Could Maryland lawyers pool small client trust funds into interest-bearing NOW accounts to fund legal aid without violating federal banking law?

Plain-English summary

The Chairman of the newly created Maryland Legal Services Corporation asked whether lawyer trust accounts set up to fund the Corporation could be held in NOW accounts, a type of interest-bearing checking account that federal law restricted to individual depositors and certain nonprofit organizations holding the entire beneficial interest in the funds. A companion Maryland law had just authorized lawyers to commingle small or short-term client trust funds into a single account and send the combined interest earned to the Legal Services Corporation to fund civil legal aid. The opinion concluded that arrangement qualified for NOW accounts under 12 U.S.C. section 1832(a)(2), because while individual clients retained an interest in the underlying principal of their own funds, the Corporation alone held the exclusive right to the interest income the pooled accounts would generate, and it was that income-earning feature, not the underlying principal, that the federal eligibility rule was actually concerned with. This opinion effectively laid the legal groundwork for Maryland's Interest on Lawyer Trust Accounts (IOLTA) program.

Currency note

This opinion was issued in 1982. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The opinion applied 12 U.S.C. section 1832(a)(2) and Federal Reserve Regulation Q as they existed in 1982, along with the newly enacted Article 10, sections 44 and 45A et seq. of the Maryland Code. Federal banking deregulation later eliminated most NOW account eligibility restrictions, and Maryland's IOLTA program and its governing statutes have been substantially developed and recodified since 1982. Anyone researching the current legal framework for Maryland lawyer trust accounts or IOLTA funding should consult current federal banking law and the current Maryland attorney trust account rules rather than relying on this opinion's 1982 analysis.

Common questions

Why did it matter who held the "beneficial interest" in these trust accounts?
Because federal law limited NOW accounts to deposits where the entire beneficial interest belonged to an individual or a qualifying nonprofit. Client funds held in a lawyer's trust account technically belong to the clients, so the opinion had to work through who actually held the beneficial interest in the interest income specifically, as opposed to the underlying principal, since only the income-earning feature is what distinguishes a NOW account from an ordinary checking account.

So did clients lose their interest in their own trust funds by having them pooled into one account?
No. The opinion reasoned that the new law only directed the interest earned on commingled trust funds to the Legal Services Corporation; it did not touch the underlying principal, which remained the clients' money as before. Because clients' interest was confined to the principal, an aspect of the account identical to any ordinary checking account, the opinion found their interest did not interfere with the Corporation's exclusive claim to the account's distinctive income-producing feature.

Was Maryland the first state to try this kind of program?
No, according to the opinion. It relied heavily on a similar program the Florida Bar Foundation had established, which the Federal Reserve Board's General Counsel had already approved under the same federal statute, and treated that approval as persuasive support for reaching the same conclusion for Maryland's program.

Did federal regulators actually agree with this opinion?
Yes. An Editor's Note attached to the opinion quotes a follow-up letter from the Federal Reserve Board's General Counsel, dated January 1983, confirming that the submissions for the Maryland program, including this Attorney General opinion, satisfied the requirements, and that funds deposited under the program could be maintained in NOW accounts.

Background and statutory framework

The Maryland Legal Services Corporation was created effective July 1, 1982 by Chapter 829, Laws of Maryland 1982, enacting Article 10, sections 45A through 45-O of the Maryland Code, to receive and distribute funds supporting civil legal aid to eligible clients. A companion measure, Chapter 830, Laws of Maryland 1982, amended Article 10, section 44 to create a funding source for the Corporation. Before the amendment, section 44 required lawyers to keep trust funds in a separate account and barred commingling those funds with the lawyer's own money or using them for any purpose other than the one for which they were entrusted. Chapter 830 made two changes effective the same date: it let lawyers choose among noninterest bearing checking, interest bearing checking, savings, or NOW accounts for trust funds, and it specifically authorized lawyers to commingle small or short-term trust funds into a single account, with the aggregate interest on that commingled account paid to the Legal Services Corporation for its charitable purposes.

The opinion analyzed the federal eligibility rule for NOW accounts, 12 U.S.C. section 1832(a)(2), which limits them to deposits where the entire beneficial interest is held by an individual or by a nonprofit organized for religious, philanthropic, charitable, educational, or similar purposes. It reasoned that the statute's underlying purpose, tied to the legislative history of the Consumer Checking Account Equity Act of 1980, was concerned specifically with who benefits from the interest-earning feature that distinguishes a NOW account from an ordinary checking account, not with every possible interest anyone might hold in the underlying funds. It also noted the Federal Reserve Board had recognized that section 1832(a)(2)'s language mirrors Regulation Q's restriction on eligibility for unlimited savings deposit accounts, and that the Board had already ruled a qualifying nonprofit organization may hold a NOW account in its own capacity.

Turning to state law, the opinion found that Maryland's Financial Institutions Article already authorized state-chartered savings and loan associations to offer NOW accounts without additional eligibility restrictions, and that Maryland law, citing Mitchell v. Register of Wills, has long recognized that a trust account beneficiary holds a valuable interest created by the account's establishment. Because Chapter 830's amendment directed that commingled trust account interest be paid to the Corporation exclusively for its charitable purposes, the opinion concluded the Corporation held the entire beneficial interest in that income specifically, even though clients retained whatever interest they held in the underlying principal, an interest that was, in the opinion's view, limited to features common to any ordinary checking account and therefore merely incidental to the account's NOW-account eligibility.

The opinion found this conclusion reinforced by a Florida precedent: the Federal Reserve Board's General Counsel had already approved a substantially similar program for the Florida Bar Foundation, concluding that because no entity other than the Foundation had any interest in the income from the pooled trust funds, the Foundation held the entire beneficial interest required by section 1832(a)(2) and Regulation Q. An Editor's Note appended to the opinion confirms that the Federal Reserve Board's General Counsel later reached the same conclusion for the Maryland program in a January 1983 letter, expressly citing this Attorney General opinion as part of the basis for that approval.

Citations

Statutes:

• 12 U.S.C. §1832(a)(2)
• Article 10, §44
• Article 10, §44(a)(2)
• Chapter 829, Laws of Maryland 1982
• Chapter 830, Laws of Maryland 1982
• Article 10, §45H
• Financial Institutions Article §9-408
• 12 C.F.R. §217.1(e)
• 12 C.F.R. §217.157
• 12 C.F.R. §217.132
• Internal Revenue Code §501(c)
• Pub. L. No. 96-221, 94 Stat. 132

Cases:

• Mitchell v. Register of Wills, 227 Md. 305 (1962)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1982/Volume67_1982.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Legal Services Corporation—Attorneys—Escrow Accounts—Trust Funds—Beneficiaries—"NOW" Accounts—Taxation—"Beneficial Interest"—Trust Accounts Established for Benefit of Corporation May Be Deposited in NOW Accounts

August 19, 1982

Benjamin R. Civiletti, Esquire
Chairman
Maryland Legal Services Corporation

You have requested our opinion on whether, under State law, trust accounts established by lawyers for the benefit of the Maryland Legal Services Corporation would qualify under 12 U.S.C. §1832(a)(2) for deposit in negotiable order of withdrawal accounts ("NOW accounts").

In our opinion, they would.

I
Background

The Maryland Legal Services Corporation (the "Corporation") was established on July 1, 1982, by Chapter 829, Laws of Maryland 1982. Chapter 829 enacted new §§45A through 45-O of Article 10 of the Maryland Code (the "Maryland Legal Services Corporation Act") for the primary purpose "of establishing the Maryland Legal Services Corporation as a nonstock, nonprofit corporation, to receive and distribute funds to grantees that provide legal assistance in noncriminal proceedings or matters to eligible clients".

A companion measure, Chapter 830, Laws of Maryland 1982, amended Article 10, §44 of the Maryland Code to provide a source of funding for the Corporation. Prior to the amendment, Article 10, §44 required lawyers to maintain all trust funds "as a separate account or accounts", and it prohibited any lawyer from either (i) commingling trust funds with the lawyer's own funds or (ii) using trust funds "for any purpose other than the purpose for which such funds were entrusted to him".

Effective July 1, 1982, Chapter 830 made two major changes in the law: It first authorizes lawyers "to determine whether such trust [funds] are to be deposited in a noninterest bearing checking account, in an interest bearing checking account, in one or more savings accounts, in one or more accounts subject to negotiable orders of withdrawal ('NOW accounts'), or in any combination thereof"; it further specifically authorizes lawyers to commingle certain small or short-term trust funds into one account, with "the aggregate interest earned on such commingled account [to] be paid ... to the Maryland Legal Services Corporation exclusively for the charitable purposes defined in its statutory charter".

The question you pose involves the ability of lawyers to place these commingled funds in NOW accounts, with the interest earned on the accounts to be paid to the Legal Services Corporation.

II
Requirements of Federal Law

Federal law imposes certain restrictions on the availability of NOW accounts. Under 12 U.S.C. §1832(a)(2), NOW accounts are available "only with respect to deposits or accounts which consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, or other similar purposes and which is not operated for profit".1

1 For purposes of this Opinion, we assume that the Corporation will qualify as a nonprofit organization of the type described in this section. See, e.g., Article 10, §45H, as enacted by Chapter 829, Laws of Maryland 1982.

The unique feature of a NOW account, when compared to a "traditional" (i.e. noninterest bearing) checking account, is the income, the interest or dividends, that may be earned on deposited funds. This distinctive feature of NOW accounts is recognized in the legislative history of Title III of Pub. L. 96-221, the Consumer Checking Account Equity Act of 1980, which made NOW accounts available nationwide. Pub. L. No. 96-221, 94 Stat. 132. See S. Rep. No. 96-368, 96th Cong. 2d Sess. 8 (1979), reprinted in 1980 U.S. Code Cong. & Ad. News 236, 243.

Thus, the underlying purpose of the Consumer Checking Account Equity Act, from the depositor's point of view at least, is to permit the earning of this income on funds subject to withdrawal by negotiable instruments. In our opinion, the restrictions imposed on NOW account eligibility by 12 U.S.C. §1832(a)(2) must be viewed in light of this underlying purpose of the Act and, as such, as applying only to that aspect of a NOW account which specifically differentiates it from a checking account: the interest or dividends to be earned on the account.

In this regard, we note that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") has recognized that the language of 12 U.S.C. §1832(a)(2) is virtually identical to the language used by Regulation Q, in 12 C.F.R. §217.1(e), to restrict eligibility for unlimited savings deposit accounts.2 Thus, the Federal Reserve Board has ruled that Regulation Q is applicable to NOW accounts as well as to unlimited savings deposit accounts. See 12 C.F.R. §217.157. And, under the Board's interpretation of Regulation Q, a nonprofit organization (such as the Maryland Legal Services Corporation) is eligible to hold a NOW account in its own capacity. Id. Similarly, we believe, attorney trust accounts established for the use and benefit of such an organization may be held in NOW accounts.

2 See Letter from Michael Bradfield, General Counsel of the Federal Reserve Board, to Donald M. Middlebrooks, Director, Florida Bar Foundation, Inc. (October 15, 1981), reprinted in Middlebrooks, The Interest on Trust Accounts Program, Mechanics of its Operation, 56 Fla. Bar J. 115, 117 (1982). See also 12 C.F.R. §217.132 (trust funds classified as savings deposits within the meaning of Regulation Q); 12 C.F.R. §217.157 (nonprofit organizations qualifying under certain provisions of §501(c) of the Internal Revenue Code may maintain NOW accounts).

III
Effect of State Law

To the extent that NOW accounts are governed by Maryland law, lawyers' trust accounts are unquestionably eligible for deposit in them. See, e.g., §9-408 of the Financial Institutions Article of the Maryland Code, which authorizes state-chartered savings and loan associations to establish NOW accounts without, however, imposing any eligibility restrictions on them.

Also, under Maryland law, it has long been recognized that the beneficiary of a trust account holds a valuable interest created by the establishment of the account in such a form. Mitchell v. Register of Wills, 227 Md. 305 (1962). See also 40 Opinions of the Attorney General 546, 555 (1955) (recognizing that a "beneficial interest" in a trust account may be jointly held). As discussed above, the amendment to Article 10 that allows commingling of certain trust funds also expressly directs that the income from any such commingled account be paid to the Corporation, "exclusively for [its] charitable purposes". Thus, the Corporation clearly holds a "beneficial interest", indeed, the sole and entire beneficial interest, in that income.

In our view, the significant and distinct beneficial interest in commingled trust accounts, as authorized by Chapter 830, is the right to receive all of the income to be earned on the accounts, particularly so where, as here, the commingled trust accounts are only established in the first instance for the specific purpose of transmitting that income to the Corporation for its exclusive use and sole benefit. Conversely stated, whatever other interest in these trust funds might be held by someone other than the Corporation would be an interest that: (i) is limited to those aspects of a NOW account that are identical to traditional (i.e., noninterest bearing) checking accounts; and (ii) as such, derives no benefit whatever from that income-producing feature which differentiates a NOW account from a traditional checking account. Any such other interest, therefore, is merely incidental to the maintenance of the NOW account and would not, in our view, vitiate compliance with 12 U.S.C. §1832(a)(2).

Under State law, the Corporation clearly holds the sole and entire beneficial right and interest in all of the income, all of the interest or dividends, that may be earned on these NOW accounts. Neither the lawyers participating in the State program nor their clients, nor, indeed, any person or entity other than the Maryland Legal Services Corporation, obtains any direct financial benefit from the establishment or maintenance of these accounts. Accordingly, we believe, the Corporation holds a beneficial interest in these accounts to the full extent required by 12 U.S.C. §1832(a)(2).

Our view of the applicable law is reinforced by an opinion of the Federal Reserve Board's General Counsel in which he approved, also under 12 U.S.C. §1832(a)(2), a like program in Florida. Under the Florida program, which went into effect on September 1, 1981, lawyers' trust funds are held in NOW accounts in a substantially similar, if not identical, manner and for substantially similar, if not identical, purposes as will be the case in Maryland. The Federal Reserve Board's General Counsel wrote as follows on the question of beneficial interest:

"In his opinion concerning the [Florida] Program, the Florida Attorney General has expressed the view that . . . the Florida Bar Foundation, Inc. has the exclusive right to the interest on the trust funds maintained under the Program . . . .[3] Since no entity other than the Foundation has any interest to the income derived from funds maintained under the Program, it would appear that, for purposes of 12 U.S.C. §1832 and 12 CFR §217.1(e), the Foundation hold[s] the entire beneficial interest to the funds. Accordingly, it is my opinion that funds held under the Florida Bar Foundation's Interest on Trust Accounts Program are eligible to be maintained in NOW accounts at member banks." Letter from Michael Bradfield, General Counsel, to Donald M. Middlebrooks, Director, Florida Bar Foundation, Inc. (October 15, 1981), reprinted in Middlebrooks, The Interest on Trust Accounts Program, Mechanics of its Operation, 56 Fla. Bar J. 115, 117 (1982).

3 This refers to an opinion of the Florida Attorney General that assessed the impact of Florida law on the restrictions in 12 U.S.C. §1832(a)(2). Letter from Jim Smith, Attorney General, to E. Albert Pallet, President of the Florida Bar Foundation (August 21, 1981), reprinted in Middlebrooks, The Interest on Trust Accounts Program, Mechanics of Its Operation, 56 Fla. Bar J. 115, 116 (1981). We note here that, for purposes of this inquiry, the general authorities regarding "beneficial interests" cited in that letter are as applicable in this State as they are in Florida.

IV
Conclusion

In summary, it is our opinion that trust accounts established under Article 10, §44(a)(2) of the Maryland Code for the benefit of the Maryland Legal Services Corporation qualify under 12 U.S.C. §1832(a)(2) for deposit in NOW accounts.

Stephen H. Sachs, Attorney General
Avery Aisenstark, Chief Counsel,
Opinions and Advice

Editor's Note: The Federal Reserve Board's General Counsel has since agreed that trust accounts established under the Maryland program qualify for deposit in NOW accounts:

"With respect to the program authorized under Maryland law, it is my opinion that the submissions included with your request fulfill [the requisite] conditions. These submissions provide evidence that the [Maryland Legal Services] Corporation is a nonprofit organization that qualifies under section 501(c)(3) of the Internal Revenue Code and an opinion rendered by the Maryland Attorney General expressing the view that the Corporation has the exclusive right to interest earned on the trust accounts. Consequently, it is my opinion that funds deposited under this program may be maintained in NOW accounts." Letter from Michael Bradfield, General Counsel, to Charles B. Schelberg, Esq. (January 10, 1983).