Model Rules for Lawyer Disciplinary Enforcement
Clearly Identified Trust Accounts in Approved Financial Institutions Required.
(1) Lawyers who practice law in [this state] shall deposit all funds held in trust in this jurisdiction [in accordance with Rule 1.15(a) of the Model Rules of Professional Conduct] in accounts clearly identified as "trust" or "escrow" accounts, referred to herein as "trust accounts," and shall take all steps necessary to inform the depository institution of the purpose and identity of the accounts. Funds held in trust include funds held in any fiduciary capacity in connection with a representation, whether as trustee, agent, guardian, executor or otherwise. Lawyer trust accounts shall be maintained only in financial institutions approved by the court [the board].
(2) Every lawyer engaged in the practice of law in [this state] shall maintain and preserve for a period of at least five years, after final disposition of the underlying matter, the records of the accounts, including checkbooks, canceled checks, check stubs, vouchers, ledgers, journals, closing statements, accountings or other statements of disbursements rendered to clients or other parties with regard to trust funds or similar equivalent records clearly and expressly reflecting the date, amount, source, and explanation for all receipts, withdrawals, deliveries and disbursements of the funds or other property of a client.
Overdraft Notification Agreement Required.A financial institution shall be approved as a depository for lawyer trust accounts if it files with the court an agreement, in a form provided by the court [board] to report to the disciplinary agency whenever any properly payable instrument is presented against a lawyer trust account containing insufficient funds, irrespective of whether or not the instrument is honored. The court [board] shall establish rules governing approval and termination of approved status for financial institutions, and shall annually publish a list of approved financial institutions. No trust account shall be maintained in any financial institution that does not agree to so report. Any such agreement shall apply to all branches of the financial institution and shall not be cancelled except upon [thirty] days notice in writing to the court [board].
Overdraft Reports.The overdraft notification agreement shall provide that all reports made by the financial institution shall be in the following format:
(1) In the case of a dishonored instrument, the report shall be identical to the overdraft notice customarily forwarded to the depositor, and should include a copy of the dishonored instrument, if such a copy is normally provided to depositors;
(2) In the case of instruments that are presented against insufficient funds but which instruments are honored, the report shall identify the financial institution, the lawyer or law firm, the account number, the date of presentation for payment, and the date paid, as well as the amount of overdraft created thereby.
Timing of Reports.Reports under paragraph C shall be made simultaneously with, and within the time provided by law for notice of dishonor, if any. If an instrument presented against insufficient funds is honored, then the report shall be made within [five] banking days of the date of presentation for payment against insufficient funds.
Consent By Lawyers.Every lawyer practicing or admitted to practice in this jurisdiction shall, as a condition thereof, be conclusively deemed to have consented to the reporting and production requirements mandated by this rule.
Costs.Nothing herein shall preclude a financial institution from charging a particular lawyer or law firm for the reasonable cost of producing the reports and records required by this rule.
Definitions.For purposes of this Rule:
(1) "Financial institution" includes a bank, savings and loan association, credit union, savings bank, and any other business or person that accepts for deposit funds held in trust by lawyers.
(2) "Properly payable" refers to an instrument which, if presented in the normal course of business, is in a form requiring payment under the laws of this jurisdiction.
(3) "Notice of dishonor" refers to the notice that a financial institution is required to give, under the laws of this jurisdiction, upon presentation of an instrument that the institution dishonors.
Paragraph A sets forth the requirements for deposit of trust funds in clearly identified trust accounts in approved financial institutions. Funds held not in connection with a representation, such as a trust fund for a lawyer's own spouse or minor child, do not fall under this rule. This rule also does not concern a lawyer's own funds properly held in a non-fiduciary capacity, such as funds in a business or personal account.
Under Rule 1.15(a) of the Model Rules of Professional Conduct, trust property may be held outside the lawyer's home jurisdiction upon consent of the client. The overdraft notification rule governs funds held within the adopting state. A lawyer's obligation to deposit trust funds in an approved institution will arise upon adoption of the overdraft notification rule in a state where the lawyer deposits trust funds, whether that state is the state wherein the lawyer's office is situated or some other state.
The overdraft notification agreement requires that all overdrafts be reported, irrespective of whether the instrument is honored. In light of the purposes of Rule 29, and in view of ethical proscriptions concerning the preservation of client funds and commingling of client and lawyer funds, it would be improper for a lawyer to accept overdraft privileges or any other arrangement for a personal loan on a client trust account in exchange for the institution's promise to delay or not to report an overdraft.
Absence of discretion makes notification by a financial institution an administratively simple matter. An institution which receives an instrument for payment against insufficient funds need not evaluate whether circumstances require that notification be given; it merely provides notice.
It then becomes the responsibility of the disciplinary agency to determine whether further action is necessary. In cases where an overdraft is a result of an accounting error (caused by either the lawyer or the institution), but notification has already been sent to the state agency, the institution should provide the lawyer with a written explanation (preferably, an affidavit from an officer of the institution) that the lawyer can then submit to the agency to verify the error.
The rule provides the proper format for overdraft reports. In so doing, the rule distinguishes between dishonored instruments and instruments that are presented against insufficient funds but honored. Where instruments are presented against insufficient funds but paid, the rule specifies the information that the institution should provide.
Ordinarily, within 24 hours of dishonor an institution gives notice of an overdraft to a depositor whose account is charged. See Uniform Commercial Code, Section 3-508. This is the same time period in which overdraft notification is given to the state disciplinary agency. Where an instrument presented against insufficient funds is honored, the financial institution should send overdraft notification to the agency within five days of the date of presentation.
Upon receipt of an overdraft notification, Rule 29 contemplates that the state agency will contact the lawyer or firm by telephone and request an explanation for the overdraft. A letter requesting a documented explanation may also be sent. If the overdraft is an accounting error, the lawyer or firm submits a written explanation, including any documents to substantiate the claim. Where the lawyer or firm cannot supply an adequate or complete explanation for the overdraft, other action may be generated, including an audit or a demand for production of the lawyer's books and records.
The rule establishes that consent to the reporting and production requirements mandated by the rule is a condition of the privilege to practice law in a jurisdiction that has adopted the rule. This condition is intended to protect financial institutions from claims by lawyer-depositors based on disclosures made by financial institutions, provided that the disclosures are in accordance with the rule. Parties to an overdraft notification agreement are the court and a financial institution. The consent provision in the rule avoids the necessity for financial institutions to draft separate agreements with lawyers to establish consent to overdraft notification.
In addition to normal monthly maintenance fees on each account, a lawyer or firm can anticipate additional fees to be charged by the financial institutions for reporting overdrafts in accordance with this rule. However, because financial institutions already flag overdrafts and returned checks, it appears only slightly more burdensome for the institution to forward a copy to the local disciplinary agency. As a result, the additional cost to the lawyer should not be exorbitant.
Paragraph F should not be interpreted to allow a lawyer to permit trust account funds to be reduced through deductions made by a financial institution to cover costs of overdraft notification. Such costs should not be borne by clients.
Under the laws of most jurisdictions, the definition of "properly payable" will be contained in section 4-104 of the Uniform Commercial Code.
Under the laws of most jurisdictions, the definition of "notice of dishonor" will be determined by reference to section 3-508 of the Uniform Commercial Code, under which notice must be given by a bank before its midnight deadline and by any other person or institution before midnight on the third business day after dishonor or receipt of notice of dishonor.
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. VERIFICATION OF BANK ACCOUNTS
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