A lawyer who receives funds in connection with an imminent real estate closing must first decide whether the funds are "client" funds for purposes of DR 9-102. If they are client funds and if, because of the possibility of delay in the closing, the lawyer deposits them in an interest-bearing account containing commingled client funds, the lawyer must account to the client for the interest received even if the funds are held only for a short time and the interest received is therefore small. In deciding whether such funds may be placed in an IOLTA account rather than an interest-bearing client funds account, the lawyer must make the substantive judgment in advance whether the situation meets the IOLTA requirement that the funds will only be held for a "short period of time." If the funds are placed in an IOLTA account and the closing is substantially delayed, the lawyer should withdraw them and place them in an interest-bearing client funds account.
Facts: A lawyer who handles numerous real estate transactions often receives monies that will or may be paid over to his client at the time of the closing of the transaction. The lawyer knows that many transactions scheduled for early closing will not in fact close on time and that in some unknown number of situations a client who would not be entitled to interest because of the short-term nature of the deposit will become entitled to interest because the monies are held for a longer period. The lawyer has always dealt with that problem by depositing all funds received into an interest-bearing N.O.W. account containing only commingled client funds. He states that if the funds are held only a short time, the clients do not expect interest and he pays none. If the funds are held for more than a short time, he allocates interest and pays it to the client. This procedure results in excess interest in the account. The lawyer sought to turn the excess interest over to the IOLTA Implementation Committee but was turned down on the ground that the funds did not qualify for the Program under DR 9-102(C). The Implementation Committee's response stated that it was not proper under the rules to maintain an account for commingled client funds in which interest was paid to some clients but not others in the lawyer's discretion. The Implementation Committee also suggested that the lawyer consider converting his N.O.W. account into an IOLTA account. The lawyer inquires whether his method of holding client funds in these situations complies with the Disciplinary Rules. He also inquires whether it is appropriate to turn over the past interest remaining in his account to the Massachusetts Legal Assistance Corporation directly.
Discussion: The controlling provision of the Disciplinary
Rules is DR 9-102, which provides: "DR 9-102. Preserving Identity of Funds and Property of a Client.
(A) All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:
(1) Funds reasonably sufficient to pay bank charges may be deposited therein.
(2) Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.
(B) A lawyer shall:
(1) Promptly notify a client of the receipt of his funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of the handling, maintenance and disposition of all funds securities and other properties of a client coming into the possession of the lawyer from the time of receipt to the time of final distribution preserve such records for a period of ten years after final distribution of such funds securities or other properties; and render appropriate accounts to the client regarding them.
(4) Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.
(C) A lawyer may elect to create, to maintain, and at any time to close an interest-bearing trust account (hereinafter "trust account") for clients' funds which in the judgment of the lawyer are nominal in amount, or are to be held for a short period of time, in compliance with the following provisions:
(1) The trust account may be established with any bank or savings and loan association authorized by Federal or State law to do business in Massachusetts and insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, or similar State insurance programs for State-chartered institutions. Funds in the trust account shall be subject to withdrawal upon request and without delay.
(2) Lawyers or law firms electing to deposit client funds in the trust account shall direct the depository institution:
(a) To remit interest or dividends, net of any service charges or fees, on the average monthly balance in the account, or as otherwise computed in accordance with an institution's standard accounting practice, at least quarterly, to a tax-exempt recipient disburser entity (hereinafter "charitable entity") designated by the Supreme Judicial Court for use in (1) improving the administration of justice or (2) delivering civil legal services to those who cannot afford them.l
(b) To transmit with each remittance to the charitable entity a statement showing the name of the lawyer or law firm which deposited the funds; and
(c) At the same time to transmit to the depositing lawyer or law firm, with a copy to the IOLTA Implementation Committee or its designee, a report showing the amount paid to the charitable entity, the rate of interest applied, and the average account balance for the period for which the report is made.
(3) This court shall appoint an IOLTA Implementation Committee.2
(4) The representatives appointed to the Committee shall oversee the implementation of an IOLTA program, including:
(a) the encouragement of lawyers to create and maintain interest-bearing trust accounts under DR 9-102(C);
(b) the encouragement of the banking community and the public to support an IOLTA program;
(c) the obtaining of tax rulings and other administrative approval for an IOLTA program as appropriate;3
(d) the preparation of such guidelines as may be deemed necessary or advisable for the operation of an IOLTA program, including (i) standards for the manner of recruiting of attorneys to participate in the IOLTA program, including the use of a common solicitation form describing all recipient charitable entities and a common fact sheet describing the IOLTA program for media and direct solicitation, and (ii) standards for recipient charitable entities in accounting for the expenditure for IOLTA funds, including permissible categories of, and a ceiling on, recipient expenses; and
(e) reporting to the court in such manner as the Court may direct.
(5) Any charitable entity designated by the Supreme Judicial Court hereunder may engage in attorney recruitment efforts. All charitable entities, other than Massachusetts Legal Assistance Corporation, shall pay to Massachusetts Legal Assistance Corporation not less than fifty percent (50%) of the IOLTA funds received less expenses properly allocable to such share. Massachusetts Legal Assistance Corporation will retain for its use in the furthering of its corporate purpose all of the IOLTA funds received by it, by direct solicitation and from other charitable entities.
(6) Each charitable entity shall submit an annual report to the Court describing its IOLTA activities for the year and providing a statement of the source and application of IOLTA funds received pursuant to this Order.
(1) In our Opinion 74-6, we advised that when a lawyer places client funds in an interest-bearing account, the lawyer must account to the client for the interest earned on the funds. We sympathize with the difficulty faced by a lawyer attempting to deal with a client's funds in the situation described in the present inquiry. Nevertheless we believe that the principle set forth in our Opinion 74-6 governs our response. While it may eventually turn out with respect to a specific transaction that the lawyer was not required to place the funds in an interest-bearing account because of the short-term nature of the deposit, once the funds were placed in such an account, it became the lawyer's duty to account for the interest earned, even though the allocation was an annoyance because the amount was small. Of course it is always possible for a client to waive his or her entitlement to such interest. However, since by hypothesis the size of the entitlement will not be known beforehand, the waiver should not be agreed upon until afterwards and it should be made clear to any client from whom a waiver is sought that he or she is in fact making a gift of a specified amount of earned interest to whatever entity is selected to receive the excess interest. Thus we agree with the statement of the IOLTA Implementation Committee that an attorney may not be maintain an account of commingled client funds in which interest is paid to some clients but not to others in the attorney's discretion.
(2) The more difficult problem raised by the inquiry comes from the suggestion of the IOLTA Implementation Committee that the lawyer consider converting his N.O.W. account into an authorized IOLTA account. The lawyer may certainly do that; but the question for him and for all lawyers in similar circumstances will be what funds they may properly place in such an IOLTA account. There are two problems. The first is whether the funds are client funds so that they are eligible to be placed in an IOLTA account at all. The second is whether the funds qualify for deposit in an IOLTA account by reason of meeting the condition that they "are nominal in amount, or are to be held for a short period of time."
First, when funds are deposited with the seller's attorney prior to closing, they may represent a deposit designed to take care of some contingency or they may represent a deposit on the purchase price. In the former case, it will not be clear until the closing whether the deposit will be turned over in whole or in part to the lawyer's client. The client does, however, have a contingent interest in them and we believe that they are therefore sufficiently "client funds" to fall within the provisions of DR 9-102. In the latter case, if the transaction closes, the deposit will go to the client and they are similarly covered DR 9-102.
The next question that arises is whether the funds may be placed in an IOLTA account or should be placed in an interest-bearing client funds account. DR 9-102(C) permits deposit in an IOLTA account only "for clients' funds which in the judgment of the lawyer are nominal in amount, or are to be held for a short period of time.'' The Supreme Judicial Court in adopting DR 9-102(C) stated that there was no constitutional or ethical problem with the IOLTA concept because "it was not feasible to place (these clients' funds) at interest, given the transaction costs and unavailability of practical sub-accounting procedures." In the Matter of A Petition By the Massachusetts Bar Association and the Boston Bar Association, 395 Mass. 1, 7 (1985). As far as the issue of discussion with clients of the place where funds should be deposited is concerned, we should note that the Supreme Judicial Court stated that the rule provides that the "determination whether a client's funds are nominal in amount or to be held for a short period of time rests in the sound judgment of each participating attorney," Id., at 5. The reason for leaving the responsibility to the lawyer is disclosed later in the court's opinion when it discussed whether the interest earned on an IOLTA account might be taxable to the client under the so-called "assignment of income" doctrine. The court pointed out that the Internal Revenue Service had ruled with respect to a similar IOLTA program that "the assignment-of-income doctrine would pose no obstacle 'so long as clients could in no way and to no degree control the creation or destiny of earnings generated on their attorney-held funds'" Id. at 8. (See also Internal Revenue Service, Rev. Rul. 87-2)
In deciding whether to deposit client funds in an IOLTA account pursuant to DR 9-102(C), a lawyer will therefore have to decide the substantive law question whether his or her fiduciary obligation requires the placing of the funds in an interest-bearing account for the benefit of the client, and more particularly, whether the possibility that the funds will be held for more than a short time imposes such an obligation. If the lawyer decides to deposit the funds in an interest-bearing client funds account, but the period turns out to be short, there is at present no way to direct that interest to the IOLTA Program. The interest must, therefore, be allocated and paid over to the client or the adverse party or both, as the case may be. On the other hand, if the lawyer deposits the money in an IOLTA account and it then becomes clear that the closing will be substantially delayed, the lawyer should withdraw the funds from the IOLTA account and place them in an interest-bearing client funds account.
The inquirer has raised the question whether the availability of a pooled N.O.W. account makes it possible for lawyers to resolve the difficult question whether to place a client's funds in an interest-bearing account. All funds would be placed in such an account, but only funds that were substantial or held for more than a short period of time would receive interest. No interest need be paid in other situations because of the accounting difficulty and cost, and such excess interest could be paid directly to an IOLTA program. The only response that the committee can make is that the rule adopted by the Supreme Judicial Court, for a combination of policy and tax reasons, does not implement the inquirer's suggestion. Our earlier discussion under paragraph 1 sets forth our understanding that interest, however small, on client funds must be accounted for when pooled in a N.O.W. account.
This discussion has assumed that there is no provision in the agreement between the parties with respect to interest on deposited funds. If there is such an agreement, deposit in an IOLTA account will, in the usual case, be precluded because the parties will have provided either explicitly or by implication for deposit in an interest-bearing account for the benefit of one or both of them.
1. The Boston Bar Foundation, the Massachusetts Bar Foundation, and the Massachusetts Legal Assistance Corporation are hereby designated as "charitable entities," as defined in DR 9-102(C)(2)(a).
2. The Boston Bar Foundation, the Massachusetts Bar Foundation, and the Massachusetts Legal Assistance Corporation each are requested to nominate by July 1, 1985, three representatives to the IOLTA Implementation Committee. The aforementioned charitable entities should be mindful in submitting their nominations of the need for the committee to be truly representative of the constituency of persons interested in the provision of civil legal services to the poor and the improvement of the administration of justice.
3. The IOLTA Implementation Committee may require that no deposits under the IOLTA program shall be made until a favorable tax ruling has been obtained.
Permission to publish granted by the Board of Delegates on May 29, 1987.
As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.