Earlier today, I highlighted the basics of the trust accounting rules. Now, part 2: an overview of the tools that the Professional Responsibility Program (PRP) uses to investigate and enforce compliance.
Compliance Reviews
Speaking of compliance, it’s apropos to begin with the most proactive of the enforcement tools: the compliance review. By rule, lawyers and law firms must submit to a “compliance review of financial records, including trust and fiduciary accounts, by the Professional Responsibility Program’s Disciplinary Counsel.”
Disciplinary Counsel might request a compliance review in response to information gleaned while investigating a disciplinary complaint or an insufficient funds notice. In addition, a compliance review can be ordered even in the absence of indicia of a problem with the trust account. Moreover, contrary to a popular colloquialism that’s existed ever since I started in the PRP in 1998, nothing in the rule requires a compliance review to be “random.” Indeed, about 15 years ago, I was disciplinary counsel. Following a series of high-profile defalcations by real estate lawyers who worked alone or in very small firms, I selected real estate lawyers who worked alone or in very small firms for all the compliance reviews that we could afford within that year’s budget.
Disciplinary Counsel and the Board have agreements with accounting firms throughout the state, each of which is experienced in examining a lawyer or law firm’s compliance with the record-keeping rules. As with any other investigation, depending on the results of the compliance review, Disciplinary Counsel can charge the lawyer with violating the rules, refer the lawyer for the non-disciplinary resolution of the trust accounting problems, or close the file without further action.
Compliance Surveys
Beginning around 2006 and continuing through 2015 or 2016, the PRP mailed compliance surveys to 100 lawyers selected at random from the bar directory. We stopped for staffing reasons. It’s something I might re-employ once the Bar Assistance Program is up and running.
Responses that raised “red flags” were assigned docket numbers and either referred for an audit, referred for non-disciplinary resolution, or referred to Disciplinary Counsel for an investigation. In addition, and per the recommendation of a CPA, we randomly selected 10 responses that did not otherwise raise “red flags” for audits. One resulted in the disbarment of a lawyer who, on the eve of an audit, contacted me to let me know that the audit would reveal misappropriation. The lawyer’s dishonesty on the compliance survey compounded the lawyer’s problems.
Insufficient Funds Notices
Many of you might be thinking “wait Mike, don’t you mean ‘overdraft notices?’” I don’t. “Overdraft notice” is a misnomer.
As I mentioned in part 1, trust accounts must be maintained at a financial institution that has been approved by the Professional Responsibility Board. Approval is conditioned upon the institution agreeing to notify Disciplinary Counsel whenever an instrument drawn on an attorney trust account is presented against insufficient funds. Notification is required “irrespective of whether or not the instrument is honored.” That’s why “overdraft notice” is a misnomer. Stated differently, if it isn’t going to notify Disciplinary Counsel as well, it’s not cool for your bank to contact you to warn you that a trust account check has been presented against insufficient funds.
Years ago, the Board decided to treat insufficient funds notices differently than other disciplinary complaints. When a disciplinary complaint is filed, it is screened by Bar Counsel. If the complaint is referred to Disciplinary Counsel for an investigation, the lawyer has 20 days to file a written response. By contrast, and per Board policy, ISF notices are not “screened.” They go straight to Disciplinary Counsel and the lawyer has 5 days to explain what happened.
While some do, not every ISF notice results in a disciplinary prosecution. Those that involve relatively minor bookkeeping issues are resolved by Disciplinary Counsel or referred for non-disciplinary resolution by an assistance panel, and still others are closed without further action.
How could an ISF notice be closed without further action? Isn’t an ISF notice proof of a violation?
Excellent questions.
Indeed, disbursing without the funds to do so is a serious problem. However, there are a few answers.
One is referenced in Don’t Disburse without Collected Funds. The rules authorize lawyers to disburse against the deposit of certain “trusted” instruments. At times, even those instruments fail, with the result being that the trust account check issued in reliance thereon fails too. If the disbursement was against an approved instrument, the subsequent presentation against insufficient funds is not a violation.
Another example is bank error. Yes, sometimes banks make mistakes.
Finally, intervention by the Professional Responsibility Program isn’t always required in response to an isolated instance in which a lawyer mistakenly disburses from the wrong trust account. Real estate lawyers, for example, often have trust accounts at multiple banks. Sometimes they mistakenly use the Bank A checks to disburse in connection with a closing conducted through the trust account that’s maintained at Bank B. Caveat: fool us once, shame on you. Fool us twice with the ole “I used the wrong checkbook!” shame on us.
In my opinion, ISF notices are important in that they draw scrutiny to lawyers with shoddy bookkeeping practices. This is especially true when we receive multiple notices about the same account, lawyer, or law firm. And, it’s critical that we scrutinze shoddy bookkeeping practices because they put client funds at risk. However, I don’t think ISF notices help to prevent or detect misappropriation.
For one, as I blogged in Don’t Borrow, borrowing from the trust fund has another name: misappropriation. Lawyers who misappropriate, while not smart, tend to be smart enough not to borrow too much. Effectively, they wager that certain clients won’t ask for their money back anytime soon. As you might guess, wagering with client funds is frowned upon.
Further, I prosecuted three major defalcations in the mid-00’s. In each, hundreds of thousands of dollars were taken without causing a single overdraft. One lawyer had intentionally NOT informed the bank that the account was an IOLTA. Thus, while the account was often overdrawn, we never found out. Another made sure not to “borrow” beyond the “float” the lawyer had deposited into the trust account. A “float” is the lawyer’s own funds, deposited to ensure that the account is never overdrawn. Finally, a third attorney settled a matter, didn’t tell the client, and took the money. (Vermont’s rules do not require payee notification.)
Still, absent bank error or an isolated mistake, an ISF notice is a sign that something is seriously amiss. The lawyer’s explanation might provide grounds for a disciplinary prosecution. Or, before deciding whether to file formal disciplinary charges, Disciplinary Counsel might order a compliance review or request our next tool, a court-ordered audit.
Audits
By rule, the “Supreme Court may at any time order an audit of financial records, including trust and fiduciary accounts, of a lawyer or law firm and take such other action as it deems necessary to protect the public.” Read literally, “at any time” means “at any time.” Nevertheless, I considered a court-ordered “audit to protect the public” to be a step beyond a “compliance review” that Disciplinary Counsel could order for any reason or no reason at all. So, I’d typically only ask for one in connection with a request for an interim suspension. Absent evidence of a violation, I was far more likely to employ a “compliance review.” Which brings me too . . .
Interim Suspensions
Usually, Disciplinary Counsel can’t simply charge a lawyer with violating the rules. Rather, if an investigation leads to a decision that charges are warranted, Disciplinary Counsel must ask a hearing panel (our trial court) to review the decision for probable cause. If probable cause is found, Disciplinary Counsel can charge the lawyer.
However, the rules that govern the PRP recognize that there will be cases so serious that the lawyer should not be allowed to practice pending the outcome of Disciplinary Counsel’s investigation. By rule, if Disciplinary Counsel receives “sufficient evidence demonstrating” that a lawyer has violated the rules and “presently poses a threat of serious harm to the public,” Disciplinary Counsel must transmit the evidence to the Supreme Court, along with a proposed order for the immediate interim of suspension of the lawyer’s license. If granted, the interim suspension remains in effect until the final resolution of the conduct that poses the threat of harm. I suppose they’re analogous to a “hold without bail.”
Unsurprisingly, it’s rare to request an interim suspension. Generally, they issue when a lawyer abandons a practice, commits a serious crime, suffers from a severe behavioral health issue, or misappropriates client funds.
Conclusion
I’ve often stated that the duty of candor to a court trumps all other duties. In fact, it does.
However, in my view, there is no greater threat to the privilege to self-regulate than the failure to impose serious sanctions on lawyers who misappropriate or fail to safeguard funds held in trust. That is why we’ve chosen to provide Disciplinary Counsel and the PRP with so many different tools to investigate and enforce compliance with the trust accounting rules.
Again, these two posts were inspired by someone asking me why I never blog about trust accounting. Ummm, have you not seen the “related posts” that are linked below? If not, check ‘em out. In the meantime, I’ll conclude this post as I did the first: don’t tell me I don’t blog about trust accounting.
Oh, and speaking of calling it a night and “in the meantime,” I think I’ll have a drink and listen to Spacehog.
Related Posts:
The Trust Account CLE Videos:
Ethical Grounds 