Trust Accounts - June 29 Flashcards
What is a client trust account? (Q)
A client trust account is a bank account, separate from the lawyer’s personal or business account, in which the lawyer deposits money belonging to clients or third parties. In many cases it is permissible for a lawyer to use one client trust account for multiple clients, as long as he keeps detailed records of who owns which funds. However, it may be appropriate to establish separate client trust accounts if a lawyer is administering an estate or acting in some other fiduciary role.
Although the Model Rules of Professional Conduct (MRPC) do not specify in great detail how client trust accounts are to be maintained, many states have detailed requirements for trust-account maintenance that lawyers must follow.
A lawyer was a sole practitioner with a relatively small practice. The lawyer had one client trust account in which she deposited all client funds. The lawyer kept fastidious records to denote which funds belonged to which clients.
By holding multiple clients’ funds in a single account, is the lawyer committing an ethical violation? (Q)
No. The lawyer is not committing an ethical violation. A lawyer must keep client funds separate from the lawyer’s own funds, generally in a client trust account. However, a lawyer is not required to maintain a separate client trust account for each client. Separate trust accounts may be necessary if the lawyer is administering estate monies or acting in a fiduciary capacity regarding the funds, but in many cases it is permissible for a lawyer to use one client trust account for multiple clients, as long as she keeps detailed records of who owns which funds.
Here, the lawyer kept multiple clients’ funds in a single account, but she used an appropriate client trust account and kept fastidious records of the trust account to keep track of the funds. Thus, the lawyer is not committing an ethical violation.
What recordkeeping requirements do the MRPC impose on lawyers regarding client trust accounts? (Q)
Under the MRPC, a lawyer must (1) keep complete records of client-trust-account funds and (2) preserve those records for five years after the end of the representation. Other more detailed recordkeeping requirements are imposed under applicable law or the rules of professional conduct in each state.
The American Bar Association has promulgated a set of Model Rules for Client Trust Account Records, as well as model standards regarding trust-account audits and overdrafts. These standards are representative of the types and varieties of trust-account regulations that a lawyer may encounter.
If a client advances funds to a lawyer to pay for future fees or expenses, must the lawyer deposit the money in a client trust account? (Q)
Yes. If a client advances funds to a lawyer to pay for future fees or expenses, the lawyer must deposit the money in a client trust account. The lawyer may withdraw the client’s funds to cover fees and expenses only as they are incurred.
What is the only purpose for which a lawyer may deposit her own funds in a client trust account? (Q)
A lawyer may deposit her own money into a client trust account only for the purpose of paying bank service charges on the account. The lawyer’s personal deposits must be limited to the amount necessary to cover those charges. A lawyer may not use a client trust account for personal reasons.
What is an IOLTA account? (Q)
An IOLTA (Interest on Lawyers Trust Accounts) account is an interest-bearing account into which a lawyer places client funds that are either too small or will be held for too short a time to generate interest greater than the expense of maintaining the funds in a separate account. An IOLTA account pools these funds into a larger account that will generate interest. That interest is then paid to the state bar or other professional governing body and is used for civic or charitable purposes. Every state has an IOLTA program, most of which are mandatory for lawyers practicing in that state.
In general, should a lawyer exercise the care of a professional fiduciary in safeguarding a client’s property? (Q)
Yes. In general, a lawyer should exercise the care of a professional fiduciary in safeguarding a client’s property. Fiduciary standards will vary from state to state and from one situation to another. However, in general, a lawyer’s fiduciary care regarding property requires taking reasonable measures to protect property from loss or damage, considering the portability of the property, its fragility, its value to the client, its market value, and the cost of specific protective measures.
If a lawyer holds a client’s funds or property in the course of a representation, must the lawyer keep the funds or property separate from the lawyer’s own funds or property? (Q)
Yes. If a lawyer is holding a client’s funds or property in the course of a representation, the lawyer must keep the funds or property separate from the lawyer’s own funds or property. In other words, the lawyer may not commingle a client’s funds or property with the lawyer’s own. Client funds must be kept in a separate account, which will usually be a client trust account. This account must be maintained in the state in which the lawyer’s office is located, unless the client consents to keeping the account elsewhere.
Client property must be identified as client property and appropriately safeguarded, e.g., securities should be kept in a safe-deposit box, and tangible property should be stored in accordance with fiduciary responsibilities.
A lawyer who worked in an office building was representing a man in a divorce. The man and his spouse agreed that the man would take ultimate possession of a ruby ring valued at $5,000. The spouse delivered the ring to the lawyer’s office. The lawyer placed the ring in his top desk drawer, which did not lock, and went to lunch. The lawyer left his office door open while he was away. When the lawyer came back after lunch, the ring was gone. Subsequent investigation revealed that the ring had been stolen.
Has the lawyer committed professional misconduct? (Q)
Yes. The lawyer has committed professional misconduct. If a lawyer holds nonmonetary property that belongs to a client, the lawyer must appropriately safeguard the property. The appropriate safeguards will depend on the situation, but they generally require consideration of the portability and value of the property, as well as the cost of particular safeguards.
Here, the lawyer placed a client’s valuable ring in an unlocked drawer and left his office door open when he went to lunch. Considering the value and portability of the ring, greater measures than these were appropriate to prevent someone from taking the ring from the office. It would have cost nothing for the lawyer to use higher safeguards such as locking the door, taking the ring with him, or giving it to a trusted colleague while he was out. Thus, the lawyer has committed professional misconduct.
If a lawyer holds a client’s funds or property in the course of a representation, must the lawyer keep complete records of all the client’s funds or property? (Q)
Yes. If a lawyer holds a client’s funds or property in the course of a representation, the lawyer must keep complete records of the funds or property in the lawyer’s possession. In addition, the lawyer must retain these records for five years after the representation ends.
Most or all of the recordkeeping requirements regarding client funds will be fulfilled by complying with the recordkeeping requirements imposed on client trust accounts.
Do the MRPC’s rules about safeguarding funds and property apply only when a lawyer holds funds or property in the course of rendering legal services? (Q)
Yes. The MRPC’s provisions about safeguarding funds and property apply only when a lawyer holds funds or property in the course of rendering legal services. A lawyer who holds funds or property in some other capacity, e.g., as an escrow agent, is not subject to these rules. However, the lawyer will likely be subject to other rules or obligations, depending on the situation and the applicable law.
If a lawyer receives funds or other property in which a client has an interest, must the lawyer promptly notify the client? (Q)
Yes. A lawyer who receives funds or other property in which a client has an interest must promptly notify the client. The client may then provide further instructions to the lawyer regarding the delivery or other disposition of the funds or property.
Must a lawyer promptly deliver and account for a client’s funds or other property upon request? (Q)
Yes. Unless the law provides or the client agrees otherwise, a lawyer must promptly deliver to the client any funds or property to which the client is entitled, either upon request or otherwise. In addition, a lawyer must, upon the client’s request, promptly give a full accounting of all of the client’s funds or property held by the lawyer.
A client paid a lawyer a $5,000 retainer as an advance payment of the lawyer’s eventual fees. The lawyer deposited the $5,000 in a client trust account and withdrew money only as it was earned for the work the lawyer had completed. When the account balance dropped to $500, the lawyer asked the client for another $5,000 retainer. The client asked the lawyer for a statement outlining the work completed to date. The lawyer informed the client that he was too busy advocating on the client’s behalf to draw up a statement, but the lawyer assured the client that he was working on the client’s case and requested that the client send the additional $5,000 immediately.
Has the lawyer committed professional misconduct? (Q)
Yes. The lawyer has committed professional misconduct by refusing to promptly render a full accounting of work done to date and corresponding withdrawals from the client trust account upon the client’s request. The monies in a client trust account belong to the client, and a lawyer must promptly provide a full accounting of client funds upon the client’s request. The client is entitled to be kept apprised of how the money is used and the reasons for which the lawyer has withdrawn money.
Here, the client requested an accounting detailing what the lawyer had done with the client’s money. The lawyer was required to comply promptly with this request, whether or not the lawyer had done anything improper or controversial with the client’s money. Thus, the lawyer’s refusal to provide this accounting constitutes professional misconduct.
Are the ethical rules for safeguarding funds or property of third persons the same as the rules that apply to safeguarding funds or property of a lawyer’s clients? (Q)
Yes. The ethical rules for safeguarding funds or property of third persons are the same as those that apply to funds or property of clients. Thus, among other obligations, a lawyer (1) may not commingle third-party funds or property with the lawyer’s own, (2) must strictly account for funds or property, and (3) must otherwise safeguard the funds and property as if they belonged to a client.
