If Connecticut lawyers could bestow halos, New York-based Hudson Valley Bank would definitely get one. The financial institution, which has operated a half dozen Connecticut branches, pays an interest rate on lawyers trust accounts that is "way, way above other banks," according to Connecticut Bar Foundation executive director Sandra Klebanoff.
That’s critical to the state’s legal aid agencies, which in the past derived much of their funding from the so-called IOLTA accounts, but have watched that money dwindle in recent years due to plunging interest rates. "It’s one of our recognized leadership banks," said Klebanoff, whose foundation funnels money to legal aid agencies.
But as of May 24, Hudson Valley Bank was scheduled to start shutting down its Connecticut operations, starting with its Stamford branch. That may be putting some of its lawyer-depositors in an ethical bind, according to a would-be class action lawsuit filed by Stamford lawyer Daniel F. McGuire.
According to McGuire, who has IOTLA funds in Hudson Valley Bank, the elimination of Connecticut branches may cause lawyers to incur ethical breaches and expose them to tort suits from unhappy clients. McGuire, who heads a four-lawyer business litigation firm, has filed a state class action-style lawsuit against Hudson Valley Bank, asking the bank to formally notify Connecticut lawyers whose IOLTA accounts are subject to transfer out of state.
McGuire warns that lawyers could be violating the Rules of Professional Conduct and may be open to client lawsuits if they let client funds be moved out of state without permission. He cites Rule 1.15, which says a lawyer "shall hold property of clients or third persons" in a separate account "maintained in the state where the lawyer’s office is situated or elsewhere with the consent of the client or third person…."
McGuire has been communicating with the bank since February and is seeking a court injunction ordering it to notify lawyers with IOLTA accounts of the potential issue. Hudson Valley Bank notified Stamford depositors in an April 24 letter that accounts would be moved to its Port Chester branch on May 24. The bank has other branches — in Darien, Fairfield, Milford, Stratford and Westport — that are scheduled to close in July.
Michael Bowler, Connecticut’s statewide bar counsel, said on May 24 that the matter had just been brought to his attention. "I can see why the lawyers are concerned," he said. He said part of the issue arises from the fact that client fund accounts and IOLTA accounts are not exactly the same thing. A client can request that her or his funds be maintained in a separate account, which may not necessarily be in-state or compliant with the IOLTA parameters, Bowler said.
The applicable professional rules, Bowler said, "were written in a simpler time," and they may have been assumed that only banks that had branches in Connecticut would want to be Connecticut IOLTA banks.
In a hearing on McGuire’s request for injunctive relief on May 21, Stamford Superior Court Judge Kenneth B. Povadator declined to order the bank to notify Connecticut lawyers of their responsibilities, or to halt the branch closure.
Thomas Goldberg, a lawyer for Hudson Valley Bank, said the bank isn’t responsible for making sure lawyers follow their ethical rules. There are many simple solutions to this "mountain out of a molehill," he said. If a lawyer has funds in the Stamford branch awaiting a house closing, for example, the lawyer could simply notify the client that the money is being moved to Port Chester, and get the client’s permission.
In addition, the client funds accounts could be moved to a Connecticut bank. "It could be done over a lunch hour," Goldberg said. McGuire, the lawyer pursuing the class action, said it’s not that easy. "I tried to make this point to the judge; it’s not just a matter of going to a bank and saying, ‘I want to open an IOLTA account.’ Since they’re such a special animal, you have to do your due diligence," McGuire said. "Some bank managers really don’t know what they’re talking about when it comes to IOLTA accounts. They may offer them, but they don’t know how to set them up or service them."
Goldberg, a partner at the Stamford office of Day Pitney, said his research found no recorded cases of a Connecticut lawyer being sued or disciplined for keeping clients’ funds in a New York bank. On May 24, he said by e-mail, that the bank is continuing with its plans: "The Stamford branch will be closing today and accounts will be transferred to the Port Chester branch unless otherwise requested by the account holder."
So what should Connecticut lawyers who have Hudson Valley Bank accounts do?
Connecticut Bar Association president Barry Hawkins, a partner at the Stamford office of Shipman & Goodwin, said the CBA has no formal advice on the issue. Speaking for himself, he said he would probably switch his clients’ funds to a bank that has Connecticut branches.
But Klebanoff, the Connecticut Bar Foundation director, said banks do not have to be physically located in Connecticut to be IOLTA-approved institutions. Quoting from Rule 1.15, she said IOLTA-eligible financial institutions are those "authorized by federal or state law to do business in Connecticut, the depositors of which are insured by an agency of the United States government…." Hudson Valley Bank says it is still "authorized" by federal banking authorities to do business in Connecticut.
Connecticut Bar Foundation finance director Anne Goico, according to court records, was assured by Hudson Valley Bank, in an April 11 email, that all Client Benefit Trust Accounts and IOLTA accounts belonging to Connecticut lawyers "will be included in the transfer to a New York branch." Additionally, the bar foundation was told that the bank would continue to remit interest to the bar foundation under the IOLTA program.
Meanwhile, Bowler, the statewide bar counsel, understands why lawyers might be confused. "If members of the bar want to move their accounts to another Connecticut bank, that’s fine," he said. "If they want to stay status quo [for now], they should know the [Statewide Grievance Committee] is looking at it and we’ll try to get something out next month."
Bowler said it’s quite possible that the Rules of Professional Conduct need to be "tweaked" to comport with changing banking practices, such as Internet banking. •