Oregon State Bar Bulletin — OCTOBER 2008

Bar Counsel
Trust Accounts and the FDIC
Protecting Client Funds in Uncertain Times
By Sylvia Stevens

I have fielded several inquiries lately about a lawyer’s responsibility for client funds held in trust in the event the bank becomes insolvent. Oregon lawyers are not the only ones concerned; the issue was also the topic of a recent e-mail discussion on a list serve for lawyers throughout the country who defend disciplinary and malpractice claims against other lawyers.

While it is hoped that the collapse of IndyMac and a handful of small banks are isolated incidents, none of us can predict the future, and few of us have any inside information into the health of the banks we choose for our lawyer trust accounts. Accordingly, it is incumbent on lawyers, as fiduciaries for their client funds, not only to comply with the rules of professional conduct regarding trust accounts but also to understand how deposit insurance will or will not protect client funds.

The title of RPC 1.15-1 describes the lawyer’s obligation in a nutshell: Safekeeping Property. Paragraph (a) of the rule requires first that lawyers keep client funds1 in their possession separate from the lawyer’s own funds. It also requires that client funds be held in an account denominated as a "Lawyer Trust Account," signifying that the lawyer holds the funds in trust for the clients. The lawyer trust account must be an interest-bearing account in a financial institution selected by the lawyer or law firm "in the exercise of reasonable care."

RPC 1.15-2(h) permits lawyers to have trust accounts only in institutions that are authorized by state or federal banking law to transact business in the jurisdiction where the account is located (which must be the jurisdiction in which the lawyer’s office is situated). The institution must be insured by the Federal Deposit Insurance Corporation.2

The FDIC insures deposit accounts in an institution up to $100,000 per depositor. Funds in a fiduciary account, including a lawyer trust account, are insured as the funds of the actual owner (the client) to the same extent as if deposited by the actual owner rather than the fiduciary, provided:

If the account is in compliance with RPC 1.15-1(a), the fiduciary nature of the account will be disclosed in the account title, i.e., "Perry Mason Lawyer Trust Account." If Perry maintains complete records regarding the funds in the account as required by RPC 1.15-1(a), the identity and interest of each client can be ascertained, and each client’s funds will be insured up to the limit.

Because the FDIC treats the deposits in a lawyer trust account as the accounts of the individual clients, the client’s insurance is applied to the aggregate of the client’s funds in the institution. Thus, if a client has $60,000 in a lawyer trust account in the bank and $60,000 in a personal account in the same bank, the client’s insurance is capped at $100,000, leaving $20,000 uninsured.

The scope of a lawyer’s responsibility for client funds lost in a bank failure is not entirely clear. As mentioned above, the Oregon Rules of Professional Responsibility require only that lawyers exercise reasonable care in selecting a financial institution for their lawyer trust accounts and that the institutions be federally insured. Nothing in the rule can be read as a mandate that the lawyer allocate funds between multiple institutions to assure that each client’s funds are fully protected by deposit insurance.3

Rules like Oregon RPC 1.15-1 (and ABA Model Rule 1.15 on which it is patterned) reflect and adopt as the standard of professional conduct a fiduciary’s traditional duties regarding funds of another: segregation, notification, delivery and accounting. While the rules require lawyers to be prudent in their handling of client funds, they don’t require lawyers to be able to predict the future of the banks they select for client trust accounts.

There are no disciplinary cases suggesting that proper safeguarding of client funds includes assuring the funds are fully insured. There is at least one case in which a court has held that lawyers are not civilly liable for a client’s losses resulting from a bank failure. In Bazinet v. Kluge, 788 NYS 2d 77, 14 AD3d 324 (2005), an attorney had acted as an escrow agent for his client in a real estate transaction and deposited over $1 million of earnest money into his firm’s trust account at the Connecticut Bank of Commerce. Before the transactions could be concluded, the bank was taken into receivership by the FDIC. When the client was able to recover only about 1/3 of the money from the FDIC, she sued her attorney, alleging it was malpractice for him not to have deposited the funds in a manner that would have been fully covered by the FDIC insurance. The court dismissed her claim because there was no allegation that the attorney had violated any statute or regulation and the New York rules governing lawyer trust account did not require that the funds be placed in accounts fully insured by the FDIC. Moreover, there was no allegation that the lawyer knew that the bank was in danger of closing. The proximate cause of the client’s injury, held the court, was the bank’s "unforeseen demise."

Of course, if bank failures become a more widespread occurrence, civil courts and disciplinary authorities might adopt a stricter view of what constitutes prudence and "reasonable care." In the meantime, lawyers may wish to remind clients of the $100,000 insurance limit on any individual’s funds in a single institution so the client can take appropriate steps to protect amounts that may exceed the aggregate insurance limit. This will necessarily include informing the client of the location of the lawyer trust account, e.g.: "$100,000 of your funds at [fill in the blank bank] are fully insured by the FDIC; The $15,000 I am holding in trust for you counts towards that maximum at [name the institution]; if you have additional funds in the same institution approaching or exceeding the insurable limit, you may wish to make other arrangements so that all of your deposits there will remain insured." Also, if a lawyer is holding more than $100,000 in trust for any one client, the lawyer should consider dividing the funds into accounts at different financial institutions to maximize the client’s deposit insurance. Periodic inquiries into the health of one’s bank might also be prudent.

Finally, proper accounting of client funds in trust is crucial to the ability to ascertain the amount of funds belonging to each client in the event a claim must be made for FDIC insurance At the very least, that means identifying the client on whose behalf each deposit or withdrawal is made and regularly reconciling the balance belonging to each client. Practitioners desiring help with the practical aspects of trust accounting are encouraged to contact the PLF’s Practice Management Advisors at (503) 639-6191.


1. The rule also applies to funds of third persons; for purposes of discussion here, "client funds" encompasses all funds of others held by the lawyer.

2. The rule permits lawyer trust accounts in institutions insured by "an analogous federal government agency," but as a practical matter most trust accounts are simple deposit accounts insured by the FDIC. The authority for holding client funds in brokerage or other accounts and the applicable insurance protection are beyond the scope of this article.

3. Oregon’s rules on trust accounts differ significantly from the ABA Model Rules, which do not require that the account be titled "Lawyer Trust Account," that the lawyer exercise reasonable care in selecting the account, or that accounts be in federally insured institutions. Moreover, in most jurisdictions, the details of how IOLTA and other trust accounts are maintained are not in the RPCs at all, but in stand-alone court rules. There is considerable variation among the jurisdictions in the details of trust accounting.

Sylvia Stevens is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260, ext. 359, or by e-mail at sstevens@osbar.org.

Ethics opinions are published and updated on the bar’s website here.

© 2008 Sylvia Stevens

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