Who is entitled to the interest earned on settlement funds held in an attorney trust account, and can the firm keep the 'float' after disbursement?

Plain-English summary

A personal injury firm asked whether it could pay interest to its clients and to itself on the settlement and judgment funds held in its trustee account. Because the firm's contingent-fee cases generated a large standing balance, its bank had agreed to pay interest on the trust account under a negotiated formula, and the firm wanted to pass the appropriate share of that interest to clients and keep the share attributable to its fees and cost reimbursements.

The Committee held that interest earned on the client's portion of the funds must be paid to the client. Drawing on Opinion 326, it explained that nothing requires a lawyer to invest trust funds, but there is no impediment to placing them in an interest-bearing account so long as the requirements of DR 9-102 and R. 1:21-6 are met, and any interest or accretion is the client's property. When a settlement or judgment draft is deposited, it represents the client's money less the attorney's contractual share; the receipt, deposit, and allocation are effective immediately, subject to collection, so the interest from the day of deposit belongs to each party in proportion to the principal due to each.

The firm then proposed a specific computation tied to "repurchase agreements" that would pay interest from the date of deposit to the date of the firm's disbursement. The Committee identified the "float," the interest that would accrue for the firm's benefit between the firm's disbursement to the client and the clearing of the client's check, and held that keeping it would be improper because it would amount to the firm receiving interest on money belonging to the client. The Committee declined to prescribe a method of operation but suggested the client be advised of the options for capturing earnings on the funds, and that if the client elects to deposit the draft without regard to interest, the attorney obtain the client's written approval.

Currency note

This opinion was issued in 1986, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and it predates the development of New Jersey's IOLTA program and later trust-accounting rules. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Who gets the interest earned on a client's settlement money in the trust account?

A: Per the opinion, the client. The Committee held that interest earned on the client's portion of the funds must be paid to the client.

Q: Can a firm keep the interest that accrues after it issues the client's check but before the check clears?

A: No. The opinion held that keeping this "float" would be improper, because it would result in the firm receiving interest on money belonging to the client.

Q: Is a lawyer required to place trust funds in an interest-bearing account?

A: No. Citing Opinion 326, the opinion stated that nothing requires investing trust funds, but there is no impediment to an interest-bearing account if DR 9-102 and R. 1:21-6 are satisfied, and any interest belongs to the client.

Background and rules framework

The opinion applies the trust-accounting requirements of R. 1:21-6 and former DR 9-102, together with R. 1:21-7(d) on contingent fees and post-judgment interest, to allocate interest earned on commingled settlement funds. It builds on Opinions 326 and 537 and the ABA's recognition of interest-bearing trust accounts in Informal Opinions 545 (1962) and 991 (1967).

Citations and references

Court rules:

• R. 1:21-6 (attorney trust and business accounts)
• R. 1:21-7(d) (contingent fees; post-judgment interest)

Former disciplinary rule:

• DR 9-102 (preserving the property of a client)

Other opinions cited:

• ACPE Opinion 326, 99 N.J.L.J. 298 (1976) (no duty to invest trust funds; interest is the client's property)
• ACPE Opinion 537, 114 N.J.L.J. 68 (1984)
• ABA Informal Opinions 545 (1962) and 991 (1967)

See also

• NJ ACPE Op. 598: Payroll Taxes and the Attorney Trust Account
• NJ ACPE Op. 659: Collection Attorney and Waiver of Trust Account Interest
• NJ ACPE Op. 603: Borrowing to Advance Litigation Costs

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp582-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

117 N.J.L.J. 394, March 27, 1986

OPINION 582

Attorney Trust Account: Payment of Interest to Clients and Law Firm

The inquirer initially submitted the following question for consideration by the Committee; namely: "May we pay interest to our clients and our firm on monies in our trustee account belonging to each?"

The recitation of the facts, however, indicates that, basically, the question involves the distribution of monies received by way of settlement or judgment in personal injury matters with reference to the cases handled on a contingent basis. The inquirer states:

The practice of our office consists largely of representing persons in personal injury matters. Due to the nature of this practice, our cases are handled on a contingent basis. Upon the successful conclusion of each matter, we receive checks that are payable to our clients and ourselves. Pursuant to the Court Rules and the Supreme Court Directives, it is our policy to have the client endorse each check as it is received after which the check is deposited in our trustee account for a 10-day period. At the conclusion of the 10-day period, checks are issued from our trustee account to the client for his portion of the recovery and to the firm for reimbursement of costs advanced and for our fee.

As a result of the substantial volume of tort matters that our office handles, there is always a large balance in our trust account which draws no interest but is most beneficial to our bank at the expense of our clients and our firm whose money the bank is able to use.

We have pointed out the inequities of the above situation to our bankers, as a result of which the bank has agreed to pay interest on the money in our trust account based upon a negotiated formula. As far as we can determine, there is no prohibition in the Court Rules or the Rules of Professional Conduct which would prevent interest from being paid on our trust account. In fact, R. 1:21-7(d) specifies that attorneys' contingent fees may also be calculated on post judgment interest received.

In light of the above, it is our desire to pay our clients interest on their portion of the money deposited in our trust account from the day of its deposit to the day the money is disbursed and to pay to our office the interest on that portion of the money deposited in our trustee account that represents our fees and cost reimbursement.

In our opinion, the interest that is earned on the client's portion of the monies received by way of settlement or in payment of a judgment must be paid to the client. In Opinion 326, 99 N.J.L.J. 298 (1976), the question had been raised as to "whether an attorney may ethically invest funds of a client that he is holding in trust or escrow and, if so, whether he is required to do so." We held as follows:

There is no statute, court rule, or disciplinary rule which expressly or impliedly requires the investment of funds held in trust. Since the facts and circumstances of each individual case are different, any blanket requirement for such investment would, in our opinion, be unwise.

On the other hand, there is no legal or ethical impediment to the placing of trust funds in an interest-bearing account, as long as the requirements of DR 9-102 and R. 1:21-6 are satisfied. The American Bar Association's Standing Committee on Ethics and Professional Responsibility has recognized, on at least two occasions, the use of interest-bearing trust accounts. See Informal Opinion 545 (1962) and Informal Opinion 991 (1967).

It would be advisable for an attorney either to obtain the consent of the client before investing the funds or to notify him of such investment at the time the action is taken. It goes without saying that any such investment must be undertaken with the greatest of care, and only the most secure investments, such as in governmentally-insured bank accounts, should be made. However, it must be clearly understood that any interest or accretion is the property of the client.

In further support of our conclusion, we refer the inquirer to our Opinion 537, 114 N.J.L.J. 68 (1984) dealing with attorneys' trust accounts and the matter of interest relating thereto.

The reality of the relationship is such that actually, when the settlement draft or draft in payment of a judgment is received and deposited, the same represents monies belonging to the client less the monies due the attorney pursuant to the contractual relationship with the client. The receipt, deposit, and allocation should be considered to be effective immediately, subject, of course, to the collection of funds. The interest that accrues from the day of deposit, therefore, belongs to each of the parties, calculated on the basis of the amount of principal due to each of them upon distribution.

Subsequent to the initial inquiry, the inquirer then posed the following plan to compute the interest:

Our bank is willing to pay us interest through guaranteed, insured "repurchase agreements." The interest will be paid daily on all "investments" over $100,000.00 after an $85,000.00 threshold has been met. Accordingly, if approved, we would like to use the following plan to compute the interest: We would calculate the average daily balance in our trust account on which interest would be paid and keep a running calendar of those balances. Additionally, we would also maintain a running calendar of the percent of interest paid each day.

When we are ready to disburse monies which had been in our trust account, we would calculate the average daily balance from the date the money was deposited until the date the disbursement was made to the client. We would also calculate the average daily amount of investible funds, i.e. each day's balance minus $85,000.00 (providing there is at least $100,000.00).

At this point, we would calculate the following proportion: (A) The settlement (or verdict) deposit is to (B) the average daily balance as (X) the calculated figure on which that client's interest is calculated is to the (C) average daily investible amount = A X B C

At this point, we would get the average percent of interest paid from the date of the deposit until the date of the disbursement. That would be multiplied to (X), the amount of money on which the client's interest would be calculated. That answer would give the amount of yearly interest. Accordingly, we would calculate the daily interest from that and multiply that by the total number of days that the money was in the trust account.

The figure then obtained would be the full amount of interest generated while any given deposit was in the trust account. Accordingly, our share would be the same percentage as our fee based on the fee schedule promulgated by the Supreme Court. (e.g. 25% for infants; 33 1/3% on other cases up to $250,000, etc.).

We would pay interest from the actual date of deposit until the actual date of our disbursement, even though we would probably not generate interest until after the second day of any deposit. The reason for this would be an attempt to compensate the client for any interest which may accumulate in the event of a float.

It would be impossible to calculate any interest exactly after disbursement because we have no way of knowing when the check to the client is actually cashed and any follow-up would be impractical. However, we would in our disbursement, include all of the interest in the check given to the client.

If we understand the formula correctly, there would be a period of time between the date of disbursement made by the law firm to the client and the clearance of the draft or check so issued, during which time interest would accrue on that amount for the benefit of the law firm. This is commonly known as a "float." In our opinion, this would be improper and, in effect, if permitted, would result in the law firm receiving interest on monies belonging to the client.

It is not the function of our Committee to establish methods of operation. However, we do suggest that the client be advised that his or her draft would be available for immediate delivery by the attorney in order that the client can then make a decision as to whether to open an interest-bearing account in the same institution as the attorney's trust account is maintained on the day of delivery; to arrange with the client's own bank regarding the payment of interest on the monies; to immediately cash the draft (which may not be practical) or to take such other steps as may be advisable to gain the advantage of any earnings on the monies received. It probably would be advisable that the client be informed that additional interest will accrue from the date of disbursement or delivery of the check to the date when the check clears the bank and that the attorney will forward an additional check for the accrued interest as soon as the amount is determined.

In any event, the client should be fully advised and informed of the situation and if the client elects to deposit the disbursement draft without regard to the matter of interest, then written approval should be obtained from the client.