How long can a lawyer hold a client's settlement funds in trust to let the check clear before paying the client?

Plain-English summary

The Board addressed how long a lawyer may hold a client's funds in the firm's trust account, waiting for a deposited check to clear, before the duty under Prof. Cond. R. 1.15 to "promptly" deliver funds to a client or third person requires disbursement. Rule 1.15(d) requires a lawyer to promptly notify a client or third person who has an interest in funds, promptly deliver funds the client or third person is entitled to receive, and render a full accounting on request; Rule 1.15(e) requires disputed funds to be held until entitlement is resolved.

The Board observed that the rule does not define "promptly," but that Ohio disciplinary case law treats delays of months or years as too long, while disbursing too quickly carries its own risk: paying a client from the trust account before the bank has collected the deposited funds can mean using another client's money if the check is later dishonored, conduct the Board said may constitute conversion or misappropriation even without a dishonest or selfish motive.

Reading Rule 1.15 against federal regulation 12 C.F.R. 229 (governing availability of funds and the "expeditious" return of dishonored checks), the Board concluded that a check generally clears, or the bank is notified of dishonor, within about one week. It therefore treated seven to ten days as a reasonable time to hold funds to confirm availability, with a longer period reasonable for a foreign check. The opinion notes that a lawyer should be aware of the lawyer's own bank's policies and of internet and fraudulent-check scams.

In practice

The opinion holds that, under the Ohio rule as it stood at the time, the Rule 1.15 duty to deliver funds "promptly" does not require a lawyer to disburse before a deposited check has cleared; a reasonable hold of one week to ten days (longer for foreign checks) to confirm the funds are available is consistent with the rule. Per the opinion, a lawyer should be cognizant of the lawyer's financial institution's check-clearing procedures and should wait until funds are collected before disbursing. The opinion also states that a lawyer should notify the client promptly on receipt of funds, explain that funds the bank makes "available" may not actually be collected for about a week or longer, and, where possible, confirm in a written agreement with the client at the outset of the representation that delivery of funds may be delayed by banking regulations.

Common questions

Q: How long can a lawyer hold a client's settlement check before paying the client?

A: The opinion concluded that a reasonable period to confirm the check has cleared is one week to ten days, with a longer period reasonable for a foreign check.

Q: Why not just pay the client as soon as the check is deposited?

A: The opinion concluded that disbursing before the bank has collected the funds risks paying with another client's money if the check is dishonored, which can constitute conversion or misappropriation even absent a dishonest motive.

Q: Does waiting for a check to clear violate the duty to deliver funds "promptly"?

A: The opinion concluded no; holding funds for a reasonable time to confirm availability is consistent with Prof. Cond. R. 1.15(d), because federal banking regulations bear on when funds are actually available.

Q: What does the opinion say a lawyer should do at the start of a representation?

A: Per the opinion, the lawyer should obtain a written, signed agreement notifying the client of a possible one-to-two-week delay in delivering funds due to banking regulations, and should confirm any such delay in writing on receipt of funds.

Background and rules framework

The opinion interprets Ohio Prof. Cond. R. 1.15 (safekeeping property; Model Rule 1.15), in particular the subsection (d) duty to promptly notify, deliver, and account for funds, and the subsection (e) duty to hold disputed funds. It reads that duty alongside federal regulation 12 C.F.R. 229, which governs the availability of deposited funds and the expeditious return of dishonored checks.

Citations and references

Rules of Professional Conduct:

• Ohio Prof. Cond. R. 1.15 (safekeeping property), incl. cmts. [1], [4] (Model Rule 1.15)

Statutes and regulations:

• 12 C.F.R. 229 (availability of funds and collection of checks), incl. 229.12, 229.30, 229.31, 229.33

Cases:

• Cleveland Metro. Bar Assn. v. Toohig, 133 Ohio St.3d 548, 2012-Ohio-5202, failure to remit settlement proceeds for over five months
• Cincinnati Bar Assn. v. Walker, 28 Ohio St.3d 102 (1986), failure to return client funds for six months
• Disciplinary Counsel v. Leksan, 136 Ohio St.3d 85, 2013-Ohio-2415, failure to distribute settlement funds for nine months
• In re Moras, 131 N.J. 164, 618 A.2d 1007 (1993), discipline for disbursing on a dishonored check
• Iowa Supreme Court Atty. Disciplinary Bd. v. Wright, 840 N.W.2d 295 (Iowa 2013), competence and client-funds analysis

Other opinions cited:

• Ohio BPC Adv. Op. 2007-7: duty to deliver funds or property when there is a dispute

See also

• Ohio BPC Op. 2007-007: Safekeeping Funds Subject to Third-Person Claims (Rule 1.15)
• Ohio BPC Op. 2016-001: Flat Fees Paid in Advance of Representation
• Ohio BPC Op. 2007-003: Client Credit Card Payments and the Trust Account
• Ohio BPC Op. 2005-010: Reporting Unclaimed Client Funds

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2017/04/Op_16-007.pdf

Original opinion text

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

OHIO BOARD OF PROFESSIONAL CONDUCT
OPINION 2016-7
Issued October 7, 2016

     Lawyer’s Duty to Promptly Deliver Funds to a Client or Third Party

Syllabus of Opinion:

1. A lawyer may hold a client’s funds in trust for a reasonable period of time to
   ensure that the check has cleared and the funds are available to distribute to the
   client or third party. Subject to the exceptions set forth in this opinion, a reasonable
   period of time consists of one week to ten days, given federal banking regulations
   and modern banking practices.

This nonbinding advisory opinion is issued by the Ohio Board of Professional Conduct in
response to a prospective or hypothetical question regarding the application of ethics rules
applicable to Ohio judges and lawyers. The Ohio Board of Professional Conduct is solely
responsible for the content of this advisory opinion, and the advice contained in this opinion
does not reflect and should not be construed as reflecting the opinion of the Supreme Court
of Ohio. Questions regarding this advisory opinion should be directed to the staff of the Ohio
Board of Professional Conduct.
OHIO BOARD OF PROFESSIONAL CONDUCT
65 SOUTH FRONT STREET, 5TH FLOOR, COLUMBUS, OH 43215-3431
Telephone: 614.387.9370 Fax: 614.387.9379
www.supremecourt.ohio.gov/boards/boc

PAUL M. DE MARCO RICHARD A. DOVE
CHAIR DIRECTOR
WILLIAM J. NOVAK D. ALLAN ASBURY
VICE- CHAIR SENIOR COUNSEL
HEIDI WAGNER DORN
COUNSEL

                                  OPINION 2016-7
                               Issued October 7, 2016

      Lawyer’s Duty to Promptly Deliver Funds to a Client or Third Party

SYLLABUS: A lawyer may hold a client’s funds in trust for a reasonable period of time
to ensure that the check has cleared and the funds are available to distribute to the client
or third party. Subject to the exceptions set forth in this opinion, a reasonable period of
time consists of one week to ten days, given federal banking regulations and modern
banking practices.

QUESTION PRESENTED: A lawyer seeks guidance regarding how long he may hold
client funds in the firm’s trust account to ensure that the check clears before distributing
funds to the client, in light of Prof.Cond.R. 1.15 that requires lawyers to “promptly”
deliver funds to a client or third party.

APPLICABLE RULES: Prof.Cond.R. 1.15.

OPINION: The determination as to how long a lawyer may hold client funds while
waiting for a check to clear to ensure the funds are available to distribute to the client,
must be analyzed under the Rules of Professional Conduct, the applicable federal
regulations, and banking policies.

Professional Conduct Rule 1.15

   Under Prof.Cond.R. 1.15(d), a lawyer is required to do the following with regard

to client funds: (1) promptly notify a client or third person claiming an interest in the funds,
upon receiving the funds; 2) promptly deliver the funds which a client or third person is
Op. 2016-7 2

entitled to receive; and 3) render a full accounting when requested by a client or third
person.

   There are three exceptions to a lawyer’s duty to promptly deliver funds in a

lawyer's possession to a client or a third person: 1) those stated in the rule; 2) those
permitted by law; and 3) those by agreement with the client or third person, confirmed
in writing. Prof.Cond.R. 1.15(d). Additionally, a lawyer is required to hold disputed
funds in a trust account until entitlement to the funds is resolved. Prof.Cond.R. 1.15(e).
When there is no dispute as to funds in a lawyer's possession, the lawyer's ethical duty
under Rule 1.15(d) is to promptly notify and deliver the funds to which a client or third
person is entitled. See, Prof.Cond.R. 1.15, cmt. [4]; Adv. Op. 2007-7 (duty of lawyer to
deliver funds/property when there is a dispute).

   The Rules of Professional Conduct do not provide a definition as to what

constitutes “promptly”1 delivering client funds; however, case law provides some
guidance as to what time period is considered appropriate to hold client funds. The
Court has found that delays of five, six, and nine months are too long to wait to notify a
client that the lawyer received a settlement and to deliver the funds to the client. See,
Cleveland Metro. Bar Assn. v. Toohig, 133 Ohio St.3d 548, 2012-Ohio-5202 (failure to remit
settlement proceeds to client for over five months violates rule); Cincinnati Bar Assn. v.
Walker, 28 Ohio St.3d 102 (1986) (failure to return client funds for six months violates
rule); Disciplinary Counsel v. Leksan, 136 Ohio St.3d 85, 2013-Ohio-2415 (failure to
distribute settlement funds to client for nine months violates rule). The Court also has
found that a lawyer’s complete failure or a significant delay of several years to deliver
client funds violates the rule requiring lawyers to promptly deliver client funds. See,
Disciplinary Counsel v. Folwell, 129 Ohio St.3d 297, 2011-Ohio-3181 (failure to return client
funds after two years violates rule); Disciplinary Counsel v. Ranke, 130 Ohio St.3d 139, 2011-
Ohio-4730 (complete failure to return client funds violates rule); Disciplinary Counsel v.
Longino, 128 Ohio St.3d 426, 2011-Ohio-1524 (failure to return client funds for over two
years violates rule); Columbus Bar Assn. v. Kiesling, 125 Ohio St.3d 36, 2010-Ohio-1555
(failure to return client funds and property violates rule).

   Conversely, problems may arise if a lawyer disburses funds to a client too quickly,

before the bank has collected the funds. Disbursing client funds from the IOLTA before

1
The dictionary defines “promptly” as “performed readily or immediately.” Merriam-Webster’s Collegiate
Dictionary, 11th Edition (2003).
Op. 2016-7 3

the check clears carries the risk of using funds belonging to another client to pay the check
if the check is not honored. Lawyers in other jurisdictions have been disciplined in this
type of situation. For example, the New Jersey Supreme Court issued a six-month
suspension to a lawyer for misappropriating funds of one client to pay another because
the lawyer disbursed funds to one client upon receipt of a check for that client, except
that check was dishonored. In re Moras, 131 N.J. 164, 618 A.2d 1007 (1993); see also, In re
James, 112 N.J. 580, 548 A.2d 1125 (1988). Lawyers also should be aware of internet and
fraudulent check scams that could result in dishonored checks, and in turn, result in
disbursing funds to one client that belong to another. See, Iowa Supreme Court Atty.
Disciplinary Bd. v. Wright, 840 N.W.2d 295 (Iowa 2013) (lawyer violated professional
conduct rules by failing to make competent analysis of purported bequest to client and
by obtaining loans from that client and other clients to pay taxes allegedly owed on that
bequest).

   A lawyer is required to hold the funds of a client with the care of a professional

fiduciary. Prof.Cond.R. 1.15, cmt. [1]. As such, a lawyer should be cognizant not only of
the applicable Rules of Professional Conduct, but also of the federal rules and regulations
and banking practices that apply to holding and disbursing client funds.

Federal Regulations and Bank Policies

   Federal regulations, as well as banking practices, help determine what constitutes

a reasonable time for a lawyer to hold client funds in trust and still promptly disburse
those funds to the client.

   Federal regulation 12 C.F.R. 229 governs the availability of funds for bank

accounts, including lawyer trust accounts. Lawyers should be aware of 12 C.F.R. 229 and
its requirements to ensure that client funds are “available” before distributing the funds
to a client or third party. 12 C.F.R. 229.12 outlines an availability of funds schedule for
when a check is honored or paid. If a check is not honored pursuant to 12 C.F.R. 229.30,
banks are required to “expeditiously” return checks using one of two standards: 1) the
two-day/four-day test, or 2) the forward collection test. Under the two-day/four-day test,
a returned check is considered expeditious if a local check is received by the depository
bank the second business day after presentment, and a non-local check, the fourth
business day after presentment. 12 C.F.R. 229.30. Under the forward collection test, a
returned check is expeditious if the paying bank returns a check in a manner that a
Op. 2016-7 4

similarly situated bank would normally handle the check. 12 C.F.R. 229.31. Both the two-
day/four-day test and the forward collection test ensure that checks that are not honored
are returned “expeditiously,” which generally is within about one week2.

      Under 12 C.F.R. 229, et seq., banks are required to make deposited funds available

to customers within certain timeframes, anywhere from one day to approximately one
week from the date of deposit. In practice, although the funds are not physically in the
bank, the funds are available for the customer to withdraw. This system works until there
is a problem with a check and payment is refused. As a result, banks are required to
return checks “expeditiously” using either the two-day/four-day rule or the forward
collection test. 12 C.F.R. 229.30, 12 C.F.R. 229.31. A bank is required to provide notice of
nonpayment if it determines not to honor a check of $2,500 or more. 12 C.F.R. 229.33.

      In addition to federal regulations, lawyers should be cognizant of the policies of

the bank where the lawyer maintains his or her trust account. A lawyer should know his
or her bank’s policies regarding when the bank is required to alert the account holder that
a check will not be honored, especially in situations in which the lawyer has reason to
question the check that he or she deposited into the trust account. This situation may be
avoided through the use of certified checks or by wiring money to an account.

ANALYSIS: A reasonable time for a lawyer to hold client funds in trust prior to
disbursement is dependent on Prof.Cond.R. 1.15 and the federal regulations governing
the availability of funds. Based on the applicable federal regulations, a check clears and
a bank is notified that a check will be dishonored usually within one week, or possibly
longer if it is a foreign check. Therefore, a reasonable time period for a lawyer to ensure
that a check clears and funds are available is seven to ten days. If the check is a foreign
check, a longer period of time may be considered reasonable. A lawyer who disburses
funds to a client from his or her trust account before the bank has collected the deposited
funds runs the risk of using funds belonging to another client to pay the check if the check
is not honored. Even if the lawyer has no dishonest or selfish motive, this action of using
another client’s funds may constitute conversion or misappropriation of funds. As a
result, a lawyer should be cognizant of his or her financial institution’s check-clearing
procedures and when funds become available for withdrawal, and should wait a
reasonable time before disbursing funds.

2 This time may be longer for foreign checks.
Op. 2016-7 5

A lawyer must inform and explain to his or her clients that simply because the federal
regulations require banks to make funds available those funds actually may not be
available until almost one week or longer, or perhaps not available if a check is denied
for nonpayment.

   A lawyer should take several precautions in practice when funds are received on

behalf of a client. First, the lawyer should obtain a written, signed agreement with the
client at the commencement of the representation, or shortly thereafter, that notifies the
client of a possible delay of a week or two weeks in delivery of funds to the client due to
banking regulations. Second, the lawyer should notify the client promptly upon receipt
of any funds received on behalf of the client. Third, the lawyer should confirm in a letter
to the client upon receipt of the funds the portion of the agreement regarding any delay
in the distribution of client funds. Finally, if no prior agreement with the client exists
regarding disbursement of the client funds, the lawyer should carefully explain to the
client the lawyer’s ethical obligations to hold the funds until the lawyer can confirm that
the funds are available for distribution to the client.

CONCLUSION: In order to ensure compliance with Prof.Cond.R. 1.15, a lawyer who
receives funds on behalf of a client should proceed with an abundance of caution and
wait a reasonable period of time until the check clears and the funds are available before
disbursing funds from the lawyer’s trust account to the client. Subject to the exceptions
set forth above, a period of one week to ten days is a reasonable period of time, given
federal banking regulations and modern banking practices.