July 2015 | Earn one hour of MCLE Credit in Legal Ethics
By Randall Difuntorum
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“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.
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
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
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
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
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.