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HANDLING CLIENT FUNDS AND PROPERTY
I. INTRODUCTION
The need to scrupulously handle funds entrusted to
a lawyer by a client should be self-evident. Nonetheless, cases
continue to arise where practicing attorneys, whether inadvertently or
intentionally, mishandle the money of their clients, subjecting
them inexcusably to economic hardship and seriously undermining public
confidence in the legal profession.
However, loss of money by a client is not a prerequisite to the
suspension of a lawyer’s license for mishandling client funds. Delk
v. Virginia State Bar, 233 Va. 187, 355 S.E.2d 558 (1987) (decided
under former DR 9-102). Our purpose here is threefold:
A. To develop a full understanding of the rules
for handling client funds and property;
B. To illustrate circumstances under which
mistakes are often made; and
C. To demonstrate proper trust account
procedures.
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II. RULES
The requirements and procedures governing the
holding of client funds by Virginia lawyers are found in the Rules of
Court, Part 6, § II: Rule 1.15, and § IV, ¶ 20. These rules are
reprinted at the end of this Topic section (Exhibit A) and will be
reviewed below.
A. "Trust" and "Escrow" Accounts
The word "trust" is used to reflect the fiduciary role in which
a lawyer receives or holds funds on behalf of a client, an estate
or a ward and is an important label to distinguish these accounts
from accounts containing a lawyer's operating funds. The use of
such a label should constitute notice to the depository financial
institution that the account is special in nature. The financial
institution cannot lawfully set off against such a special account
for liabilities owed it by the lawyer. Use of the term "trust
account" meets the requirement that client funds be deposited in
an "identifiable trust account." Under the new Rules, these
accounts are denominated as "escrow" accounts.
B. Commingling
A general prohibition exists against commingling a lawyer's own
funds with client funds. Rule 1.15(a)(3). The practice of "salting" a
trust account is prohibited. A lawyer cannot for his or her own
purposes maintain a sum of money on deposit in his or her trust
account. Only two exceptions to the Rule are implied:
1. The bank charges exception permits a lawyer to make
deposits of his or her own funds to cover bank charges made
for administration of the trust account. This exception is
necessary to prevent invasion of client funds to pay such
charges. Rule 1.15(a)(3)(i); see LEO 1510.
2. The mixed funds exception. Where an item received by the
lawyer includes amounts belonging to the client and amounts to
which the lawyer is entitled (such as fees or reimbursement
for previously advanced expenses), such an item must be
deposited in the trust account. Rule 1.15(a)(3)(ii).
C. Withdrawal From Trust Account Funds
A lawyer must withdraw from the trust account funds
contractually due the lawyer from the client. Rule 1.15(a)(3)(ii).
Caveat: If there is a dispute whether the lawyer is entitled to
the funds, the lawyer cannot withdraw the fees in dispute until
the controversy is resolved. Id.
Query: What constitutes a dispute? Recognition of the premise
that separation of the lawyer's funds from those of the client
is necessary for the client's protection and to avoid the
appearance of impropriety requires that disbursement of funds to
which the lawyer is entitled occur at the earliest appropriate
time.
D. Notification of Client of Receipt of Monies
A lawyer is required to promptly notify a client when funds,
securities, or other property have been received for the client's
account. Rule 1.15(b)(1).
E. Maintenance of Complete Records
A lawyer must maintain complete records of client funds,
securities, and other property in his or her possession. Rule
1.15(b)(3).
F. Accounting to Client
A lawyer must account to the client for funds, securities and
other property held and distributed by the lawyer. Rule
1.15(b)(3).
G. Insufficient Funds and Check Reporting
All trust accounts opened by a lawyer must be maintained with
an approved financial institution that has executed the Virginia
State Bar Approved Financial Institution agreement which
requires that a financial institution report to the Virginia State Bar when any instrument which would be properly payable if sufficient funds were available, is presented against a lawyer escrow account containing insufficient funds, irrespective of whether or not the instrument is honored. Va. S. Ct. R., pt.6, §IV, ¶20; Rule 1.15(d)(1). Note that the term “lawyer escrow account” means an account maintained in a financial institution for the deposit of funds received or held by an attorney or law firm on behalf of a client.
H. Prompt Payment or Delivery of Funds to Client or Third Party
A lawyer must promptly pay over or deliver to the client or
another as requested by such person, securities and other property held for the client's
account to which the client or another is entitled to receive. Rule 1.15(b)(4). A lawyer is also ethically obligated, in
certain instances, to protect the rights of third parties to
client funds, i.e., payment of medical liens. Va. Code §§
8.01-66.2-66.12; LEO 1747 (lawyer owes ethical duty under Rule
1.15 (c) (now Rule 1.15(b)) to protect rights of doctor to settlement proceeds under
an assignment executed by both attorney and client).
If
there is a dispute between the client and third party over
entitlement to proceeds held by the lawyer, the lawyer should
suggest means by which to resolve the dispute, i.e., arbitration
or mediation, and hold those funds in trust until the dispute
is resolved or interplead them into court. Comment [3], Rule 1.15. Comment [4] to Rule 1.15 provides:
Paragraphs (b)(4) and (b)(5) do not impose an obligation upon the lawyer to protect funds on behalf of the client’s general creditors who have no valid claim to an interest in the specific funds or property in the lawyer’s possession. However, a lawyer may be in possession of property or funds claimed both by the lawyer’s client and a third person; for example, a previous lawyer of the client claiming a lien on the client’s recovery or a person claiming that the property deposited with the lawyer was taken or withheld unlawfully from that person. Additionally, a lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. For example, if a lawyer has actual knowledge of a third party’s lawful claim to an interest in the specific funds held on behalf of a client, then by virtue of a statutory lien (e.g., medical, workers’ compensation, subrogation, attorneys’ lien, a valid assignment executed by the client, or a lien on the subject property created by a recorded deed of trust) the lawyer has a duty to secure the funds claimed by the third party. Under the above described circumstances, paragraphs (b)(4) and (b)(5) require the lawyer either to deliver the funds or property to the third party or, if a dispute to the third party’s claim exists, to safeguard the contested property or funds until the dispute is resolved. If the client has a non-frivolous dispute with the third party’s claim, then the lawyer cannot release those funds without the agreement of all parties involved or a court determination of who is entitled to receive them, such as an interpleader action. A lawyer does not violate paragraphs (b)(4) and (b)(5) if he has acted reasonably and in good faith to determine the validity of a third-party’s claim or lien.
Duty to Pay Third Party Liens
Although lawyers believe that they owe their primary duty to the client, a lawyer cannot—even at the client’s direction—disregard a valid third party lien or claim against the funds held by the lawyer. Doing so will expose the lawyer to discipline if the third party claimant files an inquiry against the lawyer with the Virginia State Bar. Virginia State Bar v. Timothy O’Connor Johnson, Case No. CL09-2034 (Richmond Cir. Ct. August 11, 2009). Lawyer violates Rule 1.15 (c)(4) (now Rule 1.15(b)(4) ) when refusing to honor chiropractor’s consensual lien with client, directing client’s lawyer to pay total amount owed to chiropractor out of settlement of client’s personal injury case. Although lawyer was not a party to the assignment of benefits, lawyer knew that client had contracted with chiropractor to pay the medical bill out of settlement. When chiropractor refused to reduce his bill, lawyer unilaterally arbitrated the dispute by disbursing to chiropractor an amount less than what was owed. Lawyer owed a duty to either pay the full amount owed to chiropractor or hold the amount in dispute in trust until client and chiropractor could resolve their dispute, or interplead the disputed funds into court. This was an appeal from a District Committee determination. The court cited with approval Legal Ethics Opinion 1747 and comment [4] to Rule 1.15 and affirmed the District Committee’s finding of misconduct. See, e.g., California Formal Ethics Op. 1988-101 (lawyer whose client agreed to pay recovery proceeds to health care provider may not ignore agreement and disburse all funds to client upon client’s instruction); Maryland Ethics Op. 94-19 (1993) (lawyer must disregard client’s instruction not to pay creditor when client had a valid lien assignment with creditor); Ohio Ethics Op. 95-12 (1995) (lawyer must disregard client’s instruction not to pay physician when client has earlier agreed to pay medical bills from settlement proceeds); and North Carolina Ethics Op. 94-20 (1994) (if lawyer knows that client has executed valid assignment of rights with doctor, lawyer may not comply with client’s later instruction to disregard it).
I. Disbursement on Uncollected Funds
It is improper for a lawyer to disburse monies from his or her
trust account when the funds on which such check is drawn are not
collected. See LEOs 614, 704, 1256,
and 1797.
1. Disbursement of monies on uncollected funds is
tantamount to using one client's collected funds as an
advancement on the collected funds of a second client.
2. Virginia Code § 6.1-2.13 also specifically requires a
lawyer handling a real estate closing to disburse settlement
funds within two business days after the settlement. Thus, a
settlement lawyer should not disburse monies, such as a
realtor's sales commission, until the settlement monies are
fully collected
(LEOs 183, 1797). For other requirements of an attorney serving
as a settlement agent in a residential real estate
transaction, see the Real Estate Settlements Act (Va. Code §§55-525.8-55-525.15) and the Real Estate Settlement Agents Act (Va. Code §§55-525.16-55-525.32).
3.
Even if a lawyer has a separate escrow
account for a single client, a judgment creditor, and even
with the client’s consent, the lawyer may not disburse
remittances to the creditor/client on funds that have not
cleared. LEO 1835.
4.
Lawyers must appreciate the difference between funds that
are made “available” by the bank and funds that are
“collected” and be cognizant of internet scams in which the
lawyer is asked to collect funds and promptly disburse only
to learn later, after it is too late, that the deposited
cashier’s check was counterfeit.
J.
Retention of Records and Disposition of Closed Files
Books and records must be maintained for a minimum of five
years after completion of the fiduciary obligation. Rule
1.15(c)(4). A client’s file, including original documents,
client-furnished originals, and attorney work-product prepared for
the client but must be returned to the client upon demand, even if
fees and costs are still owed to the lawyer. Rule 1.16(e). LEO
1690.
LEO 1305 offers guidance on the disposition of closed
client files. A
lawyer does not have a general duty to preserve indefinitely all
closed or retired files. Since neither the Rules of Professional
Conduct nor any specific Virginia statute apparently sets forth
specific rules addressing the retention of such files by private
practitioners, the Ethics Committee suggests the following
guidelines as indicated in ABA Informal Opinion No. 1384. (See
also Maine Ethics Opinion No. 74 (10/l/86), Nebraska Ethics
Opinion No. 88-3 (undated), New Mexico Ethics Opinion No. 1988-1
(undated), and New York City Bar Association Ethics Opinion No.
1986-4 (4/30/86)). The lawyer should screen all closed files in
order to ascertain whether they contain original documents or
other property of the client, in which case the client should be
notified of the existence of those materials and given the
opportunity to claim them. Having culled those materials from the
closed files, the lawyer should use care not to destroy or discard
materials or information that the lawyer knows or should know may
still be necessary or useful in the client's matter for which the
applicable statutory limitations period has not expired or which
may not be readily available to the client through another source.
Similarly, the lawyer should be cognizant of the need to preserve
materials which relate to the nature and value of his legal
services in the event of any action taken by the client against
the lawyer. Having screened the files for the removal of any
materials as indicated, the lawyer may at the appropriate time
dispose of the remaining files in such a manner as to best protect
the confidentiality of the contents.
In determining the appropriate length of time for retention or
disposition of the remaining materials in a given file, a lawyer
should exercise discretion based upon the nature and contents of
the file. As indicated above, however, all trust account and
fiduciary records should be maintained for a period of five years
following completion of the fiduciary obligation and accounting
period. Finally, the Committee is of the opinion that the lawyer
should preserve for an extended period of time an index of all
files which have been destroyed.
K. Retention of Unclaimed Client Funds and Property
A lawyer must identify, label, and safekeep all client properties and
maintain complete records of all client funds, securities and other
property. Rule 1.15(b)(2)-(3). When client funds or properties remain
unclaimed and the lawyer is unable to locate the client to return such
funds or properties for a period of five years, The Uniform Disposition
of Unclaimed Property Act (Va. Code §§ 55-210.1-55.210.30) provides that
such funds or properties may be turned over to the Commonwealth for
disposal in accordance with the provisions thereof. LEOs 818, 832, and
1644.
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III.
MAINTENANCE OF
INTEREST BEARING TRUST ACCOUNTS
A. Generally
All escrow accounts maintained by Virginia licensed attorneys
must comply with both ¶ 20 of the Rules of Court, Part 6: § IV and
Virginia Rules of Professional Conduct 1.15. Paragraph 20 relates
specifically to IOLTA trust accounts, the interest generated from
which is paid to Legal Services Corporation of Virginia. Rule 1.15 relates
to all escrow accounts and applies irrespective of whether
one participates in "IOLTA."
B. IOLTA
A lawyer cannot earn interest on his/her trusts account for his/her benefit. The rationale is that the money in the trust account does not belong to the lawyer; therefore, interest earned on the trust account cannot belong to the lawyer. An exception exists for “IOLTA,” a program approved by the Supreme Court in ¶20, Part 6:§ IV of its Rules. In this program, the lawyer may designate his trust account with his financial institution as a participant and all interest earned on the account, less administrative costs, will be paid to the Legal Services Corporation of Virginia (“LSCV”); Key features of the program are:
1. The lawyer must "opt out" of the program that is,
he/she must advise Legal Services Corporation of Virginia if the lawyer chooses
not to participate in the program. "LSCV" provides notice
of election forms for this purpose. An attorney must maintain
his/her trust account as an IOLTA account unless he/she
specifically "opts out" of the program.
2. Interest paid to LSCV shall be used for funding
a. civil legal services to the poor;
b. the administrative expenses of LSCV; and
c. the creation and augmentation of a reserve fund for
the same purposes.
3. The depositing financial institution agrees to remit, at
least quarterly, the interest or dividends on the average
monthly balance of each such account to LSCV.
C. Other Interest Bearing Trust Accounts
A lawyer may maintain funds of a client in a non-IOLTA interest bearing
account for clients if
1. the lawyer has established procedures for the computation
of
a. the interest earned
b. less the administrative costs of maintaining the account,
and
2. the lawyer remits at least quarterly, to each client prorate, the interest
earned. ¶20 (A).
D. Non-Interest-bearing Trust Accounts.
A lawyer may opt out of IOLTA and deposit client funds in an identifiable non-interest-bearing trust account that accrues no interest or dividends provided the attorney or law firm receives no consideration or benefit from the financial institution for opening such an account. A lawyer who elects to use this type of account must “opt out” of IOLTA and submit an election form to LSCV in accordance with the procedure set out in ¶ 20(F).
E. Client Consent
A lawyer who elects to open an IOLTA or non-interest-bearing trust account in accordance with Rule 1.15 and Paragraph 20 shall not be required to seek permission from each client in making the election or report any payment of interest to LSCV of interest or dividends paid by the financial institution. ¶ 20(D).
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IV. RECORDS
A.
Minimum Requirements for Trust Account
1. To properly maintain an escrow account, the following
records at a minimum are required:
a. Cash receipts journal, per Rule 1.15(c)(1)
b. Cash disbursements journal, per Rule 1.15(c)(1)
c. Subsidiary ledger, per Rule 1.15(c(2).
2. The concept of receipts and disbursements journals, and
client subsidiary ledgers is simple. The sum total of all
subsidiary ledgers at any given time should equal the amount
in the escrow account.
B. Accounting Systems
To demonstrate proper escrow accounting, samples of a one-write
system are being used. Many accounting systems, both manual and
automated, exist which facilitate escrow accounting in accordance
with Rule 1.15. Information about such systems is generally
available from suppliers of business systems, business consultants
and accountants. In addition Comment [6] to Rule 1.15 provides:
Nothing in this Rule is intended to prohibit an attorney from using electronic checking for his trust account so long as all requirements in this Rule are fulfilled. It is the lawyer’s responsibility to assure that complete and accurate records of the receipt and disbursement of entrusted property are maintained in accordance with this rule. Many businesses are now converting paper checks to automated clearinghouse (ACH) debits. Authorized ACH debits that are electronic transfers of funds (in which no checks are involved) are allowed provided the lawyer maintains a record of the transaction as required by this rule. The record, whether consisting of the instructions or authorization to debit the account, a record or receipt from the financial institution, or the lawyer’s independent record of the transaction, must show the amount, date, recipient of the transfer or disbursement, and the name of the client or other person to whom the funds belong.
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V. PROCEDURES A.
Authorization of Overdraft Reporting
A lawyer located in Virginia may maintain his/her escrow account only at a financial institution approved by the Virginia State Bar, unless otherwise expressly directed in writing by the client for whom the funds are being held. Rule 1.15(a)(2); ¶ 20. See Exhibit C for the Virginia State Bar Approved Financial Institution Agreement.
B. Posting of Transactions
1. A deposit from the client consisting totally of client
funds to be paid to third parties.
2. A deposit of a third party settlement check payable to
the lawyer, in which the lawyer has a partial fee interest.
3. A deposit of real estate loan funds and buyer's check
from which the lawyer must:
a. pay off an existing mortgage
b. pay delinquent real estate taxes
c. pay a title insurance premium
d. remit to the seller
C. Reconciliation
At least quarterly a reconciliation shall be made that reflects the trust account balance for each client, person or other entity. Rule 1.15(d)(3)(i).
A monthly reconciliation must be made of the cash balance derived from the cash receipts journal, cash disbursements journal,, the trust account check book balance and the trust account bank statement balance. Rule 1.15(d)(3)(ii).
At least quarterly, a reconciliation shall be made that reconciles the cash balance from Rule 1.15(d)(3)(ii) and the subsidiary ledger balance from Rule 1.15(d)(3)(i). Rule 1.15(d)(3)(iii). Reconciliations must be approved by a lawyer in the law firm. Rule 1.15(d)(3)(iv).
VI. LAWYERS DUTY TO SUPERVISE STAFF HANDLING TRUST FUNDS
Lawyer disciplinary actions underscore the importance of properly supervising staff who handle client funds. In the Matters of Khalil Wali Latif, VSB Docket Nos. 03-000-0376, 02-031-2876, 02-031-3117, 02-031-3344, 02-031-3345, 03-031-0175, 03-031-0895, and 03-031-0920 (2003), the respondent failed to adequately supervise his secretary who concealed notices and correspondence regarding his failure to pay fines and appear in court. Also, over a course of months, respondent’s secretary concealed trust account overdraft notifications from the VSB and forged respondent’s signature to a letter attempting to explain the overdrafts. An investigation revealed that respondent’s secretary had embezzled funds. The disciplinary board imposed a four-month suspension with terms. In the Matters of Robert Sidney Ricks, VSB Docket Nos. 02-010-0908 (2003) the disciplinary board revoked a lawyer’s license on fifteen complaints of misconduct, many of which involved embezzlement of trust funds by respondent’s secretary, who he continued to employ even after he discovered her embezzlements, allowing defalcations to continue.
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Exhibit A - Rules of Court, Part 6, Section
II
(a) Depositing Funds.
(1) All funds received or held by a lawyer or law firm on behalf of a client or a third party, or held by a lawyer as a fiduciary, other than reimbursement of advances for costs and expenses shall be deposited in one or more identifiable trust accounts or placed in a safe deposit box or other place of safekeeping as soon as practicable.
(2) For lawyers or law firms located in Virginia, a lawyer trust account shall be maintained only at a financial institution approved by the Virginia State Bar, unless otherwise expressly directed in writing by the client for whom the funds are being held.
(3) No funds belonging to the lawyer or law firm shall be deposited or maintained therein except as follows:
(i) funds reasonably sufficient to pay service or other charges or fees imposed by the financial institution or to maintain a required minimum balance to avoid the imposition of service fees, provided the funds deposited are no more than necessary to do so; or
(ii) funds in which two or more persons (one of whom may be the lawyer) claim an interest shall be held in the trust account until the dispute is resolved and there is an accounting and severance of their interests. Any portion finally determined to belong to the lawyer or law firm shall be withdrawn promptly from the trust account.
(b) Specific Duties. A lawyer shall:
(1) promptly notify a client of the receipt of the client’s funds, securities, or other properties;
(2) identify and label securities and properties of a client, or those held by a lawyer as a fiduciary, promptly upon receipt;
(3) maintain complete records of all funds, securities, and other properties of a client coming into the possession of the lawyer and render appropriate accountings to the client regarding them;
(4) promptly pay or deliver to the client or another as requested by such person the funds, securities, or other properties in the possession of the lawyer that such person is entitled to receive; and
(5) not disburse funds or use property of a client or third party without their consent or convert funds or property of a client or third party, except as directed by a tribunal.
(c) Record-Keeping Requirements. A lawyer shall, at a minimum, maintain the following books and records demonstrating compliance with this Rule:
(1) Cash receipts and disbursements journals for each trust account, including entries for receipts, disbursements, and transfers, and also including, at a minimum: an identification of the client matter; the date of the transaction; the name of the payor or payee; and the manner in which trust funds were received, disbursed, or transferred from an account.
(2) A subsidiary ledger containing a separate entry for each client, other person, or entity from whom money has been received in trust. The ledger should clearly identify: (i) the client or matter, including the date of the transaction and the payor or payee and the means or methods by which trust funds were received, disbursed or transferred; and (ii) any unexpended balance.
(3) In the case of funds or property held by a lawyer as a fiduciary, the required books and records shall include an annual summary of all receipts and disbursements and changes in assets comparable in detail to an accounting that would be required of a court supervised fiduciary in the same or similar capacity; including all source documents sufficient to substantiate the annual summary.
(4) All records subject to this Rule shall be preserved for at least five calendar years after termination of the representation or fiduciary responsibility.
(d) Required Trust Accounting Procedures. In addition to the requirements set forth in Rule 1.15 (a) through (c), the following minimum trust accounting procedures are applicable to all trust accounts.
(1) Insufficient Fund Reporting. All accounts are subject to the requirements governing insufficient fund check reporting as set forth in the Virginia State Bar Approved Financial Institution Agreement.
(2) Deposits. All trust funds received shall be deposited intact. Mixed trust and non-trust funds shall be deposited intact into the trust fund and the non-trust portion shall be withdrawn upon the clearing of the mixed fund deposit instrument. All such deposits should include a detailed deposit slip or record that sufficiently identifies each item.
(3) Reconciliations.
(i) At least quarterly a reconciliation shall be made that reflects the trust account balance for each client, person or other entity.
(ii) A monthly reconciliation shall be made of the cash balance that is derived from the cash receipts journal, cash disbursements journal, the trust account checkbook balance and the trust account bank statement balance.
(iii) At least quarterly, a reconciliation shall be made that reconciles the cash balance from (d)(3)(ii) above and the subsidiary ledger balance from (d)(3)(i).
(iv) Reconciliations must be approved by a lawyer in the law firm.
(4) The purpose of all receipts and disbursements of trust funds reported in the trust journals and ledgers shall be fully explained and supported by adequate records.
COMMENT
[1] A lawyer should hold property of others with the care required of a professional fiduciary. Securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property which is the property of clients or third persons should be kept separate from the lawyer's business and personal property and, if monies, in one or more trust accounts. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities.
[2] Separation of the funds of a client from those of the lawyer not only serves to protect the client but also avoids even the appearance of impropriety, and therefore commingling of such funds should be avoided. [2a] In relation to (b)(5), consent can be inferred from the engagement agreement or any consequential agreement between the lawyer and the client regarding the disbursement of fees, i.e., when earned fees are routinely withdrawn from the lawyer’s trust account upon an accounting to the client, when costs and expenses of litigation are routinely withdrawn, or when other fees/costs or expenses are agreed upon in advance.
[3] Lawyers often receive funds from third parties from which the lawyer's fee will be paid. If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds should be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.
[4] Paragraphs (b)(4) and (b)(5) do not impose an obligation upon the lawyer to protect funds on behalf of the client’s general creditors who have no valid claim to an interest in the specific funds or property in the lawyer’s possession. However, a lawyer may be in possession of property or funds claimed both by the lawyer’s client and a third person; for example, a previous lawyer of the client claiming a lien on the client’s recovery or a person claiming that the property deposited with the lawyer was taken or withheld unlawfully from that person. Additionally, a lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. For example, if a lawyer has actual knowledge of a third party’s lawful claim to an interest in the specific funds held on behalf of a client, then by virtue of a statutory lien (e.g., medical, workers’ compensation, attorneys’ lien, a valid assignment executed by the client, or a lien on the subject property created by a recorded deed of trust) the lawyer has a duty to secure the funds claimed by the third party. Under the above described circumstances, paragraphs (b)(4) and (b)(5) require the lawyer either to deliver the funds or property to the third party or, if a dispute to the third party’s claim exists, to safeguard the contested property or funds until the dispute is resolved. If the client has a non-frivolous dispute with the third party’s claim, then the lawyer cannot release those funds without the agreement of all parties involved or a court determination of who is entitled to receive them, such as an interpleader action. A lawyer does not violate paragraphs (b)(4) and (b)(5) if he has acted reasonably and in good faith to determine the validity of a third-party’s claim or lien.
[5] The obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal services. For example, a lawyer who serves as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction. [6] Nothing in this Rule is intended to prohibit an attorney from using electronic checking for his trust account so long as all requirements in this Rule are fulfilled. It is the lawyer’s responsibility to assure that complete and accurate records of the receipt and disbursement of entrusted property are maintained in accordance with this rule. Many businesses are now converting paper checks to automated clearinghouse (ACH) debits. Authorized ACH debits that are electronic transfers of funds (in which no checks are involved) are allowed provided the lawyer maintains a record of the transaction as required by this rule. The record, whether consisting of the instructions or authorization to debit the account, a record or receipt from the financial institution, or the lawyer’s independent record of the transaction, must show the amount, date, recipient of the transfer or disbursement, and the name of the client or other person to whom the funds belong.
Prior Rule Comparison This rule is substantially the same as the original Rule 1.15 adopted January 1, 2000 except that the language has been substantially simplified for ease of understanding and the portions regarding the Financial Institutions duties redacted as they are appropriately incorporated into the “Trust Account Notification Agreement” signed by all Virginia approved financial institutions.
Committee Commentary The Committee chose to modify the rule for ease of understanding and enforcement with no substantive changes to a lawyer’s safekeeping property and recordkeeping requirements.
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Exhibit B -
Rules of Court, Part 6, Section IV Paragraph 20
MAINTENANCE OF
ESCROW ACCOUNTS; NOTICE OF ELECTION REQUIREMENTS
Every trust account maintained by an active member of the VSB under Rules of Professional Conduct 1.15 shall also be maintained at a “financial institution approved by the Virginia State Bar” and maintained in accordance with this paragraph and Rule 1.15. A “financial institution approved by the Virginia State Bar” includes regulated state or federal chartered banks, savings institutions, and credit unions that are properly licensed and authorized to do business, have federal insurance on deposits, and have entered into and agreed to abide by a Virginia State Bar Approved Financial Institution Agreement. (See Appendix A which the Virginia State Bar reserves the right to amend or modify upon notice to all approved financial institutions.) The Virginia State Bar shall maintain and publish from time to time a list of approved financial institutions.
A. Interest-bearing Trust Accounts. A lawyer may maintain funds of clients in one or more interest-bearing accounts in one or more financial institutions, whenever the lawyer has established and follows record-keeping, accounting, clerical, and administrative procedures to compute and credit or pay periodically, but at least quarterly, pro rata to each client the interest on such client’s funds less fees, costs, or expenses charged by the lawyer for the record-keeping, accounting, clerical, and administrative procedures associated with computing and crediting or paying such amounts.
B. IOLTA Accounts. A lawyer may deposit funds of a client in an identifiable interest-bearing trust (IOLTA) account for which the lawyer has not established procedures to compute and credit or pay pro rata net earnings to such client whenever:
1. At the time of such deposit the lawyer reasonably expects that the fees, costs, or expenses which the lawyer would be entitled to charge under Paragraph 20(A) would equal or exceed the pro rata interest on such client’s funds (The determination of whether the funds of a client or third person can earn income in excess of fees, costs or expenses the lawyer would be entitled to charge under paragraph 20(A) shall rest in the sound judgment of the lawyer or law firm, and no lawyer shall be charged with an ethical impropriety or breach of professional conduct based on the good faith exercise of such judgment); and
2. The financial institution has agreed to:
a. Periodically, but at least quarterly, remit to the Legal Services Corporation of Virginia (LSCV) interest or dividends on the average monthly balance of each such account or as otherwise computed in accordance with such bank’s standard accounting practice, provided that such rate of interest shall not be less than the rate paid by such bank to regular, non-attorney depositors;
b. Transmit with each remittance to LSCV a statement identifying the name of the lawyer or law firm from whose account the remittance is sent, the rate of interest applied, the period for which the remittance is made, the total amount of interest earned, the service charges or other fees assessed against the account, if any, and the net amount of interest remitted;
c. Transmit to the depositing lawyer or law firm at the same time a report showing the amount paid to LSCV from such interest-bearing account, the rate of interest applied, the fees assessed, if any, and the average account balance for the period for which the report is made;
d. Charge no fees against an IOLTA trust account that are greater than the fees charged to non-attorney depositors, except that an IOLTA remittance fee may be charged to defray the depository institution’s administrative costs attributable to calculating and remitting the interest to LSCV; other allowable fees are per check charges, per deposit charges, a fee in lieu of a minimum balance and sweep fees. Allowable, reasonable fees may be deducted from interest or dividends earned on an IOLTA account, provided that such charges or fees shall be calculated in accordance with the Financial Institutions' standard practice for non-IOLTA customers. Fees or charges in excess of the interest or dividends earned on the IOLTA account, for any month or quarter, shall not be taken from the interest or dividends of any other IOLTA account. Fees for wire transfers, insufficient funds, bad checks, stop payment, account reconciliation, negative collected balances, and check printing are not considered customary account maintenance charges and are not deductible from the interest or dividends earned on the IOLTA account. All other fees including those non-customary fees just listed are the responsibility of the lawyer or law firm, who in turn may absorb these specific costs or pass along those fees to the client(s) being served by the transaction in accordance with attorney/client agreements. Financial Institutions may elect to waive any or all fees on IOLTA accounts in recognition of their charitable nature;
e. Collect no fees from the principal deposited in the IOLTA trust account;
f. Pay all or part of the funds deposited in such interest-bearing trust account upon demand or order. An IOLTA account may be an interest-bearing check account, a money market account with or tied to check-writing, a sweep account which is a government money market fund or daily overnight financial institution repurchase agreement invested solely in or fully collateralized by United States government securities, or an open-end money market fund solely invested in or fully collateralized by the United States government securities; and
g. Agree and abide by all provisions in the Virginia State Bar Approved Financial Institution Agreement.
3. Interest accruing on such accounts and paid by the financial institution to LSCV shall be used for funding 1) civil legal services to the poor in Virginia, 2) LSCV’s administrative expenses, and 3) the creation and augmentation of a reserve fund for the same purposes.
C. Non-interest-bearing Trust Accounts. A lawyer may deposit funds of a client in an identifiable non-interest-bearing trust account for which the account accrues no interest or dividends so long as the attorney or law firm receives no consideration or benefit from the Financial Institution for opening a non-interest bearing trust account or for converting from an IOLTA account to a non-interest bearing trust account. A lawyer who elects not to participate in the maintenance of an interest-bearing trust account as described in Paragraph 20(B) must submit such an election in accordance with the procedures set forth in Paragraph 20(F) of this rule.
D. Reporting to Client. A lawyer who elects to deposits funds of a client in an account pursuant to Paragraph 20(B) or (C) shall not be required to seek permission from such client in making the election. As to funds deposited in accordance with Paragraph 20(B), a lawyer shall not be required to compute or report to such client any payment to LSCV of interest or dividends by the banking institution on funds in any such account wherein the client’s funds have been deposited by the lawyer.
E. Law Firm Trust Accounts. A law firm of which any participating lawyer is a member may maintain the account(s) on behalf of any or all lawyers in the firm.
F. Opt-Out of IOLTA Account. A lawyer who elects to open an IOLTA account shall obtain a “Request to Establish IOLTA Account” form from LSCV. A lawyer who elects not to maintain an IOLTA account shall make such election on a “Request to Opt-Out” form provided by LSCV.
Exhibit C
Virginia State Bar Approved Financial Institution Agreement
This Virginia State Bar Financial Institution Agreement (“Agreement”) is made this _____ day of ______________ , by and between the Virginia State Bar and __________________________ , (“Financial Institution”).
WITNESS:
The undersigned, an officer of the Financial Institution executing this Agreement, being duly authorized to bind said institution by this Agreement, hereby applies to be approved as a depository to receive escrow, trust, or client funds, as defined in Part 6, § IV, Para. 20, of the Rules of Supreme Court of Virginia, or any successor provision(s), from attorneys for deposit in what are hereinafter referred to as “Trust Accounts.” The Financial Institution agrees to comply with the following requirements, or any successor provisions:
1. Notification to Attorneys or Law Firm. To notify the attorney or law firm promptly of an overdraft in any Trust Account or the dishonor for insufficient funds of any instrument drawn on any Trust Account held by it.
2. Notification to Bar Counsel. To report the overdraft or dishonor to Bar Counsel of the Virginia State Bar, as set forth in Paragraph 5 of this Agreement.
3. Audit of Trust Account. To provide reasonable access to the Virginia State Bar of all records of the Trust Account if an audit of such account is ordered pursuant to court order, or upon receipt of a subpoena therefor. The financial institution may charge for the reasonable costs of producing these records.
4. Interest Calculation. The financial institution shall not engage in the practice of “negative netting” as to IOLTA trust accounts.
5. Form of Report. That all such reports shall be substantially in the following format:
In either case of a dishonored instrument or an instrument presented against insufficient funds in a Trust Account, but honored by the financial institution, the report shall be identical to the notice customarily forwarded to the depositor and shall include the name and address of the depositor notified, including the name of the lawyer responsible for the account, as well as a copy of the dishonored instrument, if such copy is normally provided to the depositor. In addition, the report shall identify the financial institution reporting the overdraft, the account number, the date of the overdraft, the name of the person making the report, their address and telephone number and date. The report shall be made simultaneously with and within the time provided by law for notice of dishonor to the depositor or, in the case of instruments that are honored by the financial institution, within five (5) banking days after the date of presentation for payment against insufficient funds.
6. Consent of Attorneys or Law Firms. The Financial Institution may require, as a condition to opening an attorney Trust Account, the written consent of the attorney or law firm opening such account to the notification to Bar Counsel of the Virginia State Bar as set forth in Paragraph 2 of this Agreement.
7. Change of Name or Corporate Form. If a Financial Institution changes its name, merges or otherwise affiliates with, or is acquired by another entity, the successor Financial Institution shall promptly notify Bar Counsel of the change and whether the successor institution wishes to serve as a financial institution approved by the Virginia State Bar for attorney Trust Accounts and enter into an Agreement.
8. Termination of Agreement. This Agreement may terminate upon thirty (30) days notice from the Financial Institution in writing to Bar Counsel that the institution intends to terminate the Agreement on a stated date and that copies of the termination notice have been mailed to all attorneys and law firms that maintain Trust Accounts with the Financial Institution or any branch thereof. Notice to the Bar Counsel shall be sent by certified mail to the Virginia State Bar, Attention: Bar Counsel, 707 E. Main Street, Suite 1500, Richmond, Virginia 23219? 2800. This agreement may also be canceled without prior notice by Bar Counsel of the Virginia State Bar if the financial institution fails to abide by the terms of the agreement.
9. Binding Effect. This Agreement shall be binding upon the Financial Institution and any branch thereof receiving Trust Accounts.
10. Definition. For purposes of this agreement the following definitions will apply:
a. “Notice of Dishonor” refers to the notice which, pursuant to Uniform Commercial Code Section 3-508(2), must be given by a drawee bank before its midnight deadline.
b. “Insufficient funds” refers to a state of affairs in which there is an insufficient collected balance in an account as reflected in the financial institution’s accounting records, so that an otherwise properly payable item presented for payment cannot be paid without creating an overdraft in the account.
c. “Dishonored” shall refer to instruments that have been dishonored because of insufficient funds as defined above.
d. “Negative Netting” refers to the practice of a financial institution collecting some part or all of the fees assessed during a stated period of time against any IOLTA account that has failed to generate enough interest to pay assessed fees from the positive interest generated by other IOLTA accounts and deducting those fees from the total interest remitted to the Legal Services Corporation of Virginia for that time period.
IN WITNESS WHEREOF, the Financial Institution has executed this Agreement on the date and year written above.
ATTEST:
___________________________________
Name of Financial Institution
___________________________________
Address of Financial Institution
___________________________________
By_________________________________
Officer’s Name
(Please print)
___________________________________
Officer's Signature
___________________________________
Corporate Office Held
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