§ 81.104. Rule 1.15 Funds.

 (a)  Rule 1.15 Funds are funds received by a lawyer in a representative capacity from or on behalf of a Third Party Owner. Pa.R.P.C. 1.15 requires the lawyer to maintain funds of a Third Party Owner separate from the lawyer’s own property, and to safeguard the funds appropriately. A lawyer may not personally profit from Rule 1.15 Funds.

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

     (ii)   Funds received while acting as a fiduciary: Pa.R.P.C.1.15(d) specifically excludes from its application funds received by the lawyer while acting as fiduciary for an estate, trust, guardianship, or conservatorship. However, if these funds are nominal in amount or reasonably expected to be held for such a short period that sufficient interest will not be generated to justify maintaining a segregated account, these funds may be deposited in an IOLTA Account.

     (iii)   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 Pennsylvania Rules of Professional Conduct. These include: (A) if a lawyer provides nonlegal services that are not distinct from legal services, (B) if the lawyer provides nonlegal services that are distinct from legal services, but the lawyer knows or reasonably should know that the recipient might believe that the recipient of the services is receiving the protection of a client-lawyer relationship, and (C) 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 Rule 1.15 of the Pennsylvania Rules of Professional Conduct 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 Trust Account for the benefit of the Third Party Owner.

 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:

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

   (2)  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;

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

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

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

     (iv)   Certain funds handled routinely by a lawyer may not be Rule 1.15 Funds. Rule 1.15 Funds are received by the lawyer in connection with a client-lawyer relationship. Rule 1.15 Funds are also funds received by the lawyer in connection with the provision of nonlegal services under any of the circumstances described in Section 81.104(a)(iii) of these Regulations. These Rule 1.15 Funds must be deposited in an IOLTA Account or a Trust Account for the benefit of the Third Party Owner.

 For example, if the lawyer as an agent for a title insurance company handles title insurance and real estate matters in connection with a client-lawyer relationship, or if the provision of title insurance and other services in connection with the real estate matter is not distinct from legal services provided to that recipient, or if the lawyer knows or has reason to know that the recipient of the services believes the relationship to be that of client-lawyer, funds received by the lawyer in connection with the relationship are Rule 1.15 Funds and must be placed in a Trust Account. If the Rule 1.15 Funds are Qualified Funds, the funds must be deposited in an IOLTA Account. The lawyer as title insurance agent may be required to maintain a separate settlement account for each underwriter to process funds handled by that lawyer in connection with acting as a title insurance agent. If the funds deposited in the settlement account are Qualified Funds, each settlement account must be an IOLTA Account.

 (b)  Subaccounting refers to a process whereby Nonqualified Funds are segregated by the lawyer or the lawyer’s financial institution by Third Party Owner, and interest on each subaccount is separately calculated, reported, and paid to the Third Party Owner. Subaccounting attributes all of the interest earned on the Rule 1.15 Funds to the Third Party Owner.

     (i)   Nothing in these regulations shall be construed to prohibit a lawyer from maintaining and administering a separate subaccount for each Third Party Owner from whom Rule 1.15 Funds are received.

     (ii)   A lawyer who directly maintains a subaccounting system for Rule 1.15 Funds must comply not only with Pa.R.P.C. regarding such funds, but must also comply with applicable laws and regulations of the United States and of the Internal Revenue Service in particular.

     (iii)   Nothing in these regulations shall be construed to prohibit a lawyer from delegating to a financial institution the responsibility for maintaining and administering a separate subaccount for each Third Party Owner from whom the lawyer receives Rule 1.15 Funds.

 (c)  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 interest generated on the funds will exceed the cost of earning and conveying the interest 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 net interest 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 net interest for the Third Party Owner are Qualified Funds.

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

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

   (2)  the account and service charges of the financial institution in which the account is maintained;

   (3)  the minimum deposit requirements of the financial 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).

 (d)  Examples of Rule 1.15 Funds and Qualified Funds:

     (i)   Estates, trusts, guardianships, etc.: Funds held by a lawyer as a personal representative, trustee, guardian, attorney-in-fact or the like are specifically excluded from the definition of Rule 1.15 Funds. However, if these funds are nominal in amount or reasonably expected to be held for such a short period that sufficient interest will not be generated to justify the expense of earning interest for the client or third person, these funds may be deposited in an IOLTA Account.

     (ii)   Conveying accounts/real estate closings: Funds generated from real estate closings will be Qualified Funds, if the lawyer receives the funds in connection with a client-lawyer relationship or if Pa.R.P.C. 5.7(a), (b), or (c) apply. Generally, these funds are held for a short period of time and are not expected to provide interest for the Third Party Owner.

     (iii)   Advanced costs, fees, and refundable retainer accounts: Such advances are 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: Generally settlement funds are Qualified Funds if the settlement proceeds are nominal in amount or held for a short period of time. If settlement proceeds are not Qualified Funds, they must be placed in a Trust Account or other investment vehicle specifically agreed upon by the lawyer and the Third Party Owner.