Escrow Is Not an Operating Account: First Department Clarifies Rule 1.15 and Rejects Preclusive Effect of Vacated Admonition

Introduction

This commentary examines the Appellate Division, First Department’s per curiam decision in Matter of Edelman, 2025 NY Slip Op 04752 (Aug. 21, 2025), an attorney disciplinary case addressing misuse of an IOLA/escrow account and deficient recordkeeping under Rule 1.15 of the New York Rules of Professional Conduct. The Attorney Grievance Committee for the First Judicial Department (AGC) charged attorney Peter Franklin Edelman with (i) using his IOLA/escrow account as a de facto personal and business account, (ii) failing to maintain required bookkeeping records, and (iii) engaging in conduct adversely reflecting on fitness to practice. A Referee sustained the charges and recommended a suspension of at least two years. The First Department confirmed the misconduct findings but reduced the sanction to a three-month suspension.

The decision resolves three core issues:

• Whether vacatur of a prior private Admonition precludes subsequent formal charges arising from the same facts.
• Whether Rule 1.15(b)(4) permits a lawyer to leave earned fees in an IOLA account and use that account to pay personal and business expenses.
• How sanction length should be calibrated where an attorney misuses escrow without evidence of creditor-evasion, but with prior discipline and lack of remorse.

Summary of the Judgment

• The court denied respondent’s motion to disaffirm the Referee’s reports and dismiss the charges in full.
• The court confirmed the Referee’s findings that respondent violated:
  • Rule 1.15(b)(1): by using his IOLA/escrow account as a personal and business operating account.
  • Rule 1.15(d)(1)(i), (ii), and (2): by failing to maintain required bookkeeping, including ledgers and related records.
  • Rule 8.4(h): by engaging in conduct that adversely reflects on fitness to practice.
• The court rejected the argument that vacatur of a 2021 Admonition barred subsequent formal charges, calling that contention a “nonsensical” reading of its earlier remand order.
• The court clarified that Rule 1.15(b)(4) does not override Rule 1.15(b)(1): even if earned fees are temporarily in escrow, an escrow account cannot be used as a personal or business operating account.
• Sanction: The court imposed a three-month suspension (effective 30 days from the order and until further order of the court), finding a two-year suspension excessive absent evidence of creditor-shielding. Aggravating factors included a prior 2003 Admonition for the same type of misconduct and lack of remorse.

Detailed Analysis

1) Precedents Cited and Their Role

The First Department situated sanctioning within its prior jurisprudence:

• Matter of Harper, 192 AD3d 174 (1st Dept 2021) and Matter of Sieratzki, 186 AD3d 85 (1st Dept 2020):
  • These cases illustrate the higher-end sanction (two-year suspensions) when attorneys misuse escrow accounts to shield personal funds from creditors or otherwise engage in aggravated misuse beyond mere commingling.
  • The court pointedly distinguished Edelman because the record did not show creditor-evasion. That distinction undercut the Referee’s recommendation of a suspension of not less than two years.
• Matter of Johannes, 66 AD3d 39 (1st Dept 2009) and Matter of Fong, 308 AD2d 19 (1st Dept 2003):
  • These decisions support mid-range suspensions (e.g., three months) where escrow misuse occurred without creditor-shielding, especially when accompanied by aggravating features like prior discipline or lack of remorse.
  • The court anchored Edelman’s sanction to this line of cases, emphasizing recidivism and attitude as sanction drivers.

2) The Court’s Legal Reasoning

a) Vacatur of Admonition is Not Preclusive

Respondent argued that when the First Department vacated the AGC’s prior Admonition (a form of private discipline) and remanded for formal proceedings, the court had effectively exonerated him. The court rejected this as a “nonsensical reading.” Procedurally, the vacatur under 22 NYCRR 1240.7(e)(2) did not resolve the merits; it cleared the way for a full, formal adjudication under 22 NYCRR 1240.8. Put differently, vacatur removed the private discipline from the books but explicitly authorized the AGC to prosecute formal charges arising from the same factual nucleus. There is no disciplinary “double jeopardy” or res judicata bar in this context.

b) Rule 1.15(b)(4) Does Not Authorize Using Escrow as an Operating Account

Respondent maintained that Rule 1.15(b)(4) entitled him to keep earned fees within his IOLA account and then pay personal and business expenses from that account. The court flatly rejected this view. The key clarification is the relationship between subsections:

• Rule 1.15(b)(1) sets the baseline: escrow is for client and third-party funds and must not be used as a personal or business operating account. Commingling is prohibited except in narrow, defined circumstances.
• Rule 1.15(b)(4) addresses limited scenarios when funds in the account belong partly to the client or third party and partly to the lawyer (for example, when a portion has become due as a fee or where there is a dispute). The rule requires prompt withdrawal of the lawyer’s portion once due and permits retention only to the extent necessary to resolve disputes or effectuate proper distributions.

Crucially, the court held that (b)(4) does not “bypass” or supersede (b)(1). Even if earned fees are, for a time, properly in escrow, that does not transform the escrow account into a general business or personal account from which an attorney may pay day-to-day expenses.

c) Recordkeeping Failures under Rule 1.15(d)

The court also confirmed violations of Rule 1.15(d)(1)(i), (ii), and (2). It rejected respondent’s contention that maintaining bank statements, canceled checks, and deposit slips—plus monitoring the running balance—satisfies the rule. In New York, lawyers must keep robust, contemporaneous records specific to escrow activity, including at minimum:

• A ledger or similar record for each client/matter or for the account as rules require;
• A checkbook register and cash receipts/disbursements records;
• Deposit slips and canceled checks with matter identification;
• Monthly reconciliations of the escrow account’s balance across bank statements, the checkbook register, and the individual client/matter ledgers.

Bank statements alone are not a substitute for the granular, rule-specific ledgers and reconciliations demanded by Rule 1.15(d).

d) Fitness to Practice – Rule 8.4(h)

The court affirmed the Rule 8.4(h) finding—conduct adversely reflecting on fitness to practice—on the basis of the underlying escrow misuse and recordkeeping failures. Although respondent argued that this charge had been withdrawn, the Referee sustained it and the appellate court confirmed the Referee’s findings in full.

e) Sanction Calibration

The First Department crafted a three-month suspension based on several considerations:

• No creditor-evasion: The court distinguished Harper and Sieratzki (two-year suspensions) because there was no evidence respondent used escrow to shield funds from creditors.
• Recidivism: A 2003 Admonition for substantially similar misconduct (using escrow as a personal account) weighed heavily in aggravation.
• Attitude: The court found respondent’s defiant posture and lack of remorse significant. The AGC highlighted that lack of remorse in its cross-motion.
• Mitigation: The absence of client harm, cooperation with the AGC, pro bono service, and retirement from practice were noted but did not outweigh the aggravating factors and the need for general and specific deterrence.

On balance, the court followed the Johannes/Fong line for a mid-range suspension rather than the Harper/Sieratzki line, disaffirming the Referee’s not-less-than-two-years recommendation as excessive in this record.

3) Impact and Forward-Looking Significance

• Clarified boundary of Rule 1.15(b)(4): The decision serves as a clear warning that even where earned fees are briefly in escrow, lawyers cannot use escrow accounts to pay operating or personal expenses. The primary prohibition in Rule 1.15(b)(1) controls.
• Recordkeeping rigor: Maintaining only bank statements and a mental or informal running balance is insufficient. Lawyers must adhere to the detailed ledger and reconciliation obligations in Rule 1.15(d).
• Procedural posture matters—but does not immunize: Vacating a private Admonition and remanding for a hearing does not end a disciplinary matter. Respondents should recognize that a vacatur can lead to a public, formal adjudication with potentially greater sanctions.
• Sanction calibration guideposts:
  • Absent creditor-evasion: mid-range suspensions (e.g., three months) are available, especially with recidivism and lack of remorse.
  • With creditor-evasion or aggravated misuse: longer suspensions (e.g., two years) remain the norm.
• Old discipline still counts: Even a decades-old Admonition for the same conduct will aggravate sanction if the behavior recurs.

Complex Concepts Simplified

• IOLA (Interest on Lawyer Account): A pooled, interest-bearing escrow account for client and third-party funds, authorized in New York, with interest typically remitted to the IOLA Fund. It is not a law firm’s operating account.
• Escrow vs. Operating Account: Escrow holds client/third-party funds in trust; an operating account holds a firm’s funds for business expenses. Crossing this boundary—using escrow to pay personal or business bills—is prohibited.
• Commingling: Mixing client/third-party funds with a lawyer’s personal or firm funds. Rule 1.15 sharply limits any commingling, allowing only narrowly-defined exceptions (e.g., minimal bank charges, prompt withdrawal of earned fees once due, retention of disputed portions until resolved).
• Rule 1.15(d) Recordkeeping: Requires specific, contemporaneous records—client/matter ledgers, check registers, deposit slips, canceled checks, and monthly reconciliations. Bank statements alone do not satisfy the rule.
• Admonition vs. Formal Charges: An Admonition is a private disposition by the AGC. Vacatur of an Admonition does not equate to exoneration and may be followed by formal charges adjudicated by the court.
• Referee’s Report: In First Department practice, a Referee may be appointed to take evidence, find facts, and recommend sanctions. The court reviews and may confirm, modify, or reject those findings and recommendations.
• “Until further order of the Court”: Suspensions typically run for the stated period and continue until the attorney is reinstated by court order. Compliance with 22 NYCRR 1240.15 (rules for suspended attorneys) is mandatory.

Practical Guidance and Compliance Checklist

• Never pay personal, payroll, vendor, or firm expenses directly from an escrow/IOLA account.
• Withdraw earned fees promptly into the operating account once due and undisputed; do not leave firm funds “parked” in escrow.
• Keep all required records:
  • Client/matter ledgers identifying each deposit and withdrawal;
  • Checkbook register and cash receipts/disbursements journals;
  • Source-identified deposit slips and canceled checks;
  • Monthly three-way reconciliations (bank statement, checkbook register, ledgers).
• Train staff and audit regularly. Adopt written trust accounting policies and conduct periodic internal reviews.
• If an issue arises (e.g., an NSF incident), self-audit immediately, remediate, and document corrective measures.
• Exercise caution in strategic choices: seeking vacatur of an admonition can escalate the matter into a public proceeding with higher potential sanctions.

Procedural Notes

• The court acted under 22 NYCRR 1240.8(b) and the First Department’s disciplinary motion practice (referencing 603.8/603.8-a), confirming the Referee’s findings and fixing sanction.
• The suspension is effective 30 days from the order and lasts three months, continuing “until further order,” with the usual prohibitions on practice and requirements for compliance with 22 NYCRR 1240.15.

Conclusion

Matter of Edelman draws a bright line: escrow is not an operating account. Rule 1.15(b)(4) cannot be invoked to justify paying personal or business expenses from an IOLA—Rule 1.15(b)(1)’s core prohibitions remain paramount. The court also underscores that vacating a prior Admonition does not preclude formal prosecution of the underlying misconduct. On sanction, the First Department distinguishes cases involving creditor-evasion (often warranting two-year suspensions) from cases of misuse without such aggravation; here, recidivism and lack of remorse supported a three-month suspension.

The decision provides concrete compliance guidance for New York practitioners: promptly withdraw earned fees to the operating account, never “park” firm funds in escrow, and conform meticulously to Rule 1.15(d)’s recordkeeping regimen. For disciplinary law, Edelman clarifies both procedural and substantive guardrails—ensuring trust accounting integrity remains non-negotiable while aligning sanctions to the degree and purpose of misuse.