Vol. 11, No. 6, Pg. 40. Real Estate Closing & Collected Funds - Do they go Hand in Hand?.

• Author: By Cary S. Griffin

South Carolina Lawyer

2000.

Vol. 11, No. 6, Pg. 40.

Real Estate Closing & Collected Funds - Do they go Hand in Hand?

40REAL ESTATE CLOSINGS & COLLECTED FUNDS -- DO THEY GO HAND IN HAND?By Cary S. GriffinIn the very first issue of the South Carolina Lawyer (July / August 1989 Volume 1, 1) the article entitled "To Disburse or not to Disburse" focused on the issue of a real estate attorney disbursing on uncollected funds. The topic back in 1989 was fairly hot. This article will address what has happened since then.

The issue of attorney disbursement of funds out of his or her real estate trust account presents some perplexing situations-and the question is "Why?" Why is this even an issue? Does it not make sense that no one, in their right mind, would write a check out of one's account if there was no money in that account? Why is this subject even worthy of discussion and focus?

The answer lies with a number of different reasons, none of which singularly is particularly persuasive but, in combination, do have impact. These maybe summarized as follows:

A. There is an apparent lack of attention to detail or lack of understanding of how the federal reserve system works.

B.South Carolina is not a "good funds" or "collected funds" state.

3. Attorneys have special ethical constraints.

4. Real estate, and particularly residential real estate, is a "fast, fast" business.

   This article will focus on the situation (or it might better be termed a "problem"); define the issues; review recent precedent in other jurisdictions; analyze what South Carolina real estate lawyers are doing throughout the state; and make a practical recommendation.

   THE PROBLEM

   There is a difference in the practices of South Carolina lawyers involving the disbursement from a lawyer's trust account against funds that have previously been deposited, but which may not have yet been "collected" by the bank at the time of disbursement. This question most often arises in real estate transactions and, in particular, residential real estate transactions.

   Some lawyers may disburse only against "collected funds" as that term is perceived in the non-banking community. This is ordinarily the safest course for the lawyer and the lawyer's clients, but can create costly and irritating delays in closings that may result in expenses and other corollary problems to all the parties involved in a closing. In some cases, strict adherence to the practice of disbursing only against "collected funds" can make it impossible to close a transaction in a timely fashion.

   Other lawyers take the opposite course, routinely disbursing against a variety of instruments that are not "collected funds." This practice facilitates efficient and timely settlements and closings, but creates real risk for the lawyer and the lawyer's clients inthe event that the deposited funds are not ultimately "collected funds" in the attorney's trust account.

   TRUST ACCOUNTS

   Let's go back to basics here-the money we are talking about here is not ours-it belongs to our clients. South Carolina Rule of Professional Conduct 1.15 (SC.App.Ct.R.407) imposes five basic requirements on the lawyer who handles client property:

   1. The lawyer must keep clients' money separate from the lawyer's own funds;

   2. The lawyer must be able to identify the funds of each client.

   3. The lawyer must notify the client at the receipt of funds.

   4. The lawyer must promptly deliver the funds to the client.

   5. The lawyer must be able to account for the client's money.

      The basic requirement is that any South Carolina lawyer who is engaged in the private practice of the law who holds, in that capacity, funds in which a client or a third party has an interest, must maintain a trust account for the deposit of those funds. The purpose of a trust account is to safeguard client funds from loss and to avoid the appearance of impropriety. Lawyer's trust accounts must be maintained separately from the lawyer's personal and business accounts. The account should always be designated "trust account," or "escrow account" or some other similar designation. The lawyer may never write checks out of a trust account to cover payroll, expenses or personal debts (see In Re

      42 Moore and Brown 280 S.C. 178, 312 S.E.2d 1 (1984) where the court disciplined two lawyers for their handling of trust funds, including the use of client funds to meet a firm payroll and to pay some bills and expenses of the firm and other clients).

      Showing a negative balance on a trust fund account, or allowing the balance to fall below that of the amount deposited by the client, may be the most obvious evidence of violation of the rule. Inadequate balances are most often cited by the Supreme Court in disciplinary actions as evidence of misappropriation. Because the lawyer has the duty to safeguard the client's funds and to use the money only for the purpose for which it is deposited, a negative or insufficient balance shows that the...