Trust Account Tuesday: 3rd party “interests” in funds held on behalf of a client.

Second post in one day.   Both on trust accounting.  What is the world coming to?

This morning, Teddy KGB helped to remind us that lawyers have a duty to deliver funds to which clients and third persons are entitled.  Our discussion was predicated on the fact that there is no dispute that a client or third person is entitled to the funds that the lawyer intends to disburse. What about when more than one person asserts an interest in the funds?

Let’s start with the rule.  As Maria might say, it’s a very good place to start.

Rule 1.15 applies.  Specifically, paragraphs (d) and (e).

The relevant section of paragraph (d):

• (d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person.

The entirety of paragraph (e) is relevant:

• “(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be held separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

When does a third party have an interest in funds that a lawyer is holding in trust for a client or third person?  In other words, (1) when must a lawyer notify someone that the lawyer received funds; and, (2) when would a dispute over funds prohibit disbursement?

Often, the comments to the rules are helpful.  Comment [4] to Rule 1.15 says:

• “Paragraph (e) recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds collected.  A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.”

Ummm, ok.  But, again: what are the “interests” and “claims” that trigger the rule?

A few months ago, I found this advisory opinion from the Virginia State Bar.  I find pages 1-4 particularly helpful.

Let me be clear: here in Vermont, I do not know how disciplinary counsel, a hearing panel, or the Supreme Court would approach the issue.  However, I think the opinion from the Virginia State Bar is useful in formulating the appropriate thought process.

Some key quotes from the opinion:

• “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.”

This is important. In other words, when it comes to funds, a lawyer’s primary loyalty remains to the client and the conflict rules continue apply.

• “The mere assertion of an unsecured claim by a creditor does not create an ‘interest’ in the funds held by the lawyer.  Therefore, claims unrelated to the subject matter of the representation, though just, are not sufficient to trigger duties to the creditor without a valid assignment or perfected lien.”

This is consistent with how I’ve approached the issue.  Standing alone, “Hey, your client owes me money” isn’t enough.  Even if it’s true.  For example:

• Lawyer’s Client was injured skiing.
• The ski area’s insurer settled for $100,000 that’s in Lawyer’s trust account.
• Client’s injuries resulted in treatment from, among others, Physical Therapist.
• Lawyer and Client know that Physical Therapist has a lien on any recovery.
• Meanwhile, shortly before Client was injured in the skiing accident, Painter painted Client’s house.  Client disputed the bill and has yet to pay it in full.  Painter has never sued Client or obtained a judgment against Client.  Somehow, Painter found out about the ski injury settlement.  Painter called Lawyer and directed Lawyer o hold in trust the amount that Painter contends is owed by Client.

To me, Physical Therapist has “an interest” that triggers the rule, Painter does not.

The Virginia opinion lists things that trigger a lawyer’s duties to a third-party creditor:

• statutory liens
• judgment liens
• court order or judgments that affect the funds.

Then, the opinion says:

• “Likewise, agreements, assignments, lien protection letters, or other similar documents in which the client has given a third party an interest in specific funds trigger a duty under [the rules] even though the lawyer is not a party to such agreement or has not signed any document, if the lawyer is aware that the client has signed a document.” (emphasis in the original).

And, to me, here’s the key statement:

• “In other words, a third party’s interests in specific funds held by the lawyer is created by some source of obligation other than Rule 1.15 itself.”

This makes perfect sense to me.  The mere fact that Lawyer is holding the money is not enough to give a third party “an interest” in or “claim” to the funds.  That’s the “Painter” example from above.

With all of this said, the Virginia opinion makes a critical point that cannot be ignored.  While the general rule is that a lawyer have “actual knowledge” of a third party’s interest or claim to trigger the duties under the rule:

• “In some situations, under federal and state law, the lawyer need only be aware that the client received medical treatment from a particular provider or pursuant to a health care plan. In those instances, notice of lien or lien letter may not be required in order for that third party to claim entitlement to funds held by [the] lawyer.”

In other words, the duty of competence includes knowing whether, by law, a treatment provider has a valid interest, claim, or entitlement that may not need to be formally asserted.

Finally, remember, a lawyer’s is to recognize the existence of valid claims and interests to funds you are holding for a client.  Rule 1.15(e) does not require a lawyer to resolve the claims and, in fact, prohibits a lawyer from doing so unilaterally.

Where’s that leave us?  I’m not sure.  It’s an issue rarely brought to my attention.  If you’re ever unclear, call me and we’ll talk through it.

Trust Account Tuesday: Teddy KGB on prompt notification & delivery.

This column has taken on a life of its own. After a few early meetings out of the office, I need to hurry back to meet with a lawyer who wants to go over his trust accounting system.  It’s not clear to me if we’re putting the trust account into our Tuesday or the Tuesday into his trust account.  Whatever it is, we’re doing it.

Speaking of “doing it,” here are two things that the trust account rules require lawyers to do promptly:

1. notify clients & third persons upon receiving funds in which they have interests; and,
2. deliver to clients & third persons funds to which they are entitled.

The relevant rule is 1.15(d).  In a moment, I’ll get to a few of the rule’s nuances.  I’ll dive deeper in a bonus post that will go up later today.

For now, remember the movie Rounders.  When someone is entitled to funds that are in your trust account, channel your inner Teddy KGB: pay them, pay them their money.

Prompt Notification

Upon receiving funds in which a client or third person has an interest, a lawyer must promptly notify the client or third person.  It’s rare that I’ve encountered a failure to comply with this rule.  Only two instances jump to mind:

• a lawyer represented a client in a hotly contested dispute over a will.  The lawyer resolved the matter and received over $300,000 from the estate’s attorney.  The lawyer did not notify the client, preying upon the fact that client had become estranged from the family and would never find out.  Eventually, client found out.  Lawyer was disbarred.  Of course, lawyer’s failure to notify the client paled in comparison to the theft.
• a lawyer represented a client who had been injured.  upon settling the claim, the lawyer received a check from an insurance company. despite having actual knowledge of a third-party medical provider’s lien, the lawyer failed to notify the medical provider and disbursed the funds to the client.

Anyhow, each instance spurred discussion as to whether Vermont should adopt a payee-notification rule.  We’ve not.  Rather, the onus remains on the lawyer, upon receiving funds, to notify clients & third persons who have interests therein.  Later today, I will post a blog that addresses the question “when does a third person have an interest in client funds?

Prompt Delivery

This is the Teddy KGB rule: pay people.  Here’s a flow chart:

• money comes in and is deposited into trust;
• lawyer notifies people who have interests in the money;
• as soon as it is clear that a client or third person is entitled to the money, lawyer disburses, keeping in mind, as we discussed last week, the duty to wait for a deposit to become “collected funds.”

Two thoughts here.

First, the duty is to deliver funds to which a client or third person entitled promptly. That is, there’s no luxury of delivering “whenever I can get around to doing my bookkeeping.”

Second, lawyers often forget that they themselves are third persons.  That is, lawyers seem to have little problem promptly paying clients, but then they leave their share of the money in trust.

That has a name: COMMINGLING.

The first post in the Trust Account Tuesday series was entitled Don’t Commingle.

Once someone is entitled to receive the money that you’re holding in trust, pay that person.

REMINDER

This post assumes that there is no dispute that a client or third person is entitled to the funds in trust.  Later today, I will post a blog that addresses a lawyer’s duties when there exists a dispute as to who is entitled to the funds that a lawyer is holding in trust.

Related Posts

• Don’t Commingle
• Trust Accounting; basic requirements
• (Generally) don’t disburse unless you have collected funds

 

 

 

 

 

Trust Account Tuesday: Don’t disburse absent “collected funds.”

I’m not sure what Tuesday has done to me to have me return the favor by assigning it trust accounts.  Alas, the die has been cast.

This is the third in an ongoing series on trust accounts.  To date:

1. Don’t commingle
2. Basic Requirements

Today’s thought:  as a general rule, don’t disburse absent “collected funds.”

Rule 1.15 imposes a duty to safeguard client funds.  There are various aspects to the duty, including two discussed in paragraph (f):

• (f)(1) – a lawyer shall not disburse funds held for a client or third person unless the funders are “collected funds.”
• (f)(2) – a lawyer shall not use, endanger, or encumber funds held in trust a client or third person to carry out the business of another client or person.

The rule defines “collected funds” as those “that a lawyer reasonably believes have been deposited, finally settled, and credited to the lawyer’s trust account.”

Rule 1.15(f)(1)

The PRB’s hearing panels have long interpreted Rule 1.15(f)(1) as requiring a lawyer to confirm that the funds have been credited to the account.  More specifically, as made clear in both PRB Decision 62 and PRB Decision 172, it is not sufficient to assume that a wire transaction went through as expected.  Further, PRB Decision 105 holds that it is not sufficient to assume that a check was collected at a closing, and subsequently deposited in trust, when, in fact, it was not.

Verify.   The failure to do so will result in a sanction.

Rule 1.15(f)(2)

Now, when a lawyer disburses against uncollected funds, one of two things usually follows: (1) the trust account check is presented against insufficient funds; or, (2) the trust account check is honored.  Often, this results in Client A’s money being used to carry out Client B’s business.

Consider:

• Lawyer has $5,000 in trust.  It belongs to Client A.
• Lawyer also represents Client B.
• Lawyer expects $3,000 to be wired on behalf of Client B.  Client B owes the money to Opposing Party.
• Without confirming that the wire arrived, Lawyer issues a trust account check to Opposing Party in the amount of $3,000.
• Opposing Party cashes the check.
• In fact, Client B never caused the wire to be sent to Lawyer.
• As such, $3,000 that belonged to Client A was used to carry out Client B’s business.

That is a violation of Rule 1.15(f)(2).

This rule has been strictly applied against lawyers.  For instance, in PRB Decision 129, funds for Client were deposited into Trust Account 1.  The lawyer also maintained a trust account at another bank, Trust Account 2.  On behalf of Client, the lawyer’s assistant mistakenly disbursed from Trust Account 2.  The result was that other clients’ funds were used to carry out Client’s business.  The lawyer was admonished.

Rule 1.15(g)

Earlier, I indicated that the “general rule” prohibits disbursements from trust absent collected funds.  That’s true.  It’s also true that there are exceptions to the “general rule.”

The exceptions appear in Rule 1.15(g).   They were added in response to VBA Advisory Opinion 2002-04.  The opinion addressed several questions.  Among others, it advised that advised that “trust account checks can only be drawn on client funds after the deposit upon which the check is drawn clears” and becomes “available.”

The opinion correctly stated the rule as it used to be written.  However, it raised concerns related to real estate closings, tort settlements, and other matters in which clients required immediate access to funds to which they were entitled.

The concerns resulted in the Court adopting “exceptions” to the general rule.  Now, Rule 1.15(g) authorizes lawyers to disburse in reliance upon the deposit of certain types of instruments.  For example:

1. instruments drawn on banks;
2. checks drawn on an IOLTA of a licensed Vermont lawyer or on the IORTA of a licensed Vermont real estate broker;
3. checks issued by the United States or the State of Vermont;
4. personal checks, not to exceed $1,000 in the aggregate per transaction; and,
5. checks drawn on or issued by insurance companies, title insurance companies, or title insurance agencies that are listed in Vermont.

Per the Reporter’s Note, the exceptions to the general rule 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 deposits may be made in reliance on such deposits . . ..”

If it turns out that one of these deposits fails and the lawyer has already disbursed against it, the lawyer must take steps to protect funds that remain in the account and that belong to other clients.  Per the Reporter’s Note, “presumably by either making or securing reimbursement to the trust account of the amount of the failed to deposit.”

Upshot

• General rule: don’t disburse absent collected funds.
• Verify that deposits have been made and that wires have arrived.
• be familiar with the exceptions to the general rule.

Trust Accounting: Basic Requirements

This is part 2 in an ongoing series on trust accounting.

In part 1, we learned not to commingle.  That is, the first principal of trust accounting is that lawyers must keep client funds held in connection with a representation separate from their own.  So, then, where to hold them?

Rule 1.15(a)(1) requires such funds to be kept as required by Rule 1.15A and Rule 1.15B.  Let’s look at the requirements in each, at times hopping back & forth between the two.

First, funds that belong to clients or third persons and that are in lawyer’s possession as a result of a lawyer-client representation must be held in an account that is clearly labeled as a “trust” account and that is at a financial institution.  Rule 1.15A(a).

Second, not just any old financial institution.  Rule 1.15B(a)(1) requires lawyers to “create and maintain a pooled interest-bearing trust account” at a financial institution that has been approved by the Professional Responsibility Board.  The list of approved financial institutions is on this page under the heading “Attorney Trust Accounts.”

Third, lawyers must set up an accounting system that, at a bare minimum, includes the features listed in Rule 1.15A(a)(1)-(4).

• The accounting system is important.  As this decision shows, the failure to have an accounting system will earn you a public reprimand.  Also, per Rule 1.15A(b), lawyers must submit to trust account compliance reviews.  Disciplinary Counsel regularly conducts such reviews, sometimes at random.  I’ve seen the reports.  The CPAs look for compliance with the “bare minimum” requirements.   Several compliance reviews have resulted in the imposition of discipline for failure to maintain an accounting system that includes the required minimum features.
• Without getting too lost in the weeds, the bare minimum features are:
  • a system that shows all receipts, disbursements from the trust account, including the source of receipts and nature of disbursements;
  • records that identify each client or third person for whom funds are held, the amount held, all receipts & disbursements for that client, and a running balance;
  • records documenting timely notice to each client or third person of receipts and disbursements; and,
  • records documenting “timely reconciliation” of the account or accounts, and a “single source” that identifies all accounts maintained.
• “Timely reconciliation” is “no less than monthly.”

Fourth, interest on these pooled interest-bearing trust accounts must not be made available to the lawyer or the client.  The lawyer must inform the financial institution that the interest is to be paid to the Vermont Bar Foundation.  Rule 1.15B(a)(1).  

• The interest will go to the client or third person ONLY if the funds are reasonably expected to earn net interest or dividends that will exceed the transaction costs and administrative costs.  This is exceedingly RARE.  As made clear by Rule 1.15B(a)(1), the default position is that funds go into a pooled interest-bearing trust account from which the interest is paid to the VBF.  By rule, “no lawyer may be disciplined for placing client funds in the pooled interest-bearing account if the lawyer made a good faith determination that the funds” were not reasonably expected to earn net interest or dividends for the client or third person.

Finally, by rule, the financial institution MUST notify disciplinary counsel whenever an instrument drawn on an attorney trust account is presented against insufficient funds, regardless of whether the instrument is honored.  In other words, it’s not just overdrafts that will be reported.

So, that concludes lesson 2.   To recap:

1. If you’re holding funds of a client or third person in connection with a representation, keep them separate from your own.
2. Deposit the funds in a trust account at an approved institution.
3. Implement an accounting system that, basically, tracks how much you have in total, how much you have for each individual client, where money came from, where money went.
4. Make sure the interest goes to the Vermont Bar Foundation.

 

 

 

Trust Account Tuesday: Don’t Commingle

For a while now, I’ve meant to revise the Professional Responsibility Board’s guide to managing trust accounts.  We created it in 2010 and revised it in 2014.  (Thank you Beth DeBernardi!)

Over the past 5 years, some of the trust accounting rules have changed and new, more sophisticated scams have targeted lawyer trust accounts.  So, it’s time for another revision.

It’ll take me a while.  To keep me on track, and to break the project into manageable stages, I’m starting a new feature on Ethical Grounds: Trust Account Tuesday.  I will do my best to post a new “trust account” blog every Tuesday.  Then, in a few months, I’ll cobble the posts and turn a digested version into a revised revision of the guide to managing trust accounts.

Before today’s lesson, let’s start with a few reminders.

Important:  don’t fear trust accounting.  As I blogged here, we avoid things we fear.  Avoiding trust account management is not a good idea.

In a nutshell, whenever you are in possession of funds in connection with a representation:

1. funds that are not yours belong in a trust account;
2. funds that are yours do not belong in a trust account;
3. keep a system that continuously tracks how much money you are holding in trust and to whom each dollar belongs;
4. promptly disburse funds to which someone (including you) is entitled;
5. reconcile no less than monthly.

The trust accounting rules:

• Rule 1.15 – Safekeeping Property
• Rule 1.15A – Trust Accounting System
• Rule 1.15B – Pooled Interest-Bearing Trust Accounts
• Rule 1.5 – Fees

I’m going to go in order.  Today’s topic: safekeeping property and the prohibition against commingling.

A key tenet of trust accounting is to tkeep your money separate from funds held in connection with a representation.  So key that it’s expressed in the first sentence of the first paragraph of the rule on safekeeping property.  That sentence:

• “A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property.”

When you deposit money that belongs to you or your firm into trust, it is no longer “separate” from funds held for clients or third persons.

There is one exception.  Rule 1.5(b) permits a lawyer “to deposit the lawyer’s own funds in an account in which client funds are held for the sole purpose of paying service charges or fees on that account, but only in an amount necessary for that purpose.”

The Court and hearing panels of the PRP have had opportunity to address both the commingling rule and the sole exception.

In 2008, the Vermont Supreme Court reprimanded a lawyer who violated the rule.  The opinion is important.  It’s important because no harm resulted from the commingling and there were several factors that mitigated against imposing a serious sanction against the lawyer.  Indeed, at the trial level, a hearing panel admonished the lawyer.  By rule, “admonitions” do not identify an attorney.

By the same rule, however, admonitions are only appropriate in cases of “minor misconduct.”  On appeal, the Court clearly announced that commingling is not minor misconduct.  Rather, and with citations omitted,

• “As we have explained in the past, ‘protecting client property is a fundamental principle.’ Commingling personal property with client property is a serious offense because of the likely negative consequences that may result to an attorney’s clients. As another court explained:  ’The rule against commingling has three principal objectives:  to preserve the identity of client funds, to eliminate the risk that client funds might be taken by the attorney’s creditors, and most importantly, to prevent lawyers from misusing/misappropriating client funds, whether intentionally or inadvertently.’ ”

Thus, the Court upped the sanction to a public reprimand.

(Full disclosure, at least 6 times since, hearing panels have “only” admonished lawyers who commingled funds: PRB Decision 138, PRB Decision 163, PRB Decision 168, PRB Decision 170, PRB Decision 180, PRB Decision 181.  Nevertheless, I think a strong argument remains that commingling is so serious as to warrant, at a minimum, a public reprimand.)

Don’t put your own money into trust. Pay yourself from trust once money there has been earned.

Now, turning to the exception, it wasn’t until 2009 that we promulgated Rule 1.15(b) and authorized lawyers to keep their own funds in trust.  The critical thing to remember is that the amount can’t be willy nilly.  That is, a lawyer can’t toss $1,000 or $5000 into trust and justify it as “covering costs.”  No, no, no.

Rather, as the rule makes clear, the deposit must “only be in an amount necessary” to pay service charges or fees on the account.  In fact, when the rule was amended, we specifically rejected language that would authorize up to a specific dollar amount.

Why?

Because, as I’ve mentioned at every CLE at which I’ve addressed this, some trust accounts incur more charges and fees than others.  A firm’s $500 might be reasonable in an active account, but unreasonable in an account to which service charges & fees are never assessed.

Multiple lawyers have been admonished for depositing into trust more of their own money than was necessary to cover service charges and bank fees.  See, PRB Decision 163, PRB Decision 168.

In conclusion, when holding funds in connection with a representation the funds should only be in trust if they do not belong to you.  The only exception: you may deposit your funds into trust but only in an amount necessary to pay service charges or bank fees.

Trust Accounts & ACH Transfers

So far this month, two different banks have called me to ask whether a bank us has a duty to notify us that a lawyer authorized an ACH transaction to a trust account.

The answer is “no.”  But, the fact that banks are asking whether they have a duty to provide information about a customer should tell you something about ACH transactions.

This is not my first post on trust accounts and ACH transfers.  Nor is this blog the only resource on the topic.  To wit:

• last June, I posted ACH Transfers & Trust Accounts;
• the VBA’s Professional Responsibility Committee addressed ACH transfers in Advisory Opinion 2017-1; and,
• the North Carolina State Bar addressed ACH transfers in this advisory opinion.

In that it’s Thursday, I have no problem taking the easy way out and simply pasting in something I wrote before.  #TBT !  Therefore, as a refresher, here’s an excerpt from my previous post:

****

What’s an ACH transfer?  Good question.

This is an oversimplification:  an ACH transfer is an electronic transfer of funds that is processed by the Automated Clearing House.  An ACH transfer differs from a wire transfer in several respects.  Among them: funds sent via ACH transfer are not necessarily immediately available, and, ACH transfers can be reversed.  Here are some explanations of ACH transfers and how they differ from wire transfers:

• Know Your Bank: ACH vs. Wire Transfer
• Deposit Accounts: Difference Between Wire Transfer and ACH
• The Balance: Key Differences between ACH and Wire Transfers

The Vermont Bar Association’s Professional Responsibility Committee recently issued advisory opinion 2017-1. Per the opinion,

1. It is not a violation of the Rules of Professional Conduct to accept ACH transfers into a trust account.
2. An attorney should take steps to protect against ACH reversals.
3. If a reversal occurs, an attorney must act to protect client funds held in trust.

The North Carolina State Bar has also issued an advisory opinion on ACH transfers. It’s here.  The upshot: (1) an attorney may disburse immediately against funds credited to a trust account via ACH transfer; and, (2) if an ACH transfer is reversed, an attorney does not violate the rules as long as the attorney takes immediate action to protect other funds that in trust.

The NC opinion points out that ACH reversals are rare.  That’s a good thing.  However, I’m aware of two Vermont attorneys who had to deal with reversals.  It is not fun to wake up, look at your trust account statement, and see a reversal.  Simply, a reversal means that someone other than you or your firm caused money to leave your trust account.  And, often, the money that initially came in has been disbursed.  So, when the reversal occurs, the money leaving is money that belongs to a client other than the client for whom the funds were initially deposited.

As the Vermont opinion advises, take steps to protect your trust account. To quote the opinion:

• “Some banks now offer protection against ACH reversals, with names like ACH Debit Block or ACH Positive Pay. Some possible actions for an attorney to take
  to protect against ACH reversals are to ask the attorney’s bank to block reversals of ACH deposits, to set up a separate IOLTA account for ACH transfers, to set up a subsidiary account for a particular client that can only receive funds, and to give the attorney’s bank a list of entities that are authorized to withdraw from the IOLTA account.”

Check with your bank.  And, as I mentioned yesterday at the CCBA meeting, if your bank agrees to block reversals, still continue to keep an eye on your trust account! Last summer, a lawyer informed me that she’d had an ACH reversal, so she put a “block” on the trust account.  Somehow, the bank removed the block and another reversal happened.

As always, be careful out there.

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The 6th C: Commingling

A few weeks ago, I blogged about the 5 Cs of ethics:

• Competence
• Communication
• Confidentiality
• Conflicts
• Candor

It’s difficult to remember all of the rules and their nuances.  Keeping the 5 Cs in mind is easier and goes a long way towards the ultimate C:  compliance.

Still, some might argue that the 5 Cs don’t address trust accounting.  To me, the duty of competence includes acting competently to account for and safeguard client funds. Still, it’s true that not one of the 5 C’s specifically addresses trust account management.

Hence, the 6th C:  Commingling.

I understand that most of us aren’t accountants or trained in bookkeeping.  Still, we’re fiduciaries who, by virtue of our law licenses, hold money that does not belong to us.  With the privilege comes responsibilities, most of which are set out in Rules 1.15 and 1.15A.

Again, I’m aware that many lawyers find the rules complicated.  As I’ve previously blogged, don’t overcomplicate them.  In a way, trust accounting boils down to a few key concepts.

1. Money held for or on behalf of a client must be in trust.
2. Money that is yours must not be in trust.
3. Deliver funds that are due a client.
4. At all times, know how much money is in your trust account and to whom it belongs.

In my experience, lawyers are very good at numbers 1, 3 and 4.  However, #2 seems to pose problems.  That’s right: lawyers aren’t the best at paying themselves.

It’s not a problem borne of evil intent.  More often than not it’s a lawyer who no matter how diligent about paying clients and third parties treats paying herself as something that she’ll get to when she gets to, even if well beyond that month’s reconcilation.

While not one of evil intent, it’s still a problem.  There’s a word for leaving money that you’ve earned in trust: commingling.  The 6th C.

Commingling is prohibited by Rule 1.15(a).  The notion that it’s misconduct isn’t new.  Indeed, today’s rules can be traced back to David Hofffman’s Fifty Resolutons in Regard to Professional Deportment.  He published them in 1836.  Check out #26:

• “26.    I will on no occasion blend with my own my client’s money. If kept distinctly as his it will be less liable to be considered as my own.”

That’s commingling.

Not only is commingling misconduct, it’s serious.  In 2008, the Vermont Supreme Court reprimanded a lawyer who, without an iota of ill intent or selfish motive, commingled funds.  Echoing Hoffman’s Resolution 26, the Court stated:

• “Commingling personal property with client property is a serious offense because of the likely negative consequences that may result to an attorney’s clients. As another court explained: ‘The rule against commingling has three principal objectives: to preserve the identityof client funds, to eliminate the risk that client funds might be taken by the attorney’s creditors, and most importantly, to prevent lawyers from misusing/misappropriating client funds, whether intentionally or inadvertently.’ ” (citation omitted).

The Court added:

• “In addition to the potential pecuniary harm to respondent’s clients, ‘lawyer misconduct in handling and protecting client trust accounts does injure both the public at large and the profession by increasing public suspicion and distrust of lawyers. ‘ ” (citation omitted).

I can hear you now: “but Mike, how was I supposed to know it was a violation not to pay myself right away?”

1. Now you know.
2. Those who don’t, won’t be excused.

As the Court noted:

• “Furthermore, while recognizing that respondent did not act selfishly, we will not
  minimize his infraction merely because he was unaware that his acts violated the rules of professional conduct. ‘If a failure to understand the most central Rules of Professional Conduct could be an acceptable defense for a charged violation, even in cases of good faith mistake, the public’s confidence in the bar, and more importantly, the public’s protection against lawyer overreaching would diminish considerably.’ The prohibition against lawyers commingling private monies with client funds is a fundamental precept. ‘[M]istake about the applicability of an ethical rule cannot excuse or even mitigate misconduct when the lawyer has violated a rule fundamental to governance of the legal profession.'” (citations omitted).

There’s one exception to the rule that prohibits commingling. It’s in Rule 1.15(b):

• “A lawyer may deposit the lawyer’s own funds [into trust] for the sole purpose of paying service charges or fees on that account, but only in an amount reasonably necessary for that purpose.”

Don’t guess.  Figure out what the normal charges and fees are or are likely to be and deposit that amount.  Randomly tossing in $500 or $1000 could lead to discipline.

Commingling is serious.  That’s why I’m assigning it the 6th C.  Too many Cs? Ok.  Your money is an apple.  Client money is an orange.  Apples and oranges don’t belong in the same bin.

Don’t commingle.

 

 

 

 

 

 

Learn to identify trust account scams

(Updated on January 23)

The annual Vermont Bar Association YLD Thaw Bowl was last Friday.  Here’s a question that I used:

During a segment of a CLE, I shared my thoughts on two things:

1. last-minute changes to wire instructions; and,
2. a prospective out-of-state client who claims to be owed a debt by a Vermonter, and who only communicates with you by e-mail

What general topic was I discussing during that segment of the CLE?

It struck me that many were unfamiliar with the answer:  trust account scams.

A lawyer has a duty to safeguard client property & funds.  To me, the duty includes employing reasonable safeguards against trust account scams.  Is falling for a scam an ethics violation? Not necessarily, but it might be.

I’ll share two scenarios.

Scenario 1

Imagine this: you have a personal checking account at a local bank.  The bank notifies you that your money is gone.  You are shocked.  You learn that someone contacted the bank and directed the funds in your account to be wired to a different account.  Your initial reaction might be “and you didn’t check with me to confirm!?!?”

That’s the “last-minute changes to wiring instructions” scenario.  Now, flip the scenario: the missing money is a client’s that you were holding.

Here are my posts on the topic:

• 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

Granted, the scammers are sophisticated.  Often, the change in wiring instructions will appear to have come from the client or opposing counsel.

I can’t stress enough that you can’t be too safe.  The 30 seconds you take to call to confirm might be well worth it. When you do, initiate the call to a number that you already have on file.  Don’t call a new number that appears in the change to the wiring instructions.  Don’t make the change based on a call to you.

Or, consider moving to client portals.  To learn more about them, please read Nicole Black’s post at MyCase.

If you think I’m being too cautious, please read this.  It’s a post in the ABA Journal about an associate who was scammed into authorizing a $2.5 million disbursement from trust by a last-minute change to wiring instructions.  A court order in the ensuing insurance claim is here.

And it’s not just me who is urging caution.  Andy Mikell is State Manger & Title Counsel for Vermont Attorneys Title Corporation.  I sent him the story of the $2.5 million scam.  Here’s part of his response:

• “An even newer approach involves the bad guys intercepting communications and then sending FAKE payoff letters to the Closing Attorney so that when seller’s mortgage is paid from the closing, the payoff money goes immediately to the wrong place.  Poof!

  So, in addition to telling folks to ‘trust no email’, I’m instructing our members to essentially “trust no payoff letter” either. It’s nasty out there but the scheme you forwarded should be preventable. Also, yes, we are telling folks to pay serious attention to their PLI policies. More offices are getting social engineering policies which are designed to insure against the wire scam.”

Andy also sent this article, one that goes into more detail on fraudulent mortgage payoff letters.

Scenario 2

The second scenario involves a scam that has been around even longer.  There are many twists, but a few core ingredients:

• a prospective client contacts you electronically;
• the prospective client claims to be owed money by someone who is in Vermont;
• the prospective client wants to hire you to collect the debt;
• the prospective client never meets with you or contacts you by telephone.

It’s happened numerous times in Vermont.  Usually the prospective client claims to have sold a product to a Vermonter. I’m also familiar with a version in which the prospective client claimed to be a Vermont Guard member who had been deployed out of the country, and whose ex-spouse had failed to pay the appropriate share of the proceeds of the sale of the marital home following a divorce.  The prospective client asked the lawyer to enforce the terms of the divorce order.

No matter the variation, the scammers are good.  They’ll send you what appear to be legit court orders, contracts & bills of sale.  They will have created fake websites, both for themselves and the debtors.  So, when you do some cursory research, it will look as if the debtor actually exists and is located in Vermont.  Not only that, when you contact the debtor, someone will respond and acknowledge the debt.

Here’s where the rubber meets the road.

Shortly after making contact with the debtor, FedEx or UPS will deliver a check to your office.  You will deposit the check into trust, then wire the “client’s” share.  Weeks, if not months later, your bank will inform you that the check from the debtor was a fraudulent check.  Quite likely, money that belonged to other clients – who are real – will no longer in your trust account.

Magically, the long outstanding debt resolved as soon as you got involved.  If it sounds too good to be true, it probably is.

As I argued in this post, it strikes me that this scam is so well-known that falling for it violates the duty to take reasonable safeguards to protect client funds.

Taking the time to learn to identify trust account scams is worth it.

 

Monday Morning Answers #122

Welcome to Monday!  Beautiful start to the week.  I have a feeling we’ll be wishing for weather like this a week from now.

Friday’s questions are here.  The answers follow today’s Honor Roll.

Honor Roll

links if available

• Karen Allen, Esq.
• Matthew Anderson, Pratt Vreeland Kennelly & White
• Penny Benelli, Dakin & Benelli
• Rich Cassidy, Esq.
• Andrew Delaney, Martin & Associates
• Robert Grundstein, Esq.
• Anthony Iarrapino, Wilschek & Iarrapino
• Keith Kasper, McCormick, Fitzpatrick, Kasper & Burchard
• Kevin Lumpkin, Sheehey Furlong & Behm
• Johsua Martin, Green Mountain Legal
• Lon McClintock, McClintock Law Offices
• Jeff Messina, Bergeron Paradis Fitzpatrick
• Hal Miller, First American
• Herb Ogden, Esq.
• Jim Runcie, Ouimette & Runcie
• Jay Spitzen, Esq.
• Robyn Sweet, CORE Registered Paralegal, Cleary Shahi  & Aicher

Answers

Question 1

Per a particular rule, Lawyer takes direction from Lawyer’s client, acting through client’s duly authorized constituents.

Thus, which is most accurate? Lawyer represents:

• A.   The defendant in a criminal case
• B.   A juvenile defendant in a criminal case
• C.   An estate
• D.   An organization.

The rule is V.R.Pr.C. 1.13

Question 2

When it comes to lawyer advertising, which is most accurate in Vermont?

• A.   a lawyer may not advertise prior results.
• B.   a truthful report of prior results is not a violation of the rules.
• C.   a truthful report of prior results might violate the rules if it presented so as to lead a reasonable person to form an unjustified expectation that the similar results could be obtained in a different matter.
• D.   citing the First Amendment, the PRB has recommended that the Court repeal the advertising rules

Rule 7.1, See, Comment [3]

Question 3

This morning, Lawyer and Client agreed to a nonrefundable flat fee.  Client advanced the fee to Lawyer.  Lawyer has yet to do any work for Client.

What additional information do you need in order to determine which account – trust or operating – Lawyer must deposit the fee?

• A.   the amount of the fee.
• B.   the type of case.
• C.   whether the agreement was (or soon will be) confirmed in a writing that describes the scope of the services that Client will receive.
• D.  All of the above.

Judging from the responses, maybe I didn’t phrase this one too well.  However, whether a fee is reasonable has no bearing on where it’s deposited upon receipt. Indeed, generally, a challenge to a fee, whether by disciplinary complaint or fee complaint to the Bar Association, is raised well after the lawyer has taken possession of the fee.

The question asked what information do you need to know to determine where a fee must be deposited upon receipt.  The answer is that you need to know who the fee belongs too.  And, as last week’s blog post made clear, a fee for work that has not yet been done must go into trust, unless the lawyer & client have entered into an agreement for a nonrefundable fee that is deemed earned upon receipt.  Such a fee cannot go into trust.  The amount of fee and type of case are irrelevant to the question of the account into which the fee must be deposited.

Question 4

Attorney called me with an inquiry. I listened, then I asked, “will the harm be to the actor or to someone else?”  What specific issue did Attorney call to discuss?

• A.  Disclosing confidential information related to the representation of a client.
• B.  Reporting another lawyer’s misconduct.
• C.  Reporting a judge’s misconduct.
• D.  Whether to allow a client to testify in a criminal case.

This is the difference between Rule 1.6(b)(1) and Rule 1.6(c)(1).  A lawyer MUST disclose otherwise confidential information to prevent a client or other person from committing a criminal act that the lawyer reasonably believes will result in the death of or substantial bodily harm to a person other than the person committing the act.  By contrast, if the harm will be to the person committing the act, disclosure is permissive, not mandatory.

Question 5

The Lawyer and Uncle Jack are characters in a television show.  It is the longest running  live-action sitcom in American television history.

Both The Lawyer and Uncle Jack have ethical issues. Uncle Jack is flat out incompetent.  So, his nephew, Charlie, often pretends to be lawyer, assuming he can do better than his uncle.  When pretending to be a Lawyer, Charlie specializes in bird law. He and The Gang spend much of their time at Paddy’s Pub.

In one episode, Charlie & The Gang went to The Lawyer for help getting patents for things they’d invented. The Lawyer tricked them into signing a contract that gave him all of their profits and included a restraining order against them.  To try to get out of the contract, Mac ate it.   The Lawyer, however, had made 100s of extra copies.

That same season, Charlie challenged The Lawyer to a duel.  The Lawyer accepted.

Lawyer spends much of his time representing the estate of Dennis & Sweet Dee’s grandmother.  However, and speaking of bird-law, The Lawyer’s eye was gouged out at a recent trial.  Gouged out by a bird that escaped from under his client’s father’s hat.

Name the tv show.

It’s Always Sunny in Philadelphia

 

ACH Transfers & Trust Accounts

At some of my CLE presentations, I use a category called  “Conflicts, Trust Accounts, Neither.”  It’s self-explanatory: I show a slide with a word or phrase, contestants have to identify whether the phrase relates to conflicts, trust accounts or neither.  Here are a few:

• Lateral Transfers
• Coutinho Transfers
• ACH Transfers

Take a moment.

Ok.  Here we go:

• Lateral Transfers – Conflicts
• Coutinho Transfers – Neither
• ACH Transfers – Trust Accounts

I’ve written on the issues related to a lawyer’s lateral transfer from one firm to another.

Last summer, Sports Illustrated wrote about Coutinho’s transfer from Liverpool to Barca.

Which brings us to ACH transfers.

What’s an ACH transfer?  Good question.

This is an oversimplification:  an ACH transfer is an electronic transfer of funds that is processed by the Automated Clearing House.  An ACH transfer differs from a wire transfer in several respects.  Among them: funds sent via ACH transfer are not necessarily immediately available, and, ACH transfers can be reversed.  Here are some explanations of ACH transfers and how they differ from wire transfers:

• Know Your Bank: ACH vs. Wire Transfer
• Deposit Accounts: Difference Between Wire Transfer and ACH
• The Balance: Key Differences between ACH and Wire Transfers

The Vermont Bar Association’s Professional Responsibility Committee recently issued advisory opinion 2017-1. Per the opinion,

1. It is not a violation of the Rules of Professional Conduct to accept ACH transfers into a trust account.
2. An attorney should take steps to protect against ACH reversals.
3. If a reversal occurs, an attorney must act to protect client funds held in trust.

The North Carolina State Bar has also issued an advisory opinion on ACH transfers. It’s here.  The upshot: (1) an attorney may disburse immediately against funds credited to a trust account via ACH transfer; and, (2) if an ACH transfer is reversed, an attorney does not violate the rules as long as the attorney takes immediate action to protect other funds that in trust.

The NC opinion points out that ACH reversals are rare.  That’s a good thing.  However, I’m aware of two Vermont attorneys who had to deal with reversals.  It is not fun to wake up, look at your trust account statement, and see a reversal.  Simply, a reversal means that someone other than you or your firm caused money to leave your trust account.  And, often, the money that initially came in has been disbursed.  So, when the reversal occurs, the money leaving is money that belongs to a client other than the client for whom the funds were initially deposited.

As the Vermont opinion advises, take steps to protect your trust account. To quote the opinion:

• “Some banks now offer protection against ACH reversals, with names like ACH Debit Block or ACH Positive Pay. Some possible actions for an attorney to take
  to protect against ACH reversals are to ask the attorney’s bank to block reversals of ACH deposits, to set up a separate IOLTA account for ACH transfers, to set up a subsidiary account for a particular client that can only receive funds, and to give the attorney’s bank a list of entities that are authorized to withdraw from the IOLTA account.”

Check with your bank.  And, as I mentioned yesterday at the CCBA meeting, if your bank agrees to block reversals, still continue to keep an eye on your trust account! Last summer, a lawyer informed me that she’d had an ACH reversal, so she put a “block” on the trust account.  Somehow, the bank removed the block and another reversal happened.

As always, be careful out there.