Bar News - April 13, 2012
Ethics Corner: Trust Accounting Pitfalls
Dear Ethics Committee: I am a relatively new lawyer. I have heard that lawyers who have been around longer than I have sometimes get into trouble for technical violations relating to their trust accounts. How do I protect myself?
Trust accounting is taken seriously by the Attorney Discipline Office. Because the Rules of Professional Conduct and Supreme Court Rule 50 are primarily intended to protect clients, violations - even technical violations –receive careful attention. If a client complaint, or a random audit, shows that you have not been strictly complying with the rules, be prepared for a tough ride.
We recommend reviewing Professional Conduct Rule 1.15 and Supreme Court Rule 50 regularly -at least once a year – and keeping them in mind whenever you are dealing with client property. The following are a few pitfalls that may take some lawyers by surprise. These examples are by no means exhaustive. If you have questions, please feel free to consult with the Ethics Committee.
1) Don’t assume that the requirements have caught up with the paperless age. For example, Supreme Court Rule 50(2)(F) includes some fairly detailed requirements for monthly reconciliations. You will probably find that your bookkeeping software won’t provide sufficient evidence a few months or years later to show that you complied. Be prepared to print, and keep hard copies of, trust accounting records.
2) Don’t assume that your agreement with your client will be sufficient to show when you are allowed to pay yourself from client funds. For example, Supreme Court Rule 50(2)(C) says that non-refundable fees need not be deposited in your trust account. However, please read the footnote to Ethics Committee Comment to Rule 1.15, which says that "Rule 1.5 does not permit a retainer for services that is absolutely non-refundable because such a fee agreement is inconsistent with the Rule’s requirement that a fee must always be reasonable". Only "engagement retainers", which are rare these days, appear to qualify under Rule 50(2)(C). This rule can be particularly challenging for criminal defense lawyers.
3) Don’t assume that you will be OK merely by placing your client funds into your trust account and then keep careful records showing that the amount you have on hand equals the sum of your obligations to your clients. That’s a problem. Supreme Court Rule 50(2)(A)(2) makes clear that you must keep "a separate accounting page or columns for each client for whom property is held, which shall show all receipts and disbursements and carry a running account balance". The Rule goes on to say that you can meet this requirement by any means that "sufficiently accounts for trust funds" as long as your system "preserves the above-mentioned features." What does that mean? The safest course is to break out your accountings for each client matter.
4) Don’t assume that a check on the table is "good funds" on which you may disburse from your trust account. Under Professional Conduct Rule 1.15(e), if you receive funds for a client or third person in connection with a representation via cash, bank cashier’s check, certified check or electronic transfer of funds, you must not disburse funds until a) the funds are deposited in your financial institution, b) the financial institution acknowledges receipt, c) the deposited funds are at least equal to the sum of your proposed disbursements, and d) such funds are available to you from the receiving financial institution. If you receive a personal or business check that is not bank-certified, then such funds must also have been cleared by your financial institution.
That rule does not apply to non-lawyers, who may choose to assume the risk that the check isn’t good. Lawyers do not have that option. And you can’t get around the requirement by calling yourself a "title company" or a "closing company" or whatever label you wish to use. The New Hampshire Supreme Court has made clear that if you are a lawyer, the trust accounting rules apply to you, no matter how you hold yourself out.
5) Don’t assume that money makes the problem go away. Professional Conduct Rule 1.15(c) says that it is a violation for a lawyer to deposit the lawyer’s own funds in a client trust account, other than amounts necessary to cover bank service charges.
6) Don’t assume you can advance to yourself money from your client trust account, ever. Unwary lawyers may assume that, for example, when a settlement has been agreed, but a required written authorization for payment of the lawyer’s fees is expected but has not yet been received as of late Friday, there is no harm in advancing to yourself the agreed-to fee to cover weekend expenses. Until the authorization is in hand, the money belongs to the client and an "innocent cash advance" is a violation.
As always, if you do find yourself on the receiving end of an inquiry from the Professional Conduct Committee, by far the best course is to a) respond promptly and fully and b) consider hiring counsel to help you deal with the situation, remembering the old adage about having a fool for a client. Trust accounting complaints and random audits are no fun, but they always go better if your response is cooperative.
The Ethics Committee provides general guidance on the New Hampshire Rules of Professional Conduct with regard to a lawyer’s own prospective conduct. New Hampshire lawyers may contact the Ethics Committee for confidential and informal guidance by emailing Rose Anocibar. Brief commentaries of ethics topics based upon member inquiries and suggestions are published monthly in the New Hampshire Bar News.