July 2015 | Earn one hour of MCLE Credit in Legal Ethics
Client Trust Accounting: What you don’t know can hurt you
“There are two completely mistaken ideas about client trust accounting. One idea is that client trust accounting is a mysterious, complicated process that requires years of training and innate mathematical ability. The other is that ‘maintaining a client trust account’ simply means opening a bank account and depositing clients' funds into it.” (From the State Bar of California "Handbook on Client Accounting for California Attorneys," 2013 Edition)
Client trust accounting obligations affect all lawyers who receive client funds or property and sometimes even the funds and property entrusted by a non-client. Two new State Bar initiatives aim to help lawyers comply with their trust accounting obligations. This article outlines those initiatives, along with the various resources the State Bar offers on the topic.
Rule 4-100 of the Rules of Professional Conduct of the State Bar of California (Rule 4-100) requires a lawyer to account for entrusted funds and property, including a requirement to maintain records. Paragraph (B)(3) states a lawyer must:
Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
A sampling of attorney discipline case law reveals the breadth of issues that can arise in client trust accounting. The following questions are just a few of the many examples provided in Appendix 3 of the State Bar’s handbook.
Should a lawyer delegate trust accounting obligations to a partner? In the Matter of Blum (Rev. Dept. 2002) 4 Cal. State Bar Ct. Rptr. 403 involved a lawyer who relied upon her husband/law partner to manage their client trust account and when trust funds were mishandled, the State Bar Court held that such reliance does not relieve a lawyer of the personal, non-delegable duty to monitor client funds and the trust account.
How important is it to keep and monitor records concerning the balance in a trust account? In Giovanazzi v. State Bar (1980) 28 Cal.3d 465 [169 Cal.Rptr. 581], the California Supreme Court concluded that the mere fact the balance in an attorney’s trust account had fallen below the total amount deposited and held in trust will support a finding of misappropriation.
What should a lawyer do if a client gives conflicting instructions concerning trust funds? In the Matter of Davis (Rev. Dept. 2003) 4 Cal. State Bar Ct. Rptr. 576 involved an attorney representing a corporation who ordinarily follows the instructions of appropriate corporate officers in the handling of trust funds. However, where there is an intractable dispute among board members concerning the distribution of trust funds, the State Bar Court concluded that an attorney may interplead the funds to resolve conflicting instructions.
If a plaintiff’s lawyer is certain that settlement funds are inbound, then should the lawyer proceed with disbursements at a client’s request? The California Supreme Court in In re Silverton (2005) 36 Cal.4th 81 [29 Cal.Rptr.3d 766] found that a lawyer violated rule 4-100 by giving clients settlement checks drawn from a client trust account before the opposing party had actually paid the settlement.
As illustrated by the foregoing, compliance with trust accounting obligations is a significant risk management endeavor. Under paragraph (C) of Rule 4-100, the State Bar Board of Trustees has the authority to “formulate and adopt standards as to what ‘records’ shall be maintained by members and law firms in accordance with subparagraph (B)(3).” Among the standards adopted by the board are requirements that a lawyer maintain the following written records: (1) a ledger for each client; (2) a journal for each bank account that is reconciled monthly; and (3) a journal for property and securities held for the benefit of a client. The board’s standards, effective Jan. 1, 1993, detail what should be accounted for in creating and maintaining each of these written records. Adhering to these basic recordkeeping standards is the core of client trust accounting.
In its 1987 submission to the California Supreme Court seeking approval of comprehensive amendments to the rules, including the then new Rule 4-100(C), the State Bar described the purpose of the board adopted recordkeeping standards as follows: “The Rules of Professional Conduct should contain specific recordkeeping requirements to assist attorneys in setting up trust accounts and to serve as a basis for discipline if those records are not kept.” (“Request that the Supreme Court of California Approve Amendments to the Rules of Professional Conduct of the State Bar of California, and Memorandum and Supporting Documents in Explanation,” Bar Misc. No. 5626, December 1987 at p. 42.) As made clear in the latter clause of this purpose statement, the standards serve an attorney discipline function. However, the concept that the “rules” should contain specific requirements “to assist attorneys” is an equally important purpose statement. It recognizes that although guidance on recordkeeping requirements might be found in other sources such as case law, recordkeeping is a paramount issue that not only warrants inclusion in the rules but also a level of specificity and detail that helps a lawyer to comply with the requirements.
In keeping with this tradition of providing assistance to lawyers in the critical area of client trust accounting, the State Bar has launched two client trust accounting initiatives: (1) a voluntary survey on client trust accounting practices and (2) a new web page focused on client trust accounting resources.
The survey takes on average about 10 minutes to complete. People who complete it can earn a $10 promotional credit to help purchase an online MCLE program from the State Bar Office of Education’s online CLE catalog (Please note: This credit cannot be applied to this MCLE test). In addition to basic demographic information, the survey covers a variety of trust accounting topics including: IOLTA accounts (accounts for nominal and short term client deposits where pursuant to statute, the interest is collected to fund legal services programs); non-IOLTA accounts (where the interest is payable to the client); recordkeeping standards; retention of records; bank notices of insufficient funds; providing an accounting to a client; overdraft protection on trust accounts; acceptance of credit cards for payments into a client trust account; and disputes on disbursements from client trust accounts.
The survey also includes an open field for entering individual comments and observations on the challenges faced in the handling of client trust funds.
One important thing to remember is that information collected in the voluntary survey will not be used to initiate a lawyer disciplinary investigation. It’s anonymous, and the objective is threefold. First, we hope the survey will serve as a new tool for gathering reliable information about lawyers trust accounting practices. State Bar staff will study information collected from the survey with the goal of assessing existing client trust accounting education and exploring improvements.
Second, we also hope the survey will promote compliance by heightening lawyer awareness of the State Bar’s focus on trust accounting duties and mandatory recordkeeping standards. Third, the survey itself will be informative to lawyers because it contains references and links to existing State Bar client trust accounting resources.
The survey period began on June 1, 2015 and is anticipated to end on July 31, 2015. The preliminary data collected reveal the following: (1) the majority of lawyers taking the survey are lawyers who are sole practitioners or in an office with 10 or fewer attorneys (more than 60 percent); (2) nearly all have opened an IOLTA account (more than 90 percent); (3) only a minority have opened a non-IOLTA account (less than 20 percent); (4) most reconcile records on a monthly basis (more than 70 percent); (5) about half provide an accounting to a client on a monthly basis (a little more than 50 percent), while some only do so upon a client request (more than 30 percent); (6) a majority have never taken an MCLE course on client trust accounting (more than 70 percent); and (7) a majority have never received a bank notice of insufficient funds on a client trust accounting transaction (more than 70 percent).
This information accounts for about 10 days of survey data (collected through June 11, 2015). It will be interesting to see if these preliminary results remain substantially the same by the end of the two-month survey period.
If you are still on the fence about taking the survey, consider the goals of the survey. In particular, bear in mind that the board-adopted recordkeeping standards have not changed since 1993. The survey data could easily be the starting point for a discussion of possible amendments to these recordkeeping standards. For example, if you believe that new technology has changed trust accounting practices, then this survey is an opportunity to document that experience and to facilitate regulatory changes that connect with new realities and future trends in the practice of law concerning trust accounting.
As a complement to the survey, a new online resource on client trust accounting was implemented on May 8. The Ethics Information page of the State Bar website now includes a dedicated area for client trust accounting resources. This new page is similar to the existing resource areas dedicated to senior lawyers, ethics and technology, judicial ethics and attorney civility. The Client Trust Accounting resources page is a collection of resources and links from the bar’s website and other sources organized on one page into five categories: rules and statutes, publications, forms, ethics opinions and online videos.
Certain resources will be featured on a rotating basis. Currently, the featured resource is a 10-Minute Mentor video on “Understanding Attorney Client Trust Accounts.” The 10‑Minute Mentor program is an ongoing series of short educational videos produced by the California Young Lawyers Association (CYLA). Although the various substantive topics addressed in these videos may be of interest and are found on YouTube as well as the CYLA area of the State Bar website, a benefit of the new dedicated trust accounting page is that if you didn’t know anything at all about CYLA’s helpful new video series, you could still discover CYLA’s trust accounting video by visiting the new trust accounting page.
Other specific resources at the page include links to: the IOLTA form used for reporting the opening or closing of an IOLTA account; the Sample Written Fee Agreement forms developed by the Committee on Mandatory Fee Arbitration; and sample forms for trust accounting ledgers, journals and reconciliation (Appendix 4 of the Client Trust Accounting Handbook). The non-binding advisory ethics opinions by the Committee on Professional Responsibility and Conduct (COPRAC) that relate to trust accounting issues are listed and linked. They include opinions addressing the following: using a non-lawyer signatory on the client trust account, overdraft protection on client trust accounts, accepting credit card payments, third-party payor issues, attorney liens and handling disputed disbursements from a trust account.
When the creation of the Client Trust Accounting resources page was announced to the board, State Bar staff explained that the page would be the foundation for the consideration of more resources and that the data from the client trust accounting survey would inform that effort.
If you visit the new page and like what you see, then consider taking the survey and letting your experience with trust accounting contribute to the further development of new client trust accounting resources and improved MCLE programs on trust accounting. This is your chance to be heard.
Randall Difuntorum is the director of professional competence for the State Bar of California.