Money Matters: Will the Revisions to the Rules of Professional Conduct Change the Way You Handle Your Client Trust Account?
By Dominique Snyder
Dominique Snyder is in private practice in Los Angeles and focuses on providing legal ethics and risk management advice to attorneys. She served as chair and special advisor to the State Bar's Committee on Professional Responsibility and Conduct, and contributed to the State Bar's Handbook on Client Trust Accounting for California Lawyers. She is a member of LACBA's Professional Responsibility and Ethics Committee. The opinions expressed herein are her own.
Everyone tells us that change is good, but when it comes to revisions to the Rules of Professional Conduct, attorneys are wise to proceed cautiously—particularly when it involves money. Handling client trust funds, whether they belong to your client, to you, or to a third party, is an enormous responsibility. As a result, it may be helpful to consider your client trust accounting duties in light of recent changes to the Rules of Professional Conduct which become effective November 1, 2018. The bookkeeping standards, first enacted in 1993, remain part of new Rule 1.15 with only minor changes. However, there have been other substantive revisions which you should know about to avoid problems with your clients, or the State Bar.
Understanding your ethical duties to deposit, retain, account, and disburse these funds is critical because the State Bar considers client trust accounting violations as serious misconduct requiring serious discipline. Therefore, it would be helpful to take a few moments to review some of the important changes affecting your ethical obligations.
1) Is every attorney now required to have a client trust account?
Not necessarily. New Rule 1.15 (Safekeeping Funds and Property of Clients and Other Persons) requires that: "All funds received or held by a lawyer or law firm for the benefit of a client, or other person to whom the lawyer owes a contractual, statutory, or other legal duty, including advances for fees, costs and expenses, shall be deposited in one or more identifiable bank accounts labeled 'Trust Account' or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction."
Comment  to the rule also offers this definition: "As used in this rule, 'advances for fees' means a payment intended by the client as an advance payment for some or all of the services that the lawyer is expected to perform on the client's behalf…." So the rule has changed to include "advances for fees" which heretofore were not required to be maintained in a client trust account.
The key to understanding your duties is to determine whether the funds in question have "client trust fund status." Almost 40 years ago in Baranowski v. State Bar,, the California Supreme Court determined that advanced costs must be maintained in a client trust account but left undecided the issue of advanced fees. Therefore, prior to the adoption of new Rule 1.15, attorneys could choose to maintain advanced fee payments in a general account. Not anymore—since advances for fees must now be maintained in a client trust account.
However, many attorneys do not take "advances for fees." They bill only after their legal services have been performed. So, if you are one of those attorneys, you would not be required to maintain a client trust account. Many lawyers have no desire to maintain a client trust account with all the requisite accounting that goes with it (e.g., monthly reconciliation, etc.). It is good to know that attorneys can remain fully compliant with their ethical obligations (notwithstanding the adoption of new Rule 1.15), even though they continue to operate without a client trust account so long as they do not take advances for fees, costs or expenses.
2) New Rule 1.15 creates new ethical obligations to persons other than clients.
The operative word is "new." While it is true that new Rule 1.15 codifies client trust accounting duties to "other persons" into the black letter of the rule, attorneys have had such duties for years whether they knew it or not. Certainly, it is beneficial to be alerted to the existence of client trust accounting duties to third parties by including "other persons" in the rule, and case law will continue to define to whom those duties are owed and the manner in which an attorney must safeguard the property of others.
However, the common law has long recognized client accounting duties not only to your clients but to persons other than your clients. For example, attorneys have duties with regard to certain medical liens, court awarded attorney's fees belonging to opposing counsel, and even funds belonging to the opposing party if they have been "fixed" by court order and the attorney is in possession of the funds. This list is by no means all-inclusive, and it may even involve attempting to resolve the competing claims of various persons or entities since you also have a duty to disburse client trust funds to the client promptly.
Further, you are required to conduct a reasonable inquiry of the client to ascertain the existence of any liens. You must make an effort to determine if the client's medical bills have been paid because ignorance of a client's statutory lien is gross negligence, not a good faith mistake. Depending on the circumstances, you may be required to withhold disbursement of funds to your client to protect the rights of a third person. For example, a lawyer was disciplined for failing to honor a statutory Medi-Cal lien.
Remember that client trust fund status and accounting duties also apply to personal property with which you have been entrusted. If you are holding a client's valuable personal property, either to guarantee payment of your fees or because the client has requested that you do so, the same client trust accounting standards apply. You may be confident with your client trust accounting procedures simply because you know what you are holding and where it is located.
However, the required books and records are not just for your benefit. They prove to others (and that includes the State Bar) that you have complied with your ethical obligations since the purpose of proper record keeping is to demonstrate honesty and fair dealing should you be asked to do so. Therefore, having a ledger that specifies you possess a client's ring, and the ring is located in your safe, is not only a good idea; it is a requirement.
While there are certain changes to the rules involving the handling of money, certain professional obligations remain the same. Client trust accounting duties are personal and non-delegable. Even relying on your spouse or law partner will not relieve you of your duty to monitor the account. While it is tempting to let others handle your bookkeeping chores since they are often boring and repetitive, your oversight is still needed.
 Baranowski v. State Bar, (1979) 24 Cal. 3d 153.
 Kaiser Found. Health Plan v. Aguiluz, (1996) 47 Cal. App.4th 302.
 Baca v. State Bar, (1990) 52 Cal. 3d 294.
 Guzzetta v. State Bar, (1987) 43 Cal. 3d 962.
 In the Matter of Riley, (Rev. Dept. 1994) 3 Cal. State Bar Ct. Rptr. 91.
 In the Matter of Respondent P, (Review Dept. 1993) 2 Cal. State Bar Ct. Rptr. 622.
 Dixon v. State Bar (1985) 39 Cal. 3d 335.
 In the Matter of Rae Blum (Rev. Dept. 2002) 4 Cal. State Bar Ct. Rptr. 403.