The Relatively Unknown Loss of Financial Institution IOLTA Account Immunity
In 1988, Pennsylvania established the Interest on Lawyers’ Trust Accounts Act (the “IOLTA Act”), 62 P.S. 4021 et seq. The IOLTA Act imposed a requirement upon attorneys to hold certain client funds, such as trust retainers and settlement proceeds, in a separate, special, interest-bearing account with a qualified financial institution. Under the IOLTA Act, the financial institution could impose “reasonable service charges” (although, in practice, most did not) for this service, and the interest earned on the funds was sent to a Lawyer Trust Account Board (LTAB) to be used to fund certain legal services access programs.
Most important for purposes of this article, the IOLTA Act provided immunity to financial institutions who provided IOLTA accounts. Section 4026(f) of the IOLTA Act states, “The depository institution shall not be subject to any action solely by reason of its opening, offering or maintaining an IOLTA account, accepting any funds for deposit to any such accounts or remitting any interest to the IOLTA fund.” Thus, likely due to lobbying efforts, a financial institution where the IOLTA account is housed was given broad immunity in exchange for making IOLTA accounts available to attorneys.
However, unbeknownst to many, in 1996, the Supreme Court of Pennsylvania replaced the existing legislatively directed IOLTA program with a judicially-directed program by promulgating Rule 1.15 of the Pennsylvania Rules of Professional Conduct and Rule 601(d) of the Pennsylvania Rules of Disciplinary Enforcement. Unbeknownst to even more people (and judges), this change also removed IOLTA account-related financial institution immunity as of January 1, 1997.
Rule 1.15 of the Pennsylvania Rules of Professional Conduct governing attorneys created the Pennsylvania Interest on Lawyers’ Trust Accounts Board (the “IOLTA Board”), which is different than the LTAB. That Rule also governs how the new IOLTA program functions, along with the obligations of both attorneys and financial institutions participating in the program. Rule 601(d) of the Pennsylvania Rules of Disciplinary Enforcement “suspended” the IOLTA Act as it is permitted to do by the Judiciary Act Repealer Act (“JARA”). Section 601(d) states, “The act of April 29, 1988 (P.L. 373, No. 59),2 known as the Interest on Lawyers’ Trust Accounts Act, is hereby suspended, effective September 1, 1996, to the extent it requires remittance to the IOLTA fund established under the act of interest earned on IOLTA accounts; and the act is hereby suspended in its entirety at such time after September 1, 1996 as all remaining monies in such IOLTA fund have been disbursed by the Lawyer Trust Account Board established under the act.” (Emphasis added). The timing of the addition of Rule 601(d) (in 1996) shows that it was done in contemplation of the transition to the new judicially-driven IOLTA system. The question then becomes, have “all remaining monies in [the prior] IOLTA fund … been disbursed by the [LTAB]”? If so, the IOLTA Act, and its immunity for financial institutions, is no more because neither Rule 1.15 nor the IOLTA Board Regulations promulgated in 1997 provide for financial institution immunity.
In response to an inquiry by me, the IOLTA Board confirmed to me via e-mail that the LTAB no longer exists, that it was replaced by the IOLTA Board, and that all remaining LTAB funds were transferred to the IOLTA Board as of January 1, 1997. The IOLTA Board also provided me with documentary evidence of the funds transfer. As a result, Section 601(d) has been triggered, the IOLTA Act has been fully suspended, and financial institution immunity relating to IOLTA Accounts no longer exists as of January 1, 1997.
This is bolstered by the fact that Rule 1.15 maintained the limited attorney immunity provided in Section 4025(b) of the IOLTA Act but is silent regarding any financial institution immunity. Rule 1.15(p) states, “A lawyer shall not be liable in damages or held to have breached any fiduciary duty or responsibility because monies are deposited in an IOLTA Account pursuant to the lawyer’s judgment in good faith that the monies deposited were Qualified Funds.” That language is nearly identical to the language set forth in Section 4025(b) of the IOLTA Act, which states, “No attorney shall be liable in damages or held to have breached any fiduciary duty or responsibility because of a deposit of moneys to an IOLTA account pursuant to a judgment in good faith that the moneys were qualified funds.” Similarly, Section 81.104(g)(ii) of the IOLTA Board Regulations also provide for limited attorney immunity but do not provide immunity for financial institutions: “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.”
Based upon the foregoing, it appears that financial institutions can be held liable in connection with IOLTA accounts to the same extent that they would have liability with regard to any other type of account. For example, if an attorney were to use his or her IOLTA account to operate a Ponzi scheme or other fraudulent scheme, and it could be proven that the financial institution where the IOLTA account is held recklessly disregarded the signs of such fraudulent scheme, the financial institution could now be held liable under a theory of aiding and abetting tortious conduct while, under the IOLTA Act, it would have had immunity. My theory has never been tested in court but I believe the reasoning is sound.