Oregon State Bar Bulletin — AUGUST/SEPTEMBER 2013



Bar Counsel

Safekeeping Funds:
Top 10 Trust Account Questions
By Helen Hierschbiel



No lawyer needs to be reminded that stealing client funds is a guaranteed way to lose one’s license to practice law. On the contrary, most lawyers have a healthy fear of and respect for their responsibility for safekeeping client money. But what does “safekeeping” mean in practical terms? A discussion of the top 10 trust account questions lawyers ask of general counsel’s office follows.

Q: When do I need a lawyer trust account?

A: Anytime you hold funds of clients or third persons. RPC 1.15-1(a).

Lawyers must hold all funds of clients and third persons in a lawyer trust account. Even when acting as an arbitrator or mediator, lawyers must hold unearned fees in a lawyer trust account. See OSB Formal Op No 2005-135. By contrast, ABA Model Rule 1.15(a) requires separate handling only of funds received “in connection with a representation.” Even so, most courts have applied the obligation to lawyers functioning in other fiduciary roles, such as a guardian, trustee, real estate broker, corporate officer, etc. SeeCharles Wolfram, Modern Legal Ethics §4.8, at 178 (1986).

Q: Where do I open a trust account?

A: In the jurisdiction where your office is located. RPC 1.15-1(a).

If you have multiple offices in multiple jurisdictions, you may be required to set up more than one trust account. You should follow the rules of the jurisdictions in which your offices are located. Any inconsistencies between rules of different jurisdictions should be resolved by reference to RPC 8.5(b).

The financial institution you choose for your lawyer trust account must: 1) be authorized by law to transact business in the state where the account is maintained; 2) be FDIC insured;1 3) have an agreement with the Oregon Law Foundation (OLF) to report and remit interest earned on IOLTA accounts; and 4) have an agreement with the OSB to notify the bar of overdrafts on lawyer trust accounts. See RPC 1.15-2(h). In addition, you may want to consider whether the financial institution has demonstrated a commitment to maximizing the rate of return on IOLTA accounts by paying higher interest rates and minimizing service fees.2

Q: When must I open a separate interest bearing account for my client’s funds?

A: When your client’s funds can earn “net interest.” RPC 1.15-2(b).

Net interest is interest in excess of the costs of generating such interest. Funds that cannot earn net interest should be kept in an IOLTA account. Client funds that canearn net interest must be deposited in an interest bearing account for the client’s benefit. In determining whether client funds can earn net interest, lawyers should consider the following factors set forth in RPC 1.15-2(d): 1) the amount of funds deposited; 2) the expected duration of the deposit; 3) the rates of interest available; 4) the cost of establishing and administering a separate account; 5) the ability of the bank and the lawyer to calculate and pay interest to individual clients; and 6) any other circumstances that affect the ability of the funds to earn a net return. See OSB Formal Ethics Op No 2005-117.

Lawyers are required to monitor their IOLTA accounts at reasonable intervals to determine whether circumstances have changed so that a particular client’s funds did or can earn net interest. See RPC 1.15-2(e). What constitutes a “reasonable interval” will vary depending on the circumstances, but at minimum lawyers should conduct reviews on an annual basis; every six months is better.

Q: May I put any of my own money in the trust account?

A: No, qualified. RPC 1.15-1(b).

Comingling of lawyer and client funds is generally prohibited. See RPC 1.15-1(a).

There is a narrow exception to this prohibition: lawyers are allowed to deposit their own funds into their lawyer trust accounts for the sole purposes of paying bank service charges and meeting minimum balance requirements. Lawyers may not, however, deposit a “cushion” of their own funds to prevent notification to the Oregon State Bar of a check presented against insufficient funds caused by a bank or a good faith bookkeeping error. See OSB Formal Ethics Op No 2005-145.

Q: What kind of records do I need to keep and for how long?

A: Complete records for five years after termination of representation. RPC 1.15-1(a).

The rules do not specify what constitutes “complete” records of trust account funds and other property. The rules do require, however, lawyers to provide a full accounting of funds for each individual client when requested by the client and to promptly notify and explain to the Oregon State Bar any overdraft of their lawyer trust account. See RPC 1.15-1(d) and RPC 1.15-2(l). Records must be sufficient to comply with these obligations, as well as the duty to safeguard client property. Generally, this means that records should be kept “in accordance with generally accepted accounting practice.” See Comment [1] to ABA Model Rule 1.15.

More specifically, the ABA Model Recordkeeping Rule calls for lawyers to maintain:

  • receipt and disbursement journals recording all deposits and withdrawals, including the date, source and description of each deposit as well as the date, payee and purpose of each disbursement;

  • a trust account ledger for each client, showing the source of the funds, the names of all persons for whom the funds are held, the amount of the funds and the names of all persons to whom money was disbursed;

  • monthly balance sheets of individual trust ledgers;

  • copies of written retainer agreements;

  • copies of statements to clients or third persons showing disbursement of funds to them or on their behalf;

  • copies of bills;

  • copies of records showing payments to lawyers, investigators or other persons not in the lawyer’s regular employ;

  • checkbook and check stubs, bank statements, prenumbered canceled checks, and duplicate deposit slips;

  • copies of records showing the books have been balanced every quarter; and

  • copies of documents “reasonably necessary for a complete understanding of the financial transactions.”

  • Similarly, former DR 9-101(C)(3) required that lawyers keep “checkbooks, canceled checks, check stubs, vouchers, ledgers, journals, closing statements, accountings or other statements of disbursements rendered to clients or equivalent records clearly and expressly reflecting the date, amount, source and explanation for all receipts, withdrawals, deliveries and disbursements of funds or other property of a client.”

    While the ABA Model Rules and the former DRs are not the law in Oregon and do not reflect the advent and popularity of electronic banking, they do offer some guidance about what kind of records lawyers should keep for their lawyer trust accounts. The PLF’s practice management advisers also often provide practical advice on how to meet trust account recordkeeping requirements.

    Q: When is it safe to disburse funds?

    A: When the funds are in the lawyer trust account.

    Funds that are available for withdrawal are not necessarily in the trust account. A good rule of thumb is to wait three business days for local checks to clear, five business days for in-state checks to clear and10 business days for out-of-state checks to clear. See also Sylvia Stevens, “Waiting for ‘Go’ Dough: A Primer on Disbursing Client Funds,” OSB Bulletin (June 2006). Beware of scams and potential fraudulent checks, however. Remember that financial institutions can recall funds based on a fraudulent check months after making the funds available for disbursement. If you have questions about how long it is prudent to wait before disbursing funds, you may want to speak with your financial institution.

    Q: To whom should I disburse the funds?

    A: To whomever is “entitled to receive” the funds. See RPC 1.15-1(d).

    The fact that you are holding money for your client’s benefit does not necessarily mean that your client is entitled to receive the funds. Whether your client or some other person is entitled to receive the funds in your trust account generally will depend on substantive law, not the rules of professional conduct. For example, if Mom paid you the retainer for Son’s legal matter and Son promptly fires you and asks for the money you received from Mom, you shouldn’t just hand over the money to Son because he asked. Instead, you must determine whether Son is in fact the owner of the money that Mom gave to you. You can avoid any question about who is entitled to the money in this scenario by getting clear instructions at the outset of representation from any third parties who are paying the client’s bill and consent from the client to the arrangement.3

    Similarly, when a medical provider or other third party asserts a claim to settlement funds you received on behalf of a client, substantive law — not the rules of professional conduct — will dictate whether the third party is entitled to receive the funds ahead of your client. See OSB Formal Ethics Op No 2005-52.

    If there is a dispute over the funds in your trust account, and you are not able to determine who is entitled to the funds, you should hold the funds in trust until the dispute is resolved. See RPC 1.15-1(e) and OSB Formal Ethics Op No 2005-68.

    Q: In what form(s) may I accept or disburse funds?

    A: In whatever form you want.

    Some clients do not have bank accounts and may insist on payment in cash. Unlike in some other jurisdictions, cash transactions are allowed in Oregon. Even so, you should exercise extra caution when dealing in cash. Consider asking clients why they want cash, so that you are satisfied you are not being asked to assist in fraudulent or illegal activity. Moreover, precise and detailed record-keeping of cash transactions is vital.4

    Similarly, electronic transfers into and out of trust accounts (e.g., wire transfers) are not prohibited by the rules of professional conduct. Again, special care must be taken to keep adequate records of such transactions. Further, make sure you understand the details of how electronic transactions work and the potential security risks involved.

    Q: May I accept credit card payments? 

    A: Yes, but the devil is in the details.

    Credit card payments for unearned retainers must go into your trust account. Credit card payments for earned fees must go into your business account. This means that you may need two designated merchant accounts for credit card payments. Before accepting credit card payments, you should carefully read OSB Formal Ethics Op No 2005-172.5

    Q: What should I do with unclaimed funds?

    A: Follow the requirements of ORS 98.302-98.436.

    Property held by fiduciaries (including lawyers) is presumed abandoned unless the owner has, within two years after it becomes payable or distributable, increased or decreased the principal, accepted payment of principal, corresponded in writing concerning the property or otherwise indicated an interest in the property. ORS 98.332. Abandoned funds in lawyer trust accounts must be reported to the Department of State Lands (ORS 98.352(1)(c)) and delivered to the Oregon State Bar along with a copy of the report. ORS 98.386(2).See OSB Formal Ethics Op No 2005-48.

    Missing heir money is still reported and remitted as escheat property to the Department of State Lands pursuant to ORS 116.203.

    Endnotes

    1. Unlimited FDIC coverage for IOLTA accounts expired Jan. 1, 2013. For more information about FDIC and trust accounts, see Sylvia Stevens, “Trust Accounts and the FDIC,” Oregon State Bar Bulletin (October 2008) and www.fdic.gov/deposit/deposits/unlimited/expiration.html.

    2. For more information on Oregon’s leadership banks, go to the Oregon Law Foundation website at http://oregonlawfoundation.org/leadershipbanks.html.

    3. Note that RPC 1.8(f) requires lawyers to get the client’s consent prior to accepting compensation for the representation from someone other than the client. In addition, lawyers must maintain confidentiality of information protected by Rule 1.6 and ensure that there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship.

    4. Lawyers who receive more than $10,000 in cash should be aware of federal laws that may require reporting to the IRS. See IRS Form 8300.

    5. Also be aware that beginning January 2013, the IRS will be imposing a 28 percent withholding penalty on all credit card transactions where the merchant’s information on file with the IRS does not exactly match the information on file with the credit card processing company. If your merchant account is your trust account, the imposition of such a penalty could result in an improper withdrawal of client money from your trust account. For more information on this issue, see www.lawpay.com/news/irs6050w.pdf.

     

    ABOUT THE AUTHOR
    Helen Hierschbiel is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260, ext. 361, or by email at hhierschbiel@osbar.org.

    Ethics opinions are published and updated on the bar’s website here.

    An archive of Bar Counsel articles is available here.


    © 2013 Helen Hierschbiel

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