When I mention Rule 1.15 funds to lawyers, they look at me as though I was speaking another language. When I say that Rule 1.15 funds are moneys that are deposited into an IOLTA account, they nod. When I go further and ask them if they know the bookkeeping requirements for those funds, most say that it is “not their responsibility.”
But when I meet attorneys who have responsibility for their firm’s IOLTA account, I often discover that they know almost as little as their colleagues who never handle these accounts. That is the problem.
It is time for law schools, bar associations, CLE boards, and disciplinary authorities to recognize the gap between the information lawyers are required to know about handling an IOLTA account and what they really know. If the gap is large enough, as it often is, lawyers may find themselves the recipient of correspondence from their state’s disciplinary authority—even when they did not steal or otherwise mishandle the money. Instead, they were likely guilty of making the kinds of mistakes that people make when they have not been taught something. We all do it, we try to do our best when faced with a challenge we are not prepared for, and then hope for the best.
Having represented numerous attorneys who hoped for the best, but in reality did not know the best practices for handling an IOLTA account, I can attest that they end up in disciplinary quicksand even though their motives were pure. Mandatory education can change that.
Take a look at Model Rule of Professional Conduct 1.15, upon which most states’ IOLTA account rules are based. Section (a) specifies that “A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years]after termination of the representation.” That seems straightforward until you recognize that it is not just the definitions that matter; it is the accounting for the funds that also matters.
But that is not all. It is the recordkeeping requirements that often trip up attorneys. The Model Rule On Financial Recordkeeping—Preface provides greater details, such as:
- Lawyers who are entrusted with the property of law clients and third persons in the practice of law must hold that property with the care required of a professional fiduciary.
- Rule 1.15 specifically requires a lawyer to preserve “complete records” with respect to a law firm’s trust accounts.
- Rule 1.15 It also obligates a lawyer to “promptly render a full accounting” for the receipt and distribution of trust property.
- A violation of Rule 1.15 may subject a lawyer to professional discipline.
Interestingly, this Preface explains that “Rule 1.15 does not provide lawyers or law firms with practical guidance in complying with these fiduciary obligations or in establishing basic accounting control systems for their law practices.” Fortunately, the Model Rule on Financial Recordkeeping does provide this guidance, but many states have not adopted this Rule or have not included its requirements in their versions of Rule 1.15 or the comments.
The Model Rule On Financial Recordkeeping “proposes uniform and minimal standards for the maintenance of law firm financial records.” Among the guidance under this Model Rule is the requirement that lawyers overseeing IOLTA accounts shall maintain current financial records and “shall retain the following records for a period of [five years]after termination of the representation: (1) receipt and disbursement journals containing a record of deposits to and withdrawals from bank accounts which concern or affect the lawyer’s practice of law, specifically identifying the date, source, and description of each item deposited, as well as the date, payee and purpose of each disbursement; (2) ledger records for all trust accounts required by [Rule 1.15], showing, for each separate trust client or beneficiary, the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons to whom such funds were disbursed; (3) copies of retainer and compensation agreements with clients [as required by Rule 1.5 of the Model Rules of Professional Conduct]; (4) copies of accountings to clients or third persons showing the disbursement of funds to them or on their behalf; (5) copies of bills for legal fees and expenses rendered to clients; (6) copies of records showing disbursements on behalf of clients; (7) checkbook registers or check stubs, bank statements, records of deposit, and prenumbered canceled checks or their equivalent; (8) copies of [monthly]trial balances and [quarterly]reconciliations of the lawyer’s trust accounts; and (9) copies of those portions of clients’ files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them.”
That is a lot of requirements. If only every lawyer who oversees an IOLTA knew this.
That is why training is so vital. However, with the exception of North Carolina and New Mexico, lawyers who oversee and sign for IOLTA accounts can do so without any training. Most likely, they did not learn how to balance an IOLTA account in law school. Most likely, they did not learn how to maintain an IOLTA account when they passed the Bar. And almost certainly they did not take any CLE courses on basic IOLTA account recordkeeping. After all, is there a more boring course than that?
But on the flip side, not knowing how to maintain the records necessary for an IOLTA account is a sure method of hearing from disciplinary authorities.
The need for lawyers to learn how to handle their trust accounts not only makes sense, but it also is consistent with various Rules. First, Rule of Professional Conduct 1.1. requires lawyers to be “competent.” If lawyers do not know the applicable ethics rules, then how can they be competent to handle them?
Considering the lack of training provided in law schools and in most CLE courses, mandating a minimum level of competence is necessary, and should prevent lawyers from pleading ignorance when they discover that their state’s Disciplinary Board is investigating them.
It is time for the ABA and every jurisdiction to require mandatory training for attorneys who are signatories on IOLTA accounts within six months of assuming that responsibility. Otherwise, despite the best of intentions, attorneys with signatory or supervisory responsibility on a trust or IOLTA may not understand their obligations to their clients and to anyone else whose funds they are maintaining.
About the Author
Daniel J. Siegel, is the principal of the Law Offices of Daniel J. Siegel, and chair of the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility. He provides ethical, technoethical and disciplinary guidance, as well as appellate, writing and trial preparation services to other attorneys. He can be reached at dan@danieljsiegel.com.