Bank Obligations Regarding Attorney Escrow Accounts

• Jurisdiction: New York,United States
• Law Firm: Gallet Dreyer & Berkey
• Subject Matter: Finance and Banking, Financial Services
• Author: Jay L. Hack
• Published date: 14 February 2023

The president of the New York State Bar Association recently appointed me to a special ethics subcommittee on escrow rules applicable to attorneys. The committee consists of the general counsels of a number of court disciplinary committees, judges and the president of the Bar Association. The issues to be addressed by the committee relate to obscure, and often arcane, matters of banking practice, the Federal Reserve's Regulation CC addressing when funds deposited in a bank become available for withdrawal, and the responsibilities and liabilities of the parties under UCC Article 4 regarding bank deposits and collections. That may explain why I found myself appointed to the committee.

Appellate Division rules force banks that want to maintain attorney escrow accounts¹ to report any circumstance in which an attorney draws a check on an escrow account against insufficient funds.² The Appellate Division has no authority to regulate banks,³ so you may ask how the courts manage to impose such a requirement. The answer is simple but ingenious. The Appellate Division has regulatory authority over attorneys.⁴ Using that power, the Appellate Division indirectly imposed escrow account requirements on banks by prohibiting attorneys from maintaining an escrow account at a bank. The exception is unless the bank agrees to report any situation in which an attorney bounces a check on an escrow account or draws a check on the account against insufficient funds.⁵ These are generally conceded to be important early indicators that something is rotten in Denmark.

The rule is commonly referred to as the "bounced check" rule because, as originally drafted, it only applied if a bank returned a check unpaid. However, the rule was recently amended to apply not only to bounced checks on escrow accounts, but also to any escrow account check if there are insufficient funds to pay the check when it is presented for payment. This happens regardless of whether the bank pays or returns the check.⁶

To qualify to be included in the list of banks approved to accept escrow checks, a bank must sign an agreement to provide reports of bounced checks or checks presented creating overdrafts, even if they are paid. A list of banks authorized to accept attorney escrow accounts in New York is available at http://www.nylawfund.org/AP- PLST%20140.pdf. Due to the amendment extending the rule to all checks drawn against insufficient funds, all participating banks must sign an amended agreement to expand their reporting obligation.

Some banks, though aware of the reporting rule, are unaware of their obligation to sign an agreement to comply.⁷ They offer escrow account services to attorneys and the attorneys, who rarely check the approved list, are technically violating the rule that limits the banks at which they may maintain escrow accounts to only banks that have signed the agreement. Attorneys should check the list provided by the Appellate Division to make sure that their bank is authorized to accept escrow accounts. If a bank is not on the official list but wants to maintain attorney escrow accounts, the bank should immediately take steps to comply.

The underlying principle of the rule is simple. If a check drawn on an escrow account is presented for payment and would create an overdraft if it were paid as of the time it is presented, then regardless of whether the check is paid or returned for insufficient funds,⁸ the bank is required to report that fact to the Lawyers' Fund for Client Protection. Unless the bank withdraws the report within 10 days,⁹ the Lawyers' Fund sends the report to the applicable attorney disciplinary committee,¹⁰ which then conducts an investigation.

Unfortunately, the administration of the rule has been fraught with some misunderstandings. All banks should review their procedures and ensure they send reports when required. Banks should ensure that they are not reporting transactions that are not covered by the rule.

Attorneys should, of course, take extreme...