NEW REQUIREMENTS FOR BANKS THAT HANDLE LAWYER TRUST ACCOUNTS
By Sonia J. Buck, Esq.
The Maine Supreme Judicial Court’s July 1, 2015 revisions to the attorney IOLTA (Interest on Lawyer Trust Accounts) rules resulted in significant changes for Maine banks and credit unions carrying such accounts for their lawyer or law firm clients.
IOLTA — BACKGROUND
In the practice of law, it is routine for lawyers to receive client funds, for fee retainers, or other future client-related use. In most cases, these deposits are relatively small amounts, or funds that will only be held in trust for a short period of time. It would not be efficient or practical to establish separate interest bearing accounts for each individual client deposit. Accordingly, lawyers with trust accounts are required to participate in the IOLTA program. Funds are placed in an interest bearing account with an IOLTA-eligible financial institution, with the interest paid to the Maine Justice Foundation. The Foundation manages the interest account and works with Maine non-profits to provide legal services pro bono publico (that is, “for the good of the public”). The organizations funded by Maine IOLTA include: Pine Tree Legal Services, Volunteer Lawyer’s Project, Legal Services for the Elderly, Cumberland Legal Aid Clinic, Maine Equal Justice Project, and the Immigrant Legal Advocacy Project.
IOLTA is an effective and long-standing mechanism for raising money to fund charitable organizations providing civil legal services to Maine’s indigent population – those most vulnerable in need of access to justice.
NEW REPORTING REQUIREMENTS
A new reporting rule has been put into place that serves as an additional layer of lawyer regulation and oversight by the attorney governing body in Maine – the Maine Board of Overseers of the Bar. The new rule requires participating financial institutions to notify the Board of Overseers of the Bar “whenever any properly payable instrument is presented against a lawyer trust account containing insufficient funds, irrespective of whether or not the instrument is honored.” See Maine Bar Rule 6(c)(3)(A-B). Even if the customer/lawyer rectifies the problem with the account, such that the check is ultimately properly cashed, a bank must nevertheless notify the Board of Overseers of the Bar. Maine IOLTA eligible financial institutions will need to comply and cooperate with the Board of Overseers of the Bar to enforce this new regulation.
Under Rule 6(c)(5)(B), the report to the Board of Overseers of the Bar “shall be made simultaneously with, and within the time provided by law for notice of dishonor.” Maine law on negotiable instruments provides that, “with respect to an instrument taken for collection by a collecting bank, notice of dishonor must be given:
(a) By the bank before midnight of the next banking day following the banking day on which the bank receives notice of dishonor of the instrument; or
(b) By any other person within 30 days following the day on which the person receives notice of dishonor.” 11 M.R.S.A. § 3-1503.
In other words, banks are not permitted to give the offending law firm a chance to correct the overdraft before it is obligated to report the overdraft to the Board. Even if the instrument presented against insufficient funds is ultimately honored, the law requires that the report “be made within five banking days of the date of presentation for payment against insufficient funds.”
NEW AGREEMENT WITH BOARD OF OVERSEERS OF THE BAR
Not only are banks now required to report their lawyer clients in the event of an “insufficient funds” situation, in order to continue to be an eligible IOLTA financial institution, the bank must sign an agreement, assuring that it will comply with these new reporting requirements. The form agreement also sets forth the procedures that eligible financial institutions are required to follow under this mandatory reporting mechanism. The agreement provides that banks may use the reporting format already in place for overdraft notices sent to their customers, generally, so long as the report provide the customary information: the identity of the financial institution and the lawyer/law firm; the account number; the date on which the check was presented for payment, the date paid (if the check were ultimately honored), and the amount of the overdraft created. Under the form agreement, a financial institution may charge the offending law firm for any costs incurred in producing the required reports and records. The agreement also requires an eligible IOLTA bank to respond to reasonable requests from the Board of Overseers of the Bar regarding overdraft reports and the related procedures.
The form of such an agreement is now available through the Maine Justice Foundation (formerly known as the Maine Bar Foundation). The form agreement is entitled Maine Justice Foundation Form #1: December 2015.
ATTORNEY AUTHORIZATION FOR BANK’S IOLTA OVERDRAFT REPORTING
The revised rule also requires lawyers or law firms who currently hold IOLTA account to
sign an authorization form, to allow banks to provide the required overdraft notification to the Board of Overseers of the Bar, notwithstanding account holder confidentiality. The law firms must provide an original authorization form to each financial institution holding their IOLTA accounts. A copy of any such authorization must also be sent to the Board of Overseers of the Bar.
Similarly, the initial form required when new IOLTA accounts are opened has also been revised to reflect this new reporting requirement and to authorize the reporting of confidential lawyer account information pursuant to the new rule.
BAR COUNSEL VERIFICATION PROCESS
Another IOLTA safeguard in Maine is Bar Rule 6(d), which allows Bar Counsel to verify the accuracy and integrity of a lawyer’s bank account(s) whenever Bar Counsel “has evidence that bank or trust accounts of a lawyer that contain, should contain, or have contained funds belonging to clients have not been properly maintained or that the funds have not been properly handled.” Bar Counsel must first obtain the approval of the Chair of the Board of Overseers of the Bar to initiate an investigation under this Rule, and the investigation must be conducted in such a way that is “to preserve the private and confidential nature of the lawyer’s records insofar as is consistent with these Rules and the lawyer-client privilege.”
According to the Maine Justice Foundation, approximately 95% of all eligible Maine lawyers participate in the IOLTA program. More than 40 Maine banks and credit unions are eligible IOLTA institutions. Although the overdraft notification requirements marks a significant departure from current Maine IOLTA practice, these changes put Maine in line with the overwhelming majority of U.S. jurisdictions that currently provide for IOLTA oversight in an effort to protect the public and the interest of the clients. It is important that Maine banks continue to work with the Maine Justice Foundation and the Board of Overseers of the Bar to continue our state’s successful IOLTA program and pro bono legal services, and to implement these new requirements in order to ensure the ongoing success of the program, as well as public confidence in the program and those that run IOLTAs.