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1. GOVERNING RULES; PROFESSIONAL RESPONSIBILITY:
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
(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
(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portion belonging to the lawyer or law firm may be withdrawn when due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
(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
(iii) the current balance in such account;
(c) all bank statements and canceled checks for each bank 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
(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
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
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
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
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
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
(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
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.
"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,  28 Cal.3d
465, 474). In Bleecker, , the Bar proceeded against respondent Bleecker
for, inter alia, the following allegations of trust account violations:
(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
In Bleecker, the Review Dept. quoted with favor from Giovanazzi,
"[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
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
'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
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
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
(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.
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
(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,
 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
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
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
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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