Can a New Jersey lawyer disburse from a trust account the same day a client's check is deposited, before it has cleared?

Plain-English summary

The Committee was asked whether an attorney may deposit a client's funds in the trust account and make immediate disbursement on that client's behalf, the practice that usually arises in a title closing. Because checks take roughly five to ten business days to clear, a trust check drawn for client A the same day client A's check is deposited is in fact drawn on funds belonging to the attorney's other clients. The Committee noted this is a long-standing, near-universal practice, and that attorneys who follow it generally do so only with bank, cashier's, or certified checks.

The Committee considered three alternatives (escrow closings that disburse nothing until funds clear, advance arrangement of closing figures so the trust account need not be used, and a separate account of the attorney's own funds), found none entirely satisfactory, and recognized that condemning the practice outright would severely disrupt title closings. It concluded that where those alternatives are not feasible, drawing against bank, certified, or cashier's checks should be permitted: such checks are obligations of the bank rather than a private party, so drawing immediately upon their deposit entails minimal risk, and clients are taken to have impliedly consented to that negligible risk. A client who explicitly asks that funds deposited for his benefit not be exposed to the practice is entitled to have them segregated, and would then have to make special arrangements.

The Committee limited its approval strictly to real estate or commercial closing transactions involving transfers of property or interests in property, including sales of businesses. Drawing on trust funds for other purposes, such as disbursing the proceeds of a negligence settlement, was held improper even where certified, cashier's, or bank checks have been deposited but not cleared. The Committee separately held that drawing against personal checks, for closing items or any other purpose and regardless of amount, is unethical, because it creates a substantial and unjustified risk of loss to the other clients' funds in the account.

Currency note

This opinion was issued in 1980, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct, and predates the 1984 replacement of the Disciplinary Rules by the RPCs. It applied R. 1:21-6 and DR 9-102; the safekeeping-of-property principles it discussed now correspond broadly to RPC 1.15 and the current recordkeeping rule. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer disburse from trust the same day a closing check was deposited?

A: Yes, but only in a real estate or commercial closing and only when the deposited check was a bank, certified, or cashier's check, whose risk of non-clearance the opinion treated as negligible.

Q: Could the practice be used to pay out a negligence settlement?

A: No. The opinion limited approval strictly to property-transfer closings; drawing on uncleared funds to disburse settlement proceeds in a negligence case was held improper even if certified or cashier's checks had been deposited.

Q: What about drawing against an uncleared personal check?

A: The opinion held that unethical for any purpose, regardless of amount, because it creates a substantial and unjustified risk to the other clients' funds in the account.

Q: Could a client refuse to have its deposit exposed to the practice?

A: Yes. The opinion stated that a client who explicitly asks that funds deposited for his benefit not be subjected to the practice is entitled to have them segregated.

Background and rules framework

The opinion applied the trust-account segregation duty then stated in R. 1:21-6(a)(1) and DR 9-102, which require a lawyer to keep client funds in a separate account and to identify each client's funds. In current New Jersey terms the safekeeping duty corresponds to RPC 1.15. The Committee's holding balanced that segregation duty against the commercial necessity of closings, permitting immediate draws only against bank-obligation checks (bank, certified, cashier's) in property-transfer closings and disapproving draws against personal checks or for non-closing purposes.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NJ RPC 1.15 (safekeeping property; client trust accounts)
• DR 9-102 (preservation of identity of funds and property of a client) (as in effect 1980)

Court rules:

• R. 1:21-6(a)(1) (attorney trust and business accounts)

See also

• NJ ACPE Op. 455: A Bar Foundation Legal-Fee Financing Plan
• NJ ACPE Op. 514: Broker's Commission Paid to the Purchaser's Attorney

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2004/acp454-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The linked official source controls.

105 N.J.L.J. 441, May 15, 1980

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

Appointed by the New Jersey Supreme Court

OPINION 454

Attorney's Trust Account - Immediate Drawing Upon Depositing Client's Check

We are asked whether it is ethical for an attorney to deposit funds belonging to a client in the attorney's trust account and to make immediate disbursement from this fund on behalf of the client. This practice usually arises in the context of a title closing, but there are, of course, many other circumstances in which this procedure is followed. R. 1:21-6(a)(1) and DR 9-102 require that an attorney maintain a separate account for funds of his clients entrusted to his care. He must maintain an appropriate book in which the funds belonging to each client are separately identified. It goes without saying that the funds deposited for a particular client must be used for the benefit of that client and for no other purpose. Many attorneys have substantial sums in their trust account at all times, sums which belong to several clients. Some part of these monies are "collected funds," i.e. funds which represent checks deposited in the account which have had ample time to clear and have thus been properly credited to the attorney's trust account. Depending usually on the distance the drawee bank is from the attorney's bank, it may take from five to ten business days for a check to clear, or from one to two calendar weeks. It is obvious, therefore, that a check drawn on the attorney's trust account for client A the same day client A's check is deposited in this account is drawn on funds which belong to other clients of the attorney.

We are aware of the fact that the foregoing practice is one of long standing in probably universal use not only in New Jersey but elsewhere. We also believe that most attorneys who follow this practice do so only where the checks involved are bank, cashier's or certified checks. Because this procedure is so widespread in title closings, to condemn it as unethical may lead to severe disruption in the handling of title closings and other matters. We suggest first, however, that there are other ways to handle these closings, none of which is entirely satisfactory. Three possibilities come to mind: (1) escrow closings in which no funds are disbursed and no closing completed until all funds have cleared; (2) pre-arrangement by the attorneys involved so that the necessary closing figures are known far enough in advance for the parties to provide funds in such a manner as to obviate the necessity of using the trust account (undoubtedly this would require cooperation of the bank mortgagee which may be asked to provide mortgage funds in several checks); (3) establishment of an account by the attorney of his own funds which can be used to accommodate a client when there is no other solution. Recognizing the problems which would arise were the present practice disapproved in its entirety, it is our opinion that where one of the foregoing solutions is not feasible, the use of bank certified or cashier's checks should be permitted to avoid disruptions in title closings and in the interest of accommodating all clients. Such checks are the obligations of the bank and not simply of a private party. Drawing immediately upon their deposit entails a minimal risk.

The practice which is sanctioned by this opinion has the effect of drawing on unsegregated trust funds of all clients for the benefit of a particular client whose matter is closing. The reduction thus resulting in available trust funds is eliminated shortly thereafter when the bank, certified or cashier's check clears. The justification for what would otherwise be an unauthorized invasion of trust funds consists of the almost nonexistent risk that such bank, certified or cashier's checks will not clear along with the overriding commercial need of all clients that such a practice be continued. Because the practice is so well known and widespread it is fair to assume that clients have implicitly consented to the negligible risk involved in drawing against such checks which have not yet cleared. Of course, any client who explicitly requests that trust funds deposited for his benefit not be subjected to the practice is entitled to have his funds segregated. A consequence of such segregation would be that that client, if involved in a transaction where closing depends upon the issuance of trust checks that have not yet cleared, would have to take special arrangements similar to one of those suggested earlier in this opinion. In other words, a client who does not want to take the negligible risks involved in the unsegregated fund will not receive the substantial benefit of the practice discussed in this opinion. Approval of the practice referred to herein is limited strictly to real estate or commercial closing transactions representing the consummation of an agreement resulting in transfers of property or interests in property whether they be real estate, personal property or a combination of both, including sales of businesses where it is either essentially or commercially desirable that trustee checks be issued against certified, bank or cashier's checks that have not cleared. Drawing on trust funds for other purposes, such as the disbursement of the settlement proceeds of a negligence case, regardless of whether certified, cashier's or bank checks have been deposited but have not yet cleared, is not proper.

We wish to make it clear that the practice we are approving relates only to the use of bank, cashier's or certified checks. We consider the practice of drawing against personal checks to cover miscellaneous items at closing or for any other purpose, regardless of the amount, to be unethical. While these amounts may be small in relation to the size of some trust accounts, the same amount may be large in relation to other trust accounts. Drawing against such personal checks creates a substantial risk of loss of trust funds deposited in the account for other clients, a risk not in any way justified by necessities of the situation. Accordingly, such practice is disapproved.