Section 81.104. Rule 1.15 Funds

(a) Generally: Pa.R.P.C. 1.15 requires the lawyer to maintain Rule 1.15 Funds separate from the lawyer’s own property, and to identify and safeguard the Rule 1.15 Funds appropriately. A lawyer may not personally profit from Rule 1.15 Funds.

(b) Received in connection with a client-lawyer relationship: Rule 1.15 Funds are funds received in connection with a client-lawyer relationship.

(c) Funds received while acting as a Fiduciary: Funds received by a lawyer while acting as a personal representative, guardian, conservator, receiver, trustee, agent under durable power of attorney, or other similar fiduciary position are Rule 1.15 Funds. Rule 1.15(l) requires all Fiduciary Funds to be placed in a Trust Account or in another investment or account which is authorized by the law applicable to the entrustment or the terms of the instrument governing the Fiduciary Funds. If the Fiduciary Funds are Qualified Funds and are deposited in a Trust Account, that account must be an IOLTA Account.

(i) Pa.R.P.C. 1.15 clarifies that a Fiduciary is not required to liquidate Fiduciary Funds in order to transfer non-income producing fiduciary account balances to an IOLTA Account.

(ii) Pa.R.P.C. 1.15 does not prohibit a Fiduciary from making an investment in accordance with applicable law or the instrument governing the Fiduciary Funds.

(iii) Funds which are controlled by a non-lawyer professional co-fiduciary are not considered Rule 1.15 Funds.

(iv) Fiduciary Funds may always be placed in an investment or account authorized by the law applicable to the entrustment or authorized by the terms of the instrument (be it a trust agreement, will or other instrument) governing the Fiduciary Funds. However, all Fiduciary Funds in the possession of a lawyer are subject to the obligations of safeguarding, notification and recordkeeping set forth in Pa.R.P.C. 1.15.

(d) Other Rule 1.15 Funds: Funds which the lawyer receives from a client or third person as an escrow agent, settlement agent or representative payee are Rule 1.15 Funds. Funds received by a lawyer from a client or third person as an agent are Rule 1.15 Funds, if the lawyer has been designated to receive the funds as a result of a client-lawyer relationship or the lawyer’s status as a lawyer.

(e) Received in connection with nonlegal services: Under Rule 5.7 of the Pennsylvania Rules of Professional Conduct, there are three situations involving the provision of nonlegal services by a lawyer which trigger the applicability of the Rules of Professional Conduct. These situations will trigger applicability of Pa.R.P.C. 1.15, in addition to those situations specifically identified in Pa.R.P.C. 1.15:

(i) if a lawyer provides nonlegal services that are not distinct from legal services,

(ii) if the lawyer provides nonlegal services that are distinct from legal services, but the lawyer knows or reasonably should know that the recipient of the services might believe that the recipient is receiving the protection of a client-lawyer relationship, or

(iii) if the lawyer is a owner, controlling party, employee, agent, or is otherwise affiliated with an entity providing nonlegal services and the lawyer knows or reasonably should know that the recipient of the service might believe that the recipient is receiving the protection of a client-lawyer relationship.

In each of these three cases, the lawyer will be subject to the obligations of Pa.R.P.C. 1.15 and these Regulations as if a client-lawyer relationship existed with the recipient of the services. If a lawyer receives funds in connection with a relationship described in any of these situations, the funds are Rule 1.15 Funds and must be deposited either in an IOLTA Account or in a Non-IOLTA Account for the benefit of the Third Party Owner.

(f) Factors which should be used to determine whether, under the tests of Pa.R.P.C. 5.7, the nonlegal services (and funds received in connection therewith) are subject to the Pa.R.P.C. include:

(i) whether funds received in connection with the nonlegal services are maintained completely separate from funds received in connection with legal services;

(ii) whether the lawyer has advised the Third Party Owner in clear, unambiguous terms that the lawyer is acting in a nonlegal capacity, and is not receiving funds in connection with a client-lawyer relationship;

(iii) whether the Third Party Owner can reasonably expect to have the protection of the client-lawyer relationship cover the entire matter;

(iv) whether the lawyer performs both legal and nonlegal services from the same office; and

(v) whether the lawyer uses different letterhead in connection with legal and nonlegal services.

(g) Qualified Funds: The lawyer should apply an economic benefits test to determine whether Rule 1.15 Funds are Qualified Funds. Rule 1.15 Funds are not Qualified Funds if the lawyer will hold the funds for such a length of time, or if the Rule 1.15 Funds are of sufficient amount that the income generated on the funds will exceed the cost of earning and conveying the income to Third Party Owner.

(i) Law firm compliance v. lawyer responsibility: A lawyer who is an employee or member of a law firm that maintains an IOLTA Account is presumed to be in compliance with IOLTA regulations when the lawyer uses only the law firm approved IOLTA Account for the deposit of all Qualified Funds entrusted to him or her. However, the lawyer is ultimately responsible to assure that he or she is in compliance with Pa.R.P.C. 1.15 and these regulations.

(ii) Good faith judgment: A lawyer must use good faith judgment in determining whether Rule 1.15 Funds are Qualified Funds. A lawyer will not be liable for damages or be held to have breached a fiduciary duty or responsibility because the lawyer deposited funds into an IOLTA Account pursuant to the lawyer’s judgment in good faith that the funds were Qualified Funds.

(iii) Nominal Rule 1.15 Funds: Funds that when considered alone are not large enough to earn income for the Third Party Owner thereof are Qualified Funds.

(iv) Funds held for a short time: Funds which are not expected to be held for sufficient time to provide income for the Third Party Owner are Qualified Funds.

(v) Factors which should be used to determine whether funds can reasonably be expected to generate income for the Third Party Owner include:

(1) the cost to the lawyer of establishing and maintaining account(s) benefitting Third Party Owners;

(2) the account and service charges of the Eligible Institution in which the account is maintained;

(3) the minimum deposit requirements of the Eligible Institution in which the account is maintained;

(4) accounting fees likely to be incurred by the lawyer in connection with the funds;

(5) the lawyer’s anticipated tax reporting requirement costs incurred in connection with the funds;

(6) the nature of the transaction(s) or proceeding(s) involved; and

(7) the likelihood of delay in the relevant transaction(s) or proceeding(s).

(h) Examples of Rule 1.15 Funds, Qualified Funds and Nonqualified Funds:

(i) Fiduciary Funds: Funds held by a lawyer as a personal representative, trustee, guardian, attorney-in-fact or the like are specifically included in the definition of Rule 1.15 Funds. If these funds are nominal in amount or reasonably expected to be held for such a short period that sufficient income will not be generated to justify the expense of earning income, these funds may be deposited in an IOLTA Account. If Fiduciary Funds are Qualified Funds and are deposited in a Trust Account, that account must be an IOLTA Account.

(ii) Conveying accounts/real estate closings: Funds generated from real estate closings are Rule 1.15 Funds. Generally, these funds will be Qualified Funds, as they are held for a short period of time and are not expected to provide income for the Third Party Owner.

(iii) Advanced costs, fees, and refundable retainer accounts: Such advances are Rule 1.15 Funds. They are also Qualified Funds when they are nominal or held for a short period of time, and will remain Qualified Funds until earned/expended by the lawyer and thereby removed from the IOLTA Account.

(iv) Proceeds from dispute settlements/lawsuits: Settlement funds are Rule 1.15 Funds. Such funds are also Qualified Funds if the settlement proceeds are nominal in amount or held for a short period of time. If settlement proceeds are Nonqualified Funds, they must be placed in a Trust Account or other investment vehicle specifically agreed upon by the lawyer and the Third Party Owner.