United States: Ethics Roundup For 2013: Six Developments That Affect The Way We Practice Law

Last Updated: December 27 2013
Article by Nicole I. Hyland

Our work as professional responsibility attorneys over the past year has given us a front row seat to the most bedeviling ethical conundrums faced by lawyers.  In our final Ethics Alert of 2013, we re-cap six important developments for New York-area lawyers, along with tips for staying on the right side of the line.  But before we get to the list, we wanted to share the good news that, effective January 1, 2014, Nicole Hyland, author of many of our alerts, has been named a partner in our expanding Professional Responsibility Group.  The group will continue to counsel lawyers on their ethical obligations, assist them in responding to disqualification motions, and represent them in disciplinary proceedings.  We will also continue to advise lawyers and law firms on partnership agreements, partnership disputes, and lateral transitions. In addition, our professional responsibility lawyers will continue to serve the legal community through their work on the most influential ethics committees and on various ethics "hotlines" that field questions from lawyers throughout the state.

Now, on to the list.

1. New York Has the Rules Now, Not the Code

Until 2009, New York lawyers were governed by the Code of Professional Responsibility.  That year, New York became the 49th State (with California the lone holdout) to implement a version of the ABA Model Rules of Professional Conduct.  Yet, many of New York's older ethics opinions and cases, which were decided under the Code, will continue to be extremely relevant to this practice area for many years to come.  Unfortunately, this seems to cause a great deal of confusion for New York lawyers who do not regularly engage in the area of professional responsibility law.   Because of this confusion, we continue to see motions and other papers that cite to the Code, instead of the Rules, even where the conduct occurred after the Rules were adopted. (Note that conduct prior to April 1, 2009 is still covered by the Code.)  We have observed similar confusion from some of our hotline callers.

Tip:  When analyzing your ethical obligations as a New York lawyer, the place to start is with the relevant provision of the New York Rules of Professional Conduct.  A copy of the Rules (with the comments) can be found here on the New York State Bar Association website. Naturally, as with any research project, reviewing the relevant rule is just the beginning.  But starting in the right place gives you the best chance of finding the right answer!

2. You Must Supervise Your Escrow Accounts

New York lawyers received a sharp wake-up call in late-2012 when the New York Court of Appeals affirmed a disciplinary charge against attorney Peter Galasso, for failing to adequately supervise his escrow account, which allowed his bookkeeper (his own brother!) to steal millions of dollars in client funds. In early 2013, following a remand after an unrelated charge was dismissed on appeal, the Second Department re-affirmed a two-year suspension of Mr. Galasso.  Escrow violations remain the number one ground for attorney discipline in New York.  Just bouncing a check on an escrow account will trigger a report to the disciplinary authorities, and will likely lead to an audit covering at least six months of account records.  An attorney can be disciplined for inadvertently commingling business or personal funds with client funds, even if no client is harmed.  And it is now clear that attorneys (at least in smaller firms) can be disciplined for not catching misappropriations in their escrow accounts, even if they had delegated the management of those accounts to another partner or a non-lawyer bookkeeper.

Tip:  The treatment of advance retainers in New York differs from other states.  In New York, lawyers are permitted to treat advance retainers as the lawyer's funds, rather than client funds. See NYS Bar Op. 816 (2007). Such retainers do not need to be placed in an escrow account until the lawyer bills time against the funds.  They can be immediately placed in the lawyer's operating account or other non-escrow account.  This reduces the risk that the lawyer will inadvertently commingle or convert client funds.   To avoid confusion, the lawyer should specify in the retainer agreement that the advance retainer will be placed in the lawyer's operating account or other non-escrow account.  Any unused portion of the advance retainer must still be refunded to the client.

3. You May Have a Duty to Disclose Your Client's Perjury or Other Fraud on the Court 

Most lawyers believe that their duty of confidentiality is sacrosanct.

They may not know, however, that a change in the ethics rules requires them to take "reasonable remedial measures" to correct false statements made to a tribunal by their client or another witness, "including, if necessary, disclosure to the tribunal." NY Rule 3.3(a)(3) & (b) (emphasis added). This obligation trumps the duty of confidentiality. See NY Rule 3.3(c).  In addition, a 2013 ethics opinion has concluded that the duty to correct false statements lasts beyond the conclusion of the legal proceeding. See NYCBA Ethics Op. 2013-2.  Over the past year, we have seen a growing number of lawyers faced with the Hobson's choice of having to disclose their client's fraud to a tribunal or risk disciplinary charges. 

Tip:  Before the rule change, lawyers would sometimes deal with this problem simply by withdrawing from the representation.  Many lawyers (particularly older ones) still think that is a sufficient remedy.  Unfortunately, that may no longer be the case, particularly where a trial is nearing or ongoing. Before disclosing any client confidences, however, a lawyer faced with this dilemma should seek independent ethics advice.

4. You Cannot Be a Technology Luddite

Another trend we are seeing is lawyers facing sanctions or discipline for technological incompetence.  Just this month, a Massachusetts lawyer was publicly reprimanded for advising his client to "scrub" certain files from his computer because the lawyer believed they were not relevant to the lawsuit.  A South Carolina lawyer was temporarily suspended  for, among other things, refusing to have an e-mail address.  An Iowa lawyer was suspended for failing to recognize an example of the notorious "Nigerian inheritance" internet scam, and arranging for several of his clients to invest in the scam.  Even technologically savvy lawyers are struggling with novel questions about the ethical implications of blogging, social media use, and internet-based advertising.

Tip:  If you're an old dog who can't be taught new technological tricks, you may be at risk for disciplinary charges or sanctions.  Make sure you associate with lawyers who understand and know how to use technology.  Then follow their advice.  If you're a young lawyer who is struggling to find a job or is concerned about your career prospects, become the go-to person for legal technology issues, particularly e-discovery and social media. 

5. It is Not Yet Clear if Your Intra-Firm Communications With Your In-House Ethics Counsel Are Privileged

Many law firms now have in-house ethics counsel to advise their lawyers on a wide range of issues, including conflicts of interest, disclosure and reporting obligations, and legal malpractice risks.  There is a real question about whether - and under what circumstances - those communications can be protected from discovery by the client or third parties in a subsequent litigation.  In 2013, two court decisions in Georgia and Massachusetts  held that - under certain conditions - such communications may be protected by the attorney-client privilege.  The status of the "intra-firm privilege" in New York is still uncertain. We expect that 2014 will bring formal proposals from Bar groups in New York and other states to codify this privilege.

Tip:  None of us wants to discourage lawyers at firms from getting advice from their in-house ethics counsel (that's what we do for our lawyers here at Frankfurt Kurnit!).  But, it is important to be aware that your communications may not be privileged.  There are several ways to improve the chances of protecting those communications, including (among other things) formalizing the position of in-house ethics counsel, segregating communications and documents relating to the ethics advice from the underlying representation, labeling the communications you wish to protect as "Privileged" or "Confidential," and limiting those communications to those individuals at the law firm who need to know.    

6.The Economic Downturn Has Created Heightened Ethical Concerns, Particularly For Young Lawyers

It is no secret that the economic downturn has fundamentally affected the job prospects of new lawyers. A recent report issued by the NY City Bar found that the percentage of new lawyers for the classes of 2011 and 2012 who were unable to find full-time law jobs increased to just under 50%. This statistic is even more disturbing when you consider that law school applications have fallen significantly in each of the past three years.  In addition, the national median salary for new lawyers entering private practice dropped 35% from 2009 to 2011, while the burden of student loan debt is rising.  None of this is good news for young lawyers entering the market.

As professional responsibility lawyers, we are witnessing some of the unfortunate consequences of these economic trends.  Young lawyers without job offers still have an important asset that they invested a lot of time and money to get: their law license.  As a result, many of them are hanging out their own shingles and trying to drum up business.  The problem is that their inexperience, coupled with their lack of familiarity with the ethics rules, is getting some of them into trouble.  We are seeing a growing number of young lawyers facing disciplinary charges for violating rules concerning competence, advertising and solicitation, fee-splitting and escrow accounts.   In fact, this problem is not limited to new lawyers.  Recently, an experienced Ohio prosecutor, who opened her own practice after being laid off in 2009, faced disciplinary charges because she was unprepared for the complexities of private practice.

Tip:   If you are considering going solo, do a lot of research and preparation first.  Speak to other solo attorneys, read books and articles on the subject, take CLE programs on practical topics relevant to solo practice (such as escrow accounts, retainer agreements, and advertising), and  take advantage of the many resources made available by the New York State Bar Association and local bar groups seeking to assist small firm and solo lawyers.  Get advice from an ethics lawyer or call one of the ethics hotlines in New York about specific questions. Make sure you have sufficient legal malpractice insurance.  


This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.

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Nicole I. Hyland
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