August 2008 • Vol. 28 No. 7 | An E-Publication of the Los Angeles County Bar Association

Ethical Hazards and the Recordkeeping of Client Trust Accounts—Details Count!

By Joel A. Osman, managing attorney of Osman & Associates, part of Travelers’ Staff Counsel Organization. He represents defendants in legal malpractice cases and is the current chair of the Los Angeles County Bar Association Professional Responsibility and Ethics Committee. He can be reached at josman@travelers.com.

Each month, a member of the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee produces an article relating to legal ethics in these pages. These articles are informative, thought provoking, and, with delightful regularity, amusing and engaging. Regrettably, this article isn’t going to be one of those amusing and engaging articles. The topic of this article relates to an ethical pit into which even careful practitioners might fall. There is nothing funny about it.

It has long been understood that the State Bar takes any impropriety in the handling of client funds very seriously and will punish any such impropriety heavily.1 It should also be understood that the State Bar takes us seriously and will punish seriously any impropriety with respect to the keeping of client trust accounts or the records associated with the holding of client funds.2

Rule of Professional Conduct 4-100 sets forth the basic requirements of a member with respect to holding and preserving the identity of funds or property of a client. Rule 4-100(A) sets forth the requirement that each member maintain a “Trust Account” into which “all funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited....” No funds belonging to the member or the law firm shall be deposited into a client trust account or co-mingled therewith except for funds reasonably sufficient to pay bank charges. “In the case of funds belonging part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or the law firm must be withdrawn at the earliest reasonable time after the member’s interest in that portion becomes fixed.”

Rule 4-100(B) sets forth rules that govern the receipt of client “funds, securities or other properties,” the labeling and safekeeping of same, the maintenance of complete records of same, and the prompt payment and or delivery of same to the client upon request.

Subsections (A) and (B) of Rule 4-100 are relatively straightforward and uncluttered with details. The details upon which a practitioner might stumble are buried in the fine print below. 

Subsection (C) of Rule 4-100 states that the Board of Governors of the State Bar shall have the authority to formulate and adopt standards as to what “records” shall be maintained by members and law firms in accordance with subsection (B). Every bit as important as the rule itself, the standards that have been promulgated require:

(1) A member shall, from the date of receipt of client funds through the period ending five years [emphasis added] from the date of appropriate disbursement of such funds, maintain:

     (a) a written ledger for each client on whose behalf funds are held that sets forth:

          (i) the name of such client,

          (ii) the date, amount and source of all funds received on behalf of such client,

          (iii) the date, amount, payee and purpose of each disbursement made on behalf of each of
                   such client, and

          (iv) the current balance for such client;

     (b) a written journal for each bank account that sets forth:

          (i) the name of such account,

          (ii) the date, amount and client affected by each debit and credit, and

          (iii) the current balance in each such account;

     (c) all bank statements and canceled checks for each bank account; and

     (d) each monthly reconciliation (balancing) of (a), (b) and (c).

(2) A member shall, from the date of receipt of all securities and other properties held for the benefit of client through the period ending five years from the date of appropriate disbursement of such securities and other properties, maintain a written journal that specifies:

    (a) each item of security and property held;

    (b) the person on whose behalf the security or property is held;

    (c) the date of receipt of the security or property;

    (d) the date of distribution of the security or property; and

    (e) person to whom the security or property was distributed.

The standards quoted above are mandatory. Unlike Rule 4-100 itself, the standards contain very detailed, very specific bookkeeping requirements that must be satisfied by any member who receives or holds any funds, securities, or other properties of a client. This is of particular import because failure comply with these very specific requirements could result in a 90-day actual suspension from practice.

The Standards for Attorney Sanctions for Professional Misconduct issued by the State Bar provide in relevant part:

Culpability of a member of commingling of entrusted funds or property with personal property or the commission of another violation of rule 4-100, Rules of Professional Conduct, none of which offenses result in the wilful misappropriation of entrusted funds or property shall result in at least a three month actual suspension from the practice of law, irrespective of mitigating circumstances.

Members of the Los Angeles County Bar Association Professional Responsibility and Ethics Committee who regularly defend attorneys before the State Bar Court report that State Bar prosecutors treat the Standards for Attorney Sanctions for Professional Misconduct as the starting point for discipline.3 Thus, a failure to keep written ledger cards or a trust account journal could result in at least a 90-day actual suspension. To be sure, a practitioner might successfully defend himself or herself against such a charge. This would be small comfort compared to the stress and expense of having to defend oneself before the State Bar Court. It would be far simpler to simply understand and comply with the standards promulgated pursuant to Rule 4-100(c).

Forewarned is forearmed.

 

1 See for example Mack v. State Bar, 2 Cal 3d 440 (1970). In Mack, the court upheld a suspension of an attorney from the practice of law for five years on conditions of probation, including actual suspension during the first two years, for issuing an NSF check drawn on a client trust account.

2See Chefsky v. State Bar, 36 Cal. 3d 116, 123 (1984), which holds in part that allowing the balance of a client trust account to fall below the amount due to a client will support a finding of wilful misappropriation.

3 The importance of the standards cannot be overemphasized. See for example In Re Silverton, 36 Cal. 4th 81 (2005) in which the supreme court rejected the recommendation of the bar’s review department for failure to follow standards.

 




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