IOLTA and safeguarding property rules changes
By Sylvia E. Stevens
Over the next few months, the general counsel’s office will continue to devote this space to discussion about the new Oregon Rules of Professional Conduct (the "Oregon RPCs"1). This month’s topic is Rules 1.15-1 (Safeguarding Property) and 1.15-2 (IOLTA Accounts and Trust Account Overdraft Notification). The IOLTA rule is one of the rules that is most changed, in form if not substance, from its Code counterpart, and many lawyers understandably have heightened concern about compliance with it.
The most noticeable aspect of Rule 1.15 is its numbering. There is no ABA Model Rule equivalent to our two-part rule. The original proposal for the Oregon RPCs contained only a single Rule 1.15, which contained 13 subparts to encompass the general obligations regarding safeguarding client property and the IOLTA and trust account overdraft notice rules.2 However, with the amendments to the IOLTA rules proposed by the Oregon Law Foundation, the rule became even longer and more unwieldy. After some discussion, we opted for a divided rule, leaving 1.15-1 to mirror the ABA Model Rule on safeguarding client property, and putting the IOLTA and trust account overdraft notice provisions into a new and unique 1.15-2. We were committed to keeping the Oregon RPC numbering consistent with the ABA Model Rules and the only alternative was to create a new Rule 1.19; that was rejected in favor of keeping the rules on handling client property in close proximity.
Our view of the revised IOLTA rule is that, despite the changes, it will be a seamless transition for lawyers who understood and complied with the old rule. The amendments to the rule were required by the U.S. Supreme Court’s decision in Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003), where the Court held that clients are entitled to the net interest earned on their funds held in trust for them. Only the interest from client funds that cannot earn net interest may be paid over to an IOLTA program. Net interest is interest earned net of the cost of generating the interest.
The former DR 9-101(D) required that client funds "for which it is not practical" to earn and account for income on individual deposits be maintained in a trust account from which the cumulative interest, net of bank charges, was paid to the Oregon Law Foundation. Under the Court’s holding in Brown, the constitutionally appropriate test is not practicality, but whether the client funds can or cannot earn net interest for the client.
The fundamental change in the rule, of course, is the concept of "net interest" and how it shall be calculated. Rule 1.15-2(d) enumerates the factors to consider:
- The amount of the funds;
- The amount of time the funds are expected to be held, with due consideration of the likelihood of delay;
- The rates of interest at the financial institutions where the funds will be held;
- The cost of establishing and administering the account, including bank service charges, the cost of the lawyer or law firm’s services in maintaining the account, the cost of preparing any tax-related documents reporting or accounting for the income accruing to the client and the ability of the financial institution, lawyer or law firm to calculate and pay net income to individual clients and
- Any other circumstances that affect the ability of the client’s funds to earn a net return for the client.
As with DR 9-101(D), the new rule allows a lawyer to use either separate interest-earning accounts for each client or client matter, or a pooled account for all clients whose funds can earn net interest. If a pooled account is used, there must be appropriate sub-accounting to compute the net interest earned by each client’s funds.
Paragraph (e) of Rule 1.15-2 requires lawyers to review their IOLTA account at "reasonable intervals" to determine whether circumstances have changed that require a different handling of client funds. For instance, the resolution of the case may take longer than originally anticipated, and the funds may be held for a period during which the client’s funds earned net interest. In such event, the lawyer or law firm must transfer the funds from the IOLTA account to an account where the interest will be earned for the client. If any interest that has been earned on the client’s funds has already been paid to the OLF, the lawyer or firm must request a refund in the manner described in paragraph (f) of Rule 1.15-2.
A lawyer trust account (IOLTA or other) may be maintained only in a financial institution that meets the requirements of Rule 1.15-2(h).3 In addition to being authorized to do business in the state where they are located and federally insured, eligible institutions must also enter into an agreement with the OLF to provide detailed reports of IOLTA account earnings and remit those earnings to the OLF at least quarterly. The financial institution must also be one that agrees to report trust account overdrafts to the bar.
Lawyers are responsible for making sure that the financial institutions where they have trust accounts meet the rule’s requirements. The bar has a record of the institutions that have agreed to report trust account overdrafts to the bar, and the OLF will soon have a record of those that have agreed to comply with the rule’s remittance and reporting requirements. Trust accounts at a noncomplying institutions must be moved to institutions that meet the rule’s requirements.
The remaining provisions of Rule 1.15-2 address the trust account overdraft notice program, including the duty of a lawyer to provide a written explanation to the bar’s disciplinary counsel of any overdraft. These requirements are identical to what was required by DR 9-102.
Rule 1.15-1 is nearly identical to the provisions of former DR 9-101 regarding the duty to safeguard and account for client property. There are a few minor changes, however. For instance, the new rule permits a lawyer or firm to maintain a trust account in a state other than the state in which the lawyer’s office is situated, with the consent of the client or third person whose money is being held in trust.
The requirement to hold in trust fees and costs paid in advance until they are earned is expressly stated in paragraph (c) of Rule 1.15-1. Under Oregon case law, fees may be earned on receipt only if the client agrees in writing. See Oregon Formal Ethics Op. No. 1998-151 and authorities cited therein.
Rule 1.15-1 carries forward the lawyer’s obligation to render a full accounting regarding the lawyer’s receipt and disposition of client property. Note, however, that Rule 1.15-1(d) requires such an accounting only upon the client’s request, whereas DR 9-101(C)(3) did not have that qualifier, arguably requiring lawyers to "render appropriate accounts" even if the client didn’t ask.
Rule 1.15-1(d) continues the requirement that funds to which two or more people (one of whom may be the lawyer) claim interests be held in trust until the dispute is resolved. The portion of funds not in dispute must, of course, be distributed promptly to the person entitled to it.
Proper safeguarding of client property, of which trust accounting is a major part, is an important aspect of the fiduciary duties of lawyers to clients. It is an obligation for which there is not much latitude for errors. Lawyers who delegate their trust account responsibilities to nonlawyer staff must use care in selecting, training and supervising those individuals. Oregon RPC 5.3 makes it clear that lawyers having direct supervisory authority over nonlawayer employees or assistants must make reasonable efforts to ensure that the person’s conduct is compatible with the lawyer’s ethical obligations. Moreover, the lawyer will be responsible for conduct of the nonlawyer that would be a violation of the rules by a lawyer if the lawyer orders or ratifies the conduct, or knows of it and fails to take reasonable remedial action when the consequences can be mitigated or avoided. On the general topic of training subordinates, see Hierschbiel, H., "Training Subordinates," OSB Bulletin, November 2004.
1. Although somewhat cumbersome, this designation will help avoid confusion with the Oregon Rules of Civil Procedure (the ORCPs).
2. The ABA Model Rules have no counterpart to our IOLTA and trust account overdraft notification provisions; most states that have such programs created them in free-standing court rules distinct from the lawyer disciplinary rules.
3. Note, too, that Rule 1.15-1(a) requires that lawyer trust accounts be in financial institutions selected by the lawyer or law firm "in the exercise of reasonable care."
© 2005 Sylvia Stevens
ABOUT THE AUTHOR
Sylvia Stevens is OSB assistant general counsel and administrator of the Client Security Fund. She can be reached at (503) 620-0222 or (800) 452-8260, ext. 359, or firstname.lastname@example.org.