reports in accordance with the provisions of22 N.Y.C.R.R. Part 1300. “Banking institution”means a state or national bank, trust company,savings bank, savings and loan association or creditunion. Such funds shall be maintained, in thelawyer’s own name, or in the name of a firm oflawyers of which the lawyer is a member, or in thename of the lawyer or firm of lawyers by whom thelawyer is employed, in a special account oraccounts, separate from any business or personal

accounts of the lawyer or lawyer’s firm, andseparate from any accounts that the lawyer maymaintain as executor, guardian, trustee or receiver,or in any other fiduciary capacity; into such specialaccount or accounts all funds held in escrow orotherwise entrusted to the lawyer or firm shall bedeposited; provided, however, that such fundsmay be maintained in a banking institution locatedoutside New York State if such banking institutioncomplies with 22 N.Y.C.R.R. Part 1300 and thelawyer has obtained the prior written approval of theperson to whom such funds belong specifying thename and address of the office or branch of thebanking institution where such funds are to bemaintained.

(2) A lawyer or the lawyer’s firm shall identify thespecial bank account or accounts required by Rule1.15(b)(1) as an “Attorney Special Account,”“Attorney Trust Account,” or “Attorney EscrowAccount,” and shall obtain checks and deposit slipsthat bear such title. Such title may be accompaniedby such other descriptive language as the lawyermay deem appropriate, provided that such additionallanguage distinguishes such special account oraccounts from other bank accounts that aremaintained by the lawyer or the lawyer’s firm.

(3) Funds reasonably sufficient to maintain theaccount or to pay account charges may be depositedtherein.


(4) Funds belonging in part to a client or thirdperson and in part currently or potentially to thelawyer or law firm shall be kept in such specialaccount or accounts, but the portion belonging tothe lawyer or law firm may be withdrawn when dueunless the right of the lawyer or law firm to receiveit is disputed by the client or third person, in whichevent the disputed portion shall not be withdrawnuntil the dispute is finally resolved.

(c) Notification of Receipt of Property;Safekeeping; Rendering Accounts; Payment orDelivery of Property.

A lawyer shall:

(1) promptly notify a client or third person of thereceipt of funds, securities, or other properties inwhich the client or third person has an interest;

(2) identify and label securities and properties of aclient or third person promptly upon receipt andplace them in a safe deposit box or other place ofsafekeeping as soon as practicable;

(3) maintain complete records of all funds,securities, and other properties of a client or thirdperson coming into the possession of the lawyerand render appropriate accounts to the client or thirdperson regarding them; and

(4) promptly pay or deliver to the client or thirdperson as requested by the client or third personthe funds, securities, or other properties in thepossession of the lawyer that the client or thirdperson is entitled to receive.

(d) Required Bookkeeping Records.

(1) A lawyer shall maintain for seven years after theevents that they record:

(i) the records of all deposits in and withdrawalsfrom the accounts specified in Rule 1.15(b) and ofany other bank account that concerns or affects thelawyer’s practice of law; these records shallspecifically identify the date, source and description

of each item deposited, as well as the date, payeeand purpose of each withdrawal or disbursement;

(ii) a record for special accounts, showing the sourceof all funds deposited in such accounts, the names ofall persons for whom the funds are or were held, theamount of such funds, the description and amounts,and the names of all persons to whom such fundswere disbursed;

(iii) copies of all retainer and compensationagreements with clients;

(iv) copies of all statements to clients or otherpersons showing the disbursement of funds to themor on their behalf;

(v) copies of all bills rendered to clients;

(vi) copies of all records showing payments tolawyers, investigators or other persons, not in thelawyer’s regular employ, for services rendered orperformed;

(vii) copies of all retainer and closing statementsfiled with the Office of Court Administration; and

(viii) all checkbooks and check stubs, bankstatements, prenumbered canceled checks andduplicate deposit slips.

(2) Lawyers shall make accurate entries of allfinancial transactions in their records of receipts anddisbursements, in their special accounts, in theirledger books or similar records, and in any otherbooks of account kept by them in the regular courseof their practice, which entries shall be made at ornear the time of the act, condition or event recorded.

(3) For purposes of Rule 1.15(d), a lawyer maysatisfy the requirements of maintaining “copies” bymaintaining any of the following items: originalrecords, photocopies, microfilm, optical imaging,and any other medium that preserves an image of thedocument that cannot be altered without detection.


(e) Authorized Signatories.All special account withdrawals shall be made onlyto a named payee and not to cash. Such withdrawalsshall be made by check or, with the prior writtenapproval of the party entitled to the proceeds, bybank transfer. Only a lawyer admitted to practicelaw in New York State shall be an authorizedsignatory of a special account.

(f ) Missing Clients.Whenever any sum of money is payable to a clientand the lawyer is unable to locate the client, thelawyer shall apply to the court in which the actionwas brought if in the unified court system, or, if noaction was commenced in the unified court system,to the Supreme Court in the county in which thelawyer maintains an office for the practice of law,for an order directing payment to the lawyer of anyfees and disbursements that are owed by the clientand the balance, if any, to the Lawyers’ Fund forClient Protection for safeguarding and disbursementto persons who are entitled thereto.

(g) Designation of Successor Signatories.(1) Upon the death of a lawyer who was the solesignatory on an attorney trust, escrow or specialaccount, an application may be made to theSupreme Court for an order designating a successorsignatory for such trust, escrow or special account,who shall be a member of the bar in good standingand admitted to the practice of law in New YorkState.

(2) An application to designate a successorsignatory shall be made to the Supreme Court in thejudicial district in which the deceased lawyermaintained an office for the practice of law. Theapplication may be made by the legal representativeof the deceased lawyer’s estate; a lawyer who wasaffiliated with the deceased lawyer in the practice oflaw; any person who has a beneficial interest in suchtrust, escrow or special account; an officer of a cityor county bar association; or counsel for an attorneydisciplinary committee. No lawyer may charge alegal fee for assisting with an application todesignate a successor signatory pursuant to thisRule.

(3) The Supreme Court may designate a successorsignatory and may direct the safeguarding of fundsfrom such trust, escrow or special account, and thedisbursement of such funds to persons who areentitled thereto, and may order that funds in suchaccount be deposited with the Lawyers’ Fund forClient Protection for safeguarding and disbursementto persons who are entitled thereto.

(h) Dissolution of a Firm.Upon the dissolution of any firm of lawyers, theformer partners or members shall make appropriatearrangements for the maintenance, by one of themor by a successor firm, of the records specified inRule 1.15(d).

(i) Availability of Bookkeeping Records: RecordsSubject to Production in DisciplinaryInvestigations and Proceedings.The financial records required by this Rule shall belocated, or made available, at the principal NewYork State office of the lawyers subject hereto, andany such records shall be produced in response to anotice or subpoena duces tecum issued inconnection with a complaint before or anyinvestigation by the appropriate grievance ordepartmental disciplinary committee, or shall beproduced at the direction of the appropriateAppellate Division before any person designated byit. All books and records produced pursuant to thisRule shall be kept confidential, except for thepurpose of the particular proceeding, and theircontents shall not be disclosed by anyone inviolation of the attorney-client privilege.

(j) Disciplinary Action.A lawyer who does not maintain and keep theaccounts and records as specified and required bythis Rule, or who does not produce any such recordspursuant to this Rule, shall be deemed in violationof these Rules and shall be subject to disciplinaryproceedings.


A Practical Guide to Attorney Trust Accounting and Recordkeeping

What follows is the text of a pamphlet guide published by the New York Lawyers’ Fund in 2009 -- “APractical Guide to Attorney Trust Accounting and Recordkeeping” -- which outlines the fiduciary,banking and record keeping standards of Rule of Professional Conduct 1.15.

Dear Colleague:

We are pleased to contribute this revised version ofA Practical Guide as a public service for the bar ofNew York, law-office staffs, and law students.

It is intended as a plain-English guide to currentcourt rules, statutes and bar association ethicsopinions on the subject of attorney trust accountsand law office recordkeeping. This brochureprovides a summary of the applicable rules andstandards when a lawyer holds client moneyand escrow funds. It is not a substitute for theblack-letter provisions of the New York Rules ofProfessional Conduct or court rules in each of thefour judicial departments in the State .

A Practical Guide was first published in April1988, with the help of the Committee onProfessional Ethics of the New York CountyLawyers' Association. This new version isprompted by recent ethics opinions, changes infederal banking law and adoption of the Rules ofProfessional Conduct which replace existingDisciplinary Rules effective on April 1, 2009.

This brochure may be reproduced without furtherpermission of the Lawyers' Fund, in connectionwith any educational, law office or bar associationactivity. We hope you find A Practical Guide to beinformative and helpful in your practice.

Eleanor Breitel Alter, ChairmanNancy M. Burner, Partricia L. Gatling, CharlotteHolstein, Charles J. Hynes, Theresa Mazzullo, Eric A. Seiff, Trustees

What are a lawyer's ethical obligations regardingclient funds?A lawyer in possession of client funds and property is afiduciary.1 The lawyer must safeguard and segregatethose assets from the lawyer's personal, business orother assets.

A lawyer is also obligated to notify a client when clientfunds or property are received by the lawyer. Thelawyer must provide timely and complete accountingsto the client, and disburse promptly all funds andproperty to which the client is entitled. A client'snon-cash property should be clearly identified as trustproperty and be secured in the lawyer's safe or safedeposit box.

These fiduciary obligations apply equally to money andproperty of non-clients which come into a lawyer'spossession in the practice of law.

What is an attorney trust account?It's a "special" bank account, usually a checkingaccount or its equivalent, for client money and otherescrow funds that a lawyer holds in the practice of law.A lawyer can have one account, or several, dependingon need. Each must be maintained separately from thelawyer's personal and business accounts, and otherfiduciary accounts, like those maintained for estates,guardianships, and trusts.

An attorney trust account must be maintained in abanking institution located within New York State; thatis, a "state or national bank, trust company, savingsbank, savings and loan association or credit union".Out-of-state banks may be used only with the prior andspecific written approval of the client or otherbeneficial owner of the funds. In all cases, lawyers canonly use banks that have agreed to furnish "dishonored

122 NYCRR Part 1200 (Rule 1.15). The Appellate Divisions’ Rules

of Professional Conduct are published in 22 NYCRR Part 1200;McKinney’s Judiciary Law (Appendix); and McKinney’s New

York Rules of Court.


check notices" pursuant to statewide court rules.2 Whilesome banking institutions may offer overdraftprotection on a client funds account, an attorney trustaccount should never be overdrawn and should notcarry overdraft protection.

These rules also require lawyers to designate existing ornew bank accounts as either Attorney Trust Account,Attorney Special Account, or Attorney Escrow Account,with pre-numbered checks and deposit slips imprintedwith that title. These titles may be further qualified withother descriptive language. For example, an attorneycan add “IOLA Account” or “Closing Account” belowthe required title. 3

What is the purpose of an attorney trust account?To safeguard clients' funds from loss, and to avoid theappearance of impropriety by the lawyer-fiduciary. Theaccount is used solely for funds belonging to clients andother persons incident to a lawyer's practice of law.Funds belonging partly to a client and partly to thelawyer, presently or potentially, must also be depositedin the attorney trust account. The lawyer's portion maybe withdrawn when due, unless the client disputes thewithdrawal. In that event, the funds must remain intactuntil the lawyer and client resolve their dispute.

Withdrawals from the attorney trust account must bemade to named payees, and not to cash. A lawyer maynot issue a check from an attorney escrow accountdrawn against a bank or certified check that has notbeen deposited or has not cleared4. A lawyer is also notpermitted to make an ATM withdrawal from a clientfunds account. Deposits by ATM may be permitted ifthe attorney carefully reviews and adequatelydocuments the deposit transaction, and otherwisecomplies with the records retention requirements ofRule 1.155

Only members of the New York bar can be signatorieson the bank account. In certain instances, a lawyer mayallow a paralegal to use the lawyer’s signature stamp to

execute escrow checks from a client trust account solong as the lawyer supervises the delegated workclosely. The lawyer though remains completelyresponsible for any misuse of funds.6

What about bank service charges?A lawyer may deposit personal funds into the attorneytrust account that are necessary to maintain theaccount, including bank service charges.

Should interest-bearing accounts be used?Lawyers, as fiduciaries, should endeavor to make clientfunds productive for their clients. By statute, everylawyer has complete discretion to determine whetherclient and escrow funds should be deposited ininterest-bearing bank accounts.7

For funds nominal in amount, or which will be heldonly briefly by a lawyer or law firm, the statuteauthorizes their deposit in so-called IOLA bankaccounts.

But lawyers may also establish interest-bearingaccounts for individual clients. For all client funds,lawyers may use pooled accounts in banks which havethe capability to credit interest to individual clientsub-accounts. A lawyer or law firm may also do thecalculations necessary to allocate interest to individualclients or other beneficial owners.

What is IOLA?IOLA is the acronym for the Interest On LawyerAccount Fund and program.8 IOLA is a state agencywhich uses interest on IOLA attorney trust accounts tofund non-profit agencies which provide civil legalservices for the poor, and programs to improve theadministration of justice.

The IOLA account is designed for nominal andshort-term client deposits which, in the sole discretionof the attorney, would not generate income for theclient-owner, net of bank fees and related charges.9

222 NYCRR Part 1200 (Rule 1.15 (b)(1)). The Dishonored

Check Notice Reporting Rules, effective January 1, 1993, arereported at 22 NYCRR Part 1300.

322 NYCRR Part 1200 (Rule 1.15 (b)(2)).

4See, NYSBA Op. 737 (2001).

5See, NYSBA Op. 759 (2002).

6See, NYSBA Op. 693 (1997).

7Judiciary Law §497.

8State Finance Law §97-v; Judiciary Law §497.

921 N.Y.C.R.R. 7000.2(e)


A lawyer's participation in IOLA has no income taxconsequences for the lawyer, or for the client. Inaddition, IOLA assumes the cost of routine bank servicecharges and fees on the account. IOLA's offices are at11 E. 44th Street, Suite 1406, New York, NY 10017.Telephone (646) 865-1541 or 1-800-222-IOLA. TheIOLA Fund also has a site on the internet atwww.iola.org.

FDIC Insurance and Attorney Trust AccountsAttorneys are not required by court rules to depositclient funds in an FDIC insured banking institution.Nevertheless, as a fiduciary of client funds, an attorneyis wise to consider FDIC insured institutions in order toprovide an added layer of protection. A lawyer whofails to consider the relative safety of a depositarybanking institution might be exposed to civil liability.10

The Federal Deposit Insurance Corporation (FDIC)provides insurance coverage to various types of depositaccounts.

The FDIC considers attorney escrow accounts as singleaccounts. An attorney must comply with New Yorkrecord keeping rules to demonstrate the fiduciary natureof an escrow account in order to extend FDIC coverageto individual client deposits.11

FDIC coverage of depositor funds is in the aggregate.Lawyers must therefore consider if their client has otherfunds on deposit with the lawyer’s depositary bank. If aclient has accumulated deposits in excess of FDICcoverage, then lawyers should discuss depositalternatives with their client.

In light of an ever-changing financial landscape,practitioners are encouraged to visit the FDIC’s websiteat www.fdic.gov to obtain the most current rulesregarding available insurance coverage.

How should large trust deposits be handled?When a client's funds and the anticipated holdingperiod are sufficient to generate meaningful interest, a

lawyer may have a fiduciary obligation to invest theclient's funds in an interest-bearing bank account.12

In that case, prudence suggests that a lawyer consultwith the client or other beneficial owner. And whendealing with large deposits and escrows, lawyers andclients should be mindful of federal bank depositinsurance limits.13

There may also be income tax implications to consider.Using the law client's social security or federal taxidentification number on the bank account can avoidtax problems for the lawyer.

May a lawyer retain the interest on an attorneytrust account?No. A lawyer, as a fiduciary, cannot profit on theadministration of an attorney trust account. While alawyer is permitted to charge a reasonable fee foradministering a client's account, all earned interestbelongs to the client. A lawyer’s fee cannot be peggedto the interest earned.14

What happens if a trust account check bounces?A bounced check on an attorney trust account is asignal that law client funds may be in jeopardy. Banksin New York State report dishonored checks onattorney trust accounts to the Lawyers' Fund for ClientProtection. Notices that are not withdrawndue to bank error are referred by the Lawyers' Fund tothe proper attorney grievance committee for suchinquiry as the committee deems appropriate.

These bank notices are required by the AppellateDivisions' Dishonored Check Notice Reporting Rules.15

A "dishonored" instrument is a check which thelawyer's bank refuses to pay because of insufficientfunds in the lawyer's special, trust, or escrow account.

10See, Bazinet v. Kluge, 14 A.D.2d 324, 10 788 NYS 2d 77

(2005).

11See, 12 CFR § 330.5 and FDIC Advisory Opinion 98-2,

June 16, 1998.

12See, NYSBA, Comm. on Prof. Ethics, Ops. 554 (1983),

575 (1986); Assoc. Bar, NYC, Comm. on Prof & Jud.Ethics, Op. 86-5 (1986).

13See, 22 NYCRR Part 1200 (Rule 1.15 (b)(1)), and Bazinet

v. Kluge, 14 A.D.2d 324, 788 NYS 2d 77 (2005).

14NYSBA, Ops. 532 (1981), 582 (1987); Assoc. Bar, NYC,

Op. 81-68 (1981).

1522 NYCRR Part 1200 (Rule 1.15 (b)(1)). The Dishonored

Check Notice Reporting Rules, effective January 1,1993, are reported at 22 NYCRR Part 1300.

http://www.iola.org.


The Lawyers' Fund holds each dishonored check noticefor 10 business days to permit the filing bank towithdraw a report that was sent in error. However, thecuring of an insufficiency of funds by a lawyer or lawfirm will not constitute reason for the withdrawal of adishonored check notice.

Are there special banking rules for downpayments?Yes. A buyer's down payment, entrusted with a seller'sattorney pending a closing, generally remains theproperty of the buyer until title passes. Thelawyer-escrow agent is serving as a fiduciary, and mustsafeguard and segregate the buyer's down payment in aspecial trust account. The purchase contract shouldmake provisions for depositing the down payment in abank account, the disposition of interest, and otherescrow responsibilities.

A 1991 statute codifies the fiduciary obligations oflawyers and realtors who accept down payments inresidential purchases and sales, including condominiumunits and cooperative apartments.16

This statute requires that the purchase contract identify:(1) the escrow agent; and (2) the bank where the downpayment will be deposited pending the closing.

There are also special rules, promulgated by the NewYork State Department of Law, where escrow accountsare established in connection with the conversion ofbuildings into condominiums and cooperatives.17

Are other bank accounts needed?Yes. A practitioner needs a business account as adepository for legal fees, and to pay operating expenses.A typical designation is Attorney Business Account.Lawyers also need special bank accounts when theyserve as fiduciaries for estates, trusts, guardianships,and the like.

Where are advance legal fees deposited?This depends upon the lawyer's fee agreement with theclient. The presumption in New York State is that theadvance fee becomes the lawyer's property when it ispaid by the client. As such, the fee should be deposited

in the business account, and not in the attorney trustaccount.

If, on the other hand, by agreement with the client, theadvance fee remains client property until it is earned bythe lawyer, it should be deposited in the attorney trustaccount, and withdrawn by the lawyer or law firm as itis earned.18

In either event, a lawyer has a professional obligationto refund unearned legal fees to a client whenever thelawyer completes or withdraws from a representation,or the lawyer is discharged by the client.19 It is goodbusiness practice to depositadvance legal fees in a non-escrow fee account anddraw upon the deposit only when legal fees are earned.This practice will ensure that a lawyer will be able tofulfill the professional obligation to refund unearnedlegal fees.

In the event of a fee dispute, court rules provide that aclient may elect mandatory fee arbitration in most civilrepresentation which commenced on or after January 1,2002 when the disputed amount is between $1,000 and$50,000.20 Fee arbitration is also mandatory in feedisputes in domestic relations matters.21

And advances from clients for court fees andexpenses?This also depends upon the lawyer's fee agreementwith the client. If the money advanced by the client isto remain client property until it is used for specificlitigation expenses, it should be segregated andsafeguarded in the attorney trust account, or

in a similar special account.

How are unclaimed client funds handled?If a lawyer cannot locate a client or another person whois owed funds from the attorney trust account, thelawyer is required to seek a judicial order to fix thelawyer's fees and disbursements, and to deposit theclient's share with the Lawyers' Fund for Client

16See, General Business Law, Article 36-c, §§778, 778-16 a.

17See, General Business Law, §352-e (2-b).

18See, NYSBA Op. 570 (1985) and Op. 816 (2007).

1922 NYCRR Part 1200(Rule 1.16 (e)).

2022 NYCRR Part 137

2122 NYCRR Part 136


Protection.22 To preserve client funds, the Lawyers’Fund will accept deposits under $1,000 without a courtorder.23

What happens when a sole signatory dies?The Supreme Court has authority to appoint asuccessor signatory for the attorney trust account. Theprocedures are set forth in courtrules adopted in 1994.24

What accounting books are required?No specific accounting system is required by court rule,but a basic trust accounting system for a law firmconsists of a trust receipts journal, a trust disbursementsjournal, and a trust ledger book containing theindividual ledger accounts for recording each financialtransaction affecting that client's funds.

At a minimum, each client's ledger account shouldreflect the date, source, and a description of each itemof deposit, as well as the date, payee, and purpose ofeach withdrawal.

Many practitioners find that the so-called "one-write"or "pegboard" manual systems provide an efficient andeconomical method of trust accounting.

There are also approved computer software packagesfor law office trust accounting. Whether it be anattorney trust account or the lawyer's operating account,each should be maintained daily and accurately to avoiderror. All documents like duplicate deposit slips, bankstatements, canceled checks, checkbooks and checkstubs must be preserved for seven years.

Internal office controls are essential. It is good businesspractice to prepare a monthly reconciliation of thebalances in the trust ledger book, the trust receipts anddisbursements journals, the bank account checkbook,and bank statements.

What bookkeeping records must be maintained?Every lawyer and law firm must preserve25, for

seven years after the events they record:

• books of account affecting all attorney trust andoffice operating accounts; and

• originalcheckbooks and check stubs, bankstatements, pre-numbered canceled checks andduplicate deposit slips26

Also, copies of:

• client retainer and fee agreements;

• statements to clients showing disbursements of theirfunds;

• records showing payments to other lawyers ornon-employees for services rendered; and

• retainer and closing statements filed with the Officeof Court Administration.

“Copies” means original records, photo copies or otherimages that cannot be altered without detection.Records required to be maintained by the Rules in theform of "copies" may be stored by reliable electronicmeans. Records that are initially created by electronicmeans may be retained in that form. Other recordsspecifically described by the Rules that are created byentries on paper books of account, ledgers or othersuch tangible items should be retained in their originalformat.27

How are these rules enforced?A violation of a Rule of Professional Conductconstitutes grounds for professional discipline undersection 90 of the Judiciary Law. Also, the accounts andrecords required of lawyers and law firms by court rulemay be subpoenaed in a disciplinary proceeding.

Lawyers are also required to certify their familiarityand compliance with Rule 1.15 in the biennial

2222 NYCRR Part 1200 (Rule 1.15 (f)).

23See, Bar Assoc. Erie Co., Cttee. Prof. Ethics Op.

#xx1-1/15/04

2422 NYCRR Part1200 (Rule 1.15 (g)).

2522 NYCRR Part 1200 (Rule 1.15 25 (d)).

26 N.B. With the advent of electronic banking and

Check 21, the ‘substitute check’ provided byparticipating banking institutions is considered the legalequivalent of the canceled check and thus the originalrecord that must be maintained by 22 NYCRR Part 1200 (Rule 1.15(d)). See also, NYSBA Op. 758.

27See, NYSBA Ops. 680 (1996), 758 (2002).


registration form that is filed with the Office of CourtAdministration.

What losses are covered by the Lawyers' Fund?The New York Lawyers' Fund for Client Protection isfinanced by a $60 share of each lawyer's $350 biennialregistration fee. The Lawyers' Fund receives norevenues from tax revenues or the IOLA program.

The Lawyers' Fund, established in 1982, isadministered pro bono publico by a Board of Trusteesappointed by the State Court of Appeals.28 The Trusteesprovide approximately $8 million in reimbursementeach year to victims of dishonest conduct in the practiceof law.

The Lawyers' Fund is authorized to reimburse lawclients for money or property that is misappropriated bya member of the New York bar in the practice of law.Awards are made after a lawyer's disbarment, and insituations where the lawyer is unable to makerestitution. The Fund's current limit on reimbursementis $300,000 for each client loss.

To qualify for reimbursement, the loss must involve themisuse of law clients' money or property in the practiceof law. The Trustees cannot settle fee disputes, norcompensate clients for a lawyer's malpractice orneglect. Typical losses reimbursed include the theft ofestate and trust assets, down payments and the proceedsin real property transactions, debt collection proceeds,personal injury settlements, and money embezzled fromclients in investment transactions. The Lawyers' Fundis located at 119 Washington Avenue, Albany, NewYork 12210. Telephone (518) 434-1935, or1-800-442-FUND. The Lawyers’ Fund also has a siteon the internet at www.nylawfund.org.

28Judiciary Law, §468-b; State Finance Law, §97-t.

http://www.nylawfund.org.


Attorney Registration

Sections 468 and 468-a of the Judiciary Law create a biennial registration programfor the legal profession in New York State. The statutes establish a central registry ofadmitted attorneys which is maintained by the Office of Court Administration, and a $375biennial registration fee which is divided as follows: $60.00 is deposited to the Lawyers’Fund for Client Protection; $50.00 to the Indigent Legal Services Fund, $25.00 to theLegal Services Assistance Fund, and the remainder in the Attorney Licensing Fund.

The Lawyers’ Fund reimburses clients and escrow beneficiaries for money andproperty that is misappropriated by attorneys in the practice of law in situations wherethe dishonest attorney is unable to make restitution. The Attorney Licensing Fund is usedto finance the operations of the New York State Board of Law Examiners; the AppellateDivisions’ Committees on Character and Fitness; the Attorney Grievance Committees inthe State’s four judicial departments; and the Office of Court Administration’s AttorneyRegistration program.

Rules of the Chief Administrative Judge governing the registration of attorneys arereported at 22 NYCRR Part 100. The Office of Court Administration maintains adirectory of attorneys on the court system’s Internet site: www.courts.state.ny.us

Judiciary Law § 468:

1. It shall be the duty of the chief administrator of thecourts to enter in a bound book or volume to be kept byhim for that purpose, which shall be known anddesignated as and is hereby made the "official registerof attorneys and counsellors-at-law in the state of NewYork," the names and residences of attorneys newlyadmitted to practice in the alphabetical order of the firstletter of their surnames, the title of the court and thetime and place where admitted. The said "officialregister of attorneys and counsellors-at-law in the stateof New York," is hereby declared to be a public recordand presumptive evidence that the individuals thereinnamed were admitted to practice as attorneys andcounsellors-at-law in the courts of record of this state. 2. The chief administrator shall provide the public withinformation contained in such official register. Uponrequest, the office of court administration shall disclosewhether a person is registered as an attorney as requiredby section four hundred sixty-eight-a of this chapter.Where the official register indicates that an attorney hasresigned from the bar, or has been removed or

suspended from practice by an appellate division of thesupreme court and has not been readmitted to practice,that fact shall also be disclosed.

Judiciary Law §468-a:

1. Every attorney and counsellor-at-law admitted topractice in this state on or before January first, nineteenhundred eighty-two, whether resident or nonresident,shall file a biennial registration statement with theadministrative office of the courts on or before Marchfirst, nineteen hundred eighty-two in such form as thechief administrator of the courts shall prescribe. Anattorney who is admitted to practice after January first,nineteen hundred eighty-two and on or before Januaryfirst, nineteen hundred eighty-six, shall file aregistration statement within sixty days after the date ofadmission. An attorney who is admitted to practice afterJanuary first, nineteen hundred eighty-six shall file aregistration statement prior to taking the constitutionaloath of office. 2. Attorneys shall register biennially on the datesprescribed by the chief administrator. In the event of a


change in information previously submitted, an attorneyshall file an amended statement within thirty days ofsuch change. 3. The chief administrator shall prescribe the form inwhich such registry of attorneys shall be maintainedand the procedures for public access thereto, and maymake all such other rules and regulations necessary andappropriate to implement and enforce the provisions ofthis section. 4. The biennial registration fee shall be three hundredseventy-five dollars, sixty dollars of which shall beallocated to and be deposited in a fund establishedpursuant to the provisions of section ninety-seven-t ofthe state finance law, fifty dollars of which shall beallocated to and shall be deposited in a fund establishedpursuant to the provisions of section ninety-eight-b ofthe state finance law, twenty-five dollars of which shallbe allocated to be deposited in a fund establishedpursuant to the provisions of section ninety-eight-c ofthe state finance law, and the remainder of which shallbe deposited in the attorney licensing fund. Such feeshall be required of every attorney who is admitted andlicensed to practice law in this state, whether or not theattorney is engaged in the practice of law in this state orelsewhere, except attorneys who certify to the chiefadministrator of the courts that they have retired fromthe practice of law. 5. Noncompliance by an attorney with the provisions ofthis section and the rules promulgated hereunder shallconstitute conduct prejudicial to the administration ofjustice and shall be referred to the appropriate appellatedivision of the supreme court for disciplinary action.


New York Lawyers’ Fund for Client Protection

The principal sources of revenue for the New York Lawyers’ Fund are a $60 share ofthe $375 biennial registration fee and earned interest on the fund’s trust account in theState Treasury. That account was created in 1981 pursuant to section 97-t of the StateFinance Law.

Other revenues include recoveries secured by the fund in the enforcement of itssubrogation rights against dishonest attorneys and collateral sources like banks andinsurance companies, contributions, and sanctions imposed on attorneys for failure toappear or for engaging in frivolous conduct in the course of civil litigation (see 22NYCRR Parts 130-1 and 130-2). The Lawyers’ Fund gets no money from the Interest OnLawyer Account (IOLA) program, or from the state’s general tax revenues.

The administration of the Lawyers’ Fund is governed by section 468-b of the JudiciaryLaw. Section 468-b is a broad grant of authority to the fund’s Board of Trustees todetermine the merits of claims seeking reimbursement from the fund. That authority, andthe fund’s procedures, are fleshed out in the Trustees’ Regulations, which are reported at22 NYCRR Part 7800, et seq.. The Trustees’ Regulations are also available at the fund’sInternet Website: www.nylawfund.org

The offices of the Lawyers’ Fund are located at 119 Washington Avenue, Albany, NY12210. Telephone: (800) 442-3863. Fax: (518) 434-5641.

State Finance Law § 97-t.

1. There is hereby established in the custody of the statecomptroller a special fund to be known as the "lawyers'fund for clients protection of the state of New York". 2. The full amount of the allocable portion of thebiennial registration fee collected pursuant to theprovisions of section four hundred sixty-eight-a of thejudiciary law and such other monies as may be creditedor otherwise transferred from any other fund or source,pursuant to law, including voluntary contributions,together with any interest accrued thereon, shall bedeposited to the credit of the lawyers' fund for clientprotection of the state of New York. All deposits ofsuch revenues not otherwise required for the paymentof claims as hereinafter prescribed shall be secured byobligations of the United States or of the state having amarket value equal at all times to the amount of suchdeposits and all banks and trust companies are

authorized to give security for such deposits. Any suchrevenues in such fund, may be invested in obligationsof the United States or of the state, or in obligations theprincipal and interest on which are guaranteed by theUnited States or by the state.

Judiciary Law §468-b

1. The court of appeals shall appoint a board of trusteesto administer the lawyers' fund for client protection ofthe state of New York established pursuant to sectionninety-seven-t of the state finance law. Such board shallconsist of seven members. Of the trustees firstappointed, three shall be appointed for a term of threeyears; two for a term of two years; and two for a term ofone year. As each such term expires, each newappointment shall be for a term of three years. Thecourt of appeals may require such reports or audits ofthe board as it shall from time to time deem to benecessary or desirable.


2. The board shall have the power to receive, hold,manage and distribute the funds collected hereunder forthe purpose of maintaining the integrity and protectingthe good name of the legal profession by reimbursing,in the discretion of the trustees to the extent they maydeem proper and reasonable, losses caused by thedishonest conduct of attorneys admitted to practice inthis state. For purposes of this section, the term"dishonest conduct" shall mean misappropriation orwilful misapplication of clients' money, securities, orother property, by an attorney admitted to practice inthis state. 3. The board of trustees shall adopt regulations for theadministration of the lawyers' fund for client protectionof the state of New York and the procedures forpresentation, consideration, allowance and payment ofclaims, including the establishment of a maximumlimitation for awards to claimants. 4. The board of trustees shall have the sole discretion todetermine the merits of claims presented forreimbursement, the amount of such reimbursement andthe terms under which such reimbursement shall bemade. Such terms of reimbursement shall require thatthe claimant execute such instruments, take such actionor enter into such agreements as the board of trusteesshall require, including assignments, subrogationagreements and promises to cooperate with the board oftrustees in making claims against the attorney whosedishonest conduct resulted in the claim. 5. The board of trustees shall serve withoutcompensation but shall be entitled to receive theiractual and necessary expenses incurred in the dischargeof their duties. 6. The board of trustees may employ and at pleasureremove such personnel as it may deem necessary for theperformance of its functions and fix their compensationwithin the amounts made available therefor. 7. The board of trustees shall be considered employeesof the state for the purpose of section seventeen of thepublic officers law. 8. All payments from the lawyers' fund for clientprotection of the state of New York shall be made bythe state comptroller upon certification andauthorization of the board of trustees of said fund.

9. Acceptance of an award of reimbursement from thelawyers' fund for client protection shall, to the extent ofsuch award, (a) subrogate the fund to any right or causeof action that accrued to the claimant as a consequenceof the dishonest conduct that resulted in the claimant'saward and (b) create a lien in favor of the fund thatshall attach to any money asset that is designated to bepaid to the claimant from, or on behalf of, the attorneywho caused the claimant's loss. If the fund fullyreimburses the claimant's loss, as determined by theboard of trustees, the lien shall be in the amount of thefund's award. If the claimant's loss exceeds the fund'saward, the lien shall not extend to the claimant's right torecover additional restitution from the attorney for theclaimant's unreimbursed loss. In the event of a recoveryby the fund, a claimant shall be entitled to any moneyrecovered in excess of the fund's award ofreimbursement to the claimant.


Interest On Lawyer Account (IOLA) Program

New York law encourages attorneys who have been entrusted with client and escrowfunds to make those funds productive in interest-bearing bank accounts. Section 497 ofthe Judiciary Law also authorizes practitioners to utilize special bank accounts(sometimes called IOLA bank accounts) for the deposit of “qualified funds” belonging tolaw clients and escrow beneficiaries in the practice of law.

An IOLA bank account is a species of the attorney trust account that is required bycourt rule (DR 9-102). Section 497 of the Judiciary Law grants broad discretion toattorneys to participate in the IOLA program. It also immunizes them from disciplinaryand civil liability should they determine not to use IOLA bank accounts.

The IOLA statute requires participating banks to remit the earned interest on IOLAbank accounts, net after bank service charges and fees, to the IOLA state agency. Thatfund’s Trustees distribute the pooled revenue, in the form of grants, to organizationswhich provide civil legal services to needy persons and projects which improve theadministration of justice in New York. The Trustees’ regulations are reported at 21NYCRR Part 7000.

“Qualified funds” are defined in subdivision (2) of section 497. IOLA’s Trustees havedetermined that a deposit of client funds is “qualified”, for purposes of the statute, if theescrow deposit is too small in amount or is reasonably expected to be held for too short atime to generate sufficient interest income to justify the expense of administering asegregated account for the benefit of the client or beneficial owner.

The offices of the IOLA Fund are located at 36 West 44th Street, New York, NY 10036. Telephone: (800) 222-IOLA (4652). Fax: (212) 944-9836.

Judiciary Law §497

1. An "interest on lawyer account" or "IOLA" is anunsegregated interest-bearing deposit account with abanking institution for the deposit by an attorney ofqualified funds. 2. "Qualified funds" are moneys received by an attorneyin a fiduciary capacity from a client or beneficial ownerand which, in the judgment of the attorney, are toosmall in amount or are reasonably expected to be heldfor too short a time to generate sufficient interestincome to justify the expense of administering asegregated account for the benefit of the client or

beneficial owner. In determining whether funds arequalified for deposit in an IOLA account, an attorneymay use as a guide the regulation adopted by the boardof trustees of the IOLA fund pursuant to subdivisionfour of section ninety-seven-v of the state finance law. 2-a. "Funds received in a fiduciary capacity" are fundsreceived by an attorney from a client or beneficialowner in the course of the practice of law, including butnot limited to funds received in an escrow capacity, butnot including funds received as trustee, guardian orreceiver in bankruptcy. 3. A "banking institution" means a bank, trust company,savings bank, savings and loan association, credit union


or foreign banking corporation whether incorporated,chartered, organized or licensed under the laws of thisstate or the United States, provided that such bankinginstitution conducts its principal banking business inthis state. 4. (a) An attorney shall have discretion, in accordancewith the code of professional responsibility, todetermine whether moneys received by an attorney in afiduciary capacity from a client or beneficial ownershall be deposited in non-interest, or in interest bearingaccounts. If in the judgment of an attorney any moneysreceived are qualified funds, such funds shall bedeposited in an IOLA account in a banking institutionof his or her choice offering such accounts.

(b) The decision as to whether funds are nominal inamount or expected to be held for a short period of timerests exclusively in the sound judgment of the lawyer orlaw firm. Ordinarily, in determining the type of accountinto which to deposit particular funds held for a client,a lawyer or law firm shall take into consideration thefollowing factors: (i) the amount of interest the funds would earnduring the period they are expected to be deposited; (ii) the cost of establishing and administering theaccount, including the cost of the lawyer or law firm'sservices; (iii) the capability of the banking institution,through subaccounting, to calculate and pay interestearned by each client's funds, net of any transactioncosts, to the individual client.

(c) All qualified funds shall be deposited in an IOLAaccount unless they are deposited in: (i) a separate interest bearing account for theparticular client or client's matter on which the interestwill be paid to the client; or (ii) an interest bearing trust account at a bankinginstitution with provision by the bank or by thedepositing lawyer or law firm for computation ofinterest earned by each client's funds and the paymentthereof to the client.

(d) Notwithstanding the deposit requirements of thissubdivision, no attorney or law firm shall be liable indamages nor held to answer for a charge of professionalmisconduct for failure to deposit qualified funds in anIOLA account.

5. No attorney or law firm shall be liable in damagesnor held to answer for a charge of professionalmisconduct because of a deposit of moneys to an IOLAaccount pursuant to a judgment in good faith that suchmoneys were qualified funds. 6. a. An attorney or law firm which receives qualifiedfunds in the course of its practice of law and establishesand maintains an IOLA account shall do so by (1)designating the account as "(name of attorney/law firmIOLA account)" with the approval of the bankinginstitution; and (2) notifying the IOLA fund withinthirty days of establishing the IOLA account of theaccount number and name and address of the bankinginstitution where the account is deposited.

b. The rate of interest payable on any IOLA accountshall be not less than the rate paid by the bankinginstitution on similar accounts maintained at thatinstitution, and the banking institution shall not imposeon such accounts any charges or fees greater than itimposes on similar accounts maintained at thatinstitution.

c. With respect to IOLA accounts, the bankinginstitution shall: (i) Remit at least quarterly any interest earned onthe account directly to the IOLA fund, after deductionof service charges or fees, if any, are applied. (ii) Transmit to the IOLA fund with each remittancea statement showing at least the name of the account,service charges or fees deducted, if any, and the amountof net interest remitted from such account. (iii) Transmit to each attorney or law firm whichmaintains an IOLA account a statement showing atleast the name of the account, service charges or feesdeducted, if any, and the amount of interest remittedfrom such account. (iv) Be permitted to impose reasonable servicecharges for the preparation and issuance of thestatement. (v) Have no duty to inquire or determine whetherdeposits consist of qualified funds. 7. a. Payment from an IOLA account to or upon theorder of the attorney maintaining such account shall bea valid and sufficient release of any claims by anyperson or entity against any banking institution for anypayments so made.


b. Any remittance of interest to the IOLA fund by abanking institution pursuant to this section shall be avalid and sufficient release and discharge of any claimsby any person or entity against such banking institutionfor any payment so made, and no action shall bemaintained against any banking institution solely foropening, offering, or maintaining an IOLA account, foraccepting any funds for deposit to any such account orfor remitting any interest to the IOLA fund. 8. Nothing contained in this section shall be construedto require any banking institution to offer, accept ormaintain IOLA accounts. 9. All papers, records, documents or other informationidentifying an attorney, client or beneficial owner of anIOLA account shall be confidential and shall not bedisclosed by a banking institution except with theconsent of the attorney maintaining the account or aspermitted by any law, regulation or administrativerequirement. 10. An attorney or law firm that can establish thatcompliance with subdivision six of this section hasresulted in any banking service charges or fees shall beentitled to reimbursement of such expense from theinterest on lawyer account fund by filing a claim withsupporting documentation with the fund.

State Finance Law Section 97-v.

1. There is hereby established in the custody of the statecomptroller a fiduciary fund to be known as the NewYork interest on lawyer account (IOLA) fund. A boardof trustees shall be appointed to administer the NewYork IOLA fund. 2. The board shall consist of fifteen members appointedby the governor. All members shall be residents of thestate of New York and shall be knowledgeable andsupportive of the delivery of civil legal services to thepoor and the improvement of the administration ofjustice. At least eight of the members shall be attorneyslicensed to practice law in the state of New York. Twomembers shall be appointed upon the recommendationof the temporary president of the senate, at least one ofwhom shall be an attorney; two members shall beappointed upon the recommendation of the speaker ofthe assembly, at least one of whom shall be an attorney;one member shall be appointed upon the

recommendation of the minority leader of the senate;and one member shall be appointed upon therecommendation of the minority leader of the assembly.Two members shall be appointed upon therecommendation of the court of appeals, each of whomshall be an attorney. The governor shall designate oneof the members of the board as chairman.

a. The term of office shall be three years, provided,however, that of the members first appointed, five shallbe appointed for terms expiring on Decemberthirty-first, nineteen hundred eighty-four, five shall beappointed for terms expiring on December thirty-first,nineteen hundred eighty-five and five shall beappointed for terms expiring on December thirty-first,nineteen hundred eighty-six. Vacancies shall be filledin the manner of original appointments for theremainder of the term.

b. The members shall receive no compensation for theirservices as members, but shall be reimbursed for theiractual and necessary expenses incurred in theperformance of their duties.

c. The members shall be considered employees of thestate for the purposes of section seventeen of the publicofficers law.

d. No member of the senate or assembly shall beeligible to serve as a member of the board. 3. a. The board shall have the power to receive, holdand manage any moneys and property received fromany source. It shall distribute funds as grants andcontracts to not-for-profit tax-exempt entities for thepurpose of delivering civil legal services to the poorand for purposes related to the improvement of theadministration of justice, including, but not limited to,the provision of civil legal services to groups currentlyunderserved by legal services, such as the elderly andthe disabled, and the enhancement of civil legalservices to the poor through innovative andcost-effective means, such as volunteer lawyerprograms and support and training services.

b. No less than seventy-five percent of the total fundsdistributed in any fiscal year shall be allocated tonot-for-profit tax-exempt providers for the purpose ofdelivering civil legal services to the poor. The fundsdistributed annually to legal services providers shall beallocated according to the geographical distribution of


poor persons throughout the state based on the latestavailable figures from the United States department ofcommerce, bureau of census, as prescribed by rules andregulations of the board of trustees.

c. The remaining funds shall be allocated for purposesrelated to the improvement of the administration ofjustice, including, but not limited to, the provision ofcivil legal services to groups currently underserved bylegal services, such as the elderly and the disabled, andthe enhancement of civil legal services to the poorthrough innovative and cost-effective means, such asvolunteer lawyer programs and support and trainingservices.

d. The board shall adopt rules and regulations for theadministration of the IOLA fund to carry out thepurposes and provisions of this section and of sectionfour hundred ninety-seven of the judiciary law. Suchregulations shall be adopted in accordance with articletwo of the state administrative procedure act.

e. The board may employ and remove such personnel asit may deem necessary for the performance of itsfunctions and fix their compensation within theamounts made available therefor and may allocatefunds for the actual and necessary nonpersonneladministrative costs of the program. No more than tenpercent of the funds available in any fiscal year shall bespent on personnel and related services, and onnecessary nonpersonnel administrative costs of theprogram provided, however, that such limitations maybe waived by the board by the adoption of a resolutionand such waiver shall remain in effect until the boarddetermines by a subsequent resolution that the programis fully operational.

f. The board shall insure that grants and contracts aremade with not-for-profit providers of civil legalservices for the poor to provide stable, economical andhigh quality delivery of civil legal services to the poorthroughout the state.

g. Notwithstanding any statute or rule to the contrary,the board shall maintain all papers, records, documentsor other information identifying an attorney, client orbeneficial owner of an IOLA account on a private andconfidential basis and shall not disclose suchinformation unless such disclosure is necessary toaccomplish the purposes of this section and section four

hundred ninety-seven of the judiciary law, or unlessdisclosure is pursuant to compulsory legal process.

h. All payments from the IOLA fund shall be made bythe state comptroller upon certification andauthorization of the board of trustees of the fund. 4. a. The board of trustees shall establish by regulationa specific dollar amount equivalent to the cost ofadministering a segregated interest bearing account fora client or beneficial owner. This dollar amount may beused by participating attorneys as a guide whendetermining whether the moneys are qualified funds.

b. The board of trustees shall also establish byregulation the qualifications of a recipient of funds andthe nature and scope of civil legal services to beprovided to poor persons by the funds disbursed underthis section. 5. If it shall appear to the satisfaction of the board oftrustees that, because of a mistake of fact, error incalculation or erroneous interpretation of the provisionsof this chapter or of section four hundred ninety-sevenof the judiciary law, or of any regulation adopted by theboard, a banking institution has remitted to the IOLAfund any moneys not required by such provisions to beremitted, the board shall refund such moneys uponapplication of any aggrieved party. Any such refundshall be paid from the IOLA fund without interest andwithout the deduction of any service charge, and shallbe and constitute a full satisfaction and discharge of anyclaim for such refund.


Dishonored Check Reporting Rule

Banks in New York State which offer fiduciary accounts to attorneys are required toreport all instances of bounced checks on attorney trust, special and escrow accounts. Thereports are forwarded to the New York Lawyers’ Fund for Client Protection, which servesas a statewide clearing house for these reports. Banks have 10 days to withdraw reportsthat have been issued in error. If not withdrawn, the reports are sent to the appropriateAttorney Grievance Committee for investigation. A bounced-check report generallytriggers an audit of the attorney’s trust, special or escrow account. The AppellateDivisions’ uniform court rule is reported at 22 NYCRR Part 1300.1.

Dishonored Check Reporting Rules forAttorney Special, Trust and EscrowAccounts (22 NYCRR 1300.1):

(a) Special bank accounts required by Disciplinary Rule9-102 (22 NYCRR 1200.46) shall be maintained only inbanking institutions which have agreed to providedishonored check reports in accordance with theprovisions of this section.

(b) An agreement to provide dishonored check reportsshall be filed with the Lawyers' Fund for ClientProtection, which shall maintain a central registry of allbanking institutions which have been approved inaccordance with this section, and the current status ofeach such agreement. The agreement shall apply to allbranches of each banking institution that providesspecial bank accounts for attorneys engaged in thepractice of law in this State, and shall not be cancelledby a banking institution except on 30 days' prior writtennotice to the Lawyers' Fund for Client Protection.

(c) A dishonored check report by a banking institutionshall be required whenever a properly payableinstrument is presented against an attorney special, trustor escrow account which contains insufficient availablefunds, and the banking institution dishonors theinstrument for that reason. A properly payableinstrument means an instrument which, if presented inthe normal course of business, is in a form requiringpayment under the laws of the State of New York.

(d) A dishonored check report shall be substantially inthe form of the notice of dishonor which the bankinginstitution customarily forwards to its customer, and

may include a photocopy or a computer-generatedduplicate of such notice.

(e) Dishonored check reports shall be mailed to theLawyers' Fund for Client Protection, 119 WashingtonAvenue, Albany, NY 12210, within five banking daysafter the date of presentment against insufficientavailable funds.

(f) The Lawyers' Fund for Client Protection shall holdeach dishonored check report for 10 business days toenable the banking institution to withdraw a reportprovided by inadvertence or mistake; except that thecuring of an insufficiency of available funds by alawyer or law firm by the deposit of additional fundsshall not constitute reason for withdrawing adishonored check report.

(g) After holding the dishonored check report for 10business days, the Lawyers' Fund for Client Protectionshall forward it to the attorney disciplinary committeefor the judicial department or district havingjurisdiction over the account holder, as indicated by thelaw office or other address on the report, for suchinquiry and action that attorney disciplinary committeedeems appropriate.

(h) Every lawyer admitted to the Bar of the State ofNew York shall be deemed to have consented to thedishonored check reporting requirements of thissection. Lawyers and law firms shall promptly notifytheir banking institutions of existing or new attorneyspecial, trust, or escrow accounts for the purpose offacilitating the implementation and administration ofthe provisions of this section.


Escrow Funds of Missing Clients and Deceased Lawyers

Rule 1.15 (f) of the new Rules of Professional Conduct provides that an application can bemade for a court order directing that unclaimed escrow funds or funds owed to a missing client bedeposited with the Lawyers' Fund for safeguarding and disbursement to persons entitled thereto.To prevent the depletion of nominal deposits, the Fund's policy is to accept deposits of $1,000 orless without a court order.

Rule 1.15 (e) of the Rules of Professional Conduct provides that only an attorney admitted topractice law in New York State shall be an authorized signatory on an attorney's trust, escrow orspecial account in order to protect law clients from the misuse of their money. Practical problemsarise when a sole practitioner dies without a successor signatory. Rule 1.15 (g) of the Rules ofProfessional Conduct permits a Justice of the Supreme Court to designate a successor signatoryfor a deceased attorney's trust, escrow or special account under. The Court may as well directthat money from a deceased attorney's client funds account be disbursed to persons who areentitled thereto, or deposited with the Lawyers' Fund for safeguarding.

These rules prevent the escheat of law client escrow funds to the State which were unclaimed orowed to missing clients as abandoned property. Sample pleadings pursuant to these rules can befound on the Fund's website at www.nylawfund.org in the escrow and ethics material section.

RULE 1.15 (f ) Missing Clients.Whenever any sum of money is payable to a clientand the lawyer is unable to locate the client, thelawyer shall apply to the court in which the actionwas brought if in the unified court system, or, if noaction was commenced in the unified court system,to the Supreme Court in the county in which thelawyer maintains an office for the practice of law,for an order directing payment to the lawyer of anyfees and disbursements that are owed by the clientand the balance, if any, to the Lawyers' Fund forClient Protection for safeguarding and disbursementto persons who are entitled thereto.

RULE 1.15 (g) Designation of Successor Signatories.(1) Upon the death of a lawyer who was the solesignatory on an attorney trust, escrow or specialaccount, an application may be made to the SupremeCourt for an order designating a successorsignatory for such trust, escrow or special account, whoshall be a member of the bar in good standing andadmitted to the practice of law in New York State.

(2) An application to designate a successor signatoryshall be made to the Supreme Court in the

judicial district in which the deceased lawyermaintained an office for the practice of law. Theapplication may be made by the legal representative ofthe deceased lawyer's estate; a lawyer who wasaffiliated with the deceased lawyer in the practice oflaw; any person who has a beneficial interest in suchtrust, escrow or special account; an officer of a city orcounty bar association; or counsel for an attorneydisciplinary committee. No lawyer may charge a legalfee for assisting with an application to designate asuccessor signatory pursuant to this Rule.

(3) The Supreme Court may designate a successorsignatory and may direct the safeguarding of funds fromsuch trust, escrow or special account, and thedisbursement of such funds to persons who are entitledthereto, and may order that funds in such account bedeposited with the Lawyers' Fund for Client Protectionfor safeguarding and disbursement to persons who areentitled thereto.


New York State Bar AssociationCommittee on Professional Ethics

Ethics Opinions

Opinion #90 - 10/7/68 (17-68)

Question

May an attorney who is holding client's funds inescrow deposit those funds in an interest-bearingsavings account?

Opinion

This is largely a question of law rather than ethics,and this Committee does not answer questions oflaw. The lawyer's professional duty is to treat thefunds in all respects as the client's property and ifany income is realized on the funds, it would, ofcourse belong to the client. [N.Y.City 181 and 590;ABA Inf. 859.)

Whether it is proper to deposit the funds in aninterest-bearing savings account will depend uponthe circumstances. In some cases the client maybelieve he has the right of immediate withdrawalnot subject to the notice and waiting period whichsometimes applies to savings accounts. In somecases, the right of immediate withdrawal may beimmaterial and it would be to the client's advantageto have the funds draw interest. Basically, it is amatter of the attorney's authority. The safestprocedure would be to have the client's specificinstructions whenever possible.

Opinion 532 - 5/27/81 (39-80)

Question

May a lawyer representing a client in a transactionin which the lawyer serves as an escrow agentaccept or seek as compensation for such service theinterest earned on funds held in escrow?

Opinion

The question comes to this Committee in thecontext of a specific inquiry as to the ethicalpropriety of a lawyer including in a real estatecontract a clause that provides:

“The deposit monies received pursuant to thiscontract shall be held in escrow by Seller'sattorneys, pending close of title or until earliertermination pursuant to the terms hereof, in aninterest bearing savings account with the interestaccruing thereon, if any, to belong to and to beretained by said attorneys to cover the cost andexpense of administrating [sic] such escrowaccount, without being required to account for theamount of interest to either Seller or Purchaser.”

In the opinion of the Committee it would beethically improper under the Code for a lawyer toaccept or seek the interest earned on funds held inan escrow account as compensation for serving asan escrow agent. Such a fee arrangement presentsso great a danger of unfairness, deception,overreaching and conflict of interest, or theappearance thereof, that we find any sucharrangement per se improper under the standardsincorporated into such Code provisions as Canons5 and 9, EC 2-17, EC 2-18, EC 5-3, EC 9-,5, EC 9-6, DR 2-106 (A), and DR 9-102(A) and (B). Cf.,DR 5-104(A).

A recent opinion, N.Y. City 79-48 (1980),identified a number of the ethical dangers involvedwhere a lawyer seeks to enter into an agreement,which would permit the lawyer to retain escrowinterest as compensation for "the cost and expenseof administering [an] escrow account." Thisopinion, inter alia, states:

“[B]ecause of the fiduciary nature of the attorney--client relationship, agreements between lawyer andclient where the attorney may be in the superiorbargaining position, present a clear danger ofoverreaching.... The attorney bears the burden ofdemonstrating that the agreement was fair and thatit was made by the client with full knowledge of allmaterial circumstances known to the attorney....


“Several aspects of the proposed clause presentproblems of fairness and adequacy of disclosure.Use of the phrase ‘to defray the cost and expense ofadministering such escrow account’ may wellmislead the client, since it is likely that in all butthe most unusual situations, the costs ofadministration would be negligible and the interestaccrued would far exceed such costs. For the samereason, the clause might result in a violation of DR2-106(A), which prohibits a lawyer from enteringinto an agreement for, charging or collecting aclearly excessive fee.

“Use of the proposed clause may also impair thelawyer's ability to exercise independentprofessional judgment on behalf of a client asrequired by Canon 5, since the lawyer will have afinancial interest in delaying the event which wouldterminate the escrow.

N.Y. City 79-48 then concluded:

“[W]hile... use of the proposed clause would [not]be improper per se, we do believe that it cannotproperly be used without the exercise of extremecaution to ensure that it is fair under the particularcircumstances of the representation and that theclient has given his or her fully informed consent tothe arrangement.”

Our Committee agrees that N.Y. City 79-48correctly identifies the serious dangers ofunfairness, deception, overreaching and conflict ofinterest involved in agreements permitting a lawyerto retain the interest on escrowed funds. Wedisagree, however, with the opinion's conclusionthat the dangers are not so great as to requireinterpreting the Code as imposing a per se pro-hibition against such fee arrangements. In servingas an escrow agent the lawyer is a fiduciary. Anyprovision which permits possible self-dealing withan escrow fund should be rejected unless there issome strong countervailing consideration. None hasbeen shown here. The potential for abuse, or atleast the appearance thereof, is great. We can findno countervailing interest which would justify thistype of arrangement.

When a lawyer serves as an escrow agent, hisobligations are those of a trustee. Farago v. Burke,262 N.Y. 229, 233; 186 N.E. 683,684 (1933); seealso, Herman v. Dixon, 71 Misc. 2d 1057, 1059,338 N.Y. 2d 139, 142 (Civil Ct. N.Y.C. 1972) andcases therein cited. The lawyer escrow agent mustmeet the same fiduciary and professional standardsthat are mandated for lawyers as well as for trusteeswith respect to the preservation, safekeeping anduse of client funds and of trust property. Theseinclude maintaining proper trust accounts for allsuch funds, not commingling them with his ownfunds, and not using them for his own benefit. EC9-5, DR 9- 102(A) and (B). See also former Canon9; Drinker, Legal Ethics, pp. 89-92 (1953); Scott onTrusts, §§170.17, 180.2 (3rd ed. 1967).

Ethics opinions either requiring an accounting toclients for interest earned on client funds orcondemning the retention of such interest "todefray expenses of maintaining the account" or "tooffset... the expense of running the account"include N.Y. State 90 (1968); N.Y. City 181(1931); ABA Inf. 991 (1967); ABA Inf. 545(1962); Arizona 225, 6 Ariz. B.J. 36 (1970), Maru5979 (1970 Supp.); Florida 72-13 (1972), Maru8157 (1975 Supp.); Massachusetts 74-6, 59 Mass.L.Q. 298 1974), Maru 8653 (l975 Supp.); NorthCarolina Opinion CPR 30, 21 N.C. Bar 15 (1974),Maru 9624 (1975 Supp.); and Los Angeles Inf.1961-7, Maru 7782 (1975 Supp.)

Although we recognize, as do some of the abovecited opinions, that no impropriety would beinvolved in a lawyer making a reasonable chargefor escrow or administrative expenses, the fiduciarynature of the lawyer's role makes it especiallyinappropriate for a lawyer to ask parties to a realestate transaction, one of whom the lawyerrepresents, to approve an escrow compensationagreement measured by interest earned onescrowed funds.

While we interpret the Code as requiring a per seprohibition against retaining interest earned onescrowed funds in the circumstances stated, werecognize a possible distinction where interest ispaid on a special account in which a lawyer


deposits such non-escrow client funds as advancesfor costs, expenses or fees not yet earned, or onother client funds which are to be promptly androutinely disbursed. Such funds should, of course,be kept in an identifiable client account, in whichthe funds of a number of different clients may prop-erly be deposited. EC 9-5, DR 9-102 (A). Wherethe amount of interest allocable to any one client'saccount is relatively small in relation to thebookkeeping expense which would be required todetermine the precise amount of interest earned asof any given date, it would not be inappropriate fora lawyer and client to agree that the amount ofinterest earned could be approximated and appliedagainst any fees or charges owed to, the lawyer.Cf., Massachusetts 74-6, supra, with N.Y. State 90,supra.

For the reasons stated, the question posed is

answered in the negative.

Opinion 554 - 11/21/83 (22-83)

Question

May a lawyer participate in a program establishedby state statute to provide financial assistance tocivil legal services programs and for other purposesaffecting the administration of justice throughdeposit in a commingled interest-bearing trustaccount of client funds held for a short period oftime or nominal in amount?

Opinion

The New York State Bar Association’s SpecialCommittee to study Alternative Sources of Fundingfor the New York Legal Services Council, havingsupported the enactment of legislation which wouldestablish a non-mandatory program to providefinancial support for legal services and otherpurposes through deposit by lawyers in an interest-bearing trust account ("IOLA program") of clientfunds held for a short period of time or nominal inamount, asks what would be the ethical obligations

of an attorney who elects to participate in the IOLAprogram.

Over the past several years concern has mounted inthe legal community as to how best to meet theneed to provide civil legal assistance to the poor inthe face of substantial cutbacks in federal fundingof programs providing these services. In a numberof states, programs have been proposed, and insome cases implemented, to provide financialsupport for these programs and other similar publicservice projects from interest earned on lawyers'trust accounts in depository institutions. Ethicalquestions arise as to the propriety of depositingclient funds in such a commingled trust account.

A basic tenet of general application with respect tothe lawyer-client relationship is contained in DR 9-102, which requires that funds deposited in alawyer's trust account, which by definition are theclient's funds, be kept separate and apart from thelawyer's funds and that any interest earned on thosefunds belongs to the clients. N.Y. State 90 (1968);N.Y. City 81-68 (1982); N.Y. City 79-48 (1980). Inmost instances these funds are held by an attorneyfor a short period of time to be used for a specificpurpose by the attorney on behalf of the client.Generally separate accounts are not established;rather, the funds are commingled with other clientfunds, but because suballocation of interest isneither practical nor cost-effective the funds areheld in non-interest bearing accounts. However, ifany interest is earned by these accounts or on anyseparate trust account maintained by a lawyer forthe benefit of a client, that interest, absent theclient's consent, belongs to the client. DR 9-102(B);N.Y. City 81-68 (1982).

Where a lawyer holds a sum for a client which issufficient to earn interest, the lawyer has a fiduciaryobligation to invest that sum, 2 Scott, Law ofTrusts, Sections 180.3, 181 (3d ed. 1967), and anethical obligation to notify the client of receipt ofthe funds, and any interest thereon, maintainadequate records and make prompt payment of bothprincipal and interest. DR 9-102 (B)(1),(3),(4).


The question remains whether this ethical analysisis applicable to interest earned on clients' funds, toonominal in amount or held for too short a period oftime to generate interest in a separate account, butwhich when aggregated with other client funds maygenerate interest which by statute is to be paid totax-exempt organizations for the support of legalservices or other purposes defined by thelegislature.

The question can be resolved by examining wheth-er or not the income generated by the aggregatedfunds can be classified as clients' property. Since itis currently not economically feasible for financialinstitutions to suballocate these funds and provideclients with interest, it can be fairly said that theclient does not have a reasonable expectation ofreceiving interest sufficient to support a claim ofentitlement. Where other similar programs havebeen established the Internal Revenue Service hasruled that as long as the client has no right todetermine whether the funds will be placed in thetrust account the income generated is not taxable tothe client. Thus, courts (see Matter of Interest onTrust Accounts, 402 So. 2d 389 (Fla. 1981)),legislatures and other ethics committees (see ABA348 (1982)) have concluded that the ethicalconstraints set forth in Canon 9 are not applicableto interest so generated.

Under the plan adopted by statute in New York thelawyer who elects to participate in the program willcontinue to have the same fiduciary and ethicalresponsibilities with respect to treatment of clients'funds that are likely to generate income for theclient. The decision as to which funds may beappropriately placed in the IOLA program is left tothe discretion of the lawyer to whom the funds areentrusted.

Judiciary Law §497(5) expressly provides that "Noattorney shall be. . . held to answer for a charge ofprofessional misconduct because of a deposit ofmoneys to an IOLA account pursuant to a judgmentin good faith that such moneys were qualifiedfunds." See Judiciary Law §497(2) for definition of"qualified funds." Accordingly, there can be noethical impropriety in the event an attorney makes a

deposit in an IOLA account under suchcircumstances. N.Y. State 415 (1975); cf. N.Y.State 323 (1974); N.Y. State 328 (1974).

For the reasons stated, the question posed isanswered in the affirmative.

Opinion 570 - 6/7/85 (37-84)

Questions

(1) Must a lawyer deposit advance payment of legalfees in a trust account as funds of a client, whensuch payments are refundable to the extent notearned?

(2) Is a lawyer prohibited from depositing advancepayments of legal fees in a trust account as funds ofa client?

(3) Must a lawyer remit to the client interest earnedon advance payments of legal fees?

Opinion

A lawyer has adopted the common practice ofreceiving from a new client advance payment oflegal fees expected to be earned in the course of therepresentation. To the extent that the fees thus ad-vanced are not earned, in whole or in part, duringthe representation, the lawyer agrees to return themto the client.1

The lawyer assumes that these advance feepayments are not client funds and that they are notrequired to be deposited in a client trust account,although it has been the lawyer's practice to depositthem in a trust account nevertheless. The lawyerasks whether she may retain any interest earned onthese advance fee payments.

The answer to this inquiry turns upon whether thelawyer is correct in the assumption that advancepayments of legal fees are not client funds and arenot required to be deposited in a client trust accountpursuant to DR 9-102(A). If, contrary to the


lawyer’s assumption, the fee advances are clientfunds, it is clear that any interest earned on thembelongs to the client and not the lawyer. E.g., ABA348, at 4-6 (1982); N.Y. State 532 (1981); NassauCounty 84-2 (1984); cf. N.Y. City 79-48 (1980).

We conclude that advance payments of legal feesneed not be considered client funds and need not bedeposited in a client trust account, and that anyinterest earned on fee advances may therefore beretained by the lawyer. Of course, the lawyer isobliged promptly to return any portion of the feeadvance that is not earned in rendering legalservices. DR 2-110(A)(3). If the lawyer treatsadvance payments of fees as the lawyer's own (andtherefore retains any interest earned on them), itfollows that the lawyer may not deposit the feeadvances in a client trust account, as this wouldconstitute impermissible commingling. On theother hand, the lawyer may agree to treat advancepayments of legal fees as client funds and depositthem in a client trust account; in that event anyinterest earned on the funds while in the client trustaccount must be remitted to the client.

(1) Must Fee Advances Be Deposited in a TrustAccount as Client Funds?

DR 9-102(A) provides:

“All funds of clients paid to a lawyer or law firm,other than advances for costs and expenses, shall bedeposited in one or more identifiable bank accountsmaintained in the state in which the law office issituated and no funds belonging to the lawyer orlaw firm shall be deposited therein except asfollows:

1. Funds reasonably sufficient to pay bank chargesmay be deposited therein.

2. Funds belonging in part to a client and in partpresently or potentially to the lawyer or law firmmust be deposited therein, but the portionbelonging to the lawyer or law firm may bewithdrawn when due unless the right of the lawyeror law firm to receive it is disputed by the client, in

which event the disputed portion shall not bewithdrawn until the dispute is finally resolved.”

Lawyers frequently come into possession of thefunds and property of others in a wide variety ofsituations. They may receive the proceeds of asettlement or judgment, a distribution from anestate or trust, or funds to be distributed uponclosing of a real estate conveyance or sale of abusiness, to mention but a few examples. Suchfunds clearly are not the property of the lawyer,even though in some circumstances the lawyer's feemay be payable out of them or the lawyer may havea lien upon them to secure payment of a fee.

DR 9-102 (A) is an expression of the lawyer's duty,in common with all fiduciaries, to preserve theidentity of property belonging to others and not tocommingle others' property with the lawyer's own.E.g., Restatement (Second) of Agency §§ 381-821207, 1334-35 (1957). Even though DR 9-102(A)by its terms is applicable only to the funds andproperty of a client, lawyers nevertheless are legallyand ethically required to observe the same duty ofsegregation with respect to the property of thirdparties. E.g., In re Lurie, 113 Ariz. 95, 98, 546 P.2d1126, 1129 (1976); Worth v. State Bar, 17 Cal. 3d337, 341, 551 P.2d 16, 18 (1976); In re Kramer, 92Ill. 2d 305, 310, 442 N.E.2d 171, 173 (1982); In reGallop, 85 N.J. 317, 426 A.2d 509 (1981); N.Y.City 82-8 (1983).

DR 9-102(A) parallels the normal common lawrule against commingling, to which specificreference is made in the drafters' notes:

“[C]ommingling is committed when a client'smoney is intermingled with that of his attorney andits separate identity lost so that it may be used forthe attorney's personal expenses or subjected toclaims of his creditors. . . The rule againstcommingling was adopted to provide against theprobability in some cases, the possibility in manycases, and the danger in all cases that suchcommingling will result in the loss of clients'money. ABA Code of Professional ResponsibilityDR 9-102 n.10 (1969), quoting Black v. State Bar,


57 Cal. 2d 219, 225-26, 368 P.2d 118, 122 (1962).”

Textually, it appears that the drafters of the Code ofProfessional Responsibility did not consideradvance payments of fees to be client fundsnecessitating their deposit in a trust account. DR 9-102(A) makes no explicit reference to advance feepayments. The Code does make explicit referenceto advance fee payments in DR 2-110(A)(3), whichrequires that any unearned fee advance be promptlyrefunded upon termination of the representation; itdoes not require that the advance be deposited in atrust account until earned. Indeed, DR 2-110 treatsfee advances and client property as different things.It provides specifically in DR 2-110(A)(2) for thereturn of all client property to the client uponwithdrawal from employment, and then providesseparately for the refund of any unearned feeadvance in DR 2-110 (A)(3).

Nor is there any suggestion in any of the Code'snumerous provisions dealing with legal fees orclient funds that advance payments of legal fees aredeemed client funds to be deposited in a trustaccount. See generally DR 2-103(C)-(D), 2-106, 2-107, 2-110 (A)(3), 3-102, 4-101(C)(4), 5-103 (A),5-106 (A) ; EC 2-8, 2-15 to -25, 2-32, 9-5.

Further it strains the normal meaning of words tointerpret the phrase "funds of clients" as embracingadvance legal fees paid to the lawyer. Although thelawyer receiving an advance fee payment has alegal and ethical obligation to render the servicesagreed upon and to refund any unearned portion ofthe fee advanced, it does not follow that theadvance remains client property until earned.Normally, when one pays in advance for services tobe rendered or property to be delivered, ownershipof the funds passes upon payment, absent anexpress agreement that the payment be held in trustor escrow, and notwithstanding the payee'sobligation to perform or to refund the payment. Thelawyers who drafted the Code should not lightly beassumed to have overlooked these fundamentalprinciples in choosing the language of DR 9- 102(A).

We are also mindful that the very reason that manylawyers require advance fee payments in the firstplace is so that they will not be subject to a client'srefusal to pay for legal services after they arerendered. If fee advances were required to bedeposited in a client trust account, it would followthat this purpose of requiring advance paymentcould be easily defeated by a client who, afterservices are rendered, disputes a justly earned fee.Under DR 9-102(A)(2), the disputed portion of thefee would have to be retained in the client trustaccount, and would not be available to the lawyer,until the dispute was resolved.2

Our conclusion that legal fees paid in advance neednot be considered client funds and therefore neednot be deposited in a client trust account issupported by some, albeit a minority, of the ethicscommittee opinions that have considered this ques-tion. D.C. 113 (1982), 110 Daily Washington L.Rptr. 2772 (1982), digested in Lawyers' Man. Prof.Cond. 801:2306 (ABA/BNA)(1984); Fla. 76-27(1976), Fla. Bar Comm. on Professional Ethics,Selected Opinions 88 (1977), indexed in Maru'sDigest No. 10867 (Supp. 1980); Md. 83-62 (1983),digested in Lawyers' Man. Prof. Cond. 801:4330(ABA/BNA) (1984).

We recognize that our conclusion is contrary to themajority of opinions by other ethics committeesthat have addressed the issue, which would requirethat advance payments of legal fees be deposited ina client trust account and retained there untilearned. Ind. 4-197,7, 21 Res Gestae 402 (1977),indexed in Maru's Digest No. 11061 (Supp. 19.80);Mass. 78-11, 63 Mass. L. Rev. 231 (1978), indexedin Maru's Digest No. 11441 (Supp. 1980); Ore. 251Opinion 570 (1973), indexed in Maru's Digest No.9812 (Supp. 1975);3 Tex. 391 (1978), 41 Tex. B.J.322 (1978), indexed in Maru's Digest No. 12749(Supp. 1980); Va. 186-A (1981); San Francisco Inf.1973-14 (1973), indexed in Maru's Digest No.10669 (Supp. 1980). For the reasons set forthabove, we decline to follow these opinions.4

Based on the foregoing, we must clarify the dictumin N.Y. State 532, at 3-4 (1981), which refers to"advances for costs, expenses or fees not yet


earned," among other things, and states: "Suchfunds should, of course, be kept in an identifiableclient account," citing DR 9-102(A). Insofar as thisdictum states that advances for costs and expensesmust be kept in a client trust account, it isinconsistent with DR 9-102(A), which specificallyexempts "advances for costs and expenses." To theextent this dictum would impose the samerequirement upon advances for legal fees, it iscontrary to our analysis set forth above.

(2) May Fee Advances Be Deposited in a TrustAccount as Client Funds?

As seen from the above analysis, the Code does notrequire a lawyer to treat advance payments of legalfees as client funds. Nevertheless, we recognizethat many lawyers consider it more appropriate totreat advances for unearned fees as client fundsuntil the fees are earned through services rendered.We conclude that DR 9-102(A) does not prohibitlawyers from agreeing with their clients to treat feeadvances as client funds and depositing them in aclient trust account. Where a lawyer agrees to treatadvance fee payments in this manner, all of therequirements of DR 9-102 applicable to clientfunds and trust accounts would govern. Theseinclude the prohibition against withdrawing anyportion of the lawyers' fee that is disputed by theclient, DR 9-102(A)(2), and all of the detailedaccounting, recordkeeping, and reportingrequirements of DR 9-102(B) and of the applicableAppellate Division rules,5 with which all lawyersshould be familiar.

Absent an agreement to treat an advance feepayment as client property, it would beinappropriate for the lawyer to deposit advance feesin a client trust account, as this would constitutecommingling prohibited by DR 9-102(A). Further,once a lawyer agrees to treat a fee advance as clientproperty, the lawyer is bound by that agreement andall of its consequences.

(3) Who Earns Interest on Fee Advances?

If a lawyer does not agree to treat a fee advance asclient property, the lawyer may use the money as

the lawyer chooses (except that the lawyer may notdeposit it in a client trust account), subject only tothe requirement that any unearned fee paid inadvance be promptly refunded to the client upontermination of the employment. DR 2-110(A)(3). Inthat case, any interest earned on the advancepayment of fees would belong to the lawyer.

If the lawyer agrees to treat an advance fee paymentas client property, it follows that any interest earnedon it must be reported and remitted to the client.E.g., ABA 348, at 4-6 (1982); N.Y. State 532(1981); Nassau County 84-2 (1984); cf. N.Y. City79-48 (1980).

Conclusion

For the reasons stated, and subject to the qualifica-tions set forth above, the questions posed areanswered in the negative._______________

1 Although commonly referred to as a "retainer,"such an advance payment of legal fees that is notearned until legal services are performed and that isrefundable to the extent not earned should bedistinguished from the "classic retainer" or "generalretainer” more common in earlier times. Such aretainer is a payment to the lawyer for beingavailable to the client in the future and for beingunavailable to the client's opponents, and is earnedupon receipt. See generally Baranowski v. StateBar, 24 Cal. 3d 153, 164 n.4, 593 P.2d 613, 618n.4, 154 Cal. Rptr. 752, 757 n.4 (1979); Greenbergv. Remick & Co., 230 N.Y. 70, 75, 129 N.E. 211,212 (1920); Conover v. West Jersey Mortgage Co.,96 N.J. Eq. 441, 451, 126 A. 855, 859 (1924);Bright v. Turner, 205 Ky. 188, 191, 265 S.W. 627,628 (1924); Union Surety Co. v. Tenny, 200 Ill.349, 353, 65 N.E.688,689 (1902); Severance vBizallion, 67 Misc. 103, 106, 121 N.Y.S. 627, 629(App. T. 1st Dep’t 1910); Jacobson v. Sassower113 Misc. 2d 279, 281, 452 N.Y.S.2d 981 983(Civ. Ct. N.Y. Co. 1982), aff'd, 122 Misc. 2d 862474 N.Y.S.2d 167 (App. T. lst Dep't (1983); H.Drinker, Legal Ethics 172 (1953).


2 Of course, even if fees paid in advance aredeposited in a lawyer's general account, a clientcould still dispute, justly or unjustly, whether thefee was earned. The difference is that the lawyerwould not be deprived of all use of the funds pend-ing resolution of the dispute, a result that thelawyer and client bargained for at the outset of therepresentation in agreeing to advance payment ofthe fee.

3 Ore. 251 cites as support Ore. 205 (1972),indexed in Maru's Digest No. 9766 (Supp. 1975).however, Ore. 205 was withdrawn on December15, 1972. Maru's Digest at 444 (Supp. 1975).

4 We are also aware that a view contrary to thatadopted here is taken in the textual portion of theLawyers' Manual On Professional Conduct,45:104-05 (ABA/BNA)(1984). The textual materialrelies on some of the ethics committee opinionscited above and also relies heavily on State v.Hilton, 217 Kan. 694, 538 P.2d 977 (1975). We donot agree with the statements in that textualmaterial as to what the court said or held in State v.Hilton.

5 22 NYCRR 603.15 (lst Dep't); 22 NYCRR§691.l2 (2d Dep't); 22 NYCRR §§ 1022.5, 1022.7(4th Dep't).

6 We do not consider whether or under whatcircumstances a lawyer's receipt of fee advancesmay constitute income subject to taxation.

Opinion - 575 - 4/18/86 (46-85)

Question

When an attorney representing a party to a realestate transaction also acts as escrow agent, whatethical duties does the attorney have to place thecontract deposit in an interest-bearing account?

Opinion

A lawyer acting as attorney for the seller in a realestate transaction has received the buyer's contract

deposit, and is holding the funds as escrowagent/attorney. The lawyer asks whether he has anethical duty to deposit the funds in an interest-bearing account.

It is settled that an attorney for one party to a realestate transaction my act as an escrow agent forboth sides with full disclosure of the facts and withthe consent of both parties. ABA Inf. 923 (1966) Inthat capacity, the attorney is merely carrying out theescrow instructions of both parties. In N.Y. State ,532 (1981), where we opined that a real estatecontract permitting the lawyer/escrow agent toretain interest earned on escrow funds ascompensation for administrative costs and expenseswas per se improper, we noted as follows:

“When a lawyer serves as an escrow agent, hisobligations are those of a trustee. Farago v. Burke,282 N.Y. 229, 233, 186 N.E. 683, 684 (1933); seealso, Helman v. Dixon, 71 Misc. 2d 1057, 1059,338 N.Y.S.2d 139,142 (Civil Ct. N.Y.C. 1972, andcases therein cited. The lawyer/escrow agent mustmeet the same fiduciary and professional standardsthat are mandated for lawyers as well as for trusteeswith respect to the preservation, safekeeping anduse of client funds and of trust property."

The professional standards mandated for lawyerswith respect to clients' funds place emphasis onusing one or more identifiable bank accountswithout commingling funds belonging to thelawyer, maintaining complete records andrendering appropriate accounts to the client, andpromptly paying such funds as requested by theclient. See DR 9-102. The Code of ProfessionalResponsibility is silent as to whether the account inwhich such funds are deposited should be interest-bearing. In N.Y. State 90 (1968), at a time whenwithdrawals from interest-bearing bank accountswere generally subject to notice and a waitingperiod, this Committee noted that such restrictionsmay conflict with the client's desire and right toprompt payment (cf. DR 9-102(B)(4)) and advisedobtaining the client's specific instructions beforedepositing the funds in an interest-bearing account.


In ABA 348(1982), the Committee on Ethics andProfessional Responsibility of the American BarAssociation addressed a range of questions onplacing clients funds at interest. That Committeenoted that client funds are generally commingledand left un-invested because of the administrativeexpense of establishing a separate account for eachclient and the impracticability of calculating andallocating interest on commingled funds.

However, consistent with our comments in N.Y.State 554 (1983), the A.B.A. Committee concludedthat “where the amount of funds held for a specificclient and the expected holding period make itobvious that the interest which would be earnedwould exceed the lawyer's administrative costs andbank charges, the lawyer should consult the clientand follow the client’s instructions as to investing."ABA 348(1982). See also N.Y. State 554(1983)("where a lawyer holds a sum for a client which issufficient to earn interest, the lawyer has a fiduciaryobligation to invest that sum, and an ethicalobligation to notify the client of receipt of thefunds, and any interest thereon, maintain adequaterecords, and make prompt payments of bothprincipal and interest" ); N.Y. State 532(1981) (re-quiring an accounting to clients for interest earnedon client funds); N.Y. City 81-68(1981)(interestearned on client funds belongs to the client). Seegenerally DR 9-102(B)(1),(3),(4).

The same principles apply to a lawyer acting asescrow agent/attorney, whether the lawyer is actingfor the seller or the buyer As an escrow agent, theattorney owes fiduciary duties to both parties to thecontract with respect to the preservation,safekeeping and use of client funds and of trustproperty. See N.Y. State 532 (1981); N.Y. City 80-56 (1980); cf., In re Solomon, 87 A.D.2d 137, 450N.Y.S.2d 804 (lst Dep't 1982) (sellers' attorneydisciplined for withdrawing funds from escrowaccount without authorization despite lack of harmto buyers or sellers).

In the opinion of the Committee, when an attorneyis requested to act as escrow agent/attorney for acontract deposit sufficient in amount that it mightwarrant being placed in an interest-bearing account

if it were client's funds, the attorney shouldrecommend to the contracting parties that specificinstructions be included in the escrow agreementon whether such funds should be placed in aninterest-bearing account and how the interestearned should be apportioned between the parties.In making this recommendation, the attorneyshould consider the amount of the deposit, theexpected holding period, and the costs and ex-penses involved in making such a deposit. SeeNassau County 85-9(1985). Where the contractpursuant to which the deposit is made is silentabout placing the funds at interest but the amountthereof and other circumstances might warrant itsbeing placed at interest, the attorney should consultwith the parties for their specific instructions. If theparties then are unable to agree, the duty of anescrow agent/attorney with respect to placing thefunds at interest ceases to be an ethical questionand becomes one as to what, if any, duties in thatregard are imposed by law in light of the terms ofthe escrow agreement. This Committee does notopine on questions of law.

Of course, as discussed above, the escrowagent/attorney has the same duties respectingrecord keeping and accounting as an attorney haswith respect to client funds.

Opinion 582 - 5/4/87 (13-87)

Question

Where an attorney receives a settlement check onbehalf of a client and deposits it in an interest-bearing escrow account, is it permissible for theattorney to retain the interest earned on the fundsfrom the date of deposit of the check into theaccount until the date the settlement check clears?

Opinion

An attorney proposes to maintain an interest-bearing escrow account which would be used solelyfor the deposit of checks representing settlementsof personal injury cases. A check payable to the


order of the client for the client's full share of thesettlement amount would be issued on the date thatthe settlement check "cleared". Interest would bepaid to the client on a daily basis from the date thesettlement check cleared until the date the check tothe client was charged to the escrow account.Personal funds of the attorney would not becommingled in this account and clients would signa written agreement to the above arrangement. Inthe event that a significant amount of interest waspaid to the client, Form 1087 would be filed by theattorney with the Internal Revenue Service.

This Committee held in N.Y. State 532 (1981) thatit is ethically improper for a lawyer to receiveinterest earned on funds held in an escrow accountas compensation for serving as the escrow agent.We stated in that opinion, “Such a fee arrangementpresents so great a danger of unfairness, deception,overreaching and conflict of interest or theappearance thereof, that we find any such arrange-ment per se improper under the standardsincorporated into such Code provisions as Canons5 and 9, EC 2-17 EC 2-18, EC 5-3, EC 9-5, EC 9-6, DR 2- 106(A), and DR 9-102(A) and (B)."

It is the opinion of the Committee that N.Y. State532 is fully applicable to the facts set forth herein.Under the proposed arrangement the interest paidto the attorney would clearly be compensatory forthe attorney's service as escrow agent.

While we recognized in N.Y. State 532 that itmight be permissible for an attorney subject to theclient's consent, to retain the interest on client fundswhich are to be promptly and routinely disbursed,that statement was limited to instances "[w]here theamount of interest allocable to any one client'saccount is relatively small in relation to thebookkeeping expense which would be required todetermine the precise amount of interest earned asof any given date." Id. Under the proposedarrangement, the attorney is willing to calculate aclient's interest on a daily basis commencing withthe date the settlement money becomes available.We therefore, see no reason why it should beadministratively burdensome for the attorney to

calculate the interest earned from the date ofdeposit.

For the reasons stated the question posed isanswered in the negative.

Opinion 600 - 5/16/89 (2-88)

Questions

1. May an attorney use a credit line supported bychecks deposited in a multiple-client escrowaccount where the bank would provide immediatecredit in the form of bank cashier's checks orcertified checks based on the attorney's credit-worthiness and the balance in the account?

2. May an attorney use an "attorney exchangeaccount" in which the proceeds of a single closingare deposited, against which funds the bank wouldprovide immediate credit in the form of a bankcashier's check if the bank relies solely on thepersonal credit-worthiness of the attorney?

Opinion

A lawyer proposes to use one or both of theproducts described above that a bank may offer toits attorney customers. The first arrangement isimpermissible in that it would involve improperuse of other clients' funds in the escrow account forthe benefit of the client for whom the check isdrawn. DR 9-102. Were the check to bounce, thebank would be protected against any loss by thedeposits in the multiple client escrow account, butthat use of the funds of Client A to benefit Client Bwould be an impermissible conversion. See Pa. Op.85-172 (1986), indexed in ABA/BNA 901:7301;N.C. Op. 358 (1984), indexed in ABA/BNA801:6614; S.C. Op. 20-78, indexed in Maru's No.12726 (1980).

In the second arrangement, however, the funds ofother clients are not involved. Furthermore, sinceno funds of the lawyer are actually deposited in theescrow account, there would be no impermissible


commingling of the lawyer's and client's funds. SeeDR 9-102 and the rules of the four JudicialDepartments, which each require that a client'sfunds be identified and deposited separately fromthe lawyer’s funds, remaining at all times the prop-erty of the client. 22 NYCRR 6O3.15, 691.12,806.8, 1022.5.

This second service is tantamount to a lawyerlending funds to a client or guaranteeing funds ad-vanced by the bank. In litigated matters, such anarrangement is prohibited by DR 3-103(B). Thereis no express prohibition against a lawyer lending aclient funds in connection with a non-litigatedmatter. C. Wolfram, Modern Legal Ethics 507 n. 75(1986). But see ABA Inf. 1170 (1970). Since thelawyer may directly lend or guarantee the funds tothe client, it is not per se unethical for a lawyer topermit the bank to use the lawyer's credit-worthiness to provide immediate credit to a clientbased on a single closing account. Washington Op.177, indexed in ABA/BNA 801:8902. In order touse this service, however, the lawyer must explainthe arrangement to the client who must thenconsent. Pa. Op. 85-172 (1986), indexed inABA/BNA 901:7301. DR 5-104(A) provides:

“A lawyer shall not enter into a businesstransaction with a client if they have differinginterests therein and if the client expects the lawyerto exercise his professional judgment therein forthe protection of the client, unless the client hasconsented after full disclosure.”

The lawyer and the client have potentially differinginterests in the loan transaction. Should the payornot make good on the deposited check, the bankmay proceed against the lawyer who would in turnseek indemnification from the client. Therefore, thelawyer should enter into this arrangement onlywhere the lawyer is confident that the clientunderstands the ramifications and the potentialconflict, including the fact that the lawyer mayhave to withdraw from representation at some pointin the future. In addition, the client must fullycomprehend his obligations to the lawyer. Theextent of the disclosure will depend on the client'sexperience and sophistication and it may be

impossible in some situations to obtain knowingconsent.

Despite the fact that the lawyer is extending abenefit to the client, it is important that he exercisecaution when considering personal involvement inclient affairs.

For the reasons stated above, Question 1 is an-swered in the negative and, subject to thequalifications set forth, Question 2 is answered inthe affirmative.

Opinion 680 - 1/10/96 (57-95)

Question

May lawyers comply with the mandatory record-retention provisions of the Code by storing recordsin the form of computer-generated images or byother electronic means?

Opinion

Canon 9 of the New York Lawyer's Code ofProfessional Responsibility contains, in DR 9-102(D), mandatory record-retention requirementsapplicable to all members of the New York bar.Retainer agreements, bills to clients, bankstatements, and records of transactions in escrowaccounts are among the categories of records thatthe Code requires be maintained "for seven yearsafter the events which they record." In addition, DR9-102(H) provides that all such records must be"located, or made available at the principal NewYork State office of the lawyers subject hereto" forproduction in connection with disciplinaryproceedings.

With the increasing computerization of the lawoffice, and the recent development of electronicimaging and storage technology, the questionnaturally arises as to whether New York lawyersare required, as an ethical matter, to retain recordsin original, hard-copy form for the seven-yearperiod provided in the Code, or whether the Code


permits record retention by more technologicallyadvanced means.

We take it that the possibly higher cost of creatingrecords in the form of (or transferring existingrecords to) computer images may be more thanoffset by the savings in storage costs attributable todramatically reducing the volume of the retainedrecords.

Our review of the pertinent Disciplinary Rulepersuades us that the Code permits some records tobe maintained in the form of computer images,while other records must, as the Code is nowwritten, be retained in their original, hard-copyform. We note that DR 9-102(D)(3)-(7) referexplicitly to "copies" of the documents referred toin those subsections (e.g., retainer andcompensation agreements, statements to clients orothers showing disbursements of funds, bills toclients), while DR 9-102(D)(8) refers not to"copies" but explicitly to: "all checkbooks andcheckstubs, bank statements, prenumberedcanceled checks and duplicate deposit slips.... “.

We conclude that the items referred to in DR 9-102(D)(8) must be retained in just the formdescribed by the Code; that is, the actual check-books, checkstubs, bank statements and the otherdocuments referred to in that subsection must beretained as is, in paper form, for the seven-yearperiod prescribed by that Rule.

We also conclude, however, that those documentsfor which the Rule explicitly permits "copies" to beretained may be stored in the form of computerimages. In reaching this conclusion, we have reliedupon our understanding that the computer imagesare stored electronically as images on storagemedia (such as CD-ROMs) that are "read-only" andtherefore are not any more likely to be altered ordestroyed inadvertently than the paper copies theyreplace, and that when such images are ultimatelyprinted onto paper they produce an accuratereproduction of the original document.

We also understand that techniques are nowcommercially available under which electronic data

can be recorded and stored on optical disks in amanner that the information cannot be modified orremoved from the disk without detection. R.Raysman and P. Brown, "The New Technology forStoring Business Records," N.Y.L.J. at 3 (Aug. 9,1994). We note that the staff of the Securities andExchange Commission ("SEC") has recently reliedupon such a system to conclude that storage onoptical disks was acceptable to satisfy the records-retention requirements imposed upon investmentadvisers under SEC rules. See 1995 SEC No-Act.LEXIS 684, Oppenheimer ManagementCorporation, August 28,1995.

We recognize, of course, that any electronic storagetechnique is subject to abuse, and that the storedelectronic data is susceptible of being transferredfrom an unalterable format to a readily manipulableone so that without inspection of the original diskitself there can be no assurance that a paperpurportedly printed out from such a disk does notreflect an alteration.

Paper copies retained as such are also susceptibleof being intentionally altered, however, by the useof a photocopier, or in a more technologicallysophisticated manner by transferring the paperdocument (even one that has been retained foryears in that form) to a computer file by means ofan electronic scanner, altering it, and then printingit back out onto paper before producing it inconnection with a disciplinary proceeding. In short,the various different means of record storage do notby themselves appear to affect the potential forfraud in a material way.

The importance of the Code's record retentionrequirements, and associated provisions assuringthat such records will be readily available toauthorities, cannot be over-emphasized. Before anylawyer determines to change the form in whichsuch records are maintained, the lawyer must makecertain that the new storage means to be usedsafeguards the records from inadvertent destructionor alteration at least as effectively as the traditionalpaper record, and that the new technique willpermit the prompt production of accurate, unalteredcopies upon request pursuant to DR 9-102(H).


Moreover, any lawyer who chooses to transferexisting paper records to computer images mustinsure that all required copies are in fact transferredbefore any paper records are disposed of; thelawyer who fails to do so acts at the peril ofengaging in spoliation, and will be at risk to sufferthe severe consequences of such conduct. DR 9-102(I) (failure to maintain and produce records asspecified by disciplinary rules subjects lawyer todiscipline).

Finally, DR 9-102(D)(1 ), (2) and the textfollowing (8) require the maintenance of records inany bank accounts involved in the lawyer's practice,of all financial transactions in "books of account"kept in the regular course of business, and of othersimilar records. We do not believe that anything inthose Code provisions requires that such records bemade in the first instance on paper as distinguishedfrom in the form of electronic data entry.Consequently, we conclude that any such recordsthat are created in electronic form may be retainedin that form. Records described by these provisionsthat are created by entries on paper books ofaccount, ledgers, or other such tangible items,however, should be retained in their original form.

Conclusion

Records required to be maintained by the Code inthe form of "copies" may be stored by reliableelectronic means, as noted above, and records thatare initially created by electronic means may beretained in that form, but other records that arespecifically described by the Code must be retained

in their original format.

Opinion 693 - 8/22/97 (68-96)

Question

May a lawyer allow a paralegal to use a stampbearing the lawyer's signature to execute checksdrawn on a client escrow account?

Opinion

This Committee and others have frequentlyaddressed issues arising from a lawyer's delegationof tasks to a non-lawyer employee. See, e.g., N.Y.State 677 (1995); N.Y. State 255 (1972); N.Y.State 44 (1967); N.Y. City 1995-11 (1995); N.Y.City 666 (1985); Nassau County 90-13; ABA 316(1967). The question in this inquiry is whether,consistent with DR 9-102(E), a lawyer may allow anon-lawyer employee to use a signature stamp toexecute checks drawn on the lawyer's client escrowaccount. See DR 9-102(B). The inquirer notes thatthe purpose of the signature stamp is to facilitateprocedures at the closings of real estatetransactions.

The New York Lawyer's Code of ProfessionalResponsibility contemplates that lawyers willdelegate tasks to nonlawyers. DR 1-104; EC 3-6;See N.Y. City 1995-11. We have recently opinedthat it is permissible for lawyers to delegateattendance at a real estate closing to a paralegal,where the delegating lawyer is available bytelephone as necessary, the particular closing is"ministerial" and several other conditions aresatisfied. N.Y. State 677 (1995).

In our opinion we noted that all tasks assigned to aparalegal must be "within the limits prescribed bylaw" and "clearly limited to those functions notinvolving independent discretion or judgment."N.Y. State 677; see ABA 316 (1967); N.Y. State255 (1972); N.Y. City 666 (1985). Weacknowledged that many real estate and mortgageclosings do not require the paralegal to exerciseindependent discretion or judgment. N.Y. State677.

It is the attorney or a member of the attorney's firmwho is the custodian of the funds of the client. DR9-102; N.Y. State 570 (1985); Nassau County88-31. DR 9-102(A) and (B) generally require thata lawyer deposit client funds in identifiable bankaccounts within the state and segregate such fundsfrom the lawyer's general funds. N.Y. State 570(1985). An attorney is personally andprofessionally liable for funds and property


entrusted to him or her by a client and mustexercise the highest degree of care in preservingand protecting such funds and property. NassauCounty 88-31. Consistent with these principles,DR9-102(E) provides that "[o]nly an attorneyadmitted to practice law in New York State shall bean authorized signatory of a special account." Anon-lawyer may not be a signatory on a specialaccount and a lawyer may not give such a personsignatory power on such account. In re Gambino,205 A.D.2d 212, 619 N.Y.S. 2d 305, (2d Dep't1994) (lawyer violated DR 9-102(E) by permittingnon-lawyer daughter to be signatory on specialaccount); In re Stenstrom, 194 A.D.2d 277, 605N.Y.S. 2d 603 (4th Dep't 1993) (lawyer violatedDR 9-102(E) by permitting non-lawyer ex-wife tobe signatory on special account).

Although it is clear that only a lawyer may controlthe lawyer's client escrow account and be asignatory of it, the Rule does not address whether alawyer may delegate the task of signing his or hername to escrow account checks to others, and if sowhether a signature stamp can be used for thatpurpose. Based on the analysis of proper delegationin our previous opinions, we believe that it isethically permissible for a lawyer to authorize aparalegal to make use of the lawyer's signaturestamp on checks drawn from a special account atclosings under certain conditions and with propercontrols.

As with the rest of a paralegal's duties at a realestate closing, N.Y. State 677, the lawyer mustconsider in advance how the paralegal will use thesignature stamp including approving the purposeof the anticipated payments to be made by suchchecks, the nature of the payee and the authorizeddollar amount range for each check to be issued and review afterwards what actually happened toassure that the delegation of authority has beenutilized properly. As a practical matter, compliancewith these restrictions will limit the use of thesignature stamp by a paralegal to thosecircumstances in which the lawyer can reliablyforecast events at the closing.

Attorneys must be aware that responsibility forclient funds may not be delegated, and attorneysauthorizing paralegals to use signature stamps onchecks drawn from escrow accounts are"completely responsible" to the client for any errorsor misuse of the stamp. N.Y. State 677; DR 1-104.Attorneys must take steps to safeguard the use ofthe signature stamp to avoid any misappropriationof client funds.

Conclusion

A lawyer may allow a paralegal to use a signaturestamp to execute escrow checks from a client trustaccount so long as the lawyer supervises thedelegated work closely as provided in this Opinionand exercises complete professional responsibilityfor the acts of the paralegal.

Opinion 697 - 12/30/97 (41-97)

Topic: Legal fees; combination of hourly andcontingency fee.

Digest: It is proper for a lawyer to charge acombination of an hourly and a contingency fee.

Code: DR 2-106(A), 2-106(C)(1).

Question

May a lawyer charge both an hourly fee,irrespective of outcome, and, in the event of arecovery by settlement or verdict, a percentage ofthe net recovery? Such a combined fee issometimes referred to as a "modified contingentfee" or a "hybrid fee."

Opinion

DR 2-106(A) provides that a lawyer may not enterinto an agreement for an excessive fee. Indetermining whether a fee is excessive, one of thecriteria is whether the fee is fixed or contingent.

Contingent fees are normally greater than the hour-ly fees that would be charged for the same


representation, because the contingent fee lawyerbears the risk of receiving no pay if the client losesand the higher fee is compensation for that risk. SeeBoston & Maine Corp. v. Sheehan, Phinney, Bass& Green, P.A., 778 F.2d 890, 897 (1st Cir. 1985);see generally American Law Institute, Restatementof the Law Third, Restatement of the LawGoverning Lawyers, §47, comment c (ProposedFinal Draft No. 1). Similarly, a contingent fee maybe upheld, even though the lawyer devotedrelatively little time to the representation, since thelawyer risks having to provide services withoutextra pay if the representation entails a greaterexpenditure of time than the lawyer anticipatedwhen the contingent fee was negotiated. However,it has been held that large fees are unreasonablewhen they are unearned by either effort or asignificant period of risk. Id.

Of course, a lawyer may never charge a contingentfee for representing a defendant in a criminal case.DR 2-106(C)(1). Similarly, the Rules of theAppellate Division of the New York SupremeCourt limit the amount of legal fees in certainactions for personal injury or wrongful death wherethe fee is dependent in whole or in part upon theamount of recovery. See, e.g., 22 NYCRR§603.7(e)(1st Dep't). Consequently, anycombination of an hourly fee and a contingent feein such a case would have to conform to themaximum fee schedules in the court rules. See DR2-106(A)(a lawyer shall not charge an illegal fee).

We believe a hybrid or modified contingent fee ispermissible as a matter of ethics as long as the totalfee is not excessive. This will usually mean that thecontingency percentage will be lower than it wouldbe if the fee were based on a pure contingency.Whether the hourly fee must also be reduceddepends on whether the fee as a whole exceeds areasonable fee.

Although the lawyer who charges a modifiedcontingent fee does not assume the full risk of norecovery (since the lawyer is receiving an hourlyfee), we believe that the lower risk to the lawyer isbalanced by the lower bonus in the event of asuccessful completion, as defined in the retainer

agreement. Moreover, if the hourly fee is reduced,it is likely to make counsel available to clientswhose cases do not have such a high probability ofsuccess that a straight contingency fee would beattractive to prospective counsel. Thus it meets thegoal expressed in EC 2-20 of providing a means bywhich a client may economically afford, financeand obtain the services of a competent lawyer toprosecute a claim.

Modified contingent fees have also been upheld inother jurisdictions. See Boston & Main Corp. v.Sheehan, Phinney, Bass & Green, P.A., supra(hourly fee and reduced contingent fee wasreasonable even though the justification for a purecontingency fee - lawyer's risk of no compensation- was not present. In return for the lower risk,Sheehan accepted a much lower contingency fee -15%); Nevada Formal Op. 4 (1987)(reduced hourlyfee plus bonus).

Conclusion

In a case in which a lawyer could charge acontingency fee, the lawyer may charge a modifiedcontingency fee (for example, an hourly fee lessthan the lawyer would charge for a retainer on anhourly fee basis, and a contingent fee less than thelawyer would charge for a pure contingencyretainer) as long as the total fee is reasonable. A feein a personal injury matter that exceeded theAppellate Division's fee schedule for certaincontingency fees would not be reasonable.

Opinion 710 11/6/98 (35-98)

Topic: Lawyer as escrow agent; Release of funds inescrow to client.

Digest: Absent authorization by all parties, lawyerwho serves as escrow agent may not release fundsto client except as provided in the escrowagreement; while lawyer may resign as escrowagent, provision must be made to protect funds inescrow.


Code: DR 9-102.Question

A lawyer has been holding funds in escrow for anumber of years pursuant to a written agreementmade incident to a real estate transaction in whichthe lawyer represented the sellers. The purpose ofthe escrow was to secure the purchasers againstloss which they might sustain through "anassessment with regard to [a certain sidewalk]violation" by the local municipality. The inquirerstates that a representative of the municipality hasrecently advised that for various reasons there is nopossibility the municipality will issue anassessment. Still, the purchasers have refused topermit the lawyer to return the escrowed funds tothe sellers, notwithstanding the purchasers’apparent awareness of the recent communicationswith the municipality. Further, the escrowagreement failed to authorize the lawyer to releasethe funds to the seller upon ascertaining that noassessment would be made with respect to thesidewalk violation. Nor did it provide for aprocedure to resolve disputes relating to the fundsin escrow.

Under such circumstances, may the lawyer returnthe escrowed funds to the clients upon furnishingthe purchasers' attorney with an affidavitrecounting the investigation and findings?

Opinion

As a general rule, an escrow agent has contractualand fiduciary duties to all parties to an escrowarrangement which may be discharged only inaccordance with the terms of the escrow agreementor with the informed consent of all parties.

Although the Code of Professional Responsibilityimposes some additional obligations on the lawyerwho serves as an escrow agent, see, e.g., N.Y. State575 (1986); N.Y. State 532 (1981), the lawyersobligations derive principally from the substantivelaw of contracts and agency. To the extent that theinquiry in this case encompasses issues ofsubstantive law, we are obliged to decline toprovide the inquirer with guidance because the

resolution of such matters is beyond the jurisdictionof this Committee.

In the event of a dispute relating to the funds inescrow, the escrow agent is required to follow theprocedures set forth in the escrow agreement for itsresolution. Unfortunately, the escrow agreement inquestion is silent with respect to dispute resolution.Without such a provision, it would be inappropriatefor the lawyer to assume the power to resolve thedispute by releasing the escrow and returning thefunds to the sellers, because the stipulatedcontingency for release of the funds has notoccurred. See Brooklyn Op. 19931 (1993) (attorneyescrowee may urge the parties to resolve thedispute, but, if the parties cannot do so amicably,the attorney escrowee may not disburse the fundsbased on his or her own notions of fairness); seealso N.Y. City 828 (1982); N.Y. County 672(1989).

The inquirer may resign as escrow agent; however,in such case the mandate of DR 9-102 to protectthe property of others entrusted to the lawyer’scustody requires that the lawyer take steps topreserve intact the funds in escrow and initiate aprocess whereby the dispute may be resolved.Unless the parties agree to some other arrangement,one way to do this would be for the lawyer tocommence a stakeholder's action and deposit thefunds with the court. See Brooklyn Op. 19931(1993) (the attorney may commence an interpleaderaction or [a]wait a suit by a party claimingentitlement to the funds and defensively interpleadthe remaining party); cf. N.Y. City 1986-5 (1986).

The inquirer's predicament underscores theimportance of anticipating problems which mayarise when agreeing to act as an escrow agent andof making certain that the escrow agreementprovides a means of dispute resolution. See NewYork City 1986-5 (1986) (We stress the importanceof having a carefully drafted escrow agreement thatcovers, among other things, possible disputes overthe escrowed funds.). Attorneys should avoid thedanger that such arrangements will be madecasually in the press of a real estate closing,without much thought being given to the possibility


that the event stipulated for release of the funds inescrow may not occur.

Conclusion

For the reasons stated, the question posed isanswered in the negative.

Opinion 717 – 4/15/99 (43-98)

Topic: Medical liens; duty to pay funds to thirdparty; missing lienor.

Digest: Plaintiff’s attorney should pay holder ofvalid lien from settlement proceeds. If clientdisputes amount or validity of lien, attorney shouldremit to client funds not in dispute and holdremaining funds pending resolution of dispute. Inevent of missing lienor, attorney should considerseveral options, including application for courtorder concerning disbursement of funds.

Code: DR 9-102(C)(1),(4); DR 9-102(F).

Question

A lawyer has received a settlement check payableto a client and containing the legend "...fortreatment or services and interest rendered." Thecheck represents full settlement of a claim arisingfrom a motor vehicle accident. The attorney’s fee isnot in issue. The client had incurred five medicalbills for treatment as a result of the accident andthey remain unpaid. The lawyer’s preliminaryresearch indicates that two of the five medicalservice providers have liens and that one of the twois "no longer in business." One of the providerswithout a lien is also out of business.

May the attorney turn the check over to the client,relying on the client to pay the providers from theproceeds of the check?

If the attorney has an obligation to pay the holdersof valid liens directly, how would that be

accomplished in the case of the lienor which is outof business?

Opinion

DR 9-102(C)(1) states that a lawyer must: "Prompt-ly notify a client or third person of the receipt offunds, securities, or other properties in which theclient or third person has an interest." Therefore,the attorney must notify the client and the holdersof valid liens and assignments when the check isreceived.1

DR 9-102(C)(4) requires the lawyer to "promptlypay or deliver to the client or third person asrequested by the client or third person the funds,securities, or other properties in the possession ofthe lawyer which the client or third person isentitled to receive" (emphasis added). The attorneyshould make a reasonable effort to ascertain wheth-er the provider has an interest in or is entitled toreceive payment from the funds in the attorney’spossession. See Nassau County 96-13. Absent anassignment or lien, a provider would not have aninterest in and be entitled to payment from thefunds. Leon v. Martinez, 84 NY2d 83 (1994).

If a provider asserts that it has a valid lien orassignment, but the client disputes the provider’sassertion, the attorney should hold the check or itsproceeds, pending resolution of the dispute. NassauCounty 92-10, 96-13. If the check is payable to theclient, the attorney should counsel the client toendorse the check for deposit in the attorney’s trustfund to avoid the check becoming stale.2

If the client refuses to do so, the attorney shouldretain possession of the check pending resolution ofthe dispute. If, on the other hand, the clientendorses the check, the attorney should promptlyremit the balance due the client to comply with theprompt payment mandate of DR 9-102(C)(4) andhold the disputed portion. The attorney mayattempt to resolve disputes by way of negotiationor, alternatively, commence an interpleader actionto enable a court to resolve the dispute. See NassauCounty 94-19, 91-21.3


There is no provision in the Code specificallyaddressing the obligation to pay a lienor who is outof business. Nevertheless, to fulfill therequirements of DR 9-102(C)(4), the attorneymight consider the following options:

(a) If the attorney has exhausted all reasonableefforts to locate any persons or entities who mightsucceed to the assets of the out-of-business lienor,the attorney might disburse the funds to the client.

(b) The attorney might employ the proceduredescribed in DR 9-102(F) for dealing with moneyowed to a missing client, which is to apply to theSupreme Court in the county in which the attorneymaintains an office for the practice of law for anorder directing the payment of the money to the"Lawyers’ Fund for Client protection forsafeguarding and disbursement to persons who areentitled thereto."

(c) If the lienor was a hospital, the attorney mightfulfill the ethical responsibility by depositing thefunds with the Commissioner of Finance in NewYork City or the applicable County treasurer wherethe lien was filed. See N.Y. Lien Law, §189 (9).

Conclusion

If a provider undisputedly has a valid lien throughstatute or assignment by the client, the attorneyshould pay the provider directly from the proceedsof the check. If the client disputes the validity ofthe lien or assignment, pending resolution of thedispute the attorney should hold the disputed fundswhile disbursing any funds that are not in dispute.If the check is payable to the client and the clientrefuses to endorse it for deposit in the attorney’strust account, the lawyer should hold the checkitself until the dispute is resolved. An interpleaderaction would be an appropriate procedure toresolve the dispute. If the provider with a valid lienis no longer in business and reasonable searchlocates no successor with a valid claim to theentity’s assets, the attorney should consider severaloptions, including applying to the Supreme Courtfor an order directing the money to be paid to theLawyers’ Fund for Client Protection.

_________________

1 While this committee does not render legalopinions, it would seem that there are no commonlaw or statutory liens for doctors’ medical services.Iaiello v. Levine, 255 N..Y.S. 2d 921 (S. Ct.Nassau Co. 1965); Healy v. Brotman, 409 N.Y.S.2d 72 (S. Ct. Suffolk Co. 1978).

2 Some banks will declare checks stale in as few as90 days.

3 Although, as we recently opined in anothercontext, filing an interpleader action would be anappropriate vehicle “...to protect the property ofothers,” N.Y. State 710, the attorney would not beethically required to employ this alternative. SeeNassau County 91-21.

______________________________Opinion 737 (2/1/01)

Topic: Escrow accounts

Digest: A lawyer may not issue a check from anattorney escrow account drawn against a bank orcertified check that has not been deposited or hasnot cleared.

Code: DR 9-102

QUESTION

In payment of a client's obligations to a third party,may a lawyer issue an attorney escrow checkagainst undeposited or uncleared client fundsdelivered to the lawyer in the form of a bank orcertified check?

OPINION

Disciplinary Rule (DR) 9-102 establishes theframework for how lawyers must handle clients'funds. For example, DR 9-102(A) provides that alawyer is a fiduciary with respect to the clientwhose funds are maintained in the lawyer's escrowaccount and prohibits the lawyer fromcommingling such funds with the lawyer's own. DR9-102(B)(1) requires a lawyer to maintain an


escrow account for client funds "separate from anybusiness or personal accounts of the lawyer or thelawyer's firm, and separate from any accountswhich the lawyer may maintain as executor,guardian, trustee or receiver, or in any otherfiduciary capacity." DR 9-102(C)(4) requires alawyer to promptly pay to the client from escrowthose funds which the client is entitled to receive.DR 9-102(D) requires certain bookkeeping recordsbe maintained for escrow accounts which, pursuantto subdivision (1) thereof, "specifically identify thedate, source and description of each item deposited,as well as the date, payee and purpose of eachwithdrawal or disbursement."

Implicit in this framework is that a lawyer will notdraw on funds belonging to Client A for the benefitof Client B. Yet this is literally what occurs wherea lawyer maintains funds belonging to multipleclients in a single unsegregated escrow account andissues a check in payment of the obligation of oneclient before certified checks or bank checksdelivered to the attorney's possession for the benefitof that client in amounts sufficient to cover thatobligation are deposited into the lawyer's escrowaccount and cleared. The issue before thisCommittee is whether there are practicalconsiderations which, with appropriate safeguards,may permit a relaxation of the ethical proscriptionagainst a lawyer, in effect, granting Client B atemporary loan out of funds belonging to Client A.

The issue arises most often in the context ofresidential real estate closings. In many parts of theState, the seller's attorney or a real estate brokertypically holds funds from the buyer in an escrowaccount. The amount, which in some transactionsmay be as much as ten percent of the purchaseprice, represents the buyer's down paymentdelivered upon execution of a residential purchasecontract. This down payment — cleared by the timeof closing — may be sufficient for the seller'sclosing obligations if there is adequate pre-closingplanning and communication between the attorneysfor the seller, the attorneys for the purchaser andthe attorneys for the purchaser's lending institutionconcerning the correct closing figures and themanner of the purchaser's payment of the balance

due. Sometimes, however, open taxes, openjudgments or other liens will first appear in acontinuation title search run immediately prior to orat the closing in amounts that exceed the fundsalready cleared and in escrow. As theseencumbrances constitute a cloud on title that mustbe cleared at the closing in order for the seller toconvey good title, the purchaser's title agent mustbe given adequate funds from or on behalf of theseller to cure the problem or to omit them from thetitle commitment. For this purpose, only a bankcheck, a certified check or an attorney's check willtypically be accepted.

In these circumstances — where the earnest moneyor down payment deposited and cleared in escrowis insufficient to satisfy the seller's closingobligations and where bank or certified checks inthe proper amounts are not available at the closing— it might seem that a practical solution to avoidthe delay, inconvenience and expense of anadjournment would be for the seller's attorney toaccept for deposit in his or her escrow account thebank or certified checks tendered by the purchaseror the purchaser's lender for the balance of thepurchase price, checks usually made payable to theseller, which the seller then endorses over to theseller's attorney for deposit in the escrow account.

The seller's attorney would then issue checks drawnon the escrow account payable in the amountsrequired to satisfy the seller's closing obligations,including the open taxes, judgments or other liensthat encumber the good title that the seller iscontractually obligated to convey, and remits thebalance of the proceeds to his or her client.Apparently, the title companies and others willaccept the escrow check of the seller's attorney,notwithstanding actual knowledge that the bankchecks and certified checks delivered to the seller'sattorney at the closing have not yet been depositedinto the attorney's escrow account and, perforce,have not yet cleared.

The seller's attorney is often willing to issue suchescrow checks because there are sufficient funds,already cleared on deposit in the attorney's escrowaccount, to cover the checks issued at the closing.


To the extent the total amount of the escrow checksissued at closing thus exceeds the buyer's downpayment or earnest money, the funds on deposit inthe attorney's escrow account that are used to coverthe excess are indisputably funds belonging toother clients.

There are a number of arguments that can beadvanced in favor of interpreting DR 9-102 toallow a lawyer to issue escrow checks on behalf ofClient B that are covered by cleared funds in thesame escrow account deposited on behalf of ClientA where the lawyer is in physical possession ofbank or certified checks appropriately endorsed fordeposit into the lawyer's escrow account on behalfof Client B that, if and when cleared, would besufficient to cover those escrow checks. Some ofthese arguments have been favorably considered bythe authorities in other states. Thus, Florida andIllinois have adopted specific rules permittinglawyers to disburse uncleared funds. See Rule 1.15of the Illinois Rules of Professional Conduct; Rule5-1.1(g) of the Rules Regulating the Florida Bar. Inaddition, New Jersey, North Carolina, and Virginiahave approved of the practice, see N.J. Eth. Op.454 (1980), N.C. Eth. Op. RPC 191 (1997), andVa. Eth. Op. 183 (1996), while South Carolina hasnot. See In re Hensel, 2000 WL 640239 (S.C. Sup.Ct. May 15, 2000), S.C. Adv. Op. 78-20 (1978). Onbalance, however, we find none of the argumentssufficiently persuasive to subvert the obviousintended core purpose of DR 9-102 — to maintainthe integrity of a client's funds for the benefit ofthat client only, until payment of those funds to, foror on behalf of that client and no other client, isdue.

First, it can be argued that an attorney comes into"possession" of funds on behalf of Client B withinthe meaning of DR 9-102(A) when he or shereceives the bank checks or certified checksproperly endorsed for deposit into his escrowaccount on behalf of Client B at the closing.Because the risk that a certified check or bankcheck will not clear is considered to be negligible,it can be argued that the receipt should beanalogized to the receipt of cash. However, evencash can be lost or stolen between the time of the

closing and the time of the bank deposit, and untilthe cash is deposited and credited to the escrowaccount, the cash does not generate available funds.A bank or cashier's check may also be subject to astop payment order if the check was procured byfraud. See, e.g., U.S. Printnet, Inc. v. ChemungCanal Trust Co., 270 A.D.2d 544, 703 N.Y.S.2d821, 823 (3rd Dept. 2000), and cases cited therein.In addition, the checks themselves may turn out tobe forgeries. See, e.g., U.S. v. Van Shutters, 163F.3d 331 (6th Cir. 1998) (counterfeit bank checkswere used to purchase automobiles) and U.S. v.Werber, 787 F. Supp. 353 (S.D.N.Y. 1992) (same).

Finally, there has been at least one recent casewhere a fully licensed mortgage broker was unableto meet its obligations, defaulting on its ownchecks. See "New York State Banking DepartmentSuspends Mortgage Banker's License," PressRelease issued July 5, 2000 by NYS BankingDepartment, available at (visited 12/5/00).

Second, it is doubtless correct that bank checks andcertified checks are ordinarily accepted as a propertender of payment in business transactions and it istherefore argued to be unreasonable to hold anattorney to a higher standard in the administrationof his escrow account. The commercialreasonableness of the practice, however, does notfairly address the situation where one client's fundsare being used to cover the checks issued on behalfof another client. If a commercial party chooses toaccept the minimal risk of loss associated with theacceptance of a bank check or certified check, thatsame party will bear any loss that actually comes topass. However, if Client A's funds are used to coverthe checks written by an attorney for the benefit ofClient B, and the bank or certified check depositedafter the checks are issued to cover Client B'sobligations is for whatever reason unpaid, it isClient A, a stranger to the transaction, not Client B,a party to the transaction, who will suffer the loss.

Third, it may indeed be true that in most cases it isincidental closing expenses that will be paid if thesubject practice is allowed and that, therefore, anyloss, already a remote possibility, will likely be in anominal amount. In the same vein, it is argued that


prohibiting the practice will engender delay andinconvenience and may adversely affect theeconomy.

Whether or not these are accurate statements of therisk and the peril seems, however, beside the point.If a client's funds may not be invaded for thebenefit of another, the principle must hold nomatter what the size or extent of the plannedinvasion and no matter what may be the detrimentto third parties of withholding the use of thatclient's funds.

Fourth, the practice of writing escrow checks at aclosing drawn on the funds of other clients andagainst undeposited or uncleared bank or certifiedchecks, if prohibited as unethical, can be argued tohave a greater adverse impact upon persons ofmoderate or low income. This is because, where theprice of real estate in a given community is lower,the legal fees associated with the closings are oftenlower as well. There is more pressure uponattorneys who practice in these communities togenerate fees on a volume basis and less time maybe spent in preparing for closings generally with aview toward "working out" what title and otherproblems exist at that time. It is these attorneyswho may be compelled to raise their fees in orderto carry on their residential real estate practices ifmore pre-closing preparation time is required tosatisfy ethical obligations. Alternatively, ifadditional pre-closing preparation time is eschewedin favor of an occasional adjournment of a closingin order to allow the seller additional time to clearan unexpected title objection or to allow thepurchaser additional time to obtain a bank orcertified check in a previously uncalculated oruncommunicated pay-off amount, this is still likelyto result in additional cost to the parties, as thepurchaser's lender will often charge a fee to adjourna closing and the lender itself will often charge afee to extend a loan commitment.

Although the Committee is sympathetic to theconcerns of all parties to a residential real estatetransaction who quite understandably would preferto avoid the increased legal fees or costs that mightbe associated with an adjournment of a closing,

these considerations are insufficient to overcomethe fiduciary obligation that an attorney owes to theattorney's other clients whose funds must not beinvaded.

Fifth, it has been suggested that Client A, byallowing his funds to be deposited in anunsegregated attorney escrow account hasimplicitly consented to the possibility that thosefunds might be drawn upon in behalf of a Client B,including the small risk that a bank or certifiedcheck deposited into the escrow account for thebenefit of Client B might be dishonored. Theimplied consent is said to arise from knowledge ofthe widespread practice of attorneys writing escrowchecks against undeposited or uncleared bank orcertified checks. Far from assuming Client A'sconsent to the practice, this Committee wouldassume the very opposite — that Client A, if asked,would vigorously object to putting his funds at riskand granting a no-interest loan for the benefit ofClient B with whom Client A shares neither asocial nor a business bond.

Nor can we ascertain any conditions orqualifications to the issuance of attorney escrowchecks against undeposited or uncleared bank orcertified checks that might ethically purify thepractice. For example, the practice has been foundacceptable provided, among other things, that theattorney immediately makes good any loss. SeeN.C. Eth. Op. RPC 191 (1997). But if the attorneyis personally willing to take the risk that the checkswill not clear, we see no reason why the attorneyshould not simply advance the disbursementsnecessary to effect the closing out of his ownoperating account and await a refund from hisescrow account if and when the bank or certifiedcheck clears. From a practical as well as a fiduciaryperspective, it is far more appropriate for theattorney for both Client A and Client B to make atemporary, no-interest loan to Client A than it is forClient B to make such loan. The attorney hasknowledge of the facts and circumstancespertaining to the closing and can evaluate thedegree of risk associated with acceptance of theproffered bank or certified check. Client B, on theother hand, neither knows or controls anything


and has consented to nothing.

Finally, we note that our conclusion appears to bein seeming conformance with several recentdisciplinary determinations of the AppellateDivision, Second Department, and we are unawareof any determinations of the First, Third or FourthDepartments which suggest a contrary result. SeeMatter of Abbatine, 263 A.D.2d 228, 700 N.Y.S.2d211 (2d Dept. 1999) (five year suspension orderedfor attorney who, inter alia, issued escrow check for$4,147.18 from unsegregated escrow accountagainst $10,000 deposit made 16 days later); Matterof Ferguson, 259 A.D.2d 186, 694 N.Y.S.2d 113(2d Dept. 1999) (one year suspension ordered forattorney who, inter alia, issued escrow checkagainst "wired" funds not yet received); and Matterof Joyce, 236 A.D.2d 116, 119, 665 N.Y.S.2d 430,431 (2d Dept. 1997) (indefinite suspension orderedfor attorney who, inter alia, "[o]n at least fouroccasions...issued checks from his escrow accountfor a particular transaction in advance of depositingthe subject funds into his escrow account, causingchecks to clear against the funds of other clients orthird parties").

CONCLUSION

The Committee welcomes further study of theproblem addressed in this opinion with a viewtoward devising solutions that adhere to ethicalrequirements. However, for the reasons stated, thequestion is answered in the negative.(22-00)

_____________________________

Opinion 758 – 12/10/02

Topic: Retention of Original Trust AccountDocuments

Modifies: N.Y. State 680 (1996) Digest: Trustaccount documents required to be retained inoriginal form should be retainedas paper copies where available to lawyer in theordinary course of business; otherwise, thesedocuments may be retained in electronic form.

Code: DR 9-102(D)

QUESTION

May the items listed in DR 9-102(D)(8) –"checkbooks and check stubs, bank statements,prenumbered canceled checks and duplicate depositslips" – be retained by the attorney in electronicform (rather than in the form of paper copies) forthe designated seven-year period?

OPINION

N.Y. State 680 (1996) makes clear that the itemsreferred to in DR 9-102(D)(8) must be retained intheir original form; the items listed are"checkbooks and check stubs,bank statements,prenumbered canceled checks and duplicate depositslips." Opinion 680, which was issued in 1996,assumes that the original form of the enumeratedrecords will be paper hard copies and that theattorney will be in possession of the cancelledchecks and deposit slips. Under modernbookkeeping and banking practices, neither ofthose assumptions is necessarily correct. Thecheckbook and bank statement may exist aselectronic documents in the first instance; paperchecks may be replaced by electronic transfers;even if paper checks are used, they may not bereturned to the lawyer by the drawee bank afterpayment – instead, the bank may provide thelawyer with images of the checks or with a meredescriptive listing of checks paid.

In these circumstances, we interpret DR9-102(D)(8) to require the lawyer to retain thelisted items in their original form, be it paper orelectronic. If these items are returned to the lawyerin paper form by the lawyer's bank in the ordinarycourse of business, the lawyer should retain them inthat form.

However, the lawyer is not required to undertakeextraordinary effort or incur extra expense to obtainthese items in paper form.


CONCLUSION

The items listed in DR 9-102(D)(8) – "checkbooksand check stubs, bank statements, prenumberedcanceled checks and duplicate deposit slips" –should be retained by the attorney in their originalform. Where these items are returned to the lawyerin paper form by the lawyer's bank in the ordinarycourse of business, the lawyer should retain them inthat form.

However, the lawyer is not required to undertakeextraordinary effort or incur extra expense to obtainthese items in paper form.

(24-02)

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Opinion 759 – 12/10/02

Topic: Deposits into special accounts

Digest: Lawyer may use ATM for makingdeposits into special account.

Code: DR 9-102

QUESTION

May an attorney use an automated teller machine("ATM") for the purpose of making deposits into aspecial account required by DR 9-102(B)?

OPINION

DR 9-102 contains several provisions regarding thesafekeeping of client property, including the ruleson maintenance of client trust accounts and themaintenance of required bookkeeping records.

The many demands of DR 9-102 are designed tosafeguard clients' funds from loss and to avoid theappearance of impropriety by the lawyer. The rulesalso assist the lawyer in providing an audit trailto the client documenting the history and status ofthe funds entrusted to the attorney's care. Adiscussion of the aspects of DR 9-102 that arerelevant to this inquiry follows.

A lawyer possessing funds belonging to anotherperson incident to the practice of law mustmaintain them "in a banking institution within theState of New York which agrees to providedishonored check reports" in accordance with rulesof the Appellate Division. DR 9-102(B). The fundsmust be maintained in a "special account" separatefrom any business or personal accounts of thelawyer or the lawyer's firm. Id. The lawyer mustidentify the special account as an "Attorney SpecialAccount," "Attorney Trust Account," or "AttorneyEscrow Account," and must obtain checks anddeposit slips bearing such title. DR 9-102(B)(2).

DR 9-102 also imposes rigorous record keepingrequirements. DR 9-102(C)(3) requires the lawyerto maintain complete records of all funds of a clientor third person coming into her possession and torender accounts to the client or third personregarding same. DR 9-102(D)(1) requires a lawyerto maintain the records of all deposits in trustaccounts and "any other bank account whichconcerns or affects the lawyer's practice of law."See N.Y. State 680 (1996). The record must"specifically identify the date, source anddescription of each item deposited." DR9-102(D)(1). The lawyer must also maintain arecord for all special accounts showing, amongother things, the source of all funds deposited insuch accounts. The lawyer must also retain a copyof all "duplicate deposit slips with respect to thespecial accounts specified in DR 9-102(B)." DR9-102(D)(8). The latter three requirements,imposed by DR 9-102(D), provide that the lawyermust maintain the records for seven years after theevents they record. All of the financial recordsrequired by DR 9-102 must be made available forinspection on demand at the firm's principal NewYork State office. DR 9-102(I); see also 22NYCRR § 603.15 (1st Dep't), 22 NYCRR § 691.12(2d Dep't) (establishing procedures for randomreview of bookkeeping records). DR 9-102(J)emphasizes that a lawyer who fails to retain therecords required by DR 9-102, or who fails toproduce the records, "shall be deemed in violationof these Rules and shall be subject to disciplinaryproceedings."


In N.Y. State 680 (1996), we concluded that, forpurposes of complying with the mandatoryrecord-retention provisions of the Code, somerecords may be maintained in the form of computerimages, while other records must be maintained intheir original, hard-copy form. In that regard, weconcluded that duplicate deposit slips must bemaintained in paper form for the seven-year period.

In addition, all of the other records noted in theprevious paragraph must be maintained in theiroriginal form. See also N.Y. State 758 (2002).

We believe that it is permissible for an attorney touse an ATM for the purpose of making depositsinto a special account, provided the aboverequirements are satisfied. Therefore, in making thedeposit, the attorney must use a deposit slip bearingthe title of the special account and must maintain acopy of a duplicate deposit slip recording suchtransaction for seven years.

The record provided by the ATM must also showthe amount, account, date, time and place of thetransaction so the attorney will have sufficientproof of the deposit prior to receiving officialverification from the bank. This record must bemaintained with the duplicate deposit slip. Theattorney must also verify that the deposit isaccurately recorded in the subsequent bankstatement.

The attorney must also maintain an independentrecord of the deposit that includes the "date, sourceand description of each item deposited." DR9-102(D)(1).

Although we could find no case in New Yorkaddressing a lawyer's use of an ATM inconjunction with a special account, authorities inother jurisdictions have condoned its use ifaccompanied by careful oversight and review of thetransaction. See Matter of Heiner, 1 Cal. State BarCt. Rptr. 301, 316-317 (Cal. Bar Ct. 1990); see alsoVapneck, Tuft, Peck and Weiner, CaliforniaPractice Guide, Professional Responsibility, p.9:246-247 (2001) (use of ATM card for depositsonly does not pose real danger to client trust funds,

provided lawyer can document amount depositedon behalf of each client); Vecchione, Working withClient's Trust Accounts,www.state.ma.us/obcbbo/ctatips.htm (use of ATMfor deposits is permitted, but ATM should never beused for withdrawals).

While we believe that a lawyer depositing funds ina special account via an ATM can comply with therequirements of DR 9-102, a lawyer may not use anATM for withdrawals from a special account.Doing so would, in effect, violate the dictates ofDR 9-102(E), which provides that "[a]ll specialaccount withdrawals shall be made only to a namedpayee and not to cash."

CONCLUSION

An attorney may use an ATM for the purpose ofmaking deposits into a special account if theattorney carefully reviews the transaction andotherwise complies with the requirements of DR9-102.(27-02)

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Opinion 760 – 1/27/03

Topic: Retainer agreement – power ofattorney; Lawyer settling matter under power ofattorney; Lawyer endorsing settlementcheck on behalf of client under power ofattorney.

Digest: A lawyer may obtain or use arevocable power of attorney, either in astand-alone document or as part of thelawyer's retainer agreement, that authorizes thelawyer to settle a case and to endorse the client'sname to the settlement check, provided that thelawyer makes full disclosure as to the effect of suchpower ofattorney and provided that (i) the lawyermay only settle a case on terms indicated inadvance by the client or if the settlement issubmitted to the client for approval, and (ii) alawyer who endorses a settlement check on behalfof the client must promptly comply with the notice,


record keeping and disbursement requirements ofDR 9-102.

Code: DR 1-102(A)(1), (4), (5), (6); DR9-102(B)(4), (C), (C)(1), (D); EC 7-7.

QUESTION

May a lawyer's retainer agreement contain a powerof attorney authorizing the lawyer to sign a generalrelease and stipulation of discontinuance for theclient upon settling the case, or to endorse asettlement check on behalf of the client? May anattorney use a power of attorney executedseparately by the client in favor of the lawyer tosign a settlement agreement or to endorse asettlement check made out jointly to the lawyer andthe client or solely to the client?

OPINION

The Code of Professional Responsibility ("Code")does not expressly prohibit a lawyer from obtainingor using a power of attorney from the clientauthorizing the lawyer to perform a variety of actson behalf of the client. Indeed, the relationshipbetween attorney and client is generally consideredto be an agency relationship in which the clientgives the lawyer authority to act on his or herbehalf in connection with the representation.

Moreover, there are good reasons why a clientmight wish to give a general or specific power ofattorney to the lawyer. See, e.g., N.Y. State 746(2001) (lawyer with a durable power-of-attorneyshould not petition for the appointment of aguardian without the client's consent if the clientbecomes incompetent unless there isno practical alternative, through the use of thepower of attorney or otherwise, to protect theclient's best interests).

However, without the client's informed consent thelawyer should never use a stand-alone power ofattorney or a power of attorney contained in aretainer agreement to exercise rights orprerogatives reserved to the client under the Codeor substantive law.

Authority to Agree to Settlement

Even without a power of attorney, a lawyer isauthorized to make many decisions on behalf of theclient. For example, the lawyer generally is entitledto make decisions in certain areas of legalrepresentation not affecting the merits of the causeor substantially prejudicing the right of the client.EC 7-7. In civil cases, however, it is for the clientto decide whether to accept a settlement offer. EC7-7; American Law Institute, Restatement (Third)of the Law Governing Lawyers(hereinafter, "Restatement"), § 22, comment d (Alawyer may not make a settlement without theclient's authorization. A lawyer who does so maybe liable to the client or the opposing partyand is subject to discipline.) Nevertheless, a clientmay authorize the lawyer to negotiate a settlementthat is subject to the client's approval or to settle amatter on terms indicated by the client.Restatement, § 22, Comment c. A retaineragreement is generally signed before thecommencement of the representation or within areasonable time thereafter, before the lawyer hashad an opportunity to ascertain the facts of the caseand the willingness of the parties to settle. See, e.g.,22 NYCRR Part 1215 (Joint Order of AppellateDivisions establishing requirement to providewritten letter of engagement or obtain retaineragreement). Consequently, it is unlikely that at thetime of entering into the retainer agreement thelawyer would have been able to make thedisclosures necessary to validate using thesettlement authority.

Therefore, if the lawyer obtains a general power ofattorney in advance of the settlement, the lawyershould not use the power to settle the matterwithout obtaining more explicit instructions fromthe client after the lawyer and the clienthave discussed the merits of the case, the client'swillingness to settle and the settlement terms thatare acceptable to the client. Court rules may requirea lawyer to appear at a settlement conference withthe authority to settle a matter. See, e.g., 22NYCRR 202.19(b)(3) (Uniform Rules - TrialCourts; compliance conference to explore potentialsettlement); NYCRR 202.16(f)(2)(iii) and (3)


(matrimonial matters); 22 NYCRR 600.17(e)(1stDep't), 22 NYCRR 670.4(a)(2d Dep't) and 22NYCRR 800.24-b (3d Dept) (all civil matters);Federal Rules of Civil Procedure 16(a) ("At leastone of the attorneys for each party participating inany conference before trial shall have authority toenter into stipulations and to make admissionsregarding all matters that the participants mayreasonably anticipate may be discussed. Ifappropriate, the court may require that a party or itsrepresentative be present or reasonably available bytelephone in order to consider possible settlementof the dispute.") While the lawyer may comply withsuch rules by appearing with the client, the lawyermay also comply by obtaining express settlementauthorization from the client.

We see nothing unethical about the lawyerobtaining such authorization in advance.

We believe, however, that it would be inconsistentwith the Code for the lawyer to use such settlementauthorization without obtaining explicitinstructions from the client after the lawyer and theclient have discussed the merits of the case, theclient's willingness to settle and the settlementterms that are acceptable to the client.

Any power of attorney granted to the lawyer forsettlement purposes, whether general or specific,must be revocable. See Hayes v. Eagle-PicherIndus., Inc. 513 F.2d 892 (10th Cir. 1975); cf.Model Rule 1.2, comment 5: An agreementconcerning the scope of representation must accordwith the Rules of Professional Conduct and otherlaw. Thus, the client may not be asked ... tosurrender the right ... to settle litigation that thelawyer might wish to continue.

See also Restatement, § 22(3) ("Regardless of anycontrary contract with a lawyer, a client may revokea lawyer's authority to make the decisions describedin Subsection (1) [including whether and on whatterms to settle a claim]"); Restatement, § 22,comment d (A lawyer may not enter into anirrevocable contract that the lawyer will decide onthe terms of settlement. A contract that the lawyer

as well as the client must approve any settlement isalso invalid.)

Settlement Checks

It is not per se unethical for a lawyer to obtain apower of attorney that would authorize the lawyerto sign a settlement check on behalf of a client.Indeed, it will usually be convenient in contingentfee matters for the proceeds of a settlement checkto be deposited into the lawyer's trust account forfurther disposition and accounting. See, e.g.,Rohrbacher v. Bancohio Nat'l Bank, 171 A.D. 2d533, 567 N.Y.S.2d 431 (1st Dep't 1991) (retaineragreement stated "We hereby authorize you toendorse my name on any check or draft obtainedherein, if said check or draft is deposited to yourescrow-trust account pending distribution of theproceeds pursuant to the terms of this retainer").

Nevertheless, neither a general power of attorney infavor of the lawyer nor a specific power of attorneyauthorizing the lawyer to sign settlement checks onbehalf of the client would override the provisionsof the Code that apply to client money in thepossession of the lawyer. In particular, DR9-102(B)(4) provides that all funds belonging inpart to the client – which would include theproceeds of a settlement or judgment where thelawyer claims part of the proceeds as a fee or forreimbursement of expenses -- must be deposited inthe lawyer's attorney trust account, and the lawyermay not withdraw the part that the lawyer claims tothe extent that the client disputes the lawyer'sentitlement thereto: Funds belonging in part to aclient or third person and in part presently orpotentially to the lawyer or law firm shall be keptin such special account or accounts [the attorneytrust account], but the portion belonging to thelawyer or law firm may be withdrawn when dueunless the right of the lawyer or law firm to receiveit is disputed by the client or third person, in whichevent the disputed portion shall not be withdrawnuntil the dispute is finally resolved.

Moreover, under DR 9-102(C) the lawyer mustpromptly notify the client of the receipt of funds in


which the client has an interest and, under DR9-102(D), the lawyer must properly account for allsuch funds.

We note that the Appellate Division, SecondDepartment has upheld a disciplinary action againstan attorney for using an irrevocable power ofattorney in a personal injury action to authorize himto endorse a settlement check. In re Stanley S.Hansen, 108 A.D.2d 206, 488 N.Y.S.2d 742 (2dDep't 1985). The respondent in that case hadreceived a letter of admonition that the routineinclusion of an unconditional power of attorney inhis retainer agreements in no-fault collection cases"represented over-reaching and created a dangerouspossibility of abuse."

We do not read this case as prohibiting any use of apower of attorney to authorize a lawyer to endorsethe client's name on a settlement check. Rather, webelieve the court was objecting to the irrevocablenature of the power of attorney used by therespondent: Notwithstanding the fact that he may(as the Special Referee found) have intended todelete the word "irrevocably" therefrom, there isnothing in the record which would even tend tosupport his decision to procure an unconditionalpower of attorney from the client in the firstinstance.

We are not aware of any cases in New Yorkholding that a revocable power of attorneyauthorizing a lawyer to sign a settlement checkwould be per se unethical.

We note that it is a common practice in certainlawsuits – for example, where the defendant'spotential liability is the subject of an insurancepolicy – for the check paying a judgment orsettlement to be made out to both the plaintiff andhis or her lawyer. This is particularly true inpersonal injury actions, where plaintiff's counselmay be charging a contingent fee and may have alien on the proceeds. As the Second Circuit Courtof Appeals noted in Hafter v. Farkas, 498 F.2d 587(2d Cir. 1974), drawing a settlement check in thenames of both the plaintiff and his or her attorney isa way for the debtor to ensure that both the creditor

and his or her lawyer are made aware of thesatisfaction. Id. at 590.

The regulations of the New York State InsuranceDepartment do not mandate that settlement checksbe made out to both the plaintiff and his or herattorney. However, Regulation 64 of the InsuranceDepartment provides that, when an insurer ispaying $5,000 or more in settlement of a third-partyliability claim to a natural person, it must mailwritten notice to the claimant at the same timepayment is made to the claimant's attorney or otherrepresentative. 11 NYCRR §216.9(a). According toan interpretation issued by the office of the GeneralCounsel of the Insurance Department, thisprovision, which was adopted in 1988, was addedto the Insurance Department's Rules at the requestof the Clients' Security Fund (now the Lawyers'Fund for Client Protection), which saw it as anecessary response to documented instances oftheft where an attorney would forge a client'sendorsement on a check and pocket the proceeds.See N.Y. Department of Insurance, NY GeneralCounsel Opinion 4-1-2002, available on theInsurance Department's website athttp://www.ins.state.ny.us/rg204011.htm (lastvisited January 8, 2003). Thus, the regulations ofthe Insurance Department are consistent with DR9-102. We do not believe that the existence of theInsurance Department regulation obviates the needfor the lawyer to give the notice required by DR9-102(c).

For all these reasons, we believe that it is not per seunethical for an attorney to seek such a power ofattorney. If the lawyer uses this authority promptlyto cash the check and to deposit the proceeds in thelawyer's trust account, and (i) promptly notifies theclient of the receipt of the funds in accordance withDR 9-102(C)(1), (ii) maintains complete records ofsuch funds in accordance with DR 9-102(D),including the deposit and disbursement thereof, and(iii) promptly pays to the client as requested anyfunds the client is entitled to receive, then noviolation of the Code would have occurred. Seealso Wolfram, Modern Legal Ethics, Section 4.8,footnote 21 (The need to renegotiate the instrumentpromptly in order to protect against non-payment


argues for obtaining the client's signed permissionto sign the client's name to the check as designatedendorsee.)

Prompt deposit of the endorsed check into a trustaccount fully complies with the safekeepingrequirements of DR 9-102. If, on the other hand,the lawyer uses the power of attorney to endorsethe client's name on the check and does notpromptly notify the client and otherwise complywith DR 9-102, then the lawyer will have violatednot only DR 9-102, but also DR 1-102(A)(1)(lawyer shall not violate a disciplinary rule), DR1-102(A)(4) (lawyer shall not engage in conductinvolving deceit), DR 1-102(A)(5) (conductprejudicial to the administration of justice), andDR1-102(A)(7)(conduct that adversely reflects onfitness to practice law). The lawyer will thereforebe subject to discipline and possibly a law suit forconversion of the client's funds. See, e.g., In reTheodore L. Malatesta, 124 A.D.2d 62, 511N.Y.S.2d 246 (1st Dep't 1987). Malatesta involvedan attorney who converted the proceeds of asettlement check by signing a settlement checkmade out to the attorney and client. The lawyerargued that he was authorized to do so based on ahandwritten notation on the retainer agreementwhich stated "[subject to] full authority to settle,sign release and endorse check." Although the courtfound that the client had not added the language tothe retainer agreement, it concluded that, even ifthe language had been agreed to by the client, it didnot excuse the lawyer's conversion of the funds.

CONCLUSION

A lawyer may obtain and use a revocable power ofattorney, either in a stand-alone document or as partof the lawyer's retainer agreement, that authorizesthe lawyer to settle a case and to endorse theclient's name to the settlement check, provided thatthe lawyer makes full disclosure as to the effect ofsuch power of attorney and provided that (i) thelawyer may only settle a case on terms indicated inadvance by the client or if the settlement issubmitted to the client for approval, and (ii) alawyer who endorses a settlement check on behalfof the client must promptly comply with the notice,

record keeping and disbursement requirements ofDR 9-102.

(25-02)

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Opinion 764 – 7/22/03

Topic: Escrow funds; fee agreements; conflicts ofinterest; Interest on Lawyer Account (IOLA).

Digest: Lawyer may only accept IOLA accountearnings credit with consent of client after fulldisclosure

Code: DR 2-106(A), 5-101(A), 5-107(A)(2),7-101(A)(3), 9-102(A); EC 2-21

QUESTION

May an attorney accept an earnings credit againstbank charges based upon balances held in theattorney's IOLA account?

OPINION

A bank is developing a package of bankingproducts designed specifically for attorneys thatwill include an "earnings credit" based on balancesheld in an attorney's operating accounts. Subject tothis committee's approval, the earnings credit willalso be given with respect to balances maintainedin an attorney's IOLA account, but not with respectto non-IOLA attorney trust accounts. The earningscredit would only be applied to reduce or eliminatemonthly bank fees otherwise chargeable to theattorney, and would not result in a cash payment orbank credit over and above the monthly bank fees.

Because the bank would, in addition, waive themonthly maintenance fee associated with the IOLAaccount, the IOLA Fund would receive moremoney from IOLA accounts maintained byattorneys who have accepted the earnings creditsthan from other IOLA accounts.

IOLA accounts are unsegregated interest-bearingtransaction accounts with check writing privileges.


The interest on IOLA accounts is used to helpfinance legal services for the poor. The currentIOLA interest rate paid by the bank state wide is.35 percent per annum. Pursuant to New YorkJudiciary Law §497(4)(c)(i) and (ii), "qualifiedfunds" that are not deposited in an unsegregatedIOLA account must be deposited in a segregatedinterest-bearing attorney trust account for theclient's benefit, or in an unsegregatedinterest-bearing attorney trust account provided thebank or the depositing lawyer can separatelycompute and pay to each client the interest earnedby such client's funds.

"Qualified funds" are defined by Judiciary Law§497(2) as: moneys received by an attorney in afiduciary capacity from a client or beneficial ownerand which, in the judgment of the attorney, are toosmall in amount or are reasonably expected to beheld for too short a time to generate sufficientinterest income to justify the expense ofadministering a segregated account for the benefitof the client or beneficial owner. In determiningwhether funds are qualified for deposit in an IOLAaccount, an attorney may use as a guide theregulation adopted by the board of trustees of theIOLA fund pursuant to subdivision four of sectionninety-seven-v of the state finance law.

The qualified funds determination "guideline"authorized by § 497(2) is found at 21 NYCRR§7000.10, and provides that where the deposit isnot expected to "generate at least $150 in interest orsuch larger sum as the attorney or law firm in theexercise of his professional judgment deems maybe equivalent to the cost of administering a separateaccount," the attorney "may choose to place thesefunds in a pooled IOLA account." The guidelinethus reaffirms, in the context of a $150 "safeharbor," the broad IOLA deposit standard of NewYork Judiciary Law §497(4)(b), which states:

The decision as to whether funds are nominal inamount or expected to be held for a short period oftime rests exclusively in the sound judgment of thelawyer or law firm. Ordinarily, in determining thetype of account into which to deposit particular

funds held for a client, a lawyer shall take intoconsideration the following factors:

(i) the amount of interest the funds would earnduring the period they are expected to be deposited;(ii) the cost of establishing and administering theaccount, including the cost of the lawyer or lawfirm's services;

(iii) the capability of the banking institution,through subaccounting, to calculate and pay interestearned by each client's funds, net of any transactioncosts, to the individual client.

Judiciary Law §497 also limits a lawyer's exposureto damages or professional misconduct chargesarising out of his or her decision to deposit clientfunds into an IOLA account to "bad faith" claims.Subdivision (5) of the statute states: "No attorneyor law firm shall be liable in damages nor held toanswer for a charge of professional misconductbecause of a deposit of moneys to an IOLA accountpursuant to a judgment in good faith that suchmoneys were qualified funds."

Most segregated interest-bearing attorney trustaccounts maintained by the bank are savingsaccounts. When funds from the attorney trustaccount need to be disbursed, a transfer is made tothe IOLA account from which checks are thendrawn. In the metropolitan region, the interest paidby the bank on such savings accounts is currently.65 percent interest per annum. The upstate interestrate is currently .50 percent per annum.

The earnings credit factor to be employed by thebank is progressive. In the metropolitan region, ifthe aggregate amount of the qualifying accountbalances, including an IOLA account, were $5,000or less, there would be no earnings credit. If theamount were between $5,000 and $50,000, therewould be a credit of .9 percent annually. Foraggregate balances above $50,000, the credit wouldbe 1.0 percent annually. The regime would be thesame upstate, except $2,500, not $5,000, wouldrepresent the breakpoint between an earnings creditof zero and an earnings credit of .9 percent.


There are a number of ethical concerns which touchupon the question presented, some of which havebeen brought to our attention by the inquirer. Eachconcern arises from the same basic dynamic –namely, the statute and regulations governing IOLAaccounts give an attorney considerable discretion indetermining whether to deposit client funds into anaccount that pays interest to the client or into anaccount that pays interest to the IOLA Fund, andwhere the anticipated interest would be less than$150, such discretion is arguably beyond allreview.

Whether or not the IOLA Fund benefits from thebank's proposed special program for attorneys, boththe bank and the attorney would benefit wheneveran attorney exercised his or her discretion in favorof a deposit into an IOLA account. The bank wouldbenefit from paying a lower interest rate and, moreimportantly, the lawyer would benefit from payinglower monthly bank charges.

Notwithstanding, this arrangement would not, inour opinion, run afoul of the prohibition againstcharging or collecting "an illegal or excessive fee"set forth in DR 2-106(A), as the earnings credit isnot a client generated "fee." Similarly, the bar ofDR 9-102(A) against misappropriation of client"funds" or client "property" does not apply, as theproposed earnings credit is neither. In this respect,our prior opinions in N.Y. State 532 (1981) (alawyer may not seek or accept interest earned onfunds held in an escrow account as compensationfor serving as an escrow agent), N.Y. State 582(1987) (a lawyer may not retain interest earned on asettlement check deposited into an escrow accountfrom the date of deposit until the date of checkclearance), and N.Y. State 570 (1985) (a lawyermay not retain interest earned on an advance feewhere the lawyer and client have agreed to treat theadvance fee as client property), which the inquirerseeks to distinguish, are largely irrelevant.

Nor do we believe it is necessary to decide whetherthe determination to deposit client funds in anunsegregated IOLA account or in a segregatedattorney trust account (i) is or is not "the exercise ofprofessional judgment" within the meaning of DR

5-101(A), thereby implicating a potential financialconflict of interest, or (ii) might "prejudice ordamage the client" within the meaning of DR7-101(A)(3).

Rather, the disposition of this inquiry is clearlygoverned by DR 5-107(A)(2) and EC 2-21. DR5-107(A)(2) provides: "Except with the consent ofthe client after full disclosure a lawyer shall not:Accept from one other than the client anything ofvalue related to his or her representation of oremployment by the client." EC 2-21 provides: "Alawyer shall not accept compensation or anythingof value incident to the lawyer's employment orservices from one other than the client without theknowledge and consent of the client after fulldisclosure."

In N.Y. State 320 (1973), we opined that, absentdisclosure and client consent, an attorney could notretain the discount received from title companieswithout crediting his or her client the amount of thediscount. In N.Y. State 461 (1977), we opined thatthe acceptance of a portion of the commissionobtained by a fire adjuster in connection with theloss sustained by the lawyer's client would not beunethical "provided the client, with full knowledgeof the facts, has consented to the arrangement andall proceeds secured therefrom by the lawyer arecredited or otherwise disbursed to the client." InN.Y. State 576 (1986) (which opinion amplifiedN.Y. State 351 [1974]), we opined that absentexpress consent to the contrary, a real estateattorney also acting as title insurance agent mustreduce the client's legal fee by the amount ofremuneration from such title company. In N.YState 667 (1994), we reached the same conclusionwith regard to requiring disclosure and clientconsent before an attorney could accept a referralfee from a mortgage broker; however, we therestated that the attorney was not required to remitthe referral fee to the client if the client consentedto its retention by the attorney. Each of theseopinions rested upon the authority of DR5-107(A)(2), and two of them (N.Y. State 461 and667) cited EC2-21.


As the trust funds to be deposited by the attorneyinto an attorney trust account (IOLA or non-IOLA)will only come into the attorney's hands as aconsequence of the representation of a client, andas the proposed earnings credit would reduce oreliminate monthly bank charges that wouldotherwise be debited from the attorney's accounts,there is clearly something "of value" that is beingoffered to the attorney by "one other than theclient" which is "related to his or her representationof or employment by the client." That the earningscredit will not influence his or her conduct withregard to the negotiation of a transaction or theprosecution or defense of a claim for which thelawyer was retained does not, in our view, take thematter outside the sweeping purview of DR5-107(A)(2). For example, if an attorney maintainsan average monthly IOLA balance in excess of$50,000, the bank will credit him or her at least$500 in reduction of bank fees for the year, not aninsignificant or de minimus sum. Such an earningscredit may well influence the attorney's decision asto where client trust funds should be deposited, andthat decision would have a direct decision as towhere client trust funds should be deposited, andthat decision would have a direct and adversefinancial impact upon the client if an IOLA accountis chosen.

We do not, however, see the proposed earningscredit on IOLA accounts as presenting "so great adanger of unfairness, deception, overreaching andconflict of interest, or the appearance thereof" as towarrant a per se prohibition. Compare N.Y. State532 (1981) ("While we interpret the Code asrequiring a per se prohibition against retaininginterest earned on escrowed funds in thecircumstances stated [lawyer representing clientand also serving as escrow agent in real estatetransaction], we recognize a possible distinctionwhere interest is paid on a special account in whicha lawyer deposits [certain] non-escrow clientfunds..."). Therefore, as contemplated by DR5-107(A), provided the client has consented to thearrangement after full disclosure, an attorney mayaccept an earnings credit against bank chargesbased upon balances held in the attorney's IOLAaccount.

CONCLUSIONAn attorney may only accept an earnings creditagainst bank charges based uponbalances held in the attorney's IOLA account withthe consent of the client after full disclosure.

(26-03)

____________________________

Opinion 816 (10/26/07)

Topic: Advance payment retainer; client trustaccount.

Digest: A lawyer may ethically accept an advancepayment retainer, place such funds in the lawyer'sown account, and retain any interest earned. TheLawyer may require the client to forward anadvance payment retainer to pay for final fees thataccrue at the end of the relationship.Rules: DR 2-106(C), DR 2-110(A); DR 9-102(A),(C).

QUESTIONS

1. May a lawyer ethically accept an advancepayment retainer and place such funds in thelawyer's own account while retaining any interestearned from such amount?

2. If so, may a lawyer request the client to forwardan advance payment retainer to pay for final feesthat accrue at the very end of the relationship, withinterim fees billed out as they are performed?

OPINION

3. Recently, we have received inquiries regardingthe continued validity of our opinion in N.Y. State570 (1985), which addressed the ethical proprietyof what is commonly known as an advancepayment retainer. An advance payment retainer is asum provided by the client to the lawyer to coverpayment of legal fees expected to be earned duringthe representation. To the extent the fees advanced


are not earned during the representation, the lawyeragrees to return them to the client.

This form of retainer should be distinguished froma general retainer, which is a sum paid to thelawyer for being available to the client. A generalretainer is earned upon receipt.[1] The recentinquiries regarding advance payment retainers maystem from the fact that since we issued Opinion570 in 1985, there have been several significantdevelopments on the subject of retainer agreementsand the language in DR 9-102 has beensubstantially amended. Therefore, it is nowappropriate to revisit the principles stated in N.Y.State 570.

4. In N.Y. State 570 we concluded that fees paid toa lawyer in advance of services rendered are notnecessarily client funds and need not be depositedin a client trust account. Therefore, any interestearned on these fee advances may be retained bythe lawyer. The opinion cautioned, however, thatthe lawyer is obliged to return any portion of thefee advance that is not earned during therepresentation.[2]

5. If the parties agree to treat advance payment offees as the lawyer's own, the lawyer may notdeposit the fee advances in a client trust account, asthis would constitute impermissiblecommingling.[3] "On the other hand, the lawyermay agree to treat advance payment of legal fees asclient funds and deposit them in a client trustaccount; in that event any interest earned on thefunds while in the client trust account must beremitted to the client." [4]

6. Since 1985, we have cited N.Y. State 570 onseveral occasions.[5] N.Y. State 570 has also beencited with approval by the Appellate Division,Fourth Department and the New York City Barethics committee.[6] The validity of such anadvance payment retainer has also been recentlyrecognized by the Supreme Court of Illinois.[7]

7. In opinion 570, we noted that "it appears that thedrafters of the Code of Professional Responsibilitydid not consider advance payments of fees to be

client funds necessitating their deposit in a trustaccount." Although DR 9-102 has beensubstantially amended since 1985, thedeposit in a trust account." Although DR 9-102 hasbeen substantially amended since 1985, the changesdo not affect the reasoning of that opinion. DR2-110(A)(3) requires a lawyer who withdraws fromrepresenting a client to "refund promptly any partof a fee paid in advance that has not been earned."As we observed in Opinion 570, this provisiondoes not require that the advance be deposited in aclient trust account until earned. This conclusion issupported by the language in DR 2-110(A), whichstill separately classifies fee advances and clientproperty. DR 2-110(A)(2) requires a lawyerplanning to withdraw from representing a client to"deliver to the client all papers and property towhich the client is entitled" while DR 2-110(A)(3)separately provides for the refund of any unearned"fee paid in advance." In sum, the standardsdelineated in N.Y. State 570 for advance paymentretainers are still valid today.

8. We note that advance payment retaineragreements, like any other fee agreement between alawyer and client, must be "fair, reasonable, andfully know and understood by the client."[8] Theseagreements must also comply with other relevantprovisions of the Code. In this respect, we construeDR 9-102 to require the lawyer to maintaincomplete records of any advance payment retainerreceived and to render appropriate account to theclient regarding the retainer. [9] Although theadvance payment retainer is not client property, theclient retains an interest in that portion of theretainer that is not yet earned by the lawyer. Furthermore, at the conclusion of the representationthe lawyer must promptly return any portion of theadvance payment retainer that is not earned.[10]

Finally, it would be inappropriate for a lawyer tonegotiate a nonrefundable advance paymentretainer with the client.[11]

9. An advance payment retainer will obviouslybenefit the lawyer by helping to ensure that he orshe will be paid for services rendered, at least to theextent of the advance. This form of arrangement


can also benefit the client, who may wish to hirecounsel to defend the client from judgmentcreditors. If the lawyer deposited such a retainer ina client trust account, the funds would remain theproperty of the client and might be subject toclaims of the client's creditors, thereby making itdifficult for the client to retain counsel. [12]Therefore, it is imperative for a lawyer at the outsetof the representation to discuss the advantages anddisadvantages of advance payment retainers and toreach an agreement about the treatment of any suchadvances. These agreements should be confirmedin writing in the engagement letter where one isrequired. [13]

10. We also conclude that an attorney may requestan advance payment retainer for final fees thataccrue at the very end of the relationship, withinterim fees billed out as they are performed. Whilesuch an arrangement is permissible, it must complywith the standards outlined in Jacobson and ourprior opinions. If the advance payment retainer isintended to be payable only once specific servicesuse performed, it must describe the services that itis intended to cover. If the services outlined in theagreement are not provided, that portion of theadvance payment retainer must be promptlyreturned to the client. [14]

CONCLUSION

11. A lawyer may ethically accept an advancepayment retainer and need not place such funds in aclient trust account. If the advance payment retaineris placed in the lawyer's account, the lawyer mayretain any interest earned from such amount. Alawyer may request an advance payment retainerfor final fees that accrue at the very end of therelationship.

(14-07)

[1] See N.Y. State 570 n. 1.[2] See DR 2-110(A)(3) ("A lawyer who withdrawsfrom employment shall refund promptly any part of afee paid in advance that has not been earned.").[3] See DR 9-102(A)(lawyer may not commingle clientfunds on property with his or her own).[4] N.Y. State 570

[5] See, .e.g., N.Y. State 599 (1989)(discussing nonrefundable minimum fee provisions);N.Y. State 693 (1997); N.Y. State 764 (2003).[6] See Matter of Aquilo, 162 A.D.2d 58, 560 N.Y.S.2d583 (4th Dep't 1990) ("Moneys advanced by clients fordisbursements need not, unless expressly agreed, butheld in trust and may be placed in a general account.");N.Y. City 2002-2.[7] Dowling v. Chicago Options Associates, Inc.,___N.E.2d ___, 2007 WL 1288279, at *7 (Ill., May 3,2007) ("we recognize advance payment retainers as oneof three retainers available to lawyers and theirclients").[8] Jacobson v. Sassower, 66 N.Y.2d 991, 993, 489N.E.2d 1283, 1284, 499 N.Y.S.2d 381, 382 (1985); seeN.Y. State 599 ("The essence of the matter is clarity").[9] DR 9-102(c)(3) requires a lawyer to "[m]aintaincomplete records of all funds, securities, and otherproperties of a client or third person coming intopossession of the lawyer and render appropriateaccounts to the client or third person regarding them."[10] DR 9-102(c)(4) (requiring a lawyer to "pay ordeliver to the client or third person as requested by theclient or third person the funds, securities or otherproperties in the possession of the lawyer which theclient or third person is entitled to receive").[11] See DR 2-106(c)(2)(b) (prohibiting use of anonrefundable fee clause in a domestic relationsmatter); Matter of Cooperman, 83 N.Y.2d 465, 633N.E.2d 1069, 611 N.Y.S.2d (1994) (holding that thepayment of a nonrefundable fee for specific services, inadvance and irrespective of whether professionalservices are actually rendered, is per se violative ofpublic policy).[12] See, e. g., Dowling, ___N.E.2d at___, 2007 WL1288279, at *8 ("Paying the lawyer a security retainermeans the funds remain the property of the client andmay therefore be subject to the claims of the client'screditors. This could make it difficult for the client tohire legal counsel. Similarly, a criminal defendantwhose property may be subject to forfeiture may wishto use an advance payment retainer to ensure that he orshe has sufficient funds to secure legalrepresentation.").[13] See 22 NYCRR Part 1215 (engagement letters areto include, among other things, an [e]xplanation ofattorney's fees to be charged, expenses and billingpractices").[14] See DR 2-110(A)(3); DR 9-102(C)(4); N.Y. State570.


The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics

Opinion No. 1986-5 (7/14/86)

Lawyer as Escrow Agent

Introduction

This opinion addresses certain ethical questionsthat arise when lawyers hold funds in escrow.Although the issues are, in many cases, similar tothose involving trust funds or other funds held forclients or third parties, only escrow accounts arecovered here.

We first discuss the general duties of escrowagents and the need for fully informed consent byall parties before the lawyer for one of them canact as escrow agent. We stress the importance ofhaving a carefully drafted escrow agreement thatcovers, among other things, possible disputes overthe escrowed funds. Our opinion then speaks tothe possibility that the escrow agreement mayinvolve a client confidence or secret and discussesthe conflicts that may arise between the interests ofthe client and the interests of the other party to theescrow. We then turn to the conflicts that mayarise between the interests of the lawyer and theinterests of his own client with respect to theescrowed funds. Finally, our opinion discusses thepermissible modes of investing the funds, thelawyer's entitlement to any income that may beearned thereon, participation in the New YorkIOLA (Interest on Lawyer Accounts) program,problems of commingling and recordkeepingrequirements.

I. Escrow Accounts and Escrow Agents

An escrow agent is a custodian or stakeholder offunds designated for a special purpose, usuallypursuant to a written agreement. The escrow agenthas contractual and fiduciary duties to all parties tothe escrow arrangement and may dispose of theescrowed funds only in accordance with the termsof the escrow agreement or with the consent of allparties. The duties of an escrow agent are thus

principally matters of contract and fiduciary law,rather than of ethics, and to that extent are beyondthe jurisdiction of this Committee.

A lawyer serving as escrow agent has fiduciaryduties and obligations, not only to his client, but toall parties to the escrow agreement. In addition, alawyer's conduct with respect to escrowarrangements is governed by the Code ofProfessional Responsibility. As discussed morefully below, the requirements of Canon 9pertaining to the preservation, safekeeping and useof client funds and trust property are applicable toescrowed funds held by a lawyer, although suchfunds are not literally "funds of clients." N.Y. City82-8; N.Y. City 79-48 (1980); N.Y. State 532(1981); In Re Hollendonner, No. D-1 (N.J. Sup.Ct., Oct. 17, 1985).

II. Consent and Escrow Agreements

As a general rule, it is ethically permissible for alawyer to represent a client and to act as escrowagent in the same transaction if all interestedparties have consented after full disclosure by thelawyer of the possible effect of his dual role on theinterests of each party, and if it is obvious that thelawyer can adequately represent the interests of allparties. See DR 5-105(C); N.Y. County 573(1969). Such consent must be fully informed. Aconsent based upon the contemplated discharge ofroutine escrow instructions, without taking intoaccount potential disputes among the parties, is notsufficient to override a conflict of interest in theevent of a dispute. N.Y. City 80-56.

It is advisable, therefore, to include in the escrowagreement carefully drafted provisions makingclear that the non-client party agrees that, in theevent of a dispute between the parties with respectto the escrow or the underlying transaction, thelawyer may represent his client in the dispute.Such a provision clarifies the scope of the non-client's consent and therefore lessens thelikelihood of confusion and delay that might be


caused by the lawyer's attempting to obtain suchconsent after a dispute occurs, or having to resignas escrow agent or being disqualified fromrepresenting his client.

In order to give the lawyer-escrow agent anagreed-upon means of resolving any conflict ofinterest, the escrow agreement should also providethat the escrow agent may at his option pay theescrowed funds into court or submit the matter toarbitration in the event of a dispute over the funds.Such a provision should expedite the ability of theescrow agent to resign as such, but to continue torepresent his client, in the event that he deems itnecessary or desirable. If the escrow agent were tobring an interpleader action, however, the courtmight decide that, notwithstanding the fullyinformed consent of all interested parties, thelawyer-escrow agent cannot represent one of theclaimants to the escrowed funds while at the sametime he is seeking to be discharged by the courtfrom any further liability with respect to the funds.It is also possible that the lawyer would berequired to testify in such an action, therebydisqualifying him from representing his client. SeeDRs 5-101 and 5-102.

III. Escrow Agreement as Confidence or Secret

Whether the existence of an escrow account, orinformation pertaining to that account, is aconfidence or secret of a client within the meaningof Canon 4 is a question that frequently arises,usually in the context of a request for suchinformation by the Internal Revenue Service orother governmental authority. Under Canon 4, alawyer is prohibited from knowingly revealing aconfidence or secret of his client. A "confidence"refers to information protected by the attorney-client privilege under applicable law. DR 4-101(A). Whether information pertaining to anescrow account constitutes a confidence is thus aquestion of law beyond the jurisdiction of thisCommittee. A "secret" refers to other informationgained in the professional relationship that theclient has requested be held inviolate or thedisclosure of which would be embarrassing orwould likely be detrimental to the client. Id.

Whether the existence of, or information withrespect to, an escrow account fits this definitionrequires a factual determination on a case-by-casebasis.

A lawyer may reveal confidences or secrets withthe consent of the clients affected, but only afterfull disclosure to them. A lawyer may also revealconfidences or secrets when permitted under theDisciplinary Rules or required by law or courtorder. DR 4-101(C). Thus, if presented with arequest by a governmental authority for productionof information pertaining to escrow accounts whena client is a target of an investigation, a lawyermust, unless the client has consented to disclosure,decline to furnish such information on the groundeither that it is protected by the attorney-clientprivilege or that it has been gained in the course ofa confidential relationship. Taking such a position(as in support of a motion to quash a subpoena)will usually result in a court order deciding theissue. If disclosure is compelled, it will not breacha lawyer's ethical obligation with respect to hisclient's confidences or secrets. If the records of thelawyer, rather than of the client, are the subject ofthe inquiry, the lawyer's response should be thesame, unless he is certain that the requestedinformation does not constitute a client confidenceor secret. See N.Y. County 413 (1953); ABA 393(1961); N.Y. County 377 (1975); N.Y. City 312(1934); Connecticut 81-3 (1980); Oregon 440(1980); Michigan CI-1088 (1985); Michigan CI-925 (1983); Michigan CI-389 (1979); Tennessee81-F-20 (1981). Depending upon his client'sinterests, however, the lawyer may have a furtherduty under Canon 7 (a lawyer should represent hisclient zealously within the bounds of the law) toappeal a court order adverse to his client. SeeMichigan CI-925 (1983); Michigan CI-1088(1985).

IV. Conflicts of Interest -- Client versus ThirdParty

Canon 5, which requires a lawyer to exerciseindependent professional judgment on behalf ofhis client, and in particular to avoid a stake ininterests that might conflict with those of his


client, is applicable to the conduct of a lawyer whorepresents one party to a transaction and at thesame time acts as escrow agent for both parties.See N.Y. City 80-56; N.Y. County 573 (1969);N.Y. County 477 (1959); ABA 923 (1966). Therole of the escrow agent as a neutral stakeholdermay conflict with the obligation of the lawyer toassert his client's position with respect to thetransaction. See N.Y. City 82-8; N.Y. City 80-56;N.Y. County 357 (1940); Nassau County 80-7. Inthe event of a dispute over the disposition of theescrowed funds, the escrow agent, as a fiduciaryfor both sides, would be obligated to assume aneutral position, while, as the lawyer for one party,he would be ethically bound to represent his clientzealously. See N.Y. County 357 (1940); Canon 7.

Another source of conflict between thesimultaneous roles of lawyer and escrow agentmay arise when the lawyer is put in a position ofhaving to assert a lien on the escrowed funds onbehalf of his client. On the one hand, the escrowagent has a duty to treat the escrowed fundsneutrally and in accordance with the terms of theescrow agreement. See Nassau County 80-8. Onthe other hand, the lawyer has an ethical obligationto assert any claims his client may have in adispute. This Committee has noted in the past thatalthough the issue involves questions of lawrelating to the duties of an escrow agent, such alien would nonetheless appear to be anencumbrance on escrowed funds, the imposition ofwhich would seem incompatible with thestakeholder's role. N.Y. City 80-56. In the absenceof knowing consent by the non-client to thelawyer's continuing to act in both capacities, thelawyer should either resign as escrow agent ordecline to represent his client in the dispute. In anycase, Canon 9 requires a lawyer to avoid even theappearance of impropriety. Depending upon thecircumstances, it might appear improper for alawyer to participate in the attachment of funds heis holding as escrow agent. Id.

Even in the absence of a dispute between theparties to the escrow agreement, the lawyer-escrowagent may face conflicts of interest. For example,in the course of the attorney-client relationship, the

lawyer may acquire information material to theescrow arrangement which should be disclosed tothe parties in interest. If such information does notconstitute a client confidence or secret, the lawyershould, if circumstances warrant, advise his clientto take action to eliminate the need for disclosure.If the client is unwilling or unable to do so, thelawyer should disclose such information to theother parties to the escrow agreement. See N.Y.County 477 (1959). If the information doesconstitute a confidence or secret, the lawyer shouldprobably resign as escrow agent to avoid even theappearance of conflict of interest or divided loyaltyto his client.

V. Conflicts of Interest -- Lawyer versus Client

Lawyers sometimes wish to assert their ownclaims against funds they are holding in escrow,usually to recover unpaid legal fees. Such claimsmay arise in one of three situations: (1) fundswhich are payable in full to the parties to theescrow and the client is entitled to receive at leastpart; (2) funds which are immediately payable onlyin part; and (3) funds which are only potentiallypayable to the client. The question whether thelawyer-escrow agent may claim the funds in any ofthese situations principally involves legal issues.For example, the existence of an attorney'sretaining or charging lien on the escrowed funds aswell as the lawyer-escrow agent's contractual andfiduciary duties are all legal matters and, aspreviously noted, are thus beyond the jurisdictionof this Committee.

The ethical considerations come into play only tothe extent the lawyer has legal rights to theescrowed funds. There are two provisions of theCode of Professional Responsibility with which alawyer in this position should primarily beconcerned. The first is DR 9-102(A)(2), whichprovides as follows:

Funds belonging in part to a client and inpart presently or potentially to the lawyer orlaw firm must be deposited [in a separateaccount], but the portion belonging to thelawyer or law firm may be withdrawn when


due unless the right of the lawyer or law firmto receive it is disputed by the client, inwhich event the disputed portion shall not bewithdrawn until the dispute is finallyresolved.

The second is DR 9-102(B)(4), which states that alawyer shall:

Promptly pay or deliver to the client as requestedby a client the funds, securities, or other propertiesin the possession of the lawyer which the client isentitled to receive. See N.Y. City 82-22; N.Y. City82-61; N.Y. City 82-65; N.Y. City 590 (1941);N.Y. City 229 (1932); ABA 859 (1965); Maryland84-60 (1983); Kentucky E-292 (1984); MichiganCI-636 (1981).

When the entire amount in escrow is payable andat least a part is to be paid to the client againstwhom the lawyer has a claim, the lawyer must firstdetermine whether the funds to be paid the client"presently" or "potentially" belong to the lawyer.This is a legal and not an ethical question. Forexample, the escrow agreement may provide that aportion of the escrowed funds is to be paid to thelawyer as legal fees. (In such cases, because of thepotential conflict the lawyer may have, all partiesto the escrow agreement should have the conflictexplained to them at the outset and their consentshould be obtained.) In such situations, as a matterof contract law, part of the funds would presentlyor potentially belong to the lawyer. The clientwould not be "entitled to receive" the funds andthus DR 9-102(B)(4) would not require that thefunds be paid to the client. However, if the fundsdo not presently or potentially belong to thelawyer, they must be "promptly" turned over to theclient.

Assuming the funds may legally belong to thelawyer, he should then notify the client of hisclaim to see if the client agrees or disagrees. If theclaim is disputed, then, under DR 9-102(A)(2), thelawyer may not pay out the disputed portion tohimself until the dispute is resolved, but mayretain the funds until such time. 1 Again, this isbecause the client would not be "entitled to

receive" the funds and thus DR 9-102(B)(4) wouldnot be applicable. Of course, if there is no dispute,the funds may be taken by the lawyer. If the lawyerhas a claim to only part of the funds, theundisputed portion should promptly be paid to theclient.

If the escrow agreement calls for only a portion ofthe escrowed funds to be paid out, or if the fundsare only potentially payable to the client, a similaranalysis to that described above should befollowed. There may, however, be additionalethical considerations. The lawyer as escrow agentmay be presented with a conflict of interest. To theextent that his disputed claim may only partially besatisfied by the funds payable, or is only to besatisfied from potentially payable funds, thelawyer will have a self-interest in interpreting theescrow agreement, if susceptible to interpretation,in such a manner that the funds not yet payablebecome so as soon as possible. This conflict wouldbe greater if the escrow agent is, in certaincircumstances, required to pay the funds to a thirdparty. In such an instance, the lawyer-escrow agentwill have an interest in interpreting the agreementso that the funds go to his client and thus may beobtained by the lawyer. If the funds payable wouldfully satisfy the disputed claim, the lawyer mayhave an interest in delaying further distributions tothe client, if possible, as a means of forcing asettlement of the dispute. Because of the conflict,the lawyer should resign as escrow agent in thesecases.

VI. Permissible Modes of Investing EscrowedFunds

All escrowed funds received by a lawyer must bedeposited in one or more identifiable accounts, inwhich (with limited exceptions) no fundsbelonging to the lawyer may be deposited. DR 9-102(A).

We have previously opined that, although the ruleby its terms refers only to "bank accounts," itallows the lawyer to deposit escrowed funds inother types of accounts which bear characteristicsof safety and security similar to a bank account.


We express no opinion on the merits of any suchalternative investment account. See N.Y. City 82-8; N.Y. City 81-15; N.Y. City 79-48 (1980); N.Y.City 79-22.

The propriety of using a particular investmentmode is primarily a matter of the lawyer-escrowagent's authority under the escrow agreement andhis obligations under applicable law. We urge thatthe lawyer obtain the consent of the parties to theescrow agreement before depositing escrowedfunds in an account other than a bank account.N.Y. City 82-8; N.Y. City 79-22. Further, thelawyer should ensure that any pre-withdrawalnotice and waiting periods that may apply areunderstood and approved. N.Y. State 90 (1968). Ifknowing consent of all parties is obtained, thelimitation of DR 9-102(A) to bank accounts (ortheir equivalent) should not be applicable toescrow accounts.

VII. Commingling of Escrowed Funds

It is impermissible for a lawyer to commingle aclient's funds with his own funds; however, sinceit is generally impractical to deposit each escrowedfund in a separate account (DR 9-102(A) and EC9-5), lawyer-escrow agents often commingleseveral funds in one escrow account. This ispermissible as long as proper records aremaintained and other ethical requirements arefulfilled.

VIII. Interest-Bearing Accounts; Distribution ofInterest

The typical escrow account -- containing severalescrowed funds -- is often not an interest-bearingaccount because of the difficulty in calculating theinterest attributable to each party. ABA 348(1982); N.Y. State 554 (1983). Nonetheless,Canon 9 has been repeatedly interpreted to permit,but not require 2, the placement of escrowed fundsin one or more interest-bearing accounts, as longas the requirements of DR 9-102 and other ethicalrules are met. N.Y. City 81-15; N.Y. State 554(1983); ABA 348 (1982); cf. N.Y. City 79-22.

Lawyers may not retain as compensation for theirescrow services, or otherwise, any of the interestearned in interest-bearing escrow accounts unlessthey have obtained the prior knowing consent oftheir clients and the other parties to the escrow,and even with such consent, there are still seriousrisks of ethical impropriety.

In light of the fiduciary nature of the attorney-client relationship and the fact that the lawyer maybe in a superior bargaining position, agreementspurporting to grant consent to such arrangementspresent a clear danger of overreaching and couldlead to a breach of Canon 5, which requires alawyer to exercise independent professionaljudgment on the client's behalf. This is so becausethe lawyer would have a financial interest indelaying the event that terminates the escrowwhich might conflict with his duty to his client andother parties relating to the funds. See N.Y. City81-68 (1982).

There is also the danger of violating DR 2-106(A),which prohibits a lawyer from collecting a clearlyexcessive fee. Since the expenses involved in anescrow account are generally nominal, the interestaccrued would often substantially exceed anyactual administrative costs. See N.Y. City 79-48(1980). See also N.Y. City 181 (1931)(professionally improper for an attorney,"arbitrarily," to retain interest as compensation forhis services as escrow agent where the escrowagreement is silent on the subject); N.Y. City 81-15 ("In the absence of an explicit agreement, anyincome realized on the client's funds by anattorney-escrow agent belongs to the client.");ABA 348 (1982) (reaffirming ABA 545 (1962))and ABA 991 (1967), and stating that underpresent-day Canon 9, although depositing funds instatutory "IOLTA" or "IOLA" accounts is proper,it is unethical to use interest earned on client funds"to defray the lawyer's own operating expenseswithout the specific and informed consent of theclient."); N.Y. State 554 (1983) (interest earned on"trust accounts," absent the client's consent,belongs to the client).


Some bar association ethics committees have gonefarther and concluded that agreements permittingpayments to lawyers from the interest earned onescrow accounts for the purpose of defraying theiradministrative costs are per se improper. See N.Y.State 532 (1981) (expressly rejecting N.Y. City79-48 (1980)); N.Y. State 575 (1986); NassauCounty 85-9; Nassau County 84-2. Our Committeedoes not agree with this view. We adhere to theposition of our earlier opinions that it is not per seimproper for a lawyer to pay himself interestearned on escrowed funds if he has obtained theprior knowing consent of the client and the otherinterested parties; however, we again caution thateven with such consent, there are grave risks ofethical impropriety. These risks includeoverreaching, a conflict of financial interestbetween the lawyer and client in violation ofCanon 5, overcharging the client in violation ofDR 2-106(A), and commingling client funds withthe lawyer's funds in violation of DR 9-102(A).Any agreement purporting to give such consent, ifchallenged, would be subject to strict scrutiny.

IX. IOLA

The New York IOLA (Interest on Lawyer Acc-ounts) program, authorized by the legislature inSection 497 of the Judiciary Law, 3 is anonmandatory, state-supervised program underwhich lawyers may deposit and commingle in aninterest-bearing account clients' funds (includingescrowed funds) that are too small, or to be heldfor too short a period of time, to be worthinvesting in a separate interest-bearing account.The interest on the funds is automatically paid tolegislatively approved organizations. The mainpurpose of the program is to help provide civillegal assistance to the poor.

It is ethically proper for lawyers to participate inIOLA. N.Y. State 554 (1983); see also ABA 348Since the funds used in IOLA are not reasonablyexpected by the client to earn interest (because thesum is so small or to be held for so short a time),the client is not "entitled" to the interest earned byvirtue of the program DR 9-102(B)(4); hence,

there is no violation if that interest is paid outunder the program rather than to the client.

X. Recordkeeping

Pursuant to DR 9-102(B)(3), a lawyer mustmaintain complete records of all escrowed fundscoming into his possession and render appropriateaccounts to his client and the other interestedparties regarding them. Lawyers in New Yorkshould also refer to the Uniform Rule for thePreservation of Client Funds, applicable in all fourDepartments of the Appellate Division (22NYCRR §§§§ 603.15, 691.12, 806.18 and1022.5), which sets forth detailed requirementsregarding client-fund recordkeeping, including aseven-year retention rule. _______________________

1 One committee has said that the only instance inwhich a lawyer may ethically withhold escrowedfunds from a client is when the escrow agreementspecifically so permits. Nassau County 80-7;Nassau County 85-7. We do not agree.

2 Although there is generally no ethical obligationto place funds in an interest-bearing account, theremay be a fiduciary obligation to do so under thelaw of trusts where the funds are sufficient to earninterest. See N.Y. State 554, citing 2 Scott, Law ofTrusts, §§§§ 180.3, 181 (3d ed. 1967); N.Y. State575 (1986); Judiciary Law §§ 497(4). Further, inABA 348, it was indicated that where the amountand the holding period of particular funds make itobvious that the interest to be earned wouldexceed the cost of placing the funds in an interest-bearing account, the failure to seek the client'sinstructions as to how to invest the funds could bean "extreme violation" of the lawyer's fiduciaryobligation, and thus violative of DR 6-101(A) andDR 7-101(A)(1). We agree with the ABA position.

3 Subdivision (5) of §§ 497 provides that "Noattorney shall be liable in damages nor held toanswer for a charge of professional misconductbecause of a deposit of moneys to an IOLAaccount pursuant to a judgment in good faith thatsuch moneys were qualified funds." The term


"qualified funds" is defined in subdivision (2) as"moneys received by an attorney in a fiduciarycapacity from a client or beneficial owner andwhich, in the judgment of the attorney, are toosmall in amount or are reasonably expected to beheld for too short a time to generate sufficientinterest income to justify the expense ofadministering a segregated account for the benefitof the client or beneficial owner."

Opinion No. 1991-3 (5/16/91)

Opinion

The Committee has received several inquiriesconcerning the ethical propriety of "non-refundable retainers" for lawyers practicing inNew York.

This Opinion addresses whether a lawyer mayethically enter into a fee agreement with a clientproviding for a fee paid in advance of theperformance of the services that is to be "non-refundable". We conclude that (i) various types offee agreements that may commonly be thought ofor referred to as "non-refundable" are ethicallypermissible; however, (ii) no fee paid in advancecan be literally "non-refundable" in allcircumstances; and, therefore, (iii) a lawyer maynot ethically represent or characterize to a client afee being paid in advance as "non-refundable".

I. There has been controversy over the ethicalappropriateness of "non-refundable retainers". Forexample, the Bar Association of Nassau Countyhas opined that a lawyer may never enter into a feeagreement with a client that calls for a non-refundable retainer and that unearned advance feepayments must be refunded to a client upondischarge from employment. Opinion 85-5 (June18, 1985). See also Bar Association of GreaterCleveland Opinion 84-1 (October 26, 1984) (alawyer may not require a non-refundable retainerto secure his or her availability over a specifiedperiod of time without regard to a specifiedmatter); Brickman and Cunningham, "Non-

refundable Retainers: Impermissible UnderFiduciary, Statutory and Contract Law", 57Fordham L. Rev. 149 (1988).

At what might appear to be the other end of thespectrum, the Pennsylvania Bar AssociationCommittee on Legal Ethics and ProfessionalResponsibility has expressly disagreed with theNassau County Bar. In Formal Opinion 85-120(Jan. 29, 1987), the Pennsylvania Committeeconcluded that a non-refundable retainer places alawyer on call so that the lawyer must forego otheremployment and that it is proper to compensate alawyer for that factor. That Committee concluded,therefore, that Pennsylvania lawyers could enterinto "non-refundable retainer" agreements withclients provided that the fee charged wasreasonable and not excessive and that suchagreements were fully explained to the clients andreduced to writing.

To some degree, these apparently differing viewsabout "non-refundable retainers" result fromdiffering uses of the term. For purposes of thisOpinion, we distinguish among three types of feearrangements, each of which may on occasion bereferred to as a "non-refundable retainer", asfollows:

(i) Minimum fee. A "minimum fee" is a statedminimum payment a lawyer receives forundertaking a representation regardless of theamount of work actually involved. Such aminimum fee may entitle the client to someamount of legal services, with additional chargesfor work beyond that amount, but the client wouldnormally receive no refund if the actual servicesare less than the total covered by the minimum.Often, the minimum fee amount is collected inadvance. Such a minimum fee might reflect therecovery of necessary start-up costs that areincurred with each new matter -- costs whichalternatively, for example, could be recoveredthrough a higher than normal charge for the firstfew hours of representation -- or compensation forthe fact that other employment will be foreclosedas a result of taking on the new matter.


(ii) Flat fee. A "flat fee" is a stated amount for therepresentation contemplated, to be paid regardlessof the actual hours that are ultimately required.The agreement might provide for an additional feeif the representation extends to an additional phase(e.g., the case goes to trial or there is an appeal).The flat fee reflects a sharing of risks betweenlawyer and client and generally provides the clientwith the security or comfort of a known cost for aparticular service.

(iii) Retainer. A "retainer" is an amount paid forreserving the availability of a lawyer, generallywith respect to a particular period of time. Theretainer may also provide that the lawyer be on callto represent a specific client in connection with aparticular event or transaction, if the client decidesto use the lawyer. In the latter case, the retaineragreement may implicitly contemplate that thelawyer could not represent anyone else inconnection with the event or transaction wheresuch representation could interfere, by reason of aconflict of interest or otherwise, with therepresentation of the client who is reserving theservices of the lawyer. Where the retainer is for aspecified period of time, it is generallycontemplated that the lawyer will limit his or herother commitments so as to be available for theclient paying the retainer. Fees for actual legalservices performed might be credited against theretainer amount (in which case the retainer wouldresemble a minimum bill) or they might be billedin addition to the retainer.

These distinctions reflect basic differences in thenature of fee arrangements both in terms of theclient's expectations and the lawyer's justification.Any of these three types of arrangements might,under various circumstances, be called "non-refundable", since the client would not generallyhave an expectation of receiving a refund at theend whether as a consequence of the resultsobtained, the hours actually worked or the natureof the services actually performed. 1 Therefore,each of these fee arrangements is clearlydistinguishable from a simple "advance" againstfuture fees and expenses. In addition, each mightbe referred to as a "non-refundable retainer".

II. The principal ethical issue involving "non-refundable" fee arrangements is whether thelawyer is thereby charging a fee that is "excessive"within the prohibition of DR 2-106(A) of theLawyer's Code of Professional Responsibility (the"Code").

DR 2-106(B) defines what is an excessive fee andlists a number of relevant factors to be consideredin determining a fee's reasonableness. DR 2-106(B) states in full:

"A fee is excessive when, after a review of thefacts, a lawyer of ordinary prudence would be leftwith a definite and firm conviction that the fee isin excess of a reasonable fee. Factors to beconsidered as guides in determining thereasonableness of a fee include the following:

1. The time and labor required, the novelty anddifficulty of the questions involved and the skillrequisite to perform the legal service properly.

2. The likelihood, if apparent or made known tothe client, that the acceptance of the particularemployment will preclude other employment bythe lawyer.

3. The fee customarily charged in the locality forsimilar legal services.

4. The amount involved and the results obtained. 5. The time limitations imposed by the client or by

circumstances. 6. The nature and length of the professional

relationship with the client. 7. The experience, reputation and ability of the

lawyer or lawyers performing the services. 8. Whether the fee is fixed or contingent."

The standard set forth in DR 2-106(B) is highlyfact-specific, and the Committee does not expressany opinion on its operation in the abstract. DR 2-106(A) provides that a "lawyer shall not enter intoan agreement for, charge or collect an illegal orexcessive fee". Thus, every fee agreement must bejustifiable at the time it is entered into based uponthe factors listed in DR 2-106(B). The Committeeconcludes that, in the case of fees agreed to andpaid in advance of the time the services areperformed, the point of termination of the


representation constitutes a time at which the fee is"charge[d]" or "collect[ed]" by the lawyer. Therefore, ethically, no fee or fee agreement canever be absolutely "non-refundable" as that termmay be literally understood, since it will always besubject to the proscription of DR 2-106(A), asexplicated by DR 2-106(B).

At the same time, it is the opinion of thisCommittee that flat fees, minimum fees andtraditional retainers can satisfy the criteria ofreasonableness. In fact, one can argue that such feearrangements are at least implicitly contemplatedby DR 2-106(B). The relevant factors clearlyinclude more than the number of hours of legalservices actually performed, the lawyer's skill andexperience, and the results obtained. For example,DR 2-106(B)(2) expressly lists the likelihood thatthe representation in question will preclude otheremployment if that likelihood is "apparent or madeknown to the client". The preclusion of otheremployment would appear to be a principaljustification for a traditional "retainer" (although,not necessarily the lawyer's only motivation inseeking a "retainer") and may be relevant to"minimum fee" and "flat fee" arrangements aswell. 2 Similarly, the factors set out insubparagraphs (3), (5), (6), (7) and (8) of DR 2-106(B) could be relevant to the reasonableness ofand provide justification for flat fees, minimumfees and retainers. All of these factors could justifya fee that might otherwise appear, when viewedafter the fact, to be high relative to the actualnumber of hours of service performed or theresults obtained.

III. Additional issues arise where the lawyerwithdraws from the representation or is dischargedby the client prematurely.

The case of withdrawal is expressly addressed byDR 2-110(A)(3) -- "any part of a fee paid inadvance that has not been earned" shall be"promptly" refunded. What it means for a fee tohave been "earned" is not clear. Certainly, thefactors relevant to the reasonableness of the feewould apply here as well, and any amounts inexcess of a reasonable fee must be refunded. The

Committee believes, however, that the concepts of"reasonableness" and "earned" are not identical.

How much of the fee has been "earned" willdepend upon the express terms of the feearrangement and the parties' expectations, as amatter of contract interpretation, as well as theextent to which the lawyer satisfied the client'slegitimate expectations, the benefits received bythe client, what the lawyer actually did during therepresentation and the situation in which the clientis left after withdrawal. The fee "earned" may beless than an amount that might otherwise beconsidered not to be "excessive".

The case of discharge is affected by significantlegal issues. As a matter of law, the client's right todischarge a lawyer is essentially absolute, andwell-established legal precedent dictates that aclient should not be compelled to continue beingrepresented by a lawyer in whom the client has lostconfidence or trust. See, e.g., Martin v. Camp, 219N.Y. 170, 114 N.E. 46 (1916). These policies canbe jeopardized by fee arrangements that purport tobe "non-refundable", especially where the lawyeris discharged before any meaningful services havebeen performed. Such an arrangement, if enforced,could effectively compel some clients to continuean unsatisfactory relationship with a lawyerbecause the client would otherwise be required topay twice for the contemplated representation orbe unable to afford new counsel. Therefore, courtshave generally been reluctant to enforce suchagreements and have, instead, based thecompensation to a lawyer who has beendischarged upon quantum meruit. See, e.g.,Jacobson v. Sassower, 122 Misc. 2d 863, 474N.Y.S. 2d 167 (1983), aff'd, 107 A.D. 2d 603, 483N.Y.S. 2d 711 (1st Dept.), aff'd, 66 N.Y. 2d 991,489 N.E. 2d 1283, 499 N.Y.S. 2d 381 (1985). Seealso Brickman and Cunningham, supra, at 153-170.

This Committee does not opine on legal questions;and, therefore, we express no view as to the legalenforceability of a "non-refundable" agreementwhere an attorney has been discharged or the prop-


er legal standard for determining the amount of thefee to which the lawyer is entitled.

As a matter of ethics, however, the Committeelooks to the proscriptions and guidelines of DR 2-106. In the case of discharge where a fee has beenagreed to and paid in advance, this Committeebelieves it appropriate to apply the analysis of DR2-106(B), with the benefit of hindsight, to all thecircumstances as they exist at the time of thedischarge. That analysis would includeconsideration of the actual amount of workperformed, the results achieved and the variousother factors that could not have been known inadvance when the agreement was entered into andthe payment made. That analysis, therefore, couldresult in the conclusion that the amount of the feealready paid is unreasonable and that a refund isrequired.

IV. To this point, we have discussed the ethicalissues concerning the substance of various types offee agreements that could be loosely termed "non-refundable". We turn now to the matter of theactual usage in fee agreements of the word "non-refundable" or other language purporting to statethat the fee paid will not be refunded under anycircumstances, whether such agreements are oralor written.

Because we conclude that no agreement can makea fee literally non-refundable, being subject to (i)the reasonableness standard of DR 2-106(A) in allcases, (ii) the "not earned" standard of DR 2-110(A)(3) in the case of withdrawal, and (iii)potential legal limitations in the case of discharge,the Committee also concludes that the use of theword "non-refundable" or equivalent language in afee agreement is necessarily misleading. Atminimum, it may be likely to cause the client toreach mistaken conclusions as to his or her legalrights. In addition, we have already noted that thewords "non-refundable retainer" as applied to feesappear to be subject to various meanings andinterpretations with in the profession so that theusage is ambiguous in fact.

Finally, if the issue of a possible refund arises, thelawyer will be in an obvious and untenableposition of conflict. The lawyer's duty to the clientwould require that the lawyer advise the client thatthe "non-refundable" fee is not or may not actuallybe non-refundable under the particularcircumstances as a matter of law, while at thesame time the lawyer would presumably bedesirous of retaining the amounts already paidpursuant to the fee agreement. We believe thatthese circumstances raise ethical problems underEC 2-19, EC 5-2, DR 5-101(A), EC 7-8, EC 7-9,DR 7-101(A), EC 9-1 and EC 9-2.

Therefore, we conclude that a lawyer may notproperly denominate or characterize a fee as "non-refundable" or otherwise use words that couldreasonably be expected to convey to the client theunderstanding that a fee paid before the servicesare performed will not be subject to refund oradjustment under any possible circumstance. ________________

1 We discuss separately below the issue of refundwhere the lawyer withdraws or is discharged bythe client.

2 If that factor is a basis for the fee arrangement,then that circumstance should normally beexplained to the client in order to fall clearly withDR 2-106(B)(2).

Opinion No. 1995-6 - (4/5/95)

Topic: Client Funds; Incompetent Client; Intereston Trust Accounts. Digest: A lawyer who has (a) successfullynegotiated a settlement of a lawsuit on behalf of anincompetent client, (b) received the settlementproceeds and (c) is holding those proceeds in atrust account, but who cannot release the proceedsto the client without delivering a general release tothe defendant should take steps necessary to obtaina valid release or measures that would permit himto dispense with the requirement that a release be


delivered. Although the Code does not specificallyrequire that lawyers hold client funds in interest-bearing accounts, the failure to invest client funds,taking into account the amount of funds held for aspecific client and the expected holding period,may in some circumstances constitute neglect.

Code: DRs 6-101(A), 9-102, 9-102(F).

Question

What are the ethical obligations of a lawyer whohas (a) successfully negotiated a settlement of alawsuit on behalf of an incompetent client, (b)received the settlement proceeds and (c) is holdingthose proceeds in a trust account, but who cannotrelease the proceeds to the client withoutdelivering a general release to the defendant?

Opinion

The inquirer is counsel for an individual who hasbeen institutionalized in a mental facility. Theclient is mentally incompetent, has not granted apower of attorney to anyone and does not have alegal guardian. The inquirer has successfullynegotiated the settlement of a law suit on behalf ofthe client and is holding the $4,000 settlementproceeds in an attorney trust account. The client,however, did not execute a general release prior tohis incapacity, and the inquirer is not authorized torelease the settlement proceeds without firstobtaining an executed general release anddelivering it to the defendant. We have been askedto opine on the inquirer's ethical responsibilities inthese circumstances.

The inquirer is ethically obligated to maintain thefunds in an appropriate escrow account until oneof the following four conditions has occurred:

(1) The client recovers sufficient mental capacityto sign a general release.

(2) A guardian is appointed who signs the generalrelease, or, should the client die, the release is

executed on behalf of the client's estate by theadministrator or executor of the client's estate.

(3) In view of the circumstances, the inquirerreaches an agreement with the defendant underwhich it authorizes the release of the settlementproceeds in the absence of a general release.

(4) An application is granted by the appropriatecourt for permission to deposit the funds in courtfollowing a procedure similar to that set forth inDR 9-102(F).

So long as the inquirer continues to hold the funds,depending on the prognosis of the client'scontinued incompetence and his life expectancy, itmay be incumbent upon the inquirer to transfer thesettlement proceeds from an "interest on lawyeraccount" ("IOLA") (designed to hold smallamounts of money where the amount and the timethe funds will be in escrow are not sufficient tojustify opening an individual escrow account) toan individual escrow account.

Both the Lawyer's Code of ProfessionalResponsibility (DR 9-102) and the Model Rules ofProfessional Conduct (Rule 1.15) require thatproperty of clients and third parties be keptseparate from a lawyer's own property. However,these rules say nothing concerning whether suchfunds must be maintained in an interest-bearingaccount. N.Y. State 90 (1968) advanced the viewthat whether a client's funds may be put in aninterest-bearing savings account is "largely aquestion of law rather than ethics," and suggestedthat whether such a deposit was proper dependedon the circumstances.

The opinion focused on the notice and waitingperiod technically applicable to savings accounts.See also N.Y. State 575 (1986) and 554 (1983);ABA, Annotated Model Rules of ProfessionalConduct 254 (2d ed. 1992) ("[g]enerally, a lawyerneed not deposit client funds in an interest-bearingaccount"). * See generally ABA/BNA Lawyers'Manual on Professional Conduct at 45:201 (1994)


("Traditionally, lawyers at their discretion havebeen able to deposit client funds in interest-bearingaccounts. . . . Neither the Model Code nor theModel Rules impose an obligation on a lawyer toinvest funds for the benefit of a client or thirdperson. Instead, they leave the matter to lawsgoverning the general obligations of a fiduciary.");Charles W. Wolfram, Modern Legal Ethics §§ 4.8,at 183 (1986) ("[t]rust accounts are typically non-interest bearing").

Judiciary Law §§ 497, enacted in 1983, providesrules with respect to interest on lawyer accountsand specifically states: "An attorney shall havediscretion, in accordance with the Code ofProfessional Responsibility, to determine whethermoney received by an attorney in a fiduciarycapacity from a client or beneficial owner shall bedeposited in non-interest or in interest bearingaccounts." ABA 348 (1982), which provides alengthy examination of the rules with respect toplacing client's funds in interest bearing accounts,noted that the focus of the ethical rules on clientfunds was safekeeping, accounting and delivery,not investment. However, the opinion stated thatwhen the amount of funds held for a specific clientand the expected holding period make it obviousthat the interest to be earned would exceed thelawyer's administrative charges, "the lawyershould consult the client and follow the client'sinstructions as to investing." It also stated that inthe case of an extreme violation of a lawyer's dutyto invest a client's funds amounting to grossneglect, see DR 6-101(A), there would be a basisfor professional discipline.

It is not clear whether the opinion refers to afailure to follow a client's instructions or to asituation that demanded investment where thelawyer failed to invest. See also N.Y. City 1986-5n.2.

It is the view of this Committee that, given the sizeof the fund and available interest rates, if the fundis likely to be retained in escrow for a period of ayear or more, a separate interest-bearing trustaccount for the client may be ethically required.

Conclusion

A lawyer who has (a) successfully negotiated asettlement of a lawsuit on behalf of anincompetent client, (b) received the settlementproceeds and (c) is holding those proceeds in atrust account, but who cannot release the proceedsto the client without delivering a general release tothe defendant should take steps necessary to obtaina valid release or dispense with the requirementthat a release be delivered. If it is likely that thesettlement proceeds will be retained by the lawyerfor a period of a year or more, the lawyer shouldestablish a separate interest-bearing trust accountfor the client.

Opinion No. 1997-1 (3/97)

Topic: Interest charges on unreimbursed expenses

Digest: A lawyer may enter into a fee agreementunder which the client will be charged interest onunreimbursed expenses of litigation to coverinterest paid to the bank from which the lawyerborrows to pay the expenses

Code: DRs 2-106(D), 5-103(B)(1), 5-104(A)

Question

A lawyer represents plaintiffs in personal injuryactions on a contingent fee basis. The lawyeradvances funds to pay expenses of litigation (e.g.,court costs, expert witness fees and otherdisbursements). The lawyer borrows from a bankto finance these disbursements. May the lawyercharge clients interest on funds advanced to paylitigation expenses at the rate charged by the bank?

Opinion

Loans from a lawyer to a client are generallyrestricted, see DR 5-104(A), and in litigation,loans for most purposes are flatly forbidden. As an


exception, however, DR 5-103(B)(1) provides that"[a] lawyer may advance or guarantee the expensesof litigation . . . ." Although the exception does notexplicitly address whether a lawyer may chargeinterest on funds advanced for this purpose, otherethics committees have uniformly concluded that,subject to limitations, a lawyer may do so. SeeAla. RO-88-88 (1988); Fla. Op. 86-2 (1986); Ga.Op. 92-1 (1992); Haw. Op. 32 (1992); Ill. 94-6(1994); Iowa Op. 81-7 (1981); Md. Op. 94-24(1994); N.J. Op. 603 (1987); Va. Op. 1595 (1994).

We agree, subject to limitations recognized in theabove-cited opinions. First, the interest chargedmay not exceed the interest charges actuallyincurred by the lawyer. Second, the provision mustbe explained clearly to the client in advance andagreed upon by the client. Finally, the method bywhich the rate of interest will be determined mustbe stated in a writing provided to the client. SeeDR 2-106(D) ("Promptly after a lawyer has beenemployed in a contingent fee matter, the lawyershall provide the client with a writing stating themethod by which the fee is to be determined,including . . expenses to be deducted from therecovery [ILLEGIBLE WORD]"): see also N.Y.City Bar Op. 1993-2 (1993).

Although this Committee does not address issuesof substantive law, we note that Rules of Courtadopted by the Appellate Divisions of the SupremeCourt of the State of New York may furtherrestrict the proposed practice of charging intereston disbursements in personal injury actions. Rulesof Court governing contingent-fee representationin personal injury actions require the filing ofretainer statements and prescribe their contents.Among other things, the Rules provide that thelawyer's percentage of the amount recovered "shallbe computed on the net sum recovered afterdeducting from the amount recovered expensesand disbursements for expert medical testimonyand investigative or other services properlychargeable to the enforcement of the claim orprosecution of the action." McKinney's 1996 Rulesof Court, sec. 691.20 (22 NYCRR sec. 691.20).The lawyer should consider whether the proposedconduct is permissible under these Rules.

Conclusion

Subject to the limitations identified above and anyapplicable legal restrictions, the Committeeanswers the question in the affirmative. Weconclude that a lawyer may charge clients intereston funds loaned to cover expenses of litigation.

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Formal Opinion 2002-2: Duty to PayInterest on Client Funds Deposited in an

Interest-Bearing Account

TOPIC: Duty to pay interest on client fundsdeposited in an interest-bearing account whereretainer agreement does not require attorney to payinterest to client.

DIGEST: Where a lawyer has placed clientfunds in an interest-bearing escrow account, andthe lawyer's retainer agreement does not addresswhether the lawyer must pay interest on clientfunds to the client, the lawyer must pay anyinterest earned on the funds to the client. If thelawyer cannot locate the client, the lawyer shoulddeposit the client's funds with the Lawyers' Fundfor Client Protection.

CODE: DR 9-102

QUESTIONIf a lawyer has deposited client escrow funds in aninterest-bearing account, and the retaineragreement does not address the lawyer's duty topay interest to the client on such funds, may thelawyer retain the interest earned on these deposits?

OPINION:A lawyer has submitted an inquiry indicating thatshe has several Client Fund Accounts in JPMorgan Chase that involved cases that have beenclosed. The funds were escrowed in connectionwith the purchase and sale of real estate. The


moneys remaining in escrow represent interestearned prior to the closing of the transaction. Thereal estate contracts did not require funds to beplaced in interest bearing accounts, and herengagements with the clients are silent on theissue. The aggregate dollar amount of the interestis around $3,000. The interest arises fromapproximately sixteen separate client transactions,dating back up to ten years. Some of the formerclients may be difficult to locate. She has asked forguidance as to how to dispose of the interestresidue.

DR 9-102(A) [22 N.Y.C.R.R. § 1200.46] strictlyprohibits commingling of client funds with thefunds of a fiduciary, and DR 9-102(B)(2) requiresthat a lawyer in possession of funds belonging toanother, incident to her practice of law, maintainthose funds in special bank accounts. These rules,taken together with general trust principals,mandate that interest on separated client fundsbelongs to the client. See N.Y. State 582 (1987)("it is ethically improper for a lawyer to receiveinterest earned on funds held in an escrow accountas compensation for serving as the escrow agent,"citing N.Y. State 532 (1981)); N.Y. State 554(1983) ("where a lawyer holds a sum for a clientwhich is sufficient to earn interest, the lawyer hasa fiduciary obligation to invest that sum, and anethical obligation to notify the client of receipt ofthe funds, and any interest thereon, maintainadequate records to and make prompt payment ofboth principal and interest" (citations omitted));N.Y. State 90 (1968) (lawyer's duty as to escrowedfunds is "to treat the funds in all respects as theclient's property and if any income is realized onthe funds, it would, of course, belong to theclient"); Nassau County 84-2 (1984) (attorney maynot retain interest earned on funds during escrow);N.Y. City 81-68 (1981) ("[s]ince the fundsdeposited in the lawyer's trust account are, bydefinition, client's funds, it follows that anyinterest earned on those funds belongs to theclient"); N.Y. City 79-48 (1980) ("in the absenceof an explicit agreement, any income realized onthe client's funds by an attorney-escrow agentbelongs to the client"); see also N.Y. State 570(1985) (the client is entitled to interest on funds

deposited into escrow even where they are notstrictly client's funds).

Although some opinions have suggested in dictumthat "it might be permissible for an attorneysubject to the client's consent to retain interest onclient funds which are to be promptly androutinely disbursed," e.g., N.Y. State 532 (1981),this possible exception to the stringentrequirements of DR 9-102 would apply, if at all,only to situations where the lawyer had obtainedexpress consent to retain the interest and theamount of interest was so small as to be deminimus. N.Y. State 582 (1987); N.Y. City 81-68(1981). Neither of these conditions exists on thefacts presented. In any case, the better practice inthose situations where the amount of interest willbe negligible and the funds must be promptly androutinely disbursed is to use an IOLA account.N.Y. State 554 (1983) (where the funds are heldfor a short period of time and the amount ofinterest is expected to be nominal, the funds maybe deposited into an IOLA account and the interestpaid to tax-exempt organizations for the support oflegal services or other purposes as defined by thelegislature). "The decision as to which funds maybe appropriately placed in the IOLA program isleft to the discretion of the lawyer to whom thefunds are entrusted." Id. A client may also agree todonate interest to a charity of the client's choice.N.Y. City 84-15 (1981).

Thus, on the facts provided, any interest on thefunds belongs to the clients and should be paid tothem, if they may be located.

If a lawyer cannot locate a client or another personwho is owed funds from the attorney trust account,the lawyer is required to seek a judicial order to fixthe lawyer's fees and disbursements, and to depositthe missing client's share with the Lawyers' Fundfor Client Protection. DR 9-102(F) [22N.Y.C.R.R. § 1200.46(f)]. Forms for such anapplication are available online at the website forthe Lawyers' Fund for Client Protection,www.nylawfund.org.


1 Because DR 9-102(F) requires that monies owedto missing clients be deposited with the Lawyers'Fund for Client Protection, the lawyer's may notexercise discretion to deposit funds in an IOLAaccount under the circumstances presented here.Issued: March, 2002

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Formal Opinion 2008-1: A Lawyer'sEthical Obligations to Retain and to

Provide a Client with ElectronicDocuments Relating to a Representation

QUESTIONS What ethical obligations does a lawyer have toretain e-mails and other electronic documentsrelating to a representation? Does a lawyer needclient permission before deleting e-mails or otherelectronic documents relating to therepresentation? When a client requests that alawyer provide documents relating to therepresentation, may the lawyer charge the clientfor the costs associated with retrieving e-mails andother electronic documents from accessible andinaccessible storage media?

OPINION

I. Background We live in the digital era. Lawyers routinely usee-mail to formally convey important informationand documents to clients, colleagues, and othercounsel. Just as routinely, lawyers use e-mail toconduct informal conversations. In many lawpractices, lawyers are as likely to send an e-mail asto pick up the telephone or walk down the hall to acolleague's office. The growing reliance by lawyers on digitaltechnology, of course, is not limited to e-mails.Virtually all correspondence, transactionaldocuments, and court filings originate as electronicdocuments. Many of these electronic documentsare never converted into paper format, and lawyers

have become increasingly comfortable in drafting,editing, and commenting on these documents.Emblematic of the growing reliance on electronicdocuments, courts and administrative agenciesnow increasingly insist that lawyers make filingselectronically. In addition, many lawyers and lawfirms, taking advantage of widely availabledocument imaging technology, convert their paperrecords into electronic documents fororganizational and storage purposes. Given this reality, we believe that it would beuseful to address some of the ethical issuesimplicated by a lawyer's reliance on e-mails andother electronic documents. Specifically, thisOpinion addresses (i) a lawyer's ethical obligationto retain e-mails and other electronic documentsrelating to a representation; (ii) the ethicallimitations on a lawyer's ability to delete e-mailsand other electronic documents; (iii) the extent towhich a client has a presumptive right to e-mailsand other electronic documents in a lawyer'spossession; and (iv) the extent to which a lawyermay charge a client for producing e-mails andother electronic documents at the client's request.1 II. A Lawyer's Obligation to Retain E-mails andOther Electronic Documents A lawyer's file relating to a representation includesboth paper and electronic documents.2 The ABAModel Rules of Professional Conduct (the "ModelRules") define a "writing" as "a tangible orelectronic record of a communication orrepresentation ...." Rule 1.0(n), Terminology. The Code of Professional Responsibility (the"Code") does not explicitly identify the fullpanoply of documents that a lawyer should retainrelating to a representation. The only Codeprovision that specifically requires a lawyer toretain client records is DR 9-102. That disciplinaryrule imposes mandatory record-retentionrequirements with respect to a small number ofdiscrete documents, such as retainer agreements,bills to clients, bank statements, and records oftransactions in escrow accounts. See DR9-102(D)(1)-(10).


The Code, however, contains several provisionsthat implicitly impose on lawyers an obligation toretain documents. For instance, under DR 6-101, alawyer has an obligation to represent a clientcompetently. See also EC 6-1 ("Because of thelawyer's vital role in the legal process, the lawyershould act with competence and proper care inrepresenting clients."). Similarly, DR 7-101(A)(3)states that "[a] lawyer shall not intentionally . . .[p]rejudice or damage the client during the courseof the professional relationship," subject to certaindefined exceptions in DR 2-110 and DR 7-102. In 1986, before the explosive growth in electronicdocuments, this Committee addressed a lawyer'sobligations regarding the retention and dispositionof documents in the lawyer's file at the end of arepresentation. Endorsing several guidelinesadopted by the American Bar Association,3 werecognized as a starting point that certaindocuments in a lawyer's file might belong to theclient and should be returned at the client'srequest.4 ABCNY Formal Op. 1986-4. ThisCommittee further opined, without significantelaboration, that before destroying any documentsthat belong to the client, the lawyer should contactthe client and ask whether the client wants deliveryof those documents.5 As to documents "that belong to the lawyer" or "asto which no clear ownership decision can bemade," this Committee opined that the questionswhether and how long to retain these documentswere "primarily a matter of good judgment." Id.We noted that with respect to these documents, thelawyer should use care not to destroy or discarddocuments (i) that the lawyer knows or shouldknow may still be necessary or useful in theassertion or defense of the client's position in amatter for which the applicable statutorylimitations period has not expired; or (ii) that theclient has not previously been given but which theclient may need and may reasonably expect thatthe lawyer will preserve. Id. In any given representation, a number ofdocuments will likely fall into one of these two

categories. Among those documents are legalpleadings, transactional documents, andsubstantive correspondence. Other documentsregularly generated during a representation, suchas draft memoranda or internal e-mails that do notaddress substantive issues, are unlikely to fall intothese categories. Often a lawyer will need toexercise good judgment, document by document,to determine whether specific documents shouldbe retained. To be sure, our 1986 Opinion does not require alawyer to retain every paper document that bearsany relationship, no matter how attenuated, to arepresentation. For instance, consistently with theguidelines described above, a lawyer does not havean ethical obligation to keep every handwrittennote of every conversation relating to arepresentation. The same conclusion will often bereached with respect to drafts of correspondence,of pleadings, and of legal memoranda, amongother types of paper documents. Because many e-mails and other electronicdocuments now serve the same function that paperdocuments have served in the representation of aclient, we believe that the retention guidelinesarticulated in our 1986 Opinion should also applyto e-mails and other electronic documents. As is the case with paper documents, whiche-mails and other electronic documents a lawyerhas a duty to retain will depend on the facts andcircumstances of each representation. Manye-mails generated during a representation areformal, carefully drafted communications intendedto transmit information, or other electronicdocuments, necessary to effectively represent aclient, or are otherwise documents that the clientmay reasonably expect the lawyer to preserve.These e-mails and other electronic documentsshould be retained. On the other hand, in manyrepresentations a lawyer will send or receivecasual e-mails that fall well outside the guidelinesin our 1986 Opinion. No ethical rule prevents alawyer from deleting those e-mails.6


We also expect that many lawyers may retaine-mails and other electronic documents beyondthose required to be retained under our 1986Opinion. For example, some lawyers and lawfirms may retain all paper and electronicdocuments, including e-mails, relating in any wayto a representation, as a measure to protect againsta malpractice claim. Such a broad approach todocument retention may at times be prudent, but itis not required by the Code. III. A Lawyer's Obligations to Organize and StoreE-mails and Other Electronic Documents We next consider whether a lawyer has any ethicalobligation to organize in any particular mannerthose e-mails and other electronic documents thatthe lawyer retains, or to store those documents inany particular storage medium. We do not believe, as a general matter, that alawyer has any ethical obligation to organizeelectronic documents in any particular manner, orto store those documents in any particular storagemedium. In determining how to organize and storeelectronic documents, a lawyer should take intoconsideration the nature, scope, and length of therepresentation, and the client's likely need forready access to particular documents. From anethical standpoint, a lawyer should ensure that themanner of organization and storage does not (a)detract from the competence of the representationor (b) result in the loss of documents that the clientmay later need and may reasonably expect thelawyer to preserve. This is more of an issue for e-mails than for otherelectronic documents. Law firms frequently storeelectronic documents other than e-mails, such astransactional documents and court filings, in adocument management system. In such a system,electronic documents are typically coded withseveral identifying characteristics, including byclient and matter. Many document managementsystems permit documents to be located by usingthose identifying characteristics, making it mucheasier to assemble them.

E-mails raise more difficult organizational andstorage issues. Some e-mail systems automaticallydelete e-mails after a period of time. With such asystem, a lawyer will have to take affirmative stepsto preserve those e-mails that the lawyer decides tosave. Furthermore, unless a lawyer organizes thesaved e-mails to facilitate their later retrieval, itmay be exceedingly difficult and expensive for thelawyer to retrieve those e-mails, and, as explainedin Part V below, the lawyer must not charge theclient for retrieval costs that could reasonably havebeen avoided. Thus, a practice with much to commend it is toorganize saved e-mails to facilitate their laterretrieval, for example, by moving those e-mails toan electronic file devoted to a specificrepresentation, or by coding those e-mails withspecific identifying characteristics, such as a clientand matter number, when the e-mails are first sentor received. IV. A Lawyer's Obligation to Provide the Clientwith E-mails and Other Electronic Documents inthe Lawyer's Possession A related, but distinct, issue is the scope of alawyer's obligation to provide the client withe-mails and other electronic documents retained bythe lawyer. Put differently, once a lawyer decidesto retain an e-mail or other electronic document —even when that electronic document does not haveto be retained under our 1986 Opinion — does thelawyer have an obligation to provide the clientwith that electronic document upon request? The Code does not explicitly address this issue.The Code recognizes that a client has a right tocertain "papers and property" in the possession ofthe lawyer, but does not spell out what those"papers and property" consist of. See, e.g., DR2-110(2) (providing that, upon withdrawing from arepresentation, a lawyer shall "deliver[] to theclient all papers and property to which the client isentitled"); DR 9-102(C)(4) (providing that lawyershall "[p]romptly pay or deliver to the client orthird person as requested by the client or thirdperson the funds, securities, or other properties in


the possession of the lawyer which the client orthird person is entitled to receive").7 The leading New York case discussing this issue isthe Court of Appeals' 1997 decision inSage RealtyCorp. v. Proskauer Rose Goetz & MendelsohnLLP, 91 N.Y.2d 30, 37 (1997). Abandoning thedistinction adopted by some courts "betweendocuments representing the ‘end product' of anattorney's services, which belong to the client, andthe attorney's ‘work product' leading to thecreation of those end product documents, whichremains the property of the attorney," id. at 35, theCourt of Appeals adopted what it termed the"majority view." It held that "upon termination ofthe attorney-client relationship, where no claim forunpaid legal fees is outstanding," the client is"presumptively accord[ed]... full access" to thelawyer's file on a represented matter. Id. at 34.8 Sage Realty recognized two principal exceptionsto the general rule of presumptive right of fullaccess. The Court of Appeals held that a client isnot entitled to the disclosure of (i) "documentswhich might violate a duty of nondisclosure owedto a third party, or otherwise imposed by law", or(ii) certain "firm documents intended for internallaw office review and use" that are "unlikely to beof any significant usefulness to the client or to asuccessor attorney." Id. at 37-38. The Court ofAppeals elaborated that this second category mightinclude "documents containing a firm attorney'sgeneral or other assessment of the client, ortentative preliminary impressions of the legal orfactual issues presented in the representation,recorded primarily for the purpose of givinginternal direction to facilitate performance of thelegal services entailed in that representation." Id.9

Consistently with the exceptions recognized bySage Realty, a client does not have a presumptiveright of access to e-mail communications betweenlawyers of the same law firm that are "intended forinternal law office review and use" and are"unlikely to be of any significant usefulness to theclient or to a successor attorney." Although itwould be impossible to construct a list of the typesof e-mails that would fall within the Sage Realty

exceptions, those e-mails might include aninstruction to another lawyer or employee of thefirm to perform a particular task; a preliminaryanalysis by a lawyer of a factual or legal issue inthe representation; or a communication by alawyer addressing an administrative issue. The Sage Realty Court did not address whether alawyer would need to provide client access tootherwise inconsequential documents similar tothose intended for "internal law office review anduse," but sent instead to or from a third party notemployed by the lawyer's firm. Common examplesof these documents are an e-mail sent to opposingcounsel confirming the starting time of adeposition, or an e-mail sent to a testifying expertasking for transcripts of recent testimony. Alawyer is not under an ethical obligation to providea client with electronic documents of this sort. V. A Lawyer's Entitlement to Reimbursement forProviding the Client with Electronic Documents inthe Lawyer's File The burden associated with retrieving andproducing e-mails and other electronic documentsis mitigated by the lawyer's ability, under SageRealty, to charge the client based on the lawyer's"customary fee schedules" for gathering andproducing documents to a client. Sage Realty, 91N.Y.2d at 38. Although the Court of Appeals' SageRealty decision principally related to paperdocuments, we do not see any principled reasonwhy a lawyer's fees may not reflect the reasonablecosts of retrieving electronic documents from theirstorage media and reviewing those documents todetermine the client's right of access. See DR2-106.10 The reasonableness of that fee will oftendepend on the circumstances. On the one hand, itmay be reasonable for a lawyer to charge a clientfor hiring an outside vendor to assist in theretrieval of electronic documents that a lawyer hasstored on a less accessible storage medium thatwas widely in use at the time of retention. On theother hand, it may not be reasonable for a lawyer,who chooses not to use widely available andcost-effective technology to organize or code


electronic documents, to then charge the client theadditional costs resulting from the lawyer's choice. In some situations, a client might request a copy ofthe electronic documents in the lawyer's file, butdecline to pay the lawyer's reasonable feeassociated with the retrieval and review of thosedocuments. As a general matter, a lawyer is notobligated to shoulder the costs of retrievingelectronic documents in order to return thosedocuments to the client. As the Court of Appealsheld in Sage Realty: "[A]s a general proposition,unless a law firm has already been paid forassemblage and delivery of documents to theclient, performing that function is properlychargeable to the client under customary feeschedules of the firm, or pursuant to the terms ofany governing retainer agreement." 91 N.Y.2d at38. We are reluctant, however, to articulate abright-line rule. There may be some circumstancesunder which a client reasonably expects its lawyerto manage the client's e-mails and other electronicdocuments to allow for those materials to be sentto the client without either the lawyer or the clientincurring substantial additional expense.11 Alawyer should also consider whether to insist onthe advance payment of fees associated with theretrieval and review of electronic documents whenit is reasonably foreseeable that the client wouldsuffer immediate harm as a result of any delay inthe delivery of the requested documents. VI. At the Outset of the Engagement Lawyer andClient Should Consider Discussing the Retention,Storage, and Retrieval of E-mails and OtherElectronic Documents In light of the exponential growth in e-mails andother electronic documents, and the pace oftechnological change involving the organizationand storage of electronic documents, it may beprudent for a lawyer and client to discuss theretention, storage, and retrieval of electronicdocuments at the outset of an engagement. Lawyerand client may find it worthwhile to discuss andreach agreement at the outset on issues such as (i)the types of e-mail and other electronic documentsthat the lawyer intends to retain, given the nature

of the engagement; (ii) how the lawyer willorganize those documents; (iii) the types of storagemedia the lawyer intends to employ; (iv) the stepsthe lawyer will take to make e-mail and otherelectronic documents available to the client, uponrequest, during or at the conclusion of therepresentation; and (v) any additional fees andexpenses in connection with the foregoing.Consistently with the holding of Sage Realty andDR 2-106, those costs should accord with thelawyer's customary fee schedule and must not beexcessive. By raising these issues at the outset ofthe representation, perhaps as part of theengagement letter, a lawyer and a client will beable to make informed decisions about theappropriate manner of retention, storage, andretrieval of electronic documents to which a clienthas a presumptive right of access.

CONCLUSION

In ABCNY Formal Op. 1986-4, we addressed alawyer's obligations to retain paper documentsrelating to a representation. We now conclude thatthe guidelines articulated in ABCNY Formal Op.1986-4 should also apply to a lawyer's obligationsto retain e-mails and other electronic documents.With respect to the electronic documents that thelawyer retains, the lawyer is not under an ethicalobligation to organize those documents in anyparticular manner, or to store those documents inany particular storage medium, so long as thelawyer ensures that the manner of organization andstorage does not (a) detract from the competenceof the representation or (b) result in the loss ofdocuments that the client may later need and mayreasonably expect the lawyer to preserve. To thoseends, electronic documents other than e-mailspresent less difficulty because they are frequentlystored in document management systems in whichthey are typically coded with several identifyingcharacteristics, making it easier to locate andassemble them later. E-mails raise more difficultorganizational and storage issues. Some e-mailsystems automatically delete e-mails after a periodof time, so the lawyer must take affirmative stepsto preserve those e-mails that the lawyer decides tosave. In addition, e-mails generally are not coded,


or otherwise organized, to facilitate their laterretrieval. Thus, a practice with much to commendit is to organize saved e-mails to facilitate theirlater retrieval, for example, by coding them orsaving them to dedicated electronic files.Otherwise, it may be exceedingly difficult andexpensive for the lawyer to retrieve those e-mails,and, as discussed in this Opinion, the lawyer mustnot charge the client for retrieval costs that couldreasonably have been avoided. In New York, a client has a presumptive right tothe lawyer's entire file in connection with arepresentation, subject to narrow exceptions. Thelawyer may charge the client a reasonable fee,based on the lawyer's customary schedule, forgathering and producing electronic documents.That fee may reflect the reasonable costs ofretrieving electronic documents from their storagemedia and reviewing those documents todetermine the client's right of access. It is prudentfor lawyer and client to discuss the retention,storage, and retrieval of electronic documents atthe outset of the engagement and to considermemorializing their agreement in a retention letter. July 2008

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1 This Opinion does not purport to address issuesrelating to the duty of a lawyer and client topreserve evidence, including electronicdocuments, that arise when a party has notice thatthe evidence is relevant to litigation or reasonablyshould know that the evidence may be relevant toanticipated litigation. See, e.g., Zubulake v. UBSWarburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003);Delta Fin. Corp. v. Morrison, 819 N.Y.S.2d 908(Sup. Ct. Nassau County 2006). 2 The term "lawyer's file" is fast becoming athrowback to an earlier era, connoting as it does acollection of sorted physical documents. In thisOpinion, "lawyer's file" means the collection ofdocuments relating to a representation, regardlessof the (electronic or paper) form or character(sorted or unsorted) of the documents.

3 Formal Opinion 1986-4 of the Committee onProfessional and Judicial Ethics stated in pertinentpart:With respect to papers that belong to the lawyer, orpapers as to which no clear ownership decisioncan be made, the answer to the questions whetherand how long to retain such files is primarily amatter of good judgment, in the exercise of whichthe lawyer should bear in mind the possible needfor the files in the future. See ABA Inf. Op. 1384(1977); N.Y. State 460 (1977). The ABAguidelines, which follow, are particularly helpful: •Unless the client consents, a lawyer should notdestroy or discard items that . . . probably belongto the client. . . . •A lawyer should use care not to destroy ordiscard information that the lawyer knows orshould know may still be necessary or useful in theassertion or defense of the client's position in amatter for which the applicable statutorylimitations period has not expired. •A lawyer should use care not to destroy ordiscard information that the client may need, hasnot previously been given to the client, and is nototherwise readily available to the client, and whichthe client may reasonably expect will be preservedby the lawyer. •In determining the length of time for retention ordisposition of a file, a lawyer should exercisediscretion. The nature and contents of some filesmay indicate a need for longer retention than dothe nature and contents of other files, based upontheir obvious relevance and materiality to mattersthat can be expected to arise. •A lawyer should take special care to preserve,indefinitely, accurate and complete records of thelawyer's receipt and disbursement of trust funds. •In disposing of a file, a lawyer should protect theconfidentiality of the contents. •A lawyer should not destroy or dispose of a filewithout screening it in order to determine thatconsideration has been given to the mattersdiscussed above. •A lawyer should [consider preserving], perhapsfor an extended time, an index or identification ofthe files that the lawyer has destroyed or disposedof.


ABCNY Formal Op. 1986-4. 4 Although the 1986 Opinion recognized thedistinction between documents that are the client'sproperty and documents that are the lawyer's, it didnot articulate any rules for drawing thatdistinction. This is understandable because thedistinction is a question of law, and is thereforebeyond the Committee's jurisdiction. See, e.g.,N.Y. State 623 (1991) ("Which documents may bedeemed to belong to the lawyer is not always easyto ascertain; in certain instances, the lawyer'sownership of such documents may be a complexissue of both law and fact."); ABCNY Formal Op.1986-4 ("Initially, it must be determined whetherthe papers in question, including work product,belong to the client or to the attorney. This is alegal question beyond our jurisdiction."). 5But cf. ABA Informal Op. 1384 (1977) ("Alawyer does not have a general duty to preserve allof his files permanently. Mounting and substantialstorage costs can affect the cost of legal services,and the public interest is not served byunnecessary and avoidable additions to the cost oflegal services."). 6 On a related subject, the Committee onProfessional Ethics for the New York State BarAssociation has set forth procedures for thedisposal of an attorney's file at the conclusion ofthe representation. See N.Y. State 623. Withrespect to documents belonging to a client, theNew York State opinion calls for the lawyer, in thefirst instance, to make the documents available tothe client and, depending on the nature of theclient's response, to take steps designed to give theclient a full opportunity to take possession of thosedocuments. With respect to documents belongingto the lawyer, the New York State opinionprovides that a lawyer may destroy all thosedocuments without consultation or notice to theclient, (i) except to the extent that the law mayotherwise require, and (ii) in the absence ofextraordinary circumstances showing a client's"clear and present need for such documents." N.Y.

State 623 (citing N.Y. State 398 (1975) andABCNY Formal Op. 1986-4). 7See Cal. State Bar Formal Op. 2007-174(construing e-mail and certain other electronicdocuments to fall within the scope of CaliforniaRule of Professional Conduct 3-700(D)(a), whichprovides that when a client requests the return ofthe "[c]lient papers and property," they include anyitems that are "reasonably necessary to the client'srepresentation"). 8 The Sage Realty Court agreed with those lowercourts that "refused to recognize a property right ofthe attorney in the file superior to that of theclient." 91 N.Y.2d at 36. For this proposition, SageRealty relied upon the New York Supreme Court'sdecision in Bronx Jewish Boys v. Uniglobe, Inc.,which held that:Under New York Law, an attorney has a generalpossessory retaining lien which allows an attorneyto keep a client's file until his/her legal fee is paid.Implied in this is the rule that attorneys have nopossessory rights in the client files other than toprotect their fee. In other words, the file belongs tothe client.Bronx Jewish Boys v. Uniglobe, Inc., 166 Misc.2d 347, 350, 633 N.Y.S.2d 711, 713 (Sup. Ct.1995)(internal citation omitted). 9 The exceptions identified by Sage Realty to thepresumption of client access to the documents inthe lawyer's file are consistent with Comment (c)to Section 46 of theRestatement (Third) of theLaw Governing Lawyers, which also recognizescircumstances under which a lawyer may refuse toprovide certain documents in the lawyer's file tothe client: A lawyer may refuse to disclose to the clientcertain law-firm documents reasonably intendedonly for internal review, such as a memorandumdiscussing which lawyers in the firm should beassigned to a case, whether a lawyer mustwithdraw because of the client's misconduct, or thefirm's possible malpractice liability to the client.The need for lawyers to be able to set down theirthoughts privately in order to assure effective and


appropriate representation warrants keeping suchdocuments secret from the client involved . . . . 10 In those instances when a lawyer's electronicdocuments have not been coded, or saved to aspecific file, a lawyer will need to take steps toensure that in returning electronic documents to aclient, the lawyer does not inadvertently reveal theconfidences and secrets of another client. See DR4-101(B)(1). 11See Model Rule 1.16(d) ("Upon termination ofrepresentation, a lawyer shall take steps to theextent reasonably practicable to protect a client'sinterests, such as giving reasonable notice to theclient, allowing time for employment of othercounsel, surrendering papers and property towhich the client is entitled and refunding anyadvance payment of fee or expense that has notbeen earned or incurred. The lawyer may retainpapers relating to the client to the extent permittedby other law."). The lawyer may retain copies ofthe client file at the lawyer's expense. See N.Y.State 780 (2004).

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