Monday, February 9, 2015

In Trust We Trust

In re PRB Docket No. 2014.168, 2015 VT 9 (mem.)

By Elizabeth Kruska

Lawyers are supposed to maintain special bank accounts, called client trust accounts, as the accounts in which client funds are placed. If someone hires a lawyer and pays him or her a retainer for the lawyer to bill against, the funds are still technically the property of the client unless and until the lawyer bills the time. For example: you hire me to represent you in a case and I request a retainer of $5000. The $5000 technically belongs to you until I earn it, but I’m holding onto it in trust in my special bank account. Suppose then I do a bunch of work and by doing so, earn $1000. I then move that earned money into a different account, which later pays me. Suppose then the case gets done at that point and there’s still $4000 left. You get that back.

Sound complicated? It is and it isn’t. Conceptually, it’s pretty easy. In practice, it can get to be a lot of work. If you’re a lawyer with 25 clients with money in trust accounts, not only do you have to keep track of the work you do and your time, but also how much money is in the trust account that is attributable to each different client. You can’t use Client X’s money for expenses of Client Y if Y is out of money. Also, you can’t combine a client’s funds with your own operating funds. If you need to pay the power bill and the only money you have is in the trust account, do not use the client money to pay the power bill, even if you know you’ll earn it later anyway. If you’re a solo practitioner or a small firm, you might find that staying on top of all this is almost like a second job.

That’s kind of what happened in this situation. This is a Professional Responsibility Board (PRB) case. There’s a lawyer involved who’s been in practice for nearly 30 years. Her client trust account got selected for audit (this happens sometimes, and at random, so it’s not like she did something bad to get this issue flagged for anyone). She had a practice of logging when fees were earned on clients’ individual billing statements. Unfortunately, it came to light that she didn’t have a separate register for the account, and that she didn’t reconcile the account against her bank statement on a regular basis. Through this checking, it also came out that she couldn’t track a certain debit from the trust account.

It was pretty clear, though, that she didn’t maliciously mishandle funds. None of her clients suffered a loss. She also reached out to other attorneys for advice on how best to handle her accounts, and also hired an accountant to help with her accounting.

The PRB admonished the lawyer, and SCOV upheld the admonishment. SCOV found that the lawyer didn’t keep appropriate receipts, and at one point commingled a client’s funds with her operating funds. SCOV points out that this probably could have been avoided if she had followed the rules on accounts. I don’t know who the lawyer in question is, but based on what I’ve read here, she probably would agree with that statement.

I went off script here a little, and looked at several recent PRB decisions. Lots of them have to do with trust accounting. I can totally see how this can get away from someone, for lots of different reasons. The PRB and SCOV remind us that we’ve got to keep it all straight with our trust accounts.

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