For the past 6 years, I have had the pleasure of teaching the CLE seminar, Ethics & Lawyer Trust Accounts, with District of Columbia Bar Counsel, Gene Shipp. This past Wednesday night marked our twelfth time teaching the course to lawyers in the D.C. area.
Some of the lawyers who attend the seminar are there because their CLE reporting deadline is approaching. Others take the course to learn the ropes of opening and properly maintaining a trust account. Some of them are taking the course because they are facing disciplinary action. And some are taking the seminar as part of the process to regain their license to practice. Whatever their initial reason, many come up after the 3-hour class to say how grateful they were to take the seminar--i.e. we saved them from a present or potential trust account violation.
Most of the lawyers I have met in my 21 years in the legal profession dislike managing money--myself included. Rather than stare at bank statements or trust account ledgers, we'd rather be practicing law. In smaller firms, it seems that lawyers delegate trust account management to their secretary, office manager, or receptionist--just about anybody in the office who seems worthy and loyal, so we don't have to manage it ourselves. In bigger firms, they have administrators or bookkeepers, but similar problems can still arise. Whatever size the firm, this person has your law license in the palm of their hand. Their conduct in managing the account is all that stands between you and the ability to practice law. Just ask some of the lawyers that take our seminar.
The biggest problem is that instead of just delegating management of the trust account, lawyers tend to abdicate all responsibility. After the initial training or explanation of the trust account, the person managing the account(s) is often left to their own skills to maintain the account. More often than we want to believe, the person handling our account either mishandles the bookkeeping, doesn't understand or comply with bar ethics rules, or succumbs to temptation because they know no one is watching. Even if the employee is doing a great job of writing checks and making deposits, how do we really know they are handling the money ethically and properly, unless we check behind them? Furthermore, our "bookkeeper" was instructed on the management process when they took over that function, but when was the last time they attended an ethics trust account class. As lawyers, we have mandatory ethics education requirements; how much of that do we pass on to staff?
So how to make improvements to make sure client funds are properly managed and our law license protected? Here are our top suggestions from twelve years of teaching this course:
1. Make sure your common-client (pooled) trust account complies with your state bar ethics rules. Review Rule 1.15, Rule 1.16, and Rule 1.5. (This numbering is based on the Model Rules of Professional Conduct; your state rule numbering may differ.) Read through the rules one-by-one, including the comments to each rule. Compare the requirements to how you have set up management of the account. Is the account in compliance with the requirements of these rules? Yes, this review is boring, but it will most likely prevent a trust account violation.
2. Visit your bank to review the opening signature card on the account. It is the signature card that is the evidence of a proper account, not the imprint on your checks. For many states, also make sure the account is properly set up as an "IOLTA" account. If you are just now setting up the account, make sure the bank employee does it correctly. If the account is improperly set up, it is your responsibility, not the bank's. (Yep, that's another person who may have your law license in the palm of their hand!)
2. Take control of the process. If you manage the account, then take steps to improve it. If you've delegated management of the account, take back some of the authority. Set up a system to organize and review the trust account on a monthly basis. Keep all the account records in a convenient location, such as a Redwell folder with 12 monthly sub-folders. Some state bars have specific record-keeping requirements, usually contained in Rule 1.15. Records to keep include the monthly bank statement, deposit slips, canceled checks, and the account journal. Also, if you do not handle the account yourself, make sure you set up and/or understand the process your bookkeeper/administrator uses to maintain the account.
3. Review your model fee agreement in conjunction with the aforementioned rules. Especially review and revise your language about how client money comes in and goes out. If the agreement is silent on when and how this happens, revise the form to use in all future engagements.
4. Do not use electronic transfers. These may be convenient, but there is little or no paper trail to document our transactions. Further, we often forget to make notation of the transaction until the next bank statement is received, increasing the risk of overdrawing client funds.
5. Do not write a check out of the trust account unless that client's funds are in the account. Money in a trust account is not fungible. You may have thousands of dollars in your account, but you cannot use it to write checks for another client whose check has not yet cleared the bank. This is known as the "Good Funds" rule.
6. "Promptly" remove earned fees from the trust account, as required by Rule 1.15. Do not let them sit there until you decide to take them. After the funds have been earned, they are no longer the property of the client. By leaving your funds in the client trust account, you are commingling funds. How "prompt" should you be? This is not defined in the rule, but removing them monthly is a good business practice.
7. Have controls on your bookkeeper so temptation is reduced. Temptation is the greatest when one person handles all financial aspects of the trust account--processes all incoming checks, prepares and makes all deposits, writes all payment checks, etc. Interject yourself in this process. Make changes as suggested in Item 2 above, and handle another part of the process too: Carefully review all outbound checks or make all deposits yourself. It may be a slight inconvenience and take you away from billable time, but it will ensure a trustworthy trust account. And your bookkeeper will thank you too.
8. Know that trust account violations are often reported by dissatisfied clients, who let the problem fester before reporting it. They may wait months or several years. By that time, lawyers have moved on to other cases and clients, but the dissatisfied client has not. When a complaint comes in, will we recall the client or trust transactions? If our records are clear, understandable, and organized, we will have a much easier time to address the complaint and show our records and actions were completely ethical.
Managing a trustworthy trust account is not a easy task, but it doesn't have to be difficult if organized and maintained properly. Further, if your state or local bar offers a course similar to ours in D.C., take it--like many of those that attend ours, you'll be glad you did!
