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

*********

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

Disbursing without Collected Funds

Last night, I presented a CLE at the Windham County Bar Association’s meeting.  A question arose related to disbursing against uncollected funds.  My answer required a short history lesson.

In April 2004, the Vermont Bar Association’s Professional Responsibility Committee issued Advisory Opinion 2002-4.  The opinion addressed 11 questions related to handling client funds.  One question was:

• “What procedures are required in issuing checks from client trust accounts
  for real estate closings drawn on funds deposited via broker’s or lawyer’s trust account checks that have not yet cleared pursuant to applicable banking rules?”

The Committee opined that, as then written, the rules prohibited lawyers from disbursing against deposits that had yet to clear.   Per the Committee:

• “As written, relevant provisions of the Vermont Rules of Professional Conduct support the inference that client funds cannot be disbursed from the client trust account until the deposit upon which the withdrawal or check will be drawn has cleared and the client funds are available for disbursement under applicable banking rules.”

Why?  Because:

• “If a check is drawn or a withdrawal is made from the client trust account before the corresponding deposit has cleared, then the funds that are being withdrawn from the account actually are the property of another client.”

Thus,

• “Under these circumstances, the only available response is for the attorney expressly to warn a client who will be involved in a closing that, unless liquid funds are available on the date of the closing the closing will not be able to proceed.”

Let me be clear: as the rules existed at the time, the Committee was spot on.

Nevertheless, the opinion caused concern.  Real estate attorneys were among those most concerned.  They worried that the opinion effectively made it unethical to conduct residential closings as we always had.  Imagine:

• Mike sells his house and buys another.
• The closings are on the same day.
• At the first closing, Mike receives a check representing the proceeds of his sale.
• Minutes later, Mike closes on his purchase.
• In so doing, Mike’s lawyer disburses from trust in reliance upon the check that Mike received minutes earlier eventually clearing and becoming “good funds.”

Per the opinion, that’s a violation.

So, in 2005, we changed the rules.  They are: Rule 1.15(f) and Rule 1.15(g).

Rule 1.15(f) carries forth the prohibition against disbursing without “collected funds.”  It defines “collected funds” as “funds that a lawyer reasonably believes have been deposited, finally settled, and credited to the lawyer’s trust account.”

Unlike the old days, however, the new rule included exceptions.  Per Rule 1.15(g):

• “In the following circumstances, a lawyer may disburse trust account funds deposited for or on behalf of a client or third person in reliance on that deposit even though the deposit does not constitute collected funds if the lawyer reasonably believes that the instrument or instruments deposited will clear and will constitute collected funds in the lawyer’s trust account within a reasonable period of time . . .”

Then, the rule lists 5 types of instruments against which a lawyer may disburse upon deposit and before the funds clear and become “collected funds.”  Essentially:

• money orders and certified/cashier’s/official checks issued by or drawn on a federally insured bank;
• checks drawn on an IOLTA or IORTA account of a lawyer or real estate broker licensed in Vermont;
• checks issued by the State of Vermont or the federal government;
• personal checks that, in the aggregate, do not exceed $1,000 per transaction; and,
• checks issued by an insurance company, including title insurance companies, licensed to do business in Vermont.

Two important points on the 2005 Amendment:

1. While the rule permits disbursement upon the deposit of certain instruments, it does not require it.  If a lawyer wait for the big settlement check to clear, that’s fine. When it clears, prompt disbursement is required.
2. If a lawyer disburses and the deposit fails to clear, it’s not an ethics violation, but Rule 1.15(h) requires the lawyer to immediately act to protect funds that remain in the account.  Per the Reporter’s Note “presumably by immediately making or securing reimbursement of the trust account to the amount of the failed deposit.”

As always, be careful out there.

*************************************************************************************

Reporter’s Notes — 2005 Amendment 

Rules 1.15(d)-(f) are added to address a problem that has arisen as a result of a recent Advisory Ethics Opinion of the Vermont Bar Association’s Professional Responsibility Committee (VBA Ethics Opinion 2002-4, published April 2004). The opinion concluded that ‘‘Trust account checks can only be drawn on client funds after the deposit on which the check is drawn clears’’ based on the Committee’s reading of V.R.P.C. 1.15(b) and other provisions of the Rules of Professional Conduct. Id. While the opinion does not have binding legal effect, it is of sufficient persuasive force to put lawyers who ignore it at risk. The impact is thus significant in the many real estate closings, tort settlements, and other transactions in which funds for clients pass through lawyers’ hands. If the lawyer cannot disburse such funds until the checks with which they have been transmitted have cleared, clients will experience significant delays in receiving funds to which they are entitled, and sequential transactions, such as the simultaneous sale and purchase of real estate, will be hindered. See, generally, R. Kohn, ‘‘Trust Account Ethics Rules: Sensible, Bizarre, or a Combination?,’’ 30 Vt. Bar Jour., No. 2, pp. 20-26 (2004). The present rule is based on provisions adopted in other states to address this problem. See, e.g., Del. Lawyers’ Rules of Prof ’l. Conduct, R. 1.15(n); Rules Regulating the Fla. Bar, R. 5-1.1(i).

Rule 1.15(d) sets forth two basic principles that must be adhered to unless the exceptions set forth in Rule 1.15(e) apply:

• (1) A lawyer may not disburse funds unless the disbursement is drawn against ‘‘collected funds’’ — i.e., those that a lawyer reasonably believes have been deposited, finally settled, and credited to the lawyer’s trust account. (Under present banking practice, there is no way a lawyer can be certain that funds have been finally settled, because the bank into which the check has been deposited is only notified when a check is dishonored, not when it is honored. As of August 2004, in accordance with Federal Reserve Board Regulation CC, checks drawn on banks within the same Federal Reserve Board region are usually honored by the banks on which they are drawn within two or three business days, and checks drawn on banks in other regions are usually honored within seven business days, except in extremely unusual circumstances. Accordingly, as of August 2004, it will usually be reasonable for a lawyer to believe that a check has been finally settled three business days after deposit for checks drawn on banks within the same Federal Reserve Board region, and seven business days for checks drawn on other United States banks.)
• (2) A lawyer may not use the funds of one client or other person held in trust to serve the needs of another client or person without full disclosure and permission of the owner. VBA Ethics Opinion 2002-4 essentially stands on the ground that a check drawn against uncollected funds in a trust account is in fact drawn against the collected funds of other clients that are held in the account.

The exceptions to these basic principles set forth in Rule 1.15(e) are based on the premise that certain categories of trust account deposits carry a limited and acceptable risk of failure so that disbursements of trust account funds may be made in reliance on such deposits without disclosure to and permission of clients owning trust account funds subject to possibly being affected. Four of the five categories of deposits enumerated in paragraph (e) reflect instruments issued by or drawn on sources of assured financial stability so that the likelihood that the instrument will be dishonored or that the deposit will otherwise fail is so slight that it may be treated as presumptively ‘‘collected.’’ The fifth category, personal checks aggregating $1,000 or less, covers the need for last-minute funds to cover minor and unanticipated closing costs and is a de minimis amount that can be readily repaid in the event of failure. The five categories in effect create ‘‘safe harbors’’ that allow the lawyer to draw against these uncollected funds, provided that the further requirement of paragraph (e) is met — that the lawyer ‘‘reasonably believes’’ that the instrument or instruments in question will clear and become ‘‘collected funds’’ in a reasonable time. (See discussion of clearance times above.) The essence of the rule is that a lawyer who draws against uncollected funds other than those within the safe harbors of paragraph (e) is in violation of the basic prohibitions of paragraph (d) and is thus subject to disciplinary action.

Rule 1.15(f) adds the further requirement that if a deposit fails, even though it was within one of the categories set forth in paragraph (e) and the lawyer’s belief that it would clear was reasonable, the lawyer must take immediate steps to protect the funds of other clients that are thus drawn upon — presumably by immediately making or securing reimbursement of the trust account to the amount of the failed deposit.

 

 

 

 

Trust Account Scams Continue

Since last Wednesday, three different firms from three different parts of the state have contacted me to report having been targeted by trust account scams.  I don’t have much to say that I’ve not already shared.  But I’m posting again, hopefully to plant a kernel of recognition that will pop if you’re ever targeted.

First, I’ll share my prior posts.  Then, I’ll share the scenarios lawyers reported to me over the past week. Finally, I’ll conclude by sharing a suggestion that I made to one of the lawyers who reported a scam to me.  It’s a suggestion that makes me feel paranoid.

My prior posts:

• Learn to Identify Trust Account Scams
• Change in wire instructions? CAUTION
• The latest scam
• Scams continue: beware ANY change in wire instructions
• Protect client funds, and your law license, by learning to identify trust account scams

The scenarios:

Scenario 1

Firm agreed to represent an out-of-state purchaser (“OOSP”).   OOSP sent Firm a check for the purchase price.  It was a significant amount.  Firm deposited the check into its pooled interest-bearing trust account (“IOLTA”).  By definition, Firm’s IOLTA contains funds that belong to other clients.

OOSP assured Firm that the purchase & sale agreement would soon follow.  All communication was by email

Last Wednesday, OOSP emailed Firm.  OOSP reported a “family emergency” that required cash to address.  OOSP asked Firm to wire $40,000 of the funds Firm was holding for the purchase.

Firm had still not received the purchase & sale agreement.  The check had only been deposited the day before.  OOSP refused to communicate with Firm in any manner other than email or to provide any detail beyond “family emergency.”

Yes, there’s a rule that requires a lawyer promptly to disburse from trust funds to which a client is entitled.  There’s also a rule that requires Firm to safeguard the funds Firm is holding for other clients.  Here, then, the circumstances strike me as such that Firm must wait for confirmation that the funds have been finally credited to the IOLTA.  It will not surprise me if Firm eventually learns that the check it received from OOSP was a fraudulent check and that there is no P&S agreement to buy a Vermont property.

Scenario 2

Today, a lawyer reported this.

For a while now, an out-of-state client (OOSC) has been emailing Lawyer asking Lawyer to represent OOSC on a contingent fee basis.  OOSC’s emails include several typographical errors.

Today, and without Lawyer even yet having agreed to represent OOSC, OOSC’s Adversary emailed Lawyer.   Adversary informed Lawyer that Adversary was ready to settle and wanted to send a check.  Adversary’s email included the same typographical errors as OOSC’s.

If you’ve not yet recognized the scam, here’s what likely would’ve happened had Lawyer not recognized it:

• Lawyer would’ve communicated Adversary’s settlement offer to OOSC;
• OOSC would’ve accepted;
• Lawyer would’ve received a check from Adversary and deposited it into Lawyer’s IOLTA;
• Lawyer would’ve sent OOSC a trust account check for OOSC’s share;
• Lawyer’s Bank would’ve notified Lawyer that Adversary’s check was fraudulent;
• By then, OOSC would’ve deposited the trust account check and funds belonging to other clients would be gone.

Scenario 3

This one, also reported today, might be the most concerning.

Firm represents Buyer in the purchase of property that is in Vermont.  Buyer is out-of-state but is known to Firm.  Firm has confirmed the transaction, worked with Seller’s attorney (an attorney the Firm knows well), and worked with a local realtor.  The plan was that Buyer would wire funds to Firm later this week.

Today, Buyer called Firm.  Buyer asked why Firm had sent an email with new wire instructions.  Firm replied that it had not.  Firm asked Buyer to forward the email.  Buyer did.

Before today, Buyer and the Firm lawyer handling the transaction had communicated by email.  Firm lawyer had used a firm account:  lawyer@firm.com   The email to Buyer that purported to include new wire instructions was from lawyer@gmail.com  Fortunately, Buyer’s antennae went up upon receiving a last-minute change in wiring instructions from an unfamiliar email address.

The concern here is that there’s been a breach.  There’s no bank involved.  But for a small down payment from Buyer, Seller is financing the sale. So, it appears that either the realtor, Firm, or Seller’s attorney has been breached.

Finally, I know this will sound paranoid, but I’m compelled to include it.  In this last scenario the lawyer who reported it told me that Buyer now intends to send a check.  That’s fine, but given that Buyer is out-of-state, it will likely result in the bank putting a hold on the check, which might impact the closing.  That’s for all involved to work out.  What’s for me to add is this:

The lawyer also told me that Firm informed Buyer that if wire instructions change, Firm will not notify Buyer by email, but will call.  Again, I know this will seem paranoid, but I suggested to the lawyer that Firm and Buyer arrange a code word that will be included if such a call is made.

Why?

It wasn’t too long ago that this happened.

Lawyer represented Buyer at a closing.  At the closing, Buyer’s Lawyer gave a trust account check to Seller.   On the way home from the closing, Buyer’s Lawyer received a phone call that his Caller ID showed as “Seller’s Attorney.”  Buyer’s Lawyer answered the call.

The caller said that she worked in Seller’s Attorney’s office, that their client couldn’t make it to the bank to cash the check, and that their client would prefer a wire.  The caller promised that they would rip up the check if Buyer’s Lawyer wired the funds.  Buyer’s Lawyer agreed.  The caller provided wire instructions.  Upon returning to the office, Buyer’s Lawyer wired the funds as instructed.

Days later, Buyer’s Lawyer noticed that the check had been cashed. Buyer’s Lawyer called Seller’s Attorney.  Seller’s Attorney said something like “we never called you to ask for a wire.”  Eventually, all involved realized that Buyer’s Lawyer had been scammed; a scam so sophisticated as to have included a phone call that, on Caller ID, appeared to have come from Seller’s Attorney.

That’s why I suggested the code word.

T.I., Jack Torrance & Trust Accounting

It’s been a while.  But, like T.I. and Jack Torrance, I’m back.

And what better way to clear out the electronic dust than to start with the trust accounting rules?

The groans as 3/4 of you just closed your browsers are echoing through the interwebs.  To the 1/4 who remain, thank you.

Don’t worry, I won’t belabor the topic.

Most importantly, don’t fear trust accounting.  As I blogged here, we avoid things we fear.  Avoiding trust account management is not a good idea.  From there, it comes down to this:  whenever a Vermont lawyer is in possession of funds in connection with a representation:

• funds that are not the lawyer’s belong in a trust account;
• the lawyer’s funds not belong in a trust account;
• the lawyer must keep a system that continuously tracks how much money you are holding in trust and to whom each dollar belongs;
• the lawyer must promptly disburse funds to which someone (including you) is entitled;
• the trust account must be reconciled no less than monthly.

Several years ago, former disciplinary counsel Beth DeBernardi developed a trust account manual.  It remains current.  Earlier this year, I posted a series of blogs on the issues I’ve seen most in my 22 years.  Here’s a list of the posts:

• Basic Requirements
• Don’t Commingle
• Don’t Disburse without Collected Funds
• Got funds? Promptly Notify & Deliver
• Non-Refundable Fees
• Third-Party Claims Against Funds Held in Trust
• Misappropriation: Know what it is, don’t do it
• Trust, but verify
• Trust Accounts & ACH Transfers

Lawyers often tell me “trust accounting is hard.”  True.  But it’s required.  Not only that, the areas of law that you practice, and the nuances buried within, are hard too.  But you do those well.  Trust accounting is no different.

With that out of the way, stay tuned.  Later this week I’ll post updates on exciting goings-on within the world of professional responsibility. Then, on Friday, the return of the mack quiz.

It’s good to be back.

Third-Party Claims against Client Funds

Earlier this month, I blogged on a lawyer’s duties when a third-party asserts an interest in funds that a lawyer is holding in trust on behalf of a client.  The post focused on a 2012 advisory opinion in which the Virginia State Bar concluded that:

• “In the absence of a valid third-party interest in the funds, the lawyer owes no duty to a creditor of the client and must act in the best interests of the client.

It’s a helpful opinion.   Yet, the question remains:  what is a “valid third-party interest?”

The opinion provides some guidance.  For instance, valid third-party interests include statutory liens, judgment liens, and court orders or judgments specific to the funds.

Last week on his Professional Responsibility Blog, Professor Alberto Bernabe posted about an advisory ethics opinion that the Texas Center for Legal Ethics issued last September.  The opinion, which is here, provides additional guidance on the critical question “what is valid third-party interest?”

Per the Texas opinion, a lawyer’s duties to a third-party are triggered “only when the third party has a matured legal or equitable interest in those particular funds.”  The opinion adds that:

“A matured legal or equitable interest in particular client funds exists when the interest is based on:

• a.    A statutory lien, 
• b.    A judgment that adjudicates ownership or disposition of the funds in question,
• c.    A court order regarding the funds in question,
• d.    A written assignment conveying an interest in the funds in question, 
• e.    A right of subrogation regarding the funds in question. or 
• f.    A signed letter of protection or similar agreement formed to aid the lawyer in obtaining the funds in question, which promises payment upon collection.”

If you or your firm often possesses client funds in which third-parties claim interests, I recommend giving the Texas opinion a read.  It analyzes interests asserted by insurers, hospitals, doctors, and former employers.

In addition, the opinion addresses another important question: what happens when a client discharges a lawyer and instructs the lawyer to send the client the funds without paying the third-party claims?

The Texas answer:

“If a lawyer is obligated under [the rules] to withhold client funds from the client due to the claim of a third party who has a matured legal or equitable interest in the funds, the lawyer’s obligation to the third party survives and is unaffected by the client’s termination of the lawyer-client relationship.”

As usual, I don’t know how the Vermont Supreme Court or one of the PRB’s hearing panels would decide this issue.  However, I’ll say this:  while not verbatim, Vermont’s rule is essentially the same as the rules in Virginia and Texas.