IOLTA and Litigation Funding Proceeds: How Trust Accounting Rules Apply

How funding disbursements and repayments move through an attorney trust account, and the professional-responsibility rules that govern that flow.

Do litigation funding proceeds pass through an attorney's IOLTA account? In most transaction structures, yes: funders disburse capital to the client's attorney trust account, and repayment at settlement is typically routed back through that same account as part of the disbursement of case proceeds, keeping the transaction within the trust accounting framework attorneys already operate under for client funds and settlement proceeds generally.

Every state's Interest on Lawyers' Trust Accounts program is built on the same core principle codified in ABA Model Rule 1.15: client and third-party funds must be held separately from the lawyer's own operating funds, in a clearly identified trust account, with the lawyer serving as a fiduciary over funds that are not the lawyer's own. A litigation funding advance complicates this picture only slightly — the funder is not the client, but once its capital reaches the trust account earmarked for a specific matter, the same segregation and recordkeeping obligations apply to those funds as to any other funds held for a matter.

At settlement, the disbursement waterfall is where trust accounting discipline matters most. A typical waterfall pays case costs and expenses, satisfies any medical or other liens against the proceeds, pays the attorney's fee under the governing fee agreement, repays any funding advance under its own priority, and distributes the remainder to the client. Rule 1.15 requires the lawyer to promptly notify third persons known to have an interest in funds held in trust and to promptly deliver funds each is entitled to receive — which extends directly to a funder whose advance is repayable from the specific proceeds being disbursed, making accurate waterfall recordkeeping a professional-responsibility obligation, not just good bookkeeping.

Commingling risk is the recurring practical issue. A lawyer who deposits funding proceeds into a general operating account, rather than a client trust account, risks a serious disciplinary violation independent of anything about the funding arrangement's substance, since the obligation to segregate client and third-party funds applies regardless of the funds' ultimate source. Firms operating law-firm-level portfolio facilities — where funding supports the firm's overall docket rather than one client's case — should be especially careful to maintain accounting practices that keep firm operating capital, client trust funds, and any funder-designated reserve accounts clearly distinguishable from one another.

Disputes over a funder's claimed share of proceeds occasionally arise at the disbursement stage, particularly when a case resolves for less than originally projected. Because the attorney holds the disputed funds as a fiduciary, Rule 1.15 generally requires the lawyer to keep the disputed portion segregated in the trust account until the dispute between the client and the funder is resolved, distributing only the undisputed portion, rather than releasing the entire balance to either party unilaterally.

Firm-level portfolio facilities complicate this picture further, because the capital is not tied to any single client's trust ledger. A portfolio advance is typically deposited into a firm operating or reserve account rather than a client-specific IOLTA sub-account, since it is not being held for the benefit of any particular client at the moment of receipt. As individual cases within the financed portfolio later resolve, the proceeds attributable to that specific case still pass through the client's trust account in the ordinary way, with the firm then remitting its own share, including whatever portion is owed to the portfolio funder, from firm funds once the client's trust distribution is complete. Maintaining a clear accounting trail between the firm-level facility and each individual client's trust ledger is essential, since blending the two without careful recordkeeping is precisely the kind of practice that invites both an IOLTA compliance problem and a funder dispute over what is actually owed.

A practical audit trail typically includes several elements: a subsidiary ledger or accounting system tracking each client matter's costs, liens, fees, and any funding-related obligations separately from the firm's general books; documentation showing when funding proceeds were received and how they were applied; and, at resolution, a settlement statement showing the full disbursement waterfall the client can review, consistent with Rule 1.15's requirement that a lawyer render a full accounting of trust property to the client upon request. Firms operating a portfolio-level facility often build this documentation practice into their case management systems from the outset, since reconstructing an accurate accounting after the fact — particularly across many matters resolving over several years — is considerably harder than maintaining the discipline contemporaneously.

Ahead of a matter's first disbursement, most funders request a short, standard documentation set: the executed funding agreement itself, a payoff or acknowledgment letter the attorney can hold in the file, and, where the transaction is structured with a security interest in the claim's proceeds, any financing statement the funder has filed against the claimant or firm. None of this displaces the attorney's own recordkeeping obligations under Rule 1.15 — the trust ledger entries, the client's informed acknowledgment of the funding relationship where the fee agreement requires it, and the eventual settlement statement remain the firm's responsibility regardless of what the funder's own paperwork looks like — but having the funder's documents on hand before the first advance clears makes the eventual disbursement calculation a matter of arithmetic rather than a scramble to reconstruct terms from memory once proceeds actually arrive.

The reconciliation burden compounds on any matter that runs for years rather than months, which is the normal case for a portfolio-level facility spanning many individual matters at different stages. A ledger that is accurate at intake can drift out of sync with the actual funding relationship if accrual, additional draws, or partial repayments are not posted to the matter's trust sub-ledger as they occur, and reconstructing that history after the fact — particularly once the attorney who originally handled the matter has moved on — is materially harder than maintaining the discipline contemporaneously. Firms operating a multi-matter facility are well served by treating the funder's own periodic statement of outstanding balances as a check against the firm's internal ledger, rather than relying on either record in isolation, since a discrepancy caught early is a bookkeeping correction and a discrepancy caught at final disbursement is a dispute.

Sources: ABA Model Rule of Professional Conduct 1.15 (Safekeeping Property); state IOLTA program rules, which closely track Model Rule 1.15 in nearly all US jurisdictions.

Disbursement instructions are structured to align with standard trust accounting practice, routing advances and repayments through the client's or firm's attorney trust account consistent with each jurisdiction's IOLTA rules. Firms with questions about how a specific funding structure interacts with their trust accounting obligations can contact our institutional team.

Discuss your matter with our institutional team.