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Client Trust Accounts and Bank Failures

By Peter Olson

MN Lawyers Mutual had an interesting piece in its last newsletter cover the issue above. The article's fairly extensive. The general rule is that you shouldn't hold more than $100,000 of a client's money in a single bank since that's the max coverage on FDIC insurance. Personally we rarely have more than $10,000 of clients' money in our trust account. This was interesting to me:

Generally, a depositor?s account at a bank is
insured by the Federal Deposit Insurance Corp.
(FDIC) for up to $100,000.4 According to the
FDIC, deposit account records of the banking
institution must disclose the existence of a
fiduciary relationship before insurance coverage
based on fiduciary relationships will be
recognized.5 Lawyers should make sure that the
fiduciary nature of any account holding fiduciary
funds is clearly reflected in the title of the
account used by the financial institution. If the
deposit account records of the banking
institution do disclose the existence of a
fiduciary relationship, then FDIC insurance (up
to applicable limits) will be available for each
client or third person whose funds are held in the
account. Under Rule 1.15(a) a lawyer is required
to ?clearly identify? his or her trust account.
Designation of the account as an IOLTA/trust
account satisfies this requirement and discloses
the existence of a fiduciary relationship for
purposes of FDIC coverage. This designation
means, for example, that if a lawyer?s IOLTA is
holding $100,000 for Client A, Client A?s funds
are insured up to $100,000 unless Client A has
funds deposited in another account in the same
financial institution as the lawyer?s IOLTA
account. A lawyer holding $1 million in his or
her clearly identified trust account on behalf of
10 clients would have FDIC insurance coverage
up to $100,000 for each of these 10 clients
provided the lawyer?s and /or bank?s recordkeeping
documents the identities and deposits of
the client?s on whose behalf the deposits were
made.

There weren't any malpractice cases cited where lawyers got in trouble, even one where lawyer kept $1,000,000 of clients money in a bank and bank failed. I would guess that result might be different now with all the banks failing.

Full post as published by Solo In Chicago on October 02, 2008 (boomark / email).