NEW YORK STATE BAR ASSOCIATIONCommittee on
Opinion #532 - 05/27/1981
Clarified by N.Y. State 570 (1985)
Topic: Escrow funds; fee agreements; conflicts of interest;
appearance of impropriety
Digest: Lawyer escrow agent may not retain interest earned on funds
Code: Canons 5 and 9; EC 2-17, 2-18, 5-3, 9-5, 9-6; DR 2-106(A),
5-104(A); 9-102(A) and (B)
May a lawyer representing a client in a transaction in which the
lawyer serves as an escrow agent accept or seek as compensation for such
service the interest earned on funds held in escrow?
The question comes to this Committee in the context of a specific
inquiry as to the ethical propriety of a lawyer including in a real
estate contract a clause that provides:
The deposit monies received pursuant to this contract shall be held
in escrow by Seller's attorneys ESQS., pending close of title or until
earlier termination pursuant to the terms hereof, in an interest bearing
savings account with the interest accruing thereon, if any, to belong to
and to be retained by said attorneys to cover the cost and expense of
administrating [sic] such escrow account, without being required to
account for the amount of interest to either Seller or Purchaser.
In the opinion of the Committee it would be ethically improper under
the Code for a lawyer to accept or seek the interest earned on funds
held in an escrow account as compensation for serving as an escrow
agent. Such a fee arrangement presents so great a danger of
unfairness, deception, overreaching and conflict of interest, or the
appearance thereof, that we find any such arrangement per se improper
under the standards incorporated into such Code provisions as Canons 5
and 9, EC 2-17, EC 2-18, EC 5-3, EC 9-5, EC 9-6, DR 2-106 (A), and DR
9-102(A) and (B). Cf., DR 5-104(A).
A recent opinion, N.Y. City 79-48 (1980), identified a number of the
ethical dangers involved where a lawyer seeks to enter into an agreement
which would permit the lawyer to retain escrow interest as compensation
for "the cost and expense of administering [an] escrow account." This
opinion, inter alia, states:
[B]ecause of the fiduciary nature of the attorneyclient
relationship, agreements between lawyer and client where the attorney
may be in the superior bargaining position, present a clear danger of
overreaching .... The attorney bears the burden of demonstrating that
the agreement was fair and that it was made by the client with full
knowledge of all material circumstances known to the attorney.
Several aspects of the proposed clause present problems of fairness
and adequacy of disclosure. Use of the phrase "to defray the cost and
expense of administering such escrow account" may well mislead the
client, since it is likely that in all but the most unusual situations,
the costs of administration would be negligible and the interest accrued
would far exceed such costs. For the same reason, the clause might
result in a violation of DR 2-106(A), which prohibits a lawyer from
entering into an agreement for, charging or collecting a clearly
Use of the proposed clause may also impair the lawyer's ability to
exercise independent professional judgment on behalf of a client as
required by Canon 5, since the lawyer will have a financial interest in
delaying the event which would terminate the escrow.
N.Y. City 79-48 then concluded:
[W]hile use of the proposed clause would [not] be improper per se, we
do believe that it cannot properly be used without the exercise of
extreme caution to ensure that it is fair under the particular
circumstances of the representation and that the client has given his or
her fully informed consent to the arrangement.
Our Committee agrees that N.Y. City 79-48 correctly identifies the
serious dangers of unfairness, deception, overreaching and conflict of
interest involved in agreements permitting a lawyer to retain the
interest on escrowed funds. We disagree, however, with the opinion's
conclusion that the dangers are not so great as to require interpreting
the Code as imposing a per se prohibition against such fee arrangements.
In serving as an escrow agent the lawyer is a fiduciary. Any provision
which permits possible self-dealing with an escrow fund should be
rejected unless there is some strong countervailing consideration. None
has been shown here. The potential for abuse, or at least the appearance
thereof, is great. We can find no countervailing interest which would
justify this type of arrangement.
When a lawyer serves as an escrow agent, his obligations are those of
a trustee. Farago v. Burke, 262 N.Y. 229, 233, 186 N.E. 683, 684 (1933);
see also, Helman v. Dixon, 71 Misc. 2d 1057, 1059, 338 N.Y.S. 2d 139,142
(Civil Ct. N.Y.C. 1972) and cases therein cited. The lawyer escrow agent
must meet the same fiduciary and professional standards that are
mandated for lawyers as well as for trustees with respect to the
preservation, safekeeping and use of client funds and of trust property.
These include maintaining proper trust accounts for all such funds, not
commingling them with his own funds, and not using them for his own
benefit. EC 9-5, DR 9-102(A) and (B). See also former Canon 9; Drinker,
Legal Ethics, pp. 89-92 (1953); Scott on Trusts,§§ 170.17,
180.2 (3rd ed. 1967).
Ethics opinions either requiring an accounting to clients for
interest earned on client funds or condemning the retention of such
interest "to defray expenses of maintaining the account" or "to offset
... the expense of running the account" include N.Y. State 90 (1968);
N.Y. City 181 (1931); ABA Inf. 991 (1967); ABA Inf. 545 (1962); Arizona
225, 6 Ariz. B.J. 36 (1970), Maru 5979 (1970 Supp.); Florida 72-13
(1972), Maru 8157 (1975 Supp.); Massachusetts 74-6, 59 Mass. L.Q. 298
(1974), Maru 8653 (1975 Supp.); North Carolina Opinion CPR 30, 21 N.C.
Bar 15 (1974), Maru 9624 (1975 Supp.); and Los Angeles Inf. 1961-7, Maru
7782 (1975 Supp.)
Although we recognize, as do some of the above cited opinions, that
no impropriety would be involved in a lawyer making a reasonable charge
for escrow or administrative expenses, the fiduciary nature of the
lawyer's role makes it especially inappropriate for a lawyer to ask
parties to a real estate transaction, one of whom the lawyer represents,
to approve an escrow compensation agreement measured by interest earned
on escrowed funds.
While we interpret the Code as requiring a per se prohibition against
retaining interest earned on escrowed funds in the circumstances stated,
we recognize a possible distinction where interest is paid on a special
account in which a lawyer deposits such non-escrow client funds as
advances for costs, expenses or fees not yet earned, or on other client
funds which are to be promptly and routinely disbursed. Such funds
should, of course, be kept in an identifiable client account, in which
the funds of a number of different clients may properly be deposited. EC
9-5, DR 9-102 (A). Where the amount of interest allocable to any one
client's account is relatively small in relation to the bookkeeping
expense which would be required to determine the precise amount of
interest earned as of any given date, it would not be inappropriate for
a lawyer and client to agree that the amount of interest earned could be
approximated and applied against any fees or charges owed to the lawyer.
Cf., Massachusetts 74-6, supra, with N.Y. State 90, supra.
For the reasons stated, the question posed is answered in the