Lawyers wear many hats so they can provide comprehensive legal services to clients. Among the services many offer are real estate settlement services, including handling closings and the distribution of funds central to the transaction. Typically, a real estate settlement or closing attorney receives the buyer’s deposit money, any additional funds from the buyer, and the mortgage money, and then disburses the funds to the seller, to any involved realtors, to any taxing authorities, and to a panoply of other entities.
Attorneys must deposit real estate settlement funds into an IOLTA account, regardless of whether the account is operated by a law firm or by a separate business created to handle the settlement services. If a lawyer receives funds as “an escrow agent, settlement agent or representative payee,” the Pennsylvania Rules of Professional Conduct requires that the money be deposited into an IOLTA account. Despite the Rules, many attorneys do not designate their real estate settlement accounts as IOLTA accounts, leading to potential disciplinary issues. At times, they make this error because they receive inaccurate advice from their banks.
Why do real estate settlement monies fall within the IOLTA provisions of the Rules of Professional Conduct? First, the accounts are operated by an attorney, or the attorney is a signer and responsible for the funds in the accounts. Second, depositing and disbursing funds into and out of a settlement service’s account generally takes only a few days, just long enough to verify that all monies have cleared and that all of the relevant entities have been paid. In some circumstances, when a lien is in dispute or some other situation arises, the funds may remain in the accounts for weeks or months.
When lawyers handle real estate settlement funds, those monies are by definition funds of others and must be deposited into the attorney’s IOLTA account. Yet, some lawyers do not comply with this obligation and risk disciplinary problems.
Pennsylvania lawyers must deposit “qualified funds” into their IOLTA accounts under Pa. Rule of Professional Conduct 1.15 (“Safekeeping Property”), which governs IOLTA accounts. Pa.R.P.C. 1.15(a)(9) defines “Qualified Funds” as “funds which are nominal in amount or are reasonably expected to be held for such a short period of time that sufficient income will not be generated to justify the expense of administering a segregated account.”
Rule 1.15(a)(10) defines “Rule 1.15 Funds” or “IOLTA funds” as “funds which the lawyer receives from a client or third person in connection with a client-lawyer relationship, or as an escrow agent, settlement agent or representative payee, or as a Fiduciary, or receives as an agent, having been designated as such by a client or having been so selected as a result of a client-lawyer relationship or the lawyer’s status as such.”
Thus, Rule 1.15 IOLTA Funds include funds received as an “escrow agent” or “settlement agent,” that is, funds received when serving as a real estate closing agent. Yet, despite these clear mandates, and guidance from the Pennsylvania IOLTA Board, some attorneys continue to hold real estate settlement funds in non-IOLTA accounts. This interpretation is also consistent with the IOLTA Board’s statement that “deposits and proceeds for distribution in a real estate transaction” are subject to the IOLTA Rules.
The fact that lawyers may handle closing through a separate business entity is also not relevant to whether the account is an IOLTA account. Pa.R.P.C. 5.7 (“Responsibilities Regarding Nonlegal Services”) notes that a lawyer who provides nonlegal services to a recipient, whether or not they are distinct from legal services, is subject to the Rules of Professional Conduct with respect to the provision of both legal and nonlegal services. Although Pa.R.P.C. 5.7(d) arguably creates an exception, Rule 1.15(a)(10) addresses that distinction.
In sum, a lawyer who provides nonlegal services to a recipient, even if they are distinct from any legal services provided to the recipient, is subject to the Rules of Professional Conduct with respect to the nonlegal services if the lawyer knows or reasonably should know that the recipient might believe that they are receiving the protection of a client-lawyer relationship.
Consequently, lawyers performing real estate closing services must verify that the bank accounts they use are designated as IOLTA accounts. Otherwise, if the IOLTA Board discovers that a lawyer is not complying with the IOLTA provisions in the Rules of Professional Conduct, it could have disciplinary implications.
The IOLTA Board discovers non-compliant accounts as part of its role in the disciplinary process. Attorneys must report all bank accounts as part of the annual registration process, listing accounts as IOLTA accounts, non-IOLTA accounts or exempt IOLTA accounts. The Disciplinary Board transmits all IOLTA account numbers to the IOLTA Board, which reconciles the bank account numbers with the accounts reported monthly by banks to the Board as IOLTA accounts.
The IOLTA Board has found accounts reported as IOLTA accounts that are not registered as IOLTA accounts. It also performs a similar examination with accounts reported as IOLTA-exempt. To be an IOLTA-exempt account, the IOLTA Board must grant the exemption as attorneys cannot designate an account as exempt, and exemptions are granted on rare occasions. Attorneys cannot unilaterally make that decision.
When the IOLTA Board discovers an account that is listed as exempt or as a non-IOLTA account, it investigates to determine whether the IOLTA is designated properly. The Board has found, however, that many attorneys do not set up their real estate settlement accounts as IOLTA accounts. Even when the accounts are for a separate business that is set up just for purposes of handling real estate closings, the account must be an IOLTA account if the attorney is a signatory.
The solution is simple. Lawyers must understand that real estate settlement accounts, whether from their firms or as part of a separate real estate settlement service, fall under the IOLTA rules if the attorneys are signers and responsible for the accounts. If the accounts are not registered as IOLTA accounts, they face disciplinary repercussions.
Daniel J. Siegel, a member of the editorial board of The Philadelphia Lawyer, is the principal of the Law Offices of Daniel J. Siegel, LLC, and chair of the Pennsylvania Bar Association Legal Ethics Committee. He provides ethical and disciplinary guidance to other attorneys and can be reached at dan@danieljsiegel.com.
