Can a real estate lawyer disburse from the trust account at closing before the lender's out-of-state draft has cleared, relying on other clients' funds as float?

Plain-English summary

A North Carolina real estate lawyer described residential mortgage lenders delivering closing packages with loan proceeds in drafts drawn on west coast banks, instructing that the draft not be deposited until closing, while his own bank placed a ten-day hold on such drafts. Because disbursements are expected the day of closing to satisfy existing mortgages and fund the seller's next purchase, depositing and disbursing the same day means using the "float" of other clients' funds in the trust account to cover the checks during the hold period. The lawyer asked whether he could ethically close before collecting the lender's draft.

The opinion concluded no, not by using the float of other clients' funds to cover the draft until collected. It relied on DR 9-102, which requires the lawyer to protect clients' funds in safekeeping and to pay or deliver them promptly when a client is entitled to them (DR 9-102(B)(4)). If the lender's draft did not clear, whether from a stop-payment order, litigation, or the lender's insolvency, the lawyer might be unable to pay other clients promptly; that risk should not fall on other clients, which is what happens when their float covers the disbursements. The opinion added that it does not prevent disbursing against a check the bank provisionally credits without a hold; barring exceptional circumstances, disbursing from provisionally credited funds is ethical.

Currency note

This opinion was issued in 1984 under North Carolina's former Code of Professional Responsibility (the DR/EC framework), before the State Bar replaced the Code with the Rules of Professional Conduct (adopted 1985) and before the 2003 revisions to those Rules. The trust-account and safekeeping principles it applied correspond to today's Model Rule 1.15. Subsequent rule amendments or later opinions may have changed the analysis, and North Carolina's good-funds and trust-accounting rules for real estate closings have developed substantially since 1984. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer disburse at closing before the lender's draft clears?

A: Not by using other clients' float. The opinion concluded the lawyer may not cover an uncollected lender's draft with the float of other clients' trust funds.

Q: Why is using the trust-account float a problem?

A: Per the opinion, if the draft fails to clear the lawyer might be unable to pay other clients promptly, so the risk of a stop-payment, litigation, or lender insolvency is improperly shifted onto those clients.

Q: Is any same-day disbursement permitted?

A: Yes. The opinion stated that disbursing against funds the bank provisionally credits to the account without a hold is, barring exceptional circumstances, ethical.

Citations and references

Rules of Professional Conduct:

• North Carolina DR 9-102 and DR 9-102(B)(4) (Code of Professional Responsibility; safekeeping and prompt delivery of client funds)
• MR 1.15 (safekeeping property; trust accounts)

See also

• NC Ethics Op. CPR 315: turning a State-supplied transcript over to the former client
• NC Ethics Op. CPR 100: the lawyer's role in a residential loan transaction

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/cpr-358/

Original opinion text

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

Inquiry:

Attorney A, licensed and practicing in North Carolina, does a substantial amount of real estate practice. Recently, Attorney A has noticed a growing practice among residential mortgage lenders to deliver closing packages with the loan proceeds evidenced by drafts drawn on California or other west coast banks. The instructions from the lender normally state that the draft is not to be deposited in the attorney's trust account until the closing has taken place. On the other hand, the bank in which the attorney maintains his trust account uniformly places a "ten-day hold" on drafts drawn on west coast banks.

In the normal residential real estate transaction, disbursements are expected from Attorney A's trust account the day of closing in order to (1) pay and satisfy the existing mortgage(s) and (2) provide the seller with the wherewithal to acquire a new or substitute home. If Attorney A deposits the lender's draft on the day of the closing and makes disbursements at the same time, he is using the "float" in his firm trust account to cover the checks during the "ten-day hold" period. Attorney A is concerned that the "float" in the trust account belongs to other clients and is bothered by using it to cover the funds until the west coast draft clears.

Can Attorney A ethically close a transaction in advance of collecting the lender's draft drawn on a west coast bank?

Opinion:

No, not by using the "float" in the trust account, representing funds of other clients, to cover the draft until it is collected. Attorney A is required by DR 9-102 to protect the funds of clients in his safekeeping. He must promptly pay or deliver those funds as requested by a client when a client is entitled to receive them. DR 9-102(B)(4). Should the draft from the west coast lender not clear, Attorney A might not be able to pay or deliver those funds promptly upon a request from one of the other clients. Although it may not be common, it is certainly possible that such a draft might not clear, whether because of a "stop payment" order by the lender, litigation tying up the funds of the lender, or the insolvency of the lender. This risk certainly should not be borne by other clients, but that is exactly what is happening when the "float" is used to cover the disbursements until the lender's draft clears. This opinion does not prevent an attorney from making disbursements based on the deposit of a check which the bank provisionally credits to the account without any "hold" period. Barring exceptional circumstances, it is ethical to make disbursements from funds provisionally credited to the attorney's trust account.