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Ethics Opinion #10
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Whether it is a breach of fiduciary duty to fail to deposit settlement finds in an account designated other than ‘tin escrow,” “as escrow agent,” or “as escrowee.”
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RICHMOND COUNTY BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
OPINION # 10
October 4, 1992
Wayne M. Ozzi, Esq.
Law Department
Supreme Court of the State of New York
County Courthouse
Staten Island, New York 10201
I have reviewed the submission of Gerald N. Horowitz, Esq., pertaining to the dissipation of certain funds escrowed in an account by an adversary's counsel.
In this matter, the defendant s counsel was to place
funds it had received pursuant to a settlement agreement between
the parties in a non—interest bearing escrow account maintained
by counsel pursuant to an agreement between the parties. Additionally,
counsel s liability was limited by the settlement agreement
to permit recourse only should counsel be grossly negligent
or if its willful acts cause a dissipation of the funds.
The correspondence between the attorneys for the parties which was attached to Mr. Horowitz s letter indicate that the defendant s counsel did assume the responsibility of escrow agent, and that a loss of funds occurred due to the linking of several of defendant s accounts at the same institution. Counsel for plaintiff, Gerald Horowitz, now seeks an opinion of this committee as to the following questions:
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a) Did defendant s counsel breach its fiduciary obligation to the plaintiff by failing to deposit the settlement funds in an account denominated “in escrow”, “as escrow agent” or “as escrowee” instead of an account denominated as “[Counsel for Defendant] Special Account for [Defendant]”?
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b) Did the action of the individual attorney charged with this matter on behalf of defendant in depositing the settlement funds in an account entitled “[Counsel for Defendant] Special Account for [Defendant]” constitute gross negligence in having failed to deposit the settlement proceeds into an escrow account?
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c) Did the action of the individual attorney constitute willful conduct by opening an account entitled “[Counsel for Defendant], Special Account for [Defendant]” when he knew or should have known that other accounts for defendant were maintained in the same banking institution as the account in question?
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d) Since counsel for defendant became obligated to act as escrowee for the settlement funds in question did the individual attorney at LRN&C P.C. act ethically in opening a “Special” account in the name of counsel for defendant without communicating to his firm or partners knowledge of the escrow nature of the funds therein on deposit.
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e) Did the individual attorney at LRNB&C P.C. willfully breach his fiduciary obligation to the plaintiff by failing to notify his partners of his firm s obligation to act as “escrowee” of the settlement funds in question?
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f) By depositing the settlement funds into an account denominated “[Counsel for Defendant], Special Account for [Defendant]” instead of an account in which the words “in escrow” , “as escrow agent” or “as escrowee” were used to depict the nature of the account, did the individual attorney contribute to the loss of a portion of the settlement funds that was transferred from that account to cover check overdrawn by defendant on another account maintained for her in the same banking institution?
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g) Should counsel for defendant and/or the individual attorney be obligated to replenish the funds transferred from the settlement account to cover checks overdrawn by defendant on another account maintained at the same banking institution?
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To ascertain the responsibility of a lawyer or law firm to maintain the integrity of funds placed in his care as escrow agent reference to the Disciplinary Rules of the Code of Professional Responsibility is appropriate. (Title 22, Part 1200, New York Codes, Rules & Regulations (NYCRR).
Disciplinary Rule 9—102(b) (1), (2) states as follows:
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“(b) Separate Accounts.
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(1) A lawyer who is in possession of funds belonging to another person incident to the lawyer s practice of law, shall maintain in a bank or trust company within the State of New York in the lawyer s own name, or in the name of a firm of lawyers of which he or she is a member, or in the name of the lawyer or firm of lawyers by whom he or she is employed, a special account or accounts, separate from any business or personal accounts of the lawyer or lawyer s firm, and separate from any accounts which the lawyer may maintain as executor, guardian, trustee or receiver, or in any other fiduciary capacity, into which special account or accounts all funds held in escrow or otherwise entrusted to the lawyer or firm shall be deposited; provided, however, that such funds may be maintained in a bank or trust company located outside the State of New York with the prior written approval of the person to whom such funds belong specifying the name and address of the bank or trust company where such funds are to be maintained.
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(2) Other than accounts maintained by a lawyer as executor, guardian, trustee or receiver, or in any other such fiduciary capacity, all special accounts as well as all deposit slips relating to and checks drawn upon such special accounts, shall be designated in a manner sufficient to distinguish them from all other bank accounts maintained by the lawyer or the lawyer s firm.”
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LNRB&C deposited the settlement funds into an account designated “[Counsel for Defendant], Special Account for [Defendant]”. The act of placing said funds into an account not designated as an escrow account, does not automatically result in a violation of the Disciplinary Rules. Disciplinary Rule 9-102(b) (2) simply requires that “all special accounts ... shall be designated in a manner sufficient to distinguish them from all other bank accounts maintained by
the lawyer or the lawyer s firm”. In this matter, however, settlement funds were transferred out of the special account to cover checks written by an undisclosed party on a conservatorship account maintained by counsel for defendant on behalf of the defendant. There is a question as to whether the bank transferred the funds without the approval of counsel for defendant, or if partners of the firm other than the individual attorney assigned to represent the defendant granted authorization to transfer the funds.
As the escrow account maintained on behalf of defendant by counsel for defendant was one of several at the same institution, and the designation on the account was not sufficient to separate the funds in that account from other accounts maintained by counsel for defendant as a fiduciary, a violation of Disciplinary Rule 9— 102(b) (1) may have resulted.
Disciplinary Rule 9-102(i) states that a lawyer who does not maintain accounts as specified by the Disciplinary Rules, shall be deemed in violation thereof, and may be subject to disciplinary proceedings.
Mr. Horowitz also requests that this committee issue an opinion as to the wilfulness of counsel for defendant s actions, whether counsel for defendant and its individual attorney breached its fiduciary obligation, was grossly negligent, and became obligated to replace the dissipated funds. These are questions of fact for which this committee is not empowered to entertain and for which a judicial determination is required.
This is an advisory opinion only. Nothing contained herein should be construed or deemed to be a representation as to the validity of a position or as a determination as to the truth or falsehood of any statement or comment made by any person or entity. This opinion is for informational purposes only and shall not be cited to any tribunal or published in any manner.
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Very truly yours,
Edward L. Larsen
Committee Member |
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