The responsibilities that come with the necessity of attorneys having to handle other people’s money are significant.  Compliance with record keeping rules and following through on the duty to promptly notify, deliver, and account for client property are in and of themselves a challenge. Frankly speaking, there is a headache factor that comes with the territory and this presumes that nothing out of the ordinary is going on.  Nightmare scenarios start to play out, however, when extraordinary things occur with other people’s money for which we are responsible.  I’m talking about things like a bank failure, being the victim of a scam, or having a trust account check bounce for any number of reasons.

I suspect most of you have heard one story or another in recent times that resulted in a tight knot in your stomach even if just for a few moments.  The attorney in Atlanta now being sued by his bank for authorizing the transfer of significant funds out of his trust account to an overseas client that turned out to be an Internet scammer or the collapse of IndyMac and the likelihood that other banks will follow serve as two examples of the kind of things I’m thinking about.  On the bright side, the very fact that these kinds of things happened to others gives the rest of us a chance to avoid these problems if we look for and embrace the learning.

Let’s start with the basic bounced check.  Checks can bounce due to a financial institution or insurance company failing and this can literally happen overnight and without warning.  It is for this reason that risk managers advise that the proceeds of any check never be disbursed prior to the deposit check clearing.  For example, should the deposit check bounce and the disbursal check clear, you have a problem because one client’s monies have been used for another client in violation of the Rules of Professional Conduct.   Even if you or your firm can cover the shortfall (and, oh boy, what if you can’t?), you have now comingled funds.  Some fail to see this as a problem particularly if no client was harmed.  Understand that intent and harm to the client are not elements of a violation of Rule 1.15 Safekeeping Property.  Attorneys have been disciplined for the unintended comingling of funds even in the absence of harm to any clients.    

Yes, I can appreciate the difficulties of following my advice.  The question “Just how long does it take for a check to clear?” comes up all the time.  I also understand the day-to-day realities of a busy real estate practice.  However, trust me when I say that theft of client property remains a common problem and a bounced check is often what eventually leads to the discovery of a pattern of theft.  I know too many real estate practitioners who were left with a serious mess upon discovering that a partner or staff member had been stealing from the trust account for some time.  In fact, several of these attorneys have since been suspended or disbarred even though they had no direct awareness of the problem.  Sloppy bookkeeping and little to no supervision was all that it took.  Be proactive and anticipate trouble.  While detailing every trust account practice tip that one could follow is beyond the scope of this article, I encourage you to take appropriate steps to ensure that a check never bounces, and that should one somehow manage to get by you, no harm befalls any client.  At a minimum, make sure deposited funds are good funds prior to any disbursal.  This may mean a wait of seven business days, which will suffice in most instances.

Let us now add in the Internet scam factor.  Here’s the gist of one current scam.  An overseas company contacts a U.S. lawyer by e-mail and retains that attorney as a settlement agent to collect a debt from a U.S. company. The U.S. company sends a settlement check to the lawyer.  Lawyer deposits the settlement check into the firm’s trust account and when informed that the funds are available, authorizes the bank to wire the net settlement amount to the "client." The settlement check turns out to counterfeit and the trust account bank lays claim to all remaining trust account funds, closes the trust account, and sues the lawyer for recovery of the trust account shortfall which is significant.  More than one attorney has fallen prey to such a scam and others likely will because these scams can be rather sophisticated.  For example, the company names that were given in the above referenced scam did check out. 

Here again, waiting to make certain that a check clears is a good idea.  There is a difference between funds being available and funds being good.  Funds are good when the trust account bank has actually collected the deposited funds.  Informing all clients up front of the firm’s policy in this regard is worthwhile.  If a prospective client has a problem waiting a few days to make certain the funds are good, perhaps that’s a red flag.  More importantly, if there is unexpected pressure for disbursal once a deposit check is in hand, there is value in asking yourself why might that be.  It is important to note here that I am not suggesting that funds be held for weeks on end out of an over-abundance of caution.  There is a duty to timely disburse funds.  I am simply trying to demonstrate the risk of acting based upon the availability of deposited funds verses the security that comes with waiting until the deposited funds are good.

Even if all precautions are taken, including waiting for funds to be good prior to disbursal, in rare instances things can still go wrong.  A true nightmare scenario is having the financial institution where client funds are on deposit fail.  Might a lawyer be held accountable in such a situation?  The answer isn’t as clear as one would hope.  Remember that as lawyers we have a duty to safeguard and protect client property.  Also be aware that, in general, a depositor’s account is insured for up to $100,000 if the financial institution is insured by the FDIC.  Thus, the first and hopefully obvious practice tip is to make certain to only place client funds in institutions insured by the FDIC.  This helps.  The problem is that in many instances, accounts, such as a firm’s IOLTA account, have more than $100,000 on deposit.

Fortunately for the purposes of FDIC insurance, IOTLA accounts and real estate escrow accounts (as well as other escrow accounts) are considered fiduciary accounts.  If certain requirements are met (for details see: http://www.fdic.gov/deposit/deposits/financial/fiduciary.html), each client with funds on deposit in your fiduciary account will be insured individually for up to $100,000 provided that none of the clients have additional funds on deposit at the same institution.  The FDIC limits insurance coverage to $100,000 per person.  So, if a client has $75,000 on deposit in your IOLTA account and also has a separate personal savings account with $50,000 on deposit at the same bank, this client would be underinsured.  If significant funds will be deposited for a client, check to make certain that this client does not have any additional funds on deposit at the same financial institution.  Beyond this, if a deposit for a client is going to be significantly over $100,000 and held for more than a few days, consider spreading the risk.  Break the amount up and place the funds in several different FDIC insured institutions.  This step will increase the insurance coverage.  Finally, read the FDIC rules, follow them, and take the detailed record keeping requirement seriously.  This is the only way that I can think of to help you avoid waking up some morning, learning that a local bank has failed, and having nothing else to say other than “Oh no!”