Rule 1.15 imposes
several affirmative duties upon lawyers governing their handling of
property held in trust for clients or third persons in connection
with a representation. Those duties include:
1.
Duty to Notify Promptly
A lawyer has a duty to notify clients or third persons promptly upon
the receipt of funds or other property in which the client or third
person has an interest. The rationale for this duty is that since
the funds belong to the client or third person, the client or third
person must make necessary decisions about what to do with their
property. See Rule 1.15(d).
2.
Duty to Segregate
A lawyer has a duty to keep client or third person funds or property
separate from the lawyer's own property, so that the property is
protected from actual or potential loss. See Rule 1.15(a).
3.
Duty to Maintain Complete Records
A lawyer has a duty to properly maintain complete trust accounting
records of client trust
account funds and other property held in trust pursuant to Rule 1.15 for a period of no less than seven years after the end of
the representation. See Rule 1.15(a); S.Ct.R. 769. In
addition, Rule 1.15(a)
specifics what complete records of client trust account funds a lawyer must
prepare and maintain. Also, Supreme Court Rule 756(d) requires all Illinois lawyers,
as part of the annual registration process, to disclose whether the
lawyer or the lawyer’s law firm maintained a client trust account during
the preceding year.
4.
Duty to Account to Client
A lawyer has a duty to promptly render a full accounting, upon
request, to the client or third person regarding the funds or
property held or distributed by the lawyer. See Rule 1.15(d).
5.
Duty of Prompt Payment or Delivery of Client or Third Person
Property
A lawyer has a duty to promptly pay over or deliver to the client or
third person any funds or property that the client or third person
is entitled to receive. See Rule 1.15(d).
6.
Duty to Preserve the Integrity of Trust Property
The single most
important duty in handling trust property is the duty to refrain
from using that trust property for any purpose whatsoever, other
than as directed by the client or third person on whose behalf the
lawyer is holding property in trust. This includes any unauthorized
use by the lawyer of the client's or third person’s funds entrusted
to the lawyer, including not only stealing, but also unauthorized
temporary use for the lawyer's own purpose, whether or not the
lawyer derives any personal gain or benefit. Misappropriation occurs
not only when the lawyer uses the trust funds to pay the lawyer's
own personal obligations, but also, for example, when the lawyer
disburses trust funds to one client before the deposits, which are
the source of the disbursement, have either cleared or are at least
available for withdrawal, thereby using one client's funds to pay
another client. In re Elias, 114 Ill.2d 321, 499 N.E.2d 1327
(1986).
B.
Definitions
1.
"Trust" Account
The word "trust" is
used to reflect the fiduciary role in which a lawyer receives or
holds property in connection
with a representation on behalf of a client or a third person. See
Comment [1] to Rule 1.15. When such property takes the form of
funds, the word “trust” is an important label to distinguish those
accounts where funds are being held in trust from the accounts
containing the lawyer's own property.
Gurnett v. Mutual Life
Insurance Co. of New York, 356 Ill. 612, 191 N.E. 250 (1934).
2.
Commingling
Commingling occurs
when a lawyer either deposits trust funds belonging to a client or
third person into the lawyer's own personal or business account or
when the lawyer maintains the lawyer’s own personal funds in the
client trust account, other than as permitted by Rule 1.15(b), such as where the lawyer does not
withdraw promptly from the client trust account his earned fees.
See In re Clayter, 78 Ill.2d 276, 399 N.E.2d 1318 (1980).
The Illinois Supreme Court has frequently warned that
commingling of a lawyer’s funds with trust funds is often the “first
step” toward conversion of trust funds. See Dowling v. Chicago
Options Associates, Inc., 226 Ill.2d 277, 293-94, 875
N.E.2d 1012, 1022 (2007).
3.
Conversion
Conversion, a common
law tort, has been defined by the Illinois Supreme Court in the
context of attorney disciplinary proceedings as "'any unauthorized
act, which deprives a man of his property permanently or for an
indefinite time.'" In re Thebus, 108 Ill.2d 255, 259, 483
N.E.2d 1258 (1985), quoting Union Stock Yard & Transit Co.
v. Mallory, Son & Zimmerman Co., 157 Ill. 554, 563 (1895).
Conversion of trust funds occurs when a lawyer uses those funds for
a purpose other than that for which they were delivered. Conversion
is typically proven when the client trust account is either overdrawn or
when the lawyer allows the balance in the client trust account to become
less than the sum total of all client and/or third person funds the
lawyer is required to maintain in trust. In re Ushijima, 119
Ill.2d 51, 58, 518 N.E.2d 73, 76 (1987); In re Cheronis, 114
Ill.2d 527, 502 N.E.2d 722 (1986).
4.
"Client Trust Account"
A "client trust account" is
defined under Rule 1.15(a) as "an
IOLTA account as defined in Paragraph (i)(2), or a separate,
interest-bearing non-IOLTA client trust account established to hold
the funds of a client or third person as provided in paragraph (f)."
It is a "special"
bank account, usually a checking or savings account, that is a
depository for all funds belonging to clients and other persons
coming into the lawyer's possession in connection with a
representation. Under
See Rule 1.15(a), Typically,
it will be
either a
separate and identifiable interest- or dividend-bearing client trust account opened on behalf of one client
or matter (usually in situations where
there is a large amount of money being held for a long period of
time), where the interest earned on the account can be calculated
and remitted to the individual client
or third person or it will be a pooled account
where the moneys of several clients are held (usually nominal or
short-term funds), where the interest earned on the account may go
is remitted
to the IOLTA program (see discussion of IOLTA accounts
below). A lawyer may have one or more client trust accounts depending on
need.
Rule
1.15(a) prohibits funds of clients or third persons from being
deposited in non-interest or non-dividend-bearing accounts.
Rule 1.15(g) provides that in determining the
type of account to deposit funds for a client, the lawyer or law
firm must take into consideration the amount of interest that the
funds would earn for a client during the period they are expected to
be held, the cost of establishing and maintaining the account, and
the capability of the financial institution, through subaccounting,
to calculate and pay interest earned by each client’s funds, net of
any transaction costs, to the individual client. See Rule
1.15(g). Under Rule 1.15(f)(7),
Rule 1.15(g) also makes
clear that the decision as to the type of client trust
account appropriate under the circumstances rests exclusively in the
sound within
the reasonable judgment of lawyer or law firm and
"no charge of ethical impropriety or other breach of professional
conduct shall attend to a lawyer’s or law firm’s exercise of
reasonable judgment under this rule or decision to place client
funds in an IOLTA account or a non-IOLTA client trust account on the
basis of that determination"
Regardless of the type of
account the lawyer decides to deposit funds, it is axiomatic that a
lawyer cannot take the interest earned on the funds held in trust.
See In re Kitsos, 127 Ill.2d 1, 535 N.E.2d 792 (1989).
5.
IOLTA Trust Accounts
Rule 1.15(i)(2)(h)(1)
defines “IOLTA account” as “an interest-
or dividend-bearing client trust account benefitting the Lawyers Trust Fund
of Illinois, established in an eligible institution for the deposit
of nominal or short-term funds of clients or third persons as
defined in paragraph (f) and from which funds may be withdrawn upon
request as soon as permitted by law.”
6. Eligible
financial institution
Funds held in the client trust account
must be maintained at an "eligible
financial institution"
selected by the lawyer in the exercise of ordinary prudence. See
Rule 1.15(a).
Rule 1.15(i)(3) defines an
"eligible financial institution"
as
"a bank or a
savings bank insured by the Federal Deposit Insurance Corporation or
an open-end investment company registered with the Securities and
Exchange Commission that agrees to provide dishonored instrument
notification regarding any type of client trust account as provided
in paragraph (h) of this Rule; and that with respect to IOLTA
accounts, offers IOLTA accounts within the requirements of paragraph
(f) of this Rule."
For a list of eligible financial institutions, please consult the
Lawyers Trust Fund of Illinois website at www.ltf.org.
III. Identifying and
Protecting Trust Property
A. Key
Characteristics of Holding Trust Funds and Property
To understand and
fulfill the requirements of Rule 1.15, property held in trust must
have all of the following three distinct and essential
characteristics: 1) separate; 2) accountable; and 3) identifiable.
Although Rule 1.15 does not
expressly prescribe any particular accounting procedures or methods
that lawyers must employ to fulfill the duties of “safekeeping”
trust property, A lawyer cannot discharge those duties unless
the way in which the property is held in trust can satisfy all of
these requirements. See Rule
1.15(a).
1.
Separate
Under Rule 1.15(a),
property of clients or third persons that is in a lawyer’s
possession in connection with a representation must be kept separate
from the lawyer’s own property. A lawyer holding property of
clients or third persons in trust should exercise the care required
of a professional fiduciary. See Comment [1] to Rule
1.15. For funds, the monies must be maintained in an
interest- or
dividend-bearing account
that is separate and
identifiable from the lawyer's personal and business accounts.
Holding client or third person funds in a safety deposit box, file
cabinet or desk drawer is usually not an acceptable way of
safekeeping trust funds and has been condemned by the Supreme Court,
which has stated that "such a covert method of handling a client's
funds is highly unprofessional and one which can only create
suspicion and harmful inference." In re Lingle, 27 Ill.2d
459, 463-64, 189 N.E.2d 342 (1963); In re Ashbach, 13 Ill.2d
411, 419, 150 N.E.2d 119 (1958). Due to the danger of conversion or
other risk of loss, "it is essential that a client's money be held
in such a manner that there can be no doubt that the lawyer is
holding it only for another and that the money does not belong to
him personally." In re Johnson, 133 Ill.2d 516, 531, 552
N.E.2d 703, 710 (1989).
Separation:
·
protects the funds from levy by the lawyer's or law
firm's creditors, including levy by the IRS (see In re Enstrom,
104 Ill.2d 410, 415, 472 N.E.2d 446, 449 (1984));
·
allows the account to be found in the event the lawyer
becomes ill, incompetent or dies;
·
protects the funds from being considered part of the
lawyer's estate in the event the lawyer files for bankruptcy, is
going through a marital dissolution proceedings or dies; and
·
discourages the lawyer from recklessly or
intentionally misappropriating client funds for the lawyer's own
personal use.
2.
Accountable
The lawyer must be
able to make a full and accurate accounting at any time to the
client or third person of the funds or property held in trust. This
is done through updated and accurate record keeping
and Rule 1.15(a)(1)-(7)
specifies what lawyers must prepare and maintain to fulfill this
duty. For trust
funds, the lawyer MUST be able to tell the client or third person
the following:
·
exactly how much monies were deposited;
·
how monies were disbursed; and
·
how much remains in the account for each client or
third person on whose behalf the funds are being held.
3.
Identifiable
The account must be
clearly labeled as a client trust account
and should use such
designations as "client trust account," "client funds account" or
similar words that would indicate the fiduciary nature of the
account. See
Comment [1] to Rule 1.15. Therefore, the account must be
opened as a client trust account, with the checks and deposit slips
imprinted with that title. Merely opening an account in the lawyer’s
or law firm’s name and treating the account as a client trust account is
not enough. See In re Clayter, 78 Ill.2d 276, 281, 399 N.E.2d
1318 (1980) (savings account, which was in the name of respondent
who testified that he kept clients' funds in this account and that
he had written "clients trust account" on the face of the passbook,
was not a separate and identifiable client trust account).
Identifying the
account as a client trust account serves as notice to the world that the
funds in this account are not the lawyer's or law firm's personal or
business assets and further safeguards the trust funds from any
attempts to get at the lawyer's or law firm's assets through the
trust fund account.
B.
Funds to be Held in the Client Trust Account
1. What MUST be held
in a Client Trust Account?
a.
All funds or property belonging to a client or third person
entrusted to the lawyer in connection with a representation,
regardless of whether the lawyer regularly handles trust funds.
See Rule 1.15(a). E.g., advances for filing fees or
costs of retaining an investigator or expert; money to pay the
client's creditors; rents collected on behalf of the client.
b.
Funds to secure payment of legal fees and expenses to be
withdrawn by the lawyer only as fees are earned and expenses
incurred and are not received as a fixed fee, a general retainer, or
an advance payment retainer as provided in Rule 1.15(c).
See discussion infra part IV.D.6.
c.
All funds or property in the lawyer’s possession in which a
client or third person has an interest. See Rule 1.15(a).
E.g., escrow funds held back in a real estate closing; escrow
funds held pending the disposition of property in a dissolution of
marriage proceeding.
d.
Those funds or property being held by the lawyer or law firm
in which two or more persons (one of whom may be the lawyer or law
firm) have competing claims to the funds or property and ownership
claims that are unresolved. See Rule 1.15(e) and
Comments [3] & [4] to Rule 1.15. E.g., amounts in
dispute where the lawyer is holding funds as an escrowee; a dispute
over the amount of a lien asserted by a medical provider on
settlement funds; a dispute with a client over the lawyer’s fees or
expenses.
e.
All nominal or short-term funds of clients or third persons
held by the lawyer or law firm, including advances for costs and
expenses, and funds belonging in part to a client or third person
and in part, presently or potentially, to the lawyer or law firm. See
Rule 1.15(f). E.g., settlement funds; bond refund checks.
2. What funds MAY be held in a Client Trust Account?
Funds of the lawyer
necessary to pay bank services charges such as the bank's minimum
balance requirements to open or maintain the client trust account.
See Rule 1.15(b).
3. What funds MUST NOT be held in a Client Trust Account?
a.
Lawyer's own personal funds.
b.
Lawyer's business and investment monies.
c.
Fees that have been earned and funds received as a fixed fee,
a general retainer or an advance payment retainer under Rule
1.15(c). See infra part IV.D.6, at p. 22.
4. What MUST go into
an IOLTA Client Trust Account?
Client funds that are
nominal in amount or expected to be held for a short period of time
shall be deposited into one or more "pooled" interest-bearing
client trust
accounts with the interest paid to the Lawyers Trust Fund of
Illinois under Rule 1.15(f). E.g., most settlement funds are
typically considered short-term since they must be promptly paid to
the client once the settlement check has cleared.
Rule 1.15(g) provides
that the decision as to whether funds are long-term or short-term,
substantial or nominal, rests in the sound judgment of the
depositing lawyer
or law firm
and no charge of ethical impropriety or other breach of professional
conduct shall arise out of the lawyer's
reasonable judgment on what is nominal
or short-term. See Rule 1.15(f)(7) and Comment [6].
In determining
whether funds must be deposited into an IOLTA or non-IOLTA client trust
account, Rule 1.15(g) sets forth the following factors that
ordinarily the lawyer or law firm would take into consideration:
Rule 1.15(g) sets
forth the factors a lawyer or law firm shall take into consideration in
exercising discretion as to whether funds should be deposited into
an IOLTA or non-IOLTA account. For example:
a.
the amount of interest which the funds would earn during the
period they are expected to be deposited;
b.
the cost of establishing and administering the account,
including the cost of the lawyer's services;
c.
the capability of the financial institution, through
subaccounting, to calculate and pay interest earned by each client's
funds, net of any transaction costs, to the individual client.
C. Trust Property Other Than
Cash
The duties of
safekeeping property under Rule 1.15 apply both to funds and
non-cash
tangible trust property.
See
Rule 1.15(a). As funds must be kept in a separate,
identifiable and interest-
or dividend-bearing client trust account, other property must also be
appropriately identified as trust property and adequately
safeguarded. See Rule 1.15(a). When the lawyer
receives non-cash
tangible trust property, as with money held in trust, the
lawyer must (1) clearly identify or label it as trust property; (2)
keep trust property separate from the lawyer's own property; and (3)
take appropriate safeguards to protect and preserve trust property.
This means that the lawyer should identify and label the trust
property promptly upon receipt and place it in a safe deposit box or
other place of safekeeping as soon as possible. The safe deposit
box, like the client trust account, should bear a label that clearly
identifies it as the repository of property not belonging to the
lawyer but property held in trust on behalf of clients, such as
“Clients’ Safe Deposit Box,” and must not contain any of the
lawyer’s property. See Comment [1] to Rule 1.15.
The lawyer must also
keep records that sufficiently describe the items that are being
held in trust, for whose benefit, and where they are being held.
Below is an example of the type of record that could be made with
respect to items being held in a safe deposit box:
Trust Safe Deposit Receipt
Received this ____ day of _____,
20__, by ________ _______________________
___________________________________________________________________
___________________________________________________________________
(Description of item(s) being placed into safe deposit box – if
items are numbered such as stocks or bonds, specify numbers.)
Item(s)
being held in trust for: __________________________________________
Firm
Name: ________________________________________________________
Client
Name: _______________________________________________________
Item(s)
being placed into safe deposit box by: _____________________________
Any
questions regarding contents should be addressed to:
____________________
Name and
Address of bank where Safe Deposit located: ______________________
Safe
Deposit Box ID Number: __________________________________________
Anticipated period of time item(s) will be held:
____________________________
IV.
Basics of Opening and Operating a Client Trust Account
A.
Determining the Kind of Client Trust Account
Under Rule 1.15(a), there are typically two types of
client trust
accounts: an account opened on behalf of one client or client matter
(usually in situations where there is a large amount of money being
held for a long period of time, such as an estate matter) where the
interest earned on the account can be calculated and remitted to the
individual client or an account where the funds of several clients
are held (usually nominal or short-term funds), where the interest
earned on the account goes to the IOLTA program. A lawyer may
have one or more client trust accounts depending on need.
Rule 1.15(a) explicitedly prohibits depositing funds of clients or
third persons into a non-interest or non-dividend-bearing account.
In determining the type of account to deposit
funds for a client, the lawyer or law firm
in the exercise of
reasonable judgment would ordinarily take into
consideration the amount of interest that the funds would earn
during the period they are expected to be held, the cost of
establishing and maintaining the account, and the capability of the
financial institution, through subaccounting, to calculate and pay
interest net of any transaction costs. See Rule 1.15(g).
B.
IOLTA Client Trust Accounts
Rule 1.15(f) requires
that all nominal or short-term funds of clients or third persons
which are nominal in amount or are expected to be held for a short
period of time, must be deposited in one or more what is called an IOLTA
client trust accounts.
An
IOLTA client trust account is defined in Rule 1.15(i)(2) as "a
pooled interest- or dividend-bearing client
trust account,
established with an eligible financial institution with the Lawyers
Trust Fund of Illinois designated as income beneficiary," where
nominal or short-term funds of clients or third person are being
held.
“IOLTA" is the acronym for the "Interest on Lawyer Trust Accounts"
program run by the Lawyers Trust Fund of Illinois, a non-profit
corporation incorporated in 1981 by the Illinois State Bar and
Chicago Bar associations. IOLTA trust accounts are pooled,
interest-bearing or dividend-earning accounts, where the nominal or
short-term funds of clients or third persons are being held.
The IOLTA account is
operationally different from a non-IOLTA client trust account in two
respects, one, that the taxpayer identification number (TIN) on the
account is the Lawyers Trust Fund of Illinois' and not the client's
or third person’s, the lawyer's or the law firm's and, second, the
interest earned on the account is collected by the bank, and is
sent, along with the remittance report, to the Lawyers Trust Fund of
Illinois.
The net interest or
dividends earned on IOLTA client trust accounts is paid directly to the
Lawyers Trust Fund of Illinois, which uses the money to fund legal
assistance and other programs benefiting the public throughout the
state, as approved by the Supreme Court of Illinois.
The Lawyers Trust
Fund of Illinois is located at Two
Prudential Plaza, 180 North Stetson Avenue, Suite 820, Chicago, IL
60601 (312) 938-2906 [Main Phone] (312) 938-3091 [Fax]
1-800-624-8962 [Toll Free]. Inquiries concerning the
IOLTA program may be directed to Ruth Ann Schmitt, Executive
Director, Lawyers Trust Fund of Illinois, at the above address or
phone number or you may visit the Lawyers Trust Fund of Illinois
website at
www.ltf.org.
The decision as to
whether funds are nominal in amount or are expected to be held for a
short period of time rests within the sound
reasonable judgment of
the lawyer or law firm and no charge of ethical impropriety or
breach of professional conduct will result from the lawyer’s or law
firm’s exercise of
reasonable judgment on what is nominal or short term. See
Rule 1.15(g)(f)(7).
As of June 1, 2007,
All IOLTA and non-IOLTA
client
trust accounts must be maintained only at
an "eligible financial
institution." financial institutions
approved by the Lawyers Trust Fund of Illinois, thereby ensuring
that IOLTA trust accounts will receive the same interest as other
types of similar accounts. An "eligible financial institution" is a
bank or savings bank insured by the FDIC, as well as an open-end
investment company registered with the Securities and Exchange
Commission, which offers IOLTA accounts within the requirements of
the Rule 1.15(f) as administered by the Lawyers Trust Fund
and
has agreed to provide
dishonored instrument notification regarding any type of client
trust account as provided in Rule 1.15(h). The Lawyers Trust Fund website (www.ltf.org)
has a listing of those institutions. To contact the Lawyers Trust
Fund of Illinois by phone, please call (800) 624-8962 or (312)
938-2906.
C.
Opening the Client Trust Account
1.
Form - Rule
1.15(a) sets forth the general requirements of all client trust accounts, IOLTA
and non-IOLTA which must be 1) separate and identifiable as a a
client trust account; 2) interest- or dividend-bearing with the income
beneficiary for IOLTA client trust accounts being the Lawyers Trust Fund of
Illinois and for non-IOLTA client trust accounts the
client designated as income beneficiary;
and 3) maintained at an eligible financial institution in
the state where the lawyer's office is situated, or elsewhere with
the informed consent of the client or third person.
Generally, the client trust account can be a savings account,
checking account or certificate of deposit at a federally insured
bank or savings and loan.
For IOLTA client trust accounts, the
account must also meet the requirements as set forth in Rule 1.15(f)
and be subject to withdrawal promptly upon request (e.g.,
a corporate/business checking account, such as a NOW account).
See Rule 1.15(f) & (i)(2).
2.
Location - The account must be maintained in the state
where the lawyer’s office is located or elsewhere with the consent
of the client or third person as provided in Rule 1.15(a).
For an IOLTA client trust account located in Illinois, it must be established
at
an eligible financial institution authorized by federal or state law
to do business in the state of Illinois.
See Rule 1.15(f)(1).
If
the client trust account is located outside of Illinois either because the lawyer
is licensed and practices in that other jurisdiction or because the
client or third person has otherwise directed the lawyer, care must
taken that the client trust account complies with that state’s trust
accounting rules.
See also ILRPC Rule 8.5(b) (Choice of Law).
In situations where
the client or third person wants the client trust account opened in another
state, it is advisable to get the consent of the client or third
person in writing.
3.
Eligible Financial
Institution - All
client trust accounts, IOLTA and non-IOLTA, must be maintained at an
"eligible" financial institution.
Rule 1.15(i)(3) defines
"eligible financial institution"
as
"a bank or a
savings bank insured by the Federal Deposit Insurance Corporation or
an open-end investment company registered with the Securities and
Exchange Commission that agrees to provide dishonored instrument
notification regarding any type of client trust account as provided
in paragraph (h) of this Rule; and that with respect to IOLTA
accounts, offers IOLTA accounts within the requirements of paragraph
(f) of this Rule."
For a list of eligible financial institutions, please consult the
Lawyers Trust Fund of Illinois website at www.ltf.org.
4. Know Your Financial Institution - Know the
financial institution’s charges and fees for maintaining such
accounts and obtain a copy of the account agreement with the
financial institution. Know the financial institution’s
schedules for posting and crediting deposits. Know what the
federally insured limits are on deposits.
At the end of 2010,
unlimited FDIC deposit insurance coverage of IOLTA trust accounts
was extended to December 31, 2012. Under
the FDIC’s program, IOLTA accounts are fully guaranteed by the FDIC
for the entire amount in the account over and above the $250,000/per
client/third person coverage available under the FDIC's general
deposit insurance rules. To receive pass-through coverage, (1)
the deposit account records generally must indicate the account's
custodial or fiduciary nature and (2) the details of the
relationship and the interests of other parties in the account must
be ascertainable from the deposit account records or from records
maintained in good faith and in the regular course of business by
the depositor or by some person or entity that maintains such
records for the depositor. If the account receives pass-through
coverage, then each owner of funds in the account is insured for his
or her share in the account up to $250,000 including any other funds
held by or for the owner at the same insured institution. The final
rule is available at:
http://www.fdic.gov/news/board/2011Janno2.pdf.
Investigate the financial institution's requirements for opening and
maintaining a client trust account such as the minimum balance to earn
interest, bank charges to handle the account, check printing
charges, and the collection process to clear intrastate and
interstate checks and other instruments. The Lawyers Trust
Fund website (www.ltf.org)
has a section on its site with information for financial
institutions describing the IOLTA program, how a financial
institution can become certified by the Lawyers Trust Fund, the
forms necessary to set up an IOLTA account and how interest is to be
reported and remitted.
5.
Naming the Client Trust Account - An IOLTA The
client trust account must
bear the lawyer or law firm's name and include
such designations as
"Client Trust Account," "Client Escrow Account," "Attorney Trust
Account" or "Real Estate Funds Account" or any other name which would clearly identify it as a
client trust account. Illinois does not require a particular form of
identification on the client trust account but the name of the account must
be sufficiently clear to serve as notice to the world that it is a
client trust account and not an account belonging to the attorney. See
Comment [1] to Rule 1.15(a). Also, it is important for FDIC insurance
coverage of the trust property that the fiduciary nature of the
account can be ascertained from the bank’s deposit account records.
For IOLTA accounts, do not identify the Lawyers Trust Fund of
Illinois as designee, trustee or owner of the account. For
non-IOLTA client trust accounts, which are opened for the benefit of a
particular client or third person, the name of the account would
include that fact.
6.
Opening an IOLTA Client Trust Account - For an IOLTA account,
the lawyer or firm enrolls in the IOLTA program by completing the
sign-up forms (Notice to Financial Institution to Establish IOLTA
Account and Notice of Enrollment in the IOLTA Program) and
submitting the forms to the bank. The enrollment forms
instruct the bank to establish an IOLTA account. The taxpayer
identification number (TIN) on the account is the Lawyers Trust Fund
of Illinois. The IOLTA enrollment forms may be submitted
electronically or downloaded from the Lawyers Trust Fund website at
www.ltf.org
or obtained by contacting the Lawyers Trust Fund at (800) 624-8962
or (312) 938-2906.
7.
Select Client Trust Account Checks that are Distinguishable from
Business Account Checks - Select checks that have the client trust
account name on them and are of a different color than those of the
operating account so that checks written on the client trust account can be
more easily distinguished from checks written on the attorney's
operating account. Also, some lawyers maintain their business and
personal accounts at a different financial institution from where
they have their client trust accounts so that no client trust account moneys will
be inadvertently accessed.
7.
Select Signatories with Care - Illinois does not
prohibit a lawyer from delegating check-signing authority to someone
other than the lawyer. However, the lawyer has a non-delegable duty
to protect and preserve the funds in the client trust account (see In re
Vrodolyk, 137 Ill.2d 407, 560 N.E.2d 840 (1990)) and can be
disciplined for failure to supervise subordinates. See In re
Waddy, M.R. 13084, 95 CH 686 (Ill. 1997).
D.
Handling Certain Types of Funds and Property
1.
Litigation Expenses
If a client advances
to the lawyer money for litigation costs and expenses to be incurred
in the future, the money shall be deposited and maintained in the
client trust account until the expense has been incurred. See
Rule 1.15(c) & (f). If a lawyer advances the court costs and
expenses of litigation on behalf of a client, which is permitted
under Rule 1.8(e), and bills the client for the expense, the funds
received by the lawyer would not be deposited in the client trust account
since the client is reimbursing the lawyer. Expenses must be
reasonable as governed by Rule 1.5.
2.
Handling Settlement Checks
Settlement checks in contingent fee matters
typically will have as payees the client, the lawyer or lawyer’s law
firm and any third persons who have served a notice of a lien on the
proceeds (often a medical provider). The settlement check must
be deposited in the client trust account. Some lawyers may be tempted
to deposit the settlement check into the lawyer’s business account
and write the client’s portion of the proceeds from the lawyer’s own
business account. This is a violation of rule which requires
that funds belonging, in whole or in part, to a client shall be
deposited in the client trust account. See In re Elias, 114
Ill.2d 321, 333, 449 N.E.2d 1327, 1331 (1986).
When disbursing the
funds the proper procedure is to secure the signatures of all the
payees and deposit the settlement check into the client trust account.
A deposit in the client trust account may not be disbursed until the funds
are at least available for withdrawal as determined
by the account agreement with the financial institution. If a
lawyer writes a check to the client or others for settlement
proceeds before the settlement has been credited to the account on
the theory that there is other money in the client trust account, if the
check is honored it will be drawing on the funds of other clients.
This is conversion because it is the unauthorized use of one
client’s money to pay another client. See In re Thebus,
108 Ill.2d 255, 260, 483 N.E.2d 1258, 1260 (1985).
3.
Real Estate Transactions
Lawyers who act as closing agents for real estate
transactions face the dilemma of the commercial necessity of
immediately issuing checks from the client trust account on funds that have
not even been deposited, much less cleared the banking process.
Rule 1.15(j)(i) was added in late 1998 (previously Rule 1.15(g)), to
permit lawyers in the closing of a real estate transaction to
disburse funds deposited, but not yet collected, so long as the
lawyer deposited the funds into a segregated Rule Estate Funds
Account (REFA), established prior to the closing and maintained
solely for the receipt and disbursement of such funds, and the
lawyer was either acting as a closing agent as prescribed by Rule
1.15(j)(i)(1) or the instrument for deposit meets the “good-funds”
requirements set forth in Rule 1.15(j)(i)(2). However, while the
rule protects a lawyer from any disciplinary consequences in this
context, Rule 1.15(j)(i)(2) states that the disbursing lawyer is
responsible for reimbursing the client trust account for such funds that
are not collected and for any fees, charges and interest assessed by
the paying bank on account of such funds being uncollected.
4.
Non-Client and Third Person Claims
The duties of prompt notification, delivery
and accounting of trust property may also extend to third persons.
Medical providers who have perfected their lien on the settlement
funds or a lawyer who has agreed to hold earnest money as an
escrowee in a real estate transaction are common examples in which a
lawyer has a fiduciary duty to non-clients to protect and preserve
funds the non-client is presently or potentially entitled.
5.
Disputed Amounts
When there is a
dispute over property held in trust, whether it be between the
client and a third person or between the client and lawyer, Rule
1.15(e) requires the lawyer to maintain the disputed portion of the
funds in the client trust account until the dispute is resolved.
Typical examples arise in connection with amounts the lawyer is
holding as an escrowee in a real estate transaction or when there is
a dispute over the amount of lien asserted by a medical provider or
when the client disputes the amount of the fees the lawyer claims
are earned. For fee disputes with the client, Comment [3] of
Rule 1.15 instructs:
[3] Lawyers often receive funds from which the lawyer’s fee will be
paid. The lawyer is not required to remit to the client funds that
the lawyer reasonably believes represent fees owed. However, a
lawyer may not hold funds to coerce a client into accepting the
lawyer’s contention. The disputed portion of the funds must be kept
in a client trust account and the lawyer should suggest means for prompt
resolution of the dispute, such as arbitration. The undisputed
portion of the funds shall be promptly distributed…
For third parties that
may have lawful claims to the funds, Comment [4] of Rule 1.15 gives
the following guidance:
[4] Paragraph
(e) also recognizes that third parties may have lawful claims
against specific funds or other property in a lawyer’s custody, such
as a client’s creditor who has a lien on funds recovered in a
personal injury action. A lawyer may have a duty under applicable
law to protect such third‑party claims against wrongful interference
by the client. In such cases, when the third-party claim is not
frivolous under applicable law, the lawyer must refuse to surrender
the property to the client until the claims are resolved. A lawyer
should not unilaterally assume to arbitrate a dispute between the
client and the third party, but, when there are substantial grounds
for dispute as to the person entitled to the funds, the lawyer may
file an action to have a court resolve the dispute.
6. Retainers and
Advances for Fees
Effective January 1, 2010,
Rule 1.15(c) governs how legal fees and expenses received in advance
are to be handled. Funds advanced by a client to secure
payment of legal fees and expenses, to be withdrawn as fees are
earned and expenses incurred, also referred to as a “security”
retainer, shall be deposited in the lawyer’s client trust account.
Funds received as a fixed fee, a general retainer, or an advance
payment retainer shall be deposited in the lawyer's own personal or
business account and not in the client trust account.
The attributes of these
types of fee arrangements and the principles guiding their drafting
and interpretation were first articulated by the Supreme Court in
Dowling v. Chicago Options Associates, Inc., 226 Ill.2d 277, 875
N.E.2d 1012 (2007) and are now incorporated in Rule 1.15(c) and
Comments [3A] through [3C]. Dowling was not a
disciplinary case but a civil matter involving a dispute over
whether a retainer paid by a client to his lawyers remained the
property of the client and could be subject to a turnover order to
the client’s creditor. The Court addressed the issue not
covered by prior Rule 1.15: the ownership to funds advanced by a
client for lawyer’s fees and where those funds must be deposited.
Based on Dowling, Rule 1.15(c) sets forth the different types
of retainers permissible in Illinois and where those funds must be
deposited as follows:
Classic Retainer.
Also referred to as a “true,” “engagement,” or “general” retainer,
funds are paid by a client to the lawyer in order to secure the
lawyer’s availability during a specified period of time or for a
specified matter. This type of retainer is earned when paid and
immediately becomes property of the lawyer, regardless of whether
the lawyer ever actually performs any services for the client and,
therefore, is not deposited in the client trust account. See
Comment [3B] to Rule 1.15; Dowling, 226 Ill.2d 277, 287, 875
N.E.2d 1012, 1019 (2007).
Security Retainer.
Under this type of retainer, funds paid to the lawyer are
not considered present payment for future services but are intended
to secure payment of fees for the future services the lawyer is
expected to perform. This type of retainer remains the property of
the client and, therefore, must be deposited in a client trust account and
kept separate from the lawyer’s own property until the lawyer
applies it to charges for services that are actually rendered.
If the lawyer and client agree that
the client will pay a security retainer, that term should be used in
any written agreement.
Any unused portion of the
retainer is refunded to the client under Rules 1.15(b) and 1.16(d)
of the Illinois Rules of Professional Conduct. See
Comment [3B] to Rule 1.15; Dowling, 226 Ill.2d 277, 287, 875
N.E.2d 1012, 1019 (2007).
Advance Payment Retainer. In contrast to the security
retainer, the funds paid to the lawyer under this retainer
are intended by the client to be present payment to the lawyer in
exchange for the commitment to provide legal services in the future.
Ownership of this retainer passes to the lawyer immediately upon
payment and is the lawyer’s property and, therefore, may not be
deposited in the client trust account; however, any
portion of an advance payment retainer that is not earned must be
refunded to the client.
An advance payment retainer is utilized
only “sparingly,” in other words, when necessary to accomplish a
purpose for the client that is appropriate under the circumstances
of the matter such as in the Dowling case where a debtor
wants to ensure that he has sufficient funds beyond the reach of
judgment creditors in order to secure legal counsel. See
Comment [3C] to Rule 1.15. Other examples the Court gave in
Dowling of the limited circumstances in which the use of an
advance payment retainer is appropriate are in a
bankruptcy case where,
before filing a petition, a debtor’s attorney receives a retainer
for services to be rendered in connection with the debtor’s
bankruptcy case (see Dowling, 226 Ill.2d at 289, 875
N.E.2d at 1020) or where a criminal defendant whose property may be
subject to forfeiture may wish to use an advance payment retainer to
ensure that the client has sufficient funds to secure legal
representation. See Dowling, 226 Ill.2d at 294,
875 N.E.2d at 1023. In the
“vast majority of cases,” the funds paid to retain a lawyer will be
considered a security retainer and placed in the client trust account.
See Comment [3C] to Rule 1.15; Dowling, 226 Ill.2d
277, 288, 875 N.E.2d 1012, 1019 (2007).
Rule 1.15(c) further
proscribes the terms of an advance payment retainer. An
advance payment retainer must be in writing, signed by the client,
must use the term "advance payment retainer" to describe the
retainer and must include in the agreement all of the
following provisions:
1) the special purpose for the
advance payment retainer and an explanation why it is advantageous
to the client;
(2) that the retainer will not be
held in a client trust account, that it will become the property of
the lawyer upon payment, and that it will be deposited in the
lawyer’s general account;
(3) the manner in which the retainer will
be applied for services rendered and expenses incurred;
(4) that any portion of the
retainer that is not earned or required for expenses will be
refunded to the client (see Comments [3B]
through [3D] to Rule 1.15 and Rule 1.16(d));
and
(5) that the client has the option
to employ a security retainer, provided, however, that if the lawyer
is unwilling to represent the client without receiving an advance
payment retainer, the agreement must so state and provide the
lawyer’s reasons for that condition.
Fixed/Flat Fee
Agreements. In addition to the three types of retainers
described above, Rule 1.15 recognizes fixed fee agreements, also
referred to as a “flat” or “lump-sum” fee,
where the lawyer agrees to provide a specific service (e.g.,
defense of a criminal charge, a real estate closing, or preparation
of a will or trust) for a fixed amount paid by the client to engage
a lawyer at the outset of a matter. Unlike an advance payment
retainer, a fixed fee is generally not subject to the obligation to
refund any portion to the client; however, a fixed fee is subject,
like all fees, to scrutiny and the fee charged must reasonable under
the circumstances as set forth in Rule 1.5(a) and any portion of the
fee must be refunded to the client under Rule 1.16(d) if retention
of the entire fee would be unreasonable and excessive under the
circumstances. See Comments [3B] through [3D] to Rule 1.15
and Comment [10] to Rule 1.16(d); see also In re Serritella,
M.R. 21655, 03 SH 115 (Ill. 2007) (retention of $10,000 flat
fee for only three hours of work was
unreasonable under Rule 1.5(a) and unearned fees must be refunded
under Rule 1.16).
General Considerations
for All Fee Agreements
While Illinois recognizes
the general rule of freedom of contract between lawyers and clients
with respect to fee agreements, the “guiding principle” is what is
in the best interests of the client. The type of retainer that
is in the client’s best interests will depend on the circumstances
of each case and the reasonableness, structure, and division
of legal fees governed by Rule 1.5 and other applicable law.
See Comments [3A], [3C] & [3D] to Rule 1.15.
The Court in Dowling
provided guidance to the profession in determining which
types of retainers are appropriate. The Court counseled:
The guiding principle, however, should be the
protection of the client’s interests. In the vast majority of cases,
this will dictate that funds paid to retain a lawyer will be
considered a security retainer and placed in a client trust account,
pursuant to Rule 1.15. Separating a client’s funds from that of the
lawyer protects the client’s retainer from the lawyer’s creditors.
See In re Lewis, 118 Ill. 2d 357, 362-63 (1987). Commingling
of a lawyer’s funds with those of a client has often been the first
step toward conversion of a client’s funds. In addition, commingling
of a client’s and the lawyer’s funds presents a risk of loss in the
event of the lawyer’s death. In re Clayter, 78 Ill. 2d 276,
281 (1980). Thus, advance payment retainers should be used only
sparingly, when necessary to accomplish some purpose for the client
that cannot be accomplished by using a security retainer.
Dowling, 226 Ill. 2d at 289, 875 N.E.2d at 1020.
Also, a client has an
unqualified right to discharge a lawyer and, if discharged, the
lawyer may retain only a sum that is reasonable in light of the
services the lawyer performed prior to being discharged.
All fee agreements are subject to
the requirement of Rule 1.5(a) that a lawyer may not charge or
collect an unreasonable fee and any fees that have not been earned
must be refunded to the client. See Comments [3B]
through [3D] to Rule 1.15 and Comment [10] to Rule 1.16(d).
Practice Pointer – All retainer agreements should:
1.
be in writing, signed by the client;
2.
clearly disclose to the client the nature of the retainer;
and
3.
indicate where the money will be deposited and how
withdrawals will be handled.
For an advance retainer agreement (deposit in the lawyer’s
business account), the agreement must include provisions #1, 2 and 3
above, and additionally must:
1. advise the client
of the option of using a security retainer; and
2. state why the
lawyer believes that an advance retainer is advantageous to the
client.
Other considerations:
1.
If there are any ambiguities in the parties’ intent, the
retainer will be construed as a security retainer and the funds must
be deposited in the client trust account.
2.
Advance payment retainers are to be used sparingly (those
circumstances in which it is in the client’s best interests as it
relates to the representation)
3.
The appropriate amount of the retainer advanced will be
determined by what is considered a reasonable fee under Rule 1.5(a).
7. Handling Credit
Card Payments for Legal Fees and Expenses
The use of credit
cards by clients to pay for legal fees and/or expenses has become
increasingly common in the last few years. While the general
consensus of authority is that lawyers may use such forms of payment
(see ABA Formal Ethics Op. 00-419 (approved the use of credit cards to pay
legal fees); ABA/BNA Lawyers’ Manual on Professional Conduct, sec.
41:601-606), when credit cards are taken for unearned fees and
expenses which must be deposited in the client trust account, the lawyer’s
duties to protect trust property are triggered. To avoid
commingling and conversion, the lawyer must carefully consider how
credit card payments will be processed (e.g.,
designation of a “merchant” account, bank services fees and
chargebacks) and take adequate precautions to protect what the
lawyer is required to maintain in trust. A number of state
ethics opinions have grappled with how a lawyer’s taking credit card
payments impacts on a lawyer’s ethical obligations.
See, e.g.,
Oregon Formal Ethics Op. 2005-172 (Aug. 2005); North
Carolina Formal Ethics Op. 2009-4 (April 2009); and Virginia Ethics
Op. 1848 (April 2009);
see also Gunnarsson, H.,
Accepting Payment by Credit Card:
Priceless?, Illinois Bar Journal (Jan. 2007).
8.
Withdrawing Earned Fees
A lawyer must promptly withdraw funds held in
the client trust account from which the lawyer’s fees are to be withdrawn
once the fees have been earned and there is no dispute over the
amount of funds to be withdrawn. However, before fees can be
withdrawn the lawyer must apprise the client of the withdrawal and
give the client a reasonable opportunity to raise any objection.
While a lawyer is not required to remit to the client funds that the
lawyer reasonably believes represent fees owed, a lawyer may not
hold funds to coerce a client into accepting the lawyer’s
contention. Therefore, any disputed portion of the funds must
be kept in a client trust account until there is a prompt resolution of the
dispute, such as arbitration. The undisputed portion should be
promptly distributed. See Comment [3] to Rule 1.15.
For contingent fee matters, this is accomplished in the settlement
statement required by Rule 1.5(c), which shows the amount that will
go to the lawyer. For hourly-fee agreements, where the lawyer
has received a security retainer and the funds are being held in the
client trust account, the lawyer would send a billing statement indicating
the services rendered and the amount the lawyer intends to withdraw
from the client trust account unless the lawyer hears otherwise from the
client within a reasonable period of time.
In withdrawing the undisputed portion,
the lawyer should promptly write a check, payable to the lawyer’s
law firm, for the full amount of the fee earned. The lawyer
must not let earned fees accumulate in the client trust account and
withdraw fees on an “as needed” basis; otherwise, commingling
occurs, and consequently, the trust funds are put at risk.
Also, the appearance may be created that the lawyer is hiding money
in the account to avoid creditors or income taxes thereby exposing
the client trust account to possible attachment or levy by the lawyer’s
creditors.
In withdrawing earned fees, the lawyer should
make the trust check payable to the lawyer’s law firm and indicate
in the memo portion of the check the purpose of the payment and the
client matter, as well as make the appropriate entries in the
checkbook register, client ledger and disbursement journal.
Practice Pointer – The payee on a
trust check for earned fees should be made payable to the lawyer’s
law firm. Trust checks for earned fees made payable to
the lawyer’s own creditors or made out to cash make it difficult to
trace the source and purpose of the payment and could create the
appearance that the lawyer is using the client trust account as a personal
account, thereby endangering the account’s status as a client trust
account, or that the lawyer is using client funds for personal
purposes.
9.
Dealing with Unclaimed or Unidentified Funds
Situations may arise where there is an
unclaimed or unidentified amount of funds in the client trust account due
to (1) the disappearance of a client or third person before a client trust
account check could have been issued; (2) the fact that the client trust
account check has yet to be cashed; or (3) there is an unexplained
amount of money that cannot be traced as belonging to either a
client, a third person or the lawyer. Whatever the situation,
the bottom line is that the lawyer is not entitled to take the
money.
When the person to whom trust funds are being
held disappears before the lawyer has issued a check to that person,
the lawyer must first take all reasonable steps to locate that
person. See In re Walner, 119 Ill.2d 511, 519 N.E.2d
903 (1988). How much effort a lawyer must undertake to find
the missing client or third person will vary in each case.
Typically, a lawyer would check with the post office to see if the
client or third person left a forwarding address. The lawyer
would then send a letter to the person’s last known address by
regular mail and by certified return receipt advising that person
that the lawyer is holding their funds and asking that person for
direction in disbursing the money. The lawyer may attempt to
contact the person’s relatives, employers, neighbors and friends,
publish notice in places where that person might frequent, use an
investigator or check with the Social Security Administration.
See Michigan State Bar Opinion RI-38 (November 20,
1989).
If the client or third person cannot be located
and the funds have remained unclaimed for five years, under the
Uniform Disposition of Unclaimed Property Act, 765 ILCS secs. 1025/1
et seq. (1992), the funds are presumed unclaimed and the
lawyer may remit the funds to the Illinois Unclaimed Property
Division of the Illinois State Treasurer. To report unclaimed
property to the state, contact the Office of the State Treasurer,
Unclaimed Property Division, P.O. Box 19495, Springfield, IL
62794-9495, (217) 524-0023 or go to the “Cash Dash” program on the
Illinois State Treasurer website at
www.treasurer.il.gov.
The same analysis applies if a
client trust account
check was issued but had not been cashed. The lawyer should contact
the person to whom the check is made payable at the person’s last
known address, advising that person that the client trust account check has
not been cashed and that unless that person advises the lawyer to
issue a replacement check, the funds will be presumed to be
unclaimed in accordance with the Uniform Disposition of Unclaimed
Property Act and the funds will be remitted to the Illinois
Unclaimed Property Division.
Sometimes ownership of the funds cannot be
traced to either a client, a third person or the lawyer typically
due to a mathematical error. In these situations, if the
lawyer cannot determine with any reasonable certainty if the amount
left over in the account belongs to either the lawyer or a client or
third person, the funds should be treated as unclaimed property and
the lawyer should proceed as discussed above.
10.
Bank Charges and Fees
Rule 1.15(b)
specifically provides that “[a] lawyer may deposit the lawyer's own
funds in the client trust account for the sole purpose of paying bank
service charges on that account, but only in an amount necessary for
that purpose." For an IOLTA account, the Lawyers Trust Fund of
Illinois will pay certain "[a]llowable reasonable fees," defined in
Rule 1.15(i)(8)(h)(5) as “per check charges, per deposit charges, a fee in
lieu of a minimum balance, federal deposit insurance fees, automated
investment ("sweep") fees, and a reasonable maintenance fee, if
those fees are charged on comparable bank accounts maintained by
non-IOLTA depositors. All other fees [e.g., NSF, stop payment
or bank reconciliation or “special” services such as wire transfers]
are the responsibility of, and may be charged to, the lawyer or law
firm maintaining the IOLTA account.”
Practice Pointer -
Any deposits of the lawyer’s own funds to cover bank charges and
fees must be entered into and accounted for in the trust accounting
records that must be maintained. See Rule 1.15(a);
Comment [2] to Rule 1.15.
V.
Client Trust Accounting
A.
Establishing Accountability
Rule 1.15 does not
specify which types of accounting records or books must be
maintained in order for the
A lawyer to fulfill
has the duty to give an
accurate and complete accounting to the client or third person.
See Rule 1.15(d).
In order to fulfill that duty, Rule 1.15(a) also requires that all
complete records of all client trust account funds and other property
held pursuant to Rule 1.15 are
kept for seven years after the end of the representation.
For client trust account funds, the "complete records" that must be
prepared and maintained are set forth in some detail in Rule
1.15(a)(1)-(7). There are various manual and automated accounting systems that are
available. In the first instance, many lawyers will consult
with an accountant to set up an appropriate accounting system.
Whichever accounting method or system is used, it must be one that
the lawyer understands, puts into practice, and follows (and that
others auditing the lawyer’s account can follow).
In establishing an
accounting system that meets the requirements of Rule 1.15,
There are no specific rules on how to
maintain the account but the following accounting principles
and the specific account and recordkeeping requirements of Rule 1.15
should be kept in mind:
1. Separate Clients
Should Be Thought of as Separate Accounts
With an IOLTA client trust account,
where the funds of more than one client or third person are being
held at any given time (a/k/a pooled), it
is important to keep in mind that while funds deposited in the
client trust account belong to more than one person,
the lawyer must know and
account for each client or third person's funds as if each client or
third person had a separate account. Client A's funds have nothing to do with Client B's funds. NEVER
allow the funds being held for one client or third person to be
used, even momentarily, to satisfy the obligations of another client
or third person. Separation is obtained by maintaining a separate
log or subsidiary ledger sheet for each client or third person. In
this way, the lawyer will be able to account exactly for all money
received or paid out on behalf of each client or third person at any
given time as well as know the total balance of all client and third
person funds the lawyer is required to maintain in the client trust
account. Also, for FDIC insurance to cover each client or third
person’s funds in the pooled client trust account up to the federally
insured limits, the name and ownership interest of each client or
third person must be ascertainable from the client trust account records
maintained by the lawyer. See
www.fdic.gov.
Recordkeeping
Requirement:
Rule 1.15(a)(2) requires that for all client trust accounts
contemporaneous ledger
records must be prepared and maintained for each separate trust
client or beneficiary whose funds are being held in trust. The
ledger records must show for each separate trust client or
beneficiary
the source of all funds deposited, the date of each deposit, the
names of all persons for whom the funds are or were held, the amount
of such funds, the dates, descriptions and amounts of charges or
withdrawals, and the names of all persons to whom such funds were
disbursed.
2. You Can't Spend
What You Don't Have or Timing is Everything
A deposit in the
client trust account cannot be disbursed until the deposited item has
cleared the banking process and been credited to the client trust account.
The funds in the client trust account cannot be used by anyone other than
the client or third person who owns them, and the lawyer is
responsible for assuring that the funds are not, even inadvertently,
diverted to another. The rule of uncollected funds is simply: if you
write a check from the client trust account after you have deposited a
check or draft on behalf of a particular client, but before the
deposited monies have cleared the banking process and have been
credited to the client trust account, if the check is presented, either it
will bounce or you will be drawing on funds belonging to other
clients or third persons. This is considered conversion even if the
lawyer has no dishonest motive and no client or third person is
ultimately harmed. In re Clayter, 78 Ill.2d 276, 283, 399
N.E.2d 1318 (1980) Conversion is defined as any unauthorized use of
trust funds that deprives the client or third person of the use of
those funds even temporarily. See In re Lenz, 108 Ill.2d 445,
484 N.E.2d 1093 (1985).
For example, do not
be tempted to do your client a favor by writing a check to the
client for settlement proceeds before the settlement check has
cleared on the theory that there is other money in the client trust
account. By doing so, you are putting at risk the funds of other
clients or third persons. See In re Reeves, M.R.
11056, 93 SH 599 (Ill. 1995) (lawyer suspended for, inter alia,
conversion of client funds where the lawyer would often issue a
client a check drawn on the client trust account prior to the deposited
settlement check clearing and its proceeds being posted to the
client trust
account. His clients would frequently cash their checks on the same
day the client trust account check was issued and the lawyer's bank would
pay out on the check from the funds currently in the account
belonging to other clients).
Therefore, it is
important to know the financial institution’s check clearing
procedures and schedules of when funds can be withdrawn. The time it
takes for funds to become available after deposit can vary between a
day to several weeks depending on the form in which the money is
deposited. Ask your financial institution for their schedule of when
deposits are posted to the account. Many banks have automated
account information systems where you can check the activity on an
account.
Automatic Overdraft Notification Rule:
Rule 1.15(h) requires
all IOLTA and non-IOLTA client trust accounts be established at financial
institutions that have agreed to notify
the Attorney Registration and Disciplinary Commission (ARDC) when a
client trust account is overdrawn,
irrespective of whether or not the instrument is honored.
Effective
September 1, 2011, Illinois joins 42 other jurisdictions that have
an overdraft notification law in place.
A bounced
check drawn on a client trust account can be an early warning that a
lawyer is engaging in conduct that could injure clients. Experience
in other states demonstrates, however, that most lawyer regulatory
action under an overdraft notification rule does not result in
lawyer disciplinary charges. Instead, the rule helps identify those
lawyers who simply need education on managing their client trust
accounts.
Practice Tip:
Normally, checks will be presumed good and many financial
institutions will automatically honor and credit a deposit a certain
number of banking days after deposit without actually having
received verification from the drawee bank that the funds have been
paid. In such cases, the lawyer can safely disburse funds against
the check when the lawyer’s bank credits the deposit to the account.
However, even after an item has been posted to an account, it still
may be returned due to insufficient funds, stop payment or improper
endorsement and a lawyer may not learn of the dishonor until several
days after the item was posted. When a lawyer has any concerns that
a check might be dishonored, the safest way to determine that an
item has cleared is to call the bank upon which it is drawn to find
out if the item has been honored.
Real Estate
Transactions: Lawyers who act as the closing agents for real
estate transactions face the dilemma of the commercial necessity of
immediately issuing checks from the client trust account on funds that have
not even been deposited, much less cleared the banking process. Rule
1.15(j)(i) permits lawyers in the closing of a real estate transaction
to disburse funds deposited, but not yet collected, so long as the
lawyer deposited the funds into a segregated Real Estate Funds
Account (REFA), established prior to the closing and maintained
solely for the receipt and disbursement of such funds. Also,
the lawyer must either be acting as a closing agent as prescribed in
subparagraph (j)(i)(1)
or the instrument for deposit must meet the "good-funds"
requirements set forth in subparagraph
(j)(i)(2).
However, while the rule protects a lawyer from any disciplinary
consequences in this context, the rule may not affect the lawyer’s
civil liability if any deposit does not clear. See Rule
1.15(j)(i)(2).
3.
Always Maintain a Paper Trail
Accountability
requires that all aspects of the transaction be traceable from the
time of receipt of the funds, up to and including the disbursement
of the funds by check, proper negotiation of that check by the payee
and clearance through the banking process. In the typical
transaction, where the client gives money to the lawyer, who then
deposits it in the client trust account and pays the money out at
the direction of the client, the following documents would provide a
paper trail for the lawyer of what actions were taken:
·
the initial deposit slip or copy of a bank receipt,
which would show the date of deposit, the amount of deposit, the
name of the client or third person on whose behalf the money has
been received, the source of the funds and the date stamp showing
the date the deposit was received by the bank;
·
the bank statement, which would show that the bank
credited the deposit and when it was credited;
·
the checkbook stub, which would show when
disbursements were made and to whom;
·
the disbursement check, which would show the date it
was drawn, the amount and the name of the payee, the purpose of the
check, the order of negotiation (from the endorsements) and the date
deposited for collection;
·
the bank statement, which would show the date the
client trust account was actually charged for the check; and
·
any file documentation that would explain the deposit
or the authority for how the money should be distributed, such as a
closing statement, a court order or a signed authorization by the
client for the disbursement of funds.
Each deposit and
disbursement should describe the client or third person and the
matter to which it relates.
Recordkeeping Requirement:
Rule 1.15(a)(1)-(8) requires
specific recordkeeping requirements for all IOLTA and non-IOLTA
client
trust accounts. Rule 1.15(a) proscribes the following records:
Maintenance of complete records of client trust accounts
shall require that a lawyer:
(1) prepare and maintain receipt and
disbursement journals for all client
trust accounts required by this Rule containing a record
of deposits and withdrawals from client trust accounts
specifically identifying the date, source, and
description of each item deposited, and the date, payee
and purpose of each disbursement;
(2) prepare and maintain contemporaneous
ledger records for all client trust accounts showing,
for each separate trust client or beneficiary, the
source of all funds deposited, the date of each deposit,
the names of all persons for whom the funds are or were
held, the amount of such funds, the dates, descriptions
and amounts of charges or withdrawals, and the names of
all persons to whom such funds were disbursed;
(3) maintain copies of all accountings, to
clients or third persons showing the disbursement of
funds to them or on their behalf, along with copies of
those portions of clients’ files that are reasonably
necessary for a complete understanding of the financial
transactions pertaining to them;
(4) maintain all client trust account
checkbook registers, check stubs, bank statements,
records of deposit, and checks or other records of
debits;
(5) maintain copies of all retainer and
compensation agreements with clients;
(6) maintain copies of all bills rendered to
clients for legal fees and expenses;
(7) prepare and maintain reconciliation
reports of all client
trust accounts, on at least a quarterly basis, including
reconciliations of ledger balances with client trust
account balances;
(8) make appropriate arrangements for the
maintenance of the records in the event of the closing,
sale, dissolution, or merger of a law practice.
Those records
may be maintained by electronic, photographic, or other media
provided that printed copies can be produced and the records are
readily accessible to the lawyer.
4.
There is No Such Thing as a Negative Balance
All balances are
either positive (while monies are being held for clients) or zero
(when the matter is closed and no monies remain in the client trust
account). The balance in the client trust account should always equal
the aggregate balance due all clients. In re Young, 111
Ill.2d 98, 488 N.E.2d 1014 (1986). If a negative balance
occurs, it is, at best, a sign of negligence and, at worst, a sign
of theft.
B.
Essential Accounting Systems
Rule 1.15
requires lawyers to do more than just deposit client or third
person funds into a separate and identifiable client trust
account. The lawyer also has the duty to give an accurate and
complete accounting to the client or third person concerning how
their property was handled by the lawyer. Rule 1.15(a)(1)
through (7) sets forth the accounting records or books listed
below that must be maintained for funds held in the client trust
account. Trust account records
required under the rule can be kept manually or electronically
through some type of accounting software program so long
as printed copies can be produced and the records are readily
accessible to the lawyer. See Rule 1.15(a).
There are
various manual and automated accounting systems that are
available. In the first instance, many lawyers will consult
with an accountant to set up an appropriate accounting system.
For records kept manually, the lawyer must record each trust
account transaction a number of different times. For example,
for a trust account
check, the lawyer would
have to prepare the check, enter the check into the check register,
enter the check in the subsidiary client ledger, and enter the
check in the
disbursement journal.
In comparison,
the use of computer software for trust accounting permits the
lawyer to only make one computer entry and the software will
enter the information into the correct ledgers and journals
assuming the software is properly setup that way. This ensures
that all the required journal entries are up-to-date and saves
time for the lawyer. While a
lawyer can purchase software specifically designed for
attorney trust accounting, two commonly used, generic accounting
programs that can be modified to provide the necessary trust
account records are Quicken® and QuickBooks. The
Minnesota Lawyers Professional Responsibility Board and the
Minnesota Office of Lawyers Professional Responsibility have
a publication explaining how to set up attorney trust accounting
records on Quicken®:
Maintaining Lawyer Trust Accounts with Quicken 2006 Basic.
Whichever
accounting system is used it must be one that the lawyer
understands, puts into practice, and follows (and that others
auditing the lawyer’s account can follow).
Required Journals: Rule 1.15(a) requires the
following journals must be prepared and
maintained, either manually or computerized, for all IOLTA and non-IOLTA
client
trust accounts:
1.
Receipts and Disbursement Journals
- Rule 1.15(a)(1). These journals lists all receipts and
disbursements chronologically
for all amounts being held in trust that sufficiently identifies the date, source
and purpose of each transaction.
TRUST ACCOUNT RECEIPTS JOURNAL
CLIENT TRUST ACCOUNT NO. ________________
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
|
|
|
|
|
|
|
|
|
|
|
TRUST ACCOUNT DISBURSEMENTS JOURNAL
CLIENT TRUST ACCOUNT NO. ________________
|
DATE |
CHECK |
PAYEE |
PURPOSE |
CLIENT |
AMOUNT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Subsidiary Ledger
Pages - Rule 1.15(a)(2). This ledger records chronologically for each client or third
person for whom funds are held in trust all receipts, disbursements
and balances. Without a subsidiary ledger the lawyer would
likely be unable to know the amount of funds that must be maintained
for a given client or third person and to provide an accurate and
complete accounting on request. Also, the FDIC insurance rules
require that to fully insure each client’s or third person’s funds
being held in the IOLTA client trust account, each client and third
person’s interests must be ascertainable from the client trust account
records. See discussion on Pages 17-18. Each
subsidiary ledger would include:
-
Separate subsidiary ledger pages for each client or third
person for whom funds are held in trust.
-
Posting transactions (receipts and disbursements) by date,
purpose and amount.
-
If the client trust account is opened for the benefit of one client
or third person or if the account allocates interest to each client
or third person, any net interest (accrued interest less service
charges) credited to the client or third person.
TRUST ACCOUNT SUBSIDIARY LEDGER PAGE
Name of Client/Third Person:
_________________________________
Legal Matter/Adverse Party: __________________________________
File or Case Number: ________________________________________
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
Checkbook Register - Rule
1.15(a)(4) A client trust account checkbook register is like
any other checkbook register. It is used to record deposits
and client trust account checks in sequential order and is also used
to maintain a running balance.
To properly maintain the
checkbook register,
check stubs, bank statements, records of deposit, and checks or
other records of debits must also be maintained.
TRUST ACCOUNT CHECKBOOK REGISTER
|
CHECK |
DATE |
PAYEE OR
DEPOSIT
SOURCE |
AMOUNT OF CHECK |
DEPOSIT
AMOUNT |
BALANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
Reconciliation Report - Rule 1.15(a)(7).
prepare and maintain reconciliation reports of all client trust
accounts, on at least a quarterly basis, including reconciliations
of ledger balances with client trust account balances;
TRUST
ACCOUNT
MONTHLY RECONCILIATION
PERIOD OF 02/01/10 - 02/28/10
CLIENT TRUST ACCOUNT NO.________________
Checkbook
Balance:______________________
Receipts
Minus Disbursement Journals Balance:__________________________
Subsidiary
Ledger Pages Balance:_____________________
Bank
Statement
Balance on
______
Plus
outstanding deposits _______
Less nest
interest accrued _______
Less
outstanding checks ______
Adjusted Bank
Statement Balance:_________________
Required Copies of Account Records: In addition to
preparing and maintaining the above journals, Rule 1.15(a) requires
that copies of the following records generated in operating the
client trust account be maintained:
-
copies of all accountings, to clients or third persons
showing the disbursement of funds to them or on their
behalf, along with copies of those portions of clients’
files that are reasonably necessary for a complete
understanding of the financial transactions pertaining
to them - Rule 1.15(a)(3);
-
copies of all retainer and compensation agreements with
clients - Rule 1.15(a)(5); and
-
copies of all bills rendered to clients for legal fees
and expenses - Rule 1.15(a)(6).
All of the books and records
required by Rule 1.15(a) must be maintained for a period of
seven years after termination of the representation. The
records can be maintained by electronic, photographic or other media
provided that printed copies can be produced and the records are
readily accessible to the lawyer.
In addition, Rule 1.15(a)(8)
requires a lawyer to make
make "appropriate arrangements" for the maintenance of the records in
the event of the closing, sale, dissolution, or merger of a law
practice. See also Comment [5] to Rule 1.3 (duty of diligence may
require sole practitioner to a successor plan in place in the event
of death or disability).
C.
Tracking Client Trust Account Funds: Record Entries
1.
Depositing Client Trust Account Funds
Deposit client funds in the client trust account promptly upon
receipt. Generate the following:
a.
Deposit slip (receipt for cash), which identifies client or file for
whom deposit is being made;
b.
Checkbook register deposit entry;
c.
Subsidiary ledger entry; and
d.
Cash receipts journal entry.
Checks payable jointly to the client and the lawyer should be
deposited in the client trust account and not endorsed over to the client.
2.
Disbursing Client Trust Account Funds
Disbursements to the client or on behalf of the client must
be made promptly after the deposit has been credited. Generate
the following:
a.
Check made payable to the client or third party, with notation of
the client matter and purpose in memo portion of the check;
b.
Checkbook register disbursement entry;
c.
Subsidiary ledger entry; and
d.
Cash disbursements journal entry.
3.
Proper Methods For Withdrawing Legal Fees
Before an earned legal fee may properly be withdrawn from a
client trust account, the client should be given notice of the nature of
the services rendered and the amount of the legal fee proposed to be
paid to the lawyer. See In re Smith, 63 Ill.2d 250, 347
N.E.2d 133 (1976). If no objection is received within a
reasonable time, the lawyer may withdraw the fee from the client trust
account.
Moreover, if no dispute over the fee exists, the lawyer’s
fees which are justly due and owing, may not remain in the client trust
account, but MUST be promptly withdrawn. See Comment
[3] to Rule 1.15. If not, the lawyer is commingling his or her
own funds with the clients' funds and, as a consequence, is
endangering the integrity of the client trust account. See In re
Enstrom, 104 Ill.2d 410, 472 N.E.2d 446 (1984).
Disbursements out of
the client trust account for earned legal fees should be made payable to
the lawyer and not to a third party creditor of the lawyer.
Otherwise, a lawyer creates the appearance of using the client trust
account for the lawyer's own personal or business expenses.
This could potentially subject the client trust account to attachment by
the lawyer's creditors, thereby endangering existing client funds
and the status of the account as a client trust account.
4.
Reconciling Account Records with Monthly Bank Statements
Rule 1.15(a)(7) requires that reconciliations must be made for all
IOLTA and non-IOLTA client trust accounts, on at least a quarterly basis,
including reconciliations of ledger balances with client trust
account balances.
Before a client trust
account can be reconciled with the monthly bank statement, the
balances of:
-
the cash receipts and cash disbursement journals;
-
the subsidiary ledger pages; and
-
the checkbook register
must equal one another.
Step 1: Add together the monthly ending balances of all
subsidiary ledger pages.
Step 2: Take
the figure you arrived at the previous month when you reconciled
your cash receipts and cash disbursements journals. Add the
cash receipts journal balance for the month in question and subtract
the cash disbursements journal balance for that month.
Step 3: Take
the balance in the checkbook register at the end of the month in
question.
The figures for Step
1, 2, and 3 must be equal. If they are not, look for entries
that do not match or addition or subtraction errors, until all three
figures are the same.
5.
Interest and Bank Costs
a.
For IOLTA accounts, interest credits are paid by the financial
institution directly to the Lawyers Trust Fund of Illinois, and
certain legitimate and reasonable bank costs are paid by the Lawyers
Trust Fund directly to the bank. If your monthly bank
statement reflects interest credited but not yet paid out to the
Lawyers Trust Fund or bank charges not yet paid by the Lawyers Trust
Fund, you should adjust the balance shown on the monthly bank
statement accordingly. The interest and the charges should not
be entered on your ledgers, cash journals, or checkbook register.
b.
For non-IOLTA client trust
accounts, where the interest is credited to individual
clients or beneficiaries, after bank costs are deducted, you will not
adjust the balance shown on the bank statement, but you must add the
net interest to your subsidiary ledger pages, your cash receipts
journal, and your checkbook register.
6. Monthly
client trust account reconciliation.
The bank statement balance must reconcile with the other
ledger balances as follows:
a.
Take the balance shown on the monthly bank statement. (For
IOLTA accounts, that balance may have to be adjusted as discussed in
(5)(a) above.)
b.
Add any deposits not credited on the bank statements.
c.
Subtract checks not debited on the bank statement.
d.
The balance should be equal to the three balances described in Step
1, 2 and 3 on Page 40 -- the subsidiary ledger pages balance, the
cash disbursements and receipts journals balance, and the checkbook
register balance.
Practice Tips:
·
Have an Accounting System - You must have a way
of accounting to a client or third persons as to how their funds
were handled. Rule 1.15 does not prescribe any particular accounting
system or method but does
mandate that specific recordkeeping be performed and specific
records be maintained as set forth in Rule 1.15(a)(1)-(8). Some common accounting record systems are
discussed below. However, you must have a system that you and anyone
else looking at your records can understand. If you don’t know how
to set up an accounting system, consult with an accountant. See
In re Sebela, M.R. 10859, 92 CH 577 (Ill. 1995) (conversion of
client funds occurred because lawyer had no accounting system,
withdrew his fees on an "as needed" basis based on his memory and,
consequently, paid himself more than what he was entitled).
·
Reconcile Monthly - You should have a practice
where you reconcile all of your accounts on a monthly
basis, regardless of whether you do your own accounting or you have
someone assisting you. Rule
1.15(a)(7) requires that reconciliations for IOLTA and non-IOLTA
client
trust accounts be performed at least on a quarterly basis and that
records of those reconciliations be maintained. If you fail to reconcile, you may not be
aware of bank errors, miscalculations and employee embezzlement. See
discussion on Page 40.
·
Don’t Share Client Trust Accounts With Lawyers Not in the
Same Firm - A lawyer has a non-delegable fiduciary duty to
safeguard client or third person property entrusted to the lawyer
during a representation. If you are in a law firm, each lawyer in
the law firm need not open up a separate client trust account for each
lawyer in the firm. However, you must not allow lawyers that are not
in your law firm to deposit trust funds into the law firm’s client trust
account; you are responsible for those funds. Conversely, if you
deposit funds entrusted to you by a client or third person for
safekeeping, you cannot deposit those funds into another lawyer’s
client trust account.
·
Do Not Withdraw Your Fees in the Form of Trust
Checks Payable for Your Own Personal Expenses - Only client
related charges, such as court costs, expert witness fees or
lawyers’ fees, may be paid out of the client trust account. The lawyer
should not withdraw earned fees from the client trust account in the form
of trust checks payable to the lawyer’s own creditors. An earned fee
must be withdrawn promptly from the client trust account and deposited in
the lawyer's own personal or business account. For example, a trust
check made payable to the gas or electric company to pay the
lawyer's gas or electric bill creates the appearance that the lawyer
is using the client trust account as a personal account and thereby
endanger its status as a client trust account, or that the lawyer is using
client funds for personal purposes.
·
Withdraw Your Fees Promptly from the Client Trust Account
Once You have Earned Them - When a fee has been earned, the
lawyer must promptly write a check, payable to the lawyer or the
lawyer's law firm, for the full amount of the fee earned. The
lawyer must not let earned fees accumulate in the client trust account and
withdraw fees on an "as needed" basis; otherwise, commingling occurs
and, consequently, the trust funds are put at risk. Also, the
appearance is created that the lawyer is hiding money in the account
to avoid creditors or income taxes. In which case, the client trust
account could be subject to attachment or levy by the lawyer's
creditors.
·
Avoid ATM Withdrawals - Because the lawyer has
a duty to account to the client or third person as to how the trust
property was handled, writing a check from the client trust account creates
an automatic audit trail that makes it easy to trace who the money
came from and where it went. A client trust account with ATM access makes
it possible for a lawyer and anyone else with the access code to
withdraw the client’s money in cash and it is very hard to account
for cash. ATMs can be an audit trail disaster. With an ATM
withdrawal, the only record of what happened to the money is a
little slip of paper that shows the date and the amount of the
withdrawal; there is nothing that shows which client’s or third
person’s money was withdrawn, who withdrew it or to whom the money
was paid. ATM withdrawals are a bad practice for all purposes,
including withdrawing lawyers’ fees, since there is no paper trail
recording the case from which the fees are owed. Even if you put all
the descriptive information on an ATM receipt, it is not good proof
of what happened to the money if there is an ARDC investigation.
·
Let Deposits Clear Before Writing Checks - The
important thing to remember is that disbursing funds before the
deposit has cleared puts the funds of other clients or third persons
at risk of loss, thereby resulting in conversion.
Also, if there are
insufficient funds at the time the trust check is presented for
payment, the trust check will be dishonored and the financial
institution will report the overdraft to the ARDC,
irrespective of whether or not the trust check is honored.
See
discussion “You Can’t Spend What You Don’t Have or Timing is
Everything” on Page 33.
·
If a Mistake Happens, Don’t Panic - If you find
that an error occurred in making calculations or deposits, don’t
panic. Take remedial action. Call your financial institution.
Failure to act not only may compound the problem but failure to
notify the financial institution of any errors, forgeries,
unauthorized signatures or alterations within a certain period of
time may waive all claims that you may have against the financial
institution regarding these problems.
7.
Retention of Records
"Complete records"
of all client trust account funds and other property maintained in trust
pursuant to Rule 1.15 must
be kept by the lawyer for a period of seven years after termination
of the representation under Rule 1.15(a). "Complete records"
for all trust funds held in IOLTA and non-IOLTA client trust accounts that
must be maintained is set forth in Rule 1.15(a)(1)-(8).
Rule
1.15(a) expressly allows the records required under the rule to be
maintained by electronic, photographic, or other media provided that
printed copies can be produced, and the records are readily
accessible to the lawyer.
Also, under Supreme
Court Rule 769(2), all financial records related to a lawyer's
practice of law must also be maintained for a minimum of seven years
after the fiduciary obligation ends. Financial records
include, but are not limited to, bank statements, time and billing
records, checks, check stubs, journals, ledgers, audits, financial
statements, tax returns and tax reports. Under the
rule, the records maintained can be originals, copies, or
computer-generated images. If a computer accounting software
package is used for the client trust accounting, to guard against the
potential loss of such computer-stored data, some experts suggest
that you print out a hard copy of the accounting records on a
monthly basis. Also, it is suggested that the data is backed
up on a regular basis.
VI. Sample
Client Trust Account
Transactions, Trust Account Trial Balances and Trust Account
Reconciliation
A. Sample
Client Trust Account
Transactions
Julia Dolan is a sole
practitioner. On January 31, 2010, the bank statement balance
for Dolan's IOLTA client trust account is $10,241.66. These funds are
identified as follows:
a.
$10,000 represents escrow money which was deposited into Dolan's
client trust account on January 1, 2010, on behalf of her client Ron
Roper.
b.
$200 represents funds of Julia Dolan which were deposited into the
client trust account in order to maintain a minimum balance necessary to
avoid bank service charges.
c.
$41.66 represents the interest credited for the month of January
which has yet to be paid by the bank to IOLTA.
The only subsidiary
ledger pages with outstanding balances on January 31, 2010, are
those for Roper and Dolan. Because this is an IOLTA account,
the interest figure ($41.66) does not appear on the subsidiary
ledger.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client:
Ron Roper
Legal Matter/Adverse Party:
Real Estate Escrow-Hadley
File or Case Number:
10-161
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
01/01/10 |
Deposit-Escrow |
|
|
$10,000 |
$10,000 |
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client: Julia Dolan, Attorney at Law
Legal Matter/Adverse Party:
None
File or Case Number:
None
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
01/01/09 |
Minimum balance
amount to avoid
service charge |
|
|
$200 |
$200 |
On February 1, 2010, Joan Smith, a
client, gives Dolan a $1000 retainer. The fee agreement with
Smith provides that the retainer is a security retainer to be placed
in the client trust account and withdrawn as earned.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client: Joan Smith
Legal Matter/Adverse Party: Marital Dissolution
File or Case Number: 10-1057
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
02/01/10 |
Retainer-Smith |
|
|
$1,000 |
$1,000 |
CASH RECEIPTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
02/01/10 |
Smith Check #2398 |
Joan Smith |
50062 |
$1,000 |
On February 5, 2010, client James Johnson is ordered to endorse his
federal and state tax refunds of $2,000 and deposit them into
Dolan's client trust account. The refunds will be distributed upon
further order of the court.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client:
James Johnson
Legal Matter/Adverse Party:
Dissolution
File or Case Number:
09-1058
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
02/05/10 |
Red/State Refund |
|
|
$2,000 |
$2,000 |
CASH RECEIPTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
02/01/10 |
Smith Check #2398 |
Joan Smith |
50062 |
$1,000 |
|
02/05/10 |
Fed/State Refund |
James Johnson |
50145 |
$2,000 |
On February 13, 2010,
Dolan receives a settlement check in the amount of $15,000 from Ace
Insurance Company for her client Bill Grey. Dolan prepares a
written settlement statement, in accordance with the terms of the
written contingent fee agreement and Rule 1.5(c):
Personal Injury
Settlement Statement
Bill Grey vs. Ace Insurance Co.
Settlement Amount
from Ace Insurance Co. $15,000.00
Court
Reporter Inc.
$400.00
Process Server Inc.
$ 60.00
Dr.
Bailey, Expert
$340.00
Total Expenses
$800.00
Attorney Fees (1/3 gross rec.)
$ 5,000.00
Amount Due Bill Grey
$ 9,200.00
On February 20, 2010, Dolan makes the disbursements in
accordance with the settlement statement after allowing seven days
for the insurance company check to clear.
SUBSIDIARY LEDGER PAGE
CLIENT TRUST ACCOUNT NO. 123-456
Name of Client: Bill Greyz
Legal Matter/Adverse Party: Personal Injury-Ace Ins. Co.
File or Case Number: 05-1002
|
DATE |
DESCRIPTION OF TRANSACTION |
CHECK |
FUNDS PAID |
FUNDS RECEIVED |
BALANCE |
|
02/13/10 |
Ace Insurance Co. |
|
|
$15,000 |
$15,000 |
|
02/20/10 |
Court Reporter Inc. |
1005 |
$400 |
|
$14,600 |
|
02/20/10 |
Process Server Inc. |
1006 |
$60 |
|
$14,540 |
|
02/20/10 |
Dr. Bailey |
1007 |
$340 |
|
$14,200 |
|
02/20/10 |
Bill Grey |
1008 |
$9,200 |
|
$5,000 |
|
01/20/10 |
Julia Dolan-Fees |
1009 |
$5,000 |
|
$0 |
CASH RECEIPTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
02/01/10 |
Smith Check #2398 |
Joan Smith |
50062 |
$1,000 |
|
02/05/10 |
Fed/State Refund |
James Johnson |
50145 |
$2,000 |
|
02/13/10 |
Ace Insurance Co. |
Bill Grey |
62001 |
$15,000 |
CASH DISBURSEMENTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
CHECK |
PAYEE |
PURPOSE |
CLIENT |
AMOUNT |
|
02/20/10 |
1005 |
Court Reporter Inc. |
Costs |
Grey |
$400 |
|
02/20/10 |
1006 |
Process Server Inc. |
Costs |
Grey |
$60 |
|
02/20/10 |
1007 |
Dr. Bailey |
Costs |
Grey |
$340 |
|
02/20/10 |
1008 |
Bill Grey |
Settlement |
Grey |
$9,200 |
|
02/20/10 |
1009 |
Julia Dolan |
Fees |
Grey |
$5,000 |
On February 21, 2010, the court orders
that $1,500 be paid to Johnson's wife from the escrowed income tax
refunds.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client: James Johnson
Legal Matter/Adverse Party:
Dissolution
File or Case Number: 03-1058
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
02/05/10 |
Red/State Refund |
|
|
$2,000 |
$2,000 |
|
02/21/10 |
Mrs. James Johnson |
1010 |
$1,500 |
|
$500 |
CASH DISBURSEMENTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
CHECK |
PAYEE |
PURPOSE |
CLIENT |
AMOUNT |
|
02/20/10 |
1005 |
Court Reporter Inc. |
Costs |
Grey |
$400 |
|
02/20/10 |
1006 |
Process Server Inc. |
Costs |
Grey |
$60 |
|
02/20/10 |
1007 |
Dr. Bailey |
Costs |
Grey |
$340 |
|
02/20/10 |
1008 |
Bill Grey |
Settlement |
Grey |
$9,200 |
|
02/20/10 |
1009 |
Julia Dolan |
Fees |
Grey |
$5,000 |
|
02/21/10 |
1010 |
Mrs. J. Johnson |
Ct. Order |
Johnson |
$1,500 |
On February 28, 2010, Dolan is retained
by Sam Spade and paid a $5,000 retainer which under the fee
agreement is to be deposited in the client trust account and withdrawn as
earned.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client: Sam Spade
Legal Matter/Adverse Party:
Business Litigation-Olson
File or Case Number:
10-1096
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
02/28/10 |
Retainer |
|
|
$5,000 |
$5,000 |
CASH RECEIPTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
02/01/10 |
Smith Check #2398 |
Joan Smith |
50062 |
$1,000 |
|
02/05/10 |
Fed/State Refund |
James Johnson |
50145 |
$2,000 |
|
02/13/10 |
Ace Insurance Co. |
Bill Grey |
62001 |
$15,000 |
|
02/28/10 |
Spade Retainer |
Sam Spade |
64662 |
$5,000 |
On February 28, 2010, Dolan bills Joan Smith $250 for court costs
paid by Dolan on Smith's behalf during February and issues a client trust
account check for that amount made payable to herself.
SUBSIDIARY LEDGER PAGE
CLIENT
TRUST ACCOUNT NO. 123-456
Name of Client:
Joan Smith
Legal Matter/Adverse Party:
Marital Dissolution
File or Case Number:
10-1057
|
DATE |
DESCRIPTION
OF
TRANSACTION |
CHECK |
FUNDS
PAID |
FUNDS.
RECEIVED |
BALANCE |
|
01/01/10 |
Retainer-Smith |
|
|
$1,000 |
$1,000 |
|
02/28/10 |
Costs- J. Dolan |
1011 |
$250 |
|
$750 |
CASH DISBURSEMENTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
CHECK |
PAYEE |
PURPOSE |
CLIENT |
AMOUNT |
|
02/20/10 |
1005 |
Court Reporter Inc. |
Costs |
Grey |
$400 |
|
02/20/10 |
1006 |
Process Server Inc. |
Costs |
Grey |
$60 |
|
02/20/10 |
1007 |
Dr. Bailey |
Costs |
Grey |
$340 |
|
02/20/10 |
1008 |
Bill Grey |
Settlement |
Grey |
$9,200 |
|
02/20/10 |
1009 |
Julia Dolan |
Fees |
Grey |
$5,000 |
|
02/21/10 |
1010 |
Mrs. J. Johnson |
Ct. Order |
Johnson |
$1,500 |
|
02/28/10 |
1011 |
Julia Dolan |
Costs |
J. Smith |
$250 |
2.
Sample Client Trust Account Trial Balances
Before Dolan's IOLTA
client
trust account can be reconciled, the checkbook register, the cash
balance and the subsidiary ledger pages must balance.
a.
Checkbook Register Balance. On February 1, 2010,
Dolan's checkbook register balance is $16,450.
CHECKBOOK REGISTER
|
CHECK |
DATE |
PAYEE OR
DEPOSIT
SOURCE |
AMOUNT OF CHECK |
DEPOSIT
AMOUNT |
BALANCE |
|
|
01/31/10 |
Balance |
|
|
$10,200 |
|
|
02/01/10 |
Joan Smith |
|
$1,000 |
$11,200 |
|
|
02/05/10 |
Johnson Tax Ref |
|
$2,000 |
$13,200 |
|
|
02/13/10 |
Ace. Ins. Co. |
|
$15,000 |
$28,200 |
|
1005 |
02/20/10 |
Court Reporter |
$400 |
|
$27,800 |
|
1006 |
02/20/10 |
Process Server |
$60 |
|
$27,740 |
|
1007 |
02/20/10 |
Dr. Bailey |
$340 |
|
$27,400 |
|
1008 |
02/20/10 |
Bill Grey |
$9,200 |
|
$18,200 |
|
1009 |
02/20/10 |
Julia Dolan |
$5,000 |
|
$13,200 |
|
1010 |
02/21/10 |
Mrs. Johnson |
$1,500 |
|
$11,700 |
|
|
02/28/10 |
Sam Spade |
|
$5,000 |
$16,700 |
|
1011 |
02/28/10 |
Julia Dolan |
$250 |
|
$16,450 |
b.
Subsidiary Ledger Pages Trial Balance. Dolan's
subsidiary ledger pages trial balance for February is calculated by
totaling all of the subsidiary ledger pages that have an outstanding
balance on February 28, 2010.
SUBSIDIARY LEDGER
TRIAL BALANCE
PERIOD OF 02/1/10 - 02/28/10
CLIENT
TRUST ACCOUNT NO. 123-456
CLIENT
|
BALANCE ON 02/28/10 |
|
Julia Dolan |
$200 |
|
Ron Roper |
$10,000 |
|
Joan Smith |
$750 |
|
James Johnson |
$500 |
|
Sam Spade |
$5,000 |
|
Trial Balance Total |
$16,450 |
c.
Cash Balance. Dolan's cash balance for February is calculated
by taking the cash balance from January and adding the total
February receipts and subtracting the total February disbursements.
CASH RECEIPTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
|
DATE |
SOURCE |
CLIENT |
DEPOSIT |
AMOUNT |
|
02/01/10 |
Smith Check #2398 |
Joan Smith |
50062 |
$1,000 |
|
02/05/10 |
Fed/State Refund |
James Johnson |
50145 |
$2,000 |
|
02/13/10 |
Ace Insurance Co. |
Bill Grey |
62001 |
$15,000 |
|
02/28/10 |
Spade Retainer |
Sam Spade |
64662 |
$5,000 |
|
03/01/10 |
|
FEBRUARY TRIAL |
|
$23,000 |
CASH DISBURSEMENTS JOURNAL
CLIENT
TRUST ACCOUNT NO. 123-456
FEBRUARY 2010
DATE
|
CHECK |
PAYEE |
PURPOSE |
CLIENT |
AMOUNT |
|
02/20/10 |
1005 |
Court Reporter Inc. |
Costs |
Grey |
$400 |
|
02/20/10 |
1006 |
Process Server Inc. |
Costs |
Grey |
$60 |
|
02/20/10 |
1007 |
Dr. Bailey |
Costs |
Grey |
$340 |
|
02/20/10 |
1008 |
Bill Grey |
Settlement |
Grey |
$9,200 |
|
02/20/10 |
1009 |
Julia Dolan |
Fees |
Grey |
$5,000 |
|
02/21/10 |
1010 |
Mrs. J. Johnson |
Ct. Order |
Johnson |
$1,500 |
|
02/28/10 |
1011 |
Julia Dolan |
Costs |
J. Smith |
$250 |
|
03/01/10 |
|
|
FEBRUARY TRIAL |
|
$16,750 |
CASH BALANCE
PERIOD OF 02/01/10 – 02/28/10
CLIENT
TRUST ACCOUNT NO. 123-456
Cash
Balance from January
$10,200
Plus
February Receipts
$23,000
Minus
February Disbursements
($16,750)
February Cash Balance
$16,450
d.
February Trial Balances. The checkbook register balance, cash
balance, and subsidiary ledger pages trial balance must be
identical.
Checkbook Register
Balance
$16,450
Cash Balance
$16,450
Subsidiary Ledger Pages Trial Balance
$16,450
3.
Sample Monthly Client Trust Account Reconciliation
After the checkbook
register, cash balance, and subsidiary ledger pages have been
balanced, the February bank statement is reconciled with the
February trial balances figure (i.e., $16,450).
Julia Dolan
Attorney at Law
IOLTA Trust Account
125 Practice Avenue
New Justice, IL 00000-0000
ACCOUNT NUMBER: 123-456
CHECKING ACCOUNT SUMMARY FOR
02/01/10 THRU 02/28/10
OPENING
WITHDRAWLS
SERVICE
CLOSING
BALANCE
DEPOSITS
INTEREST
& CHECKS
CHARGE
BALANCE
$10,241.66
$18,000.00
$62.50
$16,451.66
$0.00
$11,852.50
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
u
CHECKING ACCOUNT TRANSACTIONS
DEPOSITS
DATE
AMOUNT
50062
02/01/10
$ 1,000.00
50145
02/05/10
$ 2,000.00
62001
02/13/10
$15,000.00
Net Interest For February
02/28/10
$ 62.50
WITHDRAWALS
DATE
AMOUNT
Net Interest paid to IOLTA for
January
02/28/10
$ 41.66
CHECKS
BALANCES
ITEM
DATE
AMOUNT
DATE
BALANCE
1005
02/25/10
$ 400.00
02/06/10
$13,241.66
1006
02/24/10
$ 60.00
02/13/10
$28,241.66
1008*
02/21/10
$ 9,200.00
02/26/10
$12,081.66
1009
02/23/10
$ 5,000.00
02/28/10
$11,852.50
1010
02/26/10
$ 1,500.00
1011
02/28/10
$ 250.00
* denotes gap in check sequence
The bank statement
balance is reconciled with the trial balances figure by adding: (1)
any outstanding deposits; and by subtracting: (2) net interest
accrued, and any outstanding checks. (Accrued interest is
subtracted because it will be paid directly to IOLTA and will thus
never be added to the checkbook balance or the journal or ledger
pages balance. (See discussion at Page 41.) In this
example, the bank statement and the checkbook register reflect that
check number 1007 in the amount of $340 is outstanding and that the
$5,000 Spade deposit has not yet been credited. There are no
monthly service charges and the interest accrued figure is taken
from the bank statement.
MONTHLY RECONCILIATION
PERIOD OF 02/01/10 - 02/28/10
CLIENT TRUST ACCOUNT NO. 123-456
Checkbook Balance
$16,450.00
Cash Balance From Journals
$16,450.00
Subsidiary Ledger Pages Trial
Balance
$16,450.00
Bank Statement
Balance on 02/28/10
$11,852.50
Plus outstanding
deposits
$ 5,000.00
Less net interest
accrued
($ 62.50)
Less outstanding
checks
($ 340.00)
Adjusted Bank Statement Balance
$16,450.00
All of the records
discussed above must be kept for a period of seven years after
termination of the representation. The foregoing sample is
used to illustrate the typical daily procedures necessary to
maintain proper client trust account records. Lawyers may consult
with a reputable accountant to help them set up an accounting system
that they can understand and follow.
B. Sample Trust Account
Record Forms
Trust Account Receipts Journal
- Rule 1.15(a)(1)
Lists alls receipts chronologically for all deposits in the
trust account and identifies the date and source of each receipt
Trust Account Disbursements
Journal
- Rule 1.15(a)(1)
Lists all disbursements chronologically and identifies
the recipient, purpose and date of each disbursement.
Trust Account Client Ledger Page
-
Rule 1.15(a)(2)
A separate page for each client/matter showing chronologically
all receipts, disbursements and balances for each client/matter.
Trust
Account Checkbook Register
-
Rule 1.15(a)(4)
Lists sequentially all trust account deposits and checks
and reflects a current and accurate daily balance on the trust
account.
VII. Where to Find
Help
-
ARDC
Ethics Inquiry Program - a telephone inquiry line that
provides general information on where to find sources to help
resolve hypothetical questions arising under the Rules. Call the
ARDC at either the Chicago office at: 312/565-2600
or 800/826-8625 or the Springfield office at: 217/522-6838 or
800/252-8048.
-
Lawyers Trust Fund of Illinois (IOLTA) -
Lawyers Trust Fund of Illinois, Two Prudential Plaza, 180 North
Stetson Avenue, Suite 820, Chicago, Illinois 60601; (312) 938-2906
or (800) 624-8962; Fax (312) 938-3091 or visit the Lawyers Trust
Fund website at
www.ltf.org.
-
ABA ETHICSearch - a research service for those
needing information on the ABA Model Rules, Standards and ethics
opinions. Call 800/285-2221 or visit the ABA website at www.abanet.org/cpr/ethicsearch/ to use their
online form
for your ethics question. Most inquiries are handled on a same day
basis. Expedited same day service and fax and mailing services can
also be arranged.
-
Bar associations – Illinois State Bar Association
(ISBA) Committee on Professional Responsibility - advisory committee
that receive inquiries and render opinions either addressed to the
inquiring lawyer or published in the Illinois Bar Journal. The ISBA
ethics advisory opinions may be obtained from the ISBA website (for
ISBA members only) at
www.illinoisbar.org. Also, the
National Organization of Bar Counsel (NOBC) maintains a searchable
database of summaries of attorney disciplinary proceedings and
ethics opinions from across the country on its website
(www.nobc.org).