Trust Accounts Basics Part II: Funds That Do NOT Belong
April 2, 2014
In the first part of this series, I discussed what SHOULD be in your IOLTA. Now let’s discuss what does NOT belong.
Funds belonging entirely to the lawyer and unrelated to a representation do not belong in an attorney’s trust account. Once funds are earned they must be removed from the trust account. There is no set time period within which funds must be removed. Rule 1.15 simply requires that the attorney’s funds be removed within a reasonable time. For example, if the attorney bills on a monthly basis, funds should be removed within the same time window. Leaving funds in the trust account constitutes commingling and can result in discipline.
Placing client funds in a trust account that are not related to a representation also constitutes a violation of Rule 1.15. For example, if a lawyer holds funds from a church but doesn’t represent the church, those funds cannot be placed in the lawyer’s trust account. By the same token, if a client asks a lawyer to hold funds that are not part of the representation, those funds don’t belong in the trust account.
Funds that are held in connection with a representation but are payable to a third person belong in the trust account. The lawyer owes the same duty to safeguard and account for third party funds as he/she does for client funds. If there is a dispute as to the ownership of the funds, Rule 1.15 (d) requires the lawyer to disburse all funds not subject to dispute and allows the lawyer to hold the remaining funds subject to resolution of the dispute.
If there is a dispute between the client and a third party as to the ownership of funds in the lawyer’s trust account, the lawyer is to safeguard the third party’s funds only when the lawyer has actual knowledge that the third party has a lawful interest in the funds. Whether a third party has a lawful claim to funds is a matter of substantive law. The following are likely valid lawful claims by third parties: a valid statutory subrogation right; a valid judgment lien; a written agreement by the client promising payment to a medical provider; and a secured claim by a creditor. Upon learning of a dispute between the client and a third party with a lawful claim, the lawyer should hold the funds until the dispute is resolved and, if necessary, the lawyer can file an action in court for resolution of the dispute (Prof. Cond. Rule 1.15 (d) & (e); comment 4).