A matter of trust in using accounts

I've written before on the issue of trust accounts and general accounts, and the importance of avoiding commingling between the two. It's an issue that refuses to go away, because handling the money of others must comply with the very strict trust account rules in every state.

The American Bar Association's Model Code of Professional Responsibility, Disciplinary Rule DR 9-102, specifically addresses the issue of trust accounts and commingling of funds.

The clear conclusion to be drawn from the ABA requirement is that 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.

This must be done immediately (unless jurisdictional rules state otherwise), with the earned money being placed in the lawyer's general account.

When you first receive funds, use this as a rule of thumb for depositing them:

• 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 go into the general account.

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

Some jurisdictions may place restrictions on the withdrawal of funds from a trust account. In Wisconsin, as one example, the requirement is that before any funds can be withdrawn from the client trust account, the client must be given five days notice.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.

It is thus important to verify the rules in your jurisdiction before making an immediate withdrawal of earned funds.

One generally knowledgeable blawger, Jonathan Stein, has suggested that he escaped an ethical problem because he had a few extra dollars in his clients' trust account. Those few (100) dollars assured him that his bank wouldn't invade clients' funds if they charged an expense item against the account.

However, some states prohibit, or least frown on, lawyers keeping funds (even only $100) in a clients' trust account. Technically, this is commingling, which is illegal. Second, the lawyer should negotiate with her/his bank to take any charge or expense from the general account, not the trust account.

Despite urgent client needs and requests, no check should be drawn from the clients' trust account until after the originally deposited settlement 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.

This 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! And the subject of bar discipline!