Trust funds are under attack when a bank fails. With high funds at stake, when a bank falls down the financial hole, so do their client’s funds and that could leave people in despair. Having millions and getting back $250,000 can be a big chunk of change to say farewell to and lawyers representing the fund are usually held responsible for such a devastating loss.

Recently, lawyers have flooded bar associations with questions about how much responsibility belongs to them. Ethically, reported the associations, “lawyers must be cautious about where they hold clients’ funds, making sure they’re in Federal Deposit Insurance Corp. (FDIC)-insured, solid banks.”

Should funds be split in different banks to insure deposits then? Yes.

Research indicates that lawyers shouldn’t be worried about disciplinary actions if a bank fails UNLESS the lawyer DIDN’T choose an FDIC-insured, stable bank. Still…the bar association is advising lawyers to “take reasonable precautions,” and consult their insurance carriers.

“There’s no specific ethics opinion concerning what to do if a bank fails,” said Elizabeth Tarbert, ethics counsel for the Florida Bar. “Nevertheless, lawyers must act prudently and determine what kind of institution [they are] dealing with, what its reputation is and it’s financial stability, to the extent they can. Unfortunately, sometimes bank failures are very sudden. They keep them pretty quiet.”

Popularity: 4% [?]

The courts are taking a stand against banks who pursue criminal charges against an innocent third party whose identity is stolen and used to defraud the bank. It all began with plaintiff Howard Brunson who was arrested and spent 13 days in custody for a check fraud scheme carried out by a person who opened an Affinity account using his identity.

The New Jersey Appellate Division, in Brunson v. Affinity Federal Credit Union, No A-4439-06 ruled last week that financial institutions and fraud investigators have a duty to “pursue with reasonable care their responsibility for protecting not only their own customers, but non-customers who may be victims of identity theft.”

The holding reversed a grant of summary judgment dismissing claims for negligence and malicious prosecution against Affinity Federal Credit Union and its fraud investigator.

Popularity: 3% [?]

Participation agreements are written contracts between banks in which they agree to cooperate to handle an exceptionally large loan to a single borrower. One bank, which for legal or financial reasons cannot make the loan by itself, will originate the loan and then recruit other banks to share in the profits and in the risk. The lead bank will sell participation shares to the participating banks.

Banks may share equally (pari passu) in the risk and reward, or the banks may adopt a senior / subordinate arrangement, with the lead bank being paid first.

Banks use participation agreements for a number of reasons:

• Income generation (for all banks)
• Spreading of the risk
• Spreading of the profits
• Lead bank can retain control of client relationship
• Lead bank can originate the loan when it could not have done so otherwise
• Participating banks can diversity they investments

Banks should be clear on language in the agreement, particularly with regard to the following issues:

• Language about risk and loss so as not to break securities laws
• Lead bank’s fiduciary duty, if any, to participating banks
• Loan fees
• Profit sharing
• Borrower’s default

Popularity: 6% [?]