Reclaiming your books from unclaimed property

When the State Bar announced CTAPP and reinforced that lawyers needed to take good care of their trust accounts, licensees had a wide range of reactions. Some shrugged it off, confident that their books have always been in order and will continue to be. Others invoked the adage that they went to law school to avoid math and contemplated whether they should simply surrender their bar cards. And many had feelings that fell somewhere in between these extremes. One of the very good impacts of this was that a spotlight was shone on a fiduciary duty that could be given less attention simply because of the desire to focus as much time as possible on providing legal services to clients.

But as lawyers have worked hard to ensure their books are in order, it has been fascinating to learn that so many of them face a common theme: despite the effort to distribute funds to their proper owners, checks go uncashed. Whereas it could seem unthinkable to many that a check is not deposited almost instantaneously, it happens. And it probably occurs more frequently than what you would expect.

In the trust accounting arena, that leads to an awkward situation. Lawyers have some client ledgers with a zero balance that they have to keep at the ready—not merely preserving them in the archives for the five years after final distribution as required by Rules of Professional Conduct, rule 1.15—for monthly reconciliations. That is because the reconciliation process requires lawyers to determine what deposits have not cleared and what payments have not been cashed; and the trust account has not yet “zeroed out” for the clients where all payments have not been cashed.

Indeed, one of the benefits of monthly reconciliations is that it allows lawyers to determine relatively soon who has not received the money due them, even if payment has been tendered. That allows lawyers to follow up to determine why that has happened, whether it is because the check was not received, there is a dispute, or some other reason. Ideally, the situation can be rectified shortly within a few communications.

But that is not always the case. Sometimes people move and do not think to provide forwarding information to lawyers. Other times, they may intentionally decide to not open communications from lawyers or law firms. Regardless of the reason, however, lawyers should not simply sit on the funds indefinitely. Aside from requirements to escheat unclaimed property, it helps avoid a situation where so much time has passed that it becomes near impossible to figure out which money belongs to who. This is particularly the case for solo firms that are being wound down after a lawyer’s passing, which can be disheartening to the family and loved ones left behind.

So what are lawyers to do once they determine a check or other form of payment from the account has not cleared in the expected time?

As a practical matter, the first step should usually be to reach out to the payor to find out why. In some cases, the lawyer may learn that the contact information is out of date. If new, forwarding information cannot be readily ascertained, there are plenty of options to locate those entitled to funds, whether that be online services, sophisticated locator services, private investigators, or otherwise.

But if a lawyer is unable to locate the payee, that does not mean they get to keep the funds. Per the State Bar’s Client Trust Accounting Handbook, if you take steps to take care of balances and are still unable to pay out the funds, you should consider whether the unclaimed monies escheat to the state pursuant to Code of Civil Procedure section 1518.

That statute provides that certain tangible property and all intangible property escheats to the state if for more than three years after it becomes payable or distributable, the owner has not increased or decreased the principal, accepted payment of principal or income, corresponded in writing concerning the property, or otherwise indicated an interest in the property as evidenced by a memorandum or other record on file with the fiduciary. There are some statutory exceptions to this three-year rule, but they are less likely to apply in the context of a client trust account than other circumstances.

Indeed, the State Controller’s Office offers a handbook for these situations. In pertinent part, that likewise provides, “Interest on Lawyers’ Trust Accounts Attorneys and law firms (holders) are required to report and transfer to the State Controller’s Office property held in Interest on Lawyers’ Trust Accounts (IOLTA) for individual clients when there has been no activity on the property or contact with the owner regarding the balance for a period of three years.” Providing additional incentive to timely address these issues, noncompliance may subject lawyers to penalties, including interest and fines.

There is, of course, less of a clear path when a lawyer cannot determine where the funds belong, and there are a number of reasons why that could happen – whether it is due to changes in the firm, money paid by third parties, or funds simply having been in the account for such an extended period. If every effort has been made to locate the owner of the funds and it cannot be ascertained, one option is to simply indicate on the holder notice report that it is unknown. Sending a cover letter to explain the situation may be helpful.

Ultimately, the escheatment process is not a simple one. It includes: filing a Universal Holder Face Sheet from the Unclaimed Property section of the Controller’s office, providing a cover letter explaining IOLTA and the unknown source, and perhaps conducting the process through an alternate portal, which may necessitate assistance from someone from Unclaimed Property to walk you through the process. Fortunately, there are people available who will help you do that.

It is important to clean up accounts, and though there is a process in place lawyers should remember that escheating to the state should be a last resort. As always, the devil is in the details. Lawyers should first endeavor to find the people they are holding the funds for, as it is a fiduciary duty attorneys have been entrusted with.