Supreme Court strengthens State Bar’s new client account rules

The California Supreme Court approved a State Bar proposal establishing new rules for attorneys’ client trust accounts, which will go into effect on Jan. 1.

Attorneys or their law firm will be required to report whether they are responsible for managing a client trust account, and attest they are knowledgeable about and compliant with the rules. They also must provide the State Bar with financial institutions and account numbers for all accounts holding client money.

The new rules authorize the State Bar to require licensed attorneys to complete an annual self-assessment, and to select attorneys each year to submit to an audit by a certified public accountant.

“We thank the Supreme Court for its quick and decisive action and approval of the State Bar’s Client Trust Account Protection Program,” Ruben Duran, chair of the bar Board of Trustees, said in an email. “The Court recognizes that the State Bar has a duty and an obligation to protect the public, and this new program, which aligns with others already in place in other states, will help us do that. By its design, the CTAPP will help us assist attorneys in complying with client trust account requirements. It will also help us detect and address violations of ethics rules, and, when appropriate, refer attorneys for discipline.”

The Supreme Court went beyond the State Bar’s original proposal to require that the obligations be met, which will prohibit the bar from amending without authority the rule as it was originally proposed.

The rule was a response to accusations that former plaintiffs attorney Thomas Girardi stole millions of dollars from client funds.

“The rules seem on their basis to be a not unreasonable response,” said Philip R. Recht of Mayer Brown LLP. “These are practices that honest lawyers practice already.”

The Supreme Court also approved an amendment to a requirement that attorneys notify a client within 14 days they have received funds or property on a client’s behalf stating that they must be prompt with communication. The court also amended Rule 1.15 that requires an attorney to disburse any funds within 45 days after their client’s interest in them becomes undisputed. Now the rule adds a presumption that an attorney failed to follow the rule if he or she misses the deadline, which an attorney would need to rebut with evidence showing good cause.

“I think that these rules are really good and I think they’re going to be protective of the clients,” personal injury attorney Mary E. Alexander of Alexander & Associates P.C. said in a phone interview. “I think telling the client within 14 days of receiving funds in a trust is important. Because it’s one of the things that really was a problem with Girardi. Clients didn’t know when money came in or how much came in. If you got your house in order, it should all be in order.”

Not all lawyers were happy, though.

“The mandatory reporting to the clients of significant events…and not having the disbursement within 45 days being seen as a presumed rule violation absent good cause to the contrary will be seen as a bit of an overreach,” Olu K. Orange, director of the USC Dornsife Trial Advocacy Program, said in a phone interview. “There are many good reasons that may not necessarily amount to examining good cause that sometimes clients aren’t disbursed the proceeds of their cases within 45. To have such a situation be labeled as a presumed rule violation is going to be seen as a bit harsh.”

Some concerns have been raised by attorneys about the implementation of the rules and if they would be effective in curbing attorney theft.

“The first thought I had was that people who are doing what they’re supposed to be doing and have good relationships and provide good service to their clients will look at these rules and think, ‘That’s what I’m doing anyway’ with the exception of one of them,” Orange said. “I don’t think this will stop an improperly motivated highly skilled attorney from taking advantage of his or her clients.”

Jay Edelson of Edelson P.C. blew the whistle on Girardi’s alleged wrongdoing. He echoed criticism of the bar that it was too cozy with Girardi and other well-connected attorneys.

“The big problem is the California State Bar is a failed institution. It’s shown that its job has been to protect lawyers engaging in bad behavior. They’re not someone who I think is a credible actor in dealing with any client issues. They’re doing virtually no investigation into Thomas Girardi. They’re in self-protective mode as opposed to trying to figure out all the different people involved in Tom’s crimes, many of which are still practicing lawyers,” Edelson said.

The bar has hired an outside law firm to investigate its response to previous complaints against Girardi, and people within the bar who were believed to have had close relationships with him are no longer with the agency.

The State Bar plans to develop and distribute legal education materials focused on promoting ethical management and distribution practices as part of a public education campaign. Future requirements could also include risk-based compliance audits if the Supreme Court approves them.

“To have the lawyers do the self-assessment, I think it’s an issue if they are going to do that properly,” Alexander said. “I think there does have to be audits and they need to be something that is hanging over lawyers heads. That’s what’s going to make people do the right thing, that risk that there’s going to be an audit.”

The Client Trust Account Protection Program will be housed in the State Bar’s Division of Regulation, headed by Special Counsel Steven Moawad.