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Attorney Trust Accounts and Rule 1.15

Most people know that that stealing money is wrong – both morally and legally. And likewise, attorneys know (or should know) that when acting as a fiduciary, misappropriation – the unauthorized use of funds that belong to a client or third party – is a huge no-no and a disbarrable offense. However, even with this knowledge, attorneys are often disciplined for Rule 1.15 Safekeeping of Property violations. 1

Unfortunately, trust account management is not a subject that is taught in law school. Therefore, many attorneys are learning about their fiduciary responsibilities through on-the-job training. This training may include instances of issues that may rear its ugly head in a few forms:

Reckless Behavior
Reckless or intentional misappropriation is more obvious. Some attorneys believe that “borrowing” entrusted funds – even for a short period of time – is appropriate. Or, in some instances, attorneys believe that if they have sufficient funds in their operating account or, if they have overdraft protection, that this behavior is acceptable. Simply put, it is not. This is the essence of misappropriation and is considered an act of “moral turpitude” by most disciplinary courts. It is a clear violation of Rule 1.15(a).

Overdrawn Accounts
Attorneys are experiencing overdrafts on their trust account and Maryland Business and Occupations and Professions Article Rules 16-605 and 16-610(b)(1)(B) requires financial institutions to notify Bar Counsel’s office of an overdraft of any attorney trust account. When this occurs, Bar Counsel, by statute, is authorized and required to investigate the circumstances surrounding the overdraft. Of special note is that the Maryland Business and Occupations and Professions Article Rule 16-606.1, enacted January 1, 2008, requires – among other things – attorneys to perform a monthly reconciliation of their attorney trust account and sets forth the types of records that an attorney should keep.

Intentional or negligent misappropriation occurs when attorneys are not paying attention to their trust account and for a number of reasons, entrusted funds are invaded. Examples include:

  1. Not having enough money in the attorney trust account to account for credit card fees or banking fees;
  2. Relying on checks provided by clients that have “insufficient funds” and failing to reconcile the attorney trust account prior to writing checks against those funds;
  3. Falling victim to internet scams;
  4. Trusting employee(s) that misuse entrusted funds.

These instances can all be avoided with clear banking practices and proper oversight by the responsible attorney. Some attorneys will claim that they do not have the accounting or bookkeeping skills to manage their accounts and that is why these instances of negligent acts occur. Unfortunately, this rationale will not protect the responding attorney from disciplinary action. The Article 5 Rules set forth that an attorney is responsible for the acts of employees or agents of the lawyer. See Rule 5.3 (Responsibilities Regarding Nonlawyer Assistants). If however, an attorney feels that they cannot properly manage their trust account they should seek the assistance of a professional bookkeeper, certified public account, or office manager to assist with these accounting tasks. And even then, the attorney is still responsible for the oversight and management of the account.

Bad Record Keeping
In addition to the negligent acts described above, attorneys also find themselves violating Rule 1.15(a), which requires attorneys to maintain records of all receipts and disbursements from their attorney trust account for at least five (5) years after the transaction was made. Again, this is a rather simple requirement and violations can be avoided with a review of the relevant rules, clear banking practices, and attorney oversight.

Advanced Fees v. Flat Fees
Attorneys historically have misunderstood or misused flat fees in practice. Rule 1.15(c) requires attorneys to maintain unearned fees in an attorney trust account unless the client gives “informed consent, confirmed in writing” to an arrangement that allows the attorney to deposit funds into an operating account. Without this language, which should ideally be in the fee agreement, an attorney may be inadvertently misappropriating unearned fees while believing that they were entitled to the funds because it was characterized as a “flat fee” rather than an advanced fee.

Honest Mistakes
Things happen. But even the most diligent attorney who is familiar with the rules on attorney trust accounts can run afoul of the rules. Some common honest mistakes include:

  1. Depositing funds into the wrong account;
  2. Keeping earned funds in trust too long; and
  3. Not titling account properly as required by Maryland Business and Occupations and Professions Article Rule 16-606.2

While this list is certainly not exhaustive, hopefully it will give you an idea of some of the mistakes that can occur. However, if an attorney has been diligent with their attorney trust account management responsibilities, these mistakes should be simple to correct to bring the attorney back into the land of compliance.

Dolores Dorsainvil is a Senior Staff Attorney at the D.C. Office of Bar Counsel where she investigates, and where necessary, prosecutes cases of ethical misconduct against District of Columbia lawyers. You may read more about Ms. Dorsainvil by visiting her website at www.doloresdorsainvil.com.

1 Rule 1.15 states, “(a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained pursuant to Title 16, Chapter 600 of the Maryland Rules, and records shall be created and maintained in accordance with the Rules in that Chapter. Other property shall be identified specifically as such and appropriately safeguarded, and records of its receipt and distribution shall be created and maintained. Complete records of the account funds and of other property shall be kept by the lawyer and shall be preserved for a period of at least five years after the date the record was created.

(b) A lawyer may deposit the lawyer’s own funds in a client trust account only as permitted by Rule 16-607 b.

(c) Unless the client gives informed consent, confirmed in writing, to a different arrangement, a lawyer shall deposit legal fees and expenses that have been paid in advance into a client trust account and may withdraw those funds for the lawyer’s own benefit only as fees are earned or expenses incurred.

(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall deliver promptly to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall render promptly a full accounting regarding such property.

(e) When a lawyer in the course of representing a client is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall distribute promptly all portions of the property as to which the interests are not in dispute.”

2 An attorney or law firm shall maintain each attorney trust account with a title that includes the name of the attorney or law firm and that clearly designates the account as “Attorney Trust Account”, “Attorney Escrow Account”, or “Clients’ Funds Account” on all checks and deposit slips. The title shall distinguish the account from any other fiduciary account that the attorney or law firm may maintain and from any personal or business account of the attorney or law firm.


Retainer Agreements and Rule 1.5(b)

The most important aspect of the attorney-client relationship is the contract between the parties. If you have not recently taken the time to review your firm’s retainer agreement, now is a great time to make sure you are in compliance with the ethical rules.  Rule 1.5(b) of the Maryland Lawyers’ Rules of Professional Conduct (hereinafter “the Rules”) sets forth the ethical requirements for retainer agreements and states, “[t]he scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate.  Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.”  Although the Rules do not require that a standard (non-contingent) retainer agreement be in writing, it is a good practice for an attorney to memorialize such an agreement so that in the event that a dispute arises, the parties can review the document.

There are two requirements under Rule 1.5(b). First, the retainer agreement must clearly state, “the basis or the rate of fee,” or in other words, how the attorney will be compensated for their legal services.    Therefore, whether the fee is contingent[1] on the outcome of a recovery or settlement, an advanced fee for legal work to be performed in the future,[2] a flat fee, an hourly fee that will be billed to the client as work is performed, a statutory fee, or a combination of these fees (also known as “hybrid retainers”), it is important for the attorney to set forth and explain to the client how they expect to be compensated regardless of the type of retainer agreement.

Second, the retainer agreement should clearly state, “the scope of the representation,” or stated another way, the legal services that the attorney has agreed to perform.  When describing what the scope of the representation is, an attorney should provide as much detail as possible and, in some instances, it may be appropriate to include the services that the attorney will not provide under the retainer agreement. An attorney may want to include language that should further legal services be required, the parties, can either modify the current retainer agreement or enter into another retainer agreement altogether at an additional cost to the client.  For example, if an attorney is retained in a criminal matter and represents a client at trial, the attorney should state in the retainer agreement that the representation does not include any appellate work, should the matter present such a necessity. Having such detail in the retainer agreement will help eliminate any confusion in the event that the client is convicted and desires an appeal.

Lastly, Rule 1.5(b) requires that the attorney inform the client of any expenses related to the representation for which the client will be responsible.  By doing so eliminates any undue surprise on the part of the client once his or her matter is resolved.

Having a good iron-clad written retainer agreement serves as source of protection not only for the client but the attorney as well, especially in the event that the client files either a grievance with Bar Counsel’s office, or a fee dispute.

For more information on this topic and more on starting a solo practice, listen to this Podcast by Anthony I. Butler, Esquire. http://www.yls.org/sec_comm/sections/yls/podcasts.asp

Also check out the new MSBA App for iPhone, Android and Blackberry, which keeps theMaryland Professional Code of Conduct right at your fingertips!

[1] Contingency fee agreements in Maryland must be in writing. (emphasis added).  Rule 1.5(c) states, “[a] fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law.  A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated.  The agreement must clearly notify the client of any expenses for which the client will be responsible whether or not the client is the prevailing party.  Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter, and, if there is a recovery, showing the remittance to the client and the method of its determination.”

[2]  Maryland takes the default position that advanced fees are considered unearned upon receipt and are property of the client unless the client agrees to a different arrangement.  Rule 1.15(c) states, “[u]nless the client gives informed consent, confirmed in writing, to a different arrangement, a lawyer shall deposit legal fees and expenses that have been paid in advance into a client trust account and may withdraw those funds for the lawyer’s own benefit only as fees are earned or expenses incurred.”

Effective Client Screening

By Dolores Dorsainvil

Running a successful practice includes the ability to effectively screen prospective clients. In this tough economy, lawyers need to establish a practice policy by which they are able to make appropriate screening decisions about the clients they wish to represent. Doing so would assist an attorney in not feeling the need to accept any and every legal matter that should come through the door; and, it would also assist an attorney in avoiding possible ethical pitfalls and/or disciplinary complaints.

The initial meeting with the prospective client is an important time to assess several things. First, an attorney should determine early on whether he or she is qualified to handle the matter. (If an attorney does not feel competent enough to handle such a matter, than it is advisable for the attorney to send the prospective client a writing indicating so in the form of a non-engagement letter.) Second, the meeting provides the attorney an opportunity to assess whether the client will be a high risk or difficult client. Third, the attorney should determine what the prospective client’s expectations are and also determine whether the attorney can reasonably satisfy those expectations. After making these assessments and advising the client on the applicable law and/or the legal process, an attorney should inform the client on their fee basis and the attorney should consider whether the client can meet the attorney’s financial expectations.

If an attorney is able to complete these steps without incident, the decision to undertake such a representation should be a fairly easy one. However, there are some prospective clients that may cause an attorney some concern. When faced with these warning signs, an attorney may wish to decline the representation:

  • Client who is changing lawyers
  • Client who has had several previous lawyers on the same matter
  • Client whose expectations exceed the evaluation of the case
  • Client who has unreasonable motives or a hidden agenda
  • Client who has performed considerable amount of research on the case
  • Client who refuses to pay the required consultation fee or retainer
  • Client who you cannot empathize with
  • Client who makes you feel uncomfortable

While this list is certainly not exhaustive, an attorney should recognize certain negative gut feelings that they may have about a prospective client. Doing so will help an attorney make the critical judgment call on whether, or not, to accept the representation. Developing an effective client screening process means an attorney will spend less time defending against bar complaints, malpractice actions, and fee disputes, and can spend more time, in the long run, focusing on such things as client development, marketing, firm growth, and professional development.

For more information on this topic, check out this Podcast:  Dolores Dorsainvil on Law Practice Management.

Dolores discusses the importance of law practice management, effective client screening, retainer agreements and how to handle attorney trust accounts. She also explains what attorneys should do if disputes arise with clients and where to turn for assistance.

For more information, check out this article on Choosing Clients Wisely by Pat Yevics, MSBA LOMA director. Another helpful link from MSBA LOMA is this sample Client Intake Form.

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