Can a law firm invest its client escrow balance and keep the interest to cover the cost of accounting for the account?

Plain-English summary

The committee considered a law firm that held client and third-party funds in a busy escrow account and proposed to invest the excess cash in a time certificate, with the bank honoring any overdrafts against the firm's master note secured by the certificate; the certificate interest would be paid to the firm, which would pay the overdraft interest. The firm argued that because the interest would be used to account for the escrow funds, the persons with an interest in the account would benefit. The committee answered no.

The committee held that the money in the escrow account did not belong to the firm but to the several persons having an interest in it, and that the firm bore the obligation to account for the escrow funds. It concluded it was clear that the firm, not the owners of the escrow funds, would benefit from the interest, so the arrangement was improper.

Currency note

This opinion was issued in 1975 under Kentucky's former Code of Professional Responsibility (in effect 1971 to 1990), before the Kentucky Bar Association's 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. It also predates the development of IOLTA (interest on lawyer trust account) programs, which later created a structured way to handle interest on pooled client funds. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could the firm keep the interest if it spent it on accounting for the escrow account?

A: No. The committee held that the interest would still benefit the firm, which already bore the duty to account, not the owners of the escrowed funds.

Q: Whose money was in the escrow account?

A: The committee said the funds belonged to the several persons with an interest in the account, not to the law firm.

Background and rules framework

The opinion addressed a lawyer's duty regarding funds of clients and third persons held in trust, governed by DR 9-102 of the former Code. The modern analog is Model Rule 1.15 (safekeeping property), and the handling of interest on pooled client funds is now structured through IOLTA programs.

Citations and references

Rules of Professional Conduct:

• DR 9-102 (preserving identity of funds and property of a client); modern analog Model Rule 1.15

See also

• KBA Ethics Op. E-233: Offsetting Fees From Trust
• KBA Ethics Op. E-292: Withdrawing Disputed Fees

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-126.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-126
Issued: September1975

This opinion was decided under the Code of Professional Responsibility, which was in effect from 1971 to 1990. Lawyers should consult the current version of the Rules of Professional Conduct and Comments, SCR 3.130 (available at http://www.kybar.org), before relying on this opinion.

Question:

A law firm maintains an escrow account in which funds belonging to clients and others are deposited and from which funds belonging to clients and others are disbursed. There are many transactions in and out of this account. May the firm invest part of the balance in federally insured deposits and use the interest to help pay the expense of the accounting for the escrow account?

Answer:

No.

OPINION

The firm proposes to invest the excess cash in a time certificate. Cash overdrafts on the escrow account may result from temporary unavailability of escrow cash. The firm's bank will honor such overdrafts and charge them to the firm's master note secured by assignment of the time certificate. Interest on the certificate would be paid to the firm. The firm would pay the interest on the aforementioned overdrafts.

The money in the escrow account does not belong to the several persons having an interest in the account. The law firm's contention is that since the interest would be used to account for the escrow funds, the persons having interest in the escrow account would indeed have the benefit of the interest. The law firm has the obligation to account for the escrow funds. It is clear to us that it is the law firm, and not the owners of the escrow funds, who would benefit from the interest.

Note to Reader

This ethics opinion has been formally adopted by the Board of Governors of the Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor rule). The Rule provides that formal opinions are advisory only.