State Bar Amends Comments to Rules (Again)

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By Roy Simon
[Originally published in NYPRR March 2011]

Two months ago in this publication (NYPRR January 2011), I discussed amendments by the New York State Bar Association to its Comments on the New York Rules of Professional Conduct. My introduction to that article noted that at its November 2010 meeting, the association’s House of Delegates had approved “technical” revisions to 44 separate Comments and had withdrawn “five other Comments pending a Jan. 28, 2011 debate in the House of Delegates on proposed substantive changes.” at the Jan. 28, 2011 meeting, the five “substantive” Comments were approved by the House of Delegates without opposition. This article explains the changes and why they were made. (As in my January 2011 article, the explanations are solely my own. I do not speak for the Committee on Standards of Attorney Conduct, a/k/a “COSAC,” or for the State Bar.)

Background

At the November 2007 meeting of the State Bar’s House of Delegates, after nearly two years of discussion and debate about COSAC’s proposed Rules, the House voted to approve the full package of proposed New York Rules of Professional Conduct, including both black-letter Rules and explanatory Comments. The State Bar then forwarded the package to the appellate Divisions. At that time, in early 2008, only about a third of all state courts had officially adopted the Comments to the Rules of Professional Conduct, and the State Bar did not know whether New York’s Courts would adopt only the black-letter rules, or would adopt both the Rules and the Comments.

The quandary over the Comments hovered over COSAC for a long time. In December 2008 the Courts announced that the Rules of Professional Conduct would take effect on April 1, 2009 in a form very different from the rules as proposed by the State Bar. That rendered many of the Comments superfluous or inaccurate. Someone would have to go through the Comments to determine which ones were valid as proposed, which ones should be modified, and which ones should be deleted. But for months, the Courts did not say definitively whether they would adopt the Comments and revise the Comments themselves or would instead let COSAC undertake that task.

Because the House of Delegates knew that the Courts would not adopt the proposed Rules of Professional Conduct lock, stock, and barrel, the House had given COSAC the authority, without further approval by the House of Delegates, to conform the Comments to the Rules of Professional Conduct as adopted by the Courts. Because COSAC wanted accurate Comments in place by the time the new Rules took effect on April 1, 2009, COSAC went to work weeding out language in the Comments that contradicted the rules as adopted. COSAC met that target, and a revised set of Comments was posted on the NYSBA website on April 1, 2009. But it was a hasty effort — COSAC had to review and revise more than 100 pages of Comments in about two months, and there was no time to circulate proposed revisions for public comment before the new Rules went live on April 1st. In effect, then, the period for public comment began after the Comments had already been published in supposedly final form.

In the year or so after the Comments were posted, many observers pointed out errors or suggested changes. COSAC spent the Spring and Summer 2010 pondering these suggestions and revising the Comments whenever revisions seemed prudent or necessary. By September of 2010, COSAC had suggested revisions to 49 separate Comments. Of those, 44 proposed revisions were “technical,” and those 44 were approved by the Executive Committee and the House of Delegates at its November 2010 meeting. Those changes were the subject of my January article.

However, five of the revisions to the Comments were identified by COSAC as “substantive” — i.e., they changed the meaning, not just the wording, of what the House of Delegates had approved back in November 2007. After the November 2010 House meeting, those five proposed substantive changes — which concerned only three rules (Rules 1.8, 1.15, and 8.4) — were circulated to sections of the New York State Bar Association for comment and were put on the agenda for the Jan. 28, 2011 meeting of the House of Delegates. Those five changes are the subject of this article.

January 2011 Amendments to the Comments

At the January 2011 House meeting, President-Elect Vince Doyle, who presides over House meetings, presented a brief background for the proposed changes. He noted that the proposed changes to the five Comments had been circulated within the State Bar for comment, and that the only section to submit comments was the Family Law Section, which supported four of the five proposed changes. (The Family Law Section took no position on the change to Rule 1.8, Comment [8], concerning wills, which it considered outside its expertise.)

Following Vince Doyle, COSAC Chair Joe Neuhaus presented COSAC’s report. He gave a brief introduction to each proposed change. A motion to approve the report was then made and seconded. Vince Doyle invited speakers to approach the microphone to speak to the motion, but no one spoke. The House then voted overwhelmingly in favor of the report by voice vote, with no opposition.

Now I will describe the changes and explain why they were made, Comment by Comment. In doing so, I am relying heavily on the report that COSAC submitted to the House of Delegates, which exemplifies the careful and thoughtful work that COSAC consistently produces.

Rule 1.8, Comment [8]

Rule 1.8 of the New York Rules of Professional Conduct is entitled “Current Clients: Special Conflict of Interest Rules.” The Rule covers 10 different types of conflicts that have presented particular dangers over the years, and therefore needed more specific guidance than could be given in the general rule on conflicts of interest, Rule 1.7.

One of the special types of conflicts concerns gifts to lawyers, including testamentary gifts. Those conflicts are addressed in Rule 1.8(c), which provides as follows:

(1) solicit any gift from a client, including a testamentary gift, for the benefit of the lawyer or a person related to the lawyer; or

(2) prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any gift, unless the lawyer or other recipient of the gift is related to the client and a reasonable lawyer would conclude that the transaction is fair and reasonable.

For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative, or individual with whom the lawyer or the client maintains a close, familial relationship.

Rule 1.8 leaves open a question that faces many attorneys: may a lawyer seek or accept appointment as an executor or other fiduciary for a client? The Comments are intended to provide guidance on exactly this type of question. As originally adopted, Comment [8] began with the following sentence addressing this question: “This rule does not prohibit a lawyer from seeking to have the lawyer or a partner or associate of the lawyer named as executor of the client’s estate or named to another fiduciary position.”

Critics pointed out, however, that this language was directly at odds with Former EC 5-6, which provided as follows:

A lawyer should not consciously influence a client to name the lawyer as executor, trustee, or lawyer in an instrument. In those cases where a client wishes to name the lawyer as such, care should be taken by the lawyer to avoid even the appearance of impropriety.

Critics argued that no change in the language of the rules supported the radical change represented by the original Comment [8]. COSAC agreed. “on re-examining the Comments, particularly in light of the overall thrust of the Court’s changes to the proposed Rules,” COSAC’s report to the House of Delegates said, “COSAC has concluded that the Comment should not take a position on the propriety of a lawyer seeking to be named as an executor of a client’s estate. COSAC therefore suggests that the Comment should hew somewhat closer to the position of the EC and make clear only that a lawyer may accept a position as executor or other fiduciary.” accordingly, the full text of amended Comment [8] to Rule 1.8 now reads as follows (with deletions stricken through and additions underlined):

[8] This Rule does not prohibit a lawyer from seeking to have the lawyer or a partner or associate of the lawyer from being named as executor of the client’s estate or named to another fiduciary position. Nevertheless, such appointments will be subject to the general conflict of interest provision in Rule 1.7 when there is a significant risk that the lawyer’s interest in obtaining the appointment will adversely affect the lawyer’s professional judgment in advising the client concerning the choice of an executor or other fiduciary. In obtaining the client’s informed consent to the conflict, the lawyer should advise the client concerning the nature and extent of the lawyer’s financial interest in the appointment, as well as the availability of alternative candidates for the position.

Rule 1.15, Comment [3]

Rule 1.15 requires lawyers who handle client funds to establish and maintain special accounts variously called an “Attorney Special Account,” “Attorney Trust Account,” or “Attorney Escrow Account.” as all lawyers know, the rules governing these accounts are strict, and a lawyer who violates the trust account rules is highly likely to face professional discipline. The Comments providing guidance on ambiguous points in the rules are therefore vital. The next two substantive changes concern Rule 1.15.

An example of an ambiguous provision requiring interpretation is Rule 1.15(b)(4), which provides:

(4) Funds belonging in part to a client or third person and in part currently or potentially to the lawyer or law firm shall be kept in such special account or accounts, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client or third person, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved. [Emphasis added.]

How does this provision apply when a lawyer is holding a client’s funds in the lawyer’s capacity as an escrow agent and the client refuses to pay the lawyer’s fees? Comment [3] to Rule 1.15 initially addressed this situation by saying: “Lawyers often receive funds from which the lawyer’s fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold undisputed funds to coerce a client into accepting the lawyer’s contention.”

Critics pointed out that the italicized sentence could be read to cover client funds that a lawyer was holding in escrow as an escrow agent. Yet, as COSAC’s report to the House of Delegates noted, a lawyer’s charging or retaining lien does not generally permit a lawyer to withhold escrow funds in order to pay the lawyer’s fees. In support of this proposition, COSAC cited two cases — People v. Keeffe, 50 N.Y.2d 149 (1980) (there is no “trust interest in [funds in escrow] in anyone other than the client;” thus, lawyer does not have legal possession of the escrowed funds, and may not assert retaining lien); and Surdan v. Marine Midland Bank, 198 A.D.2d 578 (3d Dept. 1993) (escrowed funds obtained in one action cannot be basis for a charging lien in another action).

To resolve the problem, COSAC’s first thought was simply to delete the second sentence of Comment [3], but it received a helpful informal comment suggesting that COSAC should amend the Comment to “state affirmatively that lawyers may not assert a retaining lien over escrowed funds (absent an agreement otherwise).” accordingly, the amended version of Comment [3] to Rule 1.15 now provides, in full, as follows.

[3] Lawyers often receive funds from which the lawyer’s fee will or may be paid. a lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed to the lawyer. However, a lawyer may not withhold undisputed the client’s share of the funds to coerce a the client into accepting the lawyer’s claim for fees. contention While a lawyer may be entitled under applicable law to assert a retaining lien on funds in the lawyer’s possession, a lawyer may not enforce such a lien by taking the lawyer’s fee from funds that the lawyer holds in an attorney’s trust account, escrow account or special account, except as may be provided in an applicable agreement or directed by court order. Furthermore, any disputed portion of the funds must be kept in or transferred into a trust account, and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. Notice to the client of the right to arbitrate fee disputes is required in some circumstances. The undisputed portion of the funds is to be distributed promptly.

Rule 1.15, Comment [4]

Another puzzling provision of the attorney trust account rule is Rule 1.15(c)(4), which states:

A lawyer shall … promptly pay or deliver to the client or third person as requested by the client or third person the funds, securities, or other properties in the possession of the lawyer that the client or third person is entitled to receive.

The key to this rule has always been the phrase “entitled to receive,” which is a question of property law not addressed by the Rules of Professional Conduct. What may a lawyer do when a third party disputes a client’s right to receive funds that the lawyer holds in the lawyer’s trust account? As originally promulgated, Comment [4] to Rule 1.15 dealt with this situation as follows:

[4] When in the course of representation a lawyer is in possession of funds in which two or more persons (other than the lawyer) claim interests, the funds should be kept separate by the lawyer until the dispute is resolved, by agreement of the parties or court order or commencement by the lawyer of an interpleader action and deposit of the property into court. … [Emphasis added.]

Critics pointed out that this language “allowed lawyers to hold in escrow funds that are the subject of any dispute between the client and a third party, no matter how unreasonable the client’s position.” upon re-examination, COSAC agreed. It concluded that the original Comment [4] “protects the lawyer from having to make sometimes difficult judgments, but does not adequately protect the third party from having the disbursement of his or her funds held up by insubstantial or bad faith assertions by the lawyer’s client.” COSAC also noted that courts have required lawyers to exercise some judgment in this regard. COSAC cited Leon v. Martinez, 84 N.Y.2d 83 (1994), in which the Court of appeals interpreted DR 9-102(C)(4) (the identical predecessor to Rule 1.15(c)(4)) to require a lawyer to disregard a client’s demand that the lawyer continue to hold escrow funds in the face of a demand from a third party whom the lawyer knew had a contractual right to the funds. (The lawyer ended up paying the plaintiff out of his own pocket — ouch!) Persuaded by this criticism, COSAC decided to replace the original Comment [4] with the ABA version of Comment [4]. According to COSAC, the ABA version makes clear that:

[A] lawyer may only withhold funds (or disburse funds) upon a nonfrivolous claim by the client or third party, that is, where there are substantial grounds for dispute over ownership of the funds. In that case, the lawyer may hold the funds in escrow or interplead the funds pending the resolution of the dispute.

The result is that amended Comment [4] to Rule 1.15, which completely replaces the original Comment, provides, in full, as follows:

[4] Paragraph (c)(4) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. a lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

Rule 8.4, Comment [2]

Rule 8.4(b), like former DR 1-102(a)(3), provides: “a lawyer or law firm shall not … engage in illegal conduct that adversely reflects on the lawyer’s honesty, trustworthiness or fitness as a lawyer.” Does this language mean that a lawyer violates Rule 8.4(b) if the lawyer engages in any form of illegal conduct, no matter how minor (e.g., violating an ordinance about dog walking, or getting a parking ticket)? The original Comment [2] to Rule 8.4 gave lawyers some leeway. It said, in pertinent part:

[2] … Although a lawyer is personally answerable to the entire criminal law, a lawyer should be professionally answerable only for illegal conduct that indicates lack of those characteristics relevant to law practice. Violations involving violence, dishonesty, fraud, breach of trust, or serious interference with the administration of justice are illustrative of illegal conduct that reflects adversely on fitness to practice law. other types of illegal conduct may or may not fall into that category, depending upon the particular circumstances. … [Emphasis added.]

Critics pointed out that this approach differed from the approach in former EC 1-5, which provided as follows:

A lawyer should be temperate and dignified, and should refrain from all illegal and morally reprehensible conduct. Because of the lawyer’s position in society, even minor violations of law by a lawyer may tend to lessen public confidence in the legal profession. [Emphasis added.]

COSAC’s Report to the House of Delegates regarding this problem was ambivalent, and says more about COSAC’s views on the limits of its authority than it says about the best approach to minor violations of law. The report said:

Although COSAC believes there is some illegal conduct that does not reflect adversely on a lawyer’s honesty, trustworthiness or fitness as a lawyer, there is an argument, as presented in the former EC, that even minor transgressions may tend to lessen public confidence in the legal profession and thereby draw into question a lawyer’s fitness as a lawyer.

COSAC therefore concluded that it was “inappropriate for the Comment to take a bright-line position on an arguable question, particularly one that represents a significant shift from a former EC that is not supported by any change in the rule.” any change in ethical standards might “be better left to the guidance of ethics committees in particular fact situations.” The amended version of Comment [2] to Rule 8.4 now reads, in full, as follows:

[2] Many kinds of illegal conduct reflect adversely on fitness to practice law. Although a lawyer is personally answerable to the entire criminal law, a lawyer should be professionally answerable only for illegal conduct that indicates lack of those characteristics relevant to law practice. Violations Illegal conduct involving violence, dishonesty, fraud, breach of trust, or serious interference with the administration of justice are is illustrative of conduct that reflects adversely on fitness to practice law. Other types of illegal conduct may or may not fall into that category, depending upon the particular circumstances. A pattern of repeated offenses, even ones of minor significance when considered separately, can indicate indifference to legal obligation.

Rule 8.4, Comment [4]

A second problem raised by Rule 8.4(b) was whether a lawyer ever had a right to engage in civil disobedience or otherwise violate the law. The original version of Comment [4] to Rule 8.4, taken verbatim from the first sentence of the ABA version of Comment [4], stated: “a lawyer may refuse to comply with an obligation imposed by law upon a good-faith belief that no valid obligation exists.”

Critics argued (according to COSAC’s report) that the “good faith” exception “may be read very broadly to suggest that any subjectively held belief that a legal obligation is invalid exempts a lawyer from discipline for engaging in illegal conduct.” That did not sound right. COSAC acknowledged that the bar has “a long history of taking steps to oppose (for example) discriminatory or unconstitutional laws, and COSAC believes that such conduct should not be discouraged.” But COSAC concluded that the original language of Comment [4] might imply a “good-faith” exception to a lawyer’s duty to comply with legal obligations that is “overly broad and does not exist within the rule.”

In addition, COSAC believed that the Comment should contain a cross-reference to Rule 3.4(c), which generally prohibits a lawyer from disregarding (or advising a client to disregard) a ruling or standing rule of a tribunal, but expressly permits the lawyer to “take appropriate steps in good faith to test the validity of such a rule or ruling.” COSAC’s report then said: “The thrust of Rule 8.4 and 3.4(c) together is a little more nuanced than Rule 8.4 alone, because the two together make clear that a lawyer cannot simply disregard a court order or rule in a good faith belief that the order is invalid.” COSAC therefore added a reference to Rule 3.4.

The overall idea, COSAC’s report said, was “to qualify the requisite belief as reasonable, to provide some explanation of the situations to which the time-honored exception has applied, and to clarify that a lawyer may not disregard a court order.” accordingly, the amended version of Comment [4] to Rule 8.4 reads, in full, as follows:

RULE 8.4 MISCONDUCT

[4] A lawyer may refuse to comply with an obligation imposed by law if such refusal is based upon a reasonable good-faith belief that no valid obligation exists because, for example, the law is unconstitutional, conflicts with other legal or professional obligations, or is otherwise invalid. As set forth in Rule 3.4(c), a lawyer may not disregard a specific ruling or standing rule of a tribunal, but can take appropriate steps to test the validity of such a rule or ruling.

Conclusion: Lawyers Now Have Fair Warning

Since November, the Comments have been amended both in technical ways (correcting fairly plain errors) and in substantive ways (correcting misleading or legally mistaken language). Lawyers can now consult the Comments with greater confidence. And lawyers now have fair warning about some types of conduct that will not be tolerated even though the text of the corresponding rules is ambiguous. That type of interpretive guidance is exactly what the Comments are intended to provide.

Professor Roy Simon is the author of Simon’s New York Rules of Professional Conduct Annotated. The brand new 2015 edition analyzes more than 100 new cases, ethics opinions, and other developments critical to New York practice. It’s the legal ethics bible for all New York-area lawyer. To purchase, click here.

In addition, Professor Simon advises lawyers and law firms on questions of professional conduct and serves as an expert witness in cases raising issues of lawyer conduct. You may reach Professor Simon at 516-463-5289 or Roy.Simon@hofstra.edu.

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