June 2004 - #14. Trust Account Ethics Rules: Sensible, Bizarre, or a Combination?.

 
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Vermont Bar Journal

2004.

June 2004 - #14.

Trust Account Ethics Rules: Sensible, Bizarre, or a Combination?

Vermont Bar Journal - June 2004

Trust Account Ethics Rules: Sensible, Bizarre, or a Combination?

Roger E. Kohn, Esq.

Introduction

This article was prompted by Advisory Ethics Opinion No. 2002-4 of the Vermont Bar Association Professional Responsibility Committee (hereinafter "VBA Ethics Opinion 2002-4") which drew into question the way many lawyers in the state have been dealing with their trust accounts. The purpose of this article is to examine the important issue of when funds deposited in a lawyer's trust account can ethically be disbursed.

VBA Ethics Opinion 2002-4 deals with a number of issues regarding trust accounts. This article analyzes in detail only the question of when checks can be written from trust accounts, based upon the types of instruments received for deposit. Before discussing this issue, however, it is worthwhile to take a moment to note three other trust account ethics issues that are often misunderstood.

First, Rule 1.15(a) of the Vermont Rules of Professional Conduct ("V.R.P.C.") arguably does not permit a lawyer to keep money in a trust account to cover bank service charges, even if the amount proposed to be kept in the trust account is small.1 Rather, when a bank assesses service charges, the lawyer must promptly place an equal amount of funds in the trust account. VBA Ethics Opinion 2002-4 states that the VBA Committee encourages amendment of the Rule "to allow attorney funds to be held in the client trust account to cover bank service charges as long as those funds are separately accounted for and designated for this purpose." Such a change appears to make a great deal of sense.

Second, it is relatively clear that when funds have been held in the trust account for an extended period of time, and the lawyer cannot determine to whom these funds belong, they should be dealt with in accordance with Vermont law governing unclaimed property, 27 V.S.A. 1208-1238.

Third, it is important to remember that client funds may never be commingled with the attorney's funds, even for a short period of time. Accordingly, if a personal injury settlement check is received, the check may not be deposited in the law firm's general checking account, and separate checks simultaneously written to the law firm for its fee and to the client for the balance; the check must be deposited in the firm's trust account.

With these somewhat unintuitive issues out of the way, this article now turns to its primary focus - how can one, as a practical matter, deal with tort settlement checks, real estate closings, and other client matters, while following the ethical rules required for lawyers' trust accounts.

Historical Background - Rampant Ambiguity

The American Bar Association adopted thirty-two Canons of Professional Ethics in 1908; these did not deal with the issue in question. The American Bar Association adopted a model Code of Professional Responsibility in 1969, which was adopted by the Vermont Supreme Court in 1971.

Disciplinary Rule 9-102 stated:

DR 9-102 Preserving Identity of Funds and Property of a Client.

(A) All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:

(1)

Funds reasonably sufficient to pay bank charges may be deposited therein.

(2)

Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

(b) A lawyer shall:

(1)

Promptly notify a client of the receipt of his funds, securities, or other properties.

(2)

Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.

(3)

Maintain complete records of all funds, securities and other properties of a client coming into the possession of a lawyer and render appropriate accounts to his client regarding them.

(4)

Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.

The ABA included some commentary ("notes") following the Disciplinary Rules; only one dealt with the question we are considering. This note added nothing relevant to this issue, other than to explain that the purpose of the rule was to prevent commingling, and cited a case

defining commingling as follows:

[C]ommingling is committed when a client's money is intermingled with that of his

attorney and its separate identity lost so that it may be used for the attorney's personal

expenses or subjected to the claims of his creditors. . . . The rule against commingling

was adopted to provide against the probability in some cases, the possibility in many

cases, and the danger in all cases that such commingling will result in the loss of the

clients' money.2

Thus, there was nothing in Disciplinary Rule 9-101 which stated - or even indicated with any degree of clarity - that it was improper to deposit a client's personal check in a trust account, and then immediately disburse checks based upon the deposited funds. Of course, if a check was dishonored, it was relatively clear from the rest of the Code that it was the lawyer's duty to immediately deposit funds to cover the dishonored check. There may or may not have been opinions stating that this was not proper practice; the point being made is simply that from reading the Code of Professional Responsibility, it would be difficult to conclude that this practice was prohibited. In fact, the author believes that this was the practice of most Vermont attorneys for many years.

In 1999, the Vermont Supreme Court adopted the Rules of Professional Conduct, which were based upon the American Bar Association's Model Rules of Professional Conduct.3 Rule

1.15 discusses safekeeping of clients' property, and requires that property of clients or "third persons" in a lawyer's possession in connection with representation be kept separate from the lawyer's own property. Rule 1.15A requires every law firm or attorney in private practice (or attorneys not in private practice who receive client funds) to maintain one or more trust accounts, and specifies how records are to be maintained. Rule 1.15B deals with interest earned on trust account funds, and provides for the IOLTA system. Rule 1.15C provides for overdraft notification to the Professional Conduct Board.

A comment to Rule 1.15 states that "[a] lawyer should hold property of others with the care required of a professional fiduciary," and provides that if the property is money it should be kept "in one or more trust accounts." Except for this comment, there is nothing in Rule 1.15, 1.15A, 1.15B, or 1.15C that directly states when funds may be disbursed, based upon the type of check deposited in a trust account, or that even appears to bear on this issue. The sole exception is the comment to Rule 1.15 requiring funds be held "with the care required of a professional fiduciary." The author knows of no principle of general fiduciary law that makes it improper to disburse funds against clients' or commercial checks believed to represent good funds (if the fiduciary is willing to make good any check that is dishonored)4 - although various bar association ethics committees disagree with this conclusion, as will be discussed below.

V.R.P.C. 1.15(b) states that a lawyer shall deliver to the client or third person funds that this person "is entitled to receive." From this language, VBA Ethics Opinion 2002-4 infers that accepting checks that have not "cleared" is not permitted. But the applicability of this language to the issue being discussed is hardly clear.

It is of interest that the half-dozen treatises reviewed by the author make no reference whatsoever to the issue of when disbursements may be made from trust accounts based upon the type of...

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