Southern Utah
| Publication year | 2023 |
| Pages | 41 |
Bank Failures and IOLTA Accounts:
Understanding FDIC Insurance Limitations and a
Lawyer's Duty to Safeguard Client Trust Funds
by David M. Grant
With the recent bank failures of First Republic Bank on May 1, 2023, Signature Bank on March 12, 2023, and Silicon Valley Bank on March 10, 2023, and with current rating downgrades of regional banks with locations in Utah, such as Zions, Western Alliance, and U.S. Bank, it seems timely to explore how the Federal Deposit Insurance Corporation (FDIC) insurance limitations apply to client funds held by lawyers through Interest on Lawyers Trust Accounts (IOLTAs). Not only will this article cover how FDIC limits apply to IOLTAs, but it will discuss a lawyer's duty to safeguard client property from the risks associated with bank failures. And it will provide recommendations for lawyers to manage bank failure risks related to IOLTAs.
The FDIC was created by Congress as an independent agency to examine and supervise banking institutions, manage and resolve bank failures, and insure deposits held in FDIC-member banks. Credit union accounts are not insured by the FDIC. Instead, they are insured by the National Credit Union Administration (NCUA). While the NCUA essentially offers the same types and amounts of coverage as the FDIC, and while the concepts discussed herein should translate from one system to the other, some differences may apply in the way specific limitations are computed and the way claims would be processed. It is beyond the scope of this article to discuss the ways NCUA and FDIC insurances vary.
FDIC Insurance Limits for IOLTA Accounts
Under 12 C.F.R. § 330.5 and 12 C.F.R. § 330.7, IOLTA accounts held at FDIC-insured banks, if they meet certain disclosure requirements, are treated as "fiduciary accounts," which are "deposit accounts owned by one party but held in a fiduciary capacity by another party." Fiduciary accounts are characterized on a pass-through basis as the deposits of the principal (i.e., the client), rather than as deposits owned by the agent (i.e., the attorney). As such, the deposits are treated as if they were made directly by the principal.
For this pass-through treatment to extend to client funds held in an IOLTA account, all of the following three requirements must be met: (1) the funds must in fact be owned by the client, not the attorney, (2) the bank's records must indicate the account is an IOLTA account, and (3) the records of the bank or those of the attorney must indicate the identity of the client as well as the client's ownership interest in the deposit. Because of the duties imposed on attorneys with respect to IOLTA accounts under and as implied by the Utah Rules of Professional Conduct, professionally compliant IOLTA accounts will also conform to the above FDIC pass-through requirements for fiduciary accounts. Utah Code of Jud. Admin. R. 14-1001.
In its brochure entitled "Your Insured Deposits," as updated on April 3, 2023, the FDIC states, "The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category." As such, client funds held through a qualifying pass-through fiduciary account will receive FDIC deposit insurance coverage up to $250,000 for each underlying client, as aggregated and covered to the statutory limit, considering all funds held by each of the same underlying clients at the same depository institution, for each ownership category. In other words, each underlying client will have total FDIC insurance on all their deposits at a particular bank up to a total of $250,000 for each ownership category.
Client trust funds held in IOLTA accounts can have various types of owners, including individuals, married couples and individuals in other family groups, members of class actions, executors of
DAVID M. GRANT is an Assistant Professor of Accounting and Business Law at Southern Utah University. As a Practice Academic, he also advises clients in trust and estateplanning/administration, through his partnership with the law firm of Grant Morris Dodds, PLLC.
estates, partnerships, corporations, and other business organizations, and trustees of revocable and irrevocable trusts. In total, the FDIC's deposit insurance coverage rules currently protect deposits in fourteen...
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