Can a settlement attorney agree to a lender's request to waive certified funds and disburse on uncollected items at a real estate closing?

Plain-English summary

A law firm was asked whether it could honor a mortgage lender's request to waive all future rights to certified funds on real estate closings, given the firm's concern that funding such loans would not comply with the disbursement requirements of Virginia's Wet Settlement Act (Va. Code § 6.1-2.10). The committee treated several earlier opinions as dispositive, most notably LE Op. 900, which holds that an attorney must comply with a lender's or principal's instructions only to the extent they are lawful; if following them would breach the Act, the attorney must advise the lender and then comply with the Act (citing DR 7-102(A)(8), barring knowingly engaging in illegal conduct).

The committee identified DR 9-102(B)(3) and (4) as controlling: a lawyer must keep complete records of client funds and promptly pay clients funds they are entitled to receive. While the rule imposes an affirmative duty to pass funds to the party entitled to them, the committee read it to implicitly prohibit paying funds from escrow to a party not yet entitled, so a strict interpretation requires the attorney not to disburse on deposited items until the bank has irrevocably credited them. It noted that an attorney holding client money assumes a strict fiduciary responsibility, citing Pickus v. Virginia State Bar, 232 Va. 5 (1986).

Drawing on LE Op. 183, the committee explained that disbursing on a lender's or purchaser's check before it is irrevocably credited is unethical, because checks drawn against uncollected items necessarily draw on the funds of the attorney's other clients who are not parties to the transaction, making such noncompliance with the Wet Settlement Act illegal and a violation of DR 7-102(A)(8). It concluded that the lender's request to waive certified funds is permissible so long as the attorney advises the lender that the settlement proceeds must nevertheless be in one of the other acceptable forms enumerated in § 6.1-2.10 to comply with the Act.

Currency note

This opinion was issued in 1989, under Virginia's former Code of Professional Responsibility (the disciplinary rules it cites), before the Virginia State Bar's adoption of the Rules of Professional Conduct effective January 1, 2000. The trust-account duties cited here are now within Rule 1.15, and the duty not to engage in illegal conduct within Rule 1.2. Subsequent rule amendments or later opinions may have changed the analysis. 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 settlement attorney agree to a lender's waiver of certified funds?

A: Under this 1989 opinion, yes, but only conditionally. The committee said the attorney may honor the waiver only if he advises the lender that the proceeds must still take one of the forms the Wet Settlement Act permits under Va. Code § 6.1-2.10.

Q: Why can't the attorney disburse on uncollected items?

A: The committee explained that disbursing before items are irrevocably credited draws on other clients' trust funds, making the conduct noncompliant with the Wet Settlement Act and therefore illegal and a violation of DR 7-102(A)(8).

Q: What does the attorney owe the lender if its instructions would breach the Act?

A: Following LE Op. 900, the committee said the attorney must comply with the lender's instructions only to the extent lawful; if compliance would breach the Act, he must advise the lender of that fact and then comply with the Act.

Background and rules framework

The opinion interpreted former Virginia DR 9-102(B)(3) and (4) (recordkeeping and prompt payment of client funds) and DR 7-102(A)(8) (not knowingly engaging in illegal conduct), applied against the disbursement requirements of Virginia's Wet Settlement Act, Va. Code § 6.1-2.10. The trust-account duties are now within Rule 1.15.

Citations and references

Rules of Professional Conduct:

• Former Virginia DR 9-102(B)(3) and (4) (recordkeeping; prompt payment of client funds)
• Former Virginia DR 7-102(A)(8) (not knowingly engaging in illegal conduct)
• ABA Model Rule 1.15 (safekeeping property); Model Rule 1.2 (limits on assisting illegal conduct)

Statutes:

• Virginia Wet Settlement Act, Va. Code § 6.1-2.10 (forms of disbursement at real estate settlement).

Cases:

• Pickus v. Virginia State Bar, 232 Va. 5 (1986), strict fiduciary responsibility for client money.

Other opinions cited:

• Virginia LE Op. 900: duty to follow lawful instructions and otherwise comply with the Act.
• Virginia LE Op. 183; LE Op. 753; LE Op. 813: not disbursing on uncollected trust-account items.

See also

• VA LEO 1466: Wet Settlement Act Form of Funds
• VA LEO 1835: Disbursing Uncollected Trust-Account Funds
• VA LEO 1797: Trust-Account Bank Freeze and Bouncing Checks
• VA LEO 1865: Third-Party Liens on Settlement Funds

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1255.pdf

Original opinion text

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

Committee Opinion
July 25, 1989
LEGAL ETHICS OPINION 1255

REPRESENTATION WITHIN THE
BOUNDS OF THE LAW – TRUST
ACCOUNTS – WET SETTLEMENT ACT:
AGREEMENT BETWEEN ATTORNEY
AND LENDER TO WAIVE ALL FUTURE
RIGHTS TO LENDER’S CERTIFIED
FUNDS.

You have asked the Committee to consider the propriety of a law firm honoring a mortgage corporation/lender's request to waive all future rights to certified funds on closings that occurred between the mortgage corporation and the clients of the law firm. You are concerned since you believe the funding of such loans would not be in compliance with the disbursement of loan proceeds as defined in Virginia Code Section 6.1-2.10, Virginia's "Wet Settlement Act". The Committee is of the view that there are several earlier ethics opinions which are dispositive of the inquiry you have raised, most notably, LE Op. 900 which provides that an attorney has the duty to comply with the instructions of the lender or the principal to the extent that they are lawful. Should it be impractical to follow the principal or lender's instructions, the attorney has the duty to notify the lender or principals that he is required to comply with the terms of the Wet Settlement Act. If the instructions would necessitate the attorney breaching the Act, the attorney must advise the principal or lender of that fact and must then comply with the Act. (See DR:7-102(A)(8))

The appropriate and controlling rules relative to your inquiry are DR:9-102(B)(3) and (4) which provide that a lawyer shall maintain complete records of all funds, securities, and other properties of the client coming into his possession and render appropriate accounts to his clients regarding them. The lawyer shall promptly pay to a client funds which the client is entitled to receive. While the disciplinary rule establishes an affirmative duty to pass funds to a party or the parties entitled to the funds, it implicitly prohibits payment of funds from an escrow account to the party who is not or not yet entitled to the funds. (emphasis added) Thus, a strict interpretation would require an attorney not to disburse upon items deposited in his trust account until the depository bank had irrevocably credited them to that account. (See LE Op. 183, LE Op. 753 and LE Op. 813) It is well established that an attorney assumes a strict fiduciary responsibility when he holds money belonging to the client. (See Pickus v. Virginia State Bar, 232 Va. 5 (1986))

In LE Op. 183, the Committee opined that disbursement by the settlement attorney upon a check of lender or purchaser which was 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, since the checks drawn against such uncollected items are necessarily being made from the funds of the attorney's other clients who are not in any way parties to the real estate transaction. Such conduct of noncompliance with the Wet Settlement Act would therefore be illegal and violative of DR:7-102(A)(8).

Under the facts of your inquiry, the Committee would opine that the specific request from the mortgage corporation to waive all future rights to certified funds on closings is permissible as long as the attorney advises the lender that settlement proceeds must, nevertheless, be in one of the other acceptable forms enumerated under Virginia Code Section 6.1-2.10 in order to comply with the Wet Settlement Act.