May a California attorney maintain overdraft protection on a Client Trust Account, what must the attorney do if a CTA check is dishonored, and when must earned fees be withdrawn from the CTA?

State Bar of California COPRAC Formal Opinion 2005-169: Client Trust Account Overdraft Protection

Short answer: The opinion concludes that overdraft protection on a Client Trust Account is permitted only if it covers exactly the amount needed to satisfy the overdraft (plus a reasonable cushion for bank charges); a residue of attorney funds left in the CTA after the overdraft is satisfied is impermissible commingling. The bank must still report any insufficient-funds presentment to the State Bar. If a check is dishonored, the attorney must clear it, investigate the cause, prevent recurrence, and advise the client if the client will experience negative consequences. Earned fees must be withdrawn at the earliest reasonable time, benchmarked to the monthly reconciliation.

Currency note

This opinion was issued in 2005, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former Rule 4-100, together with Business and Professions Code section 6091.1 and the Standards for Client Trust Account adopted by the Board of Governors. Current Rule 1.15 (safekeeping funds and property of clients and other persons) now addresses these issues. Treat this page as historical context, not current guidance. Verify against current rules and standards before relying on any specific rule reference or numerical benchmark.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The hypothetical: Solo Attorney transferred her business and Client Trust Account to a newly opened Bank and arranged CTA overdraft protection by linking the CTA to the office business account. During a three-month trial, a Client settlement check arrived, Attorney got Client's approval and signature, the fee was fixed, and Attorney deposited the check into the CTA. Bank misposted the deposit into the office business account. After waiting for the deposit to clear, Attorney issued a CTA check for case expenses. Bank, believing the CTA balance was inadequate, honored the check by debiting the linked business account and reported the insufficient-funds presentment to the State Bar. Three months later, Attorney drew two CTA checks (to Client for Client's share of the settlement, to herself for fees and deposited immediately to the business account). Bank again flagged insufficient funds, made inquiry, discovered and corrected its misposting error, and honored both checks.

On overdraft protection generally: the committee concluded that overdraft protection is not prohibited by Rule 4-100, provided it does not commingle attorney funds with client funds. Rule 4-100 permits only two categories of attorney funds in a CTA: (a) funds reasonably sufficient to cover bank charges, and (b) undifferentiated funds belonging in part to a client and in part to the attorney. The California Supreme Court in Jackson v. State Bar (1979) 25 Cal.3d 398 held that maintaining personal funds in the CTA as a cushion is impermissible. Overdraft protection by line of credit or linked account that compensates exactly for the overdraft (plus a reasonable amount for bank charges) does not threaten the separate identity of client funds and is permissible; programs that automatically deposit a fixed amount leaving a residue of attorney funds in the CTA are not.

On bank reporting: Business and Professions Code section 6091.1 requires the bank to report every insufficient-funds presentment to the State Bar, regardless of whether the check is honored. Overdraft protection does not avoid State Bar notification and does not exculpate any underlying unethical conduct, but it does avoid negative consequences to the client from a dishonored check. Under the hypothetical, Bank's notification of the State Bar was required even though the underlying problem was Bank's own misposting; Attorney is not subject to discipline because the error was not Attorney's, and there was no lapse in office procedure or repeated impermissible use of overdraft protection.

On the attorney's duties after a dishonored or insufficient-funds CTA check: the attorney must (1) deposit funds sufficient to clear the dishonored check (depositing personal funds for this remedial purpose is not impermissible commingling per Guzzetta v. State Bar (1987) 43 Cal.3d 962) or otherwise make payment; (2) take reasonably prompt action to ascertain the condition or event that caused the dishonor; and (3) implement whatever measures are necessary to prevent recurrence. The attorney may also have an obligation to advise the affected client of the overdraft if the client will experience negative consequences. Under the hypothetical, the expense check was not dishonored, so no remedial steps or client notice were required.

On the timing of earned-fee withdrawal: Rule 4-100(A)(2) requires the attorney's portion to be withdrawn at the "earliest reasonable time" after the attorney's interest becomes fixed. The committee concluded that "earliest reasonable time" is not "immediately" but is not whenever convenient either. The committee benchmarked it to the monthly reconciliation required by the Board of Governors' Standards for Client Trust Account, Standard (1)(d) (effective January 1, 1993): the attorney should withdraw earned fees from the CTA at the time of the monthly reconciliation after that portion has become fixed. A three-month delay during trial preoccupation was not the "earliest reasonable time," even though no client was actually harmed, because the funds were exposed to attachment by Attorney's creditors who might believe the funds belonged to Attorney.

Common questions

Q: Can a California attorney maintain overdraft protection on a Client Trust Account?

A: Per the opinion, yes, provided the protection covers exactly the amount of the overdraft (plus a reasonable cushion for bank charges) and does not leave a residue of attorney funds in the CTA. Overdraft protection by line of credit or linked account that pays only the overdraft amount does not threaten the separate identity of client funds and is permitted. Programs that automatically deposit a fixed amount leaving excess attorney funds in the CTA are impermissible commingling.

Q: Does overdraft protection prevent the bank from reporting to the State Bar?

A: Per the opinion, no. Business and Professions Code section 6091.1 requires the bank to report any insufficient-funds presentment against a CTA to the State Bar, regardless of whether the check is honored. Overdraft protection avoids client harm but does not avoid State Bar notification, and does not exculpate any underlying unethical conduct that caused the overdraft.

Q: What must an attorney do when a CTA check is presented against insufficient funds?

A: Per the opinion, the attorney must (1) deposit funds sufficient to clear the dishonored check or otherwise make payment; (2) take reasonably prompt action to ascertain the cause; and (3) implement measures to prevent recurrence. Depositing personal funds to remedy an overdraft is not impermissible commingling under Guzzetta v. State Bar (1987). The attorney may also have to advise the client if the client will experience negative consequences from the overdraft.

Q: How quickly must an attorney withdraw earned fees from a CTA?

A: Per the opinion, at the earliest reasonable time after the fee becomes fixed, which the committee benchmarked to the monthly reconciliation required by Board of Governors' Standards Standard (1)(d). The opinion clarified that "earliest reasonable time" is not "immediately" but does not let the attorney wait until withdrawal is convenient; a three-month delay during trial was not reasonable because the funds were exposed to potential creditor attachment.

Q: Is the attorney disciplined when the bank itself caused the apparent overdraft through a bank error?

A: Per the opinion, no, where the apparent overdraft results from bank error rather than attorney lapse and the attorney has not used overdraft protection for an impermissible purpose. The opinion stresses, however, that the attorney's obligation to safeguard client funds is personal and nondelegable; if a bank repeatedly makes errors that threaten client funds, the attorney may have to transfer the CTA to another financial institution.

Background and rules framework

The opinion interprets former California Rule 4-100, which sets out the structural requirements for client trust accounts. It also applies Business and Professions Code section 6091.1 (bank reporting of insufficient-funds presentments) and the Standards for Client Trust Account adopted by the Board of Governors effective January 1, 1993 (monthly reconciliation requirement). Functionally, the framework now corresponds, in current California numbering, to Rule 1.15 (safekeeping funds and property of clients and other persons).

Citations and references

Rules of Professional Conduct (former, in effect at time of opinion):

• Former California Rule 4-100, including 4-100(A)(1), 4-100(A)(2), and 4-100(c)

Statutes and regulatory standards:

• California Business and Professions Code section 6091.1 (bank reporting)
• California Commercial Code section 4401(a) (presentment of overdrafts)
• 12 C.F.R. § 225.52(c)(1)
• Standards for Client Trust Account, Standard (1)(d), adopted by Board of Governors effective January 1, 1993
• Interagency Guidance on Overdraft Protection Programs, 70 Fed.Reg. 9127 (Feb. 24, 2005)

Cases:

• Clark v. State Bar (1952) 39 Cal.2d 161, definition of commingling
• Tatlow v. State Bar (1936) 5 Cal.2d 520, fundamental rule of common honesty
• Vaughn v. State Bar (1972) 6 Cal.3d 847, CTA attachment for personal debts
• Silver v. State Bar (1974) 13 Cal.3d 134, cushion of attorney funds in CTA
• Greenbaum v. State Bar (1976) 15 Cal.3d 893, obligation to ascertain and correct
• Bradpiece v. State Bar (1974) 10 Cal.3d 742, duty to prevent recurrence
• Jackson v. State Bar (1979) 25 Cal.3d 398, no personal funds as overdraft cushion
• Palomo v. State Bar (1984) 36 Cal.3d 785, willfulness from inexcusable lapses
• Waysman v. State Bar (1986) 41 Cal.3d 452, prompt client notification of misappropriation
• Guzzetta v. State Bar (1987) 43 Cal.3d 962, personal funds to restore CTA not separate violation
• Coppock v. State Bar (1988) 44 Cal.3d 665, nondelegable duty
• Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, bank dishonor of submitted check
• Hoffman v. Security Pacific National Bank (1981) 121 Cal.App.3d 964, overdraft as loan
• Chazen v. Centennial Bank (1998) 61 Cal.App.4th 532, bank set-off against CTA
• In the Matter of Respondent F (1992) 2 Cal. State Bar Ct. Rptr. 17, reasonable cushion for bank charges
• In the Matter of Malek-Yonan (2003) 4 Cal. State Bar Ct. Rptr. 627, duty to supervise employees

Other opinions and authorities cited:

• L.A. County Bar Association Formal Opinion No. 485 (1996): personal funds as cushion in CTA
• Handbook on Client Trust Accounting for California Attorneys (State Bar of California 2003)
• Vapnek et al., Cal. Practice Guide: Professional Responsibility (The Rutter Group 2004) §§ 9:153, 9:179
• Peck, Managing Clients' Trust Accounts (1994) 517 PLI/Lit 197
• 1 Brady on Bank Checks: The Law of Bank Checks (Sept. 2004) § 19.01
• Davis and Mabbit, Checking Account Bounce Protection Programs (2003) 57 Consumer Finance Law Quarterly Report 26

See also

• CA COPRAC Op. 2005-168: Web intake form confidentiality disclaimer
• CA COPRAC Op. 2004-165: Outside contract appearance lawyers
• CA COPRAC Op. 2002-160: Missing client settlement authority and fees

Source

• Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
• Original PDF: https://www.calbar.ca.gov/sites/default/files/portals/0/documents/ethics/Opinions/2005-169_03-0005_Published_Version_12-20-05-wpd-PAW.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2005-169

ISSUES: 1. Does an attorney commit an ethical violation merely by obtaining or using overdraft protection on a Client Trust Account?

2. What are an attorney's ethical obligations when a check is issued against a Client Trust Account with insufficient funds to cover the amount of the check?

3. Must an attorney immediately withdraw earned fees once funds deposited into a Client Trust Account have become fixed in order to comply with the attorney's ethical obligations?

DIGEST: 1. An attorney does not commit an ethical violation merely by obtaining or using overdraft protection on a Client Trust Account, so long as the protection in question does not entail the commingling of the attorney's funds with the funds of a client. Overdraft protection that compensates exactly for the amount that the overdraft exceeds the funds on deposit (plus funds reasonably sufficient to cover bank charges) is permissible, whereas overdraft protection that automatically deposits an amount leaving a residue after the overdraft is satisfied is not. In all cases, banks must report to the State Bar any presentment of a check against a Client Trust Account without sufficient funds, whether or not the check is honored. Although overdraft protection will not avoid State Bar notification, nor exculpate any unethical conduct that caused the overdraft, it may avoid negative consequences to a client resulting from a dishonored check.

2. When a check is issued against a Client Trust Account with insufficient funds to cover the amount of the check, an attorney must deposit funds sufficient to clear the dishonored check or otherwise make payment, must take reasonably prompt action to ascertain the condition or event that caused the check to be dishonored, and must implement whatever measures are necessary to prevent its recurrence. In addition, if a client will experience negative consequences from the dishonoring of the check, the attorney may have to advise the client of the occurrence.

3. An attorney must withdraw earned fees from a Client Trust Account at the earliest reasonable time after they become fixed in order to comply with the attorney's ethical obligations, but need not do so immediately.

AUTHORITIES INTERPRETED: Rule 4-100 of the Rules of Professional Conduct of the State Bar of California.

STATEMENT OF FACTS

Attorney, a solo practitioner who is about to begin a three-month trial, has recently transferred accounts to Bank, which has just opened for business. The accounts transferred are the office business account and the Client Trust Account (CTA). Attorney arranges for overdraft protection for the CTA by linking it to the office business account.

A month later, while Attorney is in the midst of trial, a settlement check arrives for Client. Attorney obtains Client's approval of disbursements and Client's signature on the settlement check, Attorney's fee becomes fixed, and Attorney deposits the settlement check into the CTA, but Bank misposts the check into the office business account. After making the deposit and waiting a sufficient period for the settlement check to clear, Attorney issues a check against the CTA for expenses related to Client's case. Because of its misposting of the settlement check, Bank determines that the expense check exceeds the amount on deposit. Bank honors the expense check by debiting the linked office business account and notifies the State Bar and Attorney that the check was paid against insufficient funds.

Three months after the arrival of the settlement check for Client, the trial having concluded, Attorney issues two checks on the CTA account: The first check is payable to Client for Client's portion of the settlement; the second check is payable to Attorney for fees, and is immediately deposited by Attorney into the office business account. Because of its not-yet-corrected misposting of the settlement check, Bank determines that the two disbursements exceed the amount on deposit, but makes inquiry of Attorney. As a result, Bank discovers, and corrects, its misposting, and honors the checks to the Client and to Attorney for fees.

DISCUSSION

1. Overdraft protection is not prohibited by Rule 4-100.

When a bank is presented with a check that is greater in amount than the combination of cash in the account on which it is drawn and checks deposited but not collected, the bank has the option of honoring or dishonoring the check. If a bank elects to honor the check, the payment from its funds is an overdraft and is considered to be in the nature of a loan. An overdraft is not necessarily the result of negligence or wrongdoing by the depositor. For example, an overdraft can be the result of the bank's delay in crediting a deposit or as a result of the bank's dishonoring of a check submitted by the depositor in the good faith belief it would be paid, or by an inadvertent bank computer or accounting error.

In recent years, many banks have instituted overdraft protection to avoid the dishonoring of a depositor's checks. In order to cover checks written against insufficient funds, overdraft protection can entail the making of payments by the bank on a voluntary basis or as a result of a contract with the depositor for extensions of credit or for the linking of accounts.

Whether it is permissible to obtain and use overdraft protection for a CTA depends on whether the protection in question entails the commingling of the attorney's funds with the funds of a client. Rule 4-100 of the Rules of Professional Conduct strictly limits the funds belonging to an attorney that may be deposited into a CTA to (1) funds reasonably sufficient to cover bank charges and (2) undifferentiated funds belonging in part to a client and in part to the attorney. The California Supreme Court has held that maintaining the personal funds of an attorney in a CTA as a cushion against overdrafts is not allowed by rule 4-100 and may therefore expose an attorney to discipline.

Although rule 4-100 does not define commingling, judicial decisions provide a definition. "[C]ommingling is committed when a client's money is intermingled with that of his attorney and its separate identity lost so that it may be used for the attorney's personal expenses or subjected to claims of his creditors." Employing an overdraft protection program, such as a line of credit or linkage to another account, that compensates exactly for the amount that the overdraft exceeds the funds on deposit in a CTA does not threaten the separate identity of a client's funds, does not subject the client's funds to claims of the attorney's creditors, and does not permit the attorney to use the client's funds. Furthermore, the California Supreme Court has held that an attorney's deposit of personal funds to restore funds that have been improperly withdrawn does not constitute a separate wrongful act of impermissible commingling.

A different situation is presented by an overdraft protection program that automatically deposits a fixed amount into a CTA leaving a residue after the overdraft is satisfied. The excess funds, which belong to the attorney, are not required to remedy an error. There is no meaningful distinction between depositing excess funds to cure an overdraft and maintaining a cushion of attorney funds in a CTA beyond an amount reasonably sufficient to cover bank charges, a practice that has been prohibited. Leaving excess funds belonging to the attorney in a CTA in order to avoid the negative effect of error, even if it causes no harm to a client or any other person or entity with an interest in the trust funds, may expose an attorney to discipline.

Banks are required by law to report to the State Bar the presentment of any properly payable instrument against a CTA containing insufficient funds, whether or not the instrument is honored. Although overdraft protection will not avoid notification of the State Bar, nor exculpate any unethical conduct that caused the overdraft, it may avoid negative consequences to a client resulting from a dishonored check. Therefore, rather than violating an attorney's fiduciary duties to a client under rule 4-100, overdraft protection is a recognized method of protecting the client's funds from loss.

It follows that, under the facts presented, Bank was required to notify the State Bar that the expense check drawn on the CTA was paid against insufficient funds, even though subsequent events would reveal that its action resulted from its misposting. Attorney, however, should not be subject to discipline with respect to the triggering of overdraft protection for the expense check. Of course, an attorney has a "personal obligation of reasonable care to comply with the critically important rules for the safekeeping and disposition of client funds." That obligation is nondelegable. "[W]here fiduciary violations occur as a result of the serious and inexcusable lapses in office procedure, they may be deemed 'wilful' for disciplinary purposes, even if there was no deliberate wrongdoing." Moreover, if an attorney were to make use of overdraft protection for an impermissible purpose such as issuing checks prior to the availability of the funds against which they were to be paid, the attorney could be found culpable of failure to maintain the CTA in violation of rule 4-100. Under the facts presented, however, there was no violation by Attorney because there was no lapse in office procedure or repeated use of overdraft protection for an impermissible purpose. There were indeed mistakes and errors, but they were attributable to Bank and not to Attorney.

It is recognized that, in its present version, the Handbook on Client Trust Accounting for California Attorneys, supra, pages 6 and 10, states that an attorney should not obtain or use overdraft protection on a CTA. But since its initial publication in 1992, the Handbook has been revised from time to time in response to developments in the law generally and in professional responsibility in particular.

2. An attorney who issues a CTA check against insufficient funds is required to make any dishonored check good or otherwise make payment, take reasonably prompt action to ascertain what caused the problem, and correct or change whatever led to the occurrence.

Since an attorney has an obligation that is both personal and nondelegable to take reasonable care to protect client funds, the attorney has attendant obligations: (1) to deposit funds sufficient to clear any check drawn on the CTA that is dishonored for insufficient funds (depositing personal funds into a CTA to remedy an overdraft does not constitute impermissible commingling) or to make payment by other means; (2) to take reasonably prompt action to ascertain the condition or event that caused the check to be dishonored; and (3) to implement whatever measures are necessary to prevent its recurrence. In addition, since an attorney has an obligation to keep clients advised of significant developments relating to the employment or representation, the attorney may also have an obligation to advise the affected client of the overdraft of the client's funds if the client will experience negative consequences.

Under the facts presented, the expense check drawn on the CTA was not dishonored. As a result, there was no check that Attorney had to make good or provide for payment otherwise; neither were there any practices or procedures Attorney had to change or any lapses Attorney had to correct. Likewise, there was no significant development about which Attorney had to advise Client. As its name declares, overdraft protection protected Client from experiencing any negative consequences from the dishonoring of the expense check by preventing dishonoring of the check. It follows that, under these circumstances, Attorney has no obligation to advise Client of this occurrence.

3. Earned fees need not be withdrawn immediately from a CTA after they become fixed, but instead must be withdrawn at the earliest reasonable time.

Rule 4-100(A)(2) provides: "In the case of funds belonging in part to a client and in part presently or potentially to the [attorney], the portion belonging to the [attorney] must be withdrawn at the earliest reasonable time after the [attorney's] interest in that portion becomes fixed."

Nothing in rule 4-100 or related judicial decisions defines "earliest reasonable time." But the rule does indeed give some indications in this regard. As noted, it provides that an attorney must withdraw from a CTA the portion of funds belonging to the attorney at the earliest reasonable time "after the [attorney's] interest in that portion becomes fixed."

In so providing, the plain language of rule 4-100 suggests that an attorney is not required to withdraw the attorney's fees from a CTA "immediately." But it also suggests that an attorney is not allowed to delay until he or she finds it "convenient" to make the withdrawal. If the attorney delays unreasonably, the client's funds may be "endanger[ed]," as by "attachment" in a case where the attorney's "creditors [are led] to believe the funds belong to the [attorney] rather than the client."

Although the phrase "earliest reasonable time" contains the word "reasonable" and therefore counsels that all relevant circumstances should be taken into account, including especially the risk to the client's interest, a rule of thumb is suggested by the standards for preserving the identity of funds and property of a client adopted by the Board of Governors of the State Bar. Those standards require a monthly reconciliation of a CTA, which identifies the portion of the funds belonging to the attorney. It follows, therefore, that an attorney should withdraw the attorney's fees from the CTA at the time of the monthly reconciliation after that portion has become fixed.

Under the facts presented, Attorney appears not to have withdrawn Attorney's fees from the CTA at the "earliest reasonable time." Attorney's fees had become fixed about three months earlier. Attorney's preoccupation with trial may have made such a period of time seem reasonable. But a delay of this length of time might have proved harmful to Client – and Attorney's other clients – if, for example, Attorney's creditors had attached the funds in the CTA on the belief they belonged to Attorney.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons, or tribunals charged with regulatory responsibilities, or any member of the State Bar.