South Carolina Lawyer
SC Lawyer, May 2009, #4.
Who Can You Trust? How the TLGP, FDIC, NCUSIF and CDARS Affect the Safekeeping of Client Funds
South Carolina LawyerMay 2009Who Can You Trust? How the TLGP, FDIC, NCUSIF and CDARS Affect the Safekeeping of Client FundsBy Michael J. Virzi"Put not your trust in money, but put your money in trust." -Oliver Wendell Holmes (1809-1894)
In the current economic climate, which includes a heightened risk of bank failure, lawyers and state bar ethics committees nationwide have been grappling with questions about deposit insurance limits and excess client funds held in trust. The federal government has responded, but only temporarily and incompletely. Meanwhile, our own Bar and Supreme Court have addressed questions regarding the use of credit unions rather than banks for lawyer trust accounts, but those clarifications may too be inadequate.
The credit union question appeared to be settled, but recent federal activity involving deposit insurance has shed new light on the problem. At the end of the day, what must lawyers do to keep trust funds safe? And who can they trust with their trust accounts? The first answer is different in 2009 than it may be in 2010, and the second answer is not as simple as it seems.
A lawyer's obligations regarding client funds stem from Rule 1.15 ("Safekeeping Property") of the Rules of Professional Conduct, 407 SCACR. That rule requires lawyers to place client funds and third-party funds in a trust account, separate from the lawyer's own funds. The Ethics Advisory Committee was recently asked whether lawyers have an obligation in these uncertain times to protect client funds that exceed federal insurance limits. The Committee advised that they do not. "There is no requirement in the rules for an attorney either to insure funds in excess of $100,000 or to place funds in numerous different banks. To impose such a requirement would be an unreasonable burden on the practicing attorney in most cases." Ethics Advisory Op. No. 08-10 (2008). A few days later, the FDIC temporarily raised its insurance limit to $250,000. On January 1, 2010, the limit will return to $100,000.
As a preliminary matter, lawyers and clients alike should be aware of two factors concerning FDIC insurance limits. First, when a client personally banks at the same institution where the lawyer's trust account is held, the federal insurance limit is a single cap for the client's combined funds. See 12 C.F.R. §§ 330.6(a), 330.7(a). Thus, after the FDIC limit returns to $100,000, a client with $125,000 on deposit in a personal account and $125,000 in a lawyer's trust account at the same bank will be insured only up to $100,000 total, not $100,000 for each account.
Second, as long as a trust account is identified as such in its title, and the lawyer maintains records of the individuals on whose behalf funds are held and the specific amounts attributable to each owner (i.e., if the lawyer is in compliance with Rule 417, SCACR), the FDIC insurance limit will apply separately to each client's funds. See 12 CFR § 330.5(b); FDIC Advisory Opinion Op. 98-2 (1998). Thus, after the FDIC limit returns to $100,000, if a lawyer's trust account contains $400,000 belonging in equal amounts to four clients, the entire balance will be fully insured, assuming none of the four clients also has funds in a personal account at the same bank.
The bad news about the temporary FDIC insurance...