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| October 16, 2008 |
By: Julie Kay |
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n the midst of the financial crisis and facing the potential of bank collapses, lawyers have been flooding bar associations with questions about whether they would be responsible for client trust accounts if a financial institution fails.
In response, bar associations have been posting guidance to lawyers on their Web sites, holding internal meetings on the issue and issuing formal ethics opinions.
The consensus of the bar associations is that lawyers must be cautious about where they hold clients’ funds, making sure they’re in Federal Deposit Insurance Corp.-insured, solid banks. Opinions vary on whether funds should be split up in different banks to take advantage of the $250,000 insured deposits.
According to research and interviews with a variety of bar associations, including those of Florida, California, Los Angeles and Virginia, lawyers should not worry about sanctions or disciplinary actions if a bank failure leads to the loss of client funds, provided the lawyer chooses a stable, FDIC-insured bank.
However, civil liability is another matter. A New York lawyer was once sued when a bank failed, taking client funds with it. With that in mind, bar counsel are cautioning lawyers to consult their insurance carriers and “take reasonable precautions.”
“There’s no specific ethics opinion concerning what to do if a bank fails,” said Elizabeth Tarbert, ethics counsel for the Florida Bar. “Nevertheless, lawyers must act prudently and determine what kind of institution [they are] dealing with, what its reputation is and it’s financial stability, to the extent they can. Unfortunately, sometimes bank failures are very sudden. They keep them pretty quiet.”
Variety of trust accounts
A variety of lawyers hold client funds in trust accounts — sometimes many millions of dollars — from as long as a day to years. For example, real estate lawyers hold house proceeds in escrow, probate and estate lawyers hold funds while litigation ensues, personal injury lawyers hold settlements until they can pay costs, and medical malpractice lawyers hold multimillion-dollar structured settlements that are doled out in annual installments.
Large law firms have entire departments devoted to handling the trust accounts, but small firms and solo practitioners are on their own to decide where to hold clients’ money.
One of the few cases of a lawyer being sued for legal malpractice after losing a client’s money when a bank failed occurred in 2003. In that case, Bazinet v. Kluge, an attorney who represented the seller of two Manhattan apartments deposited the proceeds — $1.4 million — in his firm’s trust account, as well as an additional $1.3 million he obtained when the original deal fell through.
The bank suddenly closed and the FDIC was named receiver. The buyer sued the client, who cross-claimed the lawyer for alleged negligence and fiduciary breach for depositing the funds in a small Connecticut bank. An expert was set to testify that the lawyer should have kept the funds in treasury bills or by obtaining supplementary insurance.
Ultimately, a New York appellate court held that the lawyer was not responsible for knowing about the bank’s financial shakiness.
A new climate
However, such a case might go the other way in this climate, according to Joan Mack, a member of the Los Angeles County Bar ethics committee and a shareholder at Caldwell Leslie & Proctor.
“That’s a shakier proposition these days, with rumors of cascading bank failures rumbling through Wall Street,” Mack said. “I think an attorney could have some exposure now. If an attorney has client funds beyond the FDIC-insured account in a bank that has been widely reported to be in trouble, and the bank fails, that would certainly influence a judge.”
Mack encourages lawyers to research the financial soundness of banks through Veribanc, a bank rating company.
Other bar associations are giving similar advice. A Florida Bar ethics opinion, 72-37, states there is no requirement that an attorney divide funds to ensure a clients’ funds are fully insured, however, an attorney should take reasonable care that the funds are safe.
Tarbert advises lawyers to find out where clients have personal bank accounts, because if it is the same place as the lawyers’ trust account, the client will only be insured up to $250,000 for both. For FDIC insurance purposes, all funds related to one person would be combined.
The Florida Bar’s board of governors recently discussed the issue at a meeting, but took no action.
According to Robert Hawley, deputy executive director of the California State Bar, no lawyers lost client money in the IndyMac failure, likely due to the fact that it was a savings and loan and lawyers would not generally hold clients’ funds in anything but a regular bank where they have quick access to funds. The California Bar’s ethics hotline has fielded just a handful of calls from lawyers on the issue, he said.
“It’s been a proactive issue — a lawyer sees what is going on and thinks, ‘Whoa, we ought to be thinking about this,’ ” he said. “But there has not been a fever pitch or hysterical reaction in any respect.”
Losing sleep
Some lawyers are losing sleep over potential bank failures while others appear nonchalant.
Bob Gordon, a partner at Gordon & Donner in Palm Beach Gardens, says the issue “weighs on us.” Gordon, a personal injury lawyer, was one of dozens of lawyers who called the Florida Bar’s ethics hotline last week for advice on the issue. He was a bit reassured to learn that lawyers are not required to divvy up clients’ monies over $250,000 in various bank accounts all over town. “That would not be feasible,” he said.
However, Gordon is still not without some worry.
“At any given time, we have hundreds of thousands of dollars sitting in trust accounts, if not millions,” he said. “It could be a nightmare if our bank failed.”
Gordon said his bank, The Bank of New York Mellon, has assured his firm it is secure and untainted with subprime exposure. Still, Gordon allows, “I doubt that anyone knew Wachovia had the problems it did.”
Martin Press, a partner in the Fort Lauderdale office of Gunster Yoakley who specializes in private wealth and estates, said he is comfortable with the banks his firm has chosen.
“Our firm has made it a rule to deal with the big institutions,” he said. “My view of the world is there are certain institutions that are too big to fail — the Bank of Americas, the Citibanks, the Chase Manhattans, the JPMorgan Chases.”
Still, Press got a call from a large London client who wanted all his funds — hundreds of thousands of dollars — removed from U.S. banks and wired to U.K. banks.
As for dividing clients’ money in banks all over town, Press said, “that’s not feasible. I know [a lawyer] who spent two full days doing that.”
John Climaco of Cleveland’s Climaco Lefkowitz Peca Wilcox & Garofoli assigned one of his partners to research its trust accounts, consulting with several clients who are money managers as well as with a law firm that represents banks. The firm concluded its bank accounts were secure. “We have made no changes at this time but are continuing to watch the situation,” Climaco said.
Colson Hicks Eidson in Coral Gables — a firm that handles primarily multimillion-dollar litigation — has its trust account at Chicago’s Northern Trust, and partner Ervin Gonzalez feels comfortable with that bank. “It’s not on the watch list,” he said. “I would certainly be concerned if a bank was in trouble.”
The issue of whether a lawyer is responsible for a client trust account enrages Stephen Baker, a St. Pete Beach real estate lawyer.
“To be responsible for money that we have no control over makes no sense,” Baker said. “At any given time, I might be holding eight figures of my clients’ money. It only takes a millisecond for a bank to go under. How am I going to ensure the money is safe? If that’s the case, I have to get a vault.”
Julie Kay reports for the National Law Journal, an IncisiveMedia affiliate of the Daily Business Review.
Martin Press photo by Melanie Bell
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