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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