Opinion No. 2013-1

(Inquiry No. 2013-1 )

Safekeeping, payment and delivery of property.

Notification of receipt of property; safekeeping; rendering accounts; payment or delivery of property; client instructions to convert property of another.


A retired attorney who has properly certified his status with the Office of Court Administration may continue to provide legal services to clients without restriction if those services are rendered without compensation and the client is fully informed of any material limitations that might be placed on the representation as a result of the attorney’s retired status—A retired attorney who agrees to hold funds or property in trust for clients must comply fully with Rule 1.15 concerning preservation of identity of funds and property of others—A retired attorney may give legal advice and provide legal services as an executor and trustee provided those services are rendered for no compensation—A retired attorney must disclose and explain his retired status to any prospective or current client with respect to any legal representation undertaken after retirement. But a retired attorney need not make any disclosure to third parties or adversaries with whom he deals on the client’s behalf, or alter office signage, personal stationary or directory listings to reveal that he is retired from practice.

Rule Provisions:
Rule 1.2(a)
Rule 1.15(a)
Rule 1.15(b)(1)
Rule 1.15(c)(1)
Rule 1.15(c)(4)
Rule 1.15(e)
Comment [1]
Comment [4]

Facts Presented:
Some time ago inquiring counsel’s law firm represented an individual in working out a settlement with the client’s lending bank in New York. As part of the settlement the client was obligated to make a payment to the bank. The client was given several options under the settlement agreement to effectuate the payment, one of which was to deposit the required sum with the firm, to be held in the firm’s escrow account and, on the execution of the final settlement agreement by the parties, forwarded to the bank via a check, in the required sum, drawn on the escrow account. The client deposited the required sum with the firm. The client subsequently gave the firm written instructions to issue and send the check. The firm did so. Insofar as the firm was concerned, the matter was settled and no further action was required on the firm’s part. The firm’s representation of the client in the matter was concluded.

A recent review of the firm’s escrow account revealed that the check was never cashed. The firm contacted the client to learn if something had happened between the client and the bank which would explain the bank’s failure to cash the check. The client told the firm that the bank had been closed by government banking authorities. Further investigation on the firm’s part revealed that the bank was in fact closed, and that the FDIC was appointed Receiver of the bank’s assets. The firm suggested that the firm should contact the FDIC to find out about the uncashed check. The firm was told by the client not to contact the bank, its attorneys, or the FDIC, to place a stop on the outstanding check, and to return the money to the client. The firm is concerned that if the firm follows the client’s instructions the firm may be violating an obligation to the bank and its Receiver and placing the firm in jeopardy because although the check may be stale at this point, it still represents a negotiable instrument upon which the bank and its Receiver may demand payment.

What are the firm’s ethical obligations?

Rule 1.15 of the New York Rules of Professional Conduct provides, in relevant part:

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

A lawyer shall:

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

* * * *

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

Comment [4] elaborates:

Paragraph (c)(4) … recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

In Simon’s New York Rules of Professional Conduct Annotated (West) (2013 ed.), after a review of New York case-law authorities, Professor Simon concluded, at p. 703:

In short, if a lawyer knows or should know that someone is “entitled” to certain trust account funds and the lawyer nevertheless disburses the fund to a client or other person, the lawyer may be personally liable (or the lawyer’s firm may be liable) to the person who was entitled to the funds.

Professor Simon continues, at p. 703:

It is not the lawyer’s obligation to resolve the dispute, and the lawyer ordinarily should not take the risk of refereeing the dispute on his own. An attorney who decides to play the role of referee risks violating Rule 1.15(c)(4). However, if a lawyer believes in good faith that a particular claimant is not “entitled” to the funds, then the lawyer may (and perhaps must) pay the funds to those the lawyer believes are entitled to them. One person’s frivolous claim of entitlement to funds in a lawyer’s trust account should not be allowed to defeat another person’s non-frivolous claim to the same funds.

In assessing the import of the “prompt notification” mandate of Rule 1.15(c)(1), Professor Simon observes, at p. 700:

“Promptly” means as quickly as reasonably practicable. Since notification is a simple procedure, “promptly” in Rule 1.15(c)(1) means within a matter of hours or days, not weeks. All that is necessary to satisfy the notice requirement is a brief communication describing the property or funds and stating that the lawyer has received it and will hold it in safekeeping.

Professor Simon observes, at pp. 704-705, that “[s]ometimes a client instructs an attorney to pay settlement proceeds to a third party. Since an attorney must initially deposit settlement proceeds into the attorney’s escrow account, such a request implicates Rule 1.15.” This Committee has determined, in Opinion 11-1, that “the attorney [is] required to comply with the request [to pay the proceeds to a third party] pursuant to Rule 1.15(c) (4) ….” See also, NYSBA Op. 946 (2012) (“Under Rule 1.2(a), a lawyer ‘shall abide by a client’s decisions regarding the objectives of the representation ….’ If a client instructs the lawyer to deliver funds to a third party, then that third person is entitled to receive the funds within the meaning of Rule 1.15(c)(4).”). The firm properly complied with the client’s instructions in issuing a check for the funds.

In New York, whatever may be the legal consequences under the Uniform Commercial Code – something which we do not address — the issuance of a check against a Rule 1.15 account is fraught with ethical significance. New York’s Rule 1.15 is far more detailed and stringent than ABA Model Rule 1.15. “Rule 1.15 is the longest and most strictly enforced rule in New York’s Rules of Professional Conduct. Even minor or unintentional violations of the detailed provisions of Rule 1.15 are met with swift and often harsh discipline.” Professor Simon, supra, p, 675.

Rule 1.15(e) provides that “[a]ll special account withdrawals shall be made only to a named payee and not to cash. Such withdrawals shall be made by check ….” Thus, the issuance of a check itself constitutes a “withdrawal” of the funds. Rule 1.15(b)(1) permits special accounts to be established only “in a banking institution within New York State that agrees to provide dishonored check reports in accordance with the provisions of 22 NYCRR Part 1300.” Indeed, in New York a lawyer may not issue a check from an attorney escrow account drawn against a bank check or certified check that has not been deposited or has not cleared, despite the fact that the risk of certified checks or bank checks not clearing is considered negligible, and other states thus permit lawyers to disburse uncleared funds from such sources. NYSBA Op. 737 (2001). The issuance of a stop on the outstanding check, as the client here has directed, could itself result in the return of the outstanding check, with the consequence that the attorneys would face potential discipline. See, In re DeBenedetto, 81 A.D.3d 65, 916 N.Y.S.2d 798 (2d Dep’t 2011) (attorney’s resignation from the bar accepted where the attorney acknowledged an inability to successfully defend on the merits a complaint that, inter alia, the attorney had disbursed funds from an IOLA trust account via a check which was returned due to a stopped payment).

The inquiring attorney’s firm has no obligation to convey to the client property in the firm’s hands which belongs to a third party. To the contrary, Rule 1.15(a) provides that “[a] lawyer in possession of any funds or property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property. . . .” Comment [1] specifies that “[a] lawyer should hold the funds and property of others using the care required of a professional fiduciary.”

The funds remain in the firm’s account due to the fortuity of the check having not yet been cashed. The client does not appear to have any claim, either frivolous or non-frivolous, to the funds. See, In Re Lehman Brothers Holdings Inc., 439 B.R. 811, 816, 837 (Bkptcy Ct., S.D.N.Y. 2010) (Peck, J.) (The “[a]ggressive and calculated strategy” of seizing deposited funds subject to an automatic bankruptcy stay and setting them off against the debtor’s obligations to the account owner was a “bold” and “combative” step constituting nothing more than “a current example of old aphorism that possession is nine-tenths of the law,” and subjecting the account holder to not only mandated disgorgement, but additionally, potential damages and sanctions.). Based upon the facts contained in the inquiry, the firm would be breaching its fiduciary duty as a custodian of what are now the third party’s funds to comply with the client’s request. The firm’s obligation under these circumstances is to notify the Receiver or the payee, and to honor the check as requested.

On the other hand, if the client, based upon facts not contained in the inquiry, actually has a non-frivolous claim to void the prior settlement and/or for any other reason to “recapture” the funds against which the firm was directed to and did issue a check, then the attorneys would still have an obligation to notify the Receiver, and to maintain the funds until any bona fide dispute regarding ownership of the funds is resolved.

Inquiring counsel’s firm must notify the party entitled to receive the funds residing in the firm’s escrow account of the firm’s possession of the funds, and take such steps as are necessary to promptly pay or deliver those funds to the person entitled to receive them. It would be improper to follow a client’s instructions to convert and transmit to the client the property of another. If there is a bona fide dispute over ownership of the funds, both sides with a claim to the funds should be notified, and the funds held until the dispute is resolved.

[Approved by the Full Committee on February 13, 2013]