What Lawyers Need To Know About Client Trust Accounts

1. GOVERNING RULES; PROFESSIONAL RESPONSIBILITY:

A. ABA:

1. ABA Model Rules of Professional Conduct:

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 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 [five 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 interest. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.

2. ABA Model Code of Professional Responsibility Disciplinary Rules DR 9-102 Preserving Identity of Funds and Property of a Client

(A) All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:
(1) Funds reasonably sufficient to pay bank charges may be deposited therein.
(2) Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

(B) A lawyer shall:
(1) Promptly notify a client of the receipt of his funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the lawyer and render appropriate accounts to his client regarding them.
(4) Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.

B. CALIFORNIA RULES OF PROFESSIONAL CONDUCT

Rule 4-100. Preserving Identity of Funds and Property of a Client

(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account", "client's Funds Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:
(1) Funds reasonably sufficient to pay bank charges.
(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed. However, when the right of the member or law firm to receive a portion of trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved.

(B) A member shall:
(1) Promptly notify a client of the receipt of the client's funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

(C) The Board of Governors of the State Bar shall have the authority to formulate and adopt standards as to what "records" shall be maintained by members and law firms in accordance with subparagraph (B)(3). The standards formulated and adopted by the Board, as from time to time amended, shall be effective and binding on all members.

Standards: Pursuant to Rule 4-100(C) the Board of governors of the State Bar adopted the following standards, effective January 1, 1993, as to what "records" shall be maintained by members and law firms in accordance with subparagraph (B)(3).

(1) A member shall, from the date of receipt of client funds through the period ending five years from the date of appropriate disbursement of such funds, maintain:

(a) a written ledger for each client on whose behalf funds are held that sets forth:
(i) the name of such client;
(ii) the date, amount and source of all funds received on behalf of such client;
(iii) the date, amount, payee and purpose of each disbursement made on behalf of such client, and
(iv) the current balance for such client;

(b) a written journal for each bank account that sets forth:
(i) the name of such account;
(ii) the date, amount and client affected by each debit and credit, and
(iii) the current balance in such account;

(d) each monthly reconciliation (balancing) of (a), (b), and (c).

(2) A member shall, from the date of receipt of all securities and other properties held for the benefit of client through the period ending five years from the date of appropriate disbursement of such securities and other properties, maintain a written journal that specifies:
(a) each item of security and property held;
(b) the person on whose behalf the security or property is held;
(c) the date of receipt of the security or property;
(d) the date of distribution of the security or property; and
(e) person to whom the security or property was distributed
(Trust Account Record Keeping Standards, as Adopted by the Board of Governors on July 11, 1992, effective January 1, 1993)

2. DISTINCTIONS; ABA vs CALIFORNIA RULES:

A. While the ABA Rules exclude "costs and expenses" from the requirement of being deposited into the lawyer's trust account, the California Rules specifically include these items and require they be first deposited into trust when they are "advances for costs and expenses..."

B. The ABA Rules allow the portion of trust funds "belonging to the lawyer" to be permissively withdrawn when due; however the California Rules require the lawyer's portion "must be withdrawn at the earliest reasonable time".

C. See also Business and Professions Code 6069, in which subsection (a) provides that all California attorneys deemed to have irrevocably authorized the disclosure to the State Bar and the Supreme Court all financial records pertaining to accounts "which the member must maintain"; but that such records shall not be disclosed without a subpoena therefor.

3. CALIFORNIA'S MINIMUM RECORDS AND RECORD KEEPING REQUIREMENTS

A. California Rules of Professional Conduct: The Standards adopted by the Board of Governors require that California Lawyers maintain least 4 separate items for each client whose funds have been in the lawyer's trust account:
1. A written ledger for each client;
2. A written journal for each bank account;
3. ALL bank statements and canceled checks for each (trust )account;
4. Each monthly balancing of the trust account checkbook.

B. In addition to the above 4 items for all trust account transactions, the lawyer must also maintain a written journal for "all securities and other properties" held for clients.

C. Period of Record Keeping: The records above must be retained for a period of 5 years from the last disbursement of the funds or property on each matter.

D. Lawyers in other jurisdictions should obtain and refer to the appropriate rules for their respective jurisdictions.

4. STATUTORY ACCOUNTINGS TO CLIENTS IN CALIFORNIA:

A. By statute (B&P 6091) a client may compel the attorney to provide an accounting for trust funds. In such cases, the lawyer must provide the statement of account within specified time limits:
(1) B&P 6091 requires the lawyer to provide a "complete statement of the funds received and disbursed" on the client's request, "within 10 calendar days after receipt of the request" and limits such requests to once each 30 days, "...unless a client files a complaint with the State Bar and the State Bar determines that more statements are warranted."
(2) This same section provides: "If a client files a complaint with the State Bar alleging that his or her trust fund is being mishandled, the State Bar shall investigate and may require an audit if it determines that circumstances warrant."( Emphasis added); this section appears to require that in complaints alleging trust account improprieties, it is mandatory that the State Bar investigate the complaint.

5. OVERDRAFTS, MISAPPROPRIATIONS AND COMMINGLING:

A. B&P Code 6091.1 includes a legislative finding that "The Legislature finds that overdrafts and misappropriations from attorney trust accounts are serious problems"

B. The statute requires the bank or financial institution at which the attorney's trust account is maintained to report NSF checks on attorney's trust accounts to the State Bar, regardless of whether the check is honored or not.
1. CAVEAT: "Overdraft protection" through your bank on your trust checking account can be dangerous! See Robins, 1 Cal. State Bar Ct. Rptr. 708:
"Respondent himself was unaware of any specific problem with his trust account balance because he had an arrangement with his bank for overdraft protection on the trust account and it never returned a check...he had no knowledge of the impropriety of such arrangement..."

C. The statute provides that all attorneys admitted in California are deemed to have consented to the reporting requirement, and that the financial institution may charge the attorney the reasonable cost of producing the reports and records to be sent to the State Bar.

D. SPECIAL PROBLEMS OF OVERDRAFTS AND MISAPPROPRIATION:

1. Where the balance in the lawyer's trust account drops below the sum required to satisfy all client fund obligations, even where there are no "bounced" checks or client problems.

(a) Example: Attorney has received and deposited into trust a total of $1,000 in client funds; $700 for client 'A' , and $300 for client 'B'; no checks on the account are dishonored, and the funds are timely disbursed to, or on behalf of the client; however before the last disbursement, the balance in the trust account drops below, but later is sufficient to clear the last check for client funds held in the account.

(b) Discussion: Since no client trust account checks have been dishonored, the bank is under no obligation to report, and in fact, all client funds have been applied and paid as required. The problem is that at one point in time, there were not sufficient funds to satisfy the lawyer's trust obligations IF a check had been presented for payment at that time.
1. See above for State Bar's statutory, apparently mandatory duty to investigate matters alleging client fund problems;
2. This issue may arise once a Bar investigation commences; a subsequent audit of the respondent-lawyer's trust account may indicate that while no trust account checks have bounced, and all client funds have been properly paid, that the account balance was, at some time, less than the total of client funds not yet disbursed.

(c) Probable result: (See In the Matter of Bleecker, 1 Cal. State Bar Ct. Rptr 113, see also Giovanazzi v. State Bar, [1980] 28 Cal.3d 465, 474). In Bleecker, , the Bar proceeded against respondent Bleecker for, inter alia, the following allegations of trust account violations:
(i) commingling;
(ii) using his trust account as a personal or business account and
(iii) misappropriation of client funds from the trust account. While the record is Bleecker does not disclose any NSF checks on Bleecker's trust account, there were times when the balance in the account was below that required to properly account for all client funds on deposit.

In Bleecker, the Review Dept. quoted with favor from Giovanazzi, supra:
"[t]he mere fact that the balance in an attorney's trust account has fallen below the total amounts deposited in and purportedly held in trust, supports the conclusion of misappropriation."

(d) Discussion: These cases present a conundrum. On the one hand, the attorney can't commingle funds by placing own funds into the trust account; on the other hand, not having sufficient funds to cover bank account operating costs and check charges may result in negligent misappropriation or NSF checks. See 2 below for a possible answer.
2. Attorney's funds in trust account to cover bank charges etc.,: In appears that an attorney may maintain a sufficient amount of the attorney's own funds in the trust account to cover bank charges and the related: See In the Matter of Respondent F, 2 Cal. State Bar Ct. Rptr. 17, holding attorney's $121.83 in trust account reasonable to cover bank charges.
3. Client's advance payments for attorney's fees:
(a) Advance deposits for fees: problems can arise where the client later disputes the attorney's entitlement to the fees, in full or in part:
(i) "Unearned fee" issues: How are the fees calculated?
(ii) What about "how much" of a fee may be retained?
(iii) Is the fee a true "pure retainer" earned when paid?
(iv) Can the attorney unilaterally set his/her own fee, modify a retainer agreement setting fees?

(b) Because the topic of the legal aspects of attorney's fees is beyond the scope of this discussion of trust account responsibilities, this discussion will be restricted to those situations where the attorney has received an "advance" fee payment from the client; and deposited it into his/her trust account.
The general rules relating to advance payments of fees are: (1) all such advance payments of fees must be deposited into the attorney's trust account ; (2) the attorney may draw out funds as they are earned and become due the attorney; (3) the attorney must provide the client with accountings at the minimum showing charges against, and balance of trust funds and fees; (4) if there develops a dispute as to fees due the attorney, the latter must hold the disputed funds in trust until the controversy is resolved; and finally (5) if any funds are unearned, such funds must be promptly returned to the client.

(c) The "pure retainer" as opposed to an "advance fee payment": In Baranowski vs. State Bar, 24 Cal.3d 153, the court in footnote 4 distinguishes the classic 'retainer fee' from an advance fee payment as follows:
'An "advance fee payment"...is to be distinguished from a classic "retainer fee"...A retainer is a sum of money paid by a client to secure an attorney's availability over a given period of time. Thus, such a fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether he actually performs any services for the client.'
Caveat: Even where the attorney contends the sum paid by the client is a pure classic "retainer fee" a prompt refund may be required where there have been no actual services of benefit conferred on behalf of the client (see In the Matter of Harris, 2 Cal. State Bar Ct. Rptr. 219, in which the attorney was required to refund all fees, even where some work was performed, but found not to be of benefit to the client.

(d) Once a fee (i.e., an hourly rate) is agreed upon between client and attorney, the attorney may not unilaterally increase the fee without prior notice to the client [see Severson & Werson v. Bolinger (1991) 235 Cal.App.3d 1569], even where a written fee agreement provides the client will pay the lawyer's then "regular hourly rates".

4. Liens; funds in trust for lien holders: (a) Client's obligations to lienholders are debts owed by the client, and the attorney is under a duty to honor the client's agreements.; where funds are in trust to satisfy a lienholder, an attorney may not pay the lienholder from his/her own personal funds, then pay him/her self from the trust funds earmarked for the lienholder (see Matter of Dyson, 1 Cal. State Bar Ct. Rprt. 280). This appears to require that client debts or obligations for which trust funds are earmarked must be paid from the trust funds. The lawyer cannot pay them from general funds, then reimburse him/herself from trust funds. (b) Where a dispute arises with a lienholder, the attorney must hold the funds in trust till the dispute is resolved then pay them over promptly to the party due, on demand (see also Kizer, 1 Cal. State Bar Ct.Rptr 87).

E. COMMINGLING AND MISAPPROPRIATIONS:

1. Commingling is found where the lawyer fails to maintain the client's funds separate and apart from the lawyer's. (a) In those jurisdictions where clients' funds need not be segregated into a separate account for each client, (e.g., California) the pivotal issue is whether the lawyer has commingled his/her own funds with the client trust funds.

Commingling can be found where the lawyer:
(i) Uses the trust account as a business or personal account;
(ii) Pays business and other operating expenses directly from the trust account;
(iii) Keeps excess amounts of the lawyer's own funds, or fees already earned and due, the in the trust account;
(iv) Fails to promptly withdraw fees earned from the trust account and instead leaves them in the trust account.

(b) Preventing commingling issues:
(i) Don't use the trust account as a general business or personal account! Maintain a separate general business and/or personal account.
(ii) Promptly draw out fees when earned; don't leave them in the trust account. Be sure to provide statement to client covering application of trust funds to fees due.
(iii) When funds are received to the trust account on behalf of a client, promptly disburse them to the client.
(iv) Where a dispute arises (whether with a client over fees due or a lienholder or creditor of client) concerning trust funds, retain the funds in trust till the dispute is resolved; then pay them to party to whom they are due, promptly. You may be required to segregate these disputed fees.

2. MISAPPROPRIATION:
A. Misappropriation is found where the lawyer takes property or fundsbelonging to another:
(i) Typically, misappropriation arises where the lawyer converts a client's funds;
(ii) Misappropriation can also occur where the lawyer converts funds received from a third party on behalf of a client.
(iii) In addition to creating grounds for disciplinary action against the lawyer, misappropriation is likely to constitute a criminal offense (see Demergian on Disbarment; 48 C. 3d 284, where the lawyer/respondent was charged with the crime of grand theft, and also disciplined by the bar for a misappropriation of client funds.

B. Negligent vs. Intentional Misappropriation:
(i) Some courts, in determining the culpability of a lawyer charged with misappropriation, have imposed differing degrees of punishment depending on whether the misappropriation was intentional or negligent.
(ii) Remember (see 5. D. 1. supra) that the mere fact the balance in a lawyer's trust account drops below the sum required to satisfy all client trust fund obligations , may give rise to an inference of misappropriation may be drawn, or that fact alone can support a finding of misappropriation (see Giovanazzi v. State Bar, [1980] 28 Cal.3d 465, 474, supra) As to a "negligent" misappropriation, see Robins, 1 Cal.State Bar Ct. Rprt. 708,; c.f. Waysman vs. State Bar, 41 Cal.3.d 452 (negligent misappropriation quickly and voluntarily remedied may not require any actual suspension).

6. CONCLUSION; COMMENTS:

A. Obtain a copy of your jurisdiction's rules governing professional conduct, especiallyas regards trust accounts. Be familiar with those rules.

B. Remember your trust account responsibilities are of the highest fiduciary standards, and are non-delegable. Regardless of who in your office handles your trust account, you remain ultimately responsible.

C. Balance your trust account monthly! Some jurisdictions require you to do so, and howelse will you know what it's status is? If you're not willing or able to do so, hire a book-keeper or account to perform this vital task.

D. Consider using a computer-based trust account program. Be sure the program will prepare and/or maintail all the records required by your jurisdiction. Back up regularly.

E. If you receive advance payments of fees in contemplation of work to be performed in the future then billed against those advance fees, be sure to provide regular statements to all such clients, showing the status of their trust funds and charges for professional services performed.

F. If a dispute arises concerning trust funds, including advance fee payments, whether with a client or third party claimant, hold the funds in trust till the dispute is resolved, then pay them promptly to the party (or parties) to whom due.

G. Don't allow your (undisputed) fees due and payable to languish in your trust account; draw them over to your general account by check promptly when earned. Be sure to credit them properly to the client from whom received.

H. Don't pay your personal or office expenses from your trust account! Draw fees due you to your general account, and pay the bills from the general account.

I. Comply with your jurisdiction's requirements concerning the records to be maintained for your trust account. Some have special requirements, including what records must be maintained, and for how long.
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Excerpted from material copyright ,1995
by The Institute for Continuing Legal Education
P.O. Box 30 -- L.V., NV 89125-0030

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