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 (more) AB 2766 (Committee on Judiciary) Page 2 of ? 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.) AB 2766 (Committee on Judiciary) Page 3 of ? 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 AB 2766 (Committee on Judiciary) Page 4 of ? 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) **************