October 2008 Nevada Lawyer
THE FDIC AND IOLTA: IF YOU’RE COMPLYING WITH THE SUPREME COURT RULES, YOUR CLIENTS’ FUNDS ARE PROBABLY SAFE
BY GLENN MACHADO, ASSISTANT BAR COUNSEL
Update 12/05/08: 12/05 IOLTA Added to Emergency Coverage Offered by the FDIC
The Federal Deposit Insurance Corp. (FDIC) announced in November that effective immediately, client funds deposited in Interest on Lawyer Trust Accounts (IOLTA), regardless of amount, are eligible for full deposit insurance coverage under the Temporary Liquidity Guarantee Program (TLGP) through December 31, 2009. Additional information can be found at the FDIC’s website.
The FDIC adopted the TLGP program on Oct. 13 because of disruptions in the credit market, and amended the program to include IOLTA after receiving a groundswell of commentary from the ABA, National Organization of Bar Counsel, IOLTA foundations, legal aid providers, attorneys and other concerned parties.
Lawyers should note that banks do have to opt in for this coverage, and pay a fee for the added insurance. Questions about a specific bank’s participation should be directed to a bank representative. The FDIC is also continually updating its website with information about FDIC insurance.
Regular article follows:
Over the past few months, the Office of Bar Counsel has received numerous telephone calls from attorneys seeking guidance in protecting their trust accounts due to the current financial climate. The question most frequently asked is whether or not they need to diversify their IOLTA account, should the account’s balance exceed $100,000, which they believe is the maximum amount insured by the Federal Deposit Insurance Corporation (“FDIC”).
In most instances, the answer will be “no.” The FDIC states that it recognizes trust accounts as “fiduciary accounts.”(1) As a result, each principal of the trust account, e.g., a client, is insured as if the funds were deposited in the bank directly by the principal. Therefore, unless an individual client has more than $100,000 deposited with the bank in which the attorney maintains the trust account, the client’s monies are insured by the FDIC, even if the balance of the trust account exceeds $100,000.
To qualify as a fiduciary account, the FDIC requires that: (1) the fiduciary nature of the account must be disclosed in the account title, e.g., IOLTA account; and (2) the identities and the interests of the clients must be ascertainable from the deposit account records or records maintained in good faith in the regular course of business by the depositor. (2)
Perceptive attorneys will recognize that the above FDIC requirements correspond with their obligations under Supreme Court Rule 78.5 (Maintenance of Trust Funds in Approved Financial Institutions; Overdraft Notification).
First, SCR 78.5(a) states that “[a]ctive members of the State Bar of Nevada shall deposit all funds held in trust in this jurisdiction in accordance with [RPC 1.15](3) in accounts clearly identified as ‘trust’ or ‘escrow’ accounts...and shall take all steps necessary to inform the depository institution of the purpose and identity of the accounts.”
Further, SCR 78.5(b) mandates that “[e]very lawyer engaged in the practice of law in the State of Nevada 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, cancelled 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...”
These requirements are also reflected in more general terms in Rule of Professional Conduct 1.15 (Safekeeping Property).
Accordingly, if your trust accounts and accounting records are in compliance with the Supreme Court Rules, meeting the FDIC requirements for a fiduciary account should not require any additional effort.
As noted above, even though the FDIC will treat each client as a principal in regard to trust funds, a client may still be exposed to loss if his or her aggregate deposit with the bank exceeds $100,000.(4) Thus, you may wish to ask your clients if they maintain any funds in the bank in which you maintain your trust account. If the answer is yes, then you should ensure that any funds you receive on their behalf will be insured by the FDIC, whether in your current trust account or with a different bank.
In regard to reported cases involving trust accounts and failed banks, there is a 2005 New York opinion (5) which held that an attorney, who was acting as an escrow, was not liable for depositing $1 million of a prospective purchaser’s funds into a bank that later failed. In the opinion, the New York appellate court ruled in favor of the attorney, finding that the bank’s demise was unforeseeable and there was no requirement that the attorney must deposit funds into an account fully insured by the FDIC.
The caveat with the opinion today is, of course, that with approximately 11 banks having failed in 2008, and two of those being Nevada banks, (6) an attorney may not be able to claim that his or her bank’s failure was unforeseeable. Likewise, the defense that no specific rule requires an attorney to ensure that all his or her clients’ funds are FDIC-insured may do little good in a malpractice lawsuit if the bank’s failure was foreseeable and precautionary measures could have been taken.
In conclusion, most attorneys need not worry about their trust accounts, and proactive measures can be taken for those clients who have more than $100,000 deposited in the bank containing the attorney’s trust account. Finally, should you find it prudent to open a new trust account, please remember to update your SCR 78.5 Certification of Compliance and Consent Form with the state bar. (7)
Glenn Machado is Assistant Bar Counsel for the State Bar of Nevada. A native of New York, where he also is licensed to practice law, he was admitted to the Nevada Bar in 2001. Before joining the State Bar in 2004, he practiced commercial litigation and transactional law.
IOLTA FOOTNOTES:
1 See 12 C.F.R. § 330.5(b) (Recognition of deposit ownership and fiduciary relationships); see also FDIC Advisory Opinions 98-2 and 92-30. In addition, a summary of this information is available at http://www.fdic.gov/deposit/deposits/financial/fiduciary.html.
3 SCR 78.5, last amended in 1991, cites the former safekeeping property rule, SCR 165, which was replaced by RPC 1.15 on May 1, 2006.
4 See http://www.fdic.gov/deposit/deposits/financial/misunderstandings.html
5 See Bazinet v. Kluge, 14 A.D.3d 324 (N.Y. App. Div. 2005).
6 See http://www.fdic.gov/bank/individual/failed/banklist.html
7 See http://www.nvbar.org/PDF/UpdCertComp.pdf