B-law B-law B-law: Ethics for Business Lawyers Client Trust Accounts

• Publication year: 2023
• Author: Written by Neil J Wertlieb*

B-LAW B-LAW B-LAW: ETHICS FOR BUSINESS LAWYERS CLIENT TRUST ACCOUNTS

Written by Neil J Wertlieb*

This edition of B-Law B-Law B-Law focuses on an attorney's obligations with respect to safekeeping of funds or property held on behalf of clients and other persons. Continue to watch this column for guidance on ethical issues of particular interest to business lawyers in the State of California.

CAUSE FOR CONCERN

The news over the past couple of years regarding the misconduct of attorney Tom Girardi—and the apparent inability of the California State Bar to detect such misconduct despite over 150 complaints filed against him going back several decades—has prompted increased scrutiny over compliance with the trust account rules. It has also led to some significant changes in such rules, as well as proposals to increase the reporting responsibilities of attorneys who witness misconduct by another attorney.⁰¹

Even before news of the Girardi scandal broke, State Bar disciplinary proceedings against attorneys for misappropriation of client funds, and other failures to comply with the trust account rules, were fairly common. Further, because of the recordkeeping obligations imposed on attorneys, violations of the rules are fairly easy to prove, either because such violations are evidenced in the records themselves, or the attorney has failed to keep accurate records.⁰²

REQUIREMENTS UNDER THE RULES OF PROFESSIONAL CONDUCT

Under rule 1.15 (Safekeeping Funds and Property of Clients and Other Persons) of the California Rules of Professional Conduct,

All funds received or held by a lawyer or law firm for the benefit of a client, or other person to whom the lawyer owes a contractual, statutory, or other legal duty, including advances for fees, costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction.⁰³

In essence, funds that do not belong to the attorney must be held in trust, in a segregated bank account for the benefit of the applicable client or other person. Further, attorneys must not commingle their own funds in such account. Paragraph (c) of rule 1.15, provides (with limited exceptions), "[f]unds belonging to the lawyer or the law

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firm shall not be deposited or otherwise commingled with funds held in a trust account."

Pursuant to paragraph (d)(3) of rule 1.15, "[a] lawyer shall ... maintain complete records of all funds, securities, and other property of a client or other person coming into the possession of the lawyer or law firm." In accordance with certain standards adopted by the Board of Trustees of the State Bar of California, the records required to be maintained in accordance with paragraph (d)(3) include: (1) a written ledger for each client, setting forth the name of such client; the date, amount, and payor or payee of all funds received or paid; and the current balance for such client; (2) a written journal for each bank account setting forth the name of such account; the date, amount and client affected by each debit and credit; and the current balance in such account; and (3) all bank statements and cancelled checks for each bank account. In addition, the lawyer is...