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Banking For the Small Firm Practitioner

The day you hang out your shingle and unlock the door to your new practice is the day to walk down to the bank and introduce yourself to the branch manager.  Your relationship with your bank is about to change.  Your banking needs and responsibilities are about to change as well, and using the short line for “special” customers is just the beginning. 

Banking Needs:  A Personal Relationship and Good Service

Find a commercial bank that wants your business.  You’re not a regular checking/savings account customer any more – you are a small business and will be spending money on your banking and bringing new clients to your bank.  Hundreds of thousands of dollars will pass through your bank accounts and the bank will benefit from every one of your pesos.  Walk into the branch and make an evaluation.  Determine if the branch will offer your firm the personal service that you need and deserve as a small business.   Sit with the branch manager or an account representative at the branch who will be your contact.  That contact should answer your calls and be your point person, helping you with any questions or special needs.  The branch representative should ask you about your small business banking needs, listen to your answer, and explain how the bank will meet those needs.  Tell the representative you expect want to work with her over time, so she will know your business and you can trust her ability to provide the particular services you require from the bank.

Maintain and develop your personal relationship with the branch manager and account representative.  When you bring new business to the branch, call your contact at the branch or walk the client over and introduce him to the branch manager or account representative.  It reminds them that you are a source of new accounts for them, increasing your value to the bank, and ensures that your client gets personal service as well.  This strengthens your relationship, which comes in handy later.  There will be times when you’ll need their help.  A friendly branch, with your own account representative, will call you if your account runs dry so you don’t bounce a business check, waive an occasional fee and will make your clients feel welcome and comfortable when you send them to the branch.  The representative has even been known to keep the door open a few seconds longer if you call ahead that you are rushing down with a deposit.

Some banks don’t care about your business – dump them.  A branch of the most ubiquitous bank in Manhattan had the use of over $150,000 of one attorney’s client escrow funds for more than a year.  When it came time to turn the funds over to the client, the bank insisted on a fee of ten dollars for a bank check.  Instead, the attorney demanded the money (more than $150,000) in cash.  It was a game of chicken for ten long minutes until the bank manager finally relented and waived the ten-dollar fee.  The attorney pulled her business from the bank and this shortsighted bank lost not only the attorney’s business, but also all the clients she would have brought to the bank as new customers.  Keep your immediate and long-term value to the bank in mind when you’re shopping around and make sure you find one that appreciates you.  

A bank that cares about your business can make all the difference to you and your clients.  A midtown Manhattan branch manager called the attorney when a client arrived at the branch, inebriated and demanding to withdraw all of the proceeds from his recent personal injury settlement.  The attorney was then able to intercede and help the client.  Today the now sober client has money in the bank, thanks to the caring branch manager who had a good relationship with the attorney and made that call.  In turn, that client has made numerous referrals to the attorney, and the attorney has brought many new accounts to the bank.

Banking Responsibilities:  Careful Maintenance of Escrow Funds

Now that your banking relationship is flourishing, focus on your banking fiduciary obligations.  Your greatest obligation is to maintain your escrow account in proper order.  The fastest way to lose your license is to mess with your escrow account.  Remember that the escrow funds are other people’s money and the cardinal rule is that you must never use other people’s money, not even for a single day.  Don’t even think about it.

“Be mindful of the rules.  An attorney is not looking to make mistakes, but it happens because he is not mindful of the rules,” admonishes Jerome Karp, an attorney well known for excellent work and sage advise in the area of professional disciplinary complaints and attorney admissions issues.   The day you start your practice and open the escrow account, pull out your copy of the Disciplinary Rules[1], which delineate your obligations regarding escrow funds. 

Anytime you hold money for someone else, whether it is for a real estate sale, the settlement of an estate, or settlement of a personal injury action, you must place the money in an escrow account.  The account (including preprinted checks and deposit slips) must be labeled as an “Attorney Escrow Account” or similar language as set forth in 22 NYCRR 1200.46(b)(2).

If you put client money in your office operating account, or office money in your escrow account, you have co-mingled funds and have committed a serious breach of your professional obligation, subject to severe sanctions.  Even the failure to promptly remove your own attorney’s fees from the escrow account, once you are entitled to those fees, has been held to constitute improper co-mingling of funds[2]

As Mr. Karp notes, a check from an escrow account should only be written to a client, the firm, or a lien holder, and never to cash.  You must itemize the purpose of each withdrawal from the escrow account.  Never, ever, write a check from the escrow account to pay your personal or firm bills, even if you are entitled to attorney’s fees from the account.  Write the escrow check to your firm operating account for the fees, and then pay the firm bills.  For your personal expenses, draw a check to your personal account from the firm account and then pay your personal bills. 

Never write a check from the escrow account until you have confirmed that the check you are writing the funds from has cleared, and the funds are actually available in the account.  Do not assume the funds are available because sufficient time has passed.  Even a government check can be rejected by the originating bank because of an error in endorsement.   If a check from an escrow account bounces, the bank is obligated to report the returned check to the Fund for Client Security in Albany, which in turn notifies the local attorney disciplinary committee, which will conduct an audit of the account, unless there is quick proof that the returned check was a bank error.

Even if a check does not bounce, but an audit reveals that the account balance dipped below the amount of funds that should have been held in deposit for clients, the attorney is in violation of the disciplinary rules per se, and may have converted or misappropriated client funds.[3]    

Proper accounting requires a separate ledger page, either written or electronically, for each client matter.  Through QuickBooks, set up a separate client account and when the matter is complete, it is easy to generate the report which will show the initial deposit though to the zero balance after all funds are disbursed. 

The Disciplinary Rules require you to keep all these financial records for 7 years, along with all retainer agreements and closing statements.

In New York State, retainer funds, also known as “advance fees,” do not need to be escrowed.  The fee can be deposited in your operating account, even if you have not yet done the work.[4]  Indeed, placing a retainer fee in the escrow account, absent express agreement with the client, may constitute prohibited commingling.[5]  Wisdom advises that you deposit the advance fee in your operating account and refund any fees not used, because creating escrow accounts where they are not required adds unnecessary complexity and obligation that can cause trouble.[6]   

That same wisdom recommends that the retainer agreement explicitly state that the funds will not be escrowed, though, of course, all retainer funds should be properly credited to the client and accounted for.

A quick review of the recorded decisions from attorney disciplinary proceedings reveals that the most common source of attorney suspensions is the result of hijinks, either wittingly or unwittingly, with the escrow account.  When in doubt, don’t do it.

After all that researching, relating, banking, and protecting, you’ve earned a reward.  You can take that well deserved nap – so long as you sleep with one eye open.



[1] 22 NYCRR 1200.46; Disciplinary Rule 9-102

[2]Matter of Friedman, 2000 Slip Op. 10647, 717 N.Y.S.2d 240 (2nd Dept. 2000)

[3] Id.

[4] See Committee on Profession Ethics, New York State Bar Opinion 570, dated June 7, 1985, page 5 observing that “[n]ormally, when on pays in advance for services to be rendered or property to be delivered, ownership of the funds passes upon payment, absent an express agreement that the payment be held in trust or escrow, and notwithstanding the payee’s obligation to perform or t refund the payment:”  (Id, at page 5).   The committee noted that this opinion is contrary to the majority of other states.  

[5] New York State Bar Opinion 570, at pages 6-7

[6] Id.