DUTY TO PAY INTEREST ON CLIENT FUNDS
DEPOSITED IN AN INTEREST-BEARING ACCOUNT
TOPIC: Duty to pay interest on client funds deposited in an interest-bearing
account where retainer agreement does not require attorney to pay interest
DIGEST: Where a lawyer has placed client funds in an interest-bearing
escrow account, and the lawyer's retainer agreement does not address whether
the lawyer must pay interest on client funds to the client, the lawyer
must pay any interest earned on the funds to the client. If the lawyer
cannot locate the client, the lawyer should deposit the client's funds
with the Lawyers' Fund for Client Protection.
CODE: DR 9-102
QUESTION: If a lawyer has deposited client escrow funds in an
interest-bearing account, and the retainer agreement does not address
the lawyer's duty to pay interest to the client on such funds, may the
lawyer retain the interest earned on these deposits?
A lawyer has submitted an inquiry indicating that she has several Client
Fund Accounts in JP Morgan Chase that involved cases that have been closed.
The funds were escrowed in connection with the purchase and sale of real
estate. The moneys remaining in escrow represent interest earned prior
to the closing of the transaction. The real estate contracts did not require
funds to be placed in interest bearing accounts, and her engagements with
the clients are silent on the issue. The aggregate dollar amount of the
interest is around $3,000. The interest arises from approximately sixteen
separate client transactions, dating back up to ten years. Some of the
former clients may be difficult to locate. She has asked for guidance
as to how to dispose of the interest residue.
DR 9-102(A) [22 N.Y.C.R.R. § 1200.46] strictly prohibits commingling
of client funds with the funds of a fiduciary, and DR 9-102(B)(2) requires
that a lawyer in possession of funds belonging to another, incident to
her practice of law, maintain those funds in special bank accounts. These
rules, taken together with general trust principals, mandate that interest
on separated client funds belongs to the client. See N.Y. State 582 (1987)
("it is ethically improper for a lawyer to receive interest earned
on funds held in an escrow account as 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 client which is sufficient to
earn interest, the lawyer has a fiduciary obligation to invest that sum,
and an ethical obligation to notify the client of receipt of the funds,
and any interest thereon, maintain adequate records to and make prompt
payment of both principal and interest" (citations omitted)); N.Y.
State 90 (1968) (lawyer's duty as to escrowed funds is "to treat
the funds in all respects as the client's property and if any income is
realized on the funds, it would, of course, belong to the client");
Nassau County 84-2 (1984) (attorney may not retain interest earned on
funds during escrow); N.Y. City 81-68 (1981) ("[s]ince the funds
deposited in the lawyer's trust account are, by definition, client's funds,
it follows that any interest earned on those funds belongs to the client");
N.Y. City 79-48 (1980) ("in the absence of an explicit agreement,
any income realized on the client's funds by an attorney-escrow agent
belongs 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 not strictly client's funds).
Although some opinions have suggested in dictum that "it might be
permissible for an attorney subject to the client's consent to retain
interest on client funds which are to be promptly and routinely disbursed,"
e.g., N.Y. State 532 (1981), this possible exception to the stringent
requirements of DR 9-102 would apply, if at all, only to situations where
the lawyer had obtained express consent to retain the interest and the
amount of interest was so small as to be de minimus. N.Y. State 582 (1987);
N.Y. City 81-68 (1981). Neither of these conditions exists on the facts
presented. In any case, the better practice in those situations where
the amount of interest will be negligible and the funds must be promptly
and routinely disbursed is to use an IOLA account. N.Y. State 554 (1983)
(where the funds are held for a short period of time and the amount of
interest is expected to be nominal, the funds may be deposited into an
IOLA account and the interest paid to tax-exempt organizations for the
support of legal services or other purposes as defined by the legislature).
"The decision as to which funds may be appropriately placed in the
IOLA program is left to the discretion of the lawyer to whom the funds
are entrusted." Id. A client may also agree to donate interest to
a charity of the client's choice. N.Y. City 84-15 (1981).
Thus, on the facts provided, any interest on the funds belongs to the
clients and should be paid to them, if they may be located.
If a lawyer cannot locate a client or another person who is owed funds
from the attorney trust account, the lawyer is required to seek a judicial
order to fix the lawyer's fees and disbursements, and to deposit the missing
client's share with the Lawyers' Fund for Client Protection. DR 9-102(F)
[22 N.Y.C.R.R. § 1200.46(f)]. Forms for such an application are available
online at the website for the Lawyers' Fund for Client Protection, http://www.nylawfund.org/pubs/misspl.htm.
1 Because DR 9-102(F) requires that monies owed to missing clients be
deposited with the Lawyers' Fund for Client Protection, the lawyer's may
not exercise discretion to deposit funds in an IOLA account under the
circumstances presented here.
Issued: March, 2002