Bank Obligations Regarding Attorney Escrow Accounts

Written By: Jay L. Hack

Jay Hack

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 president of the Bar Association. The issues to be addressed by the committee relate to obscure, and often arcane, matters of banking practice, the Federal Reserve’s Regulation CC addressing when funds deposited in a bank become available for withdrawal, and the responsibilities and liabilities of the parties under UCC Article 4 regarding bank deposits and collections. That may explain why I found myself appointed to the committee.

Appellate Division rules force banks that want to maintain attorney escrow accounts1 to report any circumstance in which an attorney draws a check on an escrow account against insufficient funds.2 The Appellate Division has no authority to regulate banks,3 so you may ask how the courts manage to impose such a requirement. The answer is simple but ingenious. The Appellate Division has regulatory authority over attorneys.4 Using that power, the Appellate Division indirectly imposed escrow account requirements on banks by prohibiting attorneys from maintaining an escrow account at a bank. The exception is unless the bank agrees to report any situation in which an attorney bounces a check on an escrow account or draws a check on the account against insufficient funds.5 These are generally conceded to be important early indicators that something is rotten in Denmark.

The rule is commonly referred to as the “bounced check” rule because, as originally drafted, it only applied if a bank returned a check unpaid. However, the rule was recently amended to apply not only to bounced checks on escrow accounts, but also to any escrow account check if there are insufficient funds to pay the check when it is presented for payment. This happens regardless of whether the bank pays or returns the check.6

To qualify to be included in the list of banks approved to accept escrow checks, a bank must sign an agreement to provide reports of bounced checks or checks presented creating overdrafts, even if they are paid. A list of banks authorized to accept attorney escrow accounts in New York is available at PLST%20140.pdf. Due to the amendment extending the rule to all checks drawn against insufficient funds, all participating banks must sign an amended agreement to expand their reporting obligation.

Some banks, though aware of the reporting rule, are unaware of their obligation to sign an agreement to comply.7 They offer escrow account services to attorneys and the attorneys, who rarely check the approved list, are technically violating the rule that limits the banks at which they may maintain escrow accounts to only banks that have signed the agreement. Attorneys should check the list provided by the Appellate Division to make sure that their bank is authorized to accept escrow accounts. If a bank is not on the official list but wants to maintain attorney escrow accounts, the bank should immediately take steps to comply.

The underlying principle of the rule is simple. If a check drawn on an escrow account is presented for payment and would create an overdraft if it were paid as of the time it is presented, then regardless of whether the check is paid or returned for insufficient funds,8 the bank is required to report that fact to the Lawyers’ Fund for Client Protection. Unless the bank withdraws the report within 10 days,9 the Lawyers’ Fund sends the report to the applicable attorney disciplinary committee,10 which then conducts an investigation.

Unfortunately, the administration of the rule has been fraught with some misunderstandings. All banks should review their procedures and ensure they send reports when required. Banks should ensure that they are not reporting transactions that are not covered by the rule.

Attorneys should, of course, take extreme care never to write an escrow check against insufficient funds. Upon getting a notice from the disciplinary committee that a report has been filed, the attorney should respond immediately to any request from the disciplinary committee for additional information. In the case of a wrongful filing by the bank, the attorney should consider preemptively submitting documentary evidence proving that no check was presented against insufficient funds.

Here is a brief Q&A addressing common issues related to the “bounced check” rule.

  1. Does the rule apply to checks drawn against an attorney’s regular operating account? No. Except for the misuse of operating account funds to pay escrow checks, which implicates wrongful commingling issues,11 the rule does not address bounced or insufficient funds checks drawn on an operating account.
  2. Is a bank responsible for escrow account rules other than NSF check reporting and IOLA interest payments? Generally, no. The attorney is responsible for ensuring 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 a regular interest-bearing account. Bank employees should not knowingly assist attorneys in covering up escrow account deficiencies, which could create liability for the bank, both to the courts for breaching its agreement and to clients of the attorney whose funds are misappropriated.
  3. 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 to an escrow account could allow the attorney to cover the misuse of escrow funds with his or her own funds, in violation of the commingling prohibition.
  4. 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? Nice try, but it doesn’t negate the bank’s reporting obligation. The presentation of a check for payment when there are insufficient funds immediately triggers the obligation to file a report, regardless of whether the check is covered after presentation. The filing obligation is measured by when the check is presented through the clearing process; thus, a deposit after the check is presented for payment does not affect the Bank’s obligation to report.
  5. Should the bank pay the check described in Q3 if a deposit is made after the check is presented? This question is not, and probably should not be, addressed by the court rules. However, I believe that the bank should pay the check if it is covered before the midnight deadline for returning the check,12 so long as 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 report. The disciplinary committee will sort things out.
  6. What is the deadline for filing the report? A bank must file the report no later than five business days after the check is presented for payment.
  7. Three days after the bank files a report, the attorney 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 report within 10 business days after filing, but 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). If an attorney error caused the insufficiency, no matter how innocent, the bank must file the report. The report will make its way through the process, and the attorney will have to explain what happened to the disciplinary committee.
  8. A check is presented at the end of the banking day, but when presented, there are only uncollected funds in the account, represented by a check deposit made that morning. Should the bank file a report?  A literal interpretation of the rule leads to the conclusion that it should not be reported if the Bank pays the check because it considers the funds ``available” under its normal availability policy. A report must be filed if the Bank bounced the check or does not consider the funds available but pays the check as an accommodation to the attorney. If the check is paid because the Bank deems the funds available, and the check subsequently bounces, then the attorney must reimburse the bank13. Still, there is no requirement for reporting what would otherwise have been an insufficient funds check when first presented for payment.
  9. If a bank returns a check on an escrow account for lack of endorsement or forged maker’s signature, should the bank file a report? No. Banks must file reports only when a check is presented against insufficient funds, regardless of whether the bank pays the check. A check returned unpaid because it is not “properly payable” for any other reason under New York law does not trigger the reporting requirement. If a check with a forged maker’s signature is presented and there would not have been sufficient funds to pay the check absent the forgery, a report should not be filed because the check was not “properly payable” at the time of presentation.
  10. How about checks returned because of a stop payment order? Once again, the check is not properly payable,14 so no bounced check report is required, regardless of whether funds in the account are sufficient to cover the check.
  11. Is a report required when our bank returns an ACH debit due to insufficient funds? A report is required only if an “instrument” is presented for payment. An ACH debit initiated by a payee (in this case, usually a thief) is not an instrument under the Uniform Commercial Code,15 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 debits while allowing credits. In that case, we advise attorneys to block all ACH transactions. We advise banks to alert attorneys to this risk and block ACH transactions on escrow accounts because many attorneys first learn about ACH debits when money disappears from their accounts.
  12. What must a bank include in the report? The report must identify the bank, name the lawyer or law firm, and provide the account number, the date of presentation for payment and, if applicable, the date paid and the amount of the resulting overdraft.
  13. Does a bank have to manage subaccounts to make sure that checks are drawn against the correct subaccount? Subaccounts should not be linked, allowing all subaccount balances to be used to pay a check drawn on funds in a specific subaccount. This is the same issue as discussed above with respect to linking an operating account with an escrow account. Even 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 ensure that the correct subaccount is used to fund the disbursement account. The attorney MUST do so.
  14. Escrow account fraud is becoming so common that some banks are implementing a positive pay system under which the bank will not pay a check unless the attorney advises the bank in advance to pay the check. How does the reporting requirement 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 adopting such programs throughout the banking system. The good news is that technology has advanced to the point where such programs are available at many banks. 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 report? If there is money in the account to cover the check, the bank should not file a report because the bank, as an agent for the depositor, is not authorized to pay the check. 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 on the data from the attorney, that the check is not “properly payable” because the check has been altered after the attorney issued it. Therefore, I believe no report needs to be filed, but this is debatable, and hopefully the NYSBA committee will clarify this.

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

However, the check could be completely counterfeit. In this situation, the Bank should immediately contact its customer upon presentation and inquire 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 if there are insufficient funds in the account, the customer suffers from their honesty. Therefore, a report must be filed because a properly payable check was presented against insufficient funds.

Banks can’t stretch the rules to keep an attorney-customer happy by allowing the attorney 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 an insufficient funds 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 that properly reports will be helping to protect funds that belong to that attorney’s clients.16

Jay L. Hack is a partner in the law firm of Gallet, Dreyer & Berkey, LLP. He has focused on 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 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


1. 22 N.Y.C.R.R. 1300.1 (a)

2. 22 N.Y.C.R.R. 1300.1 (c) provides that the reporting requirement is triggered when an instrument is “presented” against an escrow account and there are “insufficient available funds,” a report is required regardless of whether the instrument is paid or returned unpaid (i.e., bounced). The former version of the rule applied only if the bank returned the check for that reason, but that language was recently removed. A properly payable instrument means an instrument which, if presented in the normal course of business, is in a form requiring payment under the laws of the State of New York.

3. See Cuomo v. Clearing House Association, L. L. C., et al., 557 US 519, 129 S Ct 2710, 174 L Ed 2d 464 (2009) for a discussion of the difference between the right to examine banks versus the right to enforce state laws against banks.

4. New York Judiciary Law § 90.

5. 12 N.Y.C.R.R. 1300.1(a) prohibits attorneys from maintaining an escrow account in a bank unless it agrees to provide reports and 12 N.Y.C.R.R. 1300.1 (b) provides for a central registry of banks that agree.

6. 12 N.Y.C.R.R. 1300.1(c).

7. Many banks are also unaware of the obligation to sign an amendment to their agreement with the Appellate Division covering the amended rule. The Appellate Division does not seem inclined to penalize banks for this omission. However, when discussing this article with an attorney for the Lawyer’s Fund for Client Protection, I was asked to remind banks, and attorneys representing banks, of the obligation to sign a new agreement.

8. The regulation requires a report only if the check is otherwise “properly payable” under New York law.

9. 12 N.Y.C.R.R. 1300.1(f).

10. 12 N.Y.C.R.R. 1300.1(g) permits withdrawal of reports that the bank has provided “by inadvertence or mistake.” The section goes on to expressly provide except that the curing of an insufficiency of available funds by a lawyer or law firm by the deposit of additional funds shall not constitute reason for withdrawing a dishonored check and overdraft report.

11. Lawyers are not permitted to commingle their own funds with escrow funds owned in whole or in part by others. 22 N.Y.C.R.R. 1200.1.15(a), except to the minor extent necessary to cover bank charges. This prohibition on commingling is a principal reason that certain practices are prohibited, including linking operating and escrow accounts, or the retroactive covering of NSF checks.

12. Banks have until midnight of the next business day after the day of presentation to bounce a check.

13. See Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 17 NY 3d 565 (2011).

14. I do not have authority for the inclusion of a check subject to a stop payment order as being not properly payable, but the relationship between the drawer of a check and the bank that is the drawee is a principal/agent relationship. The issuance of a stop payment order withdraws the authority of the Bank as agent to pay the check, which seems to make the check no longer properly payable.

15. UCC Section 3-102 XXX defines an “instrument” as a negotiable instrument and UCC Section 3-104 provides that a negotiable instrument must, in addition to other requirements, be a writing signed by the maker or drawer. An ACH debit fails these requirements.

16. The bank may also avoid having the word “defendant” come after its name in a lawsuit by the plaintiff whose money was misapplied by the attorney. In Lerner v Fleet Bank, N.A., 318 F3d 113, 123 [2d Cir 2003], as amended (Apr. 16, 2003), involving the notorious Schick attorney defalcation, the victims sued Fleet Bank, N.A., for a RICO violation because it allegedly engaged in a regular pattern of avoiding filing bad check reports. The Second Circuit dismissed the case because of a failure to satisfy the requirement that the violation of the escrow reporting rule approximately caused injury. However, Circuit Judge Sotomayor, writing for the majority, seemed motivated, at least in part, by a desire to avoid a treble damage claim under RICO. It is easy to construct a state law claim that a bank’s failure to report bad checks was the proximate cause of future losses from subsequent defalcations without implicating RICO.


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