NYSBA 2017-07-07

When a law firm receives a settlement check covering the client's money, a referral fee, a staff bonus, and the firm's own fees, which payments must come out of the attorney trust account, and how fast?

Short answer: Money in which a client or third person has an ownership interest must be paid from the trust (Special) account; money owed to someone who has only a claim against the lawyer may be paid from either the trust or the operating account. The firm's own fees move from the trust account to the operating account by check or bank transfer, after the settlement check clears, and ownership funds must be paid promptly.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 1127: Settlement funds in the attorney trust account

Short answer: Settlement proceeds in which a client or third person holds an ownership interest must be paid out of the attorney's Special (trust) account; money owed to a person who has only a claim against the lawyer, not an ownership interest, may be paid from either the Special account or the operating account. The firm's own fees and expenses move from the Special account to the operating account by check or bank transfer, only after the settlement check has cleared, and ownership funds must be paid promptly.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

View original opinion

Plain-English summary

A firm deposits a settlement check into its Special account. The check covers the client's recovery, the firm's fees and expenses, a referral fee owed to another attorney, and a bonus the firm wants to pay a staff attorney who originated the matter. The inquirer asks whether each non-client payment must be disbursed directly from the Special account or first transferred to the operating account, and how quickly the disbursements must be made.

The committee anchors the answer in Rule 1.15(a), which forbids commingling funds "belonging to another person" with the lawyer's own, and Rule 1.15(b), which requires those funds to be held in the Special account. The key distinction is between an ownership interest in the proceeds and a mere claim against the lawyer. If a contract or law gives a third person a right to the settlement proceeds themselves (the committee cites N.Y. State 717 (1996) on medical providers with valid liens or assignments), that money "belongs" to the third person and must be paid from the Special account; it cannot be moved to the operating account. If the third person has only a claim against the lawyer personally (the committee's examples include rent, salaries, and vendor bills), the lawyer may choose to pay either directly from the Special account or by first transferring the amount to the operating account.

On timing and mechanics: where someone has a legal interest in funds in the Special account, the lawyer must promptly notify them (Rule 1.15(c)(1)) and promptly pay them (Rule 1.15(c)(4)), and "promptly" means within hours or days, not weeks. Written notice is not required but is the best way to document compliance. Regardless of which account is used, the lawyer must wait for the settlement check to clear before disbursing, because paying out against an uncleared check would use other clients' cleared funds and work a technical conversion. As for the firm's own fees, undisputed amounts due to the lawyer may be withdrawn from the Special account when due (Rule 1.15(b)(4)), and the transfer to the operating account is made by check or bank transfer (Rule 1.15(e)).

In practice

Under this opinion, a New York firm distributing settlement funds must pay anyone with an ownership interest in the proceeds (the client, and third parties holding a valid lien or assignment) directly from the Special account, and may not route that money through its operating account. Where a payee, such as a referring attorney owed a fee or a staff attorney owed a bonus, has only a claim against the lawyer rather than an ownership interest in the proceeds, the lawyer may pay either from the Special account or from the operating account. The firm's own undisputed fees and expenses are withdrawn from the Special account when due and transferred to the operating account by check or bank transfer. In every case the lawyer must let the settlement check clear before disbursing, and must pay ownership funds promptly, meaning within hours or days.

Common questions

Q: Must a referral fee be paid out of the attorney trust account?

A: It depends on whether the referring attorney has an ownership interest in the proceeds or only a claim against the lawyer. With only a claim, the lawyer may pay the referral fee either directly from the Special account or from the operating account (Opinion 1127 ¶¶ 5-6).

Q: Can the firm move the whole settlement to its operating account and pay everyone from there?

A: No. Funds in which the client or a third person has an ownership interest must be paid from the Special account and may not be transferred to the operating account, because that would commingle others' funds with the lawyer's (¶ 4).

Q: How quickly must the client be paid?

A: Promptly, which the committee defines as within hours or days, not weeks, once the lawyer is required to pay funds in which the client has an interest (¶ 7).

Q: Can the firm disburse before the settlement check clears?

A: No. The lawyer must wait for the check to clear; disbursing earlier uses other clients' cleared funds and is a technical conversion (¶ 8).

Background and rules framework

The opinion applies Rule 1.15 (Model Rule 1.15) on safekeeping property: the anti-commingling rule and fiduciary duty in Rule 1.15(a), the Special-account requirement in Rule 1.15(b), the prompt-notice and prompt-payment duties in Rule 1.15(c), and the check-or-bank-transfer mechanics in Rule 1.15(e). The analysis turns on whether funds "belong to another person" (an ownership interest) or merely support a claim against the lawyer.

Citations and references

Rules of Professional Conduct:

New York Rule 1.15(a) (Model Rule 1.15): no commingling; lawyer as fiduciary
New York Rule 1.15(b): the Special (trust) account requirement
New York Rule 1.15(c)(1), (c)(4): prompt notice and prompt payment
New York Rule 1.15(e): transfers by check or bank transfer

Cases:

In re Sukhdeo, 47 A.D.3d 6 (2d Dept. 2007); In re Rosenberg, 3 A.D.3d 52 (2d Dept. 2003); In re Rudlin, 280 A.D.2d 200 (4th Dept. 2001): disbursing against uncleared funds

Other opinions cited:

N.Y. State 717 (1996): when a third person is "entitled to receive" proceeds (liens, assignments)
N.Y. State 737 (2001): a lawyer may not draw on one client's funds for another
N.Y. State 946 (2012): the prompt-payment duty

Source

Landing page: https://nysba.org/ethics-opinion-1127/