Bank Obligations Regarding Attorney Escrow Accounts

Written By: Jay L. Hack

Jay L. Hack in front of a bank

The President of the New York State Bar Association recently appointed me to a special ethics subcommittee on escrow rules applicable to attorneys. The committee consists of the general counsels of a number of court disciplinary committees, judges and the incoming President of the Bar Association. They needed someone with familiarity with banking practice, the Fed’s Regulation CC on funds availability and UCC Article 4 on bank deposits and collections, which probably explains why I was added to the committee.

The courts in New York have no authority to regulate banks, but the courts are the regulatory authority over attorneys. Using the power to regulate attorneys and their ethical obligations, the courts have managed indirectly to impose requirements on banks by prohibiting attorneys from depositing escrow funds in a bank unless the bank agrees to play ball on what is generally conceded to be an important early indicator of misappropriation of escrow funds – bouncing a check on an escrow account.

A New York attorney is prohibited from maintaining an escrow account at a bank unless the bank agrees to comply with the courts’ “bounced check” rule. Banks must sign an agreement to agreeing to provide reports of bounced checks or checks presented creating overdrafts, even if they are paid. A list of banks that are authorized to accept Attorney escrow account rules in New York is available at All participating banks should assign an amendment to their bounced check agreements within the past year as a result of a recent amendment to the rule. If your bank is not on the official list and you want to maintain escrow accounts, be sure to take steps to comply.

The basic principle of the rule is simple - if a check drawn on an escrow account is presented for payment and it would create an overdraft if it were paid, then regardless of whether it is paid or returned for insufficient funds, the bank is required to report that fact to the Lawyers’ Fund for Client Protection. Unless the bank withdraws the report within 10 days, the Lawyers’ Fund sends the report to the Court’s attorney disciplinary committee, which then conducts a detailed investigation to determine whether the attorney has properly handled escrow funds.

Unfortunately, the administration of the rule has been fraught with some misunderstandings. All banks should review their procedures and assure that they are sending bounced check reports when required, and not reporting transactions that are not within the penumbra of insufficient funds transactions.

Here is a brief Q&A addressing common misunderstandings about bank obligations regarding escrow accounts. If you have any questions or problems related to these or any other banking issues, we are here to help.

  1. Is our bank responsible for escrow account rules other than NSF check reporting and IOLA interest payments? Generally, no. The attorney is responsible for making sure that the escrow account has the right title, deciding what money should or should not be deposited in the account, and whether funds should be in an IOLA or in a regular interest-bearing account. Obviously, bank employees should not knowingly assist attorneys in covering up escrow account deficiencies, which could create liability on the bank, both to the courts for breaching its agreement and to clients of the attorney whose funds are misappropriated.
  2. Can an attorney link an operating account with an escrow account so that funds in the operating account cover any overdraft in the escrow account? No – and the bank should not allow linkage. An attorney is only permitted to use escrow funds to satisfy escrow obligations. Linking an operating account could allow the attorney to cover misuse of escrow funds with his or her own funds. That may postpone an even bigger loss.
  3. A check is presented for payment on an escrow account and there is not enough money in the account to cover it. What if the attorney comes to the bank and deposits cash to cover the check the morning after the check is presented? The presentation of a check for payment when there are insufficient funds immediately triggers the obligation to file a bounced check no matter whether the check is covered. A deposit after the check is presented through the clearing process does not affect the bank’s obligation to report.
  4. Should the bank pay the check described in Q3? Yes. The bank should pay the check if it is covered with cash before the midnight deadline and the depositor authorizes the payment. There is nothing illegal about allowing an attorney to cover a daylight overdraft in an escrow account. However, the bank must still file the bounced check report and the court’s disciplinary committee will sort things out.
  5. When should a bank file the report? Five business days after the check is presented for payment.
  6. Our bank filed a bounced check report and three days later, the attorneys says that his office manager accidentally deposited escrow funds into the wrong account. Is the bank allowed to withdraw the report? No. A bank may withdraw a bounced check report within 10 business days after filing only if there is a bank error (e.g., the bank incorrectly credited a check to the wrong account despite correct directions from the attorney), but not if there is an attorney error that caused the insufficiency, no matter how innocent. If not withdrawn, the report will make its way through the attorney disciplinary process and the attorney will have to explain what happened to the disciplinary committee.
  7. A check is presented against uncollected funds represented by a deposit made that morning. Should the bank file a bounced check report? A literal interpretation of the rule leads to the conclusion that if the bank pays the check because it considers the funds “available” under its normal availability policy, it should not be reported. If the bank bounces the check or does not consider the funds to be available but pays the check as an accommodation to the attorney, it must be reported. If the check is paid, and the related deposit subsequently bounces, then the attorney must reimburse the bank, but there is no requirement for reporting what would otherwise have been an NSF bounced check. This is an issue our committee may explore.
  8. If our bank returns a check on an escrow account for lack of endorsement or for forged maker’s signature, should the bank file a bounced check report? No. Bounced check reports are filed only when a check is presented against insufficient funds, regardless of whether the bank pays the check. A check that that is returned unpaid because it is not “properly payable” for any other reason under New York law does not trigger the reporting requirement.
  9. How about checks returned because of a stop payment order? Once again, the check is not properly payable, so no bounced check report is required regardless of whether there are funds in the account sufficient to cover the check.
  10. Is a report required when our bank returns an ACH debit due to insufficient funds? A report is required only if a “check” is presented for payment. An ACH debit initiated by a payee is not a check under the Uniform Commercial Code, so a bank is not required to file a report when it returns an ACH debit. We advise attorneys to block all ACH transactions because they cannot control when a payee, or a thief, submits an ACH debit. ACH credits (the attorney sends money) are permitted so long as the attorney documents them, but some banks will not block only debits, we advise attorneys to prohibit all ACH transactions. Your bank may want to advise attorneys to block ACH transactions on escrow accounts because many attorneys first learn about ACH transactions when money disappears from an account.
  11. What must a bank include in the report? Be careful. Not all core data processing systems provide the required info in their standard forms. The report must identify the bank, name the lawyer or law firm, and provide the account number the date of presentation for payment, and the date paid, and the amount of resulting overdraft.
  12. Does our bank have to manage subaccounts to make sure that checks are drawn against the correct subaccount? It depends on the bank’s core system and how accounts are established. Subaccounts should not be linked, allowing all subaccount balances to be used to pay a check drawn on funds in another subaccount. This is the same issue as discussed above with respect to linking an operating account with an escrow account. However, if there is a master disbursement account established for convenience with numerous subaccounts to track ownership or interest accruals, it is not the bank’s responsibility to assure that the correct subaccount is used to fund the disbursement account.
  13. Escrow account fraud is becoming so common that our bank has implemented, or is considering implementing, a positive pay system under which the attorney must affirmatively advise the bank in advance of the check number and amount of each check written on an account, or else the bank will not pay the check. How does the bounced check rule work with that system? When positive pay is implemented, an attorney will write a check on an account and advise the bank, normally through a data upload to the bank’s website, that the check should be paid. Ten years ago, in an article I wrote for the New York Business Law Journal called “Tugboats, Glaucoma and the Check Collection Process,” I anticipated the adoption of such programs throughout the banking system. The good news is that technology has advanced to the point where such programs are available on many bank core data processing systems. The bad news is that the law and rules have not moved quite so fast, so issues remain.

    a) If a bank bounces a check because there is a discrepancy between the data the attorney provides and the actual check, must it file a bounced check report? If there is money in the account to cover the check, the bank should not file a report because the reason for bouncing it is that the bank, as agent for the depositor, is not authorized to pay it. It gets complicated if the uploaded data says the check was written for $100, but, when presented for payment, the amount has been changed to $100,000, which would create an overdraft. The bank is bouncing the check because it is not authorized to pay it. The bank has reason to believe, based upon the data from the attorney, that the check is not “properly payable,” a term used both in the bounced check rule and in the Uniform Commercial Code Article on Bank Deposits and Collections. Therefore, I believe that no bounced check report needs to be filed, but this is debatable and hopefully our committee can clarify this point.

    b) What happens if the attorney does not upload any information regarding checks written that day? If there are sufficient funds in the account to pay a check as presented, but the bank returns it because it has not gotten “positive pay” notice to pay it, no bounced check notice is required. If a check is presented that would create an overdraft and the bank has no data on the check, then the bank has no evidence that the check is not “properly payable.” Therefore, under a literal interpretation of the rule, a bounced check report should be filed even though the check is bounced because of lack of a positive pay notice rather than due to insufficient funds.

However, the check could be completely counterfeit. I suggest that in this situation, the bank should contact its customer immediately upon presentment and inquire as to whether the check is bona fide. If the customer says, “No, don’t pay the check, it is a fake,” then the bank should return the check and not file a report, because it has reason to believe that the check is not properly payable. However, if the customer says, “Oops, I forgot to upload the report and the check is proper,” then the customer suffers from his or her honesty and a bounced check report must be filed because a properly payable check was presented against insufficient available funds.

I am sorry to deliver the bad news to the banking industry, but a bank can’t go overboard to keep an attorney customer happy by allowing the customer to cover bad checks or otherwise hide escrow account shenanigans. A branch manager can’t decide to ignore the rules and allow a customer to cover a bounced check on an escrow account, EVEN IF the bank allows regular business customers to do so. In exchange for possibly adversely affecting one customer relationship, the bank will be helping to protect funds that belong to that attorney’s clients, who may well also be the bank’s customers.

Mr. Hack is a partner in the law firm of Gallet, Dreyer & Berkey, LLP. He has specialized in all aspects of the law affecting banks for over 45 years. He is the former Chair of the Business Law Section of the New York State Bar Association and regularly lectures to bankers, attorneys, real estate professionals and accountants on legal issues applicable to banks. He is the principal author of the Bar Association’s Banking Law Committee comment letter on the Department of Financial Services’ transaction filtering regulatory proposal and was instrumental in removing the express threat of criminal prosecution from the final regulation. He can be reached by email at

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Jay L. Hack


Mr. Hack’s primary practice focus is providing a full range of legal services to banks and other financial institutions.

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