Can a lawyer disburse settlement funds from the trust account against an insurance check before confirming it has been collected?

Plain-English summary

A lawyer deposits insurance-company checks for workers' compensation and personal-injury settlements into her trust account. Because insurance checks are not among the instruments identified in the Good Funds Settlement Act (G.S. § 45A-4), she must wait until the funds are irrevocably credited or collected before disbursing, per RPC 191. Unable to find a bank that will confirm when deposited funds have been collected, she and other local lawyers instead disburse against deposits using a funding schedule (3 business days for in-state checks, 7 for out-of-state). The question is whether she may disburse in reliance on that schedule.

The opinion explains that RPC 191 lets lawyers disburse immediately against provisionally credited deposits when the funds are cash, wired funds, or one of the instruments enumerated in the Good Funds Settlement Act. For all other instruments, the lawyer has an obligation to conduct reasonable due diligence to determine whether deposited funds have been collected before disbursing. A lawyer should first consult her bank about when a particular instrument has been collected or funded, and should consider the source of the funds, including whether the payor is reputable and whether the instrument is likely to be honored. If the bank confirms the funds are collected, the lawyer may rely on that and disburse.

A lawyer may reasonably rely on the bank's funding or "float" schedule only when she cannot confirm whether funds have been irrevocably credited and has no reason to believe the instrument will not be honored. In any case, if the lawyer later learns an instrument has been dishonored, she must act immediately to protect other trust account property by personally paying the amount of the failed deposit or arranging payment from other sources; RPC 191 cautions against disbursing against uncollected funds where the lawyer's assets or credit would be insufficient to cover the trust account checks if an item is dishonored. So if the lawyer cannot confirm a particular insurance check has been collected, she may rely on and disburse per the bank's funding schedule only if she reasonably believes the trust account check will be honored and she is able to fund the check if it is ultimately dishonored.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on the type of instrument and the lawyer's ability to verify collection and cover a failed deposit. The opinion holds that immediate disbursement is allowed for cash, wired funds, and the enumerated Good Funds instruments, while other instruments require reasonable due diligence and, where confirmation is unavailable, reliance on a float schedule only with a good-faith expectation of payment and the ability to cover a dishonored item.

Per the opinion, a lawyer who learns an instrument was dishonored must act immediately to protect other clients' trust funds by covering the shortfall.

Common questions

Q: Can a lawyer disburse settlement money as soon as an insurance check is deposited?

A: Not automatically. The opinion concludes that for instruments outside the Good Funds Settlement Act, such as insurance checks, the lawyer must conduct reasonable due diligence on whether the funds have been collected before disbursing.

Q: Can a lawyer rely on the bank's funding or "float" schedule?

A: Only as a fallback. The opinion concludes a lawyer may rely on the bank's float schedule only when she cannot confirm the funds are irrevocably credited, has no reason to believe the instrument will be dishonored, and can cover the trust account if the check is dishonored.

Q: What instruments can be disbursed against immediately?

A: Cash, wired funds, and the Good Funds instruments. The opinion concludes RPC 191 permits immediate disbursement against provisionally credited deposits of cash, wired funds, or instruments enumerated in the Good Funds Settlement Act.

Q: What must the lawyer do if a deposited check is later dishonored?

A: Cover it immediately. The opinion concludes the lawyer must act at once to protect other trust account property by personally paying the failed deposit or arranging payment from other sources.

Background and rules framework

The opinion applies the trust-accounting duties of North Carolina Rule 1.15 (handling of entrusted property; here, Rule 1.15-2 on trust disbursements), which tracks Model Rule 1.15, together with RPC 191 and the Good Funds Settlement Act (G.S. § 45A-4). The framework permits immediate disbursement only against specified low-risk instruments and otherwise requires due diligence on collection plus the capacity to cover a dishonored deposit.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rule 1.15-2 (safekeeping and disbursement of entrusted property)

Statutes:

• N.C. Gen. Stat. § 45A-4 (Good Funds Settlement Act; enumerated instruments)

Other opinions cited:

• NC RPC 191: a lawyer may disburse immediately against provisionally credited deposits of cash, wired funds, or enumerated instruments, but must use due diligence and not disburse against uncollected funds the lawyer could not cover.

See also

• NC RPC 191: Disbursements Upon Provisionally Credited Trust Funds
• NC 2006 FEO 16: Distribution of Disputed Legal Fees
• NC 2006 FEO 15: Dormancy Fee on Unclaimed Funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2006-formal-ethics-opinion-8/

Original opinion text

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

Inquiry:

Attorney receives insurance company checks for payment of workers' compensation and personal injury settlements. Upon receipt, Attorney deposits these checks into her trust account. Because the insurance checks are not among the identified instruments in the Good Funds Settlement Act, G.S. §45A-4, she must wait until the funds have been "irrevocably credited" or collected before disbursing from the trust account to the client. RPC 191. Attorney has been unable to locate a bank that is willing to confirm when deposited funds have been collected.

Attorney has consulted with other lawyers in her locality with similar practices. Rather than call the bank to confirm that the funds have been collected, the lawyers routinely disburse against items deposited in the trust account, based upon prior dealings with the banks, in accordance with the following funding schedule: 3 business days for an in-state check and 7 business days for an out-of-state check. Attorney would like to follow this funding or "float" schedule for disbursements, as it appears to be the standard in her community.

May Attorney disburse funds from her trust account in reliance upon this schedule?

Opinion:

RPC 191 permits lawyers to disburse immediately from the trust account in reliance upon the deposit of funds provisionally credited to the account if the funds are in the form of cash, wired funds, or one of the enumerated instruments listed in the Good Funds Settlement Act. For all other instruments, a lawyer has an obligation to conduct reasonable due diligence to determine whether funds deposited into the trust account have been collected prior to disbursement.

Initially, a lawyer always should consult with her bank to determine when a particular instrument has been collected or funded. Before disbursing, a lawyer should also consider the source of the funds, i.e., whether the payor is reputable and whether the instrument is likely to be honored. If a lawyer receives confirmation by the bank that the funds deposited are collected, then the lawyer may rely upon this information and disburse against the funds. A lawyer reasonably may rely upon her bank's funding or "float" schedule or policy only when the lawyer is unable to confirm whether funds have been irrevocably credited to his account and he has no reason to believe a particular instrument will not be honored under the circumstances. In any case, if the lawyer subsequently learns that an instrument has been dishonored, the lawyer must act immediately to protect other trust account property by personally paying the amount of any failed deposit or arranging for payment from other sources. "An attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that an... item is dishonored." RPC 191.

Therefore, if Attorney is unable to confirm that a particular insurance check has been collected, she may reasonably rely upon and disburse in accordance with her bank's funding schedule as long as 1) she reasonably believes the trust account check will be honored, and 2) she is able to fund the check in the event it is ultimately dishonored.