Friday, September 19, 2008

PA Ethical Rules for Lawyers as Fiduciaries

On September 4, 2008, the Pennsylvania Supreme Court issued an Order (PDF, 1 page), with Annexed Rule Changes (PDF, 15 pages), amending Rule 221 of the Pennsylvania Rules of Disciplinary Enforcement, and also Rule 1.15 of the Pennsylvania Rules of Professional Conduct, regarding, respectively, "Funds of clients and third persons" and "Safekeeping property", as both affect lawyers acting as fiduciaries.

The Order and the amendments will be published officially in the Pennsylvania Bulletin on September 20, 2008, at 38 Pa.B. 5157, and therefore will take effect on that date.

The amendments introduce new defined terms under those rules, including
Rule 1.15 Funds:

Rule 1.15 Funds are funds which an attorney 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 attorney's status as such. * * *
Another defined term is Fiduciary Funds: "Rule 1.15 Funds which an attorney holds as a Fiduciary."

For purposes of these rules, Fiduciary is "a lawyer acting as a personal representative, guardian, conservator, receiver, trustee, agent under a durable power of attorney, or other similar position."

The revised Comment No. 1 to Rule 1.15 now integrates those defined terms and summarizes basic principles applicable to a lawyer who also acts as a Fiduciary:

A lawyer should hold property of others with the care required of a professional fiduciary.

The obligations of a lawyer under this Rule apply when the lawyer has come into possession of property of clients or third persons because the lawyer is acting or has acted as a lawyer in a client-lawyer relationship, or when the lawyer is acting as a Fiduciary, or as an escrow agent, a settlement agent or a representative payee, or 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.

Securities should be appropriately safeguarded.

All property which is the property of clients or third persons, including prospective clients, must be kept separate from the lawyer's business and personal property and, if Rule 1.15 Funds, in one or more Trust Accounts, or, if a Fiduciary entrustment, in an investment or account authorized by applicable law or a governing instrument.

The responsibility for identifying an account as a Trust Account shall be that of the lawyer in whose name the account is held. Whenever a lawyer holds Rule 1.15 Funds, the lawyer must maintain at least two accounts: one in which those funds are held and another in which the lawyer's own funds may be held. [Reparagraphing applied.]
Previously, the Court had published proposals for amendments to these rules of conduct or discipline applicable to attorneys who also hold property as fiduciaries. Such proposals generated impassioned comments, even criticisms, from members of the probate & trust sections of the Pennsylvania Bar Association, the Allegheny County Bar Association, and the Philadelphia Bar Association.

The Court's final rule amendments appear to have addressed those concerns, as reflected in Comment No. 5:
This Rule is not intended to change the substantive law or procedural rules that govern Fiduciary Funds or property with the exception of the specific recordkeeping requirements, segregation of Fiduciary Funds or property, and where Fiduciary Funds are kept in an Eligible Institution, overdraft reporting pursuant to Pa.R.D.E. 221, to the extent that those requirements underscore or supplement the requirements regarding Fiduciary Funds or property.

The goal of the amendments is to require all attorneys to keep appropriate records of entrusted funds, segregate such funds from the attorney's funds, account to those with an interest in the funds, and distribute the funds when due, and to permit the disciplinary system to respond when lawyers fail to comply with these standards.
[Reparagraphing applied.]
Furthermore, Comment No. 6 makes clear that these rule amendments do not apply where a lawyer does not possess or control fiduciary property, or where governing instruments or substantive law provide differently:
This Rule does not require a Fiduciary to liquidate entrusted investments or investments made in accordance with applicable law or a governing instrument or to transfer non-income producing fiduciary account balances to an IOLTA Account.

This Rule does not prohibit a Fiduciary from making an investment in accordance with applicable law or a governing instrument.

Funds which are controlled by a non-lawyer professional co-fiduciary shall not be considered to be Rule 1.15 Funds for the purposes of this Rule. [Reparagraphing applied.]
I thank Daniel B. Evans, Esq., of Philadelphia, PA, for drawing these rule changes to our attention before actual publication.