A lawyer holds a small settlement for a now-incompetent client who can't sign the required release. What must the lawyer do with the funds, and must they earn interest?

Plain-English summary

The inquiring lawyer represented an institutionalized, mentally incompetent client who had no guardian and had granted no power of attorney. The lawyer had settled the client's lawsuit and held the $4,000 in proceeds in an attorney trust account, but could not release the funds because the defendant required a general release the client could not execute. The committee was asked what the lawyer's ethical obligations were.

The committee concluded the lawyer must keep the funds in an appropriate escrow account until one of four things occurred: the client regained capacity to sign the release; a guardian (or, on the client's death, an estate representative) signed it; the lawyer reached an agreement with the defendant to release the proceeds without a general release; or a court granted permission to deposit the funds following a procedure like that in DR 9-102(F). On the interest question, the committee noted that neither DR 9-102 nor Model Rule 1.15 requires that client funds be held in interest-bearing accounts, and that Judiciary Law and prior opinions left investment largely to the lawyer's fiduciary discretion. Drawing on ABA Formal Op. 348, it observed that where the amount held and the expected holding period make it obvious that interest would exceed administrative costs, the lawyer should consult the client and follow instructions, and that gross failure to invest could amount to neglect under DR 6-101(A). Given the size of this fund and prevailing interest rates, the committee's view was that if the proceeds were likely to be held in escrow for a year or more, a separate interest-bearing trust account for the client might be ethically required.

Currency note

This opinion was issued in 1995, before New York replaced the Code of Professional Responsibility (the Disciplinary Rules and Ethical Considerations cited here) with the New York Rules of Professional Conduct, effective April 1, 2009. The trust-account and IOLA rules referenced may since have changed. 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 Treat this page as historical context, not current guidance.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: What should a lawyer do with a settlement when an incompetent client cannot sign the required release?

A: The opinion concluded the lawyer must hold the funds in escrow and pursue one of four outcomes: the client's recovery, a guardian's or estate representative's signature, an agreement with the defendant to forgo the release, or a court-ordered deposit under a procedure like DR 9-102(F).

Q: Must a lawyer hold client funds in an interest-bearing account?

A: Per the opinion, neither DR 9-102 nor Model Rule 1.15 generally requires it; the matter is left to the lawyer's fiduciary discretion, except where the amount and holding period make investing clearly worthwhile.

Q: When does the committee say a separate interest-bearing account is required?

A: The committee stated that, given the fund's size and available interest rates, if the proceeds were likely to be held for a year or more, a separate interest-bearing trust account for the client might be ethically required.

Background and rules framework

The opinion applied New York Code DR 9-102 and DR 9-102(F) (preserving and depositing client property) and DR 6-101(A) (neglect), with reference to Judiciary Law's IOLA discretion and ABA Formal Op. 348. The analysis corresponds to ABA Model Rule 1.15 (safekeeping property), with the incompetent-client dimension touching Model Rule 1.14 (client with diminished capacity).

Citations and references

Rules of Professional Conduct:

• New York Code DR 9-102, DR 9-102(F), DR 6-101(A) (applied in the opinion)
• MR 1.15 (safekeeping property); MR 1.14 (client with diminished capacity)

Statutes:

• New York Judiciary Law (IOLA / interest-on-lawyer-account discretion provision)

Other opinions cited:

• ABA Formal Op. 348: ethical focus on safekeeping; duty to consult and possibly invest where interest clearly exceeds costs
• N.Y. State 90, 554, 575; N.Y. City 1986-5: interest on client funds

See also

• NYC Bar Formal Op. 1995-5: Reporting a Former Partner's Misconduct
• ISBA Ethics Op. 705: Acting on Claims Solicited by a Lay Corporation
• ISBA Ethics Op. 704: Opposing a Former Traffic Client on the Same Accident

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-1995-6-client-funds-incompetent-client-interest-on-trust-accounts/