by Robert S. Bernstein, Esq.
*This article previously appeared in the March/April 2012 issue of Commercial Law World, the official publication of the Commercial Law League of America.
True story: A lawyer represented a bank in filing lawsuits on consumer accounts, charging a flat fee of $300 plus costs per suit. When the client sent ten new matters, the office opened the files, prepared the complaints, and filed them. Then the lawyer billed the Bank $3,000. Somewhere in that chain of events, the bookkeeper wrote a check from the Trust Account to the Operating Account for $3,000, the fee amount due on the ten files. The check went into the Operating Account and was used by the lawyer in paying the bills of the office (including his paycheck and that of the staff).
The Operating Account only held funds of the lawyer. The Trust Account only held funds of clients. So, what’s the problem? Well, let’s see. Rule 1.15 begins with “(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 in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person.” It does seem like the lawyer did what was required, but this requires a more nuanced analysis.[related]
One should wonder where the $3,000 that was withdrawn from the Trust Account came from if the Bank had not yet paid the $3000. It must have come from other funds in that account. Those of us with large practices, especially large contingent collection practices, know that our Trust Account can have hundreds of thousands of dollars in it at any one time. Drawing out $3,000 or even $30,000 wouldn’t have much impact on the ability to cover checks that generally have to be written. But there is the rub. We should be treating that account as though we could have to cover every check right now! If we had to give every client all of its money right now, could we? If not, there might be a problem.
The lawyer in this story did this for about 300 of these files, drawing about $90,000 out of her trust account before the fees were even billed to the Bank, let alone paid. Even if there was enough of a float in the Trust Account, she violated Rule 1.15 since she was, in effect, lending one client funds (to pay the lawyer) from the funds (in the Trust Account) of another client. That was a problem.
Some of you may have thought that the problem was less of a problem if the client advanced costs on the cases, if the costs were in excess of the amounts drawn out (prematurely) for the fees. Unfortunately, costs advanced by the client, before they are spent on the client’s matter, are also Trust Funds, to be segregated.
Bottom line is that the client’s money is the client’s money and your Trust Account has to have enough to pay them all. Read Rule 1.15 and make sure that your Trust Accounting practices are up to snuff.