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PRESIDING JUSTICES OF NEW YORK’S FOUR JUDICIAL DEPARTMENTS ISSUE JOINT ORDER AMENDING DISCIPLINARY AND RELATED RULES TO ADDRESS OVERDRAFT ISSUES IN ESCROW ACCOUNTS

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  • Posted on: May 7 2021

Many disciplinary proceedings involving lawyers relate to the mishandling of escrow funds and/or escrow accounts.  Unfortunately, many disciplinary proceedings relating to escrow accounts result from intentional conduct on the lawyer’s part.  However, mere inadvertence or inattention to escrow accounts could be problematic for attorneys as well.  

Therefore, it is important for lawyers to be familiar with all rules related to maintaining escrow accounts and holding escrow funds.  On April 7, 2021, the Presiding Justices of New York’s four Appellate Divisions issued a Joint Order amending certain attorney disciplinary and related rules concerning escrow funds.  While the subject rules previously related only to dishonored checks, they were amended to include escrow account overdrafts.  The relevant rules, with interlineations to show the recent changes, can be found [HERE].  

Thus, Part 1200, Rule 1.15 (Rules of Professional Conduct) (Preserving identity of funds and property of others: fiduciary responsibility: comingling and misappropriation of client funds or property: maintenance of bank accounts: record keeping: examination of records), was amended such that, inter alia:

  1. Previously, escrow funds had to be maintained in a bank that agreed to provide dishonored check reports to the Lawyers’ Fund for Client Protection pursuant to 22 NYCRR 1300.1.  Now, banks must also provide overdraft reports.
  2. Previously, there was no prohibition on escrow accounts having overdraft protection.  Now, “[n]o special account or trust account…may have overdraft protection.”

Similarly, 22 NYCRR 1300.1 was amended to include overdraft reporting as well as dishonored check reporting and, inter alia:

  1. Previously, Special accounts could only be maintained in banks that have agreed to provide dishonored check reports to the Lawyers’ Fund for Client Protection pursuant to 22 NYCRR 1300.1.  Now, banks must also agree to provide overdraft reports.  See 22 NYCRR 1300.1(a).
  2. Previously, agreements to provide dishonored check reports had to be filed with the Lawyers’ Fund for Client Protection.  Now, such agreements must also include the commitment to report on overdrafts.  See 22 NYCRR 1300.1(b).
  3. Previously, a report was required whenever a check was dishonored for insufficient funds.  Now, a report is required whenever a check is presented on an attorney special, trust or escrow account that contains insufficient funds “irrespective of whether the instrument is honored.”  See 22 NYCRR 1300.1(c).
  4. Previously, the dishonored check report was substantially in the form of the bank’s notice of dishonor sent to the customer.  Now, [i]n the case of an instrument that is presented against insufficient funds, the report shall identify the financial institution, the lawyer or law firm, the account number, the date of presentation for payment, and the date paid, as well as the amount of overdraft created thereby.”  See 22 NYCRR 1300.1(d).
  5. Previously, dishonored check reports had to be mailed to the Lawyers’ Fund for Client Protection at the listed address within 5 banking days after presentment against insufficient funds.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(e).
  6. Previously, Lawyers’ Fund for Client Protection held dishonored check reports for 10 business days to permit banks to withdraw reports provided “by inadvertence or mistake,” except that curing the insufficiency by depositing additional funds will not permit the withdrawal of the report.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(f).
  7. Previously, the Lawyers’ Fund for Client Protection was required to forward the dishonored check report to the attorney disciplinary committee for the appropriate judicial department after holding the report for 10 business days.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(g).
  8. Previously, the rules provided that “[e]very lawyer admitted to the Bar of the State of New York shall be deemed to have consented to the dishonored check reporting requirements of this section.  Lawyers and law firms shall promptly notify their banking institutions of existing or new attorney special, trust, or escrow accounts for the purpose of facilitating the implementation and administration of the provisions of this section.”  Now, overdraft reporting is added to the provision.  See 22 NYCRR 1300.1(g).

TAKEAWAY

These new rules highlight the seriousness of problems with escrow accounts – whether intentional of inadvertent.  Please be careful out there.

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