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					                                                                           CHAPTER                  6
CLIENT TRUST FUNDS AND LAW
OFFICE ACCOUNTING



KEY POINTS
   A trust or escrow account is a bank account, separate from a law office’s or attorney’s business or
    operating checking account, where unearned client funds are deposited.
   Trust funds and office operating funds cannot be commingled.
   Trust funds cannot be used to pay for general offices expenses.
   Attorneys cannot ethically or legally take client funds out of the trust account unless they have been
    earned.
   IOLTA stands for Interest on Lawyers’ Trust Accounts—An IOLTA account is an interest-bearing
    account set up specifically to hold trust funds. The interest that accrues on an IOLTA account is
    given by the financial institution to a state bar foundation or other nonprofit legal organization for
    the good of the public.
   IOLTA accounts can usually be used only for client funds that are a nominal amount or that are
    expected to be held for only a short time.
   Internal control refers to procedures that an organization establishes to set up checks and balance so
    that no individual in the organization has exclusive control over any part of the accounting system.


CHAPTER OUTLINE/NOTES
I. Client Funds
A. Trust/Escrow Account
   1. A trust or escrow account is a bank account, separate from a law office’s or attorney’s business
      or operating checking account, where unearned client funds are deposited. Exhibit 6–2 shows
      an example of a trust account checkbook and client ledgers.

B. No Commingling of Client and Law Office Funds
   1. Ethical rules prohibit the commingling of client funds and law office funds in the same account.
   2. The reason for the rule is that if client funds were commingled and kept in the same bank
      account with general law practice funds, creditors could seize these funds to repay debts of the
      law practice.
   3. In addition, if attorneys could hide law office funds in the trust account, law office creditors
      would be unable to reach those funds, even though they otherwise would be able to because
      they were being kept in the trust account. Only client funds can be kept in the trust account.

C. Trust Account Examples
   1. Unearned retainers, such as cash advances, are deposited in the trust account to apply against
      future fees and expenses. When the law office has earned the monies, the part of the money
      that has been earned can then be transferred to the law office’s operating checking account.
      This is usually done by issuing a trust check made payable to the law office itself.
   2. The trust account is also used for distributing settlement funds, for instance. If a firm settled a
      case for $10,000, the opposing party would issue a $10,000 check payable to the law office and
      the client. The law office would deposit the $10,000 in the trust account. If the law office was
      entitled to $2,000 of the money, a trust check would be written to the client for $8,000, and a
      $2,000 check would be written to the law office itself (to deposit in its operating account).

D. Ethics and Trust Accounts
   1. Ethical Rule Regarding the Commingling of Client and Law Office Funds
      Rule 1.15 of the Model Rules of Professional Conduct 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 in the state where the lawyer’s office is situated, or
          elsewhere with the consent of the client or third person. Other property shall be identified
          as such and appropriately safeguarded. Complete records of such account funds and other
          property shall be kept by the lawyer and shall be preserved for a period of [five years] after
          termination of the representation.
      (b) A lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose
          of paying bank service charges on that account, but only in an amount necessary for that
          purpose.
      (c) A lawyer shall deposit into a client trust account legal fees and expenses that have been
          paid in advance, to be withdrawn by the lawyer 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 promptly deliver
          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 promptly render a
          full accounting regarding such property.
      (e) When in the course of representation a lawyer 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 promptly distribute all
          portions of the property as to which the interests are not in dispute.
   2. Trust Account Not Used to Pay Law Office/Personal Expenses
      Ethical rules prohibit attorneys from using trust funds to pay for general office expenses such as
      rent and payroll. Law offices are also prohibited from ―borrowing‖ monies from the trust
      account. However, trust checks can be written to cover client expenses. For instance, if a client
      had monies in trust and the firm needed to issue a check to a court reporter to pay for a
      deposition transcript for the case, the office would write a check to the court reporter from the
      trust account. This is perfectly acceptable as long as the expense is for the client’s case.
3. One Trust Account Acceptable for All Client Funds
   Law offices may have one trust account where all clients’ funds are deposited. Law offices do
   not have to have a separate bank account for each client, as long as there are proper records
   maintained showing how much each client has in the account.
4. Attorney Must Promptly Deliver Client Funds Back to the Client
   Attorneys have an ethical responsibility to immediately turn over to clients any funds to which
   they are entitled.
   Rule 1.15(d) of the Model Rules of Professional Conduct states:
   (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 promptly deliver 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 promptly render a full accounting
   regarding such property.
5. Commingling of Client Funds Is a Common Problem
   Literally hundreds of attorneys are suspended or disbarred every year for commingling client
   funds.
6. Trust Account Management
   Rules for good trust account management include (see Exhibit 6–4):
   ● Having a trust account and using it for all client monies.
   ● Only allowing a managing partner to sign on the account.
   ● Following the Interest on Lawyers’ Trust Accounts (IOLTA) rules for your state.
   ● Notifying the client in writing, at least on a monthly basis, regarding all deposits and
       withdrawals from the client’s account balance.
   ● Keeping unearned fees and unexpended costs in the trust account until earned or spent.
   ● Not commingling or putting attorney/law firm funds in the trust account.
   ● Reconciling the trust account monthly and maintaining a written record of the
       reconciliation.
   ● Reviewing individual client balances monthly and not delaying in giving clients their
       money.
   ● Maintaining written, detailed records justifying every deposit and every withdrawal in the
       trust account, including a detailed journal of all transactions and a client ledger.
   ● Retaining trust records even after the matter is closed, according to state rules.
       Source: Adapted from Foonberg, J. (2004). How to start and build a law practice (p. 283). American Bar
       Association.
7. Interest on Lawyers’ Trust Accounts (IOLTA)
   An IOLTA account is an interest-bearing account set up specifically to hold trust funds. The
   interest that accrues on an IOLTA account typically goes to a state bar foundation or other
   nonprofit legal organizations.
   Most states provide that IOLTA accounts can only be used for client funds that are a nominal
   amount or that are expected to be held for only a short time. If a large amount of client funds
   are involved, or if an amount is to be held for a long period, the attorney should open a separate
   interest-bearing account for that specific client and the interest should be given to the client.
II. Budgeting
1. A budget is a projected plan of income and expenses for a set period of time, usually a year.
2. Budgets are a planning tool. They allow the firm to plan for the future, to anticipate problems, needs,
   and goals for the firm, and to allocate and manage resources.
3. Steps in the budget process:
   - Prepare an income budget. An income budget estimates how many partners, associates, legal
      assistants, and others will bill for their time, what the rate or hourly charge will be, and the
      number of billable hours each timekeeper will be responsible for billing.
   - The time-to-billing percentage adjusts downward the actual number of hours the office will bill
      to clients, taking into account the fact that timekeepers are not always able to bill at their
      budgeted levels due to sickness and unforeseen events.
   - Realization is what a firm actually receives in income as opposed to the amount it bills.
   - Prepare a staffing plan. A staffing plan estimates how many employees will be hired or funded
      by the firm, in what positions or capacities they will serve, what positions will need to be added
      or deleted, and how much the compensation will be.
   - Estimate overhead expenses. The law office must make a budget of all expected overhead
      expenses such as rent, utilities, equipment, and other expenses.
   - Set a profit margin. The last step is to set a target profit margin the firm would like to achieve.
4. Budgeting Tips:
   - Budgets should be communicated to everyone involved.
   - Budgets must be tracked year-round.
   - Document budget assumptions.
   - Use zero-based budgeting. A zero-based budget means last year’s budget or actual expenses are
      not used in figuring the coming year’s budget. Each year, the budget figures stand on their own
      merit and must be justified.

III. Collection
1. Collection and income are closely tied together.
2. Billing large amounts of time and not getting paid is a sure way to bankruptcy for any law office.
3. The first step in collecting a high percentage of billings is for the attorney to carefully select and
   weed out what clients’ cases he or she will accept in the first place.
4. Another strategy that many law offices take is to get monies up front in a case using deposits in the
   form of earned and unearned retainers.
5. Other strategies law offices use for collecting fees billed include sending regular monthly billings
   and withdrawing from cases as soon as possible and feasible, once it is determined that the client
   will not pay. This is sometimes difficult to do, since ethical rules put limits on when attorneys can
   withdraw from cases. Model Rule 1.16 provides in part:
   (b) Except as stated in paragraph (c), a lawyer may withdraw from representing a client if:
   (1) withdrawal can be accomplished without material adverse effect on the interests of the client;
   (2) the client persists in a course of action involving the lawyer’s services that the lawyer reasonably
   believes is criminal or fraudulent;
   (3) the client has used the lawyer’s services to perpetrate a crime or fraud;
   (4) the client insists upon taking action that the lawyer considers repugnant or with which the lawyer
   has a fundamental disagreement;
   (5) the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services
   and has been given reasonable warning that the lawyer will withdraw unless the obligation is
   fulfilled;
   (6) the representation will result in an unreasonable financial burden on the lawyer or has been
   rendered unreasonably difficult by the client; or
   (7) other good cause for withdrawal exists.
   (c) A lawyer must comply with applicable law requiring notice to or permission of a tribunal when
   terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue
   representation notwithstanding good cause for terminating the representation.
   (d) Upon termination of representation, a lawyer shall take steps to the extent reasonably
   practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing
   time for employment of other counsel, surrendering papers and property to which the client is
   entitled, and refunding any advance payment of fee or expense that has not been earned or incurred.
   The lawyer may retain papers relating to the client to the extent permitted by other law.
6. Another strategy to collect on billings is for the attorney to actually sue the client for the fee. This is
   usually a method of last resort, as no attorney wants to be put in the situation of suing his or her own
   client.

IV. Internal Controls
A. Internal control refers to procedures that an organization establishes to set up checks and balances so
   that no one individual in the organization has exclusive control over any part of the accounting
   system.
B. Good internal controls prevent or make it much harder for employees to embezzle money.
   Embezzlement by law office staff has recently been a problem in many law offices.
C. Internal control procedures include:
   - Never allowing a bookkeeper or person preparing the checks to sign checks or to sign on the
       account.
   - Having careful, unannounced, routine examinations of the books.
   - Having partners routinely read and examine all financial reports.
   - Storing all checks in a locked cabinet.
   - Never letting the person signing the checks reconcile the account.
   - Using check request forms.
   - Having guidelines for how the mail is opened and how checks will be deposited.
   - Using non-accounting personnel to help with internal controls.
   - Requiring two signatures on checks over $10,000.
   - Stamping invoices ―canceled.‖
   - Having an audit prepared by a CPA every year.

V. Financial Management and Ethics
     A. Lawyers cannot share legal fees with a nonlawyer or practice with a nonlawyer. Model Rule
        5.4(a) states: ―A lawyer or law firm shall not share legal fees with a nonlawyer. . . .‖
WEB LINKS
http://www.alabar.org/lomap/articles.cfm
Alabama State Bar Association devoted to law practice management.
http://www.abanet.org
American Bar Association site.
http://www.abanet.org/lpm
American Bar Association site devoted to law practice management.
http://www.abanet.org/tech/ltrc/home.html
American Bar Association Legal Technology Resource Center site.
http://www.abanet.org/cpr/clientpro/apreface.html
American Bar Association Model Rule for Auditing Lawyer Trust Accounts.
http://www.abanet.org/cpr/clientpro/fpreface.html
American Bar Association Model Rule for Financial Recordkeeping.
http://www.abanet.org/cpr/clientpro/opreface.html
American Bar Association Model Rules for Trust Account Overdraft Notification.
http://www.alanet.org
Association of Legal Administrators site.
http://www.gabar.org
Georgia State Bar Association site.
http://www.lawofficecomputing.com
Home page for Law Office Computing magazine.
http://www.lawtechnews.com
Home page for Law Technology News periodical.
http://www.law.com/jsp/ltn/whitepapers.jsp
Law Technology News technology white papers site.
http://www.msba.org/departments/loma/articles/index.htm
Maryland State Bar Association law practice management site.
http://www.courts.state.mn.us/lprb/subjectindex.htm
Minnesota Lawyers Professional Responsibility Board.
http://www.courts.state.mn.us/lprb/index.asp?content=menutrust
Minnesota Lawyers Professional Responsibility Board site related to trust accounts.
http://www.msbar.org/2_client_relations_handbook.php
Mississippi State Bar Association Client Relations handbook.
http://www.nala.org
Home page for the National Association of Legal Assistants.
http://www.paralegals.org
Home page for the National Federal of Paralegal Associations.
http://www.njsba.com/law_office_manage/index.cfm?fuseaction=articles
New Jersey State Bar Association devoted to law practice management.
http://www.nysba.org/Content/NavigationMenu/Attorney_Resources/Practice_Management/Practice_
Management.htm
New York State Bar Association devoted to law practice management.
http://www.scbar.org/pmap/resources.asp
South Carolina Bar law practice management site.
http://www.abacuslaw.com/products/goldfeatures.html
AbacusLaw site.
http://www.pclaw.com
PCLaw site.
http://www.ddisoft.com
DDI site.
http://www.elite.com
Thomson software site.
http://www.juris.com
Juris site.
http://www.micro-craft.net
Verdict site.
http://www.omegalegal.com
Omega site.
http://stilegal.com/
Tabs3 site.


KEY TERMS
budget
income budget
Interest on Lawyers’ Trust Accounts (IOLTA)
internal control
realization
settlement
staffing plan
time-to-billing percentage
zero-based budgeting system

				
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