Safeguarding Client Funds: Tech Competence & Mobile Payment Apps.

Last week I posted about the Florida Bar’s proposed advisory opinion that would authorize lawyers to accept payment for legal fees via mobile apps as long as they protect client confidences and safeguard clients funds. My post focused on the “client confidences” aspect of the proposed opinion.  Today, I’ll address the “safeguard client funds” aspect.  In particular, I’m a fan of two observations made at the very end of the opinion.

But first, a quick summary of Vermont’s rules.

V.R.Pr.C. 1.15 is entitled “Safekeeping Property.”  Paragraph (a) requires a lawyer to hold property of clients and third person separate from the lawyer’s own.  Regular readers will recognize this one of the 7 C’s of legal ethics, the anti-commingling rule.  Unearned funds held in connection with a representation must be held in a trust account that is maintained at an approved financial institution.  Finally, a lawyer must comply with the record-keeping requirements in V.R.Pr.C. 1.15A(a).

So, when it comes to safeguarding client funds, what are the issues with mobile payment apps? The proposed Florida opinion identifies several.  I’ll use Venmo as an example for each.

First, it’s important to remember that a Venmo account is not a trust account, or even a bank account at all.  For instance, someone sent me money via Venmo last weekend. That’s money that Venmo took from that person and made available for me to send wherever, including to the checking account I’ve linked to the app.  I’ve not transferred my money anywhere.  Instead, I’ll “leave” it there, available to use whenever I next need to use Venmo to pay someone.

Of course, doing so with client funds as a lawyer wouldn’t cut it. So, the Florida opinion advises:

• “A payee does not acquire possession—access to and control over—funds transmitted via a payment-processing service until the service makes those funds available in the payee’s account. If the funds are the property of the lawyer, the lawyer may leave those funds in that account or transfer them to another account or payee at the lawyer’s discretion. The lawyer, however, must transfer entrusted funds from the service account into an account at a qualifying banking or credit institution promptly upon their becoming available to the lawyer.”

In other words, it’s okay to set up a Venmo account for your firm to accept payment, but, when payment is received, you must promptly transfer funds that belong to clients or third persons to a trust account at an approved financial institution.  Per the Florida opinion,

• “By transferring entrusted funds from the service account into a qualified trust account promptly upon acquiring access to and control over those funds, the lawyer complies with the requirement that those funds be kept in a qualified account.”

And therein lies the next issue.

I’ve linked my bank account to my Venmo account.  So, if I want to, I can transfer money available to me in Venmo to my account.  Alas, when it comes to client funds and prompt transfer to a trust account, it might not be so easy.

As the Florida opinion points out, many banks will not allow a lawyer to link a Venmo or other mobile payment service to a trust account. Indeed, while not exactly on point factually, in 2009, a Vermont lawyer was reprimanded for allowing a third-party electronic access to his trust account.  So, if you can’t link your trust account to your mobile payment app, how do you satisfy the requirement of promptly transferring funds to your trust account?  Florida advises:

• “the lawyer should establish with the banking institution some type of suspense account to which the account established with the payment-processing service can be linked and into which the payments are transferred, then promptly swept into the lawyer’s IOTA account.”

The last issues highlighted by the proposed Florida opinion involve transaction fees and chargebacks.  The opinion cautions lawyers against passing transaction fees on to clients and reminds lawyers to ensure that chargebacks are not assessed against funds held in trust. In my opinion, the latter is especially critical if the chargeback were to invade funds that belong to clients other than the client involved with the chargeback.

Finally, I want to highlight the paragraphs that count me among their fans.  Each appears at the end of the proposed Florida opinion.

I’m certain that there are lawyers out there nitpicking over the fact that even if a lawyer transfers payment from Venmo to the suspense account to the trust account on the same day, technically there will be a brief period when the funds are not, as they say, “in trust.”  To me, the final paragraph of the Florida opinion is for nitpickers:

• “The Rules of Professional Conduct are ‘rules of reason’ and ‘should be interpreted with reference to the purposes of legal representation and of the law itself. When reasonable to do so, the rules should be interpreted to permit lawyers and clients to conduct business in a manner that society has deemed commercially reasonable while still protecting clients’ interests. Permitting lawyers to accept payments via payment-processing services under the conditions expressed in this opinion satisfies those objectives.” (citations omitted).

Indeed.  If the Rules of Professional Conduct prohibit digital financial transactions between lawyers and clients, then the answer isn’t to ban such transactions.  The answer is to change the rules.

The other paragraph that I like is the “note” that follows the final paragraph. In it, the committee reminds lawyers that we aren’t going to answer questions like “is Venmo ethical?” Rather, we are going to stress that technology is always evolving and that no matter the technology, the duty remains the same: act competently to safeguard client funds.  As the committee phrased it:

• “The discussion about specific applications in this opinion is based on the technology as it exists when this opinion is authored and does not purport to address all such available technology. Web-based applications and technology are constantly changing and evolving. A lawyer must make reasonable efforts to become familiar with and stay abreast of the characteristics unique to any application or service that the lawyer is using.”

In other words, competence includes tech competence.

Related Posts:

• Proposed Florida opinion would allow mobile payment for legal fees (4/2/21)
• Mobile Payment & Legal Fees (11/12/19)

Reciprocal Discipline: Misappropriation Warrants Disbarment in Vermont.

Today’s post involves the concept of “reciprocal discipline” as analyzed through the lens of a recent decision by a New York court to impose a one-year suspension on a lawyer who misappropriated client funds. I hope to remind Vermont lawyers – including those admitted in New York – that similar conduct here has previously resulted in disbarment.

First, what is “reciprocal discipline?”

Vermont’s disciplinary system is set out in Supreme Court Administrative Order 9.  Rule 20 of A.O. 9 deals with “reciprocal discipline.”  I won’t get into the details.  In sum, when a lawyer who is admitted in Vermont is disciplined in another jurisdiction, the rule states that the Vermont Supreme Court “shall impose identical discipline . . . unless it clearly appears, or disciplinary counsel or the lawyer demonstrates, that” one of four exceptions is present.   The fourth exception applies when “the misconduct warrants substantially different discipline in this state.”

Today, Bloomberg Law reported that the Appellate Division of the Second Department of the New York Supreme Court suspended a lawyer from the practice of law for one year because of the lawyer’s misappropriation of client funds.  The report is here (subscription required).  The opinion is freely available here.

According to the opinion, the lawyer represented the seller in a real estate transaction.  In May 2015, the buyer provided a down payment of $28,000.  The lawyer was to hold the funds in his “escrow account” until the closing took place in March 2016.

In July 2015, the lawyer transferred $22,000 to a personal checking account he held with his wife. In November 2015, the lawyer withdrew another $5,500 from escrow.  In March 2016, the lawyer made a series of deposits and withdrawals that, on the morning of the closing, left the balance at $5,700, well short of the initial down payment.  That day, the lawyer withdrew $28,000 from a personal savings account and deposited it into the escrow. The transaction closed as scheduled.

After various disbursements associated with the closing, $6,310 of the original down payment remained in escrow.  The lawyer was required to keep $4,095 in escrow to pay taxes connected to the transaction.   In July 2016, four months after the closing, the lawyer withdrew $5500 from escrow.  Finally, in March 2017, the lawyer paid the $4,095 in taxes by a check drawn on his operating account.

A grievance committee approved a stipulated agreement and, per New York’s procedural rules, recommened that the Appellate Division suspend the lawyer for one-year.  Accepting the recommendation, the Court noted:

• “In mitigation, the respondent asserts, inter alia, that this Court should consider his inexperience with escrow accounts and the subject transaction was his first and only real estate transaction; lack of client harm; that during the relevant period he experienced personal and professional stresses; his volunteer activities which include, among other things, pro bono legal assistance; his sincere remorse; the remedial measures implemented; his cooperation with the Grievance Committee’s investigation; and his unblemished disciplinary record.”

Returning to “reciprocal discipline,” if a lawyer admitted in Vermont was disciplined in another jurisdiction for the exact conduct involved in the New York opinion, I’d argue that reciprocal discipline is NOT appropriate here.  Rather, I’d argue that Rule 22(D)(4) applies and that “the misconduct established warrants substantially different discipline in this state.”  Specifically, disbarment.

In June 2019, I posted Trust Account Tuesday: Misappropriation.  In it, I reminded Vermont lawyers that, when it comes to client funds held in trust, there’s another word for “borrowing.”   That word is “misappropriation.”

Maybe I’m missing something about the New York opinion.  However, to make today’s point, I’ll simply re-post what I did then.  Essentially, it’d be my argument in the reciprocal discipline case.

My sense is that lawyers think of “misappropriation” as “theft” or “embezzlement.”

Yes, stealing, theft, and embezzlement are bad.  Very bad.  But misappropriation includes more.

You know what’s as bad?

“Borrowing.”

Funds held in trust are not there for the lawyer’s personal use.  Whatever the reason – payroll, rent, the student loan payment you covered just this one time with client funds that you 100% will replenish once you take your fee from the case you settled yesterday – when it comes to client funds in trust, there’s no such thing as “borrowing.”

In my view, when a lawyer uses client funds for the lawyer’s own purposes without the client’s permission, the lawyer should be disbarred. Even if the lawyer replaces the funds before anyone realized they had been removed. Even if the lawyer never intended to permanently deprive a client of money.

Long ago, the New Jersey Supreme Court defined “misappropriation” as:

• “any unauthorized use by the lawyer of clients’ funds entrusted to him, including not only stealing, but also unauthorized temporary use for the lawyer’s own purpose, whether or not he derives any personal gain or benefit therefrom.”

The opinion is here.

 In 2005, I prosecuted a case that involved a lawyer’s unauthorized temporary use of client funds for the lawyer’s own purposes.  For years, the lawyer used trust funds to pay personal expenses, reimbursing the trust account when the lawyer could.  Indeed, while the investigation was still in its earliest stages, and long-before disciplinary charges were filed, the lawyer replenished the trust account in full.  Not a single client lost even a penny.

Nevertheless, I argued for disbarment.  A hearing panel of the Professional Responsibility Board agreed.  The Vermont Supreme Court adopted the panel’s decision as its own and disbarred the lawyer.

In its decision, the hearing panel cited a line of cases that stretch back to the New Jersey opinion I mentioned above.  The panel concluded that the unauthorized use of client funds for the lawyer’s own purposes is so serious that, absent “compelling mitigating circumstances,” disbarment will result.

To the panel, “compelling” meant something.  The panel specifically noted numerous factors that, in nearly any other disciplinary case, would have mitigated in favor of a lesser sanction.  Still, the panel ordered disbarment.  That’s how serious the Court and hearing panels take even the temporary unauthorized use of client funds.

A law license is not license to use other people’s money as your own.  Not even a nickel.  Not even if you put the nickel back tomorrow.  This is how I remind you.

It’s not your money.  Don’t treat it like it is.

Then, referring to the mitigating factors, I’d add that one need not be experienced to understand that client funds aren’t for our personal use.  And, unblemished record or not, there’s no excuse for treating client funds as our own.

In closing, I caution Vermont lawyers against thinking that, absent compelling mitigating factors, the intentional misappropriation of client funds will result in anything other than disbarment.

The PRP’s tools to investigate & enforce compliance with the trust accounting rules.

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.

Is a simple trust account violation grounds for an interim suspension? No. But, evidence of the misuse or failure to account for client funds is evidence of a threat to clients. Imagine: in turn Sean, Patrick, and Michael retained Lawyer.  I don’t want to be the new client whose money is used to cover Patrick’s funds that was used to carry out Sean’s transaction. And I worry for whoever comes after me.

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:

• ACH Transfers
• Bitcoin as Payment for Legal Fees
• Basics of Fee Agreements
• Basic Requirements of Trust Accounting
• Don’t Borrow
• Don’t Commingle
• Don’t Disburse without Collected Funds
• Don’t fear or overcomplicate trust accounting
• Identifying Trust Account Scams
• Non-refundable fees
• PayPal, Venmo, Mobile Apps & Legal Fees
• Prompt Notification & Delivery of Trust Funds
• Third-Party Claims Against Client Funds
• Trust, but Verify
• 6 minutes? 15 minutes? When does a rounding error become an unreasonable fee?

The Trust Account CLE Videos:

• Don’t Fear, Simplify.  (25 minutes)
• Basic Requirements(41 minutes)
• Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
• Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
• Collecting & Disbursing Funds(33 minutes)

The trust account rules.

Last week, a lawyer asked why I don’t blog about trust accounts.  As 2.5 hours of CLE videos and “related posts” that are linked at the end of this post might suggest, I disagree with the premise of the question. Nevertheless, it’s good to revisit the issue on a regular basis.

I’m not going to get too complicated.  Rather, today, I hope to remind lawyers and their bookkeepers of the basics, and to provide an overview of the Professional Responsibility Program’s investigative and enforcement tools.

The Basics

Any lawyer or law firm holding funds in connection with a representation must deposit the funds into a pooled interest-bearing trust account.  The accounts are more commonly referred to as “IOLTAs.” These accounts must be maintained at a financial institution that has been approved by the Professional Responsibility Board.  The approved institutions are listed under the “Attorney Trust Accounts” tab on this page.

When opening an account, a lawyer must (1) clearly identify it as “trust account;” (2) direct the financial institution to remit the interest to the Vermont Bar Foundation; and (3) direct the institution to copy the lawyer on the statement it sends to the VBF.

Next, the rules require lawyers to maintain an accounting system that, at a minimum, includes each of these features:

1. A system showing all receipts and disbursements from the account;
2. Records showing receipts, disbursements, and a running balance for each client whose funds are in the account;
3. Records documenting notice to clients of funds received and disbursed on their behalf;
4. A single source that identifies or lists each pooled interested-bearing account that the lawyer or firm maintains; and,
5. Records documenting timely reconciliation (no less than monthly) of each account.

 In short, a lawyer or firm must maintain a system that shows how much money is in the trust account and to whom it belongs.  For now, I’ll stop there.  However, I urge lawyers and bookkeepers to review the posts below. Generally, the key points to remember are:

• you can deposit your own funds in trust, but only in amount necessary to cover bank fees & costs;
• don’t disburse without collected funds;
• promptly notify a client or third-party upon receiving funds to which they’re entitled;
• promptly disburse any funds to which a client or third-party is entitled;
• understand the situations in which disputed funds must remain in trust;
• keep trust account records for 6 years following the termination of the representation; and,
• learn to identify trust account scams.

Each “key point” is more fully explored in a post that is listed below.

Disciplinary Counsel’s Investigative & Enforcement Tools

 So, how does the Professional Responsibility Program investigate and enforce compliance? Well, although I claimed I’d get to that, this post is already too long.  So, I’m breaking it into two parts and will post the second later.

In the meantime, don’t tell me I don’t blog about trust accounts.

 Related Posts:

• ACH Transfers
• Bitcoin as Payment for Legal Fees
• Basics of Fee Agreements
• Basic Requirements of Trust Accounting
• Don’t Borrow
• Don’t Commingle
• Don’t Disburse without Collected Funds
• Don’t fear or overcomplicate trust accounting
• Identifying Trust Account Scams
• Non-refundable fees
• PayPal, Venmo, Mobile Apps & Legal Fees
• Prompt Notification & Delivery of Trust Funds
• Third-Party Claims Against Client Funds
• Trust, but Verify
• 6 minutes? 15 minutes? When does a rounding error become an unreasonable fee?

The Trust Account CLE Videos:

• Don’t Fear, Simplify.  (25 minutes)
• Basic Requirements(41 minutes)
• Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
• Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
• Collecting & Disbursing Funds(33 minutes)

Trust Account Tips

This post is prompted by an inquiry I received yesterday. 

Keeping with the alliterative theme of a blog known for its Five For Friday feature, here a “Tuesday’s Ten Trust (Account) Tips.”  

The tips are no substitute for the rules themselves.  Rather, they’re meant to serve as a starter kit.

Tuesday’s Ten Trust (Account) Tips

 1.  When a lawyer holds funds of clients or third persons in connection with a representation, the funds must be held separately from the lawyer’s.

2.  When a lawyer holds funds of clients or third persons in connection with a representation, the funds must be held in in one or more accounts in a financial institution.

3.  Funds held as a result of a representation in a lawyer-client relationship must be held in a “trust” account.

4.  Funds held as a result of a fiduciary relationship that arises in the course of a representation or as a result of a court appointment shall be held in a “fiduciary” account.

5.  At a minimum, a lawyer’s trust accounting system must include:

• a system showing all receipts & disbursements from the account, including entries that show the source of the receipts & the nature of the disbursements;
• a record for each client or person for whom funds are held that shows all receipts and disbursements made for that client or third person and carries that client or third person’s running account balance;
• records documenting timely notice of receipts & disbursements to all clients and persons for whom funds are held; 
• records documenting timely reconciliation of all accounts, with “timely” defined as “no less than monthly;” and,
• a single source that identifies all trust & fiduciary accounts maintained by the lawyer.

6.  Funds held in connection with a representation that are not reasonably expected to earn net interest or dividends not only must be held in a “trust” account, they must deposited into a “pooled interest-bearing trust account” – aka “an IOLTA account.”

7.  IOLTA accounts may only be held at approved financial institutions.

8.  A lawyer must promptly disburse funds that a client or third person (including the lawyer) is entitled to receive.

9.  A lawyer may deposit the lawyer’s own funds in a trust account, but only in an amount necessary to pay service charges & fees on the account.

10.  Complete records of all funds held in trust must be maintained for 6 years following the termination of the representation.

That’s 10. 

Here are additional resources:

The PRB’s Trust Account Manual

Blog Posts

• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Don’t disburse without collected funds.
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Nonrefundable fees
• Misappropriation: Don’t.
• With trust accounts, verify
• Third-Party Claims against Client Funds
• Trust Account Scams Continue
• T.I. & Jack Torrance: an overview of the trust account rules
• Want to save $2.5 million? Learn to identify trust account scams
• The basics of fee agreements

 The Trust Account Videos

• Don’t Fear, Simplify.  (25 minutes)
• Basic Requirements(41 minutes)
• Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
• Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
• Collecting & Disbursing Funds(33 minutes)

 

Twofer

Two days late, but a two-fer nonetheless.

1. Beware Changes to Wiring Instructions!

Here’s a post in today’s ABA Journal: BigLaw firm sued over $3M wire transfer to fraudster’s account.  But for involving $3 million and a so-called “Big Law” firm, the scam was garden variety.  No different than one that often targets Vermont lawyers, especially real estate practitioners, it was predicated on a change in wiring instructions.

As I’ve blogged here, here, here, here, and here, a change in wiring instructions should set off alarm bells.  Further, if the change in wiring instructions comes by email, I suggest confirming the change by some other method than responding to the email.

Andy Mikell is State Manager & Title Counsel at Vermont Attorneys Title Corporation.  In a prior blog, I used this quote from Andy to highlight the importance of using two-factor authentication to confirm changes to wiring instructions:

• • “We are telling folks that the ONLY appropriate 2^nd factor authentication method is for the ‘Wiring Firm’: (a) to initiate the verification call; (b) to a phone number that they independently obtained/verified. In other words, it is NOT acceptable: (a) to receive a confirmatory phone call or (b) to call a phone number in the email which contains the requested wire change.”

Big Law should follow this blog.

2. File Retention & Delivery

Over the past few weeks, I’ve heard from a few lawyers on the issue of file retention.  Each started by saying “I have to keep the file for 6 years, right?”

Wrong.

The Vermont Rules of Professional Conduct do not specify a file retention period and never have.  Rather, V.R.Pr.C. 1.16(d) states that “upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as . . . surrendering papers and property to which the client is entitled.”  In my opinion, the file is among “the papers and property to which the client is entitled.”  So, as I’ve stated at CLEs and in this space, Deliver The File.

Nothing in Vermont’s rules affords a lawyer a 6-year window to deliver the file.  Nothing in Vermont’s rules conditions file delivery upon the client’s request.  Nothing in Vermont’s rules authorizes a lawyer to destroy an undelivered file 6 years after the representation ends.

Indeed, in 1997, the VBA’s Professional Responsibility Committee issued Advisory Ethics Opinion 97-08.  While issued under the old Code of Professional Responsibility, the opinion remains helpful.  The Committee’s conclusion is almost exactly what I might say at a seminar:

• “We cannot state that there is a specific time during which a lawyer must preserve files and, beyond which, he or she is free to destroy them. The sound exercise of good professional and business judgment should provide answers to most storage and/or retention questions that may arise.”

From there, the Committee listed factors a lawyer should consider prior to destroying a file.  Again, many remain relevant today.  In no particular order, here are thoughts & tips I’ve shared with lawyers:

• it’s okay to go paperless.  But don’t destroy any important originals.
• once delivered, there’s no requirement to keep a copy of the file.  But your liability policy might require you to, and it might be helpful to have a copy if a disciplinary complaint or malpractice claim is ever filed.  Also, title insurers sometimes require agents to maintain copies of files.
• cull files for important originals before destroying.  Especially if even one file might contain a will.
• Absent a client’s consent, anything that the client gives to the lawyer must be returned.
• give notice before destroying files.  If not in the representation agreement itself, then again – even by publication – years later.
• Different types of cases require different retention periods.  For more, see this opinion from the Kentucky Bar Association.
• A lawyer MUST keep records of client funds & property for 6 years after the termination of the representation. So, keeping a log of client files is a good idea.

For more, in 2018, I posted File Retention: How Long?  Let’s see if anyone is still reading.  In the 2018 blog, I wrote:

• “To paraphrase another Irish guy, it’s not uncommon for me to hear a frustrated lawyer say something like:
  • ‘I can’t believe the files in here.  I can’t close my eyes and make them disappear!  How long? How long must I sing this song?’”

Who is the “Irish guy” to whom I referred in the 2018 post?

And with that, I’m calling it a Thursday.  Have a great night!

 

Trust Account Tuesday: 2 new CLE videos

Originally posted on April 7.  Updated on April 10 to add third video: Contingent Fees, Referral Fees, and Fee Sharing

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CLEs on the trust accounting rules are not my favorite.  Yet, they’re critical.  Recording them in my garage makes it seem easier to present an otherwise dry topic.   So, given the topic’s importance, that’s what I’ve done.

Today, I recorded the final installments of the Garage Series on Trust Accounting:

• Trust Accounting 3: Collecting and Disbursing Funds
• Trust Accounting 4: Flat Fees, Misappropriation and Trust Account Scams

Part 3 (33 minutes) focuses on Rule 1.15 and the general prohibition against disbursing from trust without collected funds.  Meanwhile, part 4 (35 minutes) addresses how to handle fees paid in advance, cautions against even thinking about “borrowing” from trust, and shares tips on how to identify common trust account scams.  Each includes a screen share of my notes and an interactive quiz.

I have not reviewed or edited the videos.  Watching will be as if you showed up to hear me speak. You get what you get.

Enjoy.

Prior videos in the Garage Series on Trust Accounting:

• Trust Accounting 1: Don’t fear, simplify.
• Trust Accounting 2:  The Basics. And don’t commingle.

 

2 in 1 day! Another Trust Accounting CLE.

I hope to watch Season 3 of Ozark someday.   I’d planned to begin as soon as it dropped last Friday.  Alas, I couldn’t remember how Season 2 ended, so I went back to watch its final few episodes.  Still fuzzy, the problem compounded itself until I found myself starting my catch-up with episode 7 of Season 1!

Anyhow, this morning I released a CLE on the very basics of trust accounting.  The video is here.  Part of my project to provide content during the pandemic, I advertised it as the first in a series.

When’s the next segment come out?  Funny you should ask. 

Not wanting your experience to be like mine with Ozark – and don’t even get me started on how long it took to release the final season of GoT – how about now?

Here’s the next episode.  In it, I discuss:

1. Do I need a trust account?
2. If so, where can I open one?
3. What do I tell the bank when I open one?
4. Can I have more than one?
5. IOLTA or not?
6. The dangers of commingling.
7. Record Keeping Requirements.
8. Collected Funds: when can I disburse?

Enjoy.

 

The world premiere of my trust accounting video.

I’ve been using some of my time at home to record CLE seminars from my garage.

This morning, I recorded the first in what I hope will be a series of videos on trust accounting.  It’s very basic, an introduction intended to remind lawyers to simplifyy, not fear, trust accounting.  How?  By remembering five things:

• Money that isn’t yours goes into trust.
• Money that’s yours comes out of trust.
• At all times, know how much money is in trust, and to whom each dollar belongs.
• Promptly pay yourself, promptly disburse to clients and third parties.
• Don’t disburse without collected funds.

As I explain in the video, abiding by these basics goes a long way towards complying with an otherwise complicated set of rules.

The video is 24 minutes long.  Again, I hope to have a few more up soon.  Links to material referenced in the video are below

For now, here’s a link to the world premiere of my video:

• Trust Accounting: Don’t fear, simplify.

Or, watch here.  Enjoy.

 

Blog posts referenced in the video:

• Professional Responsibility & COVID-19
• Civility Matters. Especially Now.
• A New Year’s Resolution: don’t overcomplicate trust accounting
• Each post linked on the page “50 Resolutions“

Other video presentations from the Garage Bar Series:

• Sailing the 7 C’s of Legal Ethics
• Instant Analysis:  Duties to Non-Clients
• Instant Analysis:  Conflicts & Confidences
• Instant Analysis:  Trust Accounts, Fees, Duties to Clients

 

 

 

Was That Wrong? Diverting client funds & using the trust account to run a strip club.

It’s been nearly two years since my last Was That Wrong? column.

The hiatus is of my doing.  Alas, since it began, I’ve been humbled by the fact that so many of you regularly share potential entries with me, most under the subject line “Was That Wrong?”.  While I like to say that this blog was built on the slogan “competence includes tech competence,” it seems that loyal readers think otherwise.  And it’s a loyal reader who alerted me to today’s story.

But first, for those of you new to the column, it features stories of the absurd & outrageous from the world of legal ethics and attorney discipline. My aim is to highlight misconduct that I hope you’ll instinctively avoid without needing me to convene a continuing legal education seminar that cautions you to do so.

The column is inspired by the “Red Dot” episode of Seinfeld. In the episode, George Costanza has sex in his office with a character known only as “the cleaning woman.”  His boss finds out.  Here’s their ensuing exchange:

(Scene) In the boss’ office.

• Boss: I’m going to get right to the point. It has come to my attention that you and the cleaning woman have engaged in sexual intercourse on the desk in your office. Is that correct?
• George: Who said that?
• Boss: She did.
• George: Was that wrong? Should I have not done that? I tell you I gotta plead ignorance on this thing because if anyone had said anything to me at all when I first started here that that sort of thing was frowned upon, you know, cause I’ve worked in a lot of offices and I tell you people do that all the time.
• Boss: You’re fired.
• George: Well you didn’t have to say it like that.

The full script is HERE.  The scene is HERE.

A few days ago, a reader tipped me off to the story of a Florida lawyer.  The ABA Journal and The Daytona Beach News-Journal covered the lawyer’s disciplinary matter.  Someday I’ll get around to creating a YouTube channel and producing episodes of Was That Wrong? When I do, here’s how I envision the script for today’s story:

• Supreme Court:  We’ll get right to the point. It’s come to our attention that you used client funds for personal expenses.
• Lawyer:  Who said that?
• Supreme Court: They did. One is your father-in-law. He entrusted you with $255,000.  It’s also come to our attention that you used your client trust account as a business account to run your strip club.
• Lawyer: No bank would let me open a checking account for the strip club!
• Supreme Court:  (silence, staring.)
• Lawyer: Was that wrong? Should I have not done that? I tell you I gotta plead ignorance on this thing because if anyone had said anything to me at all when I first started here that that sort of thing was frowned upon, you know, cause I’ve worked in a lot of offices and I tell you people do that all the time.
• Supreme Court:  Disbarred!
• Lawyer:  Well you didn’t have to say it like that.

A referee’s report recommending disbarment is here.  The Florida Supreme Court disbarred the lawyer last month.

Here’s a list of previous Was That Wrong? posts:

• Conspiring with police to have your paralegal set up opposing counsel for a DUI
• Bringing a gun to your disbarment hearing
• Sexting a Client
• Defrauding Investors, with Client Funds as Collateral
• Outrageous Falsehoods on a Resume
• Judge Orders Attorney Handcuffed to Jury Box
• Swearing at a Judge who Overrules Your Objection
• Forging Judges’ Signatures
• Representing Plaintiff & Defendant . . . and sleeping with Defendant
• Prosecutor Snoops on Conversations between Defendant & Defense Counsel
• Smuggling toothbrushes and pepper spray to an incarcerated client
• Framing a volunteer at your kid’s elementary school for drug possession
• Forging Wiretap Orders to Spy on a Romantic Rival
• Cannabis (In)Competence
• Inexplicable Incompetence and a Thomas Jefferson Costume

Putting a Convicted Embezzler in charge of the Trust Account