I’m not sure what Tuesday has done to me to have me return the favor by assigning it trust accounts. Alas, the die has been cast.
This is the third in an ongoing series on trust accounts. To date:
Today’s thought: as a general rule, don’t disburse absent “collected funds.”
Rule 1.15 imposes a duty to safeguard client funds. There are various aspects to the duty, including two discussed in paragraph (f):
- (f)(1) – a lawyer shall not disburse funds held for a client or third person unless the funders are “collected funds.”
- (f)(2) – a lawyer shall not use, endanger, or encumber funds held in trust a client or third person to carry out the business of another client or person.
The rule defines “collected funds” as those “that a lawyer reasonably believes have been deposited, finally settled, and credited to the lawyer’s trust account.”
The PRB’s hearing panels have long interpreted Rule 1.15(f)(1) as requiring a lawyer to confirm that the funds have been credited to the account. More specifically, as made clear in both PRB Decision 62 and PRB Decision 172, it is not sufficient to assume that a wire transaction went through as expected. Further, PRB Decision 105 holds that it is not sufficient to assume that a check was collected at a closing, and subsequently deposited in trust, when, in fact, it was not.
Verify. The failure to do so will result in a sanction.
Now, when a lawyer disburses against uncollected funds, one of two things usually follows: (1) the trust account check is presented against insufficient funds; or, (2) the trust account check is honored. Often, this results in Client A’s money being used to carry out Client B’s business.
- Lawyer has $5,000 in trust. It belongs to Client A.
- Lawyer also represents Client B.
- Lawyer expects $3,000 to be wired on behalf of Client B. Client B owes the money to Opposing Party.
- Without confirming that the wire arrived, Lawyer issues a trust account check to Opposing Party in the amount of $3,000.
- Opposing Party cashes the check.
- In fact, Client B never caused the wire to be sent to Lawyer.
- As such, $3,000 that belonged to Client A was used to carry out Client B’s business.
That is a violation of Rule 1.15(f)(2).
This rule has been strictly applied against lawyers. For instance, in PRB Decision 129, funds for Client were deposited into Trust Account 1. The lawyer also maintained a trust account at another bank, Trust Account 2. On behalf of Client, the lawyer’s assistant mistakenly disbursed from Trust Account 2. The result was that other clients’ funds were used to carry out Client’s business. The lawyer was admonished.
Earlier, I indicated that the “general rule” prohibits disbursements from trust absent collected funds. That’s true. It’s also true that there are exceptions to the “general rule.”
The exceptions appear in Rule 1.15(g). They were added in response to VBA Advisory Opinion 2002-04. The opinion addressed several questions. Among others, it advised that advised that “trust account checks can only be drawn on client funds after the deposit upon which the check is drawn clears” and becomes “available.”
The opinion correctly stated the rule as it used to be written. However, it raised concerns related to real estate closings, tort settlements, and other matters in which clients required immediate access to funds to which they were entitled.
The concerns resulted in the Court adopting “exceptions” to the general rule. Now, Rule 1.15(g) authorizes lawyers to disburse in reliance upon the deposit of certain types of instruments. For example:
- instruments drawn on banks;
- checks drawn on an IOLTA of a licensed Vermont lawyer or on the IORTA of a licensed Vermont real estate broker;
- checks issued by the United States or the State of Vermont;
- personal checks, not to exceed $1,000 in the aggregate per transaction; and,
- checks drawn on or issued by insurance companies, title insurance companies, or title insurance agencies that are listed in Vermont.
Per the Reporter’s Note, the exceptions to the general rule are “based on the premise that certain categories of trust account deposits carry a limited and acceptable risk of failure so that disbursements of trust account deposits may be made in reliance on such deposits . . ..”
If it turns out that one of these deposits fails and the lawyer has already disbursed against it, the lawyer must take steps to protect funds that remain in the account and that belong to other clients. Per the Reporter’s Note, “presumably by either making or securing reimbursement to the trust account of the amount of the failed to deposit.”
- General rule: don’t disburse absent collected funds.
- Verify that deposits have been made and that wires have arrived.
- be familiar with the exceptions to the general rule.