Ethically Speaking

A Fresh Look At Stale Checks

by Charles Slanina, Esquire

Books and records continue to be the hottest topic of Office of Disciplinary Counsel action and Court imposed discipline. Chances are that the synopsis of attorney discipline contained in this issue of IN RE: contains one or more new examples. The current focus (or at least the most frequent downfall of attorneys) stems from “stale checks.” Despite the rash of discipline imposed and my previous columns, The Lawyers’ Fund for Client Protection audits continue to find that attorneys and their staff, especially in real estate practices, are still not tracking uncashed checks drawn on their escrow accounts.

You and your staff should have a thorough understanding that producing a check at a real estate settlement or drawing a check on any other escrow account does not serve to “zero balance” that account. The funds represented by that check remain in the escrow account until that check is cashed. A correct reconciliation process will note that these funds remain in that account. While it may not be possible to “zero balance” your escrow account or each client’s sub-account on a monthly basis, you must have a system in place to track these funds in transit.

I suggest that you sit down with your bookkeeper and accountant and prepare a written policy for the tracking and handling of uncashed checks and that you regularly review the application of that process. Once the policy is in place, you need to use it.

To start, I recommend that your escrow checks indicate on their face that they are only negotiable for a stated and reasonable period of time. How long is reasonable may depend on the nature of your practice, but six months is often the time period noted on such checks. Monthly lists of outstanding checks should be prepared by your staff for your review and each outstanding check should have an explanatory notation once it has remained uncashed for thirty days, sixty days or longer. On or before a check has reached the staleness date which you have determined to be appropriate, your internal operating procedure manual should direct your staff to contact the payee to confirm that the check was received and to inquire as to whether they intend to cash it. Detailed notes of your staff’s efforts should be maintained for your records. If such contacts are unsuccessful, operating procedures should be in place to obtain a stop payment order and the check should be reissued when the payee is located or correctly identified.

The policy and procedure manual for stale checks should provide for the establishment of a “pending escheat” escrow account. When outstanding checks have become stale and your staff has exhausted all reasonable efforts to reissue the funds, they should be swept from the escrow account and placed in a separate escrow account pending escheat to the state. This permits your bookkeeper to zero balance the client “sub-account” and the escrow account in general. The statute governing the escheat process can be found at 12 Del.C., Section 1130 et seq.

The key is to have a procedure in place and in use to address the stale checks. It is unlikely that you will ever be able to avoid having uncashed checks and those checks do not, themselves, constitute a disciplinary violation. However, the failure to deal with the uncashed checks does.

Failure to account for the status of your stale escrow checks can result in deficiencies being noted in any random or non-random compliance audit of your books and records. In addition to the Rule 1.15 record keeping violations, additional disciplinary rules are likely to be viewed as violated.

Rule 1.15(b) requires a lawyer to promptly deliver to a client or third person any funds to which they are entitled. ODC does not view issuing a check as constituting the delivery of the funds.

Since a failure to track stale checks prevents a successful reconciliation of the escrow account, your annual Registration Statement and included Certificate of Compliance will be deemed to be “false.” Rules 8.4(c) prohibiting dishonesty, fraud, deceit or misrepresentation and 8.4(d) conduct prejudicial to the administration of justice will also be implicated.

The apparent presumptive sanction for books and records violations with “false” certifications of compliance would appear to be a Public Reprimand with Aggravating and Mitigating factors adjusting that sanction accordingly.

If you have a large number of stale checks, a small number of very old stale checks or even a few stale checks with a large dollar total, which are not in the process of being actively investigated and cleared, you may want to dust off the ABA Standards for Imposing Lawyer Sanctions to determine which aggravating or mitigating factors might apply to you. In the alternative, get to work on that policy manual and enforce its use.

"Ethically Speaking" is intended to stimulate awareness of ethical issues. It is not intended as legal advice nor does it necessarily represent the opinion of the Delaware State Bar Association.

Return to April 2004 Table of Contents.