CNA, the leading malpractice insurer for Louisiana lawyers, recently distributed to its insureds helpful advice as to how they should handle client trust and IOLTA accounts. See CNA, Professional Counsel, Client Trust and IOLTA Accounts: Managing Money and Avoiding Risk (Dec. 2021). According to CNA, “commingling law firm funds with client fund and conversion of client funds constitute two of the leading causes of lawyer discipline and may lead to liability issues as well.” Id. at 1. Indeed, “many counts view the misappropriation of client funds as one of the most serious forms of professional misconduct.” Id. at 3. Lawyers must implement proper trust accounting procedures and supervise the parties entrusted with the authority to handle client funds to avoid such professional misconduct.
Maintain Appropriate Bank Accounts
Lawyers must be sure to maintain the appropriate bank accounts and properly determine which funds go in which type of account. CNA notes that most states require law firms to maintain the following accounts:
- Operating Account: This account should hold client funds that the law firm has earned and monies from others that are not being held in escrow. If the lawyer has not yet earned the fee, the client funds should not go in this account.
- Client Trust Account: This account should hold client funds which are intended to pay the law firm’s fee that have not yet been earned. For example, if the client pays the law firm $10,000 to work on a legal matter on an hourly basis, and the law firm has only earned $5,000, the $5,000 balance should remain in the client trust account until earned or returned to the client.
- IOLTA trust account: Client funds or funds of third parties, which are either very small or only expected to be held for a short period of time, should be placed in an IOLTA account. The interest generated from these accounts is used to fund charitable institutions, typically to legal aid entities that serve indigent clients.
A lawyer’s financial institution is obligated to alert the Office of Disciplinary Counsel when a law firm’s client trust account is overdrawn. See CNA, Professional Counsel, Client Trust and IOLTA Accounts: Managing Money and Avoiding Risk at 1. In an effort to minimize the risk of a trust account overdraft, Louisiana Rule of Professional Conduct rule 1.15 requires that lawyers reconcile their client trust accounts at least quarterly. See La. Rule of Prof’l Conduct, r. 1.15(f).
Maintain Complete Records of Client Trust Accounts for Five Years
ABA Model Rule of Professional Conduct rule 1.15 requires that lawyers preserve “complete records” of client trust accounts for five years after termination of the representation. See ABA Model Rule 1.15. The CNA bulletin recommends that lawyers retain the following records for at least five years after termination of the representation:
- Banking transaction records: All transaction records provided by the financial institution maintain the trust account, which includes but is not limited to cancelled checks, monthly banking statements, records of deposit, etc.
- Receipt and disbursement statements: Any cash transactions should be documented by the law firm.
- Engagement letters/fee agreements: Any and all engagement agreements between the lawyer and client, including language concerning the legal fees and expenses to be paid by the client,
- Bills/invoices: Any bill or invoices issues to clients for legal services or expenses.
- Third-party vendor payments/expenses: Any payments made to vendors or others, such as expert witnesses, transcription services, filing fees, etc., that are directly related to a client’s matter.
- Law firm bookkeeping/accounting records: Any ledgers or electronic records that track the activity in the law firm’s operating and trust accounts.
Avoid Commingling and Conversion of Funds
Commingling occurs when the lawyer mixes his own funds with the client funds. This makes “it difficult to discern which funds belong to the client.” See CNA, Professional Counsel, Client Trust and IOLTA Accounts: Managing Money and Avoiding Risk at 3. Conversion is a more serious problem for the lawyer. Conversion occurs when a lawyer makes unauthorized use of the trust account funds that deprive the client or third person of the use of the funds, even if the deprivation is only temporary and causes nom lasting harm to the client. Id. The CNA brochure emphasizes that “conversion may arise even if the lawyer had no dishonest motive in taking the funds.” Id.
CNA notes that Model Rule of Professional Conduct 1.15 requires that lawyers and law firms do the following in order to avoid commingling and converting client funds:
- Segregate client funds and property separate from the law firm’s own property;
- Give notice of the receipt of any funds or other property;
- Maintain appropriate records of any property, particularly money, held on behalf of another;
- Render an accounting of any funds held in a fiduciary capacity upon request;
- Promptly deliver funds or other property to the person who is legally entitled to them; and
- When a representation involves the possession of property where two or more persons claim interests, the property must be kept separate by the lawyer until the dispute is resolved.
See ABA Model Rule of Professional Conduct r. 1.15.
CNA also recommends the following best practice tips to “minimize the risk of commingling and conversion due either to carelessness or malfeasance by a rouge lawyer or employee:”
- Prohibit debit card or use of ATM to withdraw funds;
- Prohibit checks made payable to cash;
- Prohibit “cash out” on deposits;
- Reconcile monthly all law firm bank accounts, including a review of accounts payable/receivable;
- Do not write checks until all deposits have been cleared;
- Prohibit the use of signature stamps and signed blank checks;
- Require dual signatures on checks;
- Rotate job duties related to banking and accounting duties when possible;
- Consider changing passwords to bank accounts whenever a lawyer or support staff member who knew the passwords leaves the law firm; and
- Separate job duties related to finances and accounting.
See CNA, Professional Counsel, Client Trust and IOLTA Accounts: Managing Money and Avoiding Risk at 3.
The CNA bulletin concludes with sound advice: “Law firms should adopt sound banking and accounting practices and exercise their supervisory responsibilities to ensure that client funds are protected. Lawyers who fail to educate themselves on governing client trust rules and laws and neglect their duty to oversee their colleagues and outsourcing providers that help manage such accounts increase their risk of disciplinary complains and professional liability claims.” Id. at 4.