9 N.J.L. 218
                                        January 31, 2000

                                         159 N.J.L.J. 454
                                        January 31, 2000

OPINION 687

Drawing Upon and Disbursing Funds
Received at Real Estate Closings in
the Form of Negotiable Instruments
other than Cashier's or Teller's Checks

    The Advisory Committee on Professional Ethics has been asked whether negotiable instruments designated by certain financial institutions as "official checks", and received by attorneys in connection with real estate closings, may permissibly be drawn upon and disbursed immediately upon deposit. The inquiry necessitates review of Opinion 454, 105 N.J.L.J. 441 (1980) and the public policy supporting its holding, to decide whether an extension of Opinion 454 is warranted to cover these additional instruments expressly. We conclude that it is not.
    Ordinarily, clients' funds may not be disbursed from an attorney's trust account until they have been "collected", meaning that the checks have cleared, the funds have been credited to the attorney's trust account, and they are immediately available. Disbursement of funds not collected and available is an extremely serious ethical matter. See R. 1:21-6(1)(2) (approved financial institutions shall file with the Office of Attorney Ethics a report "in the event any properly payable attorney trust instrument is presented against insufficient funds, irrespective of whether the instrument is honored[.]"). Where the funds of several clients are kept in one account, the disbursal of funds prior to collection may result in the improper disbursal of other clients' funds. See, e.g., Matter of Hollendonner, 102 N.J. 21 (1985) (discipline imposed for issuance of checks against uncollected funds).
    In Opinion 454, supra, 105 N.J.L.J. 441, the Committee examined the practice of immediately drawing upon funds received at real estate closings, observing it was "one of long standing... probably universal use not only in New Jersey but elsewhere." Ibid. Because the practice was so widespread in title closings, the Committee realized that "to condemn it as unethical may lead to severe disruption in the handling of title closings and other matters." Ibid. Therefore, the Committee approved such immediate disbursements when the funds deposited were in the form of "bank, cashier's or certified checks," in order to avoid disruptions in title closings and in the interest of accommodating all clients." We did so because "[s]uch checks are the obligations of the bank and not simply of a private party. Drawing immediately upon their deposit entails a minimal risk."
    It was with great reluctance, however, that the Committee approved this very limited exception to the rule that trust account checks be drawn on collected funds. The Committee recognized the practice "has the effect of drawing on unsegregated trust funds of all clients for the benefit of a particular client whose matter is closing." Ibid. The Committee concluded the "justification for what would otherwise be an unauthorized invasion of trust funds consists of the almost non-existent risk that such bank, certified or cashier's checks will not clear, along with the overriding commercial need of all clients that such a practice be continued." Ibid.
    The Committee made informal inquiry into the practices of several financial institutions with regard to "official checks." This inquiry revealed that bank practices vary significantly as to when checks drawn by other banks were credited, what they were called and what they signified. The term "official check," unlike "cashier's check" (a check drawn by a bank on itself), or "teller's check" (a check drawn by a bank on another bank, or payable through another bank), does not appear in any New Jersey statute, or have any settled legal definition. Informal inquiry also revealed that other terms, such as "bank check", are also used by some institutions. The Federal Reserve Board, in its regulations concerning next day availability of funds, recognizes only teller's checks and cashier's checks, although it apparently recognizes some forms of official checks as teller's checks. Nor is there a consistent, universal practice as to when funds from such checks actually are made available.
    Unlike the situation in Opinion 454, therefore, there is not a single, universally recognized definition of "official check." Consequently, it is not possible to issue a ruling of general application endorsing or barring disbursement from deposits of such checks, or to give blanket approval to instruments which bear the name "official checks." Nor is it practical for this Committee to examine individually each new variation of negotiable instrument which may be developed by banking institutions. Rather, building upon our analysis in Opinion 454, our appropriate role is to clarify the principles which must guide private attorneys as they judge whether it is ethically permissible to disburse based upon deposited funds. Ultimately it is the actual substance of the instrument, not its label, which must control.
    To be permissible, such immediate disbursal of a negotiable instrument must be the virtual equivalent of collected funds. Immediate disbursement can take place only in the following circumstances:
    (1)    The check must be drawn by a licensed banking institution on itself or another such banking institution.

    (2)    The attorney must ascertain that the funds from the check will be made available by the depository bank no later than the next business day after the day of deposit.

    We also emphasize and make explicit one additional limitation on this already very limited exception to the general rule that trust account disbursements may be made only from collected funds. Before making any disbursement on the deposited funds prior to the time they actually become available, the attorney must determine that the contemplated disbursements related to the deposited funds, taken together with all other actual and reasonably anticipated disbursements during the period prior to such actual availability, will not exceed the total funds that the attorney's trust account drawee bank will make available during that period.