Trust Accounts: Staying on the Straight and Narrow

As a general rule, a client's payment for work that has been performed is to be deposited into a lawyer's general account, and payment for work that will be performed is to be deposited into the client's trust account.

The engagement agreement should detail the circumstances under which funds may or must be transferred from the client's trust account to the lawyer's general account. It all seems straightforward and clear. Yet lawyers constantly face ethical snares on the use of, and accounting for, client trust accounts.

The fundamental question for lawyers is this: When you first receive funds, which account should they be placed into? The trust account or the general account? In most instances, this is the rule of thumb to follow:

• If the funds are provided on retainer, then they are for a task that is not completed and the hours are not yet earned. That means the money goes into the client trust account.
• If the funds have been earned when you receive them, then they should go into the general account.

The rules of the game

The American Bar Association's Model Rule of Professional Responsibility 1.15 specifically addresses the impermissibility of commingling the lawyer's own funds with client funds, except when necessary to pay bank service charges on the trust account.

In short, money earned by a lawyer for provision of services belongs to the lawyer and must be removed from the client's trust account when earned. It must be done immediately (unless jurisdictional rules state otherwise), with the earned money being placed in the attorney's general account.

Some jurisdictions place additional requirements on the withdrawal of funds from a trust account. In Wisconsin, for example, the requirement is that before any funds can be withdrawn from the client's trust account, the client must be given five days' notice. This is the case even when the funds are earned and even if the engagement agreement provides for immediate withdrawal.

Lawyers should provide in their engagement letters that the client authorizes the attorney to debit trust account funds after a reasonable time from the date of billing — for example, 15, 30 or 45 days, whichever is most reasonable under the circumstances. That provides a date certain for payment to the lawyer.

Note that the client, in most jurisdictions, will retain the right to dispute the charges, although clients are unlikely to do so if they understand that, by agreement, they need to be timely with any objections.

Now what?

The real issue, however, is that when the fee is earned, it must be withdrawn from the client's trust account to avoid commingling. Consequently, it is important to put a "protest process" into the engagement agreement.

Provided there is no complaint or dispute in writing from the client within the number of days set forth in the engagement agreement from the date of the invoice or statement, the client will be deemed to have approved the billing. Then, if the client protests later, you will have a prima facie reason for the transfer, and the money will be in your pocket (not the trust account).

Once disputed, however, funds should be transferred back to the client's trust account until the dispute is resolved.

No check should be drawn from the client's trust account until after the draft or check is honored and the deposit is confirmed to be valid. Until then, payment to one client of money in accord with a settlement that is either dishonored or rejected, despite delivery of a check or draft, is actually payment (borrowing) from the funds of another client without the second client's consent. That violates the rules of professional conduct of every state. And it does not matter that the money is repaid, even if quickly. A technical violation is still a violation nevertheless.