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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6462

September 2, 1987

STATE BAR ASSOCIATION:

Michigan Bar Foundation--beneficial interest in interest earned on trust accounts under DR 9-102(C)(1)

The Michigan Bar Foundation will own the entire beneficial interest in and have the exclusive right to all the interest income earned on trust accounts to be established by attorneys in conformance with Michigan Supreme Court DR 9-102(C)(1), effective October 1, 1987.

Ms. Julia D. Darlow

President

State Bar of Michigan

306 Townsend Street

Lansing, Michigan 48933-2083

You have requested my opinion as to whether, under Michigan law, the Michigan Bar Foundation will own the entire beneficial interest of and will have exclusive right to the interest income earned on trust accounts to be established by attorneys in conformance with the provisions of the Code of Professional Responsibility, DR 9-102(C)(1).

The Michigan Supreme Court on March 16, 1987 authorized an Interest on Lawyers Trust Account (IOLTA) program with the amendment, in part, of DR 9-102 to insert (C)(1) of the Michigan Code of Professional Responsibility which provides in part:

"Except as set forth in DR 9-102(C)(2), a lawyer who or a law firm which receives client funds shall maintain a pooled interest-bearing trust account for deposit of client funds, other than advances for costs and expenses, which at the time of receipt and deposit the lawyer or law firm reasonably anticipates will generate $50 or less in interest during the period for which it is anticipated such funds are to be held. Such accounts shall comply with the following:

(a) No interest from the account(s) shall be made available to the lawyer or law firm.

(b) The account(s) shall include all client funds which are not expected to earn more than $50 in interest during the period it is anticipated such funds are to be held unless such funds are deposited in an interest-bearing account specified in DR 9-102(C)(2) or the client has directed that the funds not be placed in an interest-bearing account.

(c) Funds deposited with a bank, savings and loan association, or credit union shall be subject to withdrawal upon request and without delay and shall be insured by an agency of the federal government.

(d) The interest paid on the account(s) shall not be less than the rate paid by the bank, savings and loan association, or credit union to any other nonlawyer customers.

(e) The lawyer or law firm shall direct the bank, savings and loan association, or credit union to

(i) remit the interest on the average daily balance, less reasonable service charges, at least quarterly to the Michigan Bar Foundation;

(ii) transmit, with each remittance to the Michigan Bar Foundation, a report which shall identify each lawyer or law firm and the amount of the remittance attributable to each account maintained by each lawyer or law firm;

(iii) transmit to the depositing lawyer or law firm, in accordance with normal procedures for reporting to depositors, a report which shall indicate account balances, the rate of interest applied, interest earned, service charges, and the amount remitted to the Michigan Bar Foundation."

The Amendment to DR 9-102 will become effective on October 1, 1987.

In 1980 Congress authorized banks and other financial institutions to offer interest-bearing checking accounts, commonly referred to as "NOW" or "SUPER NOW" accounts. Section 303 of the Consumer Checking Account Equity Act of 1980, 12 USC 1832, provides in pertinent part:

"(a) Authority of depository institution; applicability

(1) Notwithstanding any other provision of law but subject to paragraph (2), a depository institution is authorized to permit the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instruments for the purpose of making transfers to third parties.

(2) Paragraph (1) shall apply only with respect to deposits or accounts which consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, or other similar purposes and which is not operated for profit,...."

With regard to eligibility for "NOW" accounts, the Code of Federal Regulations additionally provides at 12 CFR 217.157(a)(1) and (3):

"(a) Background. (1) Effective December 31, 1980, the Consumer Checking Account Equity Act of 1980 (Title III of the Depository Institutions Deregulation and Monetary Control Act of 1980; Pub.L. 96-221; 94 Stat. 146) ("Act") authorizes depository institutions nationwide to offer interest-bearing checking (NOW) accounts to depositors where the 'entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, or other similar purposes and which is not operated for profit.' (12 U.S.C. 1832(a)(2)). The purpose of the Act is to extend the availability of NOW accounts throughout the nation. Previously, as an experiment, NOW accounts were authorized to be offered by depository institutions only in New England, New York, and New Jersey.

"(3) In response to many requests for rulings since the new law was enacted, the Board has determined to clarify the types of entities that may maintain NOW accounts at member banks."

It is clear from the above quoted authority that a "NOW" or "SUPER NOW" account may be maintained if the beneficial interest in such account is held by a nonprofit organization as defined in the Internal Revenue Code 26 USC 501(c)(3).

Such an organization must be operated primarily for a charitable purpose. See, 12 CFR 217.157(c).

As you advise in your letter of July 9, 1987, the Michigan Bar Foundation is a nonprofit, charitable organization exempt from taxation pursuant to Sec. 501(c)(3) of the Internal Revenue Code. By virtue DR 9-102(C)(1), the attorney is required to establish such accounts in a manner which assures that the interest income derived from funds deposited pursuant to Michigan's IOLTA program will not be remitted to either the attorney, a law firm, or the client. The interest must be remitted, as required by the disciplinary rule, to the Michigan Bar Foundation. Thus, neither the attorney, the law firm, nor the client will have any right to interest earned on funds deposited in the IOLTA accounts.

While the Michigan courts have not construed the term "beneficial interest" as used in this context, that term has previously been defined as the profit, benefit or advantage resulting from contract or ownership of estate as distinct from legal ownership or control. Christiansen v Dep't of Social Sec, 15 Wash 2d 465; 131 P2d 189, 191-192 (1942). It is noted that Black's Law Dictionary, 5th Ed (1979), retains this same distinction:

"Profit, benefit, or advantage resulting from a contract, or the ownership of an estate as distinct from the legal ownership or control...." (Emphasis added.)

Under DR 9-102, if an attorney elects to create a pooled interest-bearing account of clients' funds which are nominal or are to be held for a short period of time, it is clear that no earnings from such an account may be paid to the attorney or the attorney's law firm. See, DR 9-102(C)(1)(a). Moreover, attorneys depositing funds in interest-bearing accounts shall direct the financial institution holding the deposits to remit interest only to the Michigan Bar Foundation. See, DR 9-102(C)(1)(e). The result of DR 9-102 is that the Michigan Bar Foundation will have an exclusive interest in receiving all income from any pooled interest-bearing accounts established by the attorney. Thus, while the attorney acting on behalf of the client will retain the legal interest in the fund's deposition, the Michigan Bar Foundation will hold entire beneficial interest in and will have the exclusive right to the interest earned upon such accounts for the purpose of 12 USC 1832(a)(2).

It is my opinion, therefore, that the Michigan Bar Foundation will own the entire beneficial interest in and will have exclusive right to all the interest income earned on trust accounts to be established by attorneys in conformance with the provisions of Michigan Supreme Court DR 9-102(C)(1), effective October 1, 1987.

Frank J. Kelley

Attorney General

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