May lawyers place client's funds in Interest-Bearing Accounts?
Are there circumstances where a lawyer must place a client's funds at interest for
the benefit of the client?
What ethical duties are imposed when an Interest-Bearing Account is used?
These inquiries have been addressed in American Bar Association Formal Opinion 348, dated
July 23, 1982, which is adopted and incorporated herein as the formal ethics opinion of the Board
of Professional Responsibility of the Supreme Court of Tennessee, to the extent quoted herein,
Historically, clients' funds entrusted to lawyers in the United
States have been placed in non-interest bearing bank checking
accounts maintained by lawyers separate from their own funds.1
Typically these funds are held temporarily for use in a particular
transaction in behalf of the client and must be readily available for
this purpose. Because of the impracticability of establishing a
separate account for each client, all client funds generally are
commingled in the lawyer's trust account. Since it is impracticable
to calculate interest on each client's funds when commingled with
the funds of other clients, the lawyer's trust account is left
uninvested. For years, clients have accepted this practice,
apparently recognizing that the earnings potential of their funds in
relation to the administrative costs would not justify investing the
As a consequence, the depository institutions have had the use of
the funds without payment of any interest. Occasionally, a client's
funds are deposited in a separate account at interest for the benefit
of the client where the amount and expected holding periods make
it obvious that the interest earned will exceed the administrative
costs of placing the funds at interest for the client.
MAY LAWYERS PLACE CLIENTS' FUNDS IN INTERESTBEARING
The Model Code does not directly address the subject of interest2DR
9-102(B) provides that a lawyer shall:
(1) Promptly notify a client of the receipt of his funds, securities, or other properties.
(2) Identify and label securities and properties of a safe deposit box or other place of
safe keeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client
coming into the possession of the lawyer and render appropriate accounts to his
client regarding them.
(4) 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
3Electronic subaccount techniques that track earnings and report them on a multitude of small
accounts are being offered by a few depository institutions in some states. But even were these
accounts widely available, bank charges and other costs of administering the accounts, such as
accounting to the client and income tax reporting, usually would make their use infeasible in
bearing lawyer trust accounts. While DR 9-102 provides rules
concerning a lawyer's handling of client funds, neither that
Disciplinary Rule nor any other specifically outlines the lawyer's
duties when client funds are placed at interest. Nor do the Ethical
Considerations of Canons provide direct
guidance for this type of lawyer activity.
It is clear, however, that nothing in the Model Code prohibits a
lawyer from placing clients' funds in interest-bearing accounts so
long as the other requirements of DR 9-102 are met.2
ARE THERE CIRCUMSTANCES WHERE A LAWYER MUST
PLACE A CLIENT'S FUNDS AT INTEREST FOR THE
BENEFIT OF THE CLIENT?
In addition to expenses created by the notification, recordkeeping
and accounting requirements of DR 9-102(B), lawyers may incur
other costs in attempting to place clients' funds at interest. Income
tax filings may be necessary to enable the client to report the
interest earned on the funds, and bank handling fees may further
reduce the potential return. It is evident, therefore, that in many --
if not most -- instances, the accounting and administrative costs,
plus any bank charges, will more than offset the potential gains to
the client. Thus, while no ethical rule proscribes placing client
funds at interest for the benefit of an individual client,
administrative costs and practical considerations often will make it
self-defeating for the lawyer to attempt to obtain interest on small
sums or even on large amounts of
clients' funds held for short periods of time.3
In apparent recognition of these practical difficulties, the Model
Code does not specify that a lawyer has the duty to invest clients'
nominal or short-term funds entrusted to the lawyer. The thrust of
DR 9-102 is that lawyers must neither misuse a client's funds nor
impede their prompt delivery. The focus is on safekeeping,
accounting and delivery, and not on investment of the funds.
The law of agency and trusts governs when a lawyer has a fiduciary
4See also Boone, A Source of Revenue for the Improvement of Legal Services, Part 1, 10 St.
Mary's L. J. 539, 541-42 (1979); Los Angeles County, California, Ethics Opinion 388 (April 21,
1981); In Re: Interest on Trust Accounts, 402 So. 2d 389, 394 (Fla. 1981).
duty to invest a client's funds. A trustee may be liable for lost
earnings on funds left
with the trustee for investment and kept uninvested for an
unreasonably long time. See 2 Scott, The Law of Trusts, Sections
180.3, 181 (3d ed. 1967 and Supp. 1981). Where, however, the
circumstances show that the trustee 'was not under a duty to invest
trust money but merely to safeguard it, he is not liable for interest
because of this failure to invest.' Id. at 1464.4
This latter exception applies to most instances where a lawyer is
entrusted with client funds. However, where the amount of funds
held for a specific client and the expected holding period make it
obvious that the interest which would be earned would exceed the
lawyer's administrative costs and the bank charges, the lawyer
should consult the client and follow the client's instructions as to
investing. In the case of an extreme violation of the lawyer's
fiduciary duty to invest a client's funds amounting to gross neglect
of a client's matter, moreover the Model Code, would provide a
basis for professional discipline. See DR 6-101(A)(3) [neglect];
DR 6-101(A)(1) [incompetence]; and DR 7-101(A)(1) [zealous
WHAT DUTIES DOES THE MODEL CODE IMPOSE WHEN
AN INTEREST-BEARING ACCOUNT IS USED?
To comply with the requirements which DR 9-102 establishes with respect to the
handling of funds entrusted to a lawyer, the lawyer must:
(a) Promptly notify a client of the receipt of the client's funds
(b) Maintain complete records of all funds of a client coming
into the possession of the lawyer and render appropriate accounts
to the client regarding the funds [DR 9-102(B)(3)];
(c) Promptly pay to the client as requested by the client the
funds in the possession of the lawyer which the client is entitled to
receive [DR 9-102(B)(4)].
These notification, recordkeeping and payment requirements apply
to the interest generated by a separate bank account established by
a lawyer for an individual client because that interest, when posted
to the client's account, becomes funds of the client.
This 29th day of May , 1984.
Henry H. Hancock
W. J. Flippin
Edwin C. Townsend
APPROVED AND ADOPTED BY THE BOARD
1Clients' funds generally must be held separate from the lawyer's funds. Model Code of
Professional Responsibility, DR 9-102(A) (1980). A lawyer who commingles clients' funds with
his own may be guilty of a crime. E.G., Md. Ann. Code Art. 10, Section 44 (1957).