Attorneys are responsible for accurately safekeeping client property as well as funds. When creating Client Trust Accounts, attorneys are required to use approved banking institutions, work with individuals within the institutions experienced in trust account management, and must be sure to label the trust accounts with the correct information. This information should clearly be recorded for both the client’s and potential audit’s sake. Attorneys must also work to preserve the identity of trust fund accounts, no matter the status. It is an obligation that must be upheld. In this article we will explore a situation in which an attorney considers moving client funds based on certain circumstances.
An attorney has been holding funds for a client for an extended period of time. The client has become unreachable. The attorney, in this hypothetical, has decided to transfer the funds in question to the firm’s general account. The plan remains to return the funds to the clients, once they have resurfaced and contacted the attorney. But, is this the ethical move to make on the part of a lawyer or law firm? Naturally, there are a few applicable regulations to consider.
Let's start by reviewing California Code of Civil Procedure section 1518. Section 1 summarized the below.
"(a)(1) All tangible personal property located in this state and, subject to Section 1510, all intangible personal property, including intangible personal property maintained in a deposit or account, and the income or increment on such tangible or intangible property, held in a fiduciary capacity for the benefit of another person escheats to this state if for more than three years after it becomes payable or distributable, the owner has not done any of the following:
(A) Increased or decreased the principal.
(B) Accepted payment of principal or income.
(C) Corresponded in writing concerning the property.
(D) Otherwise indicated an interest in the property as evidenced by a memorandum or other record on file with the fiduciary."
The scenario states that the client has not been in contact with the attorney. First thing to consider would be how long it has been since the attorney has been in contact with the client. Next, according to California Code of Civil Procedure section 1518, the funds, under these conditions, would not be transferred to the attorney or law firm's general account. The funds would escheat to the state, not the attorney's account.
The next rule to explore is Rule 8-101 which regards “Preserving Identity of Funds and Property of a Client”. Section (A) states the known basic information regarding the maintenance of safekeeping funds and regulations against commingling:
"(A) All funds received or held for the benefit of clients by a member of the State Bar or firm of which he is a member, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled "Trust Account," "Client's Funds Account" or words of similar import, maintained in the State of California, or, with written consent of the client, in such other jurisdiction where there is a substantial relationship between his client or his client's business and the other jurisdiction and no funds belonging to the member of the State Bar or firm of which he is a member shall be deposited therein or otherwise comingled therewith except as follows,"
The following parts begin to make specific mention of commingling.
"(1) Funds reasonably sufficient to pay bank charges may be deposited therein.
(2) Funds belonging in part to a client and in part presently or potentially to the member of the State Bar or firm of which is member must be deposited therein and the portion belonging to the member must be withdrawn at the earliest reasonable time after the member's interests in that portion becomes fixed. However, when the right of the member of the State Bar or firm of which the right of the member to receive a portion or trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved."
The regulations regarding the commingling of funds is what seems to be the stopping point for this inquiry. Moving the funds from the Client Trust Account to the general purpose account would be seen as commingling since the held funds still belong to the client. It would be improper to move the client funds.
Additionally, if the California lawyer is completing the required monthly three way reconciliation, the amount of which is owed to this particular client should remain unchanging and constant. This may be the best way to remain accountable for these funds, considering the attorney will be the only one responsible for the funds upon audit. It is important that held client funds never be used for anything other than their intended purpose. They may not be used for another client's situation, as set as standard in the Key Concepts of Client Trust Accounting; specifically concepts 1 and 2 respectively.
At SmartBean®, it is our goal to assist attorneys in the ever-present goal of practicing compliance with California's new Trust Account Bookkeeping requirements. From simple to more in depth, our experienced team specializes in helping attorneys meet bookkeeping and reporting obligations. SmartBean® offers free consultations. Schedule yours today to learn how we can be of service to you and your firm!
