Pesky Procedures
by Barbara Lewis MBA and Dan Otto MBA

Each year 4,000 electronic messages are sent to the State Bar from financial institutions reporting an overdraft or dishonored check from lawyers’ clients’ trust accounts. Trust accounting mismanagement constitutes the third highest bar complaint from clients and third parties. While stringent standards govern California Trust Accounts, a modicum of diligence and oversight of trust accounting procedures can prevent risk of clients’ financial loss and disciplinary liability.

In a recent CLE Ethics seminar hosted by The Rutter Group, attorney Ellen Peck, chair of the State Bar Committee on Professional Responsibility Conduct, reviewed the three standards that govern California trust accounts:

1. Rule 4-100, Rules of Professional Conduct outlines lawyers’ basic trust accounting duties.

2. Business and Professions Code section 6210 et seq. which designates that interest in certain trust accounts go to the State Bar for legal services to indigents. The Ninth Circuit is rehearing en banc challenges to these programs from groups who say the money belongs to the client. Until this issue is resolved, Peck recommends adding a fee agreement clause permitting client monies to go into IOLTA trust accounts.

3. Common law, which highlights new duties to which the attorney must adhere.

Because there is no one place that contains all of the mandates surrounding a client trust account, attorneys may grapple with the proper procedures for handling these accounts. An example is the proper handling of "retainers."

There are three types of retainers, and the type dictates where the monies should be deposited:

1. True retainers are paid to attorneys to secure their availability, whether or not the attorney does any work. This sum does not go into a trust account since it’s earned on receipt.

2. Advance fee for part or all future work – The California Supreme Court has refused to discipline California attorneys for the simple failure to deposit advanced fees in a client’s trust account. Therefore, hourly or flat advanced fees may be placed in either a client’s trust account or a general account. As a matter of risk management, Peck recommends putting advance fees into the client’s trust account. Unearned fees will thus be available to refund to the client upon termination. Earned fees must be withdrawn at the earliest reasonable time after the lawyer’s fees are "fixed."

There are no clear-cut definitions of when a fee becomes "fixed." Simplistically, it’s when the client has no objection to the fee. Peck recommends a fee agreement clause stating when the fee is fixed and invoices her clients with "the fee is fixed if you have no objection within ten days." After ten days, she removes the fee from the client trust account.

Leaving an earned and "fixed" fee in the client trust account violates one of the cardinal rules for trust accounts: "Thou shall not commingle client funds with lawyer funds."

3. Security deposit – This sum belongs to the client and goes into the trust account.

There are two types of clients’ trust accounts. Both accrue interest, but the interest goes to different places:

IOLTA (Interest on Lawyer’s Trust Account), which contains nominal amounts or amounts held for short-terms. Nowhere is there a definition of "nominal" or "short-term." The interest goes to the State Bar for providing legal services to indigents.

Non IOLTA, which contain non-nominal and non-short-term amounts where the interest accrues to the client, not the State Bar.

Peck, who related numerous horror stories of trust accounts gone awry, recommends the following for trustees:

29214. Never let an unlicensed (non-attorney) person be a signatory to your trust accounts.

29215. Don’t use a rubber stamp or an electronic signature for checks.

29216. Don’t pre-sign blank trust account checks.

29217. Don’t give an unlicensed person your power of attorney or the power to transfer funds from a trust account to an account to which he or she has access.

29218. Obtain fidelity bond coverage for your employees.

29219. Protect trust account bank statements from loss or alteration by:

Having them sent to your home or

Having your staff bring them to you unopened.

Although the State Bar recommends against having an overdraft service with your bank, Peck disagrees saying that it’s the attorney’s financial responsibility to ensure that the client is whole. Overdraft won’t prevent a State Bar prosecution, but it protects the client.

Don’t be another statistic. Review your trust accounting and record keeping practices and procedures to ensure that you are protecting clients’ entrusted funds.