Can a North Carolina lawyer disburse a personal injury settlement from the trust account before the insurance check has actually cleared?

Plain-English summary

A lawyer who handled personal injury claims deposited settlement checks into the firm trust account and waited until the funds were collected before disbursing, because RPC 191 limits disbursements against provisional credit to the instrument types specified in the Good Funds Settlement Act (G.S. Chapter 45A). He argued RPC 191 should not apply to personal injury settlements at all, since the Act is limited to residential real estate closings, and that the wait imposed a hardship on his firm and his clients.

On the first question the opinion held that RPC 191 applies to all disbursements against instruments that are not irrevocably credited on deposit, even though the General Assembly adopted the Good Funds Settlement Act only for residential real estate settlements. A lawyer may immediately disburse against collected funds such as cash or wired funds, and may disburse in reliance on provisional credit for the forms set out in G.S. section 45A-4; disbursing against provisional credit for any other instrument is professional misconduct, whether or not the instrument is ultimately honored. The opinion explained the exception is purposefully narrow because a later dishonor puts all client funds in the trust account at risk, and the Ethics Committee lacked authority to expand the statutory exemption.

On the second question the opinion held that a check made jointly payable to the law firm (or lawyer) and the client must be deposited intact into the trust account under Rule 1.15-2(g), because it combines funds belonging to the lawyer with funds belonging to the client. But if all of the check's proceeds belong to the client, or the lawyer is prepared to forgo payment from the check and bill the client separately, the check may be endorsed directly to the client without first passing through the trust account.

Currency note

This opinion was issued in 2001, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it relies on the trust-accounting rule numbering then in effect (Rule 1.15-2) and on RPC 191. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules and the current Good Funds Settlement Act before relying on any specific requirement mentioned here.

Common questions

Q: Does the good-funds rule apply to personal injury settlements, not just real estate?

A: Yes. The opinion held RPC 191 applies to all trust-account disbursements against provisionally credited instruments, even though the Good Funds Settlement Act itself was adopted for residential real estate settlements.

Q: When can a lawyer disburse before the check clears?

A: The opinion allowed immediate disbursement against collected funds such as cash or wired funds, and disbursement in reliance on provisional credit only for the instrument forms listed in G.S. section 45A-4. Disbursing against any other provisionally credited instrument is misconduct.

Q: Could the Ethics Committee carve out an exception for insurance checks?

A: No. The opinion stated the exemption is set by statute and the Ethics Committee does not have authority to expand it.

Q: Must a check payable to both the firm and the client go through the trust account?

A: Yes, under Rule 1.15-2(g), because it mixes lawyer and client funds, unless all proceeds belong to the client or the lawyer forgoes payment from the check and bills the client instead; then it may be endorsed directly to the client.

Background and rules framework

The opinion interpreted North Carolina's trust-accounting rule, Rule 1.15-2 (including subsection (g)), the analogue to Model Rule 1.15, together with the bar's prior opinion RPC 191 on disbursing against provisional credit. The instrument categories came from the Good Funds Settlement Act, G.S. Chapter 45A, including sections 45A-2 and 45A-4.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property) / NC Rule 1.15-2(g)

Statutes:

• N.C. Gen. Stat. Chapter 45A (Good Funds Settlement Act), sections 45A-2 and 45A-4

Other opinions cited:

• NC RPC 191: a lawyer may disburse against provisional credit only for the instrument types specified in the Good Funds Settlement Act

See also

• NC State Bar 2001 FEO 11: Letters of Protection
• AL Ethics Op. 2008-03: Flat Fees in Trust (IOLTA)
• NY State Bar Op. 1165: Disputed Fees, Trust Account

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2001-formal-ethics-opinion-3/

Original opinion text

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

Inquiry #1:

Attorney regularly represents individuals with personal injury claims. When an insurance company check for $5000 or more is paid in settlement of a client's claim, the check is deposited into the trust account of Attorney's firm. No disbursements are made to the client, or to third parties on behalf of the client, until the funds are actually collected because RPC 191 limits the disbursements that can be made against provisional credit. RPC 191 prohibits a lawyer from making disbursements from a trust account unless the funds are actually on deposit in the account or, if the depository institution grants provisional credit, unless the financial instrument deposited into the account is one of the ones specified in the Good Funds Settlement Act, G.S. Chap. 45A (the "Act").

Attorney believes that RPC 191 should not apply to disbursements from a trust account for a personal injury settlement because the Act is specifically limited to the settlement of residential real estate transactions. See G.S. section 45A-2. Attorney believes that the limitations of RPC 191 create a hardship on his firm and the client because the client has to come to the firm's office to endorse the settlement check and, after the check clears the bank, return to the firm to collect the disbursement. This may have an adverse effect on a client's credit and delay repairs to or replacement of an automobile if there is also a property damage settlement. It also costs Attorney additional time to meet with the client twice.

Is RPC 191 applicable to personal injury settlements? If so, is there an exemption for personal injury settlements or checks from insurance companies licensed to do business in North Carolina?

Opinion #1:

RPC 191 is applicable to all disbursements from a trust account against financial instruments that are not irrevocably credited to the account upon deposit although the Good Funds Settlement Act was adopted by the General Assembly only to regulate the settlement of residential real estate transactions. The rationale for the opinion is found in the following excerpt from the opinion:

Notwithstanding the fact that some of the forms of funds designated in the Act are not irrevocably credited to the lawyer's trust account at the time of deposit, the risk of noncollectibility is so slight that a lawyer's disbursement of funds from a trust account in reliance upon the deposit into the account of provisionally credited funds in these forms shall not be considered unethical. However, a closing lawyer should never disburse against any provisionally credited funds unless he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. A lawyer may immediately disburse against collected funds, such as cash or wired funds, and may immediately make disbursements from his or her trust account in reliance upon provisional credit extended by the depository institution for funds deposited into the trust account in one or more of the forms set forth in G.S. section 45A-4.

The disbursement of funds from a trust account by a lawyer in reliance upon provisional credit extended upon the deposit of an item into the trust account which does not take one of the forms prescribed in the Act constitutes professional misconduct, regardless of whether the item is ultimately honored or dishonored.

The exception allowed in RPC 191 to the duty to disburse only against collected funds in a trust account is purposefully narrow to limit the potential for disbursements against instruments that are subsequently dishonored. If an instrument is subsequently dishonored, it puts at risk all client funds on deposit in the trust account. The relatively minor inconvenience of waiting for a check to clear the bank is offset by the protection that disbursement against collected funds provides to all clients with funds deposited in the trust account. The General Assembly, as a matter of public policy, has determined that the items set forth in the Good Funds Settlement Act are sufficiently reliable to exempt these items from the safeguard awaiting to collect the funds but the Ethics Committee of the State Bar does not have the authority to expand the exemption.

Inquiry #2:

When Attorney settles a property damage claim on a client's vehicle, he asks the insurance company to put only the name of the client on the settlement check. Attorney believes that this is the only way that the check can be given directly to the client. If the check is made out to both the client and the law firm, Attorney deposits the check into the trust account and waits until the check is collected before disbursing the entire amount of the check to the client. The delay before disbursement can be a serious inconvenience to a client who needs an automobile for transportation.

If an insurance check is made out jointly to the law firm (or Attorney) and the client, may Attorney endorse the check and give the check to the client without depositing it first into the trust account?

Opinion #2:

When funds belonging presently or potentially to a lawyer are received in combination with funds belonging to a client, or other persons, the funds must be deposited in tact into the trust account. See Rule 1.15-2(g). However, if all of the funds represented by a check from a third party belong to the client or the lawyer is prepared to forgo being paid for his legal services from the check proceeds (and bill the client instead), the check may be endorsed directly to the client without being deposited into the trust account.