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

Earlier today, I highlighted the basics of the trust accounting rules.  Now, part 2: an overview of the tools that the Professional Responsibility Program (PRP) uses to investigate and enforce compliance.

Compliance Reviews

Speaking of compliance, it’s apropos to begin with the most proactive of the enforcement tools: the compliance review.  By rule, lawyers and law firms must submit to a “compliance review of financial records, including trust and fiduciary accounts, by the Professional Responsibility Program’s Disciplinary Counsel.”

Disciplinary Counsel might request a compliance review in response to information gleaned while investigating a disciplinary complaint or an insufficient funds notice. In addition, a compliance review can be ordered even in the absence of indicia of a problem with the trust account.  Moreover, contrary to a popular colloquialism that’s existed ever since I started in the PRP in 1998, nothing in the rule requires a compliance review to be “random.”  Indeed, about 15 years ago, I was disciplinary counsel.  Following a series of high-profile defalcations by real estate lawyers who worked alone or in very small firms, I selected real estate lawyers who worked alone or in very small firms for all the compliance reviews that we could afford within that year’s budget.

Disciplinary Counsel and the Board have agreements with accounting firms throughout the state, each of which is experienced in examining a lawyer or law firm’s compliance with the record-keeping rules. As with any other investigation, depending on the results of the compliance review, Disciplinary Counsel can charge the lawyer with violating the rules, refer the lawyer for the non-disciplinary resolution of the trust accounting problems, or close the file without further action.

Compliance Surveys

Beginning around 2006 and continuing through 2015 or 2016, the PRP mailed compliance surveys to 100 lawyers selected at random from the bar directory.  We stopped for staffing reasons. It’s something I might re-employ once the Bar Assistance Program is up and running.

Responses that raised “red flags” were assigned docket numbers and either referred for an audit, referred for non-disciplinary resolution, or referred to Disciplinary Counsel for an investigation.  In addition, and per the recommendation of a CPA, we randomly selected 10 responses that did not otherwise raise “red flags” for audits. One resulted in the disbarment of a lawyer who, on the eve of an audit, contacted me to let me know that the audit would reveal misappropriation. The lawyer’s dishonesty on the compliance survey compounded the lawyer’s problems.

Insufficient Funds Notices

Many of you might be thinking “wait Mike, don’t you mean ‘overdraft notices?’”  I don’t.  “Overdraft notice” is a misnomer.

As I mentioned in part 1, trust accounts must be maintained at a financial institution that has been approved by the Professional Responsibility Board. Approval is conditioned upon the institution agreeing to notify Disciplinary Counsel whenever an instrument drawn on an attorney trust account is presented against insufficient funds.  Notification is required “irrespective of whether or not the instrument is honored.”  That’s why “overdraft notice” is a misnomer.  Stated differently, if it isn’t going to notify Disciplinary Counsel as well, it’s not cool for your bank to contact you to warn you that a trust account check has been presented against insufficient funds.

Years ago, the Board decided to treat insufficient funds notices differently than other disciplinary complaints.  When a disciplinary complaint is filed, it is screened by Bar Counsel.  If the complaint is referred to Disciplinary Counsel for an investigation, the lawyer has 20 days to file a written response.  By contrast, and per Board policy, ISF notices are not “screened.”  They go straight to Disciplinary Counsel and the lawyer has 5 days to explain what happened.

While some do, not every ISF notice results in a disciplinary prosecution. Those that involve relatively minor bookkeeping issues are resolved by Disciplinary Counsel or referred for non-disciplinary resolution by an assistance panel, and still others are closed without further action.

How could an ISF notice be closed without further action?  Isn’t an ISF notice proof of a violation?

Excellent questions.

Indeed, disbursing without the funds to do so is a serious problem.  However, there are a few answers.

One is referenced in Don’t Disburse without Collected Funds.  The rules authorize lawyers to disburse against the deposit of certain “trusted” instruments.  At times, even those instruments fail, with the result being that the trust account check issued in reliance thereon fails too. If the disbursement was against an approved instrument, the subsequent presentation against insufficient funds is not a violation.

Another example is bank error. Yes, sometimes banks make mistakes.

Finally, intervention by the Professional Responsibility Program isn’t always required in response to an isolated instance in which a lawyer mistakenly disburses from the wrong trust account.  Real estate lawyers, for example, often have trust accounts at multiple banks.  Sometimes they mistakenly use the Bank A checks to disburse in connection with a closing conducted through the trust account that’s maintained at Bank B. Caveat: fool us once, shame on you.  Fool us twice with the ole “I used the wrong checkbook!” shame on us.

In my opinion, ISF notices are important in that they draw scrutiny to lawyers with shoddy bookkeeping practices. This is especially true when we receive multiple notices about the same account, lawyer, or law firm.  And, it’s critical that we scrutinze shoddy bookkeeping practices because they put client funds at risk. However, I don’t think ISF notices help to prevent or detect misappropriation.

For one, as I blogged in Don’t Borrow, borrowing from the trust fund has another name: misappropriation.  Lawyers who misappropriate, while not smart, tend to be smart enough not to borrow too much. Effectively, they wager that certain clients won’t ask for their money back anytime soon. As you might guess, wagering with client funds is frowned upon.

Further, I prosecuted three major defalcations in the mid-00’s.  In each, hundreds of thousands of dollars were taken without causing a single overdraft. One lawyer had intentionally NOT informed the bank that the account was an IOLTA.  Thus, while the account was often overdrawn, we never found out.  Another made sure not to “borrow” beyond the “float” the lawyer had deposited into the trust account.  A “float” is the lawyer’s own funds, deposited to ensure that the account is never overdrawn.  Finally, a third attorney settled a matter, didn’t tell the client, and took the money. (Vermont’s rules do not require payee notification.)

Still, absent bank error or an isolated mistake, an ISF notice is a sign that something is seriously amiss. The lawyer’s explanation might provide grounds for a disciplinary prosecution.  Or, before deciding whether to file formal disciplinary charges, Disciplinary Counsel might order a compliance review or request our next tool, a court-ordered audit.

Audits

By rule, the “Supreme Court may at any time order an audit of financial records, including trust and fiduciary accounts, of a lawyer or law firm and take such other action as it deems necessary to protect the public.”  Read literally, “at any time” means “at any time.”  Nevertheless, I considered a court-ordered “audit to protect the public” to be a step beyond a “compliance review” that Disciplinary Counsel could order for any reason or no reason at all. So, I’d typically only ask for one in connection with a request for an interim suspension.  Absent evidence of a violation, I was far more likely to employ a “compliance review.” Which brings me too . . .

Interim Suspensions

Usually, Disciplinary Counsel can’t simply charge a lawyer with violating the rules.  Rather, if an investigation leads to a decision that charges are warranted, Disciplinary Counsel must ask a hearing panel (our trial court) to review the decision for probable cause. If probable cause is found, Disciplinary Counsel can charge the lawyer.

However, the rules that govern the PRP recognize that there will be cases so serious that the lawyer should not be allowed to practice pending the outcome of Disciplinary Counsel’s investigation. By rule, if Disciplinary Counsel receives “sufficient evidence demonstrating” that a lawyer has violated the rules and “presently poses a threat of serious harm to the public,” Disciplinary Counsel must transmit the evidence to the Supreme Court, along with a proposed order for the immediate interim of suspension of the lawyer’s license.  If granted, the interim suspension remains in effect until the final resolution of the conduct that poses the threat of harm. I suppose they’re analogous to a “hold without bail.”

Unsurprisingly, it’s rare to request an interim suspension.  Generally, they issue when a lawyer abandons a practice, commits a serious crime, suffers from a severe behavioral health issue, or misappropriates client funds.

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

Conclusion

 I’ve often stated that the duty of candor to a court trumps all other duties. In fact, it does.

However, in my view, there is no greater threat to the privilege to self-regulate than the failure to impose serious sanctions on lawyers who misappropriate or fail to safeguard funds held in trust.  That is why we’ve chosen to provide Disciplinary Counsel and the PRP with so many different tools to investigate and enforce compliance with the trust accounting rules.

Again, these two posts were inspired by someone asking me why I never blog about trust accounting.  Ummm, have you not seen the “related posts” that are linked below?  If not, check ‘em out.  In the meantime, I’ll conclude this post as I did the first: don’t tell me I don’t blog about trust accounting.

Oh, and speaking of calling it a night and “in the meantime,” I think I’ll have a drink and listen to Spacehog.

 Related Posts:

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

The Trust Account CLE Videos:

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

Supervise Your Trust Account. And Don’t Say I Didn’t Warn Ya!

Not every blog post is an easy ride.  So, buckle up, cuz this one is meant to make you feel the bumps. And despite the high mileage, it’s still got the original shocks & struts.

Yesterday I did a virtual CLE for the Lamoille County Bar Association.  Near the end, someone asked what legal ethics issue keeps me up at night worrying for lawyers. I was quick to respond.  Before I share my response:

• • You can say you don’t like it.
  • You can say I’m too cynical.
  • You cannot say I didn’t warn ya.

I worry for the lawyers working remotely who are trusting that a trusted employee isn’t taking money from trust.  

I’ve worked in legal ethics almost as long as a first-year law student has been on this earth. Embezzlement is a thing even in the best of times. In my experience, trust account embezzlement is as much an offense of opportunity as it is malice.  That is, when they realize you aren’t paying attention, they realize an opportunity.  It often starts simple: “I’ll pay this orthodontist bill, put it back once we get the tax refund, and nobody will know the difference.” 

That’s like me saying I’ll stop after one Oreo.

Times aren’t good now.  They will get better.  And, when they do, make sure you still have a law license to enjoy them.  Supervise your trust account. Doing so will never go out of Style.

“But Mike, first of all, my staff would never steal. Second of all, if another lawyer’s did, how could that possibly impact the lawyer’s license?”

The duty to safeguard client funds is non-delegable. And, sometimes, the most trusted employee is a nightmare dressed like a daydream.

If you think I’m exaggerating, I urge you to read this post in the ABA Journal.  When you do, make sure to click on “the board said.”  Then, as you are reading the disciplinary decision, keep the ending in mind: the lawyer’s license to practice law was suspended for 6 months.  Sure, on appeal, the New Jersey Supreme Court reduced the suspension to 3 months. I guess there’s that.  Still, a nasty scar.

When it comes to your trust account, even with your most trusted employees, trust, but verify.  Otherwise, there’s a Blank Space on our complaint form, and that’s where clients will write your name.

Don’t say I didn’t warn ya.

Trust Accounting Tips

My drumbeat continues!  In my defense, it’s been 15 whole days.  Plus, back then, most of you probably still had too much summer on your mind to click on a trust accounting blog.  So, here we go again.

Over the years, more than one lawyer has told me the trust accounting rules are “too complicated.” Hence, my first post of 2018: Don’t Overcomplicate Trust Accounting.

A few moments ago, I came across a post on the Attorney at Work blog: Avoiding Common Trust Accounting Errors for Well-Intentioned Lawyers.  The post does a nice job uncomplicating trust accounting with five simple tips:

• reconcile monthly
• keep clients informed
• set up appropriate credit card processing system
• be the only signatory
• reduce personal funds in trust

Great tips.  With the respect to the final, remember, under Vermont’s rules, a lawyer may keep the lawyer’s own money in a client trust account, “for the sole purpose of paying service charges or fees on that account [and] only in an amount necessary for that purpose.”  V.R.Pr.C. 1.15(b).   As I blogged here:

• “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.”

Anyhow, it’s never a bad idea for a quick refresher on the trust accounting rules.  The Attorney at Work post above is a good start.  Also, last spring, I embarked upon a Trust Account Tuesday quest in which I posted tips on trust accounting every – you guessed it – Tuesday.  I hoped the posts would serve as a companion to the Professional Responsibility Program’s Guide to Managing Client Trust Accounts.  The entries:

• Don’t Commingle
• Basic Requirements
• Don’t Disburse Absent Collected Funds
• Teddy KGB on Prompt Notification & Delivery
• Third-Party Interests in Funds Held on Behalf of a Client
• Nonrefundable Fees
• Misappropriation:  Don’t
• With Trust Accounts, Verify
• Third-Party Claims against Client Funds (an update)

And, some posts that weren’t part of last spring’s Trust Account Tuesday trope:

• T.I., Jack Torrance & Trust Accounting
• An Improper Contingent Fee
• The 6th “C”: Commingling
• Trust Accounts & ACH Transfers
• Matters of Trust: do you trust your trust accounting system

Finally, my posts on scams:

• Trust Account Scams Continue
• 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
• Trust Account Scams: disciplinary prosecutions possible?

Maybe the rules are complicated.  But the general notion isn’t:

• know whose money you have;
• how much; and,
• keep it separate from yours.

 

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: 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 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.

 

 

 

Fees: Advanced vs. Non-Refundable

I’ll be quick to the point, to the point no fakin’: the Vermont Rules of Professional Conduct do not prohibit non-refundable flat fees.  However, Rule 1.5(f) sets out the steps a lawyer must take to treat a non-refundable fee as earned upon receipt.

Here’s a primer.

Very few lawyers charge true retainers.  What we’ve come to call a retainer is really, a fee that is a paid in advance.  Generally, if a lawyer accepts money from a client for work that has not yet been performed, then bills against that money as work is performed, that’s not a retainer.  It’s a fee that the client paid in advance.

In 2005, the Vermont Bar Association’s Professional Responsibility Program issued advisory ethics opinion 2005-4.  The Committee advised that a lawyer & client could agree that a fee paid in advance is “earned upon receipt.”  The Committee further advised that such fees become the property of the lawyer upon receipt and, therefore, cannot be deposited into the lawyer’s trust account.

In 2009, the Vermont Supreme Court amended Rule 1.5(c), the rule that governs advance fees.  Per the Reporter’s Note, the new rule required “deposit in a lawyer’s trust account of any fees or expenses paid in advance, no matter how designated, if the funds are to be applied as compensation for services subsequently rendered or expenses subsequently incurred.”  (emphasis added).

The new rule appeared to nullify or overrule that 2005 advisory opinion.  That is, “no matter how designated” suggests that a fee designated as “earned upon receipt” must,  nevertheless, go into trust until earned.

Confusion reigned.  Many lawyers routinely charged “non-refundable” fees and treated them as their own upon receipt. Others charged flat fees, put them in trust, then wondered when the fee became “earned.”

In 2016, the Court adopted the Professional Responsibility Program’s recommendation to amend Rules 1.5 and 1.15(c).  As amended, Rule 1.5(f) authorizes lawyers to enter into non-refundable fee agreements under which the fee is earned before any services are rendered.  Such fees DO NOT go into trust.  Further, the rule requires such fee agreements to be confirmed in writing and to define the scope of services that the client will receive in exchange for the non-refundable fee.  Even if labeled nonrefundable, the fee must be reasonable and, further, the new rule prohibits a lawyer from requiring the client to waive the right to challenge the reasonableness of the fee.

In short, if a lawyer complies with Rule 1.5(f), the lawyer may treat a non-refundable fee as earned upon receipt.  In that the fee is “earned,” it does not go into trust.

Of course, the rule does not REQUIRE non-refundable fee agreements.  At the same time that it amended Rule 1.5(f), the Court also amended Rule 1.15(c).  The new rule states that, with the exception of non-refundable fees that comply with Rule 1.5(f), any fee paid in advance must be deposited into trust and remain in trust until earned.

So, lawyers: if you want to treat a fee as yours upon receipt, you must comply with Rule 1.5(f).  Otherwise, a fee paid in advance must remain in trust until earned.

Word to your mother.

 

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.

 

 

 

 

Monday Morning Answers

Happy Memorial Day.

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

Congrats to all who participated in the Vermont City Marathon.  I finished, but it wasn’t pretty. Things went well until about Mile 21.8.  From there, it was a struggle.  Still, I finished, reaching my goal of 20.

Given the way it ended, I spent yesterday afternoon and evening swearing off marathons forever.  I told myself “20 is a great accomplishment. It’s time to focus on halfs.”

This morning I’ve already started looking for a full marathon to run this fall.

Honor Roll

• Penny Benelli, Dakin & Benelli
• Laura Gorsky, Law Office of David Sunshine
• Anthony Iarrapino, Wilschek & Iarrapino
• Keith Kasper, McCormick, Fitzpatrick, Kasper & Burchard
• Kevin Lumpkin, Sheehey, Furlong & Behm
• Joshua Martin
• Lon McClintock, McClintock Law Offices
• Jeff Messina, Bergeron Paradis Fitzpatrick
• Hal Miller, First American
• Jay Spitzen

Answers

Question 1

With respect to legal ethics, which involves a different set of rules than the others?

• A.  Net dividends
• B.  Screening
• C.  Overdraft Notification
• D.  Three-Way Reconciliation

Screening is associated with the conflict rules.  The others are part of the trust accounting rules.

Question 2

Which doesn’t belong with the others?

• A. a system showing all receipts & disbursements from the account
• B. records showing all receipts & disbursements for each client
• C. records documenting timely notice to clients of all receipts & disbursements
• D. an approved credit card processing system

A-C are required by Rule 1.15A.   D is not.  

Question 3

Attorney represents Tatum in the civil matter Tatum v. James.*   Lawyer represents James and has retained Expert Witness.

Whether Attorney can contact Expert Witness without Lawyer’s permission is likely governed by:

• A.  Rule 4.2 (the no-contact rule)
• B.  Rule 1.6 (information relating to the representation)
• C.  The Rules of Civil Procedure
• D.  The Rules of Evidence

Anyhow, an expert witness is not represented by the lawyer who represents the party or person for whom the witness will be testifying. So, Rule 4.2 does not apply.

However, Rule 26 of the Vermont Rules of Civil Procedure limits the ways in which discovery may be obtained from an expert witness.  Contacting that witness informally might not be one of them.  Thus, in the hypo, Rule 26 answers the question.  The Vermont rule is based on Federal Rule of Civil Procedure.  

Rule 3.4(c) of the Rules of Professional Conduct prohibits lawyers from disobeying an obligation under the rules of a tribunal.  In that V.R.C.P. 26(c) is a court rule, a violation of thereof might rise to the level of a violation of Rule 3.4(c) of the Rules of Professional Conduct.

If interested, please contact me and I will provide you with a cite to a decision from the Vermont Superior Court that is on point.  I’m having trouble linking to it.

*Sadly, James prevailed over Tatum in last night’s Game 7.  Never in my life have I heard so much praise heaped upon a superstar who, when you get right down to it, beat a team that was without its 2 best players for the entire playoffs. Not exactly something upon which legacies used to be built.

Question 4.

Pops & Olive divorced many years ago.  Pops is over a year in arrears on court-ordered spousal maintenance payments.

Olive asks Lawyer to represent her in a post-judgment motion to enforce the order.   She cannot afford Lawyer’s fee and asks Lawyer to take the case on a contingent fee basis.  Lawyer agrees.  You may assume that Lawyer does not have any conflicts that prohibit Lawyer from representing Olive.

Which is most accurate?

• A.   If the contingent fee agreement is reasonable & reduced to writing, it does not violate the rules.
• B.   Lawyer has violated the rules.  Contingent fees are banned in domestic cases.
• C.   There will not be a violation unless or until Lawyer attempts to collect a contingent fee from Olive.
• D.   There is no violation because it was Olive, the client, who proposed the contingent fee.

Rule 1.5(d)(1) allows contingent fees in this type of situation.

Question 5

Talk about unethical!!

In 1980, the first woman to cross the finish line at the Boston Marathon did so in what would have been the fastest time in Boston history, and third-fastest marathon in recorded history.  Alas, she was disqualified after it was determined that she’d not run the full course.  By some reports, she jumped into the race in the final mile before the finish.

Name her.

Rosie Ruiz.

For more, here’s a story that ran in the Lawrence Eagle Tribune a few years ago.  Until I read the story, I’d never known that it’s suspected that Rosie qualified for Boston by cheating at the 1979 New York City marathon.

Like any other human activity, the running world is replete with cheaters.  The New Yorker ran this story on Kip Litton, a runner who, among other race irregularities, is suspected of having gone to so far to concoct a fake marathon & list himself as the winner.  Letsrun wrote about Mike Rossi, the runner who probably never expected a note to his kid’s teacher would have such damning consequences.

I view Derek Murphy as the sports disciplinary prosecutor.  Derek runs Marathon Investigation.  It’s a site dedicated to exposing marathon cheats, in particular those who cheat to get into Boston.

 

Reminder: Don’t fear trust accounting

Lately, I’ve warned often of trust account scams.  Today, I thought I’d re-post a blog that originally ran in January:  Don’t Overcomplicate Trust Accounting.

Yes – scams are scary.  But, don’t let that fear – or a generalized aversion to accounting – keep you from attending to your trust account.  Here’s what I wrote earlier this year:

*****

Last November, I posted The 50 Original Rules.  It’s a post that briefly recaps the history of the conduct rules that apply to lawyers.  Best I can tell, the earliest record of guidelines for attorney conduct in the United States is David Hoffman’s 1836 publication of his Fifty Resolutions in Regard to Professional Deportment.  My post includes each of Hoffman’s 50 resolutions.

181 years later, it’s somewhat fascinating to me how many of Hoffman’s resolutions continue to resonate.  Many are embedded in the current rules and our collective professional conscience.  Given my fascination, I’ve resolved to blog about the continued relevance of Hoffman’s resolutions, taking them one at a time.  To date, I’ve posted:

• Don’t Be a Jerk
• Don’t Switch Sides

Today’s thought:  Don’t overcomplicate trust accounting.

There are three rules that apply to client property & trust accounting:  Rule 1.15, Rule 1.15A, and Rule 1.15B.   They’re not exactly models of clarity, especially for folks with no business or accounting background.

But here’s what Hoffman resolved in 1836:

25.    I will retain no client’s funds beyond the period in which I can, with safety and ease, put him in possession of them.

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.

I understand that it is a GROSS OVERSIMPLIFICATION for me to say that Hoffman’s 2 lines capture all that is required by the trust accounting rules.  However, his two lines are a damned good start.

In my experience, lawyers who overcomplicate trust accounting come to fear it.  The fear, in turn, leads to avoidance.

It’s a bad idea to avoid trust accounting.

Here are some 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 whose it is.
• Promptly pay yourself,  promptly pay your clients.

Adhering to these basic principles will go a long way towards keeping you in compliance with the trust accounting rules.  And aren’t these principles exactly what Hoffman expressed in 2 short resolutions?

Don’t overcomplicate trust accounting.

For a more complicated detailed review of the trust accounting rules, take a look at the Professional Responsibility Program’s manual on managing client trust accounts. I am working on updates that I hope to have finalized within a few months.