Trust Accounting in a Nutshell

The theme of yesterday’s post was that “back to school” season means that it’s time to get “back to basics.” In it, I shared thoughts on competence, communication, confidentiality, conflicts, and candor.

Today, it’s time to get back to the basics of trust accounting.  I know (all too well) that it’s nobody’s favorite topic.  Still, it’s important and it’s my job.

I want to be very clear about why trust accounting is important.

1. The rules are meant to ensure that lawyers act competently to safeguard client funds.  I’m not sure there’s a greater threat to the public’s confidence in the profession’s ability (and privilege) to self-regulate than would be posed by an abdication of this duty.
2. Understanding the rules is good way to avoid a disciplinary sanction.

I wanted this post to be long enough without being too long.  So, I decided to present the information in a syllabus, as if we are beginning a semester-long course.  Alas, WordPress didn’t like the outline’s formatting. 

Here it is:

Trust Accounting in a NutshellDownload

Feel free to download and share.

Finally, my original plan was to present the syllabus/nutshell via video.  Not just any video, but a video recorded on my deck and during which I paused during the transitions to display and taste the herbs & spices that I’m growing out there. 

Alas, I’ve been informed that nothing I’m growing is a spice.  As such, so much for the idea of “spicing up” trust accounting with a video in which my “spices” were special guests.

Still, I decided to record from the deck anyway.  Midway thru, I got caught in a rainstorm.  So, the outline will have to do.

The best laid plans.

As always, let’s be careful out there.

A lawyer’s duties when a third party asserts an interest in funds that the lawyer is holding in trust for a client.

As we know from a prior blog in which I paraphrased Teddy KGB, upon receiving funds in which a client or third person has an interest, a Vermont lawyer has a duty to promptly notify the client or third person.  Then, the lawyer has a duty to deliver funds to which the client or third person is entitled.

When there is no dispute that a specific client or third person is entitled to the funds, compliance with the duties isn’t difficult.  However, confusion can arise when more than one person asserts an interest in the funds that the lawyer is holding.

Let’s start with the rule that governs:  Rule 1.15 – Safekeeping Property. 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 a 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?  In other words, (1) when must a lawyer notify someone other than the client 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 claimsagainst 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?

In 2012, the Virginia State Bar issued this advisory opinion. I find pages 1-4 particularly helpful.

Aside: here in Vermont, I do not know how disciplinary counsel, a hearing panel, or the Supreme Court would approach or resolve 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 Virginia 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 to 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.

A few years ago, Professor Bernabe blogged about an advisory opinion from Texas that reaches conclusions like those reached by the Virginia State Bar. Professor Bernabe’s post is here and the Texas opinion here.

With all of this said, the Virginia opinion makes a critical point that cannot be ignored.  While the general rule is that a lawyer must 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 duty is to recognize the existence of valid claims and interests to funds in connection with a representation. Rule 1.15 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, contact me and we’ll work through it.

As always, let’s be careful out there.

Related Videos & Posts

Start with this post:   Don’t Overcomplicate Trust Accounting

Videos

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

Blog Posts

• Vermont’s rules on fees labeled “non-refundable” or “earned upon receipt”
• Beware the severance payment scam
• Reconcilation (again) is a good thing! Plus a tip to protect against check fraud
•  Timely reconciliation alerts firm to trust account fraud
• A lawyer’s professional responsibility to learn to identify common trust account scams
• Lawyers aren’t Kramer: when it comes to trust accounting, there are no excuses
• Back to (trust account) school
• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.

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

The following inquiry is not uncommon:

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

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

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

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

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

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

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

Okay.

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

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

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

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

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

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

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

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

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

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

As always, let’s be careful out there.

Trust Accounting Resources

Videos

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

Blog Posts

• Vermont’s rules on fees that are labeled “non-refundable” or “earned upon receipt”
• Beware the “severance payment” scam
• Reconciliation (again!) is a good thing. Plus, a tip to protect against check fraud.
• A lawyer’s professional responsibility to identify common trust account scams
• Lawyers aren’t Kramer: when it comes to trust accounting, there are no excuses
• Back to (trust account) school
• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.

Beware the “severance payment” trust account scam.

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

Here’s how the scam works.

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

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

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

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

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

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

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

We can now add:

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

As always, be careful out there.

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

Related Videos & Posts

Videos

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

Blog Posts

• Reconciliation (again!) is a good thing. Plus, a tip to protect against check fraud.
• A lawyer’s professional responsibility to identify common trust account scams
• Lawyers aren’t Kramer: when it comes to trust accounting, there are no excuses
• Back to (trust account) school
• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.

 

Back to (trust account) school.

Hi!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As always, let’s be careful out there.

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

Resources

• The Professional Responsibility Program’s Guide to Managing Trust Accounts

My videos on trust accounting:

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

My blog posts on trust accounting:

• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• T.I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.

2 in 1 day! Another Trust Accounting CLE.

I hope to watch Season 3 of Ozark someday.   I’d planned to begin as soon as it dropped last Friday.  Alas, I couldn’t remember how Season 2 ended, so I went back to watch its final few episodes.  Still fuzzy, the problem compounded itself until I found myself starting my catch-up with episode 7 of Season 1!

Anyhow, this morning I released a CLE on the very basics of trust accounting.  The video is here.  Part of my project to provide content during the pandemic, I advertised it as the first in a series.

When’s the next segment come out?  Funny you should ask. 

Not wanting your experience to be like mine with Ozark – and don’t even get me started on how long it took to release the final season of GoT – how about now?

Here’s the next episode.  In it, I discuss:

1. Do I need a trust account?
2. If so, where can I open one?
3. What do I tell the bank when I open one?
4. Can I have more than one?
5. IOLTA or not?
6. The dangers of commingling.
7. Record Keeping Requirements.
8. Collected Funds: when can I disburse?

Enjoy.

 

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: 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.

 

 

 

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.