I’ve had several discussions with fellow lawyers recently about unclaimed property and about whether unclaimed property laws apply to lawyer trust accounts.
And nothing like a good networking event question to trigger a blog post, right?
Not to mention, one of the fastest and easiest ways to get disbarred is to inappropriately manage your IOLTA account or other client funds.
What is Unclaimed Property?
Unclaimed property is a set of state laws that govern checks, bank accounts, and other financial assets that are abandoned. Meaning that you do not know the rightful owner of the funds or cannot find the rightful owner if you do know who they are. Or just cannot make the owner cash the check, no matter what.
Instead of a holder, in this case a lawyer, holding onto the financial assets, you can turn the amounts over as unclaimed property to the appropriate state’s unclaimed property office.
Applicable ABA Model Ethics Rules
The American Bar Association has promulgated model ethics rules, which many of the states have adopted in part or in full.
Rule 1.15 covers safekeeping client property separate from your own property. Typically, this means that you must keep prepaid fees and other amounts in a client trust account.
Also under Rule 1.15, you must maintain full records to identify the property and account for all transactions into and out of the account for five years after the termination of the representation.
But what happens to money left in the account more than five years after the termination of representation? Or any money that cannot be distributed because you have lost contact with the rightful owner?
The money does not suddenly become yours or the firms. You need to do something with it, right?
Benefits of Reporting Unclaimed Property
In many cases, unclaimed property is an ideal way to “clean up the books” of a company or law firm trust account.
Instead of an attorney having to maintain records on what is in the trust account for years to come with no hope of turning it over to the rightful owner, a lawyer can turn said money over to the unclaimed property fund for them to hold.
The state will also put the information into a state database that is publicly searchable and make other attempts to find the owner. At the state’s expense. Not going to lie, having the state do the work and carry the expense of continuing to search for someone is not a bad deal for you.
In the meantime, many states have indemnification provisions that protect you from claims for the amounts reported as unclaimed property. If someone later comes back to you and says “hey, you owe me this money” you can point them to the state unclaimed property authority to claim the money or pay it yourself and receive the amounts back from the state.
Finally, if you report the trust amounts as unclaimed property, you do not have to worry about rogue staff embezzling money. Or keeping track of the moneys.
And if something awful happens to you, you have left clean IOLTA accounts for your estate to handle. Consider reporting unclaimed property as part of your law firm’s estate plan.
Concerns About Reporting Lawyer Trust Accounts as Unclaimed Property
In some cases, turning over trust funds could be a breach of ABA Ethics Rule 1.6: confidentiality of information. In particular, the fact that you are representing a client could be confidential information in and of itself.
One common example of how reporting information could be a violation is actually from our friends in the healthcare field. Let’s say that a clinic specializes in some politically controversial field like abortion or HIV care. Reporting a patient credit balance, with the clinic’s name, could subject the patient to undue hostility and be a violation of HIPAA. Obviously not a desired outcome.
Similarly, depending on the nature of your practice, disclosing that you have a relationship with an individual or other entity could be in violation of the confidentiality provisions. This is definitely a concern for the more niche practices that specialize in a controversial area of law or in something like criminal law that could open up the confidentiality provisions.
Rule 1.6 does permit a lawyer to disclose certain information “to comply with other law or a court order”.
And the typical unclaimed property report will not disclose the underlying information about the representation. In most cases, the only information that would be transmitted is that law firm A is holding money in trust for person B at address C in the amount of D and the date of last contact E.
The unclaimed property report does not detail which kinds of cases that the money is from – it could be a personal injury, class action, real property transaction, negotiated settlements, or literally anything else that a law firm may hold money in trust for a client or other party.
The funds could be unearned prepaid fees, settlements or judgments. Funds could even be for payments to third parties, like expert witness fees, medical liens, and car shop repairs, to name a few.
If you are still concerned that reporting property as unclaimed property may lead to a breach of confidentiality rules, please contact Kimberly DeCarrera to discuss in further detail. There are ways to report unclaimed property in such a situation as to both comply with unclaimed property laws and confidentiality provisions.
Alternatives to Reporting IOLTA Funds as Unclaimed Property
Some states have provided alternatives to reporting trust or IOLTA funds as unclaimed property.
Beginning January 1, 2020, Montana added a section to Rule 1.15 to allow for funds to be paid to the Montana Justice Foundation (MJF). The full text of the new Montana section reads:
(f) Unclaimed or unidentifiable Trust Account Funds.
(1) When a lawyer, law firm, or estate of a deceased lawyer cannot, using reasonable efforts, identify or locate the owner of funds in its Montana IOLTA or non-IOLTA trust account for a period of at least two (2) years, it may pay the funds to the Montana Justice Foundation (MJF). At the time such funds are remitted, the lawyer may submit to MJF the name and last known address of each person appearing from the lawyer’s or law firm’s records to be entitled to the funds, if known; a description of the efforts undertaken to identify or locate the owner; and the amount of any unclaimed or unidentified funds.
(2) If, within two (2) years of making a payment of unclaimed or unidentified funds to MJF, the lawyer, law firm, or deceased lawyer’s estate identifies and locates the owner of funds paid, MJF shall refund the funds it received to the lawyer, law firm, or deceased lawyer’s estate. The lawyer, law firm, or deceased lawyer’s estate shall submit to MJF a verification attesting that the funds have been returned to the owner. MJF shall maintain sufficient reserves to pay all claims for such funds.
Pennsylvania has a similar two year inactivity rule and funds are reported to the IOLTA Board effective June 29, 2018.
In Illinois, it may depend on how you can trace the funds. If you know it is for a particular person, then the money is reportable as unclaimed property. If, however, you cannot trace it to a particular person or entity, the money is reportable to the Lawyers Trust Fund.
Obviously, these are just examples and not a state-by-state breakdown of each lawyer ethics rules on IOLTA or trust accounts.
Did Massachusetts Just Ban Law Firm Audits?
On October 1, 2020, a Massachusetts court ruled that “unidentified IOLTA funds should be transferred to the IOLTA committee for disposition” (opinion opens as PDF) and not the abandoned property fund through the state treasurer.
The dispute arose over the nearly $30,000 in unidentified funds left in a disbarred attorney’s IOLTA accounts. In October 2018, the attorney for the disbarred attorney made a motion to transfer the funds to the IOLTA committee. The Massachusetts Treasurer intervened, arguing that the funds were unclaimed property and should be transferred to its fund. The IOLTA committee similarly intervened stating that the funds should be transferred to its fund. The State Bar took no position on where the funds should land, but did want to be kept informed so it could do any necessary investigation.
The court in this case made specific reference to the state unclaimed property audits and examinations, where in it examines the holder’s “books and records.” The court concluded that this broad authority may be in direct conflict with the attorney’s duty to preserve attorney-client privilege and work-product confidentiality. “Allowing that to happen in the ordinary course might result in a breach of an attorney’s obligations to his or her client.”
Of course, that doesn’t mean that as an attorney, you shouldn’t maintain accurate records of your IOLTA account. Other serious consequences, including disbarment (like in this case), may result if you do not maintain accurate records. Banks are required to notify the IOLTA committee if there is no activity on an IOLTA account for more than two years. This may trigger an investigation by the Bar or IOLTA committee into the attorney’s books and records.
What You Should Not and Cannot Do
Lawyers may be tempted to craft their engagement letters such that any leftover trust funds are forfeited to the attorney.
A forfeiture provision, while tempting, may be in violation of your duties to the client under Rules 1.5 and 1.15 according to 2013 Ethics Guidance from New Hampshire.
And under unclaimed property laws, many states (and the model act) has provisions to prevent what they refer to as “private escheat” or “anti-limitations provisions.”
These provisions dictate that “a period of limitations, whether by contract, statute, or court order, does not prevent the property from being presumed abandoned or affect the duty of a holder under this [act] to file a report or pay or deliver property to the administrator.” (Revised Uniform Unclaimed Property Act of 2016, Section 610)
In essence, the unclaimed property laws are trying to prevent a holder such as a law firm from changing money owed to another into their own property.
That being said, some states have provisions allowing for the reimbursement of reasonable costs for searching and locating the rightful owner in rules or opinions governing the lawyer trust accounts.
More Information on Reporting Unclaimed Property
Like every aspect of unclaimed property, the rules are going to vary by state. And then we have to overlay state attorney ethics rules, which may follow the ABA rules or may have been amended to provide additional guidance or direction.
In general, if property is to be reported as unclaimed property, the process is pretty simple – you should conduct reasonable outreach efforts to locate the rightful owner of the funds in your possession. What is reasonable will (wait for it…) depend on the nature and value of the property.
At a minimum, however, you will be required to send a letter by first-class US Mail to the last address of record, unless you know it to be a bad address (because let’s say you have received prior correspondence back as undeliverable). Some states also allow for secure electronic communication. This process is called “due diligence” in unclaimed property.
If you still do not receive any response from the rightful owner, then you will prepare a report of unclaimed property and submit it to the proper state authorities.
Often, that will be the state authority where you practice. But there are cases where you may be required to report to other states, based on the last known address you have of the owner.
So yes, a Georgia attorney may be required to file an unclaimed property report in California, which of course has different filing requirements.
Advice for Your Corporate Clients
Did you know that all corporations and business entities are required to comply with state unclaimed property laws?
Common examples of unclaimed property, beyond IOLTA funds, include uncashed payroll or vendor checks, unapplied payments or remittances, patient credit balances, accounts receivable credits, unused gift cards, dormant bank and shareholder accounts, forgotten life insurance policies, and more. Any intangible financial asset is potentially subject to unclaimed property laws and every company has intangible financial assets.
Every company, including non-profits and government entities, likely hold at least some unclaimed property that should be reported.
DeCarrera Law can help you help your corporate clients comply with unclaimed property laws and reduce the risk of a multi-state audit by a contingent fee auditor.
See Also: The Holder’s Introduction to Unclaimed Property for more information on the history of unclaimed property and reporting considerations for holders
Get Help from an Unclaimed Property Expert
If all of this has left you confused and wanting someone else to guide you through the process of identifying unclaimed property and reporting it to the proper authority, please contact Kimberly DeCarrera for a consultation.