Recently I was contacted by a client and the discussion was whether or not a surety bond company would allow an attorney to hold cash in their attorney escrow as collateral for a bond.
Ten to 15 years ago, this used to be a common practice. The reason why was because a lot of surety companies did not accept cash as collateral. They didn’t want to hold or administer the funds. It was a lot of work. Cash collateral is necessary for the issuance of bonds in certain circumstances.
Today many companies receive cash collateral and are set up to administer the receipt, management, and return of cash collateral. Many surety companies have streamlined and developed a process to do it efficiently. I bring this up because some clients and attorneys think holding funds in their escrow is a good idea. It’s a horrible idea, and there are several reasons why I always advise against it.
The first is that an attorney may have to turn the escrow funds over to another party, such as the obligee on a surety bond. In situations where the attorney is legally required to turn the funds over and their client does not want them to, they still have to turn the escrow funds over. Given that the attorney is representing the client in an ongoing action, it may lead to many problems, lack of trust, and disputes. The client may feel that the attorney is to blame for no longer having their money in the possession of the attorney’s escrow account.
Another issue is that when an attorney gives an escrow letter to a surety company in support of the issuance of a surety bond, they are making the representation that the account is funded. If, for some reason, all of the money in the escrow account is not there, the surety can and generally will contact the Bar Association and move for disciplinary action against the attorney, which could lead to problems with an attorney’s law license.
Many clients approach me and ask, is this a good idea? And I tell them, no, it’s never a good idea. There are large, highly-rated surety companies that regularly accept money as collateral. Many of them pay interest on the money deposited with them. And the premiums generally are not significant enough to hold funds in collateral versus a bond.
We take various forms of collateral. We’re also educated on types of collateral and can have an intelligent, high-level conversation about the types and why or why not you should go before with that specific type.
We are not a company that will continually give you yes answers without fully explaining the risk to you and your client. We want to inform you of the benefits and the downside of each collateral option. Give me a call today to discuss any bonding situation and the types of collateral that surety companies accept.
Neil Pedersen
PEDERSEN & SONS SURETY BOND AGENCY, INC.
15 Maiden Lane Suite #800
New York, NY, 10038
212-227-7277
800-720-7277
neil@courtbondnow.com
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