Issue: December, 2009
Author: Mark Bassingthwaighte, Esq.
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Avoiding Problems with the Client Trust Account
While allegations vary, a common complaint made against attorneys often centers around client trust funds. This article will discuss a number of practices and procedures that, if followed, will help ensure that you never find yourself on the receiving end of an allegation of a trust account violation.
First, avoid ethical dilemmas. Although the advice sounds simple and direct, following through with it can be problematic. Rule number one, client funds belong to the client. Rule number two, never forget rule number one. Day to day, these two rules imply the following. Never loan client funds to someone else or yourself. For example, you cannot pay costs for one client with funds on deposit for another. Similarly, you cannot borrow funds from the trust account to cover checks, even payroll. Prior to taking earned fees, make certain to first pay all other disbursements for which the client is clearly obligated to pay. Do not accept a client’s word that he/she will take care of making payments on obligations. It is your responsibility.
Unless done prior to the receipt of settlement funds, do not attempt to negotiate a reduction in liens or other known client debts. Once funds have been received, there is an inherent conflict. The negotiation of a reduction in payment to a physician, as an example, is too readily viewed as an attorney trying to maximize her fee. Transfer contingent fees only after the client has acknowledged that the case is resolved and an accounting of all fees and costs has taken place. Make certain that the client and all other parties with an interest in proceeds receive prompt notification of any funds that must be held beyond the expected time of disbursement, the reason for the delay, and what must occur to allow for disbursement. Avoid the use of “non-refundable” advances of fees and, finally, never loan clients money beyond the advancement of costs or fees.
Second, avoid assumptions and misunderstandings. At the initial meeting you should talk with clients about trust accounting procedures and ethical requirements. Revisit this topic if funds need to remain on deposit longer than expected. For example, let clients know upfront that settlement proceeds will not be disbursed until the settlement check has cleared. If client funds are sufficiently large or will be held for a reasonably long time, decide with the client whether the establishment of an interest-bearing account is warranted. If the client will receive interest from funds on deposit, make certain that the initial setup meeting includes all necessary parties and that the client’s social security number is the one the bank has on file for the account.
Third, avoid defalcation. Institute a system of check requisitioning that creates a paper trail designed to assure that no client trust account (CTA) checks can be negotiated without sufficient documentation. Make certain that no disbursement can be made from the CTA without two signatures or at least a contemporaneous review by a second person. In a sole practitioner’s office, this does mean that the attorney must see all CTA checks that are prepared. In firms of three or more attorneys, have an attorney not involved with the case review and sign CTA checks. Be attuned to significant changes in behavior of attorneys and all who deal with client property. Significant changes may signal a mental health or substance abuse problem. Defalcation of client funds is often one first objective sign of a major personal problem for an office member. Note, while rules do not require an attorney signature on all client trust fund checks, the ABA has promulgated a Model Recordkeeping Rule that requires all client trust fund checks to be signed by an attorney. Implementing this rule makes sense for documentation of oversight and to assure that no misallocation of funds occurs between clients.
In addition to the above, an attorney should review all client trust fund account reconciliations at the end of each month. This will help catch any inadvertent errors that are made in payments and assure that all funds on deposit for each client can be regularly accounted for. Many firms will require that the bank statement be delivered to the reviewing attorney unopened. This attorney will look for forged checks and make certain that there is a check for each debit entered on the statement prior to forwarding these materials to the individual responsible for reconciling the account. Once the reconciliation is complete, the reviewing attorney should receive a copy of the reconciliation report along with the original bank statement to review the numbers. A firm might designate one partner (or this duty could be rotated) to handle these tasks. Virtually every state bar has promulgated rules indicating that every attorney in a firm has the responsibility for making sure the trust or escrow account is in proper order. Reliance on a bookkeeper or CPA does not nullify the attorneys’ responsibilities.
Finally, avoid inadvertent errors and sloppy accounting practices. Never allow the proceeds of a deposited check to be disbursed prior to the check clearing. Use an accounting system that continually tracks individual client sub-accounts as well as the general ledger balance. Train all necessary personnel in the rules applicable to client trust fund accounting. Make correcting entries and transfers as soon as mistakes are discovered and fully document why changes were made. Note on the invoice kept in the file the account number and from which account a check was drawn. Never commingle funds in the CTA. Other than keeping a small balance to cover incidental fees (where allowed), non-disputed firm or attorney funds should never be left sitting in the CTA. Finally, do not allow the CTA to remain out of balance.
Following through on the advice shared here may require a little extra time each month; however, given the frequency with which we see and hear about problems with client funds, the effort will reduce the likelihood that we will hear about trouble at your firm. In addition, once implemented, the advice will bring added peace of mind and I’m all for that.
Mark Bassingthwaighte, Esq. is the Risk Manager with Attorneys Liability Protection Society, Inc., a Risk Retention Group, in Missoula, Montana. Currently Mr. Bassingthwaighte’s responsibilities include developing and delivering new risk management and CLE products and services, risk management consulting, law firm risk evaluations, and publishing the company’s e-newsletter, the ALPS Risk Management Report. In his tenure with the company, Mr. Bassingthwaighte has conducted over 850 law firm risk management assessment visits, presented numerous continuing legal education seminars throughout the United States and written extensively on risk management and technology.
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