A History of the Client Protection Rules
Remedies for defalcation of clients' funds by lawyers were established in English Commonwealth countries at the beginning of the 20th century.1 Developments in the law regarding lawyers' responsibilities appear to be tied historically to depressed economic times during which lawyers misappropriated client funds.
The first major development in the protection of client funds arose in the turmoil of the Boer War (1899 1902) when the English stock market tumbled, sending many solicitors and well established firms into bankruptcy. Until then, solicitors commonly commingled their own funds with client funds and even used clients' funds, unless earmarked for a particular purpose.2
The severe losses following the market collapse prompted Parliament in 1901 to amend the Larceny Act of 18613 to make it a criminal offense to convert funds or property held in trust. The expansion of criminal liability for defalcation was not accompanied by passage of civil laws requiring the segregation of client funds; by 1907, however, solicitor's training included bookkeeping courses.
The English Law Society established a special committee to examine professional accounting requirements and the possible formation of a Guarantee Fund to protect defrauded clients. The special committee concluded that solicitors were duty bound to make a full and proper accounting of clients' funds by maintaining separate accounts. Further protections were considered unnecessary.4 It was not until Parliamentary amendments were made to the Solicitors' Act, 1933,5 that the Law Society was required to draft rules requiring solicitors to establish segregated client accounts and to maintain records of those accounts.
While the English Law Society declined to recommend the creation of a compensation fund in 1907,6 New Zealand emerged as a leader in the development of client protection remedies, particularly with the passage in 19087 of a provision requiring solicitors to deposit client funds into bank trust accounts. This was followed in 1913 with amendments empowering the New Zealand Law Society to make rules requiring audits of solicitors' trust accounts.8
Despite these provisions, losses by defaulting solicitors came to the attention of the New Zealand Parliament in 1926, and the Attorney General, who recommended that the New Zealand Law Society draft and introduce legislation regarding solicitors' accounting of client trust funds. The Association of New Zealand Chambers of Commerce presented a resolution in February 1927, providing:
[t]hat this Conference brings before the Law Society the necessity of Solicitors handling trust moneys, subscribing to an adequate indemnity insurance, or failing that, the Law Society provides a guarantee fund to admitted solicitors similar to the guarantee funds provided by the banks.9
That March, the concerns of Parliament and the Association of Chambers of Commerce were reviewed by the New Zealand Law Society Council when the Council of the Wellington
District Law Society proposed the ?creation of a fund for the purpose of making provision for monetary losses incurred by clients of defaulting solicitors."10 The measure prompted the formation of a committee to study legislation regarding Solicitors' Trust Accounts and to work with the New Zealand Attorney General in the formulation of legislation. After prolonged discussions the Law Society drafted a bill that was passed by the New Zealand Parliament creating the first trust fund, the Solicitors' Fidelity Guarantee Fund.11
When originally established, the fund reimbursed those who suffered monetary losses because of theft by a solicitor or a solicitor's servant or agent of any money or other valuable property entrusted to the solicitor in the course of practice. All solicitors were required to contribute to the fund. After the Act was adopted, the Law Society drafted an advertising circular, for publication by local law societies, informing the public about the fund benefits.
In 1930, the Legal Practitioners' Fidelity Guarantee Fund was established in Queensland, Australia.12 The first fidelity fund in Canada was established in Alberta in 1939, and entitled the Assurance Fund.13 A compensation fund was created in England in 1941 into which every practicing solicitor was required to contribute annually.14 Funds were established in Scotland in 194915 and Ireland16 in 1954.
World War II may have played a prominent, if unexpected, role in the development of lawyers' funds for client protection in the United States. According to one history of the development of such funds, Kenneth G. McGilvray, of Sacramento, California, learned about the fund concept while stationed in New Zealand during the war and returned home to publish an article discussing the New Zealand experience in the California State Bar Journal in 1946.17
Several years later, in 1953, Robert G. Storey, then American Bar Association (ABA) president, discussed lawyers' funds for client protection in his report to the Association. Interest in the funds was stimulated by New Jersey Supreme Court Chief Justice Arthur G. Vanderbuilt and Harvard Law School Dean Erwin Griswold. The ABA established a committee in 1955 to study and promote the creation of such funds.18
In the United States, 1959 stands out as a watershed year in the development of client protection measures. The first American lawyers' fund for client protection was established in Vermont in January 1959 through the auspices of the Vermont Bar Association. In February, the ABA House of Delegates adopted a resolution approving such funds in principle and urging all state bar associations to appoint feasibility study committees. In May, the Board of Governors of the Illinois State Bar Association adopted a resolution approving the principle of a fund and appointing a committee to develop ways to establish a fund with the Chicago Bar Association. In June, the Philadelphia Bar Association adopted a resolution putting a clients' security fund into operation. In August, a meeting of the ABA Clients' Security Fund Committee reported that 34 state bar associations had appointed committees to study fund creation. In September the State Bar of Washington voted to establish a security fund. The next month, bar associations in Colorado and New Mexico followed suit. In November the Board of Governors of the Virginia State Bar Association approved the establishment of a fund in principle.19 By 1976, 47 jurisdictions had established some form of lawyers' funds for client protection.20 By 1998, all jurisdictions in the United States and Canada had not established a fund. The organization, funding, accessibility and responsiveness to client claims vary widely among the funds.
MODEL RULES FOR LAWYERS' FUNDS FOR CLIENT PROTECTION
Since 1969 the ABA Standing Committee on Client Protection has actively promoted the establishment, maintenance and improvement of lawyers' funds for client protection for the benefit of the public and the profession. The Committee published Suggested Guidelines for the Establishment and Operation of a Clients' Security Fund in the mid 1970s, and in 1979 began its effort to codify into black letter the basic mechanism to achieve reimbursement of losses generated by the dishonest conduct of lawyers.
In 1981, the ABA House of Delegates approved the Model Rules for Clients' Security Funds. Nearly a decade later, based on experience in reimbursement programs nationally, the rules were updated and renamed Model Rules for Lawyers' Funds for Client Protection. The revisions were adopted by the ABA House of Delegates in 1989.
Over the ensuing years other important safeguards have been developed by the various jurisdictions that have led to the development of other important Model Rules by the Standing Committee on Client Protection. (The Standing Committee on Lawyers' Responsibility for Client Protection was constituted in 1984 through a merger of the Standing Committee on Clients' Security Fund and the Standing Committee on the Unauthorized Practice of Law. In 1997 the Committee was renamed the Standing Committee on Client Protection.)
In August 2002, the ABA House of Delegates accepted a package of revisions to the Model Rules for Lawyers' Funds for Client Protection. The amendments reflect experience gained during the two decades that have elapsed since the original Model Rules were adopted. Every U.S. jurisdiction now has a fund to compensate clients for financial loss resulting from their lawyer's dishonesty. Rather than making significant changes, the revisions are intended to fine-tune aspects of lawyers' funds for client protection.
MODEL RULES FOR TRUST ACCOUNT OVERDRAFT NOTIFICATION
Lawyers are required to maintain client funds in specially designated escrow or trust accounts, according to Rule 1.15 of the ABA Model Rules of Professional Conduct. In 1988, the ABA House of Delegates adopted the Model Rules for Trust Account Overdraft Notification, requiring financial institutions to notify the state lawyer disciplinary agency when an overdraft has occurred in a lawyers' trust or escrow account. This rule is designed to operate as an "early warning" that a lawyer may be engaging in conduct that might injure clients.
MODEL RULE FOR PAYEE NOTIFICATION
In 1991, the ABA House of Delegates approved a Model Rule for Payee Notification that requires insurers to provide written notice to a claimant that payment was delivered to the claimant's lawyer or other representative by draft, check or otherwise. This Model Rule was based on Regulation 64 of the Department of Insurance of the State of New York, 11 NYCRR 216.9, promulgated in 1988, that had proved highly successful in protecting client interests.
MODEL RULE ON FINANCIAL RECORDKEEPING
The Model Rule on Financial Recordkeeping, adopted in February 1993, delineates the types of financial records that must be maintained by a lawyer. In 1983, the ABA House of Delegates adopted the Model Rules of Professional Conduct, including Rule 1.15, requiring lawyers to maintain "complete records" regarding trust or escrow accounts. Rule 1.15 does not provide lawyers with practical guidance in complying with these recordkeeping duties. Consequently, a Model Rule was drafted to provide further definition of the requirements of Rule 1.15 and to establish uniform and minimal standards for the maintenance of law firm financial records.
MODEL RULE FOR RANDOM AUDIT OF LAWYER TRUST ACCOUNTS
Additionally, the Model Rule for Random Audit of Trust Accounts was approved in August 1993. Adoption of such a rule had been included as Recommendation Number 16 in the Report of the Commission on the Evaluation of Disciplinary Enforcement, otherwise known as the "McKay Commission," which the ABA House of Delegates adopted in February 1992.
The McKay Commission had found by 1992 that trust account notification, recordkeeping and random audit rules had been adopted by a sufficient number of jurisdictions so that a body of experience was able to demonstrate that these programs were effective deterrents as well as detectors of thefts of funds by lawyers. Consequently, the Commission recommended the highest court in each jurisdiction adopt a rule authorizing the lawyer disciplinary agency to conduct audits of lawyer trust accounts selected at random without having a basis to believe misconduct occurred.
When this Model Rule was adopted, random audit programs existed in Delaware, Iowa, Nebraska, New Hampshire, New Jersey, New York (1st and 2d Departments), North Carolina and the state of Washington.
MODEL RULES FOR FEE ARBITRATION
Another important series of recommendations in the McKay Commission report centered around the establishment of procedures for handling the numerous complaints received by disciplinary agencies that do not involve allegations of lawyer misconduct, but reflect legitimate client concerns. Among these, the Commission recommended adoption of a program for the mandatory arbitration of fee disputes.
As a result of this recommendation, the ABA House of Delegates in February 1995 adopted the Model Rules for Fee Arbitration. These rules were based on experience in six states that had programs for mandatory fee arbitration: Alaska, California, Maine, New Jersey, South Carolina and Wyoming.
MODEL RULES FOR MEDIATION OF CLIENT-LAWYER DISPUTES
On August 4, 1998, at its Annual meeting in Toronto, the ABA House of Delegates adopted the black-letter of the Model Rules for Mediation of Client-Lawyer Disputes. The mediation process will benefit the public by directly addressing instances where a lawyer is alleged to have engaged in lesser misconduct but the misconduct does not warrant a formal disciplinary proceeding. A mediation program will also protect the public by removing matters involving lesser misconduct from the disciplinary system and thereby allowing disciplinary counsel to focus their efforts on more serious matters.
GUIDELINES FOR THE ADOPTION OF A DEFINITION OF THE PRACTICE OF LAW
On August 11, 2003 the ABA House of Delegates adopted the Report and Recommendation of the Task Force on the Model Definition of the Practice of Law. The Guidelines for the Adoption of a Definition of the Practice of Law recommend that every jurisdiction and territory adopt a definition of the practice of law that includes the basic premise that the practice of law is the application of legal principles and judgment to the circumstances or objectives of another person or entity and that each state and territory should determine who may engage in the practice of law and under what circumstances, based upon the potential harm and benefit to the public. The determination should include consideration of minimum qualifications, competence and accountability.
There are an increasing number of situations where nonlawyers, or lawyers licensed in a different state or territory, are providing services that are difficult to categorize under current statutes and case law as being, or not being, the delivery of legal services. The adoption by jurisdictions and territories of a definition of the practice of law is an important step in protecting the public from unqualified service providers and in eliminating uncertainty for persons working in law-related areas, including lawyers licensed in other states or territories, about the propriety of their conduct.
MODEL COURT RULE ON INSURANCE DISCLOSURE
On August 10, 2004, the American Bar Association House of Delegates adopted as ABA policy the Model Court Rule on Insurance Disclosure. The Model Court Rule requires lawyers to disclose on their annual registration statements whether they maintain professional liability insurance. It places an affirmative duty upon lawyers to notify the highest court whenever the insurance policy covering the lawyer's conduct lapses or is terminated. This ensures that the information reported to the highest court is accurate during the entire reporting period. Lawyers who do not comply with the Model Court Rule are not unauthorized to practice law until they comply. The purpose of the Rule is to provide a potential client with access to relevant information related to a lawyer's representation in order to make an informed decision about whether to hire a particular lawyer.
The information submitted by lawyers will be made available by such means as designated by the highest court in the jurisdiction. For example, in Illinois, Kansas, Nebraska and Virginia, information regarding a lawyer's professional liability insurance is made available to a potential client if the client telephones the bar association and requests it. The information can also be accessed on the bars' websites. (See, www.vsb.org, under the headings Public Information, Attorney Records Search, Attorneys without Malpractice Insurance). To date, twelve jurisdictions have addressed the issue of reporting the maintenance of professional liability insurance.
MODEL COURT RULE ON PROVISION OF LEGAL SERVICES
FOLLOWING DETERMINATION OF MAJOR DISASTER
On February 12, 2007, the American Bar Association House of Delegates adopted as policy the Model Court Rule on Provision of Legal Services Following Determination of Major Disaster. The Model Court Rule provides that, after the highest court in an affected jurisdiction, or in another jurisdiction to which displaced persons temporarily relocate, determines that an emergency exists that affects the state's justice system and the provision of legal services, the court may allow: (1) out-of-state lawyers to provide pro bono legal services to the citizens of the affected state within certain constraints described in the model rule; and (2) lawyers from an affected state can provide legal services in an unaffected state on a temporary basis if these services are reasonably related to the lawyer's practice in the affected jurisdiction. The Model Court Rule incorporates the fundamental and well-settled Association policy that regulation of the legal profession vests with the judicial branch of government. The provision of temporary pro bono legal services under the Model Court Rule shall be assigned and supervised through an established not-for-profit bar association, pro bono program or legal services program or through such organization specifically designated by the highest court. The Model Court Rule requires out-of-state lawyers to file a registration statement with the Clerk of the Court in a form prescribed by the Court. Under paragraph (b) of the Model Court Rule, an emeritus lawyer from another United States jurisdiction may provide pro bono legal services on a temporary basis in an affected jurisdiction.