Gunster Yoakley's Martin Press
LAW FIRMS
Viability of banks with trust accounts an issue
Lawyers ponder liability if banks holding client trust accounts fail.
October 9, 2008
Following the failure of California's IndyMac Bancorp Inc. and the very real potential of other bank collapses, lawyers have been flooding bar associations with questions about whether they would be responsible for client trust accounts if a bank fails.
In response, bar associations have been posting guidance to lawyers on their Web sites, holding internal meetings and issuing formal ethics opinions.
The consensus of the bar associations is that lawyers must be cautious about where they hold clients' funds, making sure they're in Federal Deposit Insurance Corp. (FDIC)-insured banks. Opinions vary on whether funds should be split up in different banks to take advantage of the insurance on deposits up to $250,000.
According to research and interviews with a variety of bar associations, including those of California, Los Angeles, Florida and Virginia, lawyers should not worry about sanctions or disciplinary actions if a bank failure leads to the loss of client funds, provided the lawyer chooses an FDIC-insured, stable bank.
However, civil liability is another matter. A New York lawyer was once sued when a bank failed, taking client funds with it. With that in mind, bar counsel are cautioning lawyers to consult their insurance carriers and "take reasonable precautions.
"There's no specific ethics opinion concerning what to do if a bank fails," said Elizabeth Tarbert, ethics counsel for the Florida Bar. "Nevertheless, lawyers must act prudently and determine what kind of institution [they are] dealing with, what its reputation is, and its financial stability, to the extent they can. Unfortunately, sometimes bank failures are very sudden. They keep them pretty quiet."
Variety of trust accounts
A variety of lawyers hold client funds in trust accounts — sometimes many millions of dollars — from one day to years. For example, real estate lawyers hold house proceeds in escrow, probate and estate lawyers hold funds while litigation ensues, personal injury lawyers hold settlements until they can pay costs and medical malpractice lawyers hold multimillion-dollar structured settlements that are doled out in annual installments.
Large law firms have entire departments devoted to handling the trust accounts, but small firms and solo practitioners are on their own to decide where to hold clients' money.
One of the few cases of a lawyer being sued for legal malpractice after losing a client's money when a bank failed occurred in 2003. Bazinet v. Kluge, 764 N.Y.S.2d 320 (New York Co., N.Y., Sup. Ct. 2003). In that case, a lawyer who represented the seller of two Manhattan apartments deposited the proceeds — $1.4 million — in his firm's trust account, as well as an additional $1.3 million he obtained when the original deal fell through.
The bank suddenly closed and the FDIC was named receiver. The buyer sued the client, who cross-claimed the lawyer for alleged negligence and fiduciary breach for depositing the funds in a small Connecticut bank. An expert was set to testify that the lawyer should have kept the funds in treasury bills or by obtaining supplementary insurance. Ultimately, a New York appellate court held that the lawyer was not responsible for knowing about the bank's financial shakiness. 788 N.Y.S.2d 77 (App. Div. 1st Dept. 2005).
However, such a case might go the other way in the current climate, believes Joan Mack, a member of the Los Angeles County Bar ethics committee and a shareholder at Caldwell Leslie & Proctor.
"That's a shakier proposition these days, with rumors of cascading bank failures rumbling through Wall Street," said Mack. "I think an attorney could have some exposure now. If an attorney has client funds beyond the FDIC-insured account in a bank that has been widely reported to be in trouble, and the bank fails, that would certainly influence a judge." Mack encourages lawyers to research banks' financial soundness through the bank rating company Veribanc.
Other bar associations are giving similar advice. A Florida Bar ethics opinion, 72-37, states there is no requirement that an attorney divide funds to ensure that a clients' funds are fully insured, but that an attorney should take reasonable care that the funds are safe.
Some lawyers are losing sleep over potential bank failures while others appear nonchalant.
Bob Gordon, a partner at Gordon & Doner in Palm Beach Gardens, Fla., said the issue "weighs on us." Gordon, a personal injury lawyer, was one of dozens of lawyers who called the Florida Bar's ethics hotline recently for advice on the issue. He was a bit reassured to learn that lawyers are not required to divvy up client accounts larger than $250,000 into multiple bank accounts. "That would not be feasible," he said.
However, Gordon is still not without some worry. "At any given time we have hundreds of thousands of dollars sitting in trust accounts, if not millions," he said. "It could be a nightmare if our bank failed."
Martin Press, a partner in the Fort Lauderdale, Fla., office of Gunster, Yoakley & Stewart who specializes in private wealth and estates, said he is comfortable with the banks his firm has chosen. "Our firm has made it a rule to deal with the big institutions," he said. "My view . . . is there are certain institutions that are too big to fail — the Bank of Americas, the Citibanks, . . . the JPMorgan Chases."
Most Popular Headlines
- Top ABA staffers exit amid reorganization
- Daschle departing Alston for DLA Piper
- Unanimous 7th Circuit finds mezuzah removal worth a lawsuit
- Employers unsure about medical marijuana
- Obama shakes up counsel's office
- The 2009 NLJ 250
- New approaches to law firm recruitment
- Hasan case to test military justice system
- 'He had the ability to do anything'
- No quiet time for new justice
