Learning Outcomes
After reading this article, you will be able to identify the requirements for establishing and maintaining client trust accounts under the ABA Model Rules. You will understand the duties of segregation, recordkeeping, prompt notification, delivery of funds, and the proper handling of disputed claims. You will be able to apply these principles to MPRE-style scenarios and recognize common pitfalls that may lead to discipline.
MPRE Syllabus
For the MPRE, you are required to understand the ethical obligations regarding the safekeeping of client funds and property. This article focuses on the following syllabus points:
- Recognize the duty to keep client and third-party funds separate from lawyer funds.
- Identify the requirements for establishing and maintaining client trust accounts.
- Understand the rules for prompt notification, delivery, and accounting of client property.
- Apply the procedures for handling disputed claims over funds or property.
- Recognize the consequences of commingling, misappropriation, or improper handling of trust accounts.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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A lawyer receives a $10,000 settlement check for a client. The client and a third party both claim a right to $2,000 of the funds. What must the lawyer do with the disputed $2,000?
- Disburse the entire amount to the client.
- Hold the disputed $2,000 in the trust account until the dispute is resolved.
- Give the $2,000 to the third party.
- Transfer the $2,000 to the lawyer’s operating account.
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Which of the following is true regarding a lawyer’s duty to maintain client trust accounts?
- Client funds may be deposited in the lawyer’s personal account if kept separate in records.
- Client funds must always be kept in a separate trust account.
- The lawyer may borrow from the trust account if the client consents.
- The lawyer may commingle funds if the amount is small.
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When must a lawyer provide an accounting to a client for funds or property received?
- Only if the client requests it.
- Only at the end of the representation.
- Promptly upon request or when funds are delivered.
- Never, unless there is a dispute.
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A lawyer receives a retainer for future services. What must the lawyer do with the unearned portion?
- Deposit it in the operating account.
- Deposit it in the client trust account until earned.
- Spend it immediately.
- Return it to the client before any work is done.
Introduction
Lawyers frequently receive funds or property belonging to clients or third parties in connection with a representation. The ABA Model Rules impose strict duties to safeguard these funds and property. Proper establishment and maintenance of client trust accounts are essential to prevent misappropriation, commingling, and other ethical violations. Failure to comply with these duties is a common basis for professional discipline.
Key Term: Client Trust Account
A separate bank account, typically in the lawyer’s state of practice, used exclusively to hold funds belonging to clients or third parties, not the lawyer.
ESTABLISHING CLIENT TRUST ACCOUNTS
Lawyers must keep client and third-party funds separate from their own. This is achieved by opening a dedicated trust account, often called an IOLTA (Interest on Lawyers Trust Account), in a bank authorized to do business in the jurisdiction where the lawyer practices.
- All client funds, including advances for fees and expenses, must be deposited into the trust account.
- The lawyer’s own funds may be placed in the trust account only to pay bank service charges, and only in the amount necessary for that purpose.
Key Term: Commingling
The improper mixing of client or third-party funds with the lawyer’s own funds, prohibited by the Model Rules.
MAINTAINING CLIENT TRUST ACCOUNTS
Segregation of Funds
Lawyers must never use client funds for personal or business expenses. Funds must remain in the trust account until earned or until expenses are incurred.
- Unearned fees and unused advances must stay in the trust account.
- Once fees are earned or expenses incurred, the lawyer may withdraw those amounts.
Recordkeeping and Accounting
Lawyers must keep complete and accurate records of all funds and property held in trust. These records must be maintained for at least five years after the representation ends.
- Records must show the amount held for each client.
- Lawyers must promptly render a full accounting upon request or when funds are delivered.
Key Term: Accounting
The duty to provide a detailed statement of funds or property held, received, or disbursed on behalf of a client or third party.
HANDLING CLIENT AND THIRD-PARTY PROPERTY
Notification and Delivery
When a lawyer receives funds or property in which a client or third party has an interest, the lawyer must promptly notify the client or third party.
- The lawyer must promptly deliver any funds or property the client or third party is entitled to receive.
- Upon request, the lawyer must provide a full accounting.
Disputed Claims
If two or more persons (including the lawyer) claim interests in funds or property held in trust, the lawyer must keep the disputed portion separate until the dispute is resolved.
- The undisputed portion must be promptly distributed.
- The lawyer should not unilaterally decide who is entitled to the disputed funds.
Key Term: Disputed Claim
A situation where two or more parties assert competing rights to funds or property held by the lawyer, requiring the lawyer to hold the disputed portion in trust until resolved.
CONSEQUENCES OF VIOLATIONS
Improper handling of client trust accounts—such as commingling, misappropriation, or failure to maintain records—can result in severe disciplinary action, including suspension or disbarment. Even unintentional errors may lead to discipline.
Worked Example 1.1
A lawyer receives a $5,000 advance from Client A for future legal services and a $2,000 settlement check for Client B. The lawyer deposits both amounts into the trust account. After earning $1,000 in fees for Client A, the lawyer withdraws $1,000 for herself, leaving the rest in the account. Client B disputes $500 of the settlement with a medical provider. What must the lawyer do with the $500?
Answer:
The lawyer must keep the disputed $500 in the trust account until the dispute is resolved. The remaining $1,500 should be promptly delivered to Client B.
Worked Example 1.2
An attorney receives a check for $10,000 as settlement for a client. The attorney’s fee is $2,500, but the client objects, claiming the fee should be $2,000. What should the attorney do?
Answer:
The attorney must promptly deliver $7,500 (the undisputed amount) to the client and keep the disputed $500 in the trust account until the dispute is resolved.
Exam Warning
A common error is withdrawing funds from the trust account before they are earned or before a dispute is resolved. Doing so, even if the client later consents, is a violation and may result in discipline.
Revision Tip
Always remember: client funds stay in the trust account until earned, expenses are incurred, or the client is entitled to the funds. When in doubt, leave the funds in trust.
Summary
Lawyers must establish and maintain separate trust accounts for client and third-party funds. They must keep accurate records, promptly notify and deliver funds, and hold disputed amounts in trust until resolved. Violations, even if unintentional, can lead to discipline.
Key Point Checklist
This article has covered the following key knowledge points:
- Lawyers must keep client and third-party funds separate from their own by using a trust account.
- Commingling client funds with lawyer funds is prohibited.
- Accurate records of all trust account transactions must be maintained for at least five years.
- Lawyers must promptly notify, deliver, and account for client or third-party funds or property.
- Disputed funds must remain in the trust account until the dispute is resolved.
- Violations of trust account rules can result in severe discipline, regardless of intent.
Key Terms and Concepts
- Client Trust Account
- Commingling
- Accounting
- Disputed Claim