Most lawyers know that the fastest way to get disbarred is to mess with client funds in the interest on lawyer trust account (IOLTA). This likely explains the pure panic ethics lawyers hear in their clients’ voices when there is an error discovered in their trust account. It also underlies the shock that most lawyers felt when the Thomas Girardi scandal came to light in California in 2020.
Girardi did not practice law like most of us, particularly solo and small firm lawyers, do. He practiced law on a grand scale, handling massive cases and amassing enormous judgments from his large volume of high-profile cases. In fact, his level of law practice was more akin to Big Law, where disciplinary actions are relatively rare. When we think of trust account violations, we tend to think of true solos who are not keeping their books properly or small firms where lawyers can write themselves a check from the IOLTA without anyone else noticing. We do not expect the plaintiff’s lawyer who worked with Erin Brockovich on the case that made her famous in the Julia Roberts movie and who went on to represent the families of Lion Air’s 2018 crash to be accused of trust account violations.
Yet, despite how different the law practices of most solos are from that of Thomas Girardi, it is indisputable that Girardi’s fall from grace is having a massive ripple effect on solo practitioners. At this point in time, the impact is most striking for California lawyers. However, the reforms happening there are unlikely to remain isolated. Some of the changes reflect California catching up to other states in their regulation of trust accounts, but other changes establish more sweeping regulations than those found in many states and may very well catch on nationwide.
With the public noticing the ease with which lawyers can embezzle from their clients and with the regulatory focus on shoring up weaknesses in trust account management, all lawyers should be paying attention to the regulatory landscape and making every effort to ensure that their trust account practices are up to par. Disbarment for intentional malfeasance with client funds is deserved, but disbarment because you failed to take the time and care to handle trust account funds properly is an avoidable shame.
The Girardi scandal spurred California into action on trust accounts. While we may want to believe Girardi’s misconduct is just an anomaly, the truth is that many lawyers run into problems with their client trust accounts, whether intentionally or not. His conduct was just so extreme that it made headlines. According to a report issued in April 2022 by the California State Auditor, from 2010 through 2021, 23 percent of all State Bar of California discipline cases involved allegations related to client trust accounts. (Auditor of the State of Cal., The State Bar of California’s Attorney Discipline Process: Weak Policies Limit Its Ability to Protect the Public from Attorney Misconduct 28 (Apr. 2022).)
In September 2022, the State Bar of California Board of Trustees approved rules for implementing the Client Trust Account Protection Program designed to strengthen proactive oversight and regulation of client trust accounts. The program requires California licensed attorneys to register their trust accounts with the State Bar, confirm their compliance with the California Rules of Professional Conduct related to client trust accounts, and complete a self-assessment of their trust account management practices. These steps are required each year and are included as part of paying annual bar dues.
In a major move, the program also requires the State Bar to select a sample group of attorneys and conduct compliance reviews. The random audit has been the fear of many California lawyers for decades, but until this program, the state has not had this authority. The program also requires the State Bar to recommend compliance audits for select attorneys and, if necessary, mandate corrective action or refer for disciplinary proceedings those attorneys who are not in compliance with the trust account rules. Failure to comply with these program requirements subjects the attorney to being placed on inactive status (without the benefit of a State Bar Court trial beforehand).
The State Bar has also amended its Rule 1.15; the version of this rule in the American Bar Association (ABA) Model Rules of Professional Conduct has been adopted across the states in some form or another. The rule governs attorneys’ handling of client property and funds, specifically detailing requirements for client trust accounts. The changes to California’s rule include (1) requiring client notification within 14 days of receiving client funds or property; (2) removing language that conditions the duty to distribute funds or property only upon request by a client; (3) subjecting an attorney to discipline for failure to distribute undisputed funds or property within 45 days of receipt; and (4) adding a comment that an attorney must act diligently to resolve disputes that delay distribution of funds or property.
The State Bar also added a comment to Rule 1.4, stating a lawyer must proactively communicate with a client upon receipt of client funds or property.
These changes became effective January 1, 2023.
With client trust accounts and attorney conduct related to those client trust accounts under increasing scrutiny, now is a good time for attorneys with client trust accounts to review their processes and conduct a “do-it-yourself” audit to ensure compliance with the rules.
A good first step is to review your state’s rules on trust accounts. This review entails more than the ethics rules—it includes statutes and any guidance issued by the State Bar. Of particular interest should be recordkeeping requirements. Ensure that your processes are generating the state-required records. For many lawyers, using robust case management software and an accounting package such as QuickBooks will allow the required reports to be created, but do not just count on that. See what records need to be maintained and ensure that your workflow produces them.
Additional steps that are highly useful are:
Finally, make sure you know where to go for answers to some of the questions that come up in administering your trust account. Some of these unusual issues are discussed next.
The concept of a trust account seems simple enough. When you hold funds for the benefit of clients or other third parties, the funds go into the trust account. You keep records of their funds, and you pay them out to the appropriate person when the time is right.
Yet, there are all kinds of wrinkles that come up with trust accounts, and regulators are constantly trying to give attorneys guidance on how to handle these situations. Here are some of these issues and what regulators have recently said about them:
Third-party funds in trust accounts. Trust accounts are much simpler when the funds belong to the client and are to pay for your legal fees, so you know they will belong either to the client or to you. For many lawyers, the funds in trust frequently belong to third parties. A common example is a personal injury case, where lienholders (medical providers, for example) are entitled to some portion of the funds. Often, disputes arise among the lienholders and the client about ownership of funds held by the lawyer.
Changes to Rule 1.15 by the State Bar of California include a requirement that an attorney act diligently to resolve disputes that delay distribution of funds. Although disputes about amounts owed to third parties are not a new problem, there is likely to be debate and disagreement about what exactly constitutes diligence in a particular situation.
A September 2020 ethics opinion from the Illinois State Bar Association may offer some insight. A client was represented by Attorney A in a contingency fee personal injury case. The client was previously represented by Attorney B, who had perfected an attorney’s lien in the matter. The client and Attorney A both acknowledged the interest. Eventually, Attorney A settled the case and received a settlement check, which was deposited into Attorney A’s client trust account. The client, believing Attorney B had committed legal malpractice, objected to paying any portion of the settlement proceeds to Attorney B. Although Attorney A tried to resolve the dispute, the client continued to object to paying Attorney B. Unable to resolve the dispute, Attorney A paid the client the undisputed share owed and retained the disputed share in the trust account.
The issue addressed in the opinion is what Attorney A should do regarding the disputed funds remaining in the account. Recognizing that Attorney A probably does not want to be burdened with maintaining the funds and owing duties to conflicting parties, the opinion gives Attorney A an out. First, the opinion states that an attorney in possession of disputed funds must hold the funds until the dispute is resolved, but if there is no resolution forthcoming, the attorney should file an interpleader action so that the court can decide how the funds should be dispersed. (See Ill. State Bar Ass’n Pro. Conduct Advisory Op. 20-06 (Sep. 2020).)
Another issue that may arise is when a lienholder appears to have made a mistake in the client’s favor when seeking payment from funds held by the attorney. An attorney must navigate the obligations he has to the third parties while also fulfilling his duties to his client. A November 2021 ethics opinion from the Colorado Bar Association addresses situations where a third-party medical provider’s request for payment omits charges or the final bill is miscalculated. The issue addressed in the opinion is what, if any, ethical obligation the attorney has to notify the third party of the error. Recognizing that the attorney’s obligations are first and foremost to his or her client, the opinion explains that the attorney is generally not authorized to communicate with the third party about the discrepancy without the client’s consent. (See Colo. Bar Ass’n Op. 144 (Nov. 13, 2021).)
Uncashed checks. Another issue that can easily arise is the problem of the uncashed check written on the trust account. Best practices when it comes to managing a client trust account include doing regular, monthly reconciliations. It is through the reconciliation process that attorneys can uncover undispersed funds and uncashed checks. But what should you do with outstanding uncashed checks?
An October 2020 ethics opinion issued by the New Hampshire Bar Association addresses this issue. Noting that New Hampshire lawyers have a duty to resolve trust fund issues expeditiously (under the state’s version of ABA Model Rule 1.15), they must diligently follow up on any uncashed checks. This includes, at a minimum, contacting the payee and keeping detailed records of attempted contact. If the attorney is unable to reach the payee or resolve the issue, the attorney should review the state’s unclaimed and abandoned property statute to determine how the funds may escheat to the state. This process will allow the attorney to “clean up” his or her trust account. (See N.H. Bar Ass’n Op. 2020-21/01 (Oct. 15, 2020).)
New Hampshire’s opinion echoes the statutes of many states, which explain that unclaimed money held in a lawyer’s trust account escheats. This process can be cumbersome, but lawyers should have some familiarity with it or, at the very least, know where to turn if the issue arises.
New modes of client payments. Another relatively common question is how to handle payment by unfamiliar means. It may feel like it was not that long ago when attorneys finally started accepting credit cards for payment. Now, new modes of payment are raising ethical questions. Two recent ethics opinions address two such modes of payment—cryptocurrency and crowdfunding.
It should not be too much of a surprise that there are clients who want to pay their lawyers using cryptocurrency. Attorneys may be faced with the question of whether to accept cryptocurrency from a client or on behalf of a client. Of course, those attorneys are probably going to be asking, “Do I need to put this in my trust account?” The D.C. Bar issued Ethics Opinion 378 in June 2020, addressing this and other issues related to cryptocurrency. In footnote 10, the opinion states, “Rule 1.15(a) also requires that lawyers maintain trust funds to hold money belonging to clients or third parties. Because cryptocurrency has been designated by the Internal Revenue Service as property rather than money, and because it cannot be deposited into a trust fund without being converted to money, this requirement is not applicable.” (See D.C. Bar Ethics Op. 378 (June 2020).)
Crowdfunding, on the other hand, is quite a bit more complicated. Crowdfunding is available on a variety of platforms that allow individuals and organizations to raise money through usually small donations or contributions. Depending on the number of people donating or contributing, the amount raised through crowdfunding can vary widely. There are myriad issues that attorneys face when working with a client relying on crowdfunding. A June 2022 ethics opinion from the New Hampshire Bar Association provides a good overview of the issues and the rules of professional conduct that are most pertinent. One issue discussed is how raised funds may be dispersed and how unused funds may be disposed of, such as returning the money to donors. The opinion explains that “funds may be received by the client and disbursed to the attorney as billed, held by the crowdfunding platform and disbursed to the lawyer upon invoice, or deposited in the attorney’s client trust account as raised, to be drawn down as earned by the attorney.” (See N.H. Bar Ass’n Op. 2021-22/02 (June 17, 2022).)
Lawyers maintaining trust accounts must be keenly aware of the current and upcoming ethics rules. Beyond maintaining current learning, lawyers should operate their trust accounts as if they were always under audit. This is the mindset necessary to ensure that, if your state already randomly audits trust accounts or chooses to do so in the future, your account is airtight.
