For a while now, I’ve meant to revise the Professional Responsibility Board’s guide to managing trust accounts. We created it in 2010 and revised it in 2014. (Thank you Beth DeBernardi!)
Over the past 5 years, some of the trust accounting rules have changed and new, more sophisticated scams have targeted lawyer trust accounts. So, it’s time for another revision.
It’ll take me a while. To keep me on track, and to break the project into manageable stages, I’m starting a new feature on Ethical Grounds: Trust Account Tuesday. I will do my best to post a new “trust account” blog every Tuesday. Then, in a few months, I’ll cobble the posts and turn a digested version into a revised revision of the guide to managing trust accounts.
Before today’s lesson, let’s start with a few reminders.
Important: don’t fear trust accounting. As I blogged here, we avoid things we fear. Avoiding trust account management is not a good idea.
In a nutshell, whenever you are in possession of funds in connection with a representation:
- funds that are not yours belong in a trust account;
- funds that are yours do not belong in a trust account;
- keep a system that continuously tracks how much money you are holding in trust and to whom each dollar belongs;
- promptly disburse funds to which someone (including you) is entitled;
- reconcile no less than monthly.
The trust accounting rules:
- Rule 1.15 – Safekeeping Property
- Rule 1.15A – Trust Accounting System
- Rule 1.15B – Pooled Interest-Bearing Trust Accounts
- Rule 1.5 – Fees
I’m going to go in order. Today’s topic: safekeeping property and the prohibition against commingling.
A key tenet of trust accounting is to tkeep your money separate from funds held in connection with a representation. So key that it’s expressed in the first sentence of the first paragraph of the rule on safekeeping property. That sentence:
- “A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property.”
When you deposit money that belongs to you or your firm into trust, it is no longer “separate” from funds held for clients or third persons.
There is one exception. Rule 1.5(b) permits a lawyer “to deposit the lawyer’s own funds in an account in which client funds are held for the sole purpose of paying service charges or fees on that account, but only in an amount necessary for that purpose.”
The Court and hearing panels of the PRP have had opportunity to address both the commingling rule and the sole exception.
In 2008, the Vermont Supreme Court reprimanded a lawyer who violated the rule. The opinion is important. It’s important because no harm resulted from the commingling and there were several factors that mitigated against imposing a serious sanction against the lawyer. Indeed, at the trial level, a hearing panel admonished the lawyer. By rule, “admonitions” do not identify an attorney.
By the same rule, however, admonitions are only appropriate in cases of “minor misconduct.” On appeal, the Court clearly announced that commingling is not minor misconduct. Rather, and with citations omitted,
- “As we have explained in the past, ‘protecting client property is a fundamental principle.’ Commingling personal property with client property is a serious offense because of the likely negative consequences that may result to an attorney’s clients. As another court explained: ’The rule against commingling has three principal objectives: to preserve the identity of client funds, to eliminate the risk that client funds might be taken by the attorney’s creditors, and most importantly, to prevent lawyers from misusing/misappropriating client funds, whether intentionally or inadvertently.’ ”
Thus, the Court upped the sanction to a public reprimand.
(Full disclosure, at least 6 times since, hearing panels have “only” admonished lawyers who commingled funds: PRB Decision 138, PRB Decision 163, PRB Decision 168, PRB Decision 170, PRB Decision 180, PRB Decision 181. Nevertheless, I think a strong argument remains that commingling is so serious as to warrant, at a minimum, a public reprimand.)
Don’t put your own money into trust. Pay yourself from trust once money there has been earned.
Now, turning to the exception, it wasn’t until 2009 that we promulgated Rule 1.15(b) and authorized lawyers to keep their own funds in trust. The critical thing to remember is that the amount can’t be willy nilly. That is, a lawyer can’t toss $1,000 or $5000 into trust and justify it as “covering costs.” No, no, no.
Rather, as the rule makes clear, the deposit must “only be in an amount necessary” to pay service charges or fees on the account. In fact, when the rule was amended, we specifically rejected language that would authorize up to a specific dollar amount.
Because, as I’ve mentioned at every CLE at which I’ve addressed this, some trust accounts incur more charges and fees than others. A firm’s $500 might be reasonable in an active account, but unreasonable in an account to which service charges & fees are never assessed.
In conclusion, when holding funds in connection with a representation the funds should only be in trust if they do not belong to you. The only exception: you may deposit your funds into trust but only in an amount necessary to pay service charges or bank fees.