Can a lawyer act as escrow agent in a deal while also representing one of the parties, and who gets the interest on escrowed funds?

Plain-English summary

The committee addressed the ethical questions that arise when a lawyer holds funds in escrow. It explained that an escrow agent is a custodian or stakeholder with contractual and fiduciary duties to all parties, and that while those duties are mostly matters of contract and fiduciary law beyond the committee's jurisdiction, the lawyer's conduct is also governed by the Code, including Canon 9's safekeeping requirements, which apply to escrowed funds even though they are not literally client funds.

On consent, the committee concluded it is permissible for a lawyer to represent a client and act as escrow agent in the same transaction if all interested parties consent after full disclosure and it is obvious the lawyer can adequately represent all interests, citing DR 5-105(C). Consent must be fully informed; consent given for routine escrow instructions does not override a later conflict when a dispute arises. The committee advised that the escrow agreement spell out that the lawyer may represent the client in any dispute and may pay the funds into court or submit to arbitration, so the lawyer can resign as escrow agent yet continue the representation.

The opinion then worked through several conflicts. When a dispute arises, the escrow agent's duty of neutrality collides with the lawyer's duty of zealous representation under Canon 7, and absent knowing consent the lawyer should resign as escrow agent or decline to represent the client in the dispute. Where the lawyer asserts a claim against the funds for unpaid fees, DR 9-102(A)(2) bars paying out the disputed portion until the dispute is resolved, while DR 9-102(B)(4) requires prompt delivery of funds the client is entitled to receive. The committee also addressed confidentiality (whether escrow information is a confidence or secret under Canon 4 is partly a legal question), permissible investment of funds, commingling, recordkeeping under DR 9-102(B)(3), and the IOLA program. On interest, it concluded a lawyer may not retain interest earned on escrowed funds without the prior knowing consent of the client and the other parties, and that even with consent there are serious risks of impropriety under Canon 5 and DR 2-106(A); it expressly disagreed with other committees that treated such arrangements as per se improper.

Currency note

This opinion was issued in 1986, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. Safekeeping of funds and property is now addressed by Rule 1.15, conflicts by Rules 1.7 and 1.8, and confidentiality by Rule 1.6; the IOLA program is governed by Judiciary Law section 497. 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: Can a lawyer be the escrow agent and also represent one side of the deal?

A: The committee concluded yes, but only if all interested parties consent after full disclosure and it is obvious the lawyer can adequately represent all interests, citing DR 5-105(C).

Q: What happens to the dual role if a dispute breaks out over the escrowed funds?

A: The committee concluded the escrow agent's duty of neutrality conflicts with the duty of zealous representation, so absent knowing consent the lawyer should resign as escrow agent or decline to represent the client in the dispute.

Q: Can the lawyer take escrowed money to cover unpaid fees?

A: The committee concluded that under DR 9-102(A)(2) the lawyer may not pay out a disputed portion until the dispute is resolved, while undisputed funds the client is entitled to receive must be promptly delivered under DR 9-102(B)(4).

Q: Who is entitled to interest earned on escrowed funds?

A: The committee concluded the interest belongs to the client absent agreement, and a lawyer may not keep it without the prior knowing consent of the client and the other parties; even with consent there are serious risks of impropriety under Canon 5 and DR 2-106(A).

Q: May a lawyer place escrowed funds in an IOLA account?

A: The committee concluded participation in the New York IOLA program is ethically proper, because qualified funds too small or held too briefly to earn net interest are not ones the client is entitled to receive interest on.

Background and rules framework

The opinion applied New York Code Canon 9 / DR 9-102 (safekeeping, recordkeeping, and handling of funds, including DR 9-102(A), (A)(2), (B)(3), and (B)(4)), DR 5-105(C) (consent to a multiple role), DR 5-101 and DR 5-102 (lawyer as witness), Canon 4 / DR 4-101 (confidences and secrets), Canon 5 (independent judgment), Canon 7 (zealous representation), and DR 2-106(A) (excessive fees), together with Judiciary Law section 497 (the IOLA program). These correspond to ABA Model Rule 1.15 (safekeeping property), Model Rules 1.7 and 1.8 (conflicts), and Model Rule 1.6 (confidentiality).

Citations and references

Rules of Professional Conduct:

• New York Code DR 9-102(A), (A)(2), (B)(3), (B)(4); DR 5-105(C); DR 5-101, DR 5-102; DR 4-101; DR 2-106(A); Canons 4, 5, 7, 9; EC 9-5 (applied in the opinion)
• MR 1.15 (safekeeping property); MR 1.7, MR 1.8 (conflicts); MR 1.6 (confidentiality)

Statutes:

• New York Judiciary Law section 497, the IOLA (Interest on Lawyer Accounts) program

Other opinions cited:

• ABA Formal Op. 348 (1982): interest on client funds and IOLTA/IOLA accounts
• N.Y. State 532 (1981); N.Y. State 554 (1983); N.Y. State 575 (1986): interest on escrowed and trust funds
• N.Y. City 80-56; N.Y. City 82-8; N.Y. City 79-48: escrow conflicts and fund handling

See also

• NYC Bar Formal Op. 1995-6: Client Funds, Incompetent Client, Interest on Trust Accounts
• NYC Bar Formal Op. 1988-7: Mortgage on a Client's Home to Secure a Legal Fee

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-1986-5/