Your IOLTA account is safe from identity theft, right?
By Chris Mullmann
Disciplinary counsel’s office recently received information from a local law firm that its IOLTA lawyer trust account had been compromised by a third party stealing the firm’s trust account number. Apparently, someone (and who knows who it could have been, from a janitor to a dishonest client who sold the account number to a third party) used the account number and made fake checks that bore no resemblance to the IOLTA checks. They used their own — and presumably false — names and then passed the checks to various retail outlets including fast food restaurants, Meier & Frank and a local auto parts store. They only passed the checks for two days but the establishments and the bank honored the checks.
The theft was discovered during a conversation between the firm’s office manager and the bank, when the bank officer found an electronic check that looked odd. The bank then undertook a review of the firm’s lawyer trust account and found a number of similar checks and reported back to the firm. The firm immediately undertook a reconciliation of the account, identified all forged checks, and immediately took money from the general account to rebalance the trust account. The bank is continuing the investigation. Do not think your trust account is immune from such theft.
After learning of the theft from the trust account I thought it might be helpful to review some of the rules concerning trust accounts; there have been some changes in these rules. Oregon RPC 1.15-1 (a) has been amended to make clear that the lawyer trust account can be set up and maintained in the "jurisdiction" where the lawyer’s office is situated. Thus, a lawyer maintaining an office in Portland and Vancouver, Wash. may establish a trust account in either state. While probably just a clarification of the prior rule, the amendment does include a requirement that the account shall conform to the rules in the jurisdictions where the accounts are maintained.
Oregon RPC 1.15-1 (b) has been amended to allow a lawyer to deposit the lawyer’s own funds in the account for the sole purposes of paying bank service charges or meeting minimum balance requirements but only in amounts necessary for those purposes. Lawyers need to exercise discretion and good judgment in deciding what type of cushion is appropriate. See Formal Oregon Ethics Opinion 1991-117. However, a cushion to protect against overdrafts, whether caused by a bank error or a good faith bookkeeping error, constitutes an improper commingling of funds and is not within this exception. See Formal Ethics Opinion 1996-145. Service charges are now defined and limited in new Rule 1.15-2 (n) as: the institution’s customary check and deposit processing charges; monthly maintenance fees; per item check charges; items deposited charges and per deposit charges. Any other fees or transactions costs are not service charges for purposes of the rule and must b paid by the lawyer or law firm.
Oregon RPC 1-15-2 governs what we know as an IOLTA account. This is a lawyer trust account for client funds that cannot earn interest in excess of the costs of generating such interest ("net interest"). While the vast majority of the specific operational rules governing these accounts have not changed, Rule 1-15-2 (h) (3) (1) makes changes in the reporting and accounting requirements to the Oregon Law Foundation by the approved financial institution. These rules do not impact the lawyer’s handling of the trust account of funds deposited to such accounts.
Subsection (m) of the rule now requires that every lawyer shall certify annually on a form and by a due date prescribed by the Oregon State Bar that the lawyer is in compliance with these rules. Between annual certifications, a lawyer establishing an IOLTA account shall advise the Oregon Law Foundation in writing within 30 days of establishment of the account, on a form approved by the Oregon Law Foundation. At present, it is anticipated that the annual report form will be sent to members along with the annual membership statement and that it will also be possible to report IOLTA account information online.
Obviously, a lawyer’s handling of client funds is a matter subject to close scrutiny. Conversion of client funds, if done intentionally or knowingly, will almost always result in disbarment regardless of the amount converted. As Justice Lent explained in a concurring opinion in In re Smith, 292 Or 84, 102, 636 P2d 923 (1981) "conversion may occur on a spectrum from the most outright, blatant kind of theft to what may be regarded as innocent conversion." For example in In re Mannis, 295 Or 594, 668 P2d 1224 (1983), the lawyer inadvertently used client funds for personal purposes when, unknown to the lawyer, his employees had deposited client funds into his general account. The court said that the conduct technically amounted to conversion but it was not treated as dishonest conduct under the disciplinary rules.
Compare that result with the holding in In re Martin, 328 Or 177, 970 P2d 638 (1998), where the lawyer had been retained by a client to represent her to defend her in a criminal harassment charge that arose out of an altercation between the client and a Lake Oswego police officer. The lawyer agreed to charge $125 an hour and the client gave him $500 as a deposit for services. A few days later the lawyer negotiated the check and did not deposit it into trust. Instead, he spent the money on personal expenses. The court specifically found that when he spent the money he knew that he had spent only one hour on the case. At the disciplinary hearing, the lawyer testified that he was unaware of the existence of the Oregon Code of Professional Responsibility relevant to the charge of conversion. The court found that position to be "patently incredible" and disbarred the lawyer for, among other things, the conversion of the client’s deposit.
Obviously, protecting our clients’ money is an essential responsibility, and the trust fund obligations must be strictly complied with. Lawyers with supervisory responsibility must ensure that subordinate lawyers and staff are familiar with these rules and comply with them as well. More importantly, in the age of identify theft it is crucial that the lawyer trust account is reconciled at least monthly. Those with responsibility over the trust account can go online to check more frequently. Once suspicious activity is detected, prompt action to investigate and resolve the action must be taken. According to one bank manager I spoke with, the only real safeguard to theft of the trust account is vigilance, and he suggested that someone check the account electronically every day for any suspicious activity. Tracking the account may be burdensome but the law firm discussed above wishes they had taken the banker’s advice instead of trying to undo fraudulent activity after the fact.
© 2005 Chris Mullmann
ABOUT THE AUTHOR
Chris Mullmann is assistant general counsel and manager of the Client Assistance Office for the Oregon State Bar. He can be reached at (503) 620-0222 or toll-free in Oregon at (800) 452-8260, ext. 392, or by e-mail at firstname.lastname@example.org.