By Janis M. Meyer
Any law student who has taken a legal ethics course knows that converting or otherwise misappropriating the funds of a client or third party entrusted to a lawyer’s care provides a surefire route to suspension or disbarment. The logical conclusion should be that virtually all practicing lawyers are familiar with the provisions of Rules of Professional Conduct, N.Y. Comp. R. & Regs. tit. 22, §1200.0 (N.Y. Rules), R. 1.15 and the Comments thereto and handle their trust accounts, escrow accounts, special accounts, IOLA accounts and any other accounts (all of which must be interest-bearing) holding the funds of clients or third parties incident to the practice of law (for ease of reference, “IOLA Accounts”) accordingly.
Wrong! A casual review of Appellate Division cases for just the past six months yields numerous examples of practitioners being disciplined not only for misusing client funds, but also for failing to follow the appropriate recordkeeping and oversight practices for their IOLA Accounts. These poor practices result in a range of errors, including misidentified accounts, misdirected payments, improper use of client funds for personal expenses, and overdrawn accounts. Although in many cases the disciplined attorney had knowingly misused client funds or had engaged in other improper behavior, a number of violations appear to be due to negligence, mistake or sheer ignorance, that nevertheless subject the respondent-lawyers to discipline.
All indications are that many lawyers are not taking the time necessary to ensure that they are handling their IOLA Accounts properly or supervising those who are handling these accounts on the lawyers’ behalf. Despite the requirement that New York lawyers certify every two years that they have read and understand N.Y. Rule 1.15, most would likely be appalled to know that their practices or those of their firms may be in violation of a provision of this Rule.
What to do? Just as a health-minded person goes to the dentist and doctor at least once a year, a compliance-minded lawyer (meaning everyone) should regularly monitor all IOLA Accounts for which she — or her firm — is responsible. Even lawyers in large firms, where these accounts are often overseen by layers of finance staff, should make sure that their firms are handling IOLA Accounts in accordance with the Rules. Recent cases discussed below underscore the importance of lawyers taking steps to ensure that all transactions involving IOLA Accounts are properly handled.
A Few Examples
In re Feldman, 993 N.Y.S.2d 717 (2d Dept. 2014) — The Respondent had mistakenly issued two checks (totaling $800) from her escrow account for firm business expenses. She discovered the mistake and restored the funds to the account in four days. Although the Court recognized that the lawyer made a mistake and that no client was injured, the Court, nevertheless, found a violation of N.Y. Rule 1.15(a). This, together with an unrelated violation relating to a client release, resulted in a six-month suspension, despite the submission of numerous affidavits attesting to Respondent’s character and what the Court described as her “otherwise unblemished record.” Id. at 720.
In re Rokacz, 121 A.D.3d 134, 990 N.Y.S.2d 413 (1st Dept. 2014) — The Respondent had failed to keep proper records for his IOLA Accounts, which resulted in his commingling personal funds with IOLA Accounts, depositing a tenant’s security deposit into the wrong account, and issuing checks from his escrow account for personal expenses. The Court confirmed the finding of the Referee that Respondent’s “misconduct in failing to learn and comply with the rules governing escrow accounts was the result of poor judgment, not dishonesty.” Id. at 135-36, 990 N.Y.S.2d at 413. Nevertheless, he was subject to a public censure. Id at 136, 990 N.Y.S.2d at 414.
Similarly in In re Ehrenfeld, 992 N.Y.S.2d 569 (2d Dept. 2014), there was no suggestion that the Respondent had engaged in any intentional conversion of client funds, despite shortfalls in his escrow account. In that case, the respondent was publicly censured even though the Court noted that the respondent had recently entered private practice and had no experience with escrow accounts when the violation occurred. Id. at 571.
Another case involving problems in managing an IOLA Account was In re Princivil, 122 A.D.3d 23, 991 N.Y.S.2d 338 (2d Dept. 2014). In that case, the Respondent mailed the client two settlement checks drawn on his trust account. The client did not attempt to cash the checks for eleven months. In the meantime, (1) the balance in the trust account dropped (for a one-month period) below the total amount of the checks, and (2) due to a security breach, the Respondent closed his trust account and opened a new one without notifying the client. When the client finally tried to cash the checks, she was told the account was closed. The Respondent immediately issued two new checks, and the client ultimately received her settlement funds. Id. at 25, 991 N.Y.S.2d at 339. Despite the Court’s recognition of Respondent’s “unblemished record,” the Court imposed a six-month suspension. Id. at 25, 991 N.Y.S.2d at 340.
Even though two dishonored checks were due to a bank error and another shortfall in the escrow account was “isolated in nature,” the Respondent in In re Toscano, 119 A.D.3d 58, 985 N.Y.S.2d 639 (2d Dept. 2014), received a public censure. The Court found that this violation, as well as Respondent’s failure to cooperate in the investigation as required by N.Y. Rule 1.15(i) “reflected adversely on his fitness as a lawyer.” Id. at 62, 985 N.Y.S.2d at 642.
Finally, two cases illustrate the dangers of failing to supervise the handling of IOLA Accounts.
In re Kalathara, 993 N.Y.S.2d 152 (2d Dept. 2014) — On 16 occasions, the balance in the Respondent’s escrow account fell below the amount deposited on behalf of a client. The shortfalls in the account were due to his secretary’s misappropriation of client funds by forging checks and making unauthorized on-line transfers. The Respondent admitted that he had failed to keep an accurate ledger, did not review the monthly bank statements, and did not receive copies of the cancelled checks. The Respondent had no involvement in the misappropriation of the funds, however, and had recovered virtually all of the missing money. Nevertheless, the Respondent was suspended for a year for his “failure to maintain appropriate vigilance over his escrow account,” and, additionally his failure to report his secretary to the authorities. Id. at 154–155. The Court in Kolathara cited In re Galasso, 19 N.Y.3d 688, 978 N.E.2d 1254, 954 N.Y.S.2d 784(2012), for the standard to be applied in determining whether and to what extent to discipline an attorney for errors caused by the conduct of those under his or her supervision. Id. In Galasso, the Court, in affirming the two-year suspension of an attorney whose bookkeeper had misused client funds, stated that:
A discrepancy in an escrow account should, at a minimum, be alarming to a reasonably prudent attorney. This is not to say that attorneys are prohibited from delegating certain tasks to firm employees, but any delegation must be made with an appropriate degree of oversight. We stress that it is the ethical responsibility of the attorney — not the bookkeeper, the office manager or the accountant — to safeguard client funds. Id. at 695, 978 N.E.2d at 1258, 954 N.Y.S.2d at 788.
In re Posner, 118 A.D.3d 18, 983 N.Y.S.2d 408 (2d Dept. 2014) — There were shortfalls in the Respondent’s firm escrow account, called “Mortgage Closing Account.” The Respondent’s wife, who was a partner in the firm, had misappropriated funds, resigned from the bar and was convicted of grand larceny. The Court noted that, although the Respondent engaged in no oversight of the account and was not an active partner in the firm at the time or involved in the misappropriation, he was still a partner and a signatory on the account. Even after his wife advised him that she had issued dishonored checks and was the subject of a Grievance Committee investigation, he took no significant steps to become involved in the oversight and maintenance of the account. [Id. at 20, 983 N.Y.S.2d at 409.] The Court also found a violation in the failure to identify the account as an “Attorney Special Account,” “Attorney Trust Account,” or “Attorney Escrow Account” [as required by 1.15 (b)(2)]. He was suspended from practice for one year. Id. at 21, 983 N.Y.S.2d at 409–410.
Time for that Check-Up?
Overseeing one’s IOLA Accounts is not one of the more glamorous (or even moderately glamorous) tasks on a lawyer’s agenda. It is probably fair to say that most lawyers do not maintain a day-to-day understanding of the activities in their accounts. Even sole practitioners may rely on a secretary or other assistant to oversee their accounts. Lawyers in large firms are even more removed. Nevertheless, as the brief summary of cases above indicates, lawyers must review their IOLA Accounts and related procedures on a regular basis to ensure that they are in compliance with N.Y. Rule 1.15.
Handling IOLA Accounts can be — and is — the subject of entire volumes. See, e.g., N.Y. State Bar Assn., Attorney Escrow Accounts: Rules, Regulations, and Related Topics (Peter Coffey & Anne Reynolds Copps, eds., 3d ed. 2010); see also Roy D. Simon, Simon’s New York Rules of Professional Conduct Annotated, Rule 1.15 (West 2014), for a comprehensive overview of the Rule. The Lawyers’ Fund for Client Protection is a good source for information, www.nylawfund.org, and there is also useful information concerning Interest on Lawyers Trust Accounts on the IOLA Fund of the State of New York website, http://www.iola.org.
First, read (or reread) the Rule. This is not a burden given that New York lawyers certify every two years that they have reviewed the Rule and are in compliance with it. NYS Registration Form, §F, available at www.nycourts.gov; see also In re Rokacz, 121 A.D.3d at 135, 990 N.Y.S.2d at 413 (charging Respondent with, among other violations, falsely certifying in his biennial registration statement that he had read N.Y. Rule 1.15 and was in compliance with it). A review of N.Y. Judiciary Law §497 (setting the method for determining whether to place client funds in an IOLA or other interest-bearing account) is warranted as well. N.Y. Rule 1.15 is the longest and most detailed of the New York Rules of Professional Conduct, see Simon, supra, and a number of the provisions are (or should be) familiar:
• A lawyer holding funds or property of another incident to the practice of law is a fiduciary and must not misappropriate or commingle them with his or her own. N.Y. Rule 1.15(a).
• Funds belonging to another person must be kept separate from any account of the lawyer or his or her firm and at a bank in New York (or a bank outside the state if certain conditions are met) that will provide dishonored check notices. N.Y. Rule 1.15 (b)(1). (Note that a number of disciplinary decisions indicate that complaints or inquiries were originally the result of bank errors, so choice of the bank to hold IOLA Accounts is important. To minimize errors, some wise practitioners maintain their IOLA Accounts at a bank or banks at which they maintain no operating or other business accounts. In any case, the goal is to simplify the bookkeeping process and maintain control.)
• Accounts should be clearly identified as “Attorney Special Account”, “Attorney Trust Account” or Attorney Escrow Account,” and checks and deposit slips should be labeled as such. N.Y. Rule 1.15(b)(2); see also In re Posner, 118 A.D.3d at 21, 983 N.Y.S.2d at 409.
• Detailed records (as set forth in the Rule) of these accounts (and any other bank accounts concerning or affecting the lawyers’ practice of law) shall be kept for seven years. N.Y. Rule 1.15(d)(1).]
There are certain provisions, however, with which many lawyers may be less familiar:
Disputed Fees — A lawyer holding funds out of which she expects to be paid may not hold the client’s share of the funds to try to force the client into paying her fee or pay herself out of the disputed portion but rather must keep it in a trust account. N.Y. Rule 1.15(b)(4) and Comment 3; see also N.Y. City Bar Assn. Comm. On Professional Ethics Formal Op. 2014-3 (concluding that under N.Y. Rule 1.15(b)(4) a New York attorney may not charge a client’s credit card account after the client disputes the bill).
Advance Retainers — Contrary to the rules in most, if not all, other states, a retainer paid by a client to cover future legal fees is not treated as client funds and should not be deposited into a trust account unless agreed with the client. N.Y.S. Bar Assn. Comm. on Professional Ethics Op. No. 816 (2007); see also In re Aquilo, 162 A.D.2d 58, 560 N.Y.S.2d 583 (4th Dept. 1990) (“Money advanced by client for disbursements need not, unless expressly agreed, be held in trust and may be placed in general account.”). The client retains an interest in the portion not yet earned, however, and a lawyer must keep records of the treatment of the funds. N.Y.S. Bar Assn. Comm. on Professional Ethics Op. No. 816; see also In re Session, 121 A.D.3d 216, 99 N.Y.S.2d 432 (4th Dept. 2014) (noting a violation for routinely depositing funds for anticipated legal fees into trust accounts where there was no agreement with client to do so). This rule can be confusing and lead to disputes over the treatment of funds the client may believe are being held in trust. A careful lawyer should make the client aware of its choices with respect to how these funds will be held and memorialize in writing how advance retainers will be treated so that there will be no misunderstanding.
Authorized Signatories — Only an attorney admitted to practice in New York can be an authorized signatory on an IOLA Account. N.Y. Rule 1.15(e). This means that this task cannot be delegated to a non-attorney in the accounting department or to the lawyer’s secretary.
Missing Clients — If a lawyer cannot find a client to whom funds are due, N.Y. Rule 1.15(f) provides a procedure for seeking a court order turning the funds over to the Lawyers’ Fund for Client Protection for safekeeping and disbursement if the client is ultimately found. The order, if requested, will provide for payment of any outstanding fees and disbursements owed to the lawyer prior to the transfer. This procedure frees the lawyer from continued responsibility for holding the funds while ensuring that they will be kept safe.
Recordkeeping — All of the records required to be kept under the Rule must be made available to the appropriate grievance or disciplinary committee if there is a complaint, N.Y. Rule 1.15(i), and failure to produce them is a violation in itself. N.Y. Rule 1.15(j); see also In re Toscano, 119 A.D.3d at 62, 985 N.Y.S.2d at 641 (failure to cooperate reflected adversely on fitness to practice law). If nothing else, this provides an incentive for lawyers to make sure that the records are in order in case, in the worst case scenario, they are the subject of a complaint. This has been just a brief overview of some of the provisions of N.Y. Rule 1.15. Lawyers should make it a point to parse the Rule in its entirety and determine whether some remedial work is needed on their IOLA Accounts or, if they are just starting out, that they are doing it right from the beginning. As is the case with an annual doctor or dentist visit, this “check-up” plus continued oversight can prevent serious discomfort down the line.
Janis M. Meyer is a partner in the Lawyers for the Profession® practice group at Hinshaw & Culbertson LLP and teaches courses on legal ethics and lawyering at the Maurice A. Deane School of Law at Hofstra University. You may reach Ms. Meyer (Dewey & LeBoeuf Liquidation Trust), at 212-843-1857 or firstname.lastname@example.org
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