Can a lawyer treat an ACH transfer into the trust account as 'collected funds' that may be disbursed for a real estate closing?

Plain-English summary

The inquiry asked whether Automated Clearing House (ACH) transfers issued to attorney trust accounts are "collected funds" for the purpose of disbursing on real estate transactions. The committee concluded that ACH deposits may not be treated as collected funds, due to the reversibility of such deposits, at least until the expiration of five banking days after receipt.

The committee explained that Rule 1.15(f)(1) bars a lawyer from disbursing trust funds unless the funds have been deposited and are collected funds, while Rule 1.15(f)(2) lets a lawyer disburse at the lawyer's risk in reliance on a deposit made "by verified and documented electronic funds transfer," without specifically addressing the various types of electronic funds transfer. ACH transactions are a form of electronic funds transfer, distinguished from a wire transfer in that ACH processes large volumes of transactions in batches rather than individual transfers, and are governed by NACHA rules.

The committee cited Section 2.9 of the NACHA 2012 Operating Rules, under which an originator may initiate a reversing entry to correct an erroneous entry, transmitted within five banking days after the settlement date of the erroneous entry. Erroneous entries include duplicates, payments to or from the wrong receiver, and payments in the wrong dollar amount; the settlement date is when the exchange of funds is reflected on the books of the applicable Federal Reserve Bank. Because an ACH deposit may be reversed without the receiving bank's consent if it meets one of those exceptions and the reversal occurs within five banking days of the deposit being reflected on the receiving bank's books, the funds are not collected until that window closes.

In practice

The opinion holds that, under South Carolina Rule 1.15(f)(1), a lawyer may not disburse trust funds unless they are collected, and an ACH deposit is not collected for at least five banking days after receipt because NACHA rules allow an erroneous ACH entry to be reversed within that period without the receiving bank's consent. The opinion notes Rule 1.15(f)(2) lets a lawyer disburse at the lawyer's own risk in reliance on a verified and documented electronic funds transfer, but the rule does not resolve the reversibility of ACH specifically. The analysis distinguishes ACH (batched, reversible within five banking days) from wire transfers.

Common questions

Q: Can a lawyer disburse a real estate closing as soon as an ACH payment hits the trust account?

A: No, not safely. The committee said ACH deposits may not be treated as collected funds at least until five banking days after receipt, because they can be reversed within that period.

Q: Why are ACH deposits different from wire transfers?

A: Reversibility and batching. The committee said ACH processes large volumes of transactions in batches rather than individual transfers, and NACHA rules allow an erroneous ACH entry to be reversed within five banking days of settlement, unlike a wire.

Q: What does Rule 1.15 require before disbursing?

A: Collected funds. The committee said Rule 1.15(f)(1) bars disbursing trust funds unless they are deposited and collected, and Rule 1.15(f)(2) permits disbursing at the lawyer's risk in reliance on a verified and documented electronic funds transfer.

Background and rules framework

The opinion interprets South Carolina Rule 1.15(f)(1) (no disbursement unless funds are deposited and collected) and Rule 1.15(f)(2) (disbursement at the lawyer's risk in reliance on certain deposits, including verified electronic funds transfers), which correspond to South Carolina's trust-accounting provisions under Model Rule 1.15. The analysis applies the NACHA 2012 Operating Rules' five-banking-day reversal window for erroneous ACH entries to conclude that ACH deposits are not collected until that window passes.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15(f)(1) (disburse only collected funds), 1.15(f)(2) (disbursement at the lawyer's risk on verified electronic funds transfer)

Other authorities:

• NACHA 2012 Operating Rules, Section 2.9 (reversing entries for erroneous entries; five-banking-day window; settlement date)

See also

• SC Bar Ethics Op. 12-05: Out-of-State Trust Signatory
• SC Bar Ethics Op. 06-02: Marked-Up Recording Fees at Closing

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-12-11/
• Original PDF: https://www.scbar.org/media/4idfafhu/12-11.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 12-11

SC Rule of Professional Conduct: 1.15

Question

Are Automated Clearing House transfers that are issued to attorney trust accounts considered collected funds for the purpose of disbursing on real estate transactions?

Summary

Funds deposited by ACH deposit may not be treated as “collected funds”, due to the reversibility of such deposits, at least until expiration of five banking days after receipt.

Opinion

Rule 1.15(f)(1) states that a lawyer shall not disburse funds from his trust account unless the funds to be disbursed have been deposited in the account and are collected funds. It is noteworthly that 1.15(f)(2) states that a lawyer may disburse funds from a trust account at the lawyer's risk in reliance on deposits when the deposit is "(ii) by verified and documented electronic funds transfer." However, the rule does not specifically address the various types of electronic funds transfer.

Automated Clearing House (ACH) transactions are a form of electronic funds transfer but are distinguished from a wire transfer in that ACH processes large volumes of transactions in batches instead of individual transfers. ACH transactions are governed by NACHA (formerly the National Automated Clearing House Association).

Section 2.9 of the NACHA 2012 Operating Rules provides that “[a]n Originator may initiate a Reversing Entry to correct an Erroneous Entry previously initiated to a Receiver’s account.” It further provides that “[t]he Reversing Entry must be Transmitted to the ACH Operator in such a time to be Transmitted or made available to the Receiving Depository Financial Institution (RDFI) within five Banking Days after the Settlement Date of the Erroneous Entry.” Erroneous entries are defined as: “(a) a duplicate of an Entry previously initiated by the Originator or Originating Depository Financial Institution (ODFI); (b) orders payment to or from a Receiver different than the Receiver intended to be credited or debited by the Originator; (c) orders payment in a dollar amount different than what was intended by the Originator; …” The Settlement Date is further defined as “… the date an exchange of funds with respect to an Entry is reflected on the books of the applicable Federal Reserve Bank(s)… .”

Therefore, an ACH deposit may be reversed without the consent of the RDFI as long as it meets one of the exceptions noted above and the reversal is done within five banking days of the date the deposit is reflected on the books of the receiving bank.