By Lazar Emanuel [Originally published in NYPRR January 1999]
[Editor’s note: NYPRR Nov. 1998 published an article by Joseph S. Genova, “IOLA After Phillips: Clearing Up Some Misconceptions.” (Part 2 was published in NYPRR Dec. 1999.) We received the following letter from Robert Randell, a member of the Nassau County Ethics Committee, commenting on Mr. Genova’s conclusions. His letter is followed by a response from Mr. Genova.]
To the Editor:
I have enjoyed reading many of your timely articles, especially those by Professor Simon, on whose Ethics Committee I served during the two years that he was its Chair. I am still a committee member with Professor Simon.
I am writing to correct certain misstatements in the article “IOLA After Phillips: Clearing Up Some Misconceptions,” by Joseph S. Genova, which appeared in the November 1998 issue of NYPRR. Mr. Genova describes the New York IOLA program as mandatory for New York attorneys, although it is not.
Under the heading “Participation Mandatory,” Mr. Genova says that participation is mandatory “in two senses:” First, that every New York lawyer who handles client funds must maintain an IOLA account, and second, that every New York lawyer must use an IOLA account for qualifying funds unless another account is used that generates, computes and pays interest to the client. He concludes that a lawyer may not place qualifying funds in a non-interest bearing account. This is simply not true.
Lawyers’ conduct under IOLA is governed by §497 of the New York Judiciary Law, entitled “Attorneys Fiduciary Funds: Interest Bearing Accounts.” That statute does not provide that a lawyer who handles client funds is required to maintain an IOLA account. Also, there is no disciplinary rule with that requirement.
Although Judiciary Law §497 does say in subsections 4(a) through 4(c) that “qualified funds” as defined in the statute, are to be deposited in an IOLA account unless deposited in an alternative account that pays interest to the client, these provisions are subject to subsection 4(d), which provides as follows:
“(d) Notwithstanding the deposit requirements of this subdivision, no attorney or law firm shall be liable in damages nor held to answer for a charge of professional misconduct for failure to deposit qualified funds in an IOLA account.”
Clearly, under the statute a New York lawyer who handles client funds is not required to maintain an IOLA account, and will not be guilty of any type of infraction or be subject to any liability if so-called qualified funds are not deposited in an IOLA account. This is contrary to what Mr. Genova says.
Moreover, in addition to the immunity conferred by subsection 4(d), the statute gives New York lawyers absolute discretion in determining which funds shall be designated as qualifying for IOLA, and whether any fiduciary funds should be placed in interest bearing or non-interest bearing accounts.
Subsection 4(a) specifically, provides:
“An attorney shall have discretion, in accordance with the code of professional responsibility, to determine whether moneys received by an attorney in a fiduciary capacity from a client or beneficial owner shall be deposited in non-interest, or in interest bearing accounts.”
Subsection 4(c) provides:
“The decision as to whether funds are nominal in amount or expected to be held for a short period of time [i.e., “qualified funds”] rests exclusively in the sound judgment of the lawyer or law firm.”
In view of the above, it is hard to see, according to the provisions of the New York IOLA statute, how participation in the IOLA program can be characterized as mandatory.
I think that your newsletter has an obligation to correct any misconceptions that may arise from Mr. Genova’s interpretation of the New York IOLA statute.
Robert I. Randell, Manhattan
Robert I. Randell is a solo practitioner with offices in Manhattan. He specializes in real estate law, including condemnations and tax certiorari. He is a member of the Nassau County Bar’s Ethics Committee and past chairman of the County’s Solo & Small Practitioners Committee.
The Author, Joseph S. Genova, Responds:
Thank you for the opportunity to respond to Mr. Randell.
Mr. Randell insists that N.Y. lawyers may place qualifying funds in non-interest bearing accounts, but that has not been true since 1989, when the IOLA statute was amended to convert IOLA from a “voluntary” to a “comprehensive” program. He also says that New York lawyers who handle client finds need not maintain an IOLA account, which is incorrect too. Finally, he confuses the exercise of discretion granted to lawyers who must determine whether or not client funds are qualifying with non-existent “discretion” to ignore the amended statute altogether.
When New York’s IOLA program began, in 1983, lawyer participation was voluntary. Lawyers could place qualifying funds in an IOLA account, or in or in a separate interest-bearing account for the benefit of the client, or in a commingled non-interest bearing account. Lawyers who used that last category could (properly or not) enjoy the fringe benefits that many banks offer to depositors who give the bank free use of money (their own or another’s). The IOLA statute was amended in 1989, however, to make the program mandatory as I described in my article. In doing so, the legislature eliminated the troublesome non-interest bearing account.
Mr. Randell misreads §497(4)(a) of the Judiciary Law when he claims that its reference to a non-interest bearing account preserves the prior, voluntary nature of lawyer participation in IOLA. The reference to a non-interest bearing account in that section is a reference to an IOLA account, insofar as qualifying funds are concerned. Any other reading, including Mr. Randell’s, would turn the 1989 amendments on their heads, or render them meaningless, or both. Mr. Randell may regret losing the ability to ignore IOLA, but his attempts to undo the 1989 amendments through a tortured interpretation of §497(4)(a) or the statute’s “discretion” language should be replaced.
Under New York’s comprehensive IOLA programs, lawyers must first make a judgment whether funds are “qualifying.” That judgment is an exercise of discretion requiring the weighing of many factors. When this judgment is made in good faith, a lawyer is protected (by the provisions Mr. Randell cites, among other things) against claims based on a subsequent dispute as to whether a particular client’s funds were, or were not, qualifying. (As I said last month, nothing in the statute protects the lawyer who decides to place client funds in an interest bearing account which generates more cost than interest — i.e., generates a loss — for the client.) Mr. Randell errs when he asserts that the protected discretion to make individual good-faith decisions can be used to ignore the statute altogether by deciding, ab initio, that no funds are ever qualifying funds under any circumstances. (Most lawyers would call that an abuse, not an exercise, of discretion.)
His conclusion that New York lawyers who handle qualifying funds need not have IOLA accounts thus flies in the face of the statute and the whole purpose of the 1989 amendments. A lawyer who does not have an IOLA account cannot possibly be exercising the judgments required by the statute. For two or three years in the early 1990s, in order to make sure New York attorneys were aware of their augmented obligations under these amendments, the Office of Court Administration included IOLA’s “NOTICE OF MANDATORY PARTICIPATION IN THE INTEREST ON LAWYER ACCOUNT (IOLA) PROGRAM” with the registration forms that every New York lawyer must complete biennially. That notice required every attorney handling qualifying funds to submit a written declaration that he or she maintained the required IOLA account, or to open one. Although OCA no longer includes that notice with the registration forms, the IOLA program remains mandatory.
Finally, I am appalled by the implicit suggestion that a rule is not a rule if the violation of it carries little risk of serious punishment. I concede that I am unaware of any lawyer who has been disciplined for violating the comprehensive IOLA requirements in the ways urged by Mr. Randell. The fact that one may be able to violate both the spirit and the letter of a statute and the regulations promulgated thereunder, and get away with it, is not a reason, in my view, for anyone to flout the law, least of all for any lawyer to do so.
Joseph S. Genova is a litigation partner at Milbank, Tweed, Hadley & McCloy and directs the firm’s public service activity. He is a member of the ABA Commission on IOLTA.
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