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.

With trust accounts, verify.

Late last month, three New York lawyers’ licenses were suspended for 6-months due to their failure to supervise a “dedicated and trusted employee” who embezzled more than $200,000 from their firm’s client trust account.  The decisions are here, here, and here.  The ABA Journal and Legal Profession Blog covered the story.

It wouldn’t surprise me if this hits a bit too close to home for several lawyers and firms.

Per Vermont’s Rules of Professional Conduct, a lawyer shall:

• safeguard client funds;
• reconcile trust accounts no less than monthly; and,
• put into place reasonable measures to ensure that nonlawyer employees act in a manner consistent with the lawyer’s obligations under the rules; and,
• bear responsibility for a nonlawyer employee’s conduct if the lawyer fails to adequately supervise.

In short, the rules do not prohibit a lawyer from delegating bookkeeping and accounting duties to a nonlawyer.  However, responsibility for the consequences of the nonlawyer’s conduct is non-delegable.

I urge review of the New York decisions.  One of the lawyer’s made interesting statements.  Per the ABA Journal:

“Karol told the ABA Journal that the partners immediately notified ethics regulators, immediately investigated and immediately took corrective action. ‘We did everything right, except initially we didn’t supervise,’ he says. ‘We’re good lawyers and lousy businessmen.

“Karol says he thinks ethics authorities understood that he and his partners were good people. ‘As the decision indicated, I have 33 years of unblemished record,’ Karol says.

“Other lawyers should know ‘it’s a bright line test,’ he says. If someone else touches your escrow account, ‘you’ll get slammed; you’ll get spanked.’

“‘The cautionary tale is you can’t rely on people; you have to double-check yourself,’ he says.”

What jumps out to me is how readily apparent the embezzlement would’ve been had the lawyers simply looked.  From the opinions:

• “While the respondent and his partners claim there were no early warning signs of the financial improprieties occurring in the escrow account, the record reveals otherwise. Indeed, the respondent testified that once they went online and looked at their accounts, they saw that, over a 3½ year period, [the employee] was transferring client funds between the Firm’s escrow, operating, and payroll accounts. Although the respondent and his partners were unaware that online access had been instituted for the Firm’s bank accounts, these questionable transfers were also listed on the monthly bank statements received by the Firm. It is also noted that online transfers were clearly designated as such on the bank statements. We find that had the Firm’s partners provided proper oversight, including a review of the Firm’s escrow account bank statements, the questionable transfers between the Firm’s escrow, operating, and payroll accounts, including those transfers which were made using online access, should have served
  as an early warning to the respondent and his partners to undertake greater scrutiny of the escrow account transactions. The failure to detect these early warning signs is directly attributable to the respondent’s and his partners’ failure to provide proper oversight of the escrow account.”

The suspension orders also drive home a point I tried to make in an earlier post on trust accounting: improper handling of client funds will result in a serious and significant sanction even if the face of substantial mitigating factors.  The responsibility to safeguard clients funds is an enormous one.

25 years ago, I never could’ve imagined a world in which I’d be writing about legal ethics and lawyer trust accounts.  Even if I had, I can guarantee the vision wouldn’t have included thoughts of Ronald Reagan and Ice Cube.  Yet, here I am.

When it comes to trust accounting, trust, but verify.  And, as the New York lawyer suggested, double-check yourself, before you wreck yourself.

Trust Account Tuesday: Misappropriation

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

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

You know what’s as bad?

“Borrowing.”

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

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

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

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

The opinion is here.

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

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

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

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

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

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

Trust Account Tuesday: Nonrefundable fees.

This post aims to provide guidance on how to handle fees paid in advance.  It requires some background.

1. Advisory Opinion 2005-04

In 2005, the Vermont Bar Association’s Professional Responsibility Committee issued advisory opinion 2005-04. The Committee concluded:

• an attorney may charge a flat fee or a minimum fee, so long as the basis for the fee is understood by the client and the fee is reasonable.
• an advance payment remains the property of the client until earned and must be deposited in the attorney’s trust account.
• if, however, the client knowingly agrees that the fee is “earned upon receipt,” the fee is the lawyer’s property and, as such, must not be deposited into trust.
• otherwise, the lawyer must draw upon the fee as work is done, or, wait until the matter ends to take the fee out of trust.
• regardless of how labeled, a fee must be refunded if not reasonable.

My memory isn’t perfect.  However, I don’t remember receiving a single complaint between 2005 and 2009 that challenged the reasonableness of a flat fee, minimum fee, or fee labeled “earned upon receipt.”

2. The 2009 Amendment to Rule 1.15

Rule 1.15 is entitled “Safekeeping Property.”  In 2009, subsection (c) was added.  It reads:

• “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.” (emphasis added).

The Reporter’s Note cautioned lawyers to:

• “[n]ote that new Rule 1.15(c) requires deposit in a lawyer’s trust account of any fees . . . paid in advance, no matter how designated, if the funds are to be applied as compensation for services subsequently rendered.”

As amended, the rule sets out a different standard than the advisory opinion.  Whereas the advisory opinion concluded that a lawyer and client may agree that a fee becomes the lawyer’s upon receipt, the rule clarifies that, no matter how designated, a fee paid in advance must remain in trust until earned.

3. When is a fee earned?

Over the next several years, questions arose as to when a fee is earned.  For instance, consider this oversimplification:

• Client is charged with DUI
• Lawyer & Client agree to a $1500 flat fee that is “earned upon receipt.”

For several years, advisory opinion 2005-04 had authorized such an arrangement and allowed Lawyer to treat the $1500 as Lawyer’s own upon receipt. Thus, to avoid commingling, Lawyer did not deposit the fee in trust.

Rule 1.5(c) changed practice.  The fee, no matter how designated, was for work that Lawyer had yet to perform.  To comply with the rule, then, Lawyer had to deposit the $1500 in trust, where it was required to remain until earned.

When did Lawyer earn it?

After arraignment? If so, all of it or only part of it?  After the civil suspension hearing? After the matter resolved?

I received many inquiries on these exact questions.

4. Rule 1.5 is amended to allow nonrefundable fees that are the lawyer’s own upon receipt.

In 2015, the Professional Responsibility Board studied the different approaches taken in other states. In the end, the Board recommended that the Court adopt a rule like Maine’s.  The Court agreed.  Rules 1.5(f) & (g) took effect in May 2016.

As amended, the rules allow a lawyer & client to agree to a nonrefundable fee that is earned before the lawyer provides any legal services.  The fee must be reasonable and, no matter how designated, is subject to review for reasonableness and will be refunded if not.

So, where do such fees go?

Per Rules 1.5(f) & (g), if the lawyer confirms in writing:

• that the fee is nonrefundable; and,
• the scope of availability & services that the client will receive in exchange,

then the fee is the lawyer’s upon receipt and must not be deposited in trust.

Absent strict compliance with Rule 1.5(f), an advance fee remains the client’s until earned by the lawyer and, therefore, must be deposited into trust.

 

 

 

 

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.