With the client's consent, can a lawyer keep the interest on trust funds, trade it for a lower fee, or invest trust funds overnight?

Plain-English summary

The inquirer was a partner in a high-volume collection firm that deposited more than 70,000 checks and money orders annually and remitted recoveries to clients (mostly banks, retailers, and utilities) on a monthly or more frequent basis. To ensure continued compliance with the Rules, the firm posed three questions: whether a client may agree in a written fee agreement to waive interest earned on the client's trust monies held in a non-IOLTA interest-bearing general trust account, so the attorney receives that interest; whether the client may waive interest in exchange for a reduction in the contingent fee; and whether the attorney may invest trust funds overnight in "Repo Agreements" collateralized by U.S. Treasury Bills or equally secure governmentally backed collateral.

The Committee answered all three inquiries in the affirmative. Given the inquirer's representation that each arrangement is made with the knowledge and consent of the clients, the Committee found them ethically acceptable. On the third question, it drew on Opinion 326, which set the parameters for lawyers investing trust funds and required that such investments be secure and made in governmentally backed accounts; U.S. Treasury Bills or other governmentally backed collateral would provide that security, though the Committee noted not all proposed repurchase agreements would qualify.

Currency note

This opinion was issued in 1992, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and trust-account and IOLTA requirements have been amended since. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

Common questions

Q: Can a client agree to let the lawyer keep the interest earned on trust funds?

A: Per the opinion, yes, where the funds sit in a non-IOLTA interest-bearing general trust account and the client knowingly consents in a written fee agreement.

Q: Can interest be traded for a lower contingent fee?

A: Yes. The Committee found it ethically acceptable for the attorney and client to agree that the client waives interest in exchange for a reduction in the contingent fee, given the client's knowledge and consent.

Q: Can a lawyer invest trust funds overnight?

A: Per the opinion, yes, in "Repo Agreements" collateralized by U.S. Treasury Bills or equally secure governmentally backed collateral, consistent with Opinion 326's requirement that trust investments be secure and governmentally backed; the Committee noted not all proposed repos would qualify.

Background and rules framework

The opinion addressed the handling and investment of client trust funds under the lawyer's safekeeping-of-property duties (NJ RPC 1.15; Model Rule 1.15) and the IOLTA framework. The Committee relied on its earlier Opinion 326, which required that any investment of trust funds be secure and placed in governmentally backed accounts.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NJ RPC 1.15 (safekeeping of client property and funds)

Other opinions cited:

• NJ ACPE Op. 326 (99 N.J.L.J. 298), parameters for lawyers investing trust funds

See also

• NJ ACPE Op. 687: Drawing Upon and Disbursing Real-Estate Closing Funds
• NJ ACPE Op. 670: Sale or Pledge of Final JUA Judgments

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp659-1.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.

1 N.J.L. 269, March 2, 1992

130 N.J.L.J. 658, February 24, 1992

OPINION 659

Attorney With Large Collection Practice Entering Into Agreements Whereby Client Waives Accrued Interest Generally, or in Exchange for a Reduction in the Contingent Fee Ordinarily Charged

The Inquirer is a partner in a law firm which concentrates its practice in collection services and attendant litigation. Most of its clients are large financial and regional retailers, banking institutions, utilities and other companies engaged in businesses wherein credit is extended to their customers.

The Inquirer informs us that the firm's average collections are approximately $9 million per year and that they deposit more than 70,000 checks and money orders annually. They institute approximately 20,000 lawsuits, most of which are in Special Civil Part of Superior Court. As a result of these lawsuits, there are executions and orders typical of collection practice.

The firm's fees are contingent upon its collecting funds. These are remitted to clients not less often than monthly and, in connection with larger clients, as frequently as once a week.

The practice in remitting is usually established by agreement with the financial officers of the client firm. The Inquirer assures us that the firm's practices conform to the Rules of Professional Conduct. In order to ensure continued compliance, he requests answers to the following three questions:

1. May a client in a written fee agreement with an attorney agree to waive interest earned, if any, on client's Trust monies recovered or held by the attorney for or on the client's behalf in a non-IOLTA interest bearing General Attorney Trust Account? The result of this practice would be that the attorney would receive the benefit of any such interest.

2. May the attorney and the client agree that the client will waive interest in exchange for a reduction in the contingent fee that the attorney would otherwise charge the client?

3. May an attorney invest client's Trust funds that are held in a General Attorney Trust Account overnight with a federally insured financial institution in "Repo Agreements" that are collateralized by U.S. Treasury Bills, or by equally secure governmentally backed collateral?

The answer to all three inquiries is in the affirmative. Given the representation by the Inquirer that all of these actions are with the knowledge and consent of the clients, they are ethically acceptable.

In our Opinion 326, 99 N.J.L.J. 298 (1976), we outlined the parameters of lawyers investing trust funds. We said that such investments must be secure and be made in governmentally backed accounts. While REPO Agreements were not referred to in Opinion 326, and not all of those proposed by Inquirer would qualify, U.S. Treasury Bills or other governmentally backed collateral would provide the kind of security demanded by said Opinion.