December 1997
Working with Client's Trust Accounts
by
Constance V. Vecchione
First Assistant Bar Counsel
As we mark the second anniversary of
the implementation of Disciplinary Rule 9-103 (the dishonored check rule requiring
financial institutions to report bounced trust account checks to Bar Counsel),
there is good news, good-and-bad news, and bad news for the Bar.
The good news is that the number of notices of dishonored
checks received in the second year decreased about 11% from the first year.
The good-and-bad news is that, thus far, the implementation of the rule has
resulted in Bar Counsel's uncovering a few mid-level, but no major, thefts of
client funds. We don't know why, exactly. Perhaps the rule is having a deterrent
effect, or perhaps malefactors are simply avoiding bouncing checks or are using
accounts other than trust accounts.
The bad news is that the implementation of the rule shows
continuing confusion among lawyers concerning the use and management of IOLTA
and other trust accounts. Further, minor discipline for problems with the management
of trust accounts has increased as a result.
With these problems in mind, we offer some suggestions based
on the most common problems we see:
1. Deposits. The only funds that can be deposited to an
IOLTA or other trust account are client funds or other funds held in a fiduciary
capacity, such as personal injury settlements or other settlements or judgments,
collections, real estate conveyancing funds, and (most) retainers and advances
for fees until actually earned. See DR 9-102 or Mass.
R. Prof. C., Rule 1.15 (after January 1, 1998). Earned fees (meaning fees
that are earned before the client pays) are not client funds and cannot be deposited
to an IOLTA or other trust account.
2. Deposits (cont.). An account that it is purely a deposit
for personal or business funds cannot be an IOLTA account and cannot be denominated
as an IOLTA account, client account, or with any similar fiduciary designation.
Lawyers who do not receive client or other fiduciary funds should not be using
IOLTA or other trust accounts. We have seen too many attorneys in the last two
years who thought that they were required to have an IOLTA account even though
they receive no client funds and who, in their confusion, end up using the IOLTA
account as an operating or personal account. For example, an attorney whose
entire practice is criminal appointed-counsel work, and who accordingly is only
paid for work already done, cannot deposit the fees earned on those cases to
an IOLTA account. If that attorney nonetheless wishes to maintain an IOLTA account
in the event he or she does come into possession of client funds, the account
can be kept open with $50 or $100 of the lawyer's own funds--the deposit of
a small sum necessary to maintain the account or to pay bank services charges
is not considered commingling under DR 9-102(B)(1) or Mass.
R. Prof. C, Rule 1.15 (after Jan. 1, 1998)--but should not otherwise be
used unless client funds are received.
3. Deposits (cont.). If the bank does levy charges (such
as for new checks or for a wire transfer), the attorney must deposit his or
her own funds to the account to cover these expenses. Otherwise, there will
be an overdraft or the service charge will have been paid improperly with client
funds. A surprising number of dishonored checks have resulted from lawyers'
inadvertent failure to deposit their own funds to cover new check charges that
the bank debits from the account. The charge initially is paid from client funds
and, months later, when the account is at a point where the float is low, a
check to a client will bounce. Monthly reconciliation (see below) would, of
course, go a long way towards preventing this type of problem. Again, maintaining
a small sum of personal funds in the trust account to cover charges of this
nature is not considered commingling.
4. Deposits (cont.). We also are seeing too many attorneys
who, because of personal financial problems, are intentionally using an IOLTA
or other trust account as an operating account or personal account. They are
depositing their earned fees or other personal funds to the account and using
the account to pay office or personal expenses. Again, trust accounts, including
IOLTA accounts, are only for trust funds and cannot be used in this manner.
5. Commingling. When the attorney and client agree that
the attorney has a fee due from the IOLTA or trust account (a contingent fee
on a personal injury settlement, for example, or a portion of a retainer that
has been earned and billed), the attorney must promptly transfer the whole of
the earned fee from the IOLTA or trust account to the attorney's operating or
personal account. Fees that are earned cannot be disbursed piecemeal by the
lawyer to himself or herself from the IOLTA or trust account and, worse, personal
or business expenses cannot be paid directly from the IOLTA or trust account
with earned fees remaining in the account. Either of these practices constitutes
impermissible commingling. Both practices frequently result in the lawyer losing
track of what funds in the account belong to clients and what funds belong to
the lawyer. These practices have led to situations where client funds are negligently
misused by the lawyer.
6. Commingling (cont.). A variation on this theme is the
problem of the use of an ATM card with an IOLTA or trust account. While it may
be useful to have an ATM card for deposits, the card should never be used for
withdrawals. Given the absence of documentation of the purpose of the withdrawal,
it is difficult, if not impossible, to keep the complete records of trust funds
required by DR 9-102 if disbursements are made via ATM withdrawals. We have
found too that lawyers who use ATM cards in this latter manner are withdrawing
their fees piecemeal and invariably are keeping inadequate records of the balance
remaining due them such that more is ultimately withdrawn than was owed.
7. IOLTA Accounts. It also is important to understand when
to use an IOLTA account and when to use another type of trust account. Under
DR 9-102 and Mass. R. Prof. C., Rule 1.15 (after
Jan. 1, 1998), IOLTA accounts are pooled accounts for multiple clients to be
used for trust funds that are held short-term or are nominal in amount. With
a very narrow exception for certain limited types of noninterest-bearing conveyancing
accounts (a complicated rule and outside the scope of this article), nominal
sums or funds held short-term must be processed through an IOLTA account.
8. Individual Trust Accounts. Large sums or funds held longer
term must be deposited to an individual trust account earning interest for the
benefit of the client or other beneficiary. An estate account or (depending
upon the dollar amount and the length of time it will be held) an escrow account
for a substantial deposit on a sale of real estate are good examples of situations
in which individual accounts should be used. Individual accounts can be maintained
under the umbrella of a master account with subaccounts for individual matters,
but attorneys must be very careful in those situations to follow the bank's
requirements for deposit and disbursements. Banks often require all deposits
first to be made to the master account and then transferred to a subaccount,
and then to be transferred back to the master account from the subaccount before
a check can be written. Attorneys have found themselves bouncing checks because
they have forgotten to transfer funds from the subaccount to the master account
before remitting the check. Similarly, attorneys sometimes find themselves with
undisbursed funds sitting in the master account not earning interest which should
either have been transferred to a subaccount or disbursed.
9. Recordkeeping. The most critical aspect of trust accounting
is to recognize that no trust account, even one with modest or little activity,
can properly be maintained in the same manner as even a well-kept personal checking
account. A simple check register is not sufficient. Additional recordkeeping
is needed including a receipts and disbursements journal containing a chronological
record of all deposits in, withdrawals from, and charges to that account, specifically
identifying the date, source, and description of each item deposited as well
as the date, payee, and purpose of each disbursement or charge; disbursement
documentation (invoices, for example); bills and other billings records; fee
agreements; accountings to clients; and most importantly, a subsidiary ledger
(described in paragraph 10, below). These records can be kept either manually,
with a one-write or similar system, or electronically, with any of several inexpensive
software programs. A software program, properly employed, will greatly facilitate
the maintenance of certain of the necessary records, such as the subsidiary
ledgers.
10. Subsidiary ledger. The subsidiary ledger is a ledger
containing a separate page or card for each client or other person for whom
funds are held in trust, showing dates of receipts and disbursements, with up-to-date
balances. A subsidiary ledger enables the attorney to know at a glance what
funds are held for a given client and to provide the client with an accounting
on request. It probably is impossible to adequately maintain an IOLTA or other
trust account without keeping a detailed receipts and disbursement journal,
described above, and without maintaining subsidiary ledgers.
11. Cash. If a client pays with cash (and aside from the
federal reporting requirements for sums of $10,000 or more), the lawyer should
provide a receipt and retain a duplicate copy of the receipt. No trust account
checks should be payable to CASH and no disbursement to a client should ever
be made in cash. If the client does not have a personal checking account, he
or she can cash the attorney's check at the attorney's bank. It is the lawyer
who is responsible for having financial records if a dispute arises with a client
or third party over receipts or disbursements.
12. Reconciliation A properly maintained trust account must
be reconciled, preferably monthly and at least quarterly. Certain very active
accounts, such as conveyancer's accounts, should perhaps be reconciled twice
a month. A monthly trial balance of the subsidiary ledger should agree with
the month end book balance of the client account. Reconciliation insures that
any inadvertent errors--an arithmetic mistake, a deposit check mistakenly not
deposited--will be found within a month and, with luck, before problems occur.
Locating the source of a mistake obviously becomes more and more difficult the
longer it goes undiscovered. Many of the problems we see arise from the fact
that the attorney either does not do the addition and subtraction in the check
register or does not reconcile the account or both. Lawyers explaining dishonored
checks on occasion have told us that they had determined the balance in their
trust accounts by calling the bank and making disbursements to themselves or
others on that basis, thus overlooking outstanding checks that were presented--and
bounced--months later.
13. Supervision. DR 9-102, or Mass.
R. Prof. C., Rule 1.15 (after Jan. 1, 1998), is a strict liability rule.
If the trust account is mismanaged in a manner that was preventable, the attorney
will be found responsible even if a secretary or bookkeeper was actually doing
the recordkeeping. A trust account cannot simply be delegated to a staff person
untrained in trust account recordkeeping. Even with training, the lawyer is
responsible to insure that the staff person is actually maintaining the records
properly, that the receipts and disbursement journal and subsidiary ledgers
are being kept up to date, that the account is being reconciled monthly. For
this same reason, it is preferable, too, that only attorneys be authorized signatories
on the account.
14. Accounting To Clients. Lawyers should periodically apprise
the client of the status of funds held for the client and certainly should prepare
an accounting at the end of the case. If the funds in question are retainers,
a detailed monthly billing is presumably adequate. In matters such as personal
injury cases, the final accounting should show a complete summary of all receipts
including PIP, med pay, and the liability settlement, and all disbursements,
including fees, itemized costs and expenses, payments to third parties such
as medical providers, and payments to the client. If the client objects to any
disbursement, such as a payment of fees claimed to have been earned, then pursuant
to DR 9-102, or Mass. R. Prof. C., Rule 1.15
(after Jan. 1, 1998), the disputed funds must remain in a trust account until
the dispute is resolved.
The IOLTA Committee has prepared an enormously helpful booklet
of guidelines for the management of client funds account. It is available free
to any lawyer or law firm upon request. In addition, if there is sufficient
interest, the IOLTA Committee is willing to do training for attorneys on the
nuts-and-bolts of trust account recordkeeping, also free of charge. (Don't worry;
Bar Counsel won't know who attends!) If you are interested in obtaining the
booklet or attending a training session, contact the IOLTA Committee at (617)
723-9023 (telephone) or (617) 367-8815 (fax).
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