Can a North Carolina lawyer disburse against funds credited to the trust account by ACH or EFT before the transfer is final?

Plain-English summary

The inquiry concerns whether a lawyer may disburse immediately against funds credited to her trust account by automated clearinghouse (ACH) transfer or electronic funds transfer (EFT), given that the originator can request a reversal (which the originating bank must request and the receiving bank approve, typically after seeking authorization from the credited account holder). The opinion concludes the lawyer may disburse immediately. ACH and EFT transfers are designed to make funds available immediately, like wired funds, and while there is some risk the originator may initiate a reversal, the risk is slight; the lawyer should receive notice from the receiving bank in time to act to prevent the reversal or otherwise protect other client funds in the trust account, citing 97 FEO 9 (a lawyer may accept trust-account payments by credit card even though the bank may debit the account if a charge is disputed).

The opinion adds a remedial rule: a lawyer is not guilty of professional misconduct if, on learning that an ACH or EFT has been reversed, she immediately acts to protect other clients' funds on deposit in the trust account, whether by personally depositing the funds needed to cover the deficit or by arranging payment from sources other than other clients' trust funds, citing RPC 191.

The opinion's endnote addresses related trust-accounting mechanics under Rule 1.15-3: a firm may convert paper checks it receives for a client to ACH debits to the trust account if it keeps the required record (showing amount, date, recipient, and, for a general trust account, the client). Checks drawn on a trust account, however, should not be converted to ACH, because the lawyer would not receive a physical check or image to satisfy the record-keeping rules; for that reason lawyers must use business-size checks with an Auxiliary-On-Us field in the MICR line, which cannot be converted to ACH.

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which a lawyer disburses immediately against ACH or EFT funds credited to the trust account is permitted; the opinion treats such transfers like wired funds and the reversal risk as slight, with bank notice giving the lawyer time to respond. Per the opinion, the analysis turns on the immediacy of electronic funds and the lawyer's ability to react: a reversal does not make the lawyer culpable so long as she immediately moves to protect other clients' funds, by depositing her own funds or arranging non-trust payment.

The opinion's record-keeping guidance is the operative limit: trust-account transactions must satisfy Rule 1.15-3, paper checks may be converted to ACH debits with the required records, but trust-account checks must use the Auxiliary-On-Us field so they cannot be converted to ACH and the record-keeping requirements are preserved.

Common questions

Q: Can a North Carolina lawyer disburse against ACH or EFT funds before they are final?

A: Yes. The opinion concludes that because ACH and EFT transfers are designed to be available immediately like wired funds and the reversal risk is slight, the lawyer may disburse immediately, with notice from the bank in time to protect other client funds if a reversal is attempted.

Q: What happens if the transfer is reversed after the lawyer disburses?

A: The opinion says a lawyer is not guilty of misconduct if she immediately protects other clients' trust funds, by personally depositing funds to cover the deficit or arranging payment from non-trust sources, citing RPC 191.

Q: Can a firm convert client paper checks to ACH debits into the trust account?

A: Yes, with records. The endnote says a firm may convert paper checks it receives for a client to ACH debits if it keeps the record required by Rule 1.15-3, showing the amount, date, recipient, and, for a general trust account, the client.

Q: Can checks drawn on the trust account be converted to ACH?

A: No. The endnote says trust-account checks should not be converted to ACH, because the lawyer would not receive a physical check or image for the record-keeping rules, so lawyers must use business-size checks with an Auxiliary-On-Us field that cannot be converted.

Background and rules framework

The opinion applies North Carolina Rule 1.15 (safekeeping property, the analogue of Model Rule 1.15) and its trust-accounting provisions, in particular the record-keeping requirements of Rule 1.15-3, to electronic funds credited to and debited from a trust account. It treats ACH and EFT credits like wired funds for purposes of immediate disbursement.

The opinion builds on prior North Carolina authority, 97 FEO 9 (accepting trust-account payments by credit card despite possible chargebacks) and RPC 191 (a lawyer must protect other clients' trust funds against a deficit), and references Rule 1.15 Comments [17] and [18].

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rule 1.15 (safekeeping property; trust accounting); NC Rule 1.15-3 (records; Rule 1.15-3(a), (b)(3), (c)(3))

Other opinions cited:

• NC 97 FEO 9: a lawyer may accept trust-account payments by credit card despite the risk of a chargeback debit.
• NC RPC 191: a lawyer must protect other clients' trust funds against a deficit caused by a failed payment.

See also

• NC State Bar 2008 FEO 7: Recording or Disbursing Closing Funds
• Virginia Bar Op. 1835: Disbursing Irrevocably Credited Trust Funds
• Virginia Bar Op. 753: Disbursement of Loan Funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2013-formal-ethics-opinion-13/

Original opinion text

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

Inquiry:

The originator of an automated clearinghouse (ACH) transfer1 or an electronic funds transfer (EFT) can initiate a reversal of the transaction. However, the reversal must be requested by the originating bank and approved by the receiving bank. When a bank receives a reversal request, it typically will attempt to obtain authorization from the individual whose account was credited before making a reversal.

May a lawyer disburse immediately against funds that are credited to her trust account by ACH or EFT if there is some risk that the originator may initiate a reversal?

Opinion:

Yes. Electronic funds transfers, whether ACH or EFT, are designed to make funds available immediately, like wired funds. While there is some risk that the originator may initiate a reversal, the risk of reversal is slight. Moreover, the lawyer should get notice from the receiving bank in time to take action to prevent the reversal or otherwise to protect other client funds on deposit in the trust account. See, e.g., 97 FEO 9 (lawyer may accept payments to a trust account by credit card although the bank is authorized to debit the trust account in the event a credit card charge is disputed).

A lawyer is not guilty of professional misconduct if that lawyer, upon learning that an ACH or EFT has been reversed, immediately acts to protect the funds of the lawyer's other clients on deposit in the trust account. This may be done by personally depositing the funds necessary to address the deficit created by the reversal or by securing or arranging payment from sources available to the lawyer other than trust account funds of other clients. See RPC 191.

End Notes

• When a paper check is converted to an automated clearinghouse (ACH) debit, the check is taken either at the point-of-sale or through the mail for payment, the account information is captured from the check, and an electronic transaction is created for payment through the ACH system. The original physical check is typically destroyed by the converting entity (although an image of the check may be stored for a certain period of time). A law firm may convert the paper checks that it receives on behalf of a client or a client matter for payment to the trust account through the ACH system. Authorized ACH debits from the trust account that are electronic transfers of funds (in which no checks are involved) are allowed provided the lawyer maintains a record of the transaction as required by Rule 1.15-3(b)(3) and (c)(3). The record, whether consisting of the instructions or authorization to debit the account, a record or receipt from the register of deeds or a financial institution, or the lawyer's independent record of the transaction, must show the amount, date, and recipient of the transfer or disbursement, and, in the case of a general trust account, also show the name of the client or other person to whom the funds belong. Nevertheless, checks drawn on a trust account should not be converted to ACH because the lawyer will not receive a physical check or a check image that can be retained in satisfaction of the record-keeping requirements in Rule 1.15-3. The transaction will appear on the lawyer's trust account statement as an ACH debit with limited information about the payment (e.g., dollar amount, date processed, originator of the ACH debit). For this reason, lawyers are required to use business-size checks that contain an Auxiliary-On-Us field in the MICR line of the check because these checks cannot be converted to ACH. See Rule 1.15-3(a). See generally Rule 1.15, comments [17] and [18] .