NEW YORK COUNTY LAWYERS’ ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 672
TOPIC: ESCROW ACCOUNTS; FEES; RETAINING LIENS
DIGEST: A lawyer may not withdraw fees owed to the lawyer by a client from an escrow account to which the client is otherwise entitled unless the fees are not in dispute and the escrow agreement provides for such withdrawal or the client consents. A lawyer may ethically assert liens granted by law to secure legal fees. However, New York courts have held that the retaining lien does not attach to escrow funds.
CODE: DR 5-103(A)(l), EC 5-7, DR 9-102(A) (2).
QUESTION: Once the client’s rights to receive funds held in an escrow account have matured, may the lawyer who is acting as escrow agent (a) withdraw his or her legal fees from the account before turning over the balance to the client, or (b) hold the escrow funds until the lawyer’s fees are otherwise paid?
Withdrawal from the Escrow Account
Lawyers often act as escrow agents in connection with transactions to which their clients are parties, such as real estate transactions. See N.Y. State 575 (1986), ABA Inf. 923 (1966). The obligations of a lawyer who serves as an escrow agent with respect to preservation, safekeeping and use of escrow funds are those of a trustee. N.Y. State 575 (1986), N.Y. City 80-56 (1980), Farago v. Burke, 262 N.Y. 229, 233, 186 N.E. 683, 684 (1933), Helman v. Dixon, 71 Misc.2d 1057, 1059, 338 N.Y.S.2d 139, 142 (Civil Ct, N.Y.C. 1972).
The escrow agreement often provides for the disposition of the funds upon the termination of the escrow. Such disposition may include the payment of attorney’s fees. However, in the absence of authorization in the escrow agreement, it has been held that the attorney/escrow agent should not withdraw funds from the escrow account. See In re Solomon, 87 A.D,2d 137, 450 N.Y.S.2d 804 (1st Dep’t 1982)(sellers’ attorney disciplined for withdrawing funds from escrow account without authorization despite lack of harm to buyers or sellers).
Accordingly, in order for the lawyer to withdraw legal fees from the escrow funds, he or she must have the legal right to do so under the escrow agreement or the consent of the client.
Asserting and Lien and Withholding Funds
DR 9-102(B)(4) requires the lawyer to promptly pay over the client’s property to the client:
A lawyer shall promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.
However, DR 5- 103(A)(1) authorizes a lawyer to acquire a lien granted by law to secure legal fees or expenses. See also EC 5-7 (“[I]t is not improper for a lawyer to protect his right to collect a fee for his services by the assertion of legally permissible liens”.)
Whether a lawyer has acquired a lien in client property is a matter of law upon which this committee cannot pass. However, we note that there are two types of liens that a lawyer may acquire. A charging lien attaches to the judgment a lawyer obtains for a client. In New York, charging liens are granted by statute. See Judiciary Law § 475. A retaining lien is a possessory lien recognized under common law over all property, documents, moneys or securities that come into an attorney’s possession in the course of employment as a lawyer. Robinson v. Rogers, 237 N.Y. 464 (1924); Matter of Heinsheimer, 214 N.Y. 361, 364 (1915); see Note, Attorney’s Retaining Lien Over Former Client’s Papers, 65 Colum. L. Rev. 296, 301 (1965). It has been held that funds coming into the lawyer’s possession in the capacity of escrow agent are not deemed to come into the lawyer’s possession in the course of professional employment. Mayeri Corporation v. Shea & Gould, 112 Misc.2d 734, 447 N.Y.S.2d 413 (1982)(escrow agent), United States v. J.H.W. & Gitlitz Deli & Bar, Inc., 449 F. Supp. 1010 (S.D.N.Y. 1980)(escrow agent). Cf. Matter of Dawson, 110 Misc. 472, 180 N.Y.S. 271 (Surr. Ct. N.Y.Co., 1920) (estate administrator was “merely custodian”). In Mayeri Corp., the court found that, although the creation of the escrow was closely related to the professional work done by the law firm, the funds were not delivered to them as lawyers, but as escrowees. Moreover, there was nothing in the papers indicating that they were entitled to a possessory lien on the funds. Similarly, in Gitlitz Deli, the court found that, since the funds were received by the lawyer as escrow agent, then absent specific authorization to draw upon the funds for the payment of legal services, the lawyer was not entitled to a retaining lien on the funds.
A lawyer may not withdraw, from escrow funds to which the client is otherwise entitled, the amount of legal fees which the lawyer believes are owed to the lawyer unless the fees are not in dispute and the escrow agreement provides for such, withdrawal or the client consents. Although a lawyer may assert liens granted by law to secure legal fees or expenses, the question of whether a retaining lien may attach to escrow funds is one of law and thus outside the jurisdiction of this Committee.
October 20, 1989
In answering questions this Committee acts by virtue of the following provision of the By-laws of the Association, Article 54, Section 3:
“This Committee shall have power, when consulted, to advise inquirers respecting questions of proper professional conduct, reporting its action to the Board of Directors from time to time.”
It is understood that this Committee acts on specific questions submitted ex parte and in its answers bases its opinion on such facts only as are set forth in the question.