Trust Accounts in the Great Comeuppance of Ought Eight

~by Bruce Campbell, Bar Counsel, Columbus Bar Association

For most of us, the possibility of the failure of major banks seemed, until recently, as improbable as finding Alfred E. Newman at a MENSA convention. But, suddenly the phrase “What, me worry?” has new poignancy.

More than a few lawyers have been thinking about what would happen if the banks in which their trust accounts reside suddenly did a Lehman Brothers. What duty would lawyers have to clients or third parties for whom they holding funds? What if the total of the funds in a firm’s IOLTA account exceeds FDIC protection -- whatever that turns out to be? If funds held in trust vaporize, who takes the rap (figurative or literal)? What are the ethical implications? If you think this lowly commentator has the answers, you might just as well stop reading.

Apparently though, we are not alone in our befuddlement. When the Columbus Bar recently asked the ABA what advice it might have as to how attorneys should handle their client’s dollars in this global dishevelment, the ABA responded as follows:

“Queries from individual lawyers about bank safety issues raise complex issues that call for providing legal and financial advice. The issues go far beyond IOLTA - they involve the obligations of lawyers to manage client funds within ethical guidelines and with reference to sound practice management standards. State IOLTA agencies have taken the position that they want to assist lawyers in their states, but that they are only a small part of the much bigger question and should avoid exposing themselves to liability by giving legal advice. For that reason, they have been referring lawyers who inquire about bank safety issues to two web pages maintained by the FDIC, which give helpful information. Those web pages can be found at:

http://www.fdic.gov/news/news/financial/2008/fil08102a.html
http://www.fdic.gov/deposit/deposits/insured/faq3.html."

The ABA went on to say, “The various groups within the ABA that are responsible for IOLTA, ethics and practice management issues will be coordinating to determine if a statement by the ABA would be helpful, or would merely further muddy the water.”

If the ABA is only beginning to consider whether to consider the issue, I fear that an authoritative answer to the questions lawyers are now asking is a ship not soon to dock.

In the meantime, some limited comfort may be gleaned from an October 9th National Law Journal article, “Viability of Banks with Trust Accounts an Issue.” Among other things, the report notes a case in which a New York lawyer was sued in 2003 for trust account funds lost when a bank failed suddenly and unexpectedly. The court held the lawyer was not responsible knowing about the bank’s financial shakiness. Ominously, however, the article raises the question of whether a lawyer could, under the current perturbation, claim unforeseeability of bank collapse as a defense. The article is to be found at: http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202425127728.

In preperation for le deluge, should it get worse, at least one thing is certain; assiduous compliance with Rule 1.15 of the Ohio Rules of Professional Conduct governing trust account management is essential. If and when the sweet bird of prosperity gets sucked into the jets driving the airship “Economy” and causes it to plummet into the briney waters, at least you will be able to establish exactly whose money was in the trust account when the great ship went down. The salvage crew will appreciate your attention to detail. In the meantime, so will your friendly, local disciplinary agency.