When may a New Jersey lawyer disburse from the trust account against an 'official check' received at a real estate closing before it has cleared?

Plain-English summary

The Committee was asked whether negotiable instruments that some banks label "official checks," received by attorneys at real estate closings, may be drawn upon and disbursed immediately upon deposit. The general rule is that clients' funds may not be disbursed from a trust account until they are "collected," meaning the checks have cleared and the funds are available; disbursing against uncollected funds is a serious ethical matter and risks invading other clients' funds held in the same account.

In Opinion 454 (1980), the Committee had approved immediate disbursement at closings for "bank, cashier's or certified checks," reluctantly, because those are obligations of the bank with minimal risk and because the practice was nearly universal in title closings. Here the Committee found that "official check" has no settled legal definition and that bank practices vary as to what such instruments are called and when the funds are credited. It therefore declined to extend Opinion 454 to give blanket approval to instruments by that label, reasoning that the actual substance of the instrument, not its label, must control.

The Committee set the principles for permissible immediate disbursal: (1) the check must be drawn by a licensed banking institution on itself or another such institution, and (2) the attorney must ascertain that the depository bank will make the funds available no later than the next business day after deposit. It added a further limit: before disbursing against deposited funds prior to their actual availability, the attorney must determine that those disbursements, together with all other actual and reasonably anticipated disbursements during the period before availability, will not exceed the total funds the trust account's drawee bank will make available during that period.

Currency note

This opinion was issued in 2000, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance.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: Can a lawyer disburse against an "official check" the moment it is deposited?

A: Not based on the label. The opinion declined to give blanket approval to "official checks" and said the substance of the instrument, not its name, controls.

Q: What conditions did the Committee require for immediate disbursal?

A: Two: the check must be drawn by a licensed banking institution on itself or another such institution, and the attorney must ascertain that the depository bank will make the funds available no later than the next business day after deposit.

Q: Is there any additional limit beyond those two conditions?

A: Yes. The opinion required that the contemplated disbursements, together with all other actual and reasonably anticipated disbursements before the funds actually become available, not exceed the total funds the trust account's drawee bank will make available during that period.

Background and rules framework

The opinion interpreted New Jersey RPC 1.15 (safekeeping property; Model Rule 1.15) and Court Rule 1:21-6, against the background that trust disbursements must ordinarily be made only from collected funds. It built on Opinion 454 (1980), which had carved a narrow exception for bank, cashier's, and certified checks at closings. The analysis turned on the lack of a uniform definition or availability practice for "official checks," leading the Committee to articulate substance-based conditions rather than approve a label.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NJ RPC 1.15 (safekeeping property; trust accounts)

Court Rules:

• N.J. Court Rule 1:21-6 (recordkeeping; attorney trust and business accounts)

Cases:

• Matter of Hollendonner, 102 N.J. 21 (1985), discipline imposed for issuing checks against uncollected funds

Other opinions cited:

• NJ ACPE Op. 454 (1980): immediate disbursement at closings approved for bank, cashier's, or certified checks

See also

• ABA Formal Op. 475: Safeguarding Fees Subject to Division
• AL Bar Op. 2008-03: Lawyer's Trust Account Obligations for Retainers

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2005/acp687-1.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.

9 N.J.L. 218, January 31, 2000

159 N.J.L.J. 454, January 31, 2000

OPINION 687

Drawing Upon and Disbursing Funds Received at Real Estate Closings in the Form of Negotiable Instruments other than Cashier's or Teller's Checks

The Advisory Committee on Professional Ethics has been asked whether negotiable instruments designated by certain financial institutions as "official checks", and received by attorneys in connection with real estate closings, may permissibly be drawn upon and disbursed immediately upon deposit. The inquiry necessitates review of Opinion 454, 105 N.J.L.J. 441 (1980) and the public policy supporting its holding, to decide whether an extension of Opinion 454 is warranted to cover these additional instruments expressly. We conclude that it is not.

Ordinarily, clients' funds may not be disbursed from an attorney's trust account until they have been "collected", meaning that the checks have cleared, the funds have been credited to the attorney's trust account, and they are immediately available. Disbursement of funds not collected and available is an extremely serious ethical matter. See R. 1:21-6(1)(2) (approved financial institutions shall file with the Office of Attorney Ethics a report "in the event any properly payable attorney trust instrument is presented against insufficient funds, irrespective of whether the instrument is honored[.]"). Where the funds of several clients are kept in one account, the disbursal of funds prior to collection may result in the improper disbursal of other clients' funds. See, e.g., Matter of Hollendonner, 102 N.J. 21 (1985) (discipline imposed for issuance of checks against uncollected funds).

In Opinion 454, supra, 105 N.J.L.J. 441, the Committee examined the practice of immediately drawing upon funds received at real estate closings, observing it was "one of long standing... probably universal use not only in New Jersey but elsewhere." Ibid. Because the practice was so widespread in title closings, the Committee realized that "to condemn it as unethical may lead to severe disruption in the handling of title closings and other matters." Ibid. Therefore, the Committee approved such immediate disbursements when the funds deposited were in the form of "bank, cashier's or certified checks," in order to avoid disruptions in title closings and in the interest of accommodating all clients." We did so because "[s]uch checks are the obligations of the bank and not simply of a private party. Drawing immediately upon their deposit entails a minimal risk."

It was with great reluctance, however, that the Committee approved this very limited exception to the rule that trust account checks be drawn on collected funds. The Committee recognized the practice "has the effect of drawing on unsegregated trust funds of all clients for the benefit of a particular client whose matter is closing." Ibid. The Committee concluded the "justification for what would otherwise be an unauthorized invasion of trust funds consists of the almost non-existent 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." Ibid.

The Committee made informal inquiry into the practices of several financial institutions with regard to "official checks." This inquiry revealed that bank practices vary significantly as to when checks drawn by other banks were credited, what they were called and what they signified. The term "official check," unlike "cashier's check" (a check drawn by a bank on itself), or "teller's check" (a check drawn by a bank on another bank, or payable through another bank), does not appear in any New Jersey statute, or have any settled legal definition. Informal inquiry also revealed that other terms, such as "bank check", are also used by some institutions. The Federal Reserve Board, in its regulations concerning next day availability of funds, recognizes only teller's checks and cashier's checks, although it apparently recognizes some forms of official checks as teller's checks. Nor is there a consistent, universal practice as to when funds from such checks actually are made available.

Unlike the situation in Opinion 454, therefore, there is not a single, universally recognized definition of "official check." Consequently, it is not possible to issue a ruling of general application endorsing or barring disbursement from deposits of such checks, or to give blanket approval to instruments which bear the name "official checks." Nor is it practical for this Committee to examine individually each new variation of negotiable instrument which may be developed by banking institutions. Rather, building upon our analysis in Opinion 454, our appropriate role is to clarify the principles which must guide private attorneys as they judge whether it is ethically permissible to disburse based upon deposited funds. Ultimately it is the actual substance of the instrument, not its label, which must control.

To be permissible, such immediate disbursal of a negotiable instrument must be the virtual equivalent of collected funds. Immediate disbursement can take place only in the following circumstances:

(1) The check must be drawn by a licensed banking institution on itself or another such banking institution.

(2) The attorney must ascertain that the funds from the check will be made available by the depository bank no later than the next business day after the day of deposit.

We also emphasize and make explicit one additional limitation on this already very limited exception to the general rule that trust account disbursements may be made only from collected funds. Before making any disbursement on the deposited funds prior to the time they actually become available, the attorney must determine that the contemplated disbursements related to the deposited funds, taken together with all other actual and reasonably anticipated disbursements during the period prior to such actual availability, will not exceed the total funds that the attorney's trust account drawee bank will make available during that period.