Keeping Trust Accounts Ship-Shape

By Janis Reinken, Attorney / Director of Risk Management, TLIE

Proper trust account management seems simple enough in concept, but as evidenced by disciplinary statistics, some lawyers still experience confusion in this area. In Texas, the number of trust account grievance filings has declined over the past five years, but the number of alleged Disciplinary Rule violations continues to be considerable regarding the safeguarding of others’ property.

The first and second most frequently alleged violations of Disciplinary Rules concerned neglect of legal matters and the declining or terminating of representation. Reports of alleged violations for failure to safeguard others’ property ranked third. During the 1989-99 reporting period, the State Bar of Texas classified 505 grievance filings as complaints concerning this issue. That constitutes 14.6165 % of the 3,465 actual complaints classified formally from all 9,040 grievances filed.

What happens if the lawyer and the client dispute the expenses and fees disbursed from the trust account? How should a lawyer respond to a client’s monetary dispute with a third party (such as a lienholder) with an interest in the trust account funds? Disciplinary Rule 1.14 and its Comments address these issues, imposing several requirements concerning disbursements to clients, third parties, and to the attorney or law firm. The text of Rule 1.14 and the Comments are available to attorneys in the Texas Rules of Court book, without quoting them here.

Whether or not you consider yourself very familiar with Rule 1.14, please heed these reminders much as a good athlete would listen to a coach. For example, trust account funds are not to be used for direct payment to the lawyer’s or firm’s general creditors (presumably, this includes payments for MCLE seminars or professional liability insurance premiums). See Comment 2. Clients and third parties are entitled to request an accounting of trust funds held by the attorney, and payments of undisputed amounts should be remitted promptly, after an accounting and severance of the lawyer’s interest from those of other persons. See Rule 1.14 (b), (c) and Comments 2 and 4. Trust account disbursements for legal fees are allowed but only as to fees earned per the agreement, and then only after the lawyer has advised the client the legal services have been rendered and the fee amount. See Rule 1.14 (c) and Comment 2; cf., Texas Ethics Opinion 391 (February 1978, interpreting former DR 9-102); cf., Archer v. State, 548 S.W.2d 71 (Tex. Civ. App.-El Paso 1977, writ ref’d n.r.e.). A dispute as to funds allocation essentially suspends the disputed amounts until the dispute is resolved. See Rule 1.14 (c) and Comments 2, 3, and 4.

Probably all attorneys know they are required to keep complete trust account records. Also, most lawyers probably know that under Rule 1.14, those records must be preserved for five years after representation terminates. Many firms retain trust account records for seven years or more, in recognition of federal income tax rules. However, to show compliance, the trust account records must demonstrate that funds have been handled properly. Other than starting with separate accounts for trust funds and operating expenses, what are some of the ways to keep trust funds straight?

The following are some practical pointers, arguably obvious, but certainly worthy of emphasis:

• As a precaution, maintain a moderate sum of law firm funds in the trust account as a cushion against any bank charges assessed or deposits returned that would cause the client funds or third party funds to be out of balance.
  
  
• Verify amounts due to statutory lienholders (and other valid claimants). Finalize agreements with lienholders before disbursing settlement funds. This is even more essential than it was before recent Texas caselaw recognized that non-clients have standing to bring claims for negligent misrepresentation.

• Include details of trust account activity with billing statements. Clients will be less surprised at requests for additional fees or expense deposits when they can monitor ongoing costs of the representation.

• Written law firm policies should prohibit use by any personnel of trust account funds for firm or personal payments or cash withdrawals, not even temporarily. Consider requiring all firm personnel, including attorneys, to sign a personnel file form agreeing that this principle is clearly understood and failure to comply could result in termination of employment for cause.
  
  
• Limit personnel who have access to trust account funds or checks. Require dual signatures on amounts over a certain limit, and consider bonding for any personnel having signature authority. If possible given the size of the firm, segregate duties regarding deposits of funds, check-writing, and bank statement reconciliation.
  

Consult the State Bar website of the Law Office Management Program for a trust account overview, and a link for purchasing an American Bar Association book on this subject. The websites of the Bar Associations of Minnesota and North Carolina also offer helpful guidelines for maintaining appropriate trust account records. Although their procedures differ slightly from Texas requirements, the main concepts adhere.

The North Carolina State Bar website at http://www.ncbar.com/home/trust_gu.asp provides a ten-page list of frequently asked questions (with exhibits) concerning trust account maintenance.

The Minnesota State Bar website shows step-by-step how to use QuickBooks to maintain trust accounts, at http://www2.mnbar.org/qbguide/qbguide1.htm. TLIE has written permission from the MSBA for a limited license from February 21 - August 21, 2000, allowing TLIE Advisory readers to print a single copy of the web pages for their own use in their own law practice, with no additional copies or reproduction. For questions, contact the MSBA at 612/278-6339.