Out-of-State Law Practice & Escrow Accounts: Ethics Opinions

By Roy Simon

[Originally published in NYPRR December 1998]

Recently, the New York State Bar’s Committee on Professional Ethics issued an opinion about a lawyer’s duties as an escrow agent, and the Nassau County Bar’s Professional Ethics Committee issued an opinion regarding a lawyer’s right to serve clients who reside in other states.

Lawyer’s Duties as Escrow Agent

N.Y. State Bar Op. 710 (11/6/1998): For several years, a lawyer who represented the sellers in a real estate transaction has been holding funds in escrow pursuant to a written agreement incident to the transaction. The purpose of the escrow was to secure the buyers against loss if the municipality involved imposed an assessment for a certain sidewalk violation. However, the municipality advised the attorney that there is “no possibility the municipality will issue an assessment.” The attorney communicated this information to the buyers and asked their permission to return the escrow money to the sellers, but the buyers refused permission. The escrow agreement itself does not authorize the lawyer to release the funds to the seller upon learning that no assessment will be made. May the lawyer return the escrowed funds to the sellers upon furnishing the buyers with an affidavit recounting the lawyer ‘s findings that there is no possibility of a sidewalk assessment? No.

“As a general rule, an escrow agent has contractual and fiduciary duties to all parties to an escrow arrangement which may be discharged only in accordance with the terms of the escrow agreement or with the informed consent of all parties: If a dispute arises regarding funds held in escrow, the escrow agent must follow the procedures set forth in the escrow agreement. “Unfortunately, the escrow agreement in question is silent with respect to dispute resolution. Without such a provision, it would be inappropriate for the lawyer to assume the power to resolve the dispute by releasing the escrow and returning the funds to the seller, because the stipulated contingency for the release of the funds has not occurred.”

The attorney may not disburse the funds based on his own notions of fairness. He may resign as escrow agent, but if he does then, “the mandate of DR 9-102 to protect the property of others entrusted to the lawyer requires that the lawyer take steps to preserve intact the funds in escrow and initiate a process whereby the dispute may be resolved.” One way to resolve the dispute is for the lawyer to commence a stakeholder ‘s action and deposit the funds with the court. In sum, the Committee said:

The inquirer’s predicament underscores the importance of anticipating problems which may arise when agreeing to act as an escrow agent and of making certain that the escrow agreement provides a means of dispute resolution. Attorneys should avoid the danger that such arrangements will be made casually in the press of a real estate closing, without much thought being given to the possibility that the event stipulated for release of the funds in escrow may not occur.

Lawyer’s Right to Serve Out-Of-State Clients

Nassau County Bar Op. 98-8 (6/24/1998): A New York attorney has been asked to draft estate planning documents (such as a revocable trust, a will, and various ancillary documents) for a client who reside in Florida and whose assets are wholly located in Florida. To make sure that the documents comply with Florida law, the attorney will ask the client’s permission to associate with Florida counsel to review the documents. May the lawyer draft estate planning documents for a Florida client under these circumstances? Yes.

The starting point is DR 3-101(B), which forbids a New York lawyer from practicing law “in a jurisdiction where to do so would be in violation of regulations of the profession in that jurisdiction.” The Committee cannot opine on the definition of unauthorized practice “ii” Florida, but it may interpret DR 3-101(B) of the New York Code of Professional Responsibility. An important guide to interpretation is EC 3-9, which states that “the legal profession should discourage regulation that unreasonably imposes territorial limitations upon the right a lawyer to handle the legal affairs of a client or upon the opportunity of a client to obtain the services of a lawyer of the client’s choice in all matters New York case law precedents such as El Gemayel v. Seaman, 72 N.Y.2d 701 (1988), indicate that there must be “something more than ‘incidental and innocuous’ physical presence in consulting infrequently with clients in a foreign jurisdiction to constitute a violation of DR 3-101(B), and although association with local lawyers may be preferred, this is not indispensable.”

The Committee’s view is reinforced by §3 of the Restatement (Third) of the Law Governing Lawyers, adopted in 1998, which states that a lawyer may provide legal services to clients not only “at any place within the admitting jurisdiction” but also “at a place within a jurisdiction in which the lawyer is not admitted to the extent the lawyer’s activities in the matter arise out of or are otherwise reasonably related to the lawyer’s practice” within the admitting jurisdiction. Illustration 5 following §3 of the Restatement, which mirrors the specific inquiry here, makes clear that an estate planning lawyer may draft a will and other documents for an out-of-state client, and may even travel to the client’s state to have the documents executed, without engaging in the unauthorized practice of law.

Based on case law, treatises, and common practices among New York lawyers, “we adopt and endorse the terms and spirit of §3 of the Restatement.” Accordingly, the Committee finds no violation of DR 3-101(B) because (1) the attorney is not “extensively consulting with and advising while meeting the client in Florida to perform these services,” (2) “the attorney is consulting with duly admitted Florida counsel to review the documents for compliance with Florida law,” and (3) “the attorney will fully disclose these facts and arrangements to the client who is paying for these services.” Florida may not agree with the Committee’s analysis, but the Committee must follow New York precedents and “cannot give complete and automatic deference to any contrary rules or laws of other jurisdictions seeking to regulate the practice of law by New York lawyers in New York.”

In sum, “if Inquiring Counsel prepares a will in New York for a Florida resident and consults with duly admitted Florida counsel to review the document for compliance with Florida law, all while duly informing the client that Inquiring Counsel is not admitted to practice there, we conclude that the Inquiring Attorney would not violate our Code’s DR 3-101(B).”

Roy Simon is a Professor of Law at Hofstra University School of Law and Director of Hofstra’s Institute for the Study of Legal Ethics. He is the author Simon’s New York Code of Professional Responsibility Annotated, published annually by West.

DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.

Escrow Funds Jurisdiction Roy Simon