When a lawyer holds a real estate contract deposit as escrow agent, does the lawyer have to put the money in an interest-bearing account?

Plain-English summary

A lawyer representing the seller in a real estate transaction received the buyer's contract deposit and held it as escrow agent/attorney, and asked whether there is an ethical duty to deposit the funds in an interest-bearing account. The committee noted that a lawyer for one party may act as escrow agent for both with full disclosure and consent (ABA Informal Op. 923), carrying out the parties' escrow instructions, and that an escrow agent's obligations are those of a trustee (quoting N.Y. State 532 and Farago v. Burke), meeting the same fiduciary and professional standards as a lawyer holding client funds.

Those standards, under DR 9-102, emphasize using identifiable accounts without commingling, keeping complete records, and paying funds promptly on request. The Code is silent on whether the account must be interest-bearing. Reviewing its prior guidance (N.Y. State 90, N.Y. State 554, N.Y. State 532) and ABA Formal Op. 348, the committee adopted the principle that where the amount held and the expected holding period make it obvious that the interest earned would exceed the lawyer's administrative costs and bank charges, the lawyer should consult the client and follow the client's instructions on investing, and interest earned on client funds belongs to the client.

Applying the same principles to an escrow agent/attorney, the committee held that when asked to hold a contract deposit large enough that it might warrant an interest-bearing account if it were client funds, the lawyer should recommend that the escrow agreement include specific instructions on whether to place the funds at interest and how to apportion any interest, weighing the amount, the expected holding period, and the costs involved (citing Nassau County 85-9). Where the contract is silent but the circumstances might warrant interest, the lawyer should consult the parties; if they cannot agree, the question ceases to be ethical and becomes one of law, on which the committee does not opine. The escrow agent/attorney has the same record-keeping and accounting duties as for client funds.

Currency note

This opinion was issued in 1986, before New York replaced the Code of Professional Responsibility with the Rules of Professional Conduct in 2009 (safekeeping of client and third-party property now appears at Rule 1.15). The treatment of nominal or short-held funds has since been shaped by New York's IOLA program, which post-dates this opinion. 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: Must a lawyer holding an escrow deposit put it in an interest-bearing account?

A: Not automatically. The committee held that where the amount and holding period would warrant interest for client funds, the lawyer should recommend the parties instruct on an interest-bearing account and on apportioning the interest, rather than imposing a flat rule.

Q: Who decides whether the escrow funds earn interest?

A: The contracting parties. The committee held the lawyer should seek the parties' specific instructions; if the contract is silent and they cannot agree, the question becomes one of law, which the committee does not decide.

Q: Who owns interest earned on escrow or client funds?

A: The client or the parties. The committee reaffirmed that interest earned on client funds belongs to the client, and the escrow agent/attorney owes the same accounting and record-keeping duties as for client funds.

Background and rules framework

The opinion interpreted DR 9-102 and DR 9-102(B) on the preservation, identification, record-keeping, and prompt payment of client funds and trust property, applied to a lawyer acting as escrow agent under fiduciary (trustee) standards. The closest current Model Rule analogue is Rule 1.15 (safekeeping property of clients and third persons).

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property of clients and third persons)
• NY DR 9-102; DR 9-102(B)

Cases:

• Farago v. Burke, 262 N.Y. 229 (1933): an escrow agent's obligations are those of a trustee
• In re Solomon, 87 A.D.2d 137 (1st Dep't 1982): discipline for unauthorized withdrawal from an escrow account

Other opinions cited:

• N.Y. State 532 (1981): escrow agent's fiduciary duties; accounting for interest
• N.Y. State 554 (1983): duty to invest funds large enough to earn interest and to account
• ABA Formal Op. 348 (1982): consult the client where interest would exceed administrative costs

See also

• NY State Bar Op. 582: An attorney retaining interest on escrow float
• NY State Bar Op. 764: IOLA earnings credit and client consent
• NY State Bar Op.: An escrow agent releasing funds to a client

Source

• Landing page: https://nysba.org/opinion-575/