(This article appeared in Journal 21,2, June 2016)
Ethics counsel periodically receives calls from lawyers seeking guidance as to the proper disposition of “dormant” funds in their trust account. As it happens, this is not simply a matter of “finders keepers, losers weepers.” At the April Ethics Committee meeting, the State Bar’s field auditor reported that for the past quarter, 28% of lawyers audited failed to properly designate and “escheat” unidentified and/or abandoned funds as required by N.C. Gen. Stat. § 116B-53. Given that the most recent formal ethics opinion discussing escheat is from 1991, a refresher course seems in order.
First of all, what exactly is “escheat” and how the heck do you pronounce it? Apparently, the word is pronounced “es-cheet.” (Honestly, I have been pronouncing it “es-sheet” all of these years. How embarrassing!) Escheat is one of those overachieving words that can be either a noun or a verb. According to Black’s Law Dictionary (8th ed. 2004), escheat is the reversion of property to the state when the property has no known owner. It is also used to refer to the actual property that has been reverted. In the old days, there was also an “escheater” who was appointed to value the property escheating to the state. Hence, it would be perfectly proper to state: “The escheater escheated the escheat.” And if the escheater happened to be less than honest (as was, reportedly, sometimes the case), you would have to proclaim that, “The escheater cheated when escheating the escheat.” (Three times fast—I dare you.)
In any event, escheating refers to the power of the state to acquire abandoned or unclaimed property. Escheating becomes relevant in the legal profession when a lawyer holds funds in a general trust account and does not know the identity or the location of the owner.
During the required quarterly reconciliation of trust account records, lawyers should perform a classification of all funds held. Property is presumed “abandoned” if the owner has not communicated with the lawyer or indicated an interest in the property within its “dormancy holding period.” The holding periods are defined in N.C. Gen. Stat. § 116B-53(c). In most cases, the dormancy period for funds in a lawyer’s trust account is five years.
Pursuant to RPC 89 (1991), a lawyer should consider four factors when determining whether the applicable dormancy period has run. The lawyer needs to establish whether during the dormancy period (1) the fund’s principal has increased; (2) the owner has accepted payment of principal or income; (3) the owner has corresponded in writing; or (4) the owner has otherwise indicated an interest in the account as evidenced by a memorandum or other record on file with the lawyer. If any of the four events enumerated above have occurred, no abandonment will be deemed to have occurred and the client’s funds must remain in the lawyer’s trust. In addition, whenever any of the four events occurs, a new dormancy period begins to run. The property may only be deemed abandoned if none of the four enumerated events has occurred.
Once the lawyer has determined that the dormancy period has run, Rule 1.15(q) provides that the lawyer must make “due inquiry” of his personnel, records, and other sources of information in an effort to determine the identity and location of the owner of the property. The legal investigative requirements are more specific. N.C. Gen. Stat. § 116B-59 states that a holder (the lawyer in this scenario) must make a good faith effort to locate the owner. For properties over $50 in value, a holder must send a written notice by first-class mail to the last known address of the apparent owner as reflected in the holder’s records. Holders who fail to perform due diligence may be subject to penalties and interest as outlined in N.C. Gen. Stat. § 116B-77.
If the lawyer is unsuccessful in ascertaining the identity or the location of the owner of the funds, the lawyer should contact the North Carolina State Treasury Department. (nctreasurer.com/upp/Pages/default.aspx). The Unclaimed Property and Escheats Division oversees and maintains the state’s database of unclaimed property and is responsible for recovering and returning such property to all rightful owners. A helpful FAQ section can be accessed online: nctreasurer.com/upp/Resources/HolderReportingFAQs.pdf
Trust account funds for which the dormancy period has run must be escheated to the state even if it is believed, but cannot be conclusively documented, that the funds belong to the lawyer. But cf. RPC 226 (when a law firm receives funds that are not identified as client funds, the firm must investigate the ownership of the funds and, if it is reasonable to conclude the funds do not belong to a client or a third party, the firm may conclude that the funds belong to the firm).
Pending escheatment, the funds should be held and accounted for in the lawyer’s trust account. N.C. Gen. Stat. § 116B-57(a) permits a holder of abandoned or unclaimed funds to charge a reasonable “dormancy” fee, thereby reducing the amount of funds transferred to the State Treasurer’s Office, so long as (1) the holder has made a good faith effort to locate the owners of the funds; (2) there is a valid and enforceable written contract which imposes the charge; and (3) the charge is applied on a regular basis. In 2006 FEO 15, the Ethics Committee concluded that lawyer/holders may also charge a reasonable dormancy fee against unclaimed funds with the additional requirements that (1) the client receives prior notice of and gives written consent to the dormancy fee; and (2) the amount of the fee is appropriate under Rule 1.5(a) of the Rules of Professional Conduct.
According to our field auditor, the abandoned funds are often the result of uncleared checks or leftover funds from real estate closings due to miscalculations of taxes or recording fees. Sometimes the amount of these dormant funds is annoyingly small. One way to avoid escheat issues on small amounts is to obtain consent for the disposition of these “leftover” funds in the original retainer agreement. An unpublished ethics advisory opinion, EA 2217 (1998), provides that a lawyer may obtain consent from a client at the beginning of the representation to waive the lawyer’s obligation to return a di minimis amount (an aggregate amount of less than $10) owed to the client at the conclusion of the representation.
So don’t “es-cheet” yourself out of a stellar trust account audit by failing to properly handle dormant trust funds. Much of the information above is contained in the Lawyer’s Trust Account Handbook, which can be quickly and easily accessed online: ncbar.gov/media/283992/lawyer-trust-account-handbook.pdf. The handbook is always a good place to start when trust account issues arise. You may also contact our field auditor Anne Parkin (aparkin@ncbar.gov) or our trust account compliance counsel Peter Bolac (pbolac@ncbar.gov). You may also contact me, and I will do my best to assist you with the es-sheet process.
Suzanne Lever is assistant ethics counsel for the North Carolina State Bar.