Lawyers may have concerns about their obligations to properly maintain client funds due to concerns with bank stability. The following links and information are offered to assist lawyers in addressing these concerns.
Should you have further questions, you may wish to contact the State Bar Ethics Hotline, which provides research assistance on professional responsibility issues.
Rule of Professional Conduct 1.15 “Safekeeping Funds and Property of Clients and Other Persons”
All funds held for the benefit of clients must be maintained in accordance with Rule 1.15. Subject to limited exceptions, this rule requires that client funds be placed in one or more bank accounts that are properly labeled as trust accounts and that other funds are not commingled with these funds.
This rule also requires appropriate notice, record-keeping, and disbursement procedures. Notwithstanding the current concerns with bank stability, lawyers should continue to follow all requirements of Rule 1.15.
The State Bar receives revenue generated from Interest on Lawyers' Trust Accounts (IOLTA), and distributes those funds as grants to legal aid organizations throughout California.
Under Business and Professions Code section 6210, et. seq., lawyers who handle small amounts of money for their clients, or money that is held for a short period of time, must deposit these funds into IOLTA accounts at eligible financial institutions. While consulting this list of eligible financial institutions is an important starting point for deciding where to establish an IOLTA account, the State Bar does not make any determination regarding the relative stability of the financial institutions on the list.
All governing authorities related to IOLTA requirements, including State Bar Rules, must be followed. Please consult the Handbook on Client Trust Accounting for California Attorneys for additional guidance.
The Federal Deposit Insurance Corporation (FDIC) provides general information about fiduciary bank accounts, including information on FDIC insurance for such accounts. Credit unions may have insurance offered by the National Credit Union Administration (NCUA). The availability of FDIC/NCUA insurance may not be determinative of whether a particular deposit fully complies with a lawyer’s fiduciary duties. The State Bar’s Handbook on Client Trust Accounting for California Attorneys (2023 Online Edition, pages 13-14 and 16-19) includes basic information on this issue.
Although Rule 1.15 and the IOLTA requirements establish State Bar disciplinary and regulatory standards, they do not resolve potential concerns about a lawyer’s liability for client funds in the event of a bank failure.
While this is a legal and risk management issue beyond the scope of the State Bar’s regulatory function, for research guidance the State Bar Ethics Hotline is citing a non-California decision where malpractice liability was not found when a lawyer deposited funds in a bank that was subsequently closed and placed into FDIC receivership.
In Bazinet v. Kluge (N.Y.A.D. 1 Dept., 2005) 788 N.Y.S.2d 77 [14 A.D.3d 324], the New York Appellate Division found that the lawyer did not know that the bank was in danger of closing and that the proximate cause of the loss was “the bank’s unforeseen demise.” As suggested by this case, foreseeability is a key element.