THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
FORMAL OPINION 1995-6
April 5, 1995
ACTION: FORMAL OPINION
TOPIC: Client Funds; Incompetent Client; Interest on Trust Accounts.
DIGEST: A lawyer who has (a) successfully negotiated a settlement of a lawsuit on behalf of an incompetent client, (b) received the settlement proceeds and (c) is holding those proceeds in a trust account, but who cannot release the proceeds to the client without delivering a general release to the defendant should take steps necessary to obtain a valid release or measures that would permit him to dispense with the requirement that a release be delivered. Although the Code does not specifically require that lawyers hold client funds in interest-bearing accounts, the failure to invest client funds, taking into account the amount of funds held for a specific client and the expected holding period, may in some circumstances constitute neglect.
CODE: DRs 6-101(A), 9-102, 9-102(F).
What are the ethical obligations of a lawyer who has (a) successfully negotiated a settlement of a lawsuit on behalf of an incompetent client, (b) received the settlement proceeds and (c) is holding those proceeds in a trust account, but who cannot release the proceeds to the client without delivering a general release to the defendant?
The inquirer is counsel for an individual who has been institutionalized in a mental facility. The client is mentally incompetent, has not granted a power of attorney to anyone and does not have a legal guardian. The inquirer has successfully negotiated the settlement of a law suit on behalf of the client and is holding the $4,000 settlement proceeds in an attorney trust account. The client, however, did not execute a general release prior to his incapacity, and the inquirer is not authorized to release the settlement proceeds without first obtaining an executed general release and delivering it to the defendant. We have been asked to opine on the inquirer's ethical responsibilities in these circumstances.
The inquirer is ethically obligated to maintain the funds in an appropriate escrow account until one of the following four conditions has occurred:
(1) The client recovers sufficient mental capacity to sign a general release.
(2) A guardian is appointed who signs the general release, or, should the client die, the release is executed on behalf of the client's estate by the administrator or executor of the client's estate.
(3) In view of the circumstances, the inquirer reaches an agreement with the defendant under which it authorizes the release of the settlement proceeds in the absence of a general release.
(4) An application is granted by the appropriate court for permission to deposit the funds in court following a procedure similar to that set forth in DR 9-102(F).
So long as the inquirer continues to hold the funds, depending on the prognosis of the client's continued incompetence and his life expectancy, it may be incumbent upon the inquirer to transfer the settlement proceeds from an "interest on lawyer account" ("IOLA") (designed to hold small amounts of money where the amount and the time the funds will be in escrow are not sufficient to justify opening an individual escrow account) to an individual escrow account.
Both the Lawyer's Code of Professional Responsibility (DR 9-102) and the Model Rules of Professional Conduct (Rule 1.15) require that property of clients and third parties be kept separate from a lawyer's own property. However, these rules say nothing concerning whether such funds must be maintained in an interest-bearing account. N.Y. State 90 (1968) advanced the view that whether a client's funds may be put in an interest-bearing savings account is "largely a question of law rather than ethics," and suggested that whether such a deposit was proper depended on the circumstances. The opinion focused on the notice and waiting period technically applicable to savings accounts. See also N.Y. State 575 (1986) and 554 (1983); ABA, Annotated Model Rules of Professional Conduct 254 (2d ed. 1992) ("[g]enerally, a lawyer need not deposit client funds in an interest-bearing account").
* See genrally ABA/BNA Lawyers' Manual on Professional Conduct at 45:201 (1994) ("Traditionally, lawyers at their discretion have been able to deposit client funds in interest-bearing accounts. . . . Neither the Model Code nor the Model Rules impose an obligation on a lawyer to invest funds for the benefit of a client or third person. Instead, they leave the matter to laws governing 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, provides rules with respect to interest on lawyer accounts and specifically states: "An attorney shall have discretion, in accordance with the Code of Professional Responsibility, to determine whether money received by an attorney in a fiduciary capacity from a client or beneficial owner shall be deposited in non-interest or in interest bearing accounts." ABA 348 (1982), which provides a lengthy examination of the rules with respect to placing client's funds in interest bearing accounts, noted that the focus of the ethical rules on client funds was safekeeping, accounting and delivery, not investment. However, the opinion stated that when the amount of funds held for a specific client and the expected holding period make it obvious that the interest to be earned would exceed the lawyer's administrative charges, "the lawyer should consult the client and follow the client's instructions as to investing." It also stated that in the case of an extreme violation of a lawyer's duty to invest a client's funds amounting to gross neglect, see DR 6-101(A), there would be a basis for professional discipline. It is not clear whether the opinion refers to a failure to follow a client's instructions or to a situation that demanded investment where the lawyer failed to invest. See also N.Y. City 1986-5 n.2.
It is the view of this Committee that, given the size of the fund and available interest rates, if the fund is likely to be retained in escrow for a period of a year or more, a separate interest-bearing trust account for the client may be ethically required.
A lawyer who has (a) successfully negotiated a settlement of a lawsuit on behalf of an incompetent client, (b) received the settlement proceeds and (c) is holding those proceeds in a trust account, but who cannot release the proceeds to the client without delivering a general release to the defendant should take steps necessary to obtain a valid release or dispense with the requirement that a release be delivered. If it is likely that the settlement proceeds will be retained by the lawyer for a period of a year or more, the lawyer should establish a separate interest-bearing trust account for the client.