BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session


          AB 2766 (Committee on Judiciary)
          As Introduced
          Hearing Date: June 29, 2010
          Fiscal: No
          Urgency: No
          SK:jd
                    

                                        SUBJECT
                                           
                                      Attorneys

                                      DESCRIPTION  

          This bill corrects a technical error in existing law concerning  
          lawyer trust accounts by replacing the word "in" with the word  
          "on" with respect to interest-bearing lawyer trust fund  
          accounts. 

                                      BACKGROUND  

          Under existing law, an attorney or law firm must deposit all  
          client deposits or funds that are nominal in amount or are on  
          deposit or invested for a short period of time into an Interest  
          on Lawyer Trust Account (IOLTA).  These funds may be deposited  
          or invested in a single unsegregated account, and the interest  
          and dividends earned is required to be paid to the State Bar to  
          be used for programs that provide civil legal services to  
          indigent persons. 

          In 2007, the Legislature passed and the governor signed AB 1723  
          (Judiciary, Ch. 422, Stats. 2007), sponsored by the State Bar to  
          modernize statutes related to IOLTA accounts.  AB 1723 expanded  
          the types of accounts in which IOLTA funds may be deposited and  
          required banks to offer the same interest rates on IOLTA  
          accounts that they offer on other comparable accounts.   

          At the time AB 1723 was enacted, a 1981 California Supreme Court  
          order was in place which defined eligible financial institutions  
          to include entities besides banks and also required deposits to  
          be insured by an agency of the federal government.  In November  
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          2007, the State Bar petitioned the California Supreme Court to  
          rescind this order because the insurance requirement was  
          incompatible with the new types of investment vehicles allowed  
          under the statute.  More specifically, the Bar's background  
          materials state "[t]he rescission of the interim order was  
          necessary because cash management accounts that permit overnight  
          investment are not generally covered by federal insurance during  
          the period they are invested in or secured by U.S. Government  
          securities and therefore the order's language requiring deposits  
          to be insured could not apply to the new types of investments."   
          In January 2008, the court approved the Bar's petition regarding  
          the rescission of the 1981 order, thereby removing the deposit  
          insurance requirements.  The court did not, however, adopt a new  
          interim order defining eligible financial institutions.  

          As a result, without an order from the court, banks were the  
          only type of financial institution authorized to hold trust fund  
          accounts under the IOLTA statutes.  In order to correct this  
          discrepancy, last year the Legislature passed and the governor  
          signed AB 940 (Committee on Judiciary, Ch. 129, Stats. 2009)  
          which specified that a bank, savings and loan, or other  
          financial institution may hold an IOLTA account under the IOLTA  
          statutes.  AB 940 contained a technical error, however, and this  
          bill, sponsored by the State Bar of California, would correct  
          that error in order to avoid possible confusion. 

                                CHANGES TO EXISTING LAW
           
           Existing law  requires an attorney or law firm that receives or  
          disburses trust funds to establish and maintain an IOLTA account  
          in which the attorney or firm must deposit or invest all client  
          deposits or funds that are nominal in amount or are on deposit  
          or invested for a short period of time.  All such funds may be  
          deposited or invested in a single unsegregated account and the  
          interest and dividends earned on those accounts must be paid to  
          the State Bar to be used for programs that provide civil legal  
          services to indigent persons.  (Bus. & Prof. Code Sec. 6211(a).)  


           Existing law  requires an attorney or law firm that establishes  
          an IOLTA account pursuant to Section 6211(a) to meet specified  
          requirements, including that the IOLTA account be established  
          and maintained with an "eligible institution" that must offer an  
          interest rate or dividends on the IOLTA account that is not less  
          than that generally paid to nonattorney customers on similar  
          accounts.  (Bus. & Prof. Code Sec. 6212.)
                                                                      



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           Existing law  defines "eligible institution" to mean: (1) a bank,  
          savings and loan, or other financial institution regulated by a  
          state or federal agency that pays interest or dividends in the  
          IOLTA account and carries deposit insurance from an agency of  
          the federal government; or (2) any other type of financial  
          institution authorized by the Supreme Court.  (Bus. & Prof. Code  
          Sec. 6213(k).)   

           This bill  would replace the word "in" with the word "on" in the  
          definition of "eligible institution."






                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            Last year, AB 940 (Judiciary), sponsored by the State Bar to  
            codify existing rules and practices, passed both houses  
            unanimously and was signed by the Governor.  Unfortunately,  
            that bill was inadvertently chaptered with a typographical  
            error, using the word "in" when the word "on" was intended  
            with respect to interest rates and dividends.  Because  
            interest and dividends are correctly paid "on" an account, not  
            "in" an account, it would be prudent to correct this error in  
            order to promote compliance and avoid unnecessary confusion.
          
           2.  Technical correction in definition of the term "eligible  
            institutions" 
                     
          Last year's AB 940 specified that the term "eligible  
          institutions" means a bank, savings and loan, or other financial  
          institution, in an attempt to clarify which institutions may  
          hold an IOLTA account under the IOLTA statutes.  Unfortunately,  
          an inadvertent technical error was included in that definition,  
          providing that an "eligible institution" included a bank,  
          savings and loan, or other financial institution regulated by a  
          state or federal agency that pays interest or dividends in the  
          IOLTA account and carries deposit insurance from an agency of  
          the federal government.  As the author points out, interest and  
                                                                      



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          dividends are paid "on" an account, not "in" an account and in  
          order to avoid any potential confusion, this bill would correct  
          that error. 


           Support  :  None Known 

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  State Bar of California 

           Related Pending Legislation  :  None Known

           Prior Legislation  :  None Known 

           Prior Vote :

          Assembly Judiciary Committee (Ayes 10, Noes 0)
          Assembly Floor (Ayes 69, Noes 1)

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