Bar News - February 19, 2014
Trust Accounting Essentials: How to Keep Client Funds Safe
By: Mark Bassingthwaighte & William Saturley
Theft of client property remains a serious concern for the legal profession, but trust account problems aren’t just about rogue lawyers. The real problem is that far too often an attorney was less than diligent about maintaining proper and appropriate financial practices in the office, and things simply got out of hand. Also, be aware that lack of intent, shoddy record-keeping practices, and/or restitution are not effective defenses against a claim of misappropriation or conversion of client funds. With this in mind, here are a few tips that can help keep you out of trouble.
Never “borrow” from the trust account. First, and most importantly, there are no circumstances under which it would be acceptable to borrow funds from your client trust account, temporarily or otherwise. Yes, unfortunately this does need to be said. Trying to make payroll, covering a quarterly tax payment, paying your bar dues, borrowing from one client to cover a check to another, or needing to take care of a necessary personal expense do not pass muster.
Similarly, an attorney may not keep an unearned advance fee, hold onto non-disputed client funds as leverage over disputed earnings, or apply a client’s current funds to that client’s outstanding bill from a previous matter. A recent NH attorney discipline case found misconduct even when no client lost funds and the lawyer involved, an admitted alcoholic, had closed his practice appropriately.
Keep deposits and cash under lock and key. Make certain that you keep checks and cash in a locked drawer or cabinet, even if you intend to deposit the money later in the day. I have walked into numerous firms for a risk visit and found no one in the reception area. It would take only a minute to walk behind the receptionist’s desk, open the top right hand desk drawer, remove the bank deposit envelope that too many still place there, and leave the office completely unnoticed. I recommend that upon receiving a check, restrictively endorse it, and create a log of all checks that have come in. Keep the log in a separate place from where the checks are held. If any checks are ever stolen, lost, or destroyed, this will enable you to know whose checks are gone, giving you the opportunity to inform the affected clients or other payers. Also, since those checks were restrictively endorsed, they will be much easier to have replaced.
Don’t disburse check proceeds without the check being cleared. Third, never disburse the proceeds of any check prior to that check clearing, and here’s why: There is a difference between funds being available, which typically occurs within 24 hours on domestic checks, and those funds being collected funds (meaning the check has cleared), which can take several days and potentially quite a bit longer.
Checks can fail to clear for a variety of reasons, including a missing, insufficient, or incorrect endorsement; insufficient funds; a drafting error; a bank error; or because it was a forged check, just to name a few. If you disburse the proceeds of a check, and that check eventually bounces, you have commingled client funds, because another client’s funds have been used to cover the check that bounced. This would be true even if the firm covers the shortfall with its own money and no one appears to be harmed. Making matters worse, what if the firm doesn’t have sufficient funds available to cover the bounced check?
Never commingle funds in the trust account. For example, non-disputed client funds and earned attorney funds are not to be left sitting together in the trust account for an extended period of time, nor should the trust account ever be used as the employee Christmas savings account. That said, it’s a good practice to keep a small amount of firm funds in the trust account to cover any account fees or charges. This is one way to prevent client funds from being used to pay a firm expense. A recommended amount would be $50 and should never exceed $200. [In fact, the NH Supreme Court’s trust account procedural rule, specifically Rule 50(2) (F), calls for something similar.]
Exercise caution in making withdrawals from the trust account. Once you earn a fee, send the client a bill reflecting the deduction from the amount remaining in trust. The bill should state that if there is a question on the bill, the client should contact the firm within 10 days. Otherwise, the firm will make the indicated withdrawal at the end of that time. You are going to wait 20 days from the day the bill was sent before actually withdrawing the earned fee – 10 days for the bill to be delivered and 10 days to see if the bill is disputed. Too many attorneys withdraw earned monies at the same time that a bill is sent. This can create a cash flow problem, if a client ever disputes the bill. Disputed funds must be placed back in trust until the dispute is resolved. If you make a significant withdrawal at the same time the bill is sent, perhaps to pay personal and professional bills, and then you are unable to come up with those funds should the bill be disputed, you’ve got a serious problem.
Maintain separate ledgers to track account activity by individual client as well as overall account activity. The individual client ledger must detail every receipt and disbursement, the date of the transaction, a notation on the nature of the transaction, the individual account balance in trust, and the client’s name and address. Each month you must reconcile the bank statement in two ways. First, reconcile the bank statement with the general ledger and then reconcile the bank statement with the individual sub-account ledger. These separate reconciliations should balance with each other to the penny. If they don’t, figure out why and correct the problem then and there. Understand that it is going to be much easier to determine where a misstep occurred at the time it occurred, as opposed to figuring out what happened years later during an audit by the Attorney Discipline Office.
Personally open and review the trust account bank statement monthly. Support staff never should open the trust account bank statement. This envelope should be given to the attorney responsible for monitoring trust account activity. Under the rules of professional conduct, you have a duty to monitor the activity in your client trust account. Your license is on the line with this account, so stay on top of it. To do so, look at the bank statement and make certain that there is a corresponding check for every debit noted, review the signature on every cleared check for authenticity, and make certain that every debit in the account is appropriate and understood. Once this is completed, the bank statement may go to the staff person responsible for account reconciliation. When the reconciliation is complete, have the reconciliation report returned to you so that you may do a review of the numbers and check this report against the original bank statement. Then sign and date the report and bank statement to document attorney oversight of client funds.
Monthly reconciliation is a rule, not a guideline. The trust account’s bank statement must be reviewed each month and you should review the reconciliation report and bank statement together regularly as well. NH Rules of Professional Conduct require you to maintain all trust account records for at least six years after termination of the representation. See Rule 50(2)(F), Rule 50(2)(A) and Rule 1.15(b).
Mark Bassingthwaighte is risk manager for Attorneys Liability Protection Society (ALPS), one of the professional liability carriers available to NH Bar members through the NHBA Insurance Agency. This article was adapted from his blog at www.alps411.com and reviewed for its application to NH Rules of Professional Conduct by William Saturley, of Preti Flaherty. Saturley frequently writes for Bar News on attorney malpractice issues and regularly presents on ethics and professional liability at the NHBA CLE Developments in the Law program.