99-4.

• Case Date: July 14, 1999
• Court: Kansas

Kansas Ethics Opinion 1999. 99-4. July 14, 1999KBA Legal Ethics Opinion No. 99-4TOPIC: Specialty trust accounts DIGEST: The practice of opening a second trust account with a zero balance and depositing settlement checks one at a time and immediate disbursement of the check to the expenses of litigation, the client and the firm, but which is in reality covered by the creditworthiness of the firm with the bank, is not an actionable ethical violation of new rules of the Kansas Supreme Court that require reporting of trust account overdrafts or insufficient funds. Date of Request: April 15, 1999; released July 14, 1999 Reference: MRPC 1.15, Kansas Supreme Court Rule 216A The function of the Kansas Bar Association's ethics advisory service is to respond to inquiries from Kansas-licensed lawyers concerning proposed conduct. The limitations on the service do not allow us to render an opinion regarding past conduct or the conduct of someone other than the requesting attorney. The following constitutes only the opinion of the Committee on Professional Ethics-Advisory Services, and is not in any way intended to be a guarantee of a particular result or a conclusion by appropriate authorities. Further, this document constitutes the Committee's opinion based on the facts and information contained in correspondence above referenced. It is based on a review of the disciplinary rules, model rules of professional responsibility and conduct, and applicable case law. This opinion is not a grant of immunity from any form of legal or disciplinary proceeding. The opinion herein is that of a KBA committee without official government status. The Kansas Bar Association expressly disclaims any liability in connection with issuing this opinion FACTS When disbursing settlement or judgment proceeds received on contingent fee basis, the typical firm divides the funds first among advanced expenses, and then trust account checks are disbursed per the contingent percentages applicable to the client and the lawyer. [1] However, in reality a check from the judgment debtor is not funds received until the actual funds are actually forwarded or credited by the payor bank. This involves a delay of anywhere from one to three banking days. If checks are issued from the trust account prematurely, what in fact happens is the check given to the client, for example, if presented for payment at the bank the same day as issued, actually borrows from other clients who have money in the trust account. The alternative is to inform the client that while the client has a check, "their" money is not available for many banking days. Human nature is that most clients prefer to cash the check into their own bank accounts immediately. Another option is to wait three days before calling the client in to disburse the funds. However, if the amount is significant then even a short period of time between receipt of the check, deposit of the check to the law firm's trust account, and the firm-client meeting might generate a significant amount of interest that requires putting the funds in a separate account, with all the attendant expenses of setting up a single account so that interest on the account is also disbursed to the client consistent with KRPC 1.15. [2] To alleviate these alternatives, the past practice of the firm requesting the opinion has been to open a second firm trust account with a zero balance. The firm deposits larger settlement checks into the account and immediately issue checks written on the trust account dividing the sum for expenses, the client and the firm. By distributing the trust account funds the same day the settlement check is deposited, the account generates no interest. There is never more than one transaction (one client) in the special trust account at any one time. Even though the deposited check has not cleared, the bank honors the presentment of the checks for expenses, the client and the firm because of the firm's general creditworthiness. In effect, the bank is making a very short-term loan to the firm to cover the client's portion of the settlement. The account is not commingled with any other funds, and the account is not used again until after all funds have been received and appropriately zeroed out. Clients are made aware of this procedure at the beginning of the representation and the procedure is not used by the firm unless the procedure has been explained and client has executed a form approving of the process. [3] While theoretically possible the bank could refuse to honor a check issued on this account because of lack of funds on hand, the bank would not do this intentionally. In addition, the firm's agreement with the client appears to cover the matter. [4] On March 11, 1999, the Kansas Supreme Court approved amendments to KRPC 1.15 governing trust accounts and a new...