Formal Opinion 2002-2: Duty to pay interest on client funds deposited in an interest-bearing account where retainer agreement does not require attorney to pay interest to client

TOPIC: Duty to pay interest on client funds deposited in an interest-bearing account where retainer agreement does not require attorney to pay interest to client.

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?

OPINION:

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, www.nylawfund.org.

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