Escrow Account Rules Are Black And White: How to Protect Your Practice and Avoid the Grievance Committee
Of his current caseload representing lawyers in front of the state’s grievance committees, attorney Scott Bush estimates that half of them involve escrow account issues.
“Every time you have funds that belong to a third of party or a client, those go into an escrow account not an operating account. That’s where you get in trouble; that’s comingling of funds and there’s a prohibition against that,” said Bush of Corrigan McCoy & Bush. “If you are holding funds for a client, you are a fiduciary. You know the rule we’re talking about is 1.15. It’s in black and white, basically everything you have to do.”
His clients that appear before the Grievance Committee:
A) do not understand the rule;
B) haven’t read it
C) don’t care.
“It’s the latter ones that are really going to get themselves in trouble,” said Bush on the CLE webinar “Escrow Account: The Dangers And Pitfalls.”
He explained that grievance committees get involved with an attorney in one of three ways: bouncing an escrow check; holding funds for a client or third party and not turning over the funds; or stealing the money. “To be honest, there’s not much I can do for them” said Bush about clients who steal escrow funds.
According to Bush, the three biggest things grievance committees do not like are: being ignored after receiving a complaint; being lied to; and, above all, depriving clients of funds from escrow accounts.
He said that if you have a settlement check, make sure that you have an endorsement from the client or something in writing authorizing you to deposit it on their behalf. The grievance committee wants to see that everything is in writing.
With few exceptions, an escrow account has to be set up in a New York State bank. The banks are required to report any bounced checks. If the check bounces, the bank sends a letter to the Lawyers’ Fund for Client Protection and the lawyers’ fund sends a letter to the grievance committee.
“That’s one of the major ways that you get involved with respect to the committee,” said Bush.
Attorneys will then receive notification and be asked to provide up to six months worth of bank statements, deposit slips and cancelled checks. In addition, the committee will pick a date and ask for proof of how much money was in the escrow account at that time.
“That’s going to start the process with respect to the committee,” said Bush. Failure to respond in a timely manner will result in a notice to testify. If that fails, the committee will make an application to suspend you from practicing pending the investigation.
Bush noted that it’s usually small firms and solo practitioners who get in trouble. “Even if it was an interim suspension, what are you going to do? You can’t practice law. You’ve got clients. You’ve got to turn over your files. You’ve got to tell the clients what’s going on. If you can’t practice, it’s not good business.”
Bush said attorneys are required to keep bank statements for seven years but he has seen instances where some clients do not have statements from a year ago. “A lot of attorneys say well I rely on my staff or my accountant to keep track of this material,” said Bush. “That’s all well and good, but you’ve got to remember one thing: they’re your client; it’s your client’s funds.”
He clarified that retainer fees should go into an operating account or a separate retainer account; it is not required to go into an escrow account. “Retainers are not clients’ funds; that’s the distinction.”
There are times when honest mistakes happen with escrow accounts, such as staff depositing funds into an operating account. Even if you take care of it immediately but the check bounces, the lawyers’ fund notify you, which then involves the grievance committee.
He said that paralegals and third parties cannot have access to your escrow. “You as the attorney are responsible for it. It is you. It is your license on the line. It is your responsibility,” said Bush. “Grievance committees want to know that you are looking at your monthly statements, you are balancing your checkbook, you are taking care of your clients.”
He recommended that attorneys have a report for each client for monies that go into and out of the escrow account. “That’s what they want to see. They want the paper trail for that entire time period.”
Bush was succinct: “There is no excuse for an attorney using client funds for their own benefit. That is going to get you suspended no matter what.”
Various forms of discipline can include more private matters such as a letter of advisement or an admonition or more serious public charges such as censure, suspension or disbarment that will run in the newspaper.
Bush also reminded the audience of Rule 8.3, which requires lawyers to report the wrongdoing of other attorneys. “If you know that your partner is screwing around with the escrow account, you are obligated to report your partner.”