Malpractice and the Attorney Client Trust Account
There are any number of ways for an attorney to get in trouble, but one sure fire way is to mishandle client funds. While it’s obvious that stealing your client’s money constitutes malpractice, there are less obvious, and usually unintentional, ways an attorney can accomplish the same thing with an attorney client trust account.
Commingling Funds
A definite no-no is commingling client trust funds with the attorney’s own money. Of course, this means keeping the funds in a separate bank account, but there is more to it than that.
When a client pays an advance fee against the attorney’s fees that will be charged, is that comingling? No, the advance fee is all of the client’s money and does not become the attorneys until he has billed the client, so it’s appropriate to keep in a trust account. Once there is a sum certain of money owed, then that money belongs to the attorney and you must remove it from the client trust account as soon as possible.
How about a flat fee agreement? If the client is charged a set price for all of the work that the attorney will do, then the amount owed to the attorney is a sum certain and the fixed fee should not be put into a client trust account, because it is no longer the client’s money.
But a retainer, that’s the client’s money, right? Not necessarily. A non-refundable retainer, even if it will be applied to the amounts billed, is no longer the client’s money from the moment it is given to the attorney. The non-refundable retainer should not go into the client trust account.
The same is true of settlement funds once an attorney’s portion of the funds are determined as these amounts are no longer the client’s money. Although the entire settlement draft is initially deposited in the trust account, a portion of the settlement funds may be the lawyers as their fee for the legal services provided. Once the check clears and the calculations are completed, then the portion that belongs to the attorney is certain and should be removed from the trust account.
Insufficient Funds Charges
Did you know that if you allow the client trust account to go negative, it will be reported to the State Bar? How can that happen? The banks that provide trust accounts are allowed to charge reasonable fees. These fees can include a monthly service charge, a charge per check, and any other numerable ways banks have figured out how to tack on additional charges.
One Kansas attorney was suspended indefinitely for allowing his trust account to go negative for bank fee assessments. Attorneys are allowed to deposit money out of their own pockets into their client trust account to pay bank charges, but probably a better practice is to set up a system with the bank that automatically takes moneys out of the attorney’s general account. This practice will make sure the attorney does not commingle funds and never has an insufficient funds charge for the trust account.
Keeping the Interest and IOLTA Accounts
The State Bar requires client trust accounts to be interest bearing accounts. If the attorney holds client funds for a long period of time, interest will be earned on that sum. The interest belongs to the client and should be paid to them when the sum is released back to the client.
But what about small sums or sums held for a brief period of time? How do you pay a half cent of interest? For these situations, Interest on Lawyers Trust Accounts (IOLTA) have been set-up. These accounts collect the interest earned on small sums for short periods and send it to the State Bar to fund legal services for indigent persons.
Failing to Keep Good Records
If you had wanted to be an accountant, you wouldn’t have wasted all of that money on law school, but you still can’t get away with poor record keeping for your trust account. After all, you may have to show these records to the State Bar someday. The typical records that you’ll need to keep are:
- Bank Statements;
- Deposit slips which have the client’s name, the date of the deposit, and the amount;
- Check register or stub with date of payment, amount, and to whom;
- Cancelled checks; and
- Copies of front and back of settlement drafts or checks.
Sloppy Financial Records Practices
In addition to keeping good records there are practices that you should avoid.
ATM access. The client trust account should not be connected to an ATM card. This just sets up opportunities for sloppy record keeping and can create problems with identifying which specific funds were spent and where. It also creates an impression that the attorney just uses the trust account as a personal piggy bank.
Not Writing Checks: It’s a good practice to always write checks when money needs to come out of the client trust account. This makes record keeping easier and provides tangible proof of where funds are spent.
Kiting Funds
Kiting refers to paying for something before you have the funds. A typical example is writing a check today against monies that will be deposited tomorrow, but it could also be paying one client from another client’s money deposit. Examples of kiting funds include:
Paying a Client Early
It’s bad practice to pay a client’s portion of the settlement monies before the check has cleared the bank. The check may not clear and a commingling of funds will occur if attorneys deposit their own money to cover the payment to the client. More problems arise if the money to pay the client settlement comes from the deposits of other clients. See the problems that resulted for one New Jersey attorney, who didn’t wait for the check to clear.
Overdraft Protection
On its face, this isn’t a bad idea, especially for paying those pesky bank fees. However, if it’s used to pay the client early before the money is received or the check has cleared then it is an impermissible loan that creates a commingling problem.
Malpractice and the Attorney Client Trust Account: Wrap-Up
Attorney client trust accounts are not that hard to setup and manage, but the attorney needs to pay attention to the Professional Rules of Conduct concerning the accounts. Your bar association has information about how to set them up and to ensure that they operate smoothly. As long as you pay attention to the account and keep good records, there’s no reason why you should be concerned about malpractice with your client trust account.
Before You Manage Client Funds, You First Need Clients
Having an attorney client trust account does little good if you don’t have clients making deposits. FindLaw’s Legal Solutions can help your law firm find and retain clients, by providing you with sophisticated marketing support and solutions.
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