Disbursement of Uncollected Funds
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?
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.