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UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 06-03

South Carolina Bar Ethics Advisory Opinion 06-03

RULE 1.15

Date: January 20, 2006

Facts
A real estate closing attorney has verified and documented receipt of a wire transfer for a     substantial portion of the funds needed to completely fund a transaction (usually from the lender), and has received cash equivalents (as described in Rule 1.15(f)) for the remaining balance, but has not deposited the cash equivalents by the time the transaction closes (typically because cash equivalents were brought to the attorney at the time of closing).

Question
May the closing attorney disburse funds at the closing table up to the amount of the verified and documented wire transfer as he/she sees fit, and then disburse remaining funds once the cash equivalents have been deposited?  Put differently, may the closing attorney "table fund" the transaction to the extent he/she has received "collected funds" via verified and documented wire transfer or via deposit of "cash equivalents"?

Summary
Yes, the closing attorney may disburse funds at the closing table up to the amount of deposited cash equivalents notwithstanding the fact that other cash equivalents for the same transaction have not yet been deposited.

Opinion          
Rule 1.15 of the Rules of Professional Conduct was substantially amended by way of addition effective October 1, 2005.  Subsection (f) of Rule 1.15 was added and reads as follows:

Subsection (f)  A lawyer shall not disburse funds from an account containing the funds   of more than one client or third person unless the funds to be disbursed have been deposited in the account and are collected funds; provided, however, a lawyer may treat as equivalent to collected funds cash, verified and documented electronic fund transfers or other deposits treated by the depository bank as equivalent to cash, properly endorsed government checks, certified checks, cashiers checks or other checks drawn by a bank, and any other instrument payable at or through a bank, if the amount of such other instrument does not exceed $5,000 and the lawyer has reasonable and prudent belief that the deposit of such other instrument will be collected promptly.  If the actual collection of deposits treated as the equivalent of collected funds does not occur, the lawyer shall, as soon a practical but in no event more than five working days after notice of noncollection, deposit replacement funds in the account.

The initial language of Rule 1.15(f) restates a fundamental principle regarding a lawyer's trust account, i.e., the funds to be disbursed must be "collected funds" and must first be deposited in the account from which they will be disbursed.  This axiom was not created by Rule 1.15(f); rather, the first part of Rule 1.15(f) merely restates the obvious.  Rule 1.15(f) then goes on to provide lawyers with guidance as to what can be treated as "collected funds."  The portion of the first sentence of Rule 1.15(f) which follows the semicolon creates a list of "collected funds equivalents" as follows:

  1. cash;
  2. verified and documented electronic fund transfers, or other deposits treated by the depository bank as equivalent to cash;
  3. properly endorsed government checks, certified checks, cashiers checks or other checks drawn by a bank; and
  4. any other instrument payable at or through a bank if the amount of such other instrument does not exceed $5000 and the lawyer has a reasonable and prudent belief that the deposit of such other instrument will be collected promptly.

 

The foregoing list merely establishes items that the lawyer may treat as collected funds; however, it does not affect the "deposit first" requirement.

The facts as presented deal with the not uncommon situation in which the lawyer is conducting the closing having already confirmed the deposit (via verified and documented wire transfer) of some of the funds to be disbursed while having just received (in the form of collected fund equivalents which are not yet deposited) the balance of the funds to be disbursed.  Nothing in Rule 1.15(f) would prohibit the lawyer from disbursing at closing ("table funding") funds in an amount up to the amount of collected funds that have been deposited.  There is no requirement that all of the funds to be disbursed for a given transaction must be deposited collected funds before any of the funds may be disbursed.  Rule 1.15(f) neither explicitly nor implicitly prohibits a partial table funding provided that the funds so disbursed are collected funds that have been deposited into the account from which the disbursements are being made.
           
The Committee notes four areas of caution to the Bar: 

First, the last sentence of Rule 1.15(f) makes it clear that the lawyer is ultimately responsible if a collected funds equivalent is not actually collected by requiring that the lawyer deposit replacement funds (presumably collected funds) in the account within five working days after notice of noncollection. 

Second, lawyers should exercise great caution in accepting as collected funds equivalents items described in (iv) above, i.e., other instruments payable at or through a bank, if  $5000 or less in amount.  The Committee believes that that particular collected funds equivalent should be used only in rare cases to accommodate last minute changes to closing statements or similar unforeseen circumstances and that it should not be treated as an indication that amounts less than $5000 are insignificant. 

Third, in the case of loan proceeds that are wired directly into the lawyer's trust account, if the lender has not yet authorized the release of those funds (e.g., has not provided a required funding number), the lawyer should not treat those funds as collected. 

Finally, it is noted that lawyers' or law firms' trust account checks are not treated as collected funds equivalents under Rule 1.15(f); hence, the somewhat common practice of treating other lawyers' or law firms' trust account checks as collected funds immediately upon deposit should be discontinued unless the check is in the amount of $5000 or less.