Commentary: Roundtable offers tips for handling trust accounts, part 2.

• Date: 23 October 2002

Byline: Tony Anderson

WISCONSIN LAW JOURNAL: Dan, earlier, you had talked about the challenges that smaller firms face. Do you want to elaborate on that?

DANIEL L. SHNEIDMAN: Let me take a step back and indicate why I believe so many lawyers have difficulty understanding the importance of the rule. [SCR 20:]1.15 serves a very strong public policy. I think that lawyers' perceptions of what a fiduciary responsibility is probably is lost upon them when they're talking about the money or the funds that are given to them by a client, which may be reported to be fees. But in my opinion, there's a mixed question of law versus ethics.

I believe right now the Supreme Court interpretation, as applied by OLR (Office of Lawyer Regulation), would say as follows: That if a client hands a lawyer $1,000 to handle a particular case or a would-be retainer, the word "retainer" is ill-defined. But, it is used by every single lawyer in private practice.

Quite frankly, I'm not confident they understand, nor does the law give them direction. I would believe that most lawyers that get a retainer, they're really talking about an advance amount of money to be applied against the work to be done. I believe OLR - and I'd like to hear from Keith and Mary - I believe they take the interpretation that that money should go into the trust account.

When does it become the lawyer's property? Does it become the lawyer's property when the lawyer starts work on the case? Does it become the lawyer's property when the lawyer sends out a bill? Does it become the lawyer's property when the lawyer tells the client, "I've used up the $1,000 already?"

That is not clear. In 1.16(d), it says that, at the end of the representation, the lawyer must return the unearned fee. So if the lawyer asks for a $1,000 retainer, and let's say they put in a couple of hours already, and their hourly rate is $200 an hour, they've earned $400. When the client gives the $1,000, I believe OLR would say that $400 of that can be put into the operating account, but $600 has to go into the trust account.

Now, the adverse impact on the small law firm is that they don't have fancy bookkeeping. They don't have an accountant. They have either cash or a check. I'm assuming this is the honest, hard-working lawyer, and let's say this is a fluid case. It's going to be a criminal or family law case, where they're interested in carrying out the functions, which we call the representation of a client, and they are in violation of the rule.

What is the remedy? There will either be aggravating or there will be mitigating circumstances.

I think OLR will be fair and has been fair in these mitigating circumstances. The question is, for this sole practitioner, should they have on their record that they violated the trust account rule when, assuming they're in the category of even less culpability than the sloppy person, they just don't have the same people power as the larger firms?

The lawyer in the larger firm will simply call up and say, "I'm sending up $1,000 cash..." That's one of the most serious problems because it is such a disparate impact.

WLJ: Nate?

NATHANIEL CADE JR.: I agree wholeheartedly with Dan. I mean, I'm fortunate that there's a staff, there are accountants on staff, and when I give them money, they say, "Trust account? General account? Where do you want it? Do you need checks on this?"

I really don't have to think about a lot of that.

If it's a new client, or we are getting these retainer funds, what I strive to do, and I know a lot of people in my firm strive to do is, we try to create some type of evergreen account. You put the money in, but you're really holding on to that money for safe keeping if the client doesn't pay.

If it's $1,000, you put that in, and you let them know, okay, I'm going to bill you every month. We expect that paid. If we don't get paid, we then will move to withdraw at some point. Under [SCR 20:]1.16, we can argue that that money has been earned and, therefore, can be transferred over to general operating.

But the key is getting people to actually ask for the retainers and not necessarily using those funds. Instead, billing clients. It will impact a smaller firm because they're certainly going to have cash flow problems, you know, the amount of work is up and down in terms of when it's coming in.

A larger firm or a firm that even has a line of credit from a financial institution can ride those financial cash flow waves, whereas a smaller firm, now thinks, "Well, I'm going to earn it, it's a criminal matter, I know I've got a trial next week in this case or I know I've got this, I'm going to spend it."

For solos or people going out on their own, the big thing is establishing a line of credit at a financial institution, maybe even borrowing funds from family, friends, et cetera, when you're starting your practice so you do have that back-up cash flow so you're not tempted to use the money thinking you're going to earn it or rely on it.

WLJ: Mary?

MARY HOEFT SMITH: I agree with what Dan said about OLR's position on advanced fees. When a lawyer receives $1,000 as an advance to be charged against, that $1,000 must go into the lawyer's trust account. When the lawyer has earned a portion of that, the...