NYSBA 2019-05-07

Can a lawyer take disputed fees out of the client's escrow funds, add interest, and hold back a cushion for possible fee litigation?

Short answer: No. The opinion concludes a lawyer may not remove from the trust account any amount the client disputes, may charge interest on an unpaid bill only if the written fee agreement provided for it, and may not withhold a self-help cushion against possible fee litigation.

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 Not binding precedent.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.

NYSBA Ethics Opinion 1165: Disputed Fees in a Trust Account and Charging Interest

Short answer: The opinion concludes that a lawyer may not remove from a client trust account any sums the client disputes (they must stay in escrow until the dispute is finally resolved), may charge interest on an unpaid bill only if the written fee agreement provided for it in advance, and may not unilaterally hold back a "cushion" out of the escrowed funds to cover fees and expenses of possible litigation over the dispute.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's view of New York's 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.

Plain-English summary

A lawyer represented a client for nine years in estate-related litigation. Funds tied to annuity contracts the Surrogate's Court ruled were the client's property (not estate property) sat in the lawyer's escrow account, and the court has now authorized distributing them to the client. The lawyer had billed for fees and expenses but agreed to defer payment until the litigation ended; the client did not object to the invoices at the time but now refuses to pay, demanding roughly a 20 percent cut. The lawyer wants to remove from escrow the amount the lawyer believes is owed, add interest, and keep an extra "cushion" for fees and expenses if the dispute leads to litigation. The committee answers no to each request.

Under Rule 1.15(b)(4), a lawyer may withdraw funds when due "unless the right of the lawyer to receive it is disputed by the client," in which case the disputed portion must stay in the account until the dispute is finally resolved. The client's insistence on a discount is a dispute, so the lawyer must retain (not remove) the questioned sums until resolution by settlement or another process; the lawyer may take only the portion the client concedes is the lawyer's. On interest, the committee reiterates (citing N.Y. State 399 and related opinions) that absent a prior written agreement a lawyer may not unilaterally charge interest on a delinquent account; to do so the lawyer must have advised the client before performing services that interest would be charged, defined delinquency, and obtained consent. On the cushion, the committee holds the lawyer is obligated under Rule 1.15(c)(4) to promptly pay the client the funds the client is entitled to receive (the undisputed amount, without interest or holdbacks unless the client agrees), and that no authority lets a lawyer use disputed funds for self-help against possible future fee litigation.

In practice

Under this opinion, when a client disputes a fee, the lawyer must keep the disputed portion in the trust account until the dispute is resolved and promptly release the undisputed portion to the client; the lawyer cannot pay itself the contested amount through self-help. The opinion holds interest on an unpaid bill is permissible only at a reasonable rate and only if the written fee agreement provided for it in advance, and that a lawyer may not withhold an extra reserve from escrowed client funds to fund anticipated fee litigation.

Common questions

Q: Can a lawyer take disputed fees out of the client's escrow account?

A: Per the opinion, no. Rule 1.15(b)(4) requires the disputed portion to stay in the account until the dispute is finally resolved; the lawyer may take only what the client concedes is the lawyer's.

Q: Can the lawyer add interest to the unpaid bill?

A: Per the opinion, only if the written fee agreement provided for it in advance and the rate is reasonable. A lawyer may not unilaterally charge interest on a delinquent account without a prior agreement and the client's informed consent.

Q: Can the lawyer keep a cushion for possible fee-dispute litigation?

A: Per the opinion, no. Rule 1.15(c)(4) requires promptly paying the client the undisputed funds, and no authority permits using disputed funds for self-help against future litigation.

Background and rules framework

The opinion applies New York Rule 1.15(b)(4) (a lawyer must leave disputed amounts in the trust account until the dispute is finally resolved) and Rule 1.15(c)(4) (a lawyer must promptly pay the client funds the client is entitled to receive). These correspond to ABA Model Rule 1.15. The interest analysis draws on the requirement of a prior written agreement and informed client consent.

Citations and references

Rules of Professional Conduct:

New York Rules of Professional Conduct 1.15(b)(4); 1.15(c)(4)
ABA Model Rule 1.15 (analogue)

Statutes and rules:

22 NYCRR section 137.1 (mandatory fee arbitration ceiling, referenced in the facts)

Other opinions cited:

N.Y. State 399 (1975): a lawyer must obtain advance consent to charge interest on delinquent accounts
N.Y. State 1139 (2017); 910 (2012); 783 (2005): modifying retainers and conditioning continued representation on interest agreements

Source

Landing page: https://nysba.org/ethics-opinion-1165/