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Trust account problems are one of the top reasons lawyers are disciplined in the U.S. Certainly there are attorneys whose trust accounting activities are egregious—even criminal. But this doesn’t account for all of the problems. Too often, an attorney is less than diligent about maintaining proper and appropriate financial practices and things simply get out of hand. So here are some tips to help you keep on top of trust accounts and out of trouble.
1. Remember there are no circumstances in which it is proper to “borrow” funds from a client trust account. Temporarily or otherwise. And yes, unfortunately, this does need to be said. Trying to make payroll, covering a quarterly tax payment, borrowing from one client to cover a check to another, making a college tuition payment for your kid, or simply wanting to permanently leave the practice of law (and perhaps the country) are not acceptable reasons. Similarly, you may not keep an unearned advance fee, hold on to non-disputed client funds as leverage over disputed earnings, or apply client funds to previous and still outstanding bills. Also, be aware that lack of intent, shoddy recordkeeping practices and restitution are not defenses to a misappropriation or conversion of client funds.
2. Keep undeposited checks and cash locked away. Put the checks in a locked drawer or cabinet—even if you intend to deposit the money later in the day. I’ve walked into numerous offices for a risk visit and found no one in the reception area. It would take a minute or less to walk behind the receptionist’s desk, open the top desk drawer, remove a bank deposit envelope and leave unnoticed. In addition, when you receive a check, you should restrictively endorse it—and create a log of all checks that have come in. Then, if any checks are stolen, lost or destroyed, you will be able to identify them and inform affected clients or other payers. And when checks are restrictively endorsed, they are much easier to have replaced.
3. Never disburse settlement proceeds to a client or the firm before the settlement check has cleared. Never. And note that just because your bank tells you funds are available, it does not mean the check has cleared. Settlement checks may not clear for a variety of reasons, including a missing, insufficient or incorrect endorsement; insufficient funds; a drafting error; or a bank error. If you disburse settlement proceeds and the settlement check bounces, you have commingled client funds because another client’s funds have been used to cover the check that has bounced. This would be true even if the firm had covered the situation with its own money and no one appeared to be harmed because firm monies have been commingled with client funds. In a zero-tolerance jurisdiction, your license to practice can be suspended for this.
4. Don’t forget banking fees. If permissible in your jurisdiction, keep a small amount of firm funds—say, $50 but never more than $200—in the trust account to cover the account fees and charges. This will segregate the client funds from those used to pay account fees and charges.
5. Handle trust account withdrawals with care. Withdrawals should be handled as follows:
Many lawyers withdraw earned monies as soon as they send a bill to the client. The problem is simply one of cash flow. But if a client disputes a bill, the disputed funds must be placed in trust until the dispute is resolved. So if you make a significant withdrawal as soon as the bill is sent, perhaps to pay personal and professional bills, and are unable to come up with those funds should the bill be disputed, you’ve got a serious problem.
6. Take care with recordkeeping details. Make sure trust account records include a general ledger as well as a separate subaccount ledger that tracks all activity by individual client. The individual client ledger must detail every receipt and disbursement, the date of the transaction, a notation on the nature of the transaction, the individual account balance in trust, and the client’s name and address. Each month you must reconcile the bank statement in two ways. First, reconcile the bank statement with the general ledger, and second, reconcile the bank statement with the individual subaccount ledger. These separate reconciliations should balance with each other to the penny.
7. Mind your duty to open and review statements personally and frequently. Finally, support staff should never open the trust account bank statement. This envelope should be given to the attorney responsible for monitoring trust account activity. Under the rules of professional conduct, you have a duty to monitor the activity in your client trust account. Your license is on the line with this account, so stay on top of it:
Once that is completed, the bank statement may then go to the staff person responsible for account reconciliation. When the reconciliation is complete, have the reconciliation report returned to you so that you may do a review of the numbers and check this report against the original bank statement. Then sign and date the report and bank statement in order to document attorney oversight of client funds.
The trust account’s bank statement must be reviewed each month. You should review the reconciliation report and bank statement together at least quarterly. Generally, you should maintain all trust account records for at least five years after termination of the representation, although the exact time frame may differ among jurisdictions.
These suggestions are not the final word on trust account procedures. However, if you take them to heart and follow them, you can significantly reduce the likelihood that you will face a disciplinary board for a trust account violation.
Mark Bassingthwaighte is a Risk Manager with Attorney’s Liability Protection Society, Inc. (ALPS). In his tenure with the company, he has conducted over 1,000 law firm risk management assessment visits, presented numerous CLE seminars, and written extensively on risk management and technology. Mark received his J.D. from Drake University Law School. He blogs at ALPS411. Contact him at firstname.lastname@example.org.
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