By Bethany S. Ensz, M.S.
Being in the legal field for over a decade, trust accounting has rarely been a focus of continuing education, yet it is a vital part of the attorney-client relationship. Maintaining trust with the client is the duty of every legal professional which is why legal professionals must always keep an accurate record or account of any money being paid or held on behalf of the client in order to facilitate trust in the relationship.
Fortunately, legal professionals do not need to be mathematical wizards or have financial degrees. It is not as basic as having a bank account that can receive funds but also have a basic understanding of a few key concepts. Under California’s Rule of Professional Conduct 1.15, the moment a client’s money is not tracked is the moment a violation has occurred. Think about it; if a legal professional went into their personal bank and asked for a detailed record of their accounts and the bank responded that they do not have such records because the business is busy, that legal professional would not feel easy about keeping their money in such a bank. Likewise, a client would feel the same about a firm/proprietor they are working with who failed to keep detailed records of their money, there would be a lack of trust. Therefore, it is important to keep complete and accurate records of client funds. Legal professionals, especially those in a support role, know the importance of keeping a written record (save those emails!). Client trust account records should be kept for at least five years and funds should be placed in a clearly marked client trust bank account. It is not uncommon for multiple clients to have money in the same account however, it is vital that the records reflect just how much money each client has in the account. So get those ledgers ready for use!
One of the biggest pitfalls firms/proprietors should avoid is the commingling of funds. Legal professionals should keep their operating accounts separate from client trust accounts. A legal professional cannot borrow from Peter to pay Paul. Whether Paul is another client or the firm/proprietor itself, this is a huge violation. A firm/proprietor cannot spend what they do not have and having a negative balance is a problem. A negative balance indicates unethical accounting practices. If there is an unethical accounting practice it is likely the client will wonder what other ethical lines are potentially being blurred. A firm/proprietor would not have clientele knocking at the doors or a booming business if this was their standard of practice. Instead, those in the industry might see clientele departing in droves from firms/proprietors with those sorts of low practice standards. To ensure a negative balance is not an issue, be sure the client’s deposits have “cleared”. Timing is everything in the legal industry.
In practicing ethical client trust accounting there should be a positive balance if a firm/proprietor is holding client funds yet to be earned or a zero balance if all client funds held have been earned and are not subject to dispute. Under California’s Rule of Professional Conduct, 1.15 (c) (2) the only time a firm/proprietor should move client money from an account is when it is earned. If any amount of the fee is in dispute, such funds should be kept in the client’s trust account until the dispute is resolved. All amounts not in dispute should be immediately moved to the firm’s/proprietor’s operating account. Additionally, any advanced fees submitted to the firm/proprietor should be placed in a client trust account until such funds are earned. See T&R Foods, Inc. v. Rose, (1996) 47 Cal. App. 4th Supp. 1. When a legal professional’s client is entitled to receive money or property that is being held for them, a legal professional has a duty to promptly deliver it. Additionally, if a settlement is received on behalf of a client, the legal professional must promptly communicate receipt of such settlement to the client. A firm/proprietor should not use any settlement funds to pay outstanding firm/proprietor invoices until the client is billed. Once the client approves the bill, the outstanding invoice may be paid. The rule applies to flat fees as well. The flat fee should be held in trust until the services have been provided and the client approves the work. The legal professional should immediately move the funds from the client’s trust account to the operating account.
In an effort to educate legal professionals and protect client funds, the State Bar of California requested The Supreme Court of California to approve rule 9.8.5 of the California Rules of Court. The Client Trust Account Protection Program (CTAPP) took effect on January 1, 2023. The goal of the program is to promote compliance and avoid misconduct prior to a client being harmed by mismanagement of funds or property. This program will roll out in phases the first phase focuses on reporting and registering client trust accounts, and began on February 1, 2023, with additional phases beginning annually thereafter. If a legal professional is responsible for client trust accounting, they must report such duties to the State Bar. Each account will need to be registered through their My State Bar Profile or the firm/proprietor must submit the information through the State Bar’s agency billing system. If an attorney fails to register client trust accounts, the attorney’s license will be suspended until such accounts are registered. So mind those firm emails coming around informing attorneys their registration of client trust accounts are due.
Attorneys responsible for client trust accounts must complete an annual self-assessment questionnaire about the duties and practices of handling clients’ funds. The self-assessment will assist the attorney in identifying compliance issues which will allow the attorney to take corrective action immediately. Attorneys are also required to certify that they are knowledgeable about and in compliance with, applicable statutes and rules governing client trust accounts. Handbook on Client Trust Accounting for California Attorneys, The State Bar of California Office of Professional Competence (2023).
For more information on client trust accounting and CTAPP visit the State Bar of California “Client Trust Accounting & IOLTA”.
Categorized in: Legal Procedure
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