Allows Establishment of
Real Estate Funds Accounts ("REFA")

The Illinois Supreme Court has amended Rule 1.15 to allow attorneys in a real estate transaction to disburse funds after they are deposited to a trust account without necessarily having to wait for those funds to clear. All attorneys handling real estate closings should open a so-called Real Estate Funds Account ("REFA") account to take advantage of the benefits of the amendment. The REFA account should be established solely for handling real estate closing funds and all real estate funds should be deposited into it.

The amendment is designed to take into consideration the practical circumstances of disbursing funds in real estate closings. In many real estate closings, the closer will receive a check from the buyers and/or their lender(s) and then, before the incoming funds clear, cut checks to various parties designated as recipients of funds. An attorney issuing a check from a trust account in such a situation might find that the check is being paid with funds from other clients, or the check could bounce. The Attorney Registration and Disciplinary Commission ("ARDC") has taken the position that such disbursement might violate a prohibition against using a clients funds held in a trust account for any purpose other than as directed by the client. Prior to the amendment of Rule 1.15, therefore, attorneys were at a competitive disadvantage as compared to title insurance companies and lenders not subject to the risk of sanction by the ARDC. The risk of sanction existed even though it was known throughout the industry that the buyers check bounced so infrequently that the practice of taking it in and disbursing on it was considered an acceptable risk.

The Illinois State Bar Association Real Property Section proposed the amendment to Rule 1.15 as a housekeeping matter "to specify that these longstanding reasonable practices are not what the rule is intended to prohibit." Now, with the establishment of a REFA account, an attorney can continue to handle real estate closings and avoid the risk of sanction, provided he acts as a closing agent pursuant to an insured closing protection letter from a title insurance company, or takes steps to ensure that the funds deposited are "good funds" as defined in the amended rule.

In the long run, the consumer benefits from this change, because it allows real estate attorneys to continue to be involved in real estate transactions. Attorneys provide greater competition in the real estate industry and, given their professional responsibility requirements to protect and zealously represent their clients, provide better protection for consumers.

The amended text of Illinois Supreme Rule 1.15 follows (the amendment added new subsection (g)):

Illinois Supreme Court Rule 1.15. Safekeeping Property.

(a) A lawyer shall hold property of clients or third persons that is in a lawyer`s possession in connection with a representation separate from the lawyer`s own property. Funds shall be kept in a separate account or accounts maintained in the state where the lawyer`s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of seven years after termination of the representation.

(b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(c) When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.

(d) All nominal or short-term funds of clients paid to a lawyer or law firm, including advances for costs and expenses, shall be deposited in one or more pooled interest-bearing trust accounts established with a bank or savings and loan association, with the Lawyers Trust Fund of Illinois designated as income beneficiary. Each pooled, interest-bearing trust account shall comply with the following provisions:

(1) Each lawyer or law firm shall establish one or more interest-bearing trust accounts with any bank(s), savings bank(s) or savings and loan association(s) authorized by federal or state law to do business in Illinois. Each interest-bearing trust account shall be insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation and such funds shall be subject to withdrawal promptly upon request. At the direction of the lawyer or law firm, such funds may be used to purchase securities pursuant to fully collateralized overnight repurchase agreements with such financial institution(s), provided such securities; (a) are guaranteed as to principal and interest by the full faith and credit of the United States or are AAA-rated United States agency obligations, and (b) are held by a third-party custodian who shall be either the Federal Reserve Bank of Chicago or St. Louis or a correspondent bank who is a member of the Federal Reserve System.

(2) The rate of interest payable on any interest-bearing trust account shall not be less than the rate paid by the depository institution to depositors other than lawyers or law firms.

(3) Each lawyer or law firm shall direct the depository institution to remit net interest or dividends, after deduction of reasonable charges and fees, as the case may be, on the average monthly balance in the account, or as otherwise computed in accordance with the institution`s standard accounting practice, at least quarterly, directly to the Lawyers Trust Fund of Illinois. A statement shall be transmitted with each remittance showing the name of the lawyer or law firm directing that the remittance be sent, the account number, the gross interest, the service fee/handling charge, if any, the net interest remitted, the amount of such remittance, the remittance period, and the rate of interest applied.

(4) Each lawyer or law firm shall deposit into such interest-bearing trust accounts all clients` funds which are nominal in amount or are expected to be held for a short period of time.

(5) The decision as to whether funds are nominal in amount or are expected to be held for a short period of time rests exclusively in the sound judgment of the lawyer or law firm, and no charge of ethical impropriety or other breach of professional conduct shall attend a lawyer`s or law firm`s judgment on what is nominal or short term.


(e) Ordinarily, in determining the type of account into which to deposit particular funds for a client, a lawyer or a law firm shall take into consideration the following factors:

(1) the amount of interest which the funds would earn during the period they are expected to be deposited;

(2) the cost of establishing and administering the account, including the cost of the lawyer`s services;

(3) the capability of the financial institution, through subaccounting, to calculate and pay interest earned by each client`s funds, net of any transaction costs, to the individual client.


(f) Any lawyer or law firm that can establish that compliance with subparagraph (d) of this rule has resulted in any banking expense whatsoever shall be entitled to reimbursement of such expense from the Lawyers Trust Fund of Illinois by filing an appropriate claim with supporting documentation.

(g) In the closing of a real estate transaction, a lawyer`s disbursement of funds deposited but not collected shall not violate his or her duty pursuant to this Rule 1.15 if, prior to the closing, the lawyer has established a segregated Real Estate Funds Account (REFA) maintained solely for the receipt and disbursement of such funds, has deposited such funds into a REFA, and:

(1) is acting as a closing agent pursuant to an insured closing letter for a title insurance company licensed in the State of Illinois and uses for such funds a segregated REFA maintained solely for such title insurance business; or

(2) has met the "good-funds" requirements. The good-funds requirements shall be met if the bank in which the REFA was established has agreed in a writing directed to the lawyer to honor all disbursement orders drawn on that REFA for all transactions up to a specified dollar amount not less than the total amount being deposited in good funds. Good funds shall include only the following forms of deposits: (a) a certified check, (b) a check issued by the State of Illinois, the United States, or a political subdivision of the State of Illinois or the United States, (c) a cashier`s check, teller`s check, bank money order, or official bank check drawn on or issued by a financial institution insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government, (d) a check drawn on the trust account of any lawyer or real estate broker licensed under the laws of any state, (e) a personal check or checks in an aggregate amount not exceeding $5,000 per closing if the lawyer making the deposit has reasonable and prudent grounds to believe that the deposit will be irrevocably credited to the REFA, (f) a check drawn on the account of or issued by a lender approved by the United States Department of Housing and Urban Development as either a supervised or a nonsupervised mortgagee as defined in 24 C.F.R. 202.2, (g) a check from a title insurance agent of the title insurance company, provided that the title insurance company has guaranteed the funds of that title insurance agent. Without limiting the rights of the lawyer against any person, it shall be the responsibility of the disbursing lawyer to reimburse the trust account for such funds that are not collected.

Adopted February 8, 1990, effective August 1, 1990; amended July 18, 1990, effective August 1, 1990; amended April 1, 1998, effective immediately; amended October 1, 1998, effective immediately.



For more information regarding Illinois Supreme Court Rule 1.15 and REFAs, contact IRELA by E-mail at info@reallaw.org or call us at (847) 593-5750.