Unpayable Escrow Money

Sir:

I have been practicing for a long time.  A really long time.  I remember litigating against Abe Lincoln.  Let me tell you, good old “Honest Abe” may have been a great orator, but such lousy papers.  Anyway, most of my clients have now passed on and my entire practice consists of acting as conservator for 19 cats.  Recently, I looked at my escrow account and realized that there is a significant sum of money in there that I had been holding for an incompetent client who used to live in the neighborhood.  I have no idea if he is dead, institutionalized, or in Florida.  My question is; does a Ferrari look better in black or red?

Yours,                                                                  Atticus F.

Dear Atticus

Black.  However, there are certain ethics rules you might want to consider before you drive off into disbarment.  First, as you state that the money was being held for another person, you hold the money as a fiduciary.  The most basic, yet important, aspect of escrow is: it is not your money!  I’m sorry, but the fortuitous loss of your client does not make you his heir.  There are specific rules in place which control under these very circumstances; which is quite a coincidence as that is what this column is supposed to be about.

What are an attorney’s obligations where he or she holds money in escrow to which the client is unquestionably entitled to, yet the attorney is unable to locate that client?

First, there is an inherent duty of due diligence as the attorney is acting as fiduciary[1].  The attorney must make reasonable efforts to contact the client and wait a reasonable period for the client to resurface.  Once it is reasonably [2]certain the client is missing, the attorney must turn to Rule 1.15 (f) of the Rules.

The Rules mandate that should the escrow result from an action, the attorney must make application to the court wherein the action was maintained for an order directing payment to the Lawyer’s Fund for Client Protection.  Where the escrow results from a matter that was not before a court, the application should be made to the Supreme Court in any county wherein the attorney maintains an office.  In that application the attorney should also ask permission to remove and pay out any fees or disbursements that have not been distributed.  The goal of the application is full distribution of all funds held for the client.  The client’s portion is paid to the Lawyer’s Fund, where it is held for safeguarding and eventual disbursement should the client resurface one day.

If you have funds or property that you are holding in escrow and the intended recipient dies or is institutionalized, the missing client rule does not apply, as you know where the client is but can’t effectuate proper payment.  Accordingly, these client funds must be distributed via the appropriate receiver (executor, guardian, conservator, etc.).

The most important aspect of any payout scenario is that no payout should be made until after you are certain that the payment is in accord with the escrow agreement and that the payment is to the proper person or entity after all rules and formalities are observed.  As an attorney and fiduciary you may be held ethically[3] and financially[4] responsible for any inappropriate payout.  Also, you must document each action taken and maintain records of the relevant transfers for seven years[5].

        Sir:

I just read the above portion of this column and I am left with a vague feeling of unease.  Call it, a hunch.[6]  Specifically, I refer to your remarks about the removal of fees and expenses from an escrow fund.  My question is; if I cannot locate a client for whom I have received a settlement, should I leave my legal fees in the escrow account until I finally resolve the appropriate payout of the escrow corpus to either the client, the Lawyer’s Fund or to the appropriate receiver?

— Confused

Dear Confused:

Wow, you are a fast reader.  Anyway, the question you ask is a very good question, as I think I can answer it without any heavy lifting.  Moreover, the answer is applicable to almost all escrow situations and not just to missing client scenarios.

An escrow account is intended for funds that belong to a client, third parties, or a combination thereof.  You may not maintain personal funds in the escrow account, except for a minimal amount for administrative purposes.  If you maintain personal monies in the account that are commingled with client funds or funds in which any other person has an interest, or if you misuse your escrow account by using it for personal funds, you are subject to serious sanction.

Interestingly, in New Yorka legal fee paid in advance of services being rendered is deemed to be the attorney’s property upon receipt[7].  Once a legal fee is paid to you, either by the client or as part of a settlement or payment from another source, it is your money.  Therefore, unless there is a dispute as to all or part of the fee, you must promptly remove the fee portion from the escrow account upon receipt.

If there is a dispute over the amount of your fee, the amount in dispute must remain in your account until the dispute is resolved.  Note, that where the dispute is over a lesser portion of the total amount held in escrow, the attorney must remove the undisputed portion, as that portion is deemed to be the attorney’s property, as discussed above.

Your rights and obligations to the escrow can be altered by a written agreement which expressly conditions payment of your fee.  For example, if a client pays you an advance fee, but requires that you pay yourself at specific stages or dates, then the money does not become yours unless and until any stated condition(s) is satisfied.  Under this scenario the money remains client funds until earned pursuant to the agreement, thus, it must remain in escrow until earned.[8]


[1] One who acts with “scrupulous good faith and candor”, and who acts “primarily for another’s benefit”. Blacks Law Dictionary.
[2] Reasonable is a fluid term when discussing ethical obligations.  Such factors as the amount of money involved, past dealings with the client, etc., are considerations.  However, the final analysis will be objective, i.e. what would a reasonably prudent attorney/fiduciary do under the same circumstances?
[3] Ethical responsibility may be found even where there is no evidence of venal intent, Matter of Russakoff 79 N.Y.2d 520 (1992); Matter of Ford 287 A.D.2d 870 (3d dep’t. 2001)
[4] Farago v. Burke 262 N.Y. 229 (1933).
[5] Rule 1.15(d).
[6] Brooks, Mel; Young Frankenstein.
[7] N.Y. State Bar Opinion 570 (1985)
[8]N.Y. State Bar Opinion 570 (1985)

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About Chris McDonough

lawyer for lawyers
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