Can a Virginia lawyer keep using a bank that freezes the whole trust account after 2:00 deposits, knowing client checks will bounce?

Plain-English summary

A real estate firm deposits certified and cashier's checks into its trust account at a bank whose policy is to declare deposits made after 2:00 unavailable for two days and, critically, to freeze the entire account, not just the deposited amount, until then. The firm bounced two checks written for other clients because of this account-wide hold. The bank refuses to change the policy but offers to tell the Virginia State Bar each time a check bounces that the lawyers did nothing unethical. The committee was asked whether continuing to use this bank, knowing checks will occasionally bounce, violates the Rules.

The committee limits itself to the ethics question (real estate statutes are outside its purview) and identifies Rule 1.3(c) (not intentionally prejudicing a client) and Rule 8.4(b) and (c) (deliberately wrongful and dishonest conduct). It reviews the settlement-disbursement line of opinions: LEO 183 allowed immediate disbursement on funds in the forms prescribed by the Wet Settlement Act, reasoning that a diligent settlement attorney who asks for immediate credit will be accommodated by the bank, while LEO 898 barred immediate disbursement on a check deposited after the bank had closed, because such a deposit is not yet irrevocably credited.

The committee finds a post-2:00 but pre-closing deposit distinguishable from the after-hours deposit in LEO 898, since a teller would still issue a receipt rendering the deposit irrevocable. But the decisive distinction from LEO 183 is that this bank freezes the entire account, including other clients' funds, rather than just the deposited check, and is not accommodating the firm with immediate credit. That removes the situation from LEO 183's safe harbor. Writing checks for other clients knowing they will bounce intentionally prejudices those clients under Rule 1.3(c), and is a deliberately wrongful act (Rule 8.4(b)) involving a misrepresentation as to the check's negotiability (Rule 8.4(c)). The bank's explanatory letter does not change that. The committee concludes it is impermissible for the firm to write checks on the trust account during the hold period for as long as the bank maintains this policy.

In practice

The opinion holds that, under the Virginia rules as they stood at the time, a lawyer may not write trust-account checks while a bank's account-wide hold is in effect when the lawyer knows the checks will bounce. Per the opinion, intentionally bouncing client checks violates Rule 1.3(c), and issuing a check known to be unpayable is a deliberately wrongful act and a misrepresentation of the check's negotiability under Rule 8.4(b) and (c). The opinion notes that the bank's offer to vouch for the lawyers to the State Bar does not cure the violation, and the prohibition lasts as long as the bank keeps freezing the entire account.

Common questions

Q: Can a lawyer keep using a bank that freezes the whole trust account if it means some client checks bounce?

A: The opinion says the firm may not write checks on the account during the hold period while that policy continues, because it knows the account-wide freeze will bounce client checks.

Q: Which rules does intentionally bouncing a client's check violate?

A: The opinion says Rule 1.3(c) (intentionally prejudicing a client) and Rule 8.4(b) and (c) (a deliberately wrongful act and a misrepresentation as to the check's negotiability).

Q: Does it matter that the bank freezes the entire account, not just the deposit?

A: Yes. The opinion says freezing the whole account, including other clients' funds, is what removes the situation from LEO 183's safe harbor for immediate disbursement.

Q: Does the bank's letter to the State Bar protect the lawyers?

A: No. The opinion says the bank explaining its policy each time a check bounces does not change that writing the check violated Rule 1.3(c) and Rule 8.4.

Background and rules framework

The opinion interprets Rule 1.3 (Model Rule 1.3), specifically 1.3(c)'s bar on intentionally prejudicing a client, and Rule 8.4 (Model Rule 8.4), paragraphs (b) and (c) on deliberately wrongful and dishonest conduct. It applies the settlement-disbursement framework of Virginia LEO 183 and LEO 898 against the backdrop of the Wet Settlement Act (Virginia Code Section 6.1-2.10 et seq.).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.3 / Virginia Rule 1.3(c) (not intentionally prejudicing or damaging a client)
• Model Rule 8.4 / Virginia Rule 8.4(b), (c) (deliberately wrongful acts; dishonesty and misrepresentation)

Statutes:

• Virginia Code Section 6.1-2.10 et seq. (the Wet Settlement Act)

Other opinions cited:

• Virginia LEOs 183 (immediate disbursement on prescribed funds) and 898 (no disbursement on an after-hours deposit)

See also

• VA LEO 1807: Garnishing Fees in a Trust Account
• VA LEO 1835: Disbursing Uncollected Trust Funds
• ABA Formal Op. 505: Fees Paid in Advance

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1797.pdf

Original opinion text

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

Committee Opinion
June 30, 2004
LEGAL ETHICS OPINION 1797

IS IT UNETHICAL FOR AN ATTORNEY TO
DISBURSE PROCEEDS FROM A TRUST
ACCOUNT THE BANK HAS TEMPORARILY
FROZEN?

You have presented a hypothetical situation in which a law firm was shocked to learn that it
had bounced two checks on its real estate trust account. The firm in its real estate practice
believes it complies strictly with CRESPA, the Wet Settlement Act 1 and all other law applicable
to real estate closings. When the law firm receives certified or cashiers checks from clients or
mortgage institutions for real estate closings, it deposits the checks into the firm’s real estate trust
account at Bank X (“the Bank”). The Bank has a policy that if the deposit is made after 2:00 on,
for example, Monday, the Bank declares the funds unavailable until two days later, in the
example – Wednesday. The Bank permits the issuance of a certified or cashier’s check after the
deposit for purchasing the real estate; however, the Bank puts a hold on the entire trust account.
The hold is not just for the amount of the deposited check, but is on all monies in that account.
The two checks bounced were written for other clients on the Tuesday in the example and
because the Bank had put a hold on the entire account, the checks bounced. The Bank refuses to
change its policy regarding this hold procedure. The firm cannot perform all closings early
enough to deposit all checks before 2:00. The Bank tells the law firm that when such checks
bounce in the future, the Bank will, as required, notify the Virginia State Bar of the overdraft but
explain that the Bank believes the attorney has done nothing unethical. The Bank assures the
law firm that it believes its letter protects the lawyers and would meet with Virginia State Bar
approval.
Under the facts you have presented, you have asked the following question:
If the law firm continues to use this bank for its real estate trust account and
knows that the Bank’s policy will lead to occasional checks written to and for
clients bouncing (even though there are funds in the account), is the law firm
violating the Rules of Professional Conduct or any other real estate law?
Questions involving real estate statutes, regulations, and case law are outside the purview of
this Committee. Accordingly, this opinion will address only whether by continued use of this
bank, with this policy, the attorneys in this firm are in violation of the Rules of Professional
Conduct.
The specific provisions at issue for the real estate attorneys in this firm are Rules 1.3’s duty of
diligence and Rule 8.4’s description of misconduct. Specifically, Rule 1.3(c) prohibits an
attorney from intentionally prejudicing or damaging a client during the course of the professional
representation, except for in two exceptional circumstances not at issue here. Rule 8.4, in
pertinent part, deems it unethical for a lawyer to:
(b) commit a criminal or deliberately wrongful act that reflects adversely on
the lawyer's honesty, trustworthiness or fitness to practice law; [or]
1

Virginia Code Section 6.1-2.10 et. seq.

Committee Opinion
June 30, 2004

(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation
which reflects adversely on the lawyer’s fitness to practice law.
An attorney handling real estate proceeds faces a dilemma created by his obligation to disburse
the proceeds timely according to the Wet Settlement Act yet also stay within the parameters of
the ethics rules. This Committee has addressed that dilemma in prior opinions. In Legal Ethics
Opinion (LEO) 183, this Committee considered a similar question to the one raised by the
present hypothetical regarding whether an attorney serving as a settlement agent could disburse
the funds to comply with the Wet Settlement Act immediately upon deposit. The opinion
concludes that so long as the items deposited are in a form prescribed in the Wet Settlement Act,
such as cashier’s and certified checks the attorney can disburse funds immediately after deposit.
In coming to that conclusion, the opinion explains the careful balance drawn in this situation:
The Committee believes that the new Wet Settlement Act recognizes the
considerable risks, beyond the control of the settlement agent, that funds in
other forms, such as ordinary commercial checks, may be uncollectable in any
given transaction. The Committee further believes that the forms of funds
identified in the statute generally are regarded as completely reliable. The
Committee, as a matter of ethical responsibility, is unwilling to impose a
stricter rule than that necessary to conform to the Wet Settlement Act. Thus,
notwithstanding the fact that some of the forms of funds designated in Section
6.1-2.10 are not “collected” in a commercial banking sense at the time they are
deposited by the settlement attorney, the Committee is of the opinion that any
risk of noncollectability is so slight as to make it unnecessary to restrict a
settlement attorney's ability to disburse upon funds received and deposited by
him in such form.
In contrast, however, the Committee is of the further opinion that disbursement
by a settlement attorney upon a check of a lender or purchaser not within the
forms prescribed in Section 6.1-2.10 prior to actual crediting irrevocably of
such check to the settlement attorney's trust account by the depository bank is
unethical. An attorney must assume that the recipients of checks drawn upon
his trust account will present such checks for payment immediately at the
drawee bank. Because of the time lag between deposit and collection of checks
deposited by the attorney in his trust account, the payment by the drawee bank
of trust account checks drawn by the settlement attorney against such
uncollected items will necessarily be made from funds of other clients of the
attorney who are not even parties to the real estate transaction in connection
with which the settlement attorney issues his trust account checks. The
attorney has thus used the funds of other clients for his own purpose — the
conclusion of the real estate transaction from which he is earning a fee. To
illustrate the inherent impropriety in such practices, one need only ask the
rhetorical question: “Would the lawyer's other clients, not parties to the real
estate transaction, be willing to lend their funds to the lawyer without interest
so that he could conclude that real estate transaction?”

Committee Opinion
June 30, 2004

The Committee is aware that the same type of invasion of other clients' funds
may be involved in the immediate disbursement upon funds in some of the
forms specified in Section 6.1-2.10, but the Committee also believes that a
diligent settlement attorney who presents funds in these forms to his bank with
a request that such bank extend immediate credit upon deposit in his trust
account will be accommodated by the bank. While the Wet Settlement Act is
not a perfect solution to the ethical problems inherent in disbursing upon
uncollected funds, the Committee is of the opinion that an attorney who
observes its provisions strictly and who uses diligence to obtain credit in his
trust account at the earliest possible time upon items deposited therein in the
forms prescribed by the Wet Settlement Act, will not be exposing his clients to
any serious risk of harm.
The Committee found distinguishable the situation later raised in LEO 898. In that opinion,
the question raised is whether an attorney could disburse immediately after depositing a check
into the Bank after the Bank has officially closed. The opinion summarizes the prior conclusion
drawn in LEO 183 as resting on the concept that, in that situation, the check would be
“irrevocably credited” to the account. When a check is deposited after hours, it is in no way
credited to the account at the time of the deposit. Therefore, the Committee concluded in LEO
898 that an attorney could not disburse proceeds immediately after depositing the check into a
closed bank.
Is the policy of the Bank, regarding the deposit of a check after 2:00 but during the Bank’s
open hours, the equivalent to the after-hours deposit in LEO 898? The Committee opines that
the deposit after 2:00, if made while the Bank remains open, is distinguishable from LEO 898.
At this bank, even with its 2:00 policy of freezing accounts for post-2:00 deposits, when a
deposit is made, for example at 3:00, the teller would presumably still issue a deposit receipt
confirming deposit, thereby rendering the deposit “irrevocable.” Those post-2:00 but pre-closing
time deposits would be irrevocably credited and thus not directly prohibited by the principle
established in LEO 898.
The Committee opines that if the attorneys in the firm in the above hypothetical deposit the
checks in question not only after 2:00, but also after the Bank closes, LEO 898 squarely applies
and makes clear that immediate disbursement would be impermissible. The question remains
then whether the attorneys may deposit the real estate checks after 2:00 but while the Bank is
still open, an issue not addressed in LEO 898. Critical here is the principle stated in Rule 1.3(c)
that an attorney should not intentionally prejudice or damage a client. The present hypothetical
and that of LEO 183 are distinguishable in an important way. In LEO 183, only the amount of
the check is frozen by the Bank, with other monies remaining available. In contrast, in the
present hypothetical, the Bank freezes the entire account regardless of the amount of the check or
the amount of other funds in the account.
In the portion of LEO 183 quoted above, a key point is the following:

Committee Opinion
June 30, 2004
…the Committee also believes that a diligent settlement attorney who presents
funds in these forms to his bank with a request that such bank extend
immediate credit upon deposit in his trust account will be accommodated by
the bank.
(Emphasis added.) The hypothetical presented in LEO 183 included that sort of bank
cooperation. In contrast, the Bank in the present hypothetical is not cooperating and
accommodating the real estate attorneys by extending immediate credit. To the contrary, the
Bank is freezing the entire account, including all monies deposited on behalf of other clients.
The Committee opines that this distinction removes the present hypothetical from the safe harbor
developed in LEO 183.
Were these attorneys to deposit real estate proceeds in a trust account with the Bank in the
hypothetical situation, it would be done with the knowledge that as checks are written for other
clients on Monday or Tuesday, those checks will bounce. To intentionally bounce those checks
would be a violation of Rule 1.3(c). That the Bank would explain its policy to the Virginia State
Bar each time such a check bounced does not change that the writing of the check violated Rule
1.3(c)’s prohibition against intentionally prejudicing or damaging a client.
Similarly, for those attorneys to write those checks, with the knowledge that the
checks will bounce would be impermissible under Rule 8.4. In pertinent part, Rule 8.4
states:
It is professional misconduct for a lawyer to:
(b) commit a criminal or deliberately wrongful act that reflects
adversely on the lawyer's honesty, trustworthiness or fitness to practice law; [or]
(c) engage in conduct involving dishonesty, fraud, deceit or
misrepresentation which reflects adversely on the lawyer’s fitness to practice
law.
The intentional writing of a check with the knowledge it will bounce is the sort of deliberate
act prohibited in paragraph (b) of the rule. Also, such an act involves a misrepresentation as to
the negotiability of the check, and thus violates paragraph (c) of the Rule. The attorney would
be making a misrepresentation to whomever the check is written in that transmitting the check
suggests that the check is “good” and will provide the stated funds to the payee. Those
provisions are violated in that the intentional writing of checks that will bounce would reflect
adversely on an attorney’s basic trustworthiness and fitness to practice. It is fundamental that
when a client or any member of the public receives a check from a lawyer written on his trust
account, that person must be able to count on the good faith of the lawyer and the reliability of
the check.
It is outside the purview of this Committee to regulate this bank or its policies. However, this
Committee does opine that it would be impermissible under the Rules of Professional Conduct
for these attorneys to write checks on the trust account during this hold period for so long as the
Bank maintains this policy.

Committee Opinion
June 30, 2004

This opinion is advisory only, based only on the facts you presented and not binding on any
court or tribunal.