Can a lawyer who serves as escrow agent keep the interest earned on the escrowed funds as payment for handling the escrow?

Plain-English summary

The committee considered a real estate contract clause providing that deposit monies held in escrow by the seller's attorneys would be placed in an interest-bearing account, with the interest belonging to and retained by those attorneys to cover the cost of administering the escrow, without any duty to account for it. The committee concluded it would be ethically improper for a lawyer to accept or seek escrow interest as compensation for serving as escrow agent, finding the arrangement carried so great a danger of unfairness, deception, overreaching, and conflict of interest, or the appearance of those, as to be per se improper under Canons 5 and 9, EC 2-17, EC 2-18, EC 5-3, EC 9-5, EC 9-6, DR 2-106(A), and DR 9-102(A) and (B), with reference to DR 5-104(A).

The committee drew on N.Y. City 79-48 (1980), which identified the dangers in such clauses: the fiduciary nature of the relationship and the lawyer's superior bargaining position raise a clear danger of overreaching; describing the retained interest as defraying administration costs may mislead the client, since those costs are usually negligible while the interest far exceeds them, risking a clearly excessive fee under DR 2-106(A); and the arrangement may impair the lawyer's independent judgment under Canon 5 by giving the lawyer a financial interest in delaying the escrow's termination. The committee agreed with that analysis but, unlike N.Y. City 79-48, concluded the dangers were great enough to require a per se prohibition rather than a case-by-case fairness test.

The committee emphasized that an escrow agent's obligations are those of a trustee (citing Farago v. Burke), so the lawyer must meet the same fiduciary standards as trustees regarding client funds: proper trust accounts, no commingling, and no use of the funds for the lawyer's own benefit (EC 9-5, DR 9-102(A) and (B)). It noted a possible distinction for special accounts holding non-escrow client funds, such as advances for costs or fees not yet earned, where the interest allocable to one client is small relative to the bookkeeping cost; there a lawyer and client could agree to approximate the interest and apply it against fees owed. The question was answered in the negative.

Currency note

This opinion was issued in 1981, 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, fees at Rule 1.5, and business transactions with clients at Rule 1.8). Subsequent rule amendments or later opinions, including the development of New York's IOLA program, 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: Can a lawyer keep the interest on escrowed funds as payment for acting as escrow agent?

A: No. The committee held the arrangement per se improper, because the lawyer is a fiduciary and keeping the interest carries too great a danger of unfairness, overreaching, and conflict of interest.

Q: What if the clause says the interest only covers administration costs?

A: The committee found that framing potentially misleading, since administration costs are usually negligible while the interest far exceeds them, and it can produce a clearly excessive fee under DR 2-106(A).

Q: Is any arrangement involving interest on client funds permitted?

A: The committee recognized a possible distinction for special accounts holding non-escrow client funds (such as fee advances) where the interest allocable to one client is small relative to the bookkeeping cost; there, by agreement, the interest could be approximated and applied against fees owed.

Background and rules framework

The opinion applied Canons 5 and 9, DR 9-102(A) and (B) (preserving and not commingling client funds), DR 2-106(A) (clearly excessive fees), and DR 5-104(A) (business dealings with a client), under EC 2-17, EC 2-18, EC 5-3, EC 9-5, and EC 9-6, to a lawyer acting as escrow agent. The closest current Model Rule analogues are Rule 1.15 (safekeeping property), Rule 1.5 (fees), and Rule 1.8 (conflicts; business transactions with clients).

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping client and third-party property)
• MR 1.5 (fees)
• MR 1.8 (business transactions with clients)
• NY Canon 5, Canon 9, EC 2-17, EC 2-18, EC 5-3, EC 9-5, EC 9-6, DR 2-106(A), DR 5-104(A), DR 9-102(A), DR 9-102(B)

Cases:

• Farago v. Burke, 262 N.Y. 229, 186 N.E. 683 (1933), escrow agent holds as trustee
• Helman v. Dixon, 71 Misc. 2d 1057, 338 N.Y.S.2d 139 (Civ. Ct. N.Y.C. 1972), escrow fiduciary obligations

Other opinions cited:

• N.Y. City 79-48 (1980): dangers of retaining escrow interest (committee adopts a stricter per se rule)
• N.Y. State 90 (1968): accounting to clients for interest on client funds

See also

• NY State Bar Op. 554: IOLA interest on client trust accounts
• NY State Bar Op. 570: Advance fee payments and trust account treatment
• NY State Bar Op. 550: Mortgage or deed as security for a legal fee

Source

• Landing page: https://nysba.org/opinion-532/