After a matter settles, can a New York lawyer keep the leftover retainer in escrow at the client's request as an advance for unspecified future work?

Plain-English summary

A lawyer settled a case and had an unexhausted retainer balance he wanted to return. The client asked him to keep the balance in his escrow account, saying she "might need [him] for something else." The lawyer asked whether he may keep the unearned portion as an advance against unspecified future legal services.

The opinion treats the balance as an advance payment retainer, defined in N.Y. State 816 (2007) as a sum provided to cover fees expected to be earned during a representation, and reaffirms that any ultimately unearned portion must be returned to the client. The opinion explains that under N.Y. State 570 (1985) and 816, the parties may choose between two handling options. They may treat the advance as client funds, in which case the lawyer must deposit it in an escrow account and may not keep interest earned on it (subject to the IOLA rules under Judiciary Law § 497). Alternatively, they may agree to treat the advance as the lawyer's own funds, in which case the lawyer may use the money (but not deposit it in a client trust account) and keeps any interest, subject only to refunding any unearned portion on termination. The opinion notes New York's two-option approach differs from jurisdictions that require advance fees to stay in escrow until earned.

Because the client asked that the funds be kept in escrow, the opinion concludes the parties have agreed to treat the funds as client property, which binds the lawyer to all the trust-account and fiduciary requirements applicable to client funds. The opinion distinguishes this kind of advance payment retainer from a "general retainer," which secures the lawyer's availability and is earned on receipt.

The opinion adds that the lawyer's ongoing duties depend on whether the attorney-client relationship continues during the interim. Even if the lawyer serves only as an escrow agent, Rule 1.9 (duties to former clients) and Rule 1.15 (safeguarding funds of others) still apply; if the relationship continues, the full set of client duties applies. The opinion declines to decide whether the relationship continues, calling that a legal rather than ethical question, but identifies factors that bear on it and advises clarifying the arrangement, preferably in writing, citing N.Y. State 816 and Comment [4] to Rule 1.3.

In practice

The opinion holds that, under the New York rules as they stood at the time, a lawyer may retain an unearned retainer balance at the client's request as an advance for future work. Per the opinion, the parties may agree to treat that advance either as client funds kept in escrow or as the lawyer's own funds, and once they agree to treat it as client property, the lawyer is bound by all trust-account and fiduciary obligations and may not keep the interest. The opinion makes clear that any portion never earned must be refunded, and that the lawyer should clarify, preferably in writing, both how the advance is treated and whether the representation continues.

Common questions

Q: Can a lawyer keep a leftover retainer for possible future work instead of returning it?

A: Yes, at the client's request. The opinion concludes the balance becomes an advance payment retainer for future services, provided any ultimately unearned portion is refunded.

Q: Must the advance be kept in an escrow account?

A: It depends on the parties' agreement. The opinion explains the parties may treat the advance as client funds, which must go in escrow with interest belonging to the client, or as the lawyer's own funds, which may not be deposited in a client trust account.

Q: Who gets interest earned on the advance?

A: Per the opinion, if the advance is treated as client funds the interest belongs to the client (subject to IOLA rules); if treated as the lawyer's own funds, the interest belongs to the lawyer.

Q: What duties does the lawyer owe while holding the funds between matters?

A: The opinion says that even if the lawyer acts only as escrow agent, Rule 1.9 and Rule 1.15 still apply; if the attorney-client relationship continues, the full set of client duties applies. Whether the relationship continues is a legal question the opinion does not decide.

Background and rules framework

The opinion interprets New York Rule 1.5 (fees, including Rule 1.5(d)(4)'s bar on nonrefundable retainers, the analog of Model Rule 1.5) and Rule 1.15 (safeguarding funds and property of clients and others, the analog of Model Rule 1.15), along with Rule 1.16(e) (refunding unearned fees on termination). The two-option framework comes from N.Y. State 570 (1985) and N.Y. State 816 (2007).

Citations and references

Rules of Professional Conduct:

• MR 1.5 / NY Rule 1.5 (fees; Rule 1.5(d)(4) bar on nonrefundable retainers; Comment [4])
• MR 1.15 / NY Rule 1.15 (safeguarding funds; client trust accounts)
• NY Rule 1.16(e) (refunding unearned fees on termination)
• NY Rule 1.9 (duties to former clients); Rule 1.3, Comment [4] (clarifying whether representation continues)

Statutes:

• N.Y. Judiciary Law § 497 (IOLA accounts; interest remitted to the IOLA fund)

Cases:

• In re Cooperman, 83 N.Y.2d 465 (1994), prohibiting nonrefundable advance payment retainers under the prior Code

Other opinions cited:

• N.Y. State 816 (2007): advance payment retainers; two handling options
• N.Y. State 570 (1985): client may agree to treat an advance as client funds or the lawyer's own
• N.Y. State 963 (2013): existence of the client-lawyer relationship is governed by substantive law

See also

• NY State Bar Op. 996: moving escrow funds to shield them from a creditor
• NY State Bar Op. 990: representing both lender and borrower clients in a loan

Source

• Landing page: https://nysba.org/ethics-opinion-983/