Can a law firm act as escrow agent for a developer client's real estate deals (for which the firm is not closing counsel) and hold large earnest-money deposits in a non-IOLTA interest-bearing account, and may it charge a percentage holding fee?

Plain-English summary

A developer client that buys large land tracts, with purchase prices up to $25 million, asked the firm to act as escrow agent for some of its real estate transactions even though the firm is not the closing agent and does not handle closings (it has occasionally represented the client at a closing through a power of attorney). The earnest-money deposits typically range from $50,000 to $600,000 and may be held for several months to two years. The client asked the firm to hold the deposits in interest-bearing accounts, so the firm would hold the money in a non-IOLTA interest-bearing account from contract execution until closing, charging a holding fee of 0% to 3% of the amount deposited (interest accruing at 1.5%, with no service charges if a $1,500 balance is maintained).

The committee concluded the firm may act as escrow agent and deposit the funds in interest-bearing non-IOLTA accounts on these facts. It explained that lawyers serving as escrow agents must look to both Rule 1.15 and South Carolina Appellate Court Rule 412 (the IOLTA Rule). Rule 1.15(a) requires keeping the funds in a separate account and maintaining complete records for six years after the representation ends; beyond those basics, the facts raise no particular Rule 1.15 issue. The IOLTA Rule generally requires that all nominal or short-term escrow funds go in IOLTA accounts, but under Section (d) of Rule 412, if the lawyers reasonably determine the funds are not nominal or short-term, the funds may not be placed in an IOLTA account and instead may go in a separate interest-bearing account with interest accruing for the client or third party. Given the amount, the rate of return, and the length of time the funds will be held, the committee found the funds can earn income for the client exceeding the cost of securing it, so the firm may use a non-IOLTA interest-bearing account. The committee said the firm should strongly consider a written escrow agreement defining the arrangement and the parties' responsibilities, and that the firm not being the closing attorney is irrelevant.

On the 0% to 3% holding fee, the committee flagged two issues. First, under Rule 1.5 a lawyer may not collect an unreasonable fee, and basing fees on a percentage of funds held may raise a reasonableness question on these facts. Second, if the holding fees reduce the client's positive net return to a nominal amount, the determination that a non-IOLTA account is proper becomes suspect.

In practice

Under this opinion, a firm may serve as escrow agent for a developer client and hold large deposits in a non-IOLTA interest-bearing account when the funds are not nominal or short-term under Rule 412(d), and the firm's not being closing counsel does not change that. The committee held Rule 1.15(a)'s separate-account and six-year recordkeeping requirements apply, recommended a written escrow agreement, and cautioned that a percentage-based holding fee may be unreasonable under Rule 1.5 and that a fee large enough to cut the client's net return to a nominal amount undercuts the basis for using a non-IOLTA account.

Common questions

Q: Can a firm hold escrow funds in an interest-bearing non-IOLTA account?

A: The committee concluded yes where the funds are not nominal or short-term. Under Rule 412(d), if the lawyers reasonably determine the funds are not nominal or short-term, the funds may go in a separate interest-bearing account with interest for the client rather than in an IOLTA account.

Q: How do you tell whether funds are "nominal or short-term"?

A: The committee looked at the amount of funds, the rate of return, and the length of time they will be held, and concluded that funds that can earn income for the client in excess of the cost of securing it are not nominal or short-term.

Q: Does it matter that the firm is not the closing attorney?

A: No. The committee said the fact that the lawyers are not the closing attorneys is irrelevant to whether they may act as escrow agent and use a non-IOLTA account.

Q: Is a percentage-based holding fee acceptable?

A: The committee cautioned that under Rule 1.5 a lawyer may not collect an unreasonable fee, that basing the fee on a percentage of funds held may raise a reasonableness question, and that a fee reducing the client's net return to a nominal amount makes the use of a non-IOLTA account suspect.

Background and rules framework

The opinion applies South Carolina Rule 1.15 (safekeeping property; the trust-account rule), particularly Rule 1.15(a)'s separate-account and recordkeeping duties, and Rule 1.5 (reasonable fees), which correspond to the like-numbered Model Rules. It turns on South Carolina Appellate Court Rule 412 (the IOLTA Rule), specifically Section (d)'s treatment of funds that are not nominal or short-term.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15, 1.15(a) (safekeeping property; separate account; six-year records)
• MR 1.5 / SC Rule 1.5 (reasonable fees)

Rules of court:

• Rule 412, SCACR (the IOLTA Rule), Section (d) (funds not nominal or short-term may go in a separate interest-bearing account)

See also

• SC Bar Ethics Op. 07-10: Credit-Union Checks as Funds
• SC Bar Ethics Op. 06-01: Closing Lawyer and the Lender
• SC Bar Ethics Op. 18-05: Trust Funds via PayPal

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-08-03/
• Original PDF: https://www.scbar.org/media/fdmgigag/08-03.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 08-03

SC Rules of Professional Conduct: 1.5 and 1.15; Rule 412, SCACR

Facts

Client requests that lawyers act as escrow agent for some of client’s real estate transactions for which lawyer is not closing agent. Lawyers have a pre-existing relationship with client/developer who purchases large tracts of land with purchase prices of up to $25 million. Although lawyers have a pre-existing relationship with client, lawyers are not equipped to handle and do not handle real estate closings. From time to time, lawyers may have represented client at a closing through a power-of-attorney.

The earnest money deposit typically ranges from $50,000 to $600,000. The earnest money deposits may be held in trust for periods ranging from several months to two years. The client has requested that the lawyers hold the earnest money deposits related to these transactions in interest-bearing accounts. Accordingly, the firm would hold money in a non-IOLTA, interest-bearing account from the time the contract is executed until the transaction is closed.

The cost of administering the non-IOLTA account in minimal. No service charges will be assessed if a balance of $1,500 is maintained; this balance will be maintained. Lawyers will charge a fee for holding the account of 0% to 3% of the amount deposited.

Question

May a law firm act as escrow agent for pre-existing client that is a real estate developer for whom firm will not serve as closing attorneys and deposit funds in non-IOLTA accounts when it is anticipated that funds will be held for several months to two years and in amounts of up to $25 million? (Interest will accrue at 1.5 percent, and the firm will charge holding fees of 0 to 3 percent.)

Summary

Yes, the law firm may act as escrow agent and deposit funds in interest-bearing non-IOLTA accounts based on the facts presented.

Opinion

Lawyers are routinely asked to serve as escrow agents to hold earnest money deposits in connection with real estate contracts. Lawyers serving in such a capacity must look to both Rule 1.15 of the South Carolina Rules of Professional Conduct ("SCRPC") and South Carolina Appellate Court Rule 412 (the "IOLTA Rule"). SCRPC Rule 1.15(a) requires the lawyers to keep such funds in a separate account and to maintain complete records of such funds for a period of six (6) years after termination of the representation. Other than those basic requirements of Rule 1.15(a), these facts do not raise any particular issues under Rule 1.15.

The IOLTA Rule establishes the general requirement that "all nominal or short-term" escrow funds held by lawyers must be deposited in IOLTA accounts. However, pursuant to Section (d) of Appellate Court Rule 412, if the lawyers reasonably determine that the escrow funds are not "nominal or short-term," the funds may not be deposited in an IOLTA account, but the funds may be deposited in a separate interest-bearing account, with the interest accruing for the benefit of the client or a third party.

Under these facts, based on the amount of funds, the rate of return, and the length of time the funds will likely be held, it is clear that the funds can earn income for the client in excess of the costs incurred to secure that income; hence, the lawyers may deposit the funds in an interest bearing non-IOLTA account. The lawyers should strongly consider requiring a written escrow agreement to define the scope of the arrangement and the responsibilities of the parties. The fact that the lawyers are not the closing attorneys is irrelevant.

The reference to the lawyers charging "holding fees" of 0 to 3 percent raises at least two issues that the lawyers should consider. First, under SCRPC Rule 1.5, the lawyers may not collect an unreasonable fee. The Committee notes that, under these facts, basing fees on a percentage of funds held may raise a question of reasonableness. Second, if the "holding fees" are such that they reduce the positive net return to the client to a nominal amount, then the determination of the reasonableness of using the non-IOLTA account becomes suspect.