The American Bar Association's Model Rule 1.15 addresses the attorney's ethical obligation to keep a client's property safe. That obligation includes:
• Keeping the property or funds separate from the lawyer's property and in a safe place, such as a separate bank account, a safe deposit box, or a fireproof safe
• Keeping accurate and complete records of the client's funds and property (rules regarding the records to be kept vary from state to state)
• Promptly notifying the client when property or funds are received
• Promptly delivering the property to the client when entitled
• Providing a full accounting of the property upon the client's request
The client's funds are not to be commingled with the law firm's general operating account(s). Violation of this rule, even if there is no harm to the client, may result in the attorney being disciplined. There may be other ramifications such as criminal charges and civil litigation.
This is a serious issue. Here are seven important things you must remember when handling the client's money or other property:
1. 'Fees paid in advance' are not to be confused with 'retainer fees.' Advanced fees are usually requested to ensure the attorney's fees and costs will be paid. These fees are never deposited in the firm's general account. Instead, they are deposited in the client trust account and may be withdrawn only as fees are earned or expenses are paid. The fees are considered 'earned' when they are billed. Any unearned advanced fees are to be refunded to the client.
2. A 'retainer fee' is a flat amount that is paid for a specific period of time, such as monthly. Retainer fees are paid to guarantee that the attorney will be available for whatever work has to be done during the specified period of time. The retainer fee belongs to the attorney whether or not the attorney does work that would earn payment of the fee. They are not returned to the client, regardless of the amount of work done on the client's behalf.
3. Any funds received by the attorney but still belonging to the client are deposited in the law firm's trust account. The trust account is a separate account from the attorney's general operating account. It is maintained in the state where the attorney's office is located. The two accounts are never commingled, even if there is no harm to the client. For instance, it is unethical to borrow funds from the trust account to buy new office furniture or cover payroll, even if the money can be returned to the trust account before it is missed.
4. The client trust account may also be called the IOLTA Account. This is the Interest on Lawyers' Trust Account program. The supreme courts or legislatures of all 50 states have established these programs so that the interest on the attorney's trust account is forwarded to the State Bar to provide legal services for low-income citizens.
5. States are divided on the issue of paying unearned fees by credit card. The ABA approves the use of credit cards for payment of earned fees. Those fees may be deposited directly into the firm's operating account. It has been suggested that payments for unearned fees (remember that these funds still belong to the client and must be treated as such) may not be made to a credit card account that is used for the firm's general operating funds. (See Arizona Ethics Opinion 08-01 and Michigan RI-344 for examples). It would probably be best if attorneys have two credit card merchant accounts...one for earned legal fees and costs and a second for advance fees and expenses.
6. Some states allow nonlawyers to sign trust account checks. The rule varies from state to state. Whatever the rule, the attorney remains responsible for any mistakes or theft of funds from the account. It is important that the attorney reviews all trust account transactions each month. The attorney is ultimately accountable for the safekeeping of the client's funds. Nonlawyers can be prosecuted for mishandling the funds.
7. According to ABA Model Rule 1.5, the attorney must keep records of trust account funds and other property for five years after representation of the client ends. This time period varies from state to state.
Your challenge: Review the Model Rules and Ethics Opinions in your state so that you understand the rules that apply to your firm's handling of client funds and property. While the attorney will be disciplined if errors are made, you, too, could subject to criminal or civil penalties. Your firm should have a system in place to ensure that its clients' funds and property are handled properly and ethically.
©2000 Vicki Voisin, Inc.
