1.10 Trust Accounts

• Library: The Virginia Lawyer: A Deskbook for Practitioners (Virginia CLE) (2022 Ed.)

1.10 TRUST ACCOUNTS

1.1001 Duty to Safeguard Client's Funds and Property.

A lawyer who receives a client's funds and other property has a fiduciary duty to keep those funds and property separate from his or her own and to preserve and safeguard them for the benefit of the client. ¹²⁷ The dual goal of this rule is to avoid the appearance of impropriety and to eliminate the possibility that the lawyer may inadvertently use the funds for his or her own purposes or otherwise expose the funds to loss. The standard of care for the lawyer is no less than would be expected of a bank or other financial institution acting as a fiduciary. ¹²⁸

The lawyer's fiduciary obligation to preserve and keep separate the client's property is stated in Rule 1.15 of the Virginia Rules of Professional Conduct. Related rules include part 6, section IV, paragraph 20 of the Rules of the Supreme Court of Virginia and the Virginia statutes relating to real estate settlement agents. ¹²⁹

Rule 1.15 mandates that a trust account be maintained unless the lawyer's practice is such that the lawyer will never have client funds in his or her possession. ¹³⁰ The prevailing view is that the requirements regarding trust accounts may not be waived by a client or avoided by a client's consent. ¹³¹ A lawyer is strictly accountable for compliance with the trust account rules.

1.1002 Rule 1.15 Generally.

Rule 1.15(a) requires that all funds received or held by a lawyer or law firm on behalf of a client or a third party, or held by a lawyer as a fiduciary, other than reimbursement of advances for costs and expenses, must be deposited in one or more identifiable trust accounts; all other property held on behalf of a client should be placed in a safe deposit box or other place of safekeeping as soon as practicable. ¹³² The exception for advances or expenses applies to those already incurred, not to expected future expenses. Funds received from a client for expenses that have not yet been billed must be deposited in the lawyer's trust account. ¹³³

Lawyers acting as settlement agents must have a separate fiduciary trust account ¹³⁴ for those transactions involving the purchase of, or lending on the security of, Virginia real estate containing not more than four residential dwelling units. ¹³⁵ A settlement agent is a person, other than a party to the real estate transaction, who provides escrow, closing, or settlement services in connection with a subject transaction and who is listed as a settlement agent on the settlement statement or closing disclosure for the transaction. ¹³⁶ Lawyers are authorized to act as settlement agents by section 55.1-1003(A)(1) of the Virginia Code and must comply with the Virginia State Bar's regulations regarding agent certification. ¹³⁷

No funds belonging to the lawyer or law firm may be deposited into or maintained in the trust account, with two exceptions. ¹³⁸ First, funds belonging to the lawyer or the law firm may be deposited when reasonably sufficient to pay service or other charges or fees imposed by the financial institution or to maintain a required minimum balance to avoid the imposition of service fees, provided the funds deposited are no more than necessary to do so. ¹³⁹ Second, funds in which two or more persons (one of whom may be the lawyer) claim an interest must be held in the trust account until the dispute is resolved and there is an accounting and severance of their interests. ¹⁴⁰ Further, any portion finally determined to belong to the lawyer or law firm must be promptly withdrawn from the trust account. ¹⁴¹

A lawyer must promptly notify a client of receipt of the client's funds, securities, or other property ¹⁴² and label and identify securities and properties of a client or those held by a lawyer as a fiduciary promptly upon receipt. ¹⁴³ A lawyer must maintain complete records of all funds, securities, and other property of clients coming into his or her possession and render appropriate accountings to the client regarding them. ¹⁴⁴ A lawyer must promptly deliver or pay to the client or another as requested by the client any funds, securities, and other property that the client is entitled to receive. ¹⁴⁵ A lawyer must not disburse funds or use property of a client or a third party with a valid lien or assignment without their consent or convert funds or property of a client or third party except as directed by a tribunal. ¹⁴⁶

A lawyer should be aware of applicable insurance limits and the stability of the institution holding clients' funds when depositing them into trust accounts. LEO 1417 indicates there is no affirmative ethical duty on a lawyer to make sure all clients' funds are deposited in accounts within applicable insurance limits but requires that the lawyer's status as a director and stockholder of the depository bank be disclosed. If the lawyer/director knows the financial institution is in a precarious situation, the lawyer may not deposit funds in the account without specific authorization from the client.

Given a lawyer's potential liability to the client for loss of funds, it is prudent for a lawyer either to obtain the client's consent to exceed the insurance limits or to divide funds among multiple institutions to maximize available insurance if the lawyer is likely to hold substantial sums of money for the client over more than the brief interval required to complete a real estate closing or similar transaction.

1.1003 Scope of Rule 1.15.

Rule 1.15 applies to all funds held by a lawyer on behalf of a client or by a lawyer acting as a fiduciary. ¹⁴⁷ The Restatement of the Law Governing Lawyers ¹⁴⁸ provides that the safeguarding and anti-conversion and commingling provisions of the trust account rules apply to a lawyer regardless of the capacity in which the lawyer is serving.

1.1004 Other Property.

While a lawyer's obligations with respect to the client's funds are the principal focus of the authority interpreting and applying the concepts of Rule 1.15, the duties of segregation, safeguarding, and delivery of client property extend to both tangible and intangible property. ¹⁴⁹ Segregation and safeguarding are accomplished by labeling the property in question as belonging to the client and placing it in a safe deposit box or other place of safekeeping. ¹⁵⁰

1.1005 Types of Trust Accounts.

Part 6, section IV, paragraph 20 of the Rules of the Supreme Court of Virginia establishes three permissible types of lawyer trust accounts:

1. Interest-Bearing Trust Accounts. A lawyer may maintain client funds in one or more interest-bearing accounts in one or more financial institutions whenever the lawyer has established and follows record-keeping accounting, clerical, and administrative procedures to compute and credit or pay at least quarterly pro rata to each client the interest on that client's funds, less fees, costs, or expenses charged by the lawyer for the record-keeping, accounting, clerical, and administrative procedures associated with computing and crediting or paying those amounts. ¹⁵¹

2. IOLTA Accounts. An IOLTA (Interest on Lawyer Trust Account) account is an interest-bearing account for pooled client funds that does not have procedures for computing and paying to clients their share of the interest earned on the account. At the time of the deposit, the lawyer must reasonably expect that the fees, costs, or expenses that the lawyer would be entitled to charge for an interest-bearing trust account would equal or exceed the pro rata interest on the client's funds. ¹⁵² Interest on the IOLTA account or dividends must be remitted periodically, but at least quarterly, to the Legal Services Corporation of Virginia (LSCV) by the financial institution in which the account is maintained. ¹⁵³ Other than a remittance fee for computing the interest and remitting it to the LSCV, the bank may not charge fees against an IOLTA account that it would not charge nonlawyer depositors. ¹⁵⁴ Additional allowable fees are explicitly set forth in part 6, section IV, paragraph 20(B)(2)(d) of the Rules of the Supreme Court of Virginia. No fees may be charged against the principal of the account. ¹⁵⁵ The financial institution has reporting obligations to the lawyer from whose account the remittance is sent ¹⁵⁶ and must agree to pay all or part of the funds deposited in an interest-bearing trust account upon demand or order. ¹⁵⁷

3. Non-Interest-Bearing Trust Accounts. A lawyer may deposit client funds in an identifiable non-interest-bearing trust account as long as the attorney or law firm receives no consideration or benefit from the financial institution for opening a non-interest-bearing trust account or for converting from an IOLTA account to a non-interest-bearing trust account. ¹⁵⁸

Lawyers have no obligation to obtain their clients' consent for depositing funds in an IOLTA account or non-interest-bearing trust account. ¹⁵⁹ A lawyer is not required to compute or report to the client any payment to the LSCV of interest or dividends by the banking institution on funds in any such account wherein the client's funds have been deposited by the lawyer. ¹⁶⁰

A lawyer may elect not to maintain an IOLTA account by submitting a notice of election on a "Request to Opt-Out" form provided by the LSCV. ¹⁶¹ A lawyer may make this election at any time by submitting a notice of election during the month preceding the month in which participation is to be terminated. In addition, the LSCV may permit a lawyer to withdraw from the IOLTA program at any time.

An election not to have an IOLTA account effectively requires a lawyer to either credit and pay interest earned on the trust account to the clients whose funds are in the account or to maintain a non-interest-bearing trust account. The lawyer may not receive interest earned on clients' funds in the trust account. ¹⁶²

1.1006 Interest and Other Investments.

One overlooked result of the Rules regarding permissible trust accounts is the duty the Rules impose on a lawyer...