Expert Advice
Oct. 2, 2014
Client Trust Accounts
Every lawyer should understand the obligation and best practices for maintaining a client trust account.
Choosing the manner in which to hold client funds depends on the amount involved and the length of time the funds will be on deposit. Nominal or short-term deposits generally do not generate enough interest to offset the cost of establishing a separate account. Such deposits must be pooled with other client funds and placed in an Interest on Lawyers Trust Account (IOLTA); the bank automatically pays all interest to the State Bar. (See Cal. Bus. & Prof. Code §§ 6211 and 6212.) The State Bar maintains guidelines for establishing and maintaining IOLTAs, including forms for opening accounts and a list of eligible financial institutions. (The guidelines are available at www.calbar.ca.gov.) Larger amounts and long-term deposits must be maintained in a separate interest-bearing account. Attorneys are not subject to disciplinary charges for determining in good faith that client funds are exempt from deposit in an IOLTA. (Cal. State Bar Rule 2.110(B).) As such, an attorney who is in doubt about where to deposit client funds should consult with an eligible bank to determine whether the interest generated on the amount justifies setting up a separate account. Client Funds Only
Long ago, the state Supreme Court noted that "[t]he rule against commingling was adopted to provide against the probability in some cases, the possibility in many cases, and the danger in all cases that such commingling will result in the loss of clients' money." (Black v. State Bar of Cal., 57 Cal. 2d 219, 225-26 (1962).) Except for funds reasonably sufficient to pay bank charges on the account, an attorney's own money should never be commingled with client funds. (CRPC 4-100(A)(1).) Of course, when dealing with payments made in settlement of a client's claim (or in satisfaction of a judgment in the client's favor), the attorney often has some interest in securing fees from the deposited funds. When the attorney's interest becomes "fixed," those funds must be withdrawn at the earliest reasonable time. (CRPC 4-100(A)(2).) Although not defined in the rules, this may be when the client expressly acknowledges the attorney's interest and approves withdrawal, or when the attorney's interest is established by a settlement agreement, judgment, court order, or binding arbitration award. (See Cal. State Bar Comm. on Prof'l Responsibility and Conduct, Formal Op. 2006-171.) It is important to remember that funds within a common account, such as an IOLTA, belong to each separate client despite the fact the funds are pooled. An attorney is never allowed, without express permission, to use one client's funds to pay another client's obligations. To avoid inadvertently using the wrong client's funds, an attorney should not make payments to or on behalf of a client unless it's clear that the client has funds available. A settlement payment to a client, for example, should not be made until the attorney has confirmed with the bank that the deposited settlement draft has cleared. Keeping Records
Attorneys must keep complete records of all funds and property held for their clients' benefit. (CRPC 4-100(B)(3).) For common accounts such as an IOLTA, an attorney must maintain a client ledger for each client. (CRPC 4-100(C).) The ledger is a detailed account of each deposit and withdrawal. It must list each client's name, money received and withdrawn, and the balance following each transaction. The ledger must also document the date, amount, purpose, and source or payee of all incoming and outgoing client funds. In addition, an account journal containing the same transaction details must be kept for each separate bank account. Attorneys also must maintain bank account statements, cancelled checks, and all other records (for example, deposit and withdrawal slips) necessary to create an audit trail of all funds flowing through the client's account. This process should begin upon the first receipt of client funds. Moreover, attorneys should take steps to associate all deposits and withdrawals with a particular client; the client's name should be listed on each deposited check or withdrawal slip. Attorneys must perform and record a monthly reconciliation (balancing) of the ledger, journals, and bank statements. This exercise provides for prompt review and resolution of any accounting discrepancies. To ease the burden of record keeping, a variety of legal-specific accounting software programs (such as LexisNexis's PCLaw and Juris) are available to simplify the record-keeping process. Such accounting software can provide a client-by-client balance at any given time, track all client transactions by matter, and create accounting reports. Rule 4-100(C) mandates that these records be kept for at least five years after payment of the funds to which they relate. Promptly Resolve Disputes
An attorney must "promptly pay ... as requested by the client" any amount "which the client is entitled to receive." (CRPC 4-100(B)(4).) If a dispute arises between the attorney and client (or a third party) regarding the amount of funds to which the client is entitled, it is incumbent upon the attorney to promptly resolve the dispute. (Matter of Kroff, 3 Cal. State Bar Ct. Rptr. 838, 853-54 (Rev. Dept. 1998).) This may require the attorney to initiate mandatory fee arbitration, or, in the case of a third-party lienholder, file a declaratory relief or interpleader action. (See Cal. State Bar Comm. on Prof'l Responsibility and Conduct, Formal Op. 1988-101.) If a client disputes a third-party lienholder's interest, the funds must be held in the client trust account until the dispute is resolved, then properly disbursed. (Matter of Respondent H, 2 Cal. State Bar Ct. Rptr. 234, 242 (Rev. Dept. 1992).) Every California attorney must become familiar with these rules and the principles they embody. Indeed, although securing a good legal result is vital, so too is the proper maintenance of a client trust account. Shane M. Cahill is a senior associate at Long & Levit in San Francisco, where he defends lawyers and other professionals.
Trust Fund Resources - The California State Bar publishes a comprehensive handbook on client trust accounts and accounting practices (available for download at http://ethics.calbar.ca.gov/Publications/ClientTrust AccountingHandbook.aspx). - Information may also be obtained over the State Bar's confidential, toll-free Ethics Hotline (800/238-4427). - In addition, the Legal Services Trust Fund Program helps banks and attorneys with questions and issues regarding IOLTA administration. Compliance auditors can be reached at 415/538-2046 or 415/538-2227.
Kari Santos
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