With trust accounts and client funds, beware of taking the easy way out. It could cost your law license.

April 19, 2022Michael 1 Comment

The following inquiry is not uncommon:

“Mike – I owe Former Client a small amount of money. Between the time it’ll take me to prepare and send a check, and the time and hassle of Former Client having to go to the bank, it won’t be worth it for either of us. What should I do?”

My response is always the same: “I can’t tell you what to do or not to do. But if it were me, I’d send my former client what I owe them.”

As of today, I have a case to cite with my response. Granted, it’s an extreme example, but in that it resulted in a recommendation to suspend a lawyer’s law license, it might serve as helpful guidance. Especially considering that the lawyer had never been disciplined in his previous 51 years of practice.

legal ethics

Last week, a hearing committee of the Louisiana Attorney Disciplinary Board recommended a 2-year suspension, all suspended but 6 months, after concluding that a lawyer violated the rules by failing to properly handle client funds. The Legal Profession Blog reported the recommendation. Here’s what happened.

The lawyer’s bank notified Louisiana’s Office of Disciplinary Counsel (ODC) that checks drawn on the lawyer’s trust account had been presented against insufficient funds. The ensuing investigation grew beyond the overdraft notice and revealed that, for years, the lawyer had converted client funds.

More specifically, ODC learned that, from 2012 thru 2018, the lawyer had received over $17,000 in refunds from various courts. (It’s not clear to me why the lawyer frequently received refunds from courts.) Anyhow, the refunds represented amounts that clients had paid to the lawyer. Nevertheless, the lawyer did not inform the clients or send them their refunds. Rather, the lawyer kept the funds in trust and tracked them in their own sub-account. Intending to regularly maintain $100 in the sub-account, each month, the lawyer paid himself the balance that exceeded $100.

Before we continue, think back to the inquiry I described at the beginning of this post. Got it in mind?

Okay.

Now, consider a statement from the hearing panel’s recommendation. The lawyer claimed that

“the fees associated with reviewing the client file and writing letters to return the checks would have exceeded the amounts received.”

The hearing committee wasn’t moved. It concluded that the lawyer violated the trust accounting rules and, by not informing clients of their refunds, the rule that prohibits dishonest conduct. Then, the committee discussed the appropriate sanction.

As outlined by the committee, the ultimate sanction turned on the lawyer’s state of mind. The lawyer argued that his conduct was negligent. ODC argued that it was knowing or intentional.

In the end, the committee concluded that the lawyer’s conduct fell into “a grey area between negligent and knowing, and . . . was akin to gross negligence.” Nevertheless, while concluding that the conduct was “more knowing than negligent,” the committee found that the lawyer did not have a “conscious desire to deprive clients or others of funds.” Still, the committee recommended a significant suspension.

In so doing, the committee made two observations that made me want to share its decision.

First, the committee criticized the fact that the lawyer “perceived the funds and having to deal with them as a nuisance or inconvenience.” The committee wrote:

“In the regular course of practicing law, many Louisiana practitioners encounter the inconvenient experience of receiving a refund from a clerk of court related to legal matter concluded years ago, sometime more than a decade. Most lawyers would agree that long delayed refunds to clients or third parties creates an unwelcome inconvenience. Even so, inconvenience does not excuse returning funds or property to persons to whom they belong, or at least making a diligent effort to do so.”

Second, while noting again that it did not believe that the lawyer was motived by “greed or a conscious, dishonest desire,” the committee remarked that, due to his own “laziness,” the lawyer “chose an easier, softer way than is required by the Rules of Professional Conduct and it was a violation of [the rules] to do so.”

The upshot: if you’re ever tempted to get lazy with your trust account or client funds, consider whether 6-months without practicing is worth the few minutes and dollars you’ll save.

As always, let’s be careful out there.

Trust Accounting Resources

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)

Blog Posts

Happy 1-day Birthday to the Trust Accounting & Fees Tab!

March 31, 2022Michael Leave a comment

Later this morning Eileen Blackwood and I are presenting at a CLE for lawyers who are new to practicing in Vermont. The seminar is “Basic Skills in Vermont – Professionalism” and is a component of the CLE requirement that lawyers must complete within a year of admission to the Vermont bar. Eileen and I will focus on the expectations of a Vermont lawyer, areas in which Vermont’s Rules of Professional Conduct differ from other jurisdictions’ rules, and the many low and pro bono opportunities that are available within the state.

Eileen and I have been presenting versions of today’s seminar for a long time. In the early days, my task was to outline Vermont’s attorney-discipline process and to walk new lawyers through the trust accounting rules. As the program has evolved, trust accounting is no longer the primary focus.

Nevertheless, on the occasion of the seminar and with its roots in mind, I thought it appropriate to share with everyone – not only the new attorneys – a reminder on the trust accounting rules. Don’t worry, it won’t take long or hurt too much.

For starters, yesterday I created a new tab on this blog: Trust Accounting & Fees. It aggregates my videos and posts on, you guessed it, Trust Accounting Fees.

On the tab, I suggest starting with Don’t Overcomplicate Trust Accounting. It’s a post in which I argued that law offices can go a long way towards compliance by keeping in mind four simple thoughts:

If it’s not yours, it goes in trust.
If it is yours, get it out of trust.
Know how much you have and to whom it belongs.
Promptly pay yourself, promptly pay clients and third persons.

I stand by my suggestion. The tab includes posts and videos that go into each thought in more detail. Also, I’m well aware that there are wrinkles, exceptions, and nuances. The tab includes resources that adress those as well. Still, at a macro level, there’s a strong argument that the four thoughts capture the critical points of the trust accounting rules.

Anyhow, this is all but a long-winded way of me saying that I’m pleased to introduce our newest tab, Trust Accounting and Fees.

As always, be careful out there.

one day birthday

Vermont’s rules on fees that are labeled “nonrefundable” or “earned upon receipt.”

March 9, 2022Michael 2 Comments

Last week’s #fiveforfriday legal ethics quiz included a question on “flat” and “nonrefundable” fees. Today’s post responds to what I perceive to be a common misconception about how the Vermont Rules of Professional Conduct require lawyers to handle fees that are paid in advance of legal services being rendered.

Our approach has changed over time. A few years ago, I blogged about its evolution. Caught up in the history, I didn’t do a great job explaining the current rules. They are Rule 1.5(f), Rule 1.5(g), and Rule 1.15(c). I’ll address each in order.

Rule 1.5(f) begins:

“A lawyer may enter into an agreement for a client to pay a nonrefundable fee that is earned before any legal services are rendered. The amount of such an earned fee must be reasonable, like any fee, in light of all relevant circumstances. A lawyer cannot accept a nonrefundable fee, or characterize a fee as nonrefundable, unless the lawyer complies with the following conditions

(1) The lawyer confirms to the client in writing before or within a reasonable time after commencing representation:

(i) that the funds will not be refundable, and

(ii) the scope of availability and/or services the client is entitled to receive in exchange for the nonrefundable fee.”

I emphasized the last sentence of the first paragraph for a reason. It is only if the conditions that follow that sentence are met that a lawyer may characterize a fee as nonrefundable or accept a fee so characterized.

So far, so good. Right? If a lawyer provides the client with a writing that confirms that the fee is nonrefundable and that defines the scope of availability and services that the client will receive, the lawyer may characterize the fee as nonrefundable.

Of course, that’s not the end of the story. And here’s where I sense that confusion exists.

The fact that the lawyer and client have agreed to a fee that complies with paragraph (f)(1) is not tantamount to the client’s agreement to an unreasonable fee. Indeed, here’s paragraph (f)(2):

“A lawyer shall not solicit or make any agreement with a client that prospectively waives the client’s right to challenge the reasonableness of a nonrefundable fee, except that a lawyer can enter into an agreement with a client that resolves an existing dispute over the reasonableness of a nonrefundable fee, if the client is separately represented or if the lawyer advises the client in writing of the desirability of seeking independent counsel and the client is given a reasonable opportunity to seek such independent counsel.”

In other words, while paragraph (f) allows a lawyer to accept nonrefundable fees, it does not override paragraph (a)’s requirement that a lawyer refrain from agreeing to, charging, or collecting an unreasonable fee. On this point, Vermont’s approach is not novel. Among others, the New York State Bar Association has opined that “flat” and “nonrefundable” fees paid in advance remain subject to the reasonableness requirement.

Next, paragraph (f)(3) reinforces the fact that it is only when a lawyer complies with paragraphs (f)(1) and (f)(2) that a lawyer may describe a fee as “nonrefundable” or “earned upon receipt” or the like. It says:

“Where it accurately reflects the terms of the parties’ agreement, and where such an arrangement is reasonable under all of the relevant circumstances and otherwise complies with this rule, a fee agreement may describe a fee as “nonrefundable,” “earned on receipt,” a “guaranteed minimum,” “payable in guaranteed installments,” or other similar description indicating that the funds will be deemed earned regardless of whether the client terminates the representation.”

Finally, and perhaps most critical given the gravity of improperly handling client funds, the rules are very clear that it is only after a lawyer has complied with paragraph (f) that the lawyer may treat a fee that is paid in advance of services being rendered as the lawyer’s own.

First, paragraph (g) states:

“A nonrefundable fee that complies with the requirements of (f)(l)-(2) above constitutes property of the lawyer that should not be commingled with client funds in the lawyer’s trust account. Any funds received in advance of rendering services that do not meet the requirements of (f)(1)-(3) constitute an advance that must be deposited in the lawyer’s trust account in accordance with Rule 1.15(c) until such funds are earned by rendering services.”

Rule 1.15 is entitled “Safekeeping Property.” Paragraph (c) says:

“Unless a lawyer has entered into a nonrefundable fee agreement that complies with Rule 1.5(f), a lawyer shall deposit legal fees and expenses that have been paid in advance into an account in which funds are held that are in the lawyer’s possession as a result of a representation in a lawyer-client relationship. Such funds are to be withdrawn by the lawyer only as fees are earned or expenses incurred.”

In conclusion, the key takeaways are:

If a lawyer complies with Rule 1.5(f), the lawyer may characterize a fee as nonrefundable, accept the fee an advance of services being rendered, and treat the fee as the lawyer’s own upon receipt. This necessarily means that a fee that complies with Rule 1.5(f) must not be deposited into trust.
Even if eligible to be characterized as “nonrefundable” or “earned upon receipt” by virtue of a lawyer’s compliance with Rule 1.5(f), a fee paid in advance of services being rendered remains subject to the reasonableness requirement of Rule 1.5(a) and must be refunded if not earned.
If a lawyer does not enter into an agreement that complies with Rule 1.5(f), a fee that is paid in advance of services being rendered remains the property of the client until earned, must be deposited into trust, and shall only be withdrawn as earned.

As always, be careful out there.

Dollar Sign

Trust Accounting Resources

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)

Blog Posts

Beware the “severance payment” trust account scam.

March 2, 2022March 2, 2022Michael 2 Comments

Today I learned that a Vermont law firm was targeted this week in the so-called “severance agreement scam.” It was the first I’d heard of the scam happening here. Fortunately, a non-attorney employee was suspicious of the transaction. As a result, before disbursing, the firm was able to verify that a check that had been deposited to the trust account was fraudulent. Crisis averted.

Here’s how the scam works.

Someone contacts a lawyer claiming to be owed a severance payment by a former employer. Once the lawyer is involved, the “former employer” sends a check. The check is fraudulent. Alas, by the time the unsuspecting lawyer’s bank notifies the lawyer that the check was fraudulent, the lawyer has already disbursed funds that belong to other (and actual) clients.

Stewart Sutton practices law in Maryland.[1] In 2019, Attorney Sutton outlined the scam. The Virginia State Bar issued this warning the same year.

While relatively new, the “severance payment scam” is but a variation on an old theme.

A few weeks ago I posted A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams. In it, I referred to North Carolina State Bar 2021 Formal Ethics Opinion 2. The advisory opinion addresses a common scam:

Lawyer is contacted by client who is owed a debt.
Client reports that debtor will not pay.
Lawyer agrees to represent Client.
Debtor (suddenly) can’t send a check to Lawyer fast enough.
Client instructs Lawyer to deposit the check, keep Lawyer’s fee, and wire the balance.
Lawyer follows Client’s instructions.
Later, it becomes apparent that Debtor’s check was fraudulent.
Often, Lawyer has now wired to Client funds that belong to other clients.

Scams of this nature most often involve an out-of-state client who (a) claims to be owed money by a person or business located in Vermont; and (b) only communicates with the Vermont lawyer by e-mail . I’m aware of it playing out in different contexts, including:

Person or business claims to have delivered goods to a person or company that won’t pay.
Deployed member of the military claims that ex-spouse sold the marital home and refuses to share the proceeds.

We can now add:

Person claims to be owed “severance payment” by former employer who won’t pay.

As always, be careful out there.

scam

[1] I don’t know Attorney Sutton and have never communicated with him. But I’m happy to learn from his profile that he’s a member of Red Sox Nation.

Related Videos & Posts

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)

Blog Posts

Again, reconciliation is a good thing! (And a tip to protect against check fraud.)

February 18, 2022Michael 4 Comments

A few weeks ago I posted Timely Reconciliation Alerts Firm To Trust Account Fraud.

Well, it has happened again.

And, this time, the firm that shared its story also shared a tip to prevent check fraud.

fraud

A lawyer called yesterday to discuss a trust account issue. In the process of a daily reconciliation, the firm noticed an unauthorized ACH disbursement from trust. Someone had accessed the trust account to pay their credit card. The firm is working with law enforcement to identify the culprit and has confirmed that it was not an employee, client, former client, or anyone to whom the firm delivered funds on behalf of a client. The most likely explanation is the simplest: someone came across one of the firm’s trust account checks and wrote down or took a picture of the account and routing numbers. Fortunately, the daily reconciliation alerted the firm to the problem. The bank refunded the money, and the firm has taken additional steps to safeguard client funds and to protect against check fraud.

Among other things, the firm has moved to a version of “positive pay.” Every day, the bank sends the firm a list of checks that have been presented against the trust account. The firm approves or disapproves each. You can read more about “positive pay” in this post from Investopedia. Note: the firm uses “reverse positive pay.”

Nothing in this post should be read as me stating that the Vermont Rules of Professional Conduct require lawyers and law firms to enroll in a “positive pay” program. However, it’s worth considering. As I mentioned in A Lawyer’s Professional Responsibility to Learn to Identify Common Trust Account Scams, if trust funds go missing, the question will be whether the lawyer took reasonable steps to safeguard them. I could envision a disciplinary prosecutor asking, “did you ever check whether your bank offers a ‘positive pay’ or a similar service?”

Personally, I’d not want my answer to be “a what?”

As always, let’s be careful out there.

A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams

February 9, 2022February 9, 2022Michael 4 Comments

Judging from the feedback, not many people enjoy my posts and seminars on trust accounting. It’s not uncommon for someone to express that the experience leaves them worried for their license, or to remark that I “tried to scare the crap out of” the audience.

Honestly, that’s not my goal. Indeed, the first in my series of trust accounting videos is Don’t Fear, Simplify. Similarly, I kicked off 2018 by asking lawyers not to overcomplicate trust accounting.

I stand by the message in each.

So, it’s with my own trepidation that I share today’s. Alas, to protect client funds, and lawyer licenses, I’m sharing it anyway.

Scams are at the top of the list of things that make lawyers fear trust accounting. That said, I’ve often heard “But Mike, we can’t stop scams. Falling for one is a problem, but it’s not unethical.”

I’m not so certain.

In 2017, almost FIVE YEARS AGO, I posted Trust Account Scams – they won’t be an excuse for long. Referring to CLEs I was scheduled to present, I wrote:

“At the seminars, I will be very clear: in my opinion, we’re not far from the day when ‘but I was scammed!’ will not excuse a violation of the rules. It might mitigate the ultimate sanction, but it will not excuse the failure to safeguard client funds.

Then, I outlined several of the more common scams that target lawyers and their trust accounts.

My opinion hasn’t changed. And, last year, the North Carolina State Bar joined me when it issued 2021 Formal Ethics Opinion 2.

The NC opinion addresses a common trust account scam:

Lawyer is contacted by client who is owed a debt.
Client reports that debtor will not pay.
Lawyer agrees to represent Client.
Debtor (suddenly) can’t send a check to Lawyer fast enough.
Client instructs Lawyer to deposit the check, keep Lawyer’s fee, and wire the balance.
Lawyer follows Client’s instructions.
Later, it becomes apparent that Debtor’s check was fraudulent.
Often, Lawyer has now wired to Client funds that belong to other clients.

I’ve warned about this scam for years. It usually involves an out-of-state client who (a) is owed money by a person or business located in Vermont; and (b) only communicates with the Vermont lawyer by e-mail. After surveying the wealth of material warning lawyers of this common scam, the NC Bar concluded:

“Lawyer’s mistaken reliance on the counterfeit check is unexcused. Given the breadth of notice provided to the legal profession on this common scam, Lawyer should have realized that the circumstances surrounding this purported representation required additional investigation. For at least ten years, lawyers have been warned about being targets of scams such as the one at issue in this inquiry.”

The opinion goes on:

“Lawyer should have been alerted to the suspicious nature of this transaction based upon the circumstances in this scenario, including the unsolicited request for the representation; the willingness of the purported defendant to quickly resolve the dispute without much effort from Lawyer; the cashier’s check drawn on an out-of-country bank; and the cashier check being dated prior to Lawyer’s conversation with the purported defendant. Although one of these circumstances standing alone may not give cause for suspicion, the totality of the circumstances should have alerted Lawyer to the suspicious nature of the representation and the transaction.”

Finally:

“Lawyer’s failure to recognize the scam given the vast notice and information directed to lawyers on the topic demonstrated his lack of competency in violation of Rule 1.1.”

In sum, the North Carolina opinion concludes that a lawyer has a professional responsibility to be aware of common trust account scams.

I urge lawyers to familiarize themselves with the most basic & common scams. To do so, I suggest starting with the NC opinion and my posts Learn to Identify Trust Account Scams and Protect Client Funds, and your law license, by Learning to Identify Trust Account Scams.

As always, let’s be careful out there.

scam-alert

Related Videos & Posts

The Professional Responsibility Program’s Guide to Managing Trust Accounts

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)

Blog Posts

Timely Reconciliation Alerts Firm to Trust Account Fraud

January 11, 2022Michael 1 Comment

In Vermont, client trust accounts must be reconciled no less than monthly. In addition to being required by the rules, timely reconciliation can help to alert a lawyer or law firm to trust account fraud.

Fraud

Last Friday, an employee of a Vermont law firm reconciled recent trust account activity. Reviewing digital copies of checks presented against the account, the employee discovered three fraudulent checks.

I’ve seen images of the fraudulent checks. They look almost exactly like the firm’s real checks. Each includes the firm name, address, account number, routing number, and a forged signature of one of the firm’s partners.

The employee caught the fraud because two of the checks were duplicates. That is, each was the same number as a legitimate check that the firm had issued. The third bore a number that was well outside the range of the firm’s current checks.

Each fraudulent check had been negotiated using a mobile banking app. The mobile deposits were to accounts at a different bank than where the firm’s trust account is maintained. Many thousands of dollars were stolen. It seems that the fraud occurred outside the United States as two of the fraudulent checks were dated using the “dd/mm/yy” construct.

The law firm immediately notified its bank and law enforcement. Funds that remained in trust were transferred to another account. A few legitimate checks remain outstanding. The bank agreed not to honor them without contacting the firm for approval. As of last night, it appears that the banks are going to make good on the funds fraudulently obtained from the firm’s trust account. The firm and the bank are discussing whether the bank can make it so that the firm’s trust account checks cannot be negotiated electronically.

The situation shows the importance of timely reconciliation. The employee discovered the fraud within days of it happening. It’s also an example of the importance of “actual” reconciliation. Don’t just glance at the statement and conclude that the balance “looks about right.” That is not reconciling. An actual reconciliation includes reviewing each and every transaction on the account.

As always, be careful out there.

Related Material

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)

Blog posts:

Resources

The Professional Responsibility Program’s Guide to Managing Trust Accounts

Lawyers aren’t Kramer. When it comes to safeguarding client funds, there are no excuses.

November 10, 2021Michael 1 Comment

I will lead with the most important takeaway from today’s story: neither inexperience as an attorney nor unfamiliarity with the trust accounting rules will excuse the failure to safeguard client funds. For a refresher, I’ve included links to my posts and videos on trust accounting at the end of this post. Now, back to today’s story.

As many readers know, Was That Wrong? is a semi-regular column in which I use a Seinfeld episode to highlight conduct that we shouldn’t need a CLE to know to avoid. Today’s story qualifies. It also reminds of another episode: the one in which Kramer was fired from a job that he didn’t even have because it was almost like he had no business training at all.

Alas, when it comes to safeguarding client funds, there’s no training required to know the most basic notion: my client’s money isn’t my money.

Last week, a New York appellate court imposed an interim suspension in a matter in which a lawyer has been charged with mishandling client funds. The Legal Profession Blog reported the opinion. Here’s a summary of the facts.

Lawyer was admitted to practice law in 2004. After many years in a firm, Lawyer opened a solo shop.
Lawyer represented Seller in a real estate transaction. In January 2019, Buyer advanced an $18,000 down payment that Lawyer deposited into a client trust account. Over the next several months, Lawyer withdrew more than $6,000 of the down payment and used the funds to pay personal expenses.
In June 2019, Seller advanced $10,000 towards closing costs. Lawyer deposited the funds into the client trust account.
The transaction closed in October. Seller cleared just under $50,000. Lawyer deposited the proceeds into the client trust account.
About a month later, Lawyer paid $25,000 to Seller. Lawyer informed Seller that the balance would remain in trust until Lawyer received confirmation that various liens and taxes had been paid.
By June of 2020, had yet to pay Seller and only $3.78 belonging to Seller remained in trust. Lawyer had used more than $35,000 to pay personal expenses.
In September 2020 Lawyer borrowed enough money to pay just over $14,000 to Seller. Lawyer informed Seller that Lawyer was invoking his status as Seller’s power of attorney to withhold the balance pending Lawyer’s investigation into Seller’s tax liabilities associated with the sale.
Seller filed a disciplinary complaint against Lawyer.
In January 2021, Lawyer asked Seller to agree to withdraw the disciplinary complaint in exchange for payment.
In March 2021, Lawyer finally paid Seller.

Disciplinary prosecutors charged Lawyer with various violations and sought the immediate interim suspension of Lawyer’s law license pending resolution of the charges. At a hearing on the request, Lawyer’s arguments against an interim suspension included:

Lawyer had no background or training in real estate transactions.
Prior to opening his own office, Lawyer had never opened a trust account or had to manage client funds.
Lawyer received no trust account training in law school.
Lawyer never attended any trust accounting CLEs.
Lawyer had closed his office and taken a government job and, therefore, would not be handling client funds anymore.

The court wasn’t moved. In the end, the court imposed the interim suspension. The court’s order included this statement:

“While respondent cites to a lack of experience regarding the rules related to the maintenance of accounts holding client funds, he declined to familiarize himself with them at any time prior to or during his representation of the subject client.”

To me, Lawyer’s arguments are offensive not only to lawyers new to managing client trust accounts, but to anyone with a sense of right and wrong. Nobody needs law school, a CLE, or any sort of training to know that money held in trust for others is not to be used as one’s own.

End of story.

Trust Account Resources

My videos on trust accounting:

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)

My blog posts on trust accounting:

Back to (trust account) school.

August 31, 2021Michael 2 Comments

Hi!

It’s been a bit since my last post. Usually when I go on hiatus it’s because of blogger’s block. Not this time. For the past 10 days, I’ve been tied up with a special assignment. That behind me, it’s good to be back.

And speaking of back . . . it’s back to school season. Around this blog, that means it’s back to (trust account) school season. And, as a reminder that the lessons aren’t in the abstract, I’m going to mention two decisions handed down earlier this year in which Vermont lawyers were publicly reprimanded for violating the trust accounting rules.

sanctions

I’ll address the decisions in reverse order of issue. Why? Because the first is a stark reminder that failure to comply with the trust accounting rules can easily lead to a suspension.

PRB Decision 236 involved a sole practitioner whose practice focuses on residential real estate transactions. A disciplinary complaint resulted in Disciplinary Counsel conducting a compliance audit of the lawyer’s trust account. The audit revealed that the account often went unreconciled and that to the extent that the lawyer maintained records, they were substandard. Among other things, the lack of regular reconciliation caused the lawyer to fail to account for numerous uncashed checks that had been issued against the trust account.

In addition, the lawyer is a title insurance agent. For those of you who don’t know, lawyers who sell title insurance collect the premium at closing and deposit it into trust. Following the closing, the lawyer/ conducts a title update so that a final policy can issue. Then, the lawyer disburses both the title insurer’s share of the premium and the lawyer’s share.

Here, the lawyer wasn’t doing that. Rather, the lawyer admitted that there were approximately 30 closings at which the lawyer had collected the title insurance premium but not issued a final policy or disbursed the title insurance company’s share of the premium. The former is bad because it’s neglect, the latter is bad because, in this situation, the title insurance company is no different than any other person who is entitled to funds that an attorney is holding in trust.

In the end, a hearing panel concluded that the lawyer violated:

the trust account record-keeping rules;
the rule that requires timely reconciliation of a trust account;

the rule that requires prompt disbursement of funds that belong to another; and,

the rule that requires lawyers to provide clients with prompt and diligent representation.

I’ve previously blogged on how the hearing panels and Supreme Court arrive at a disciplinary sanction. In a nutshell, an analysis of several factors results in a presumptive sanction that can be modified up or down by certain aggravating and mitigating factors.

Here, the panel concluded that the presumptive sanction was a suspension of the lawyer’s law license. However, the panel went on to conclude that the mitigating factors outweighed the aggravating and warranted the lesser sanction of a public reprimand. Neither Disciplinary Counsel nor the lawyer appealed, and the Supreme Court issued an order adopting the hearing panel’s decision as its own.

The second decision is PRB Decision 235. The case involved a lawyer at a small firm whose practice focused on estate planning and residential real estate. A compliance audit of the firm’s trust accounts revealed problems associated with years of failing to reconcile the accounts. Thus, accounting errors and uncashed checks went undetected.

In the end, a hearing panel concluded that the presumptive sanction was a public reprimand. The panel also found that the mitigating factors outweighed the aggravating, and that many of the problems with the firm’s trust accounting pre-dated the lawyer’s responsibility for the accounts. Still, the panel opted against reducing the sanction from reprimand to admonition, noting that the lawyer “allowed those problems to languish and was directly responsible for repeated failures to conduct reconciliation and for failing to address and correct accounting errors that arose . . .” Neither Disciplinary Counsel nor the lawyer appealed, and the Supreme Court issued an order adopting the panel’s decision as its own.

These opinions show that, as has been the case for years, the failure to mind the trust account will result in discipline. For those of you interested going “back to (trust account) school,” see the resources below.

As always, let’s be careful out there.

PS: as I cut & pasted the links, I LMAO’d thinking about the person who recently told me that I don’t do enough on trust accounting.

Resources

The Professional Responsibility Program’s Guide to Managing Trust Accounts

My videos on trust accounting:

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)

My blog posts on trust accounting:

Safeguarding Client Funds: Tech Competence & Mobile Payment Apps.

April 8, 2021Michael

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.

Legal Ethics

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)

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Ethical Grounds

The Unofficial Blog of Vermont's Bar Counsel

Trust Account Management

With trust accounts and client funds, beware of taking the easy way out. It could cost your law license.

Happy 1-day Birthday to the Trust Accounting & Fees Tab!

Vermont’s rules on fees that are labeled “nonrefundable” or “earned upon receipt.”

Beware the “severance payment” trust account scam.

Again, reconciliation is a good thing! (And a tip to protect against check fraud.)

A Lawyer’s Professional Responsibility to Identify Common Trust Account Scams

Timely Reconciliation Alerts Firm to Trust Account Fraud

Lawyers aren’t Kramer. When it comes to safeguarding client funds, there are no excuses.

Back to (trust account) school.

Safeguarding Client Funds: Tech Competence & Mobile Payment Apps.