The Dos and Don'ts of Client Trust Accounts
by Peter Pogue
Tuesday, August 30, 2016
Whether lawyers admit it or not, the “disciplinary action” section of the local bar periodical seldom goes unread. Unfortunately, all too often the names in bold black print are associated with sanctions from censure to disbarment levied for improprieties dealing with client funds and client trust accounts.
While such offenses may be mundane to the gawker, the consequences for disciplined attorneys can be devastating.
It is easy to assume that such instances of misconduct are the product of willful ignorance or action, but all too often attorneys run afoul of the rules of professional conduct pertaining to client funds with a clean conscience and clear heart. So, what gives?
Client Trust Accounts
ABA Model Rule 1.15 Safekeeping Property serves as the model for many states’ rules regarding the possession of the property or funds of clients or third persons. However, there are significant differences between the requirements for possessing client property across the states, so be sure to know the rules for your state.
When in doubt, it is safer to place funds in a client trust account (CTA) until such doubts are resolved.
CTAs are required whenever a law firm or attorney possesses the funds or property of a client in connection with representation. In this capacity, attorneys are held to the standard of a fiduciary.
Examples of funds typically held in CTAs include:
- Settlement proceeds
- Advances on fees (retainer) and expenses prior to the work being performed or the expense being incurred
- Part of the administration of an estate
- Funds for a business/real estate transaction
Interest on Lawyers’ Trust Account
Every state has an Interest on Lawyers’ Trust Account (IOLTA) program. If the amount of a client’s funds is small enough, or, if the funds will be held for a short enough time, then the costs of administering an interest-bearing account would be greater than the interest garnered, an IOLTA would be appropriate, and, in some states, is required.
IOLTAs pool funds that would not otherwise earn interest for individual clients to create interest for state-sponsored IOLTA programs, generally charitable and educational endeavors, improvements to the administration of justice, and providing indigent and low income persons with legal services. In most jurisdictions, it is permissible to hold multiple clients’ funds in a single IOLTA account subject to record-keeping requirements.
In establishing an IOLTA, begin by reviewing your state’s procedures. Many states require that IOLTAs be established with an approved institution, typically in the same state in which the lawyer practices. Pay attention to whether the Federal Deposit Insurance Corporation covers the institution.
IOLTA account expenses cannot be paid with client funds; instead some IOLTA programs pay the expenses, some institutions waive expenses, and sometimes the attorney must pay the expenses.
Depending upon the applicable rules, CTAs may be pooled and placed into what is essentially a checking account. However, accounting for the funds in such an account is not the same as a personal checking account. To ease the administration of a CTA, pooled accounts can be broken into sub-accounts for individual clients. In any event, ledgers must be kept for each individual client.
CTA Dos and Don’ts
Being knowledgeable and actively responsible with respect to the rules and requirements for holding client funds is not a concern limited to solo practitioners. Even if you are a member of a firm with hundreds of attorneys, the funds or property of any client you represent is ultimately your responsibility, irrespective of whether you are a partner, associate, full-time or part-time practitioner. Indeed, most client trust accounting issues involve non-lawyer malfeasance for which an attorney bears full responsibility.
As a starting point, here are some general CTA guidelines:
- Provide clients with an accounting of fees incurred when money has been advanced and is being held in a CTA for approval prior to removing those funds from the account.
- Provide clients with an accounting of the disbursement of settlement funds prior to making such a disbursement.
- Promptly withdraw earned funds to prevent commingling of firm funds with client funds.
- Retain all deposit slips, bank statements, check stubs, cancelled checks and client checks to create an audit trail. Check your state’s rules to determine how long such documents must be retained.
- Keep a written ledger detailing every transaction by each client, and perform a monthly reconciliation.
- Properly train and supervise any staff working with the CTA. State bar disciplinary authorities hold lawyers accountable for the mismanagement of CTAs by subordinate personnel.
- Fail to promptly withdraw CTA funds for work that has been completed with billing approved by the client.
- Disburse settlement funds prior to the settlement draft clearing. Every cent in a CTA is earmarked for an individual client. Never rob Peter to pay Paul.
- Use CTA funds for any purpose other than a proper disbursement based upon the representation, no matter how quickly such money is replaced in a CTA.
- Commingle firm funds with client funds in a CTA. Commingling is not only universally prohibited, but could also compromise client funds with respect to a firm creditor.
- Use a CTA to shelter client funds from a client’s creditors.
Many attorneys are under the misperception that violating the rules associated with CTAs is the product of intentional conduct, or conduct that is so negligent that it may as well have been intentional. Instead, based upon the scenarios that can arise in the administration of a CTA, one must not only be conscious of the applicable regulations, but must also intentionally strive to comply with such regulations.
Wearing the crumbs of cookies not earned or properly accounted for is a fast and sure way to not only end up in the disciplinary actions section of your local bar periodical, but may also result in not having to worry about accounting for non-attorney property at all.