TRUST ACCOUNT RULES & BEST PRACTICES THE MISSOURI BAR ANNUAL MEETING SUNRISE CLE THURSDAY, OCTOBER 8, :20 8:20 A.M.

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1 TRUST ACCOUNT RULES & BEST PRACTICES THE MISSOURI BAR ANNUAL MEETING SUNRISE CLE THURSDAY, OCTOBER 8, :20 8:20 A.M. Speakers: Sam S. Phillips, Deputy Chief Disciplinary Counsel, Jefferson City Melinda J. Bentley, Legal Ethics Counsel, Jefferson City Michael P. Gunn, The Gunn Law Firm, PC, St. Louis

2 WHAT WE WILL DISCUSS TODAY: The Rules IOLTA Background & Special Considerations; Trust Account vs. Operating Account; Recent Cases; How to Keep Records; Accepting Credit Cards; and Flat Fees. 2

3 3 Highlights of the Rules

4 THE RULES EFFECTIVE JULY 1, 2013 Rule definitions for safekeeping property and IOLTA accounts; Rule provisions for the safekeeping of property; Rule provisions for maintaining IOLTA accounts; and Rule provisions for file retention. 4

5 5 RULE DEFINITIONS

6 RULE DEFINITIONS SAFEKEEPING PROPERTY & IOLTA ACCOUNT (a)(3) Client Trust Account Holds funds on behalf of a client or third person Special title - account denominated as such or by similar words Withdrawals or transfers can be made on demand, subject only to any notice period that the financial institution is required to observe by law or regulation. Shall be either IOLTA, non-iolta, or an exempt trust account. 6

7 RULE DEFINITIONS SAFEKEEPING PROPERTY & IOLTA ACCOUNT (a)(9) IOLTA Account A pooled client trust account held at an eligible & approved institution Client and third person funds that cannot otherwise earn income for the client or third person in excess of costs incurred to secure such income Can be: Interest-bearing checking account; Money market account with or tied to checking account; Sweep account that is a government money market fund or daily overnight financial institution repurchase agreement invested solely in or fully collateralized by US government securities; or Open ended money market fund solely invested in or fully collateralized by US government securities. 7

8 RULE DEFINITIONS SAFEKEEPING PROPERTY & IOLTA ACCOUNT (CONTINUED) (a)(11) Non-IOLTA Trust Account An interest bearing client trust account at an approved financial institution that is either: Separate for a particular client or third person, and the net earnings goes to the client or third person; or Pooled trust account with sub accounting by the financial institution or lawyer/law firm to compute the net interest or dividend earned by the funds of each client or third person and provide payment accordingly. 8

9 RULE DEFINITIONS SAFEKEEPING PROPERTY & IOLTA ACCOUNT (CONTINUED) (a)(6) Exempt Trust Account Exempted by the Missouri Lawyers Trust Account Foundation for the reporting period because: The IOLTA account has not and cannot reasonably be expected to produce interest or dividends in excess of the allowable reasonable fees; or There is no eligible financial institution within a reasonable proximity to his or her office which offers IOLTA accounts. 9

10 RULE SAFEKEEPING PROPERTY 10

11 RULE SAFEKEEPING PROPERTY (a) Hold property of clients or third persons separate from the lawyer s own property. (a)(1) IOLTA, non-iolta, or exempt account; other property identified and appropriately safeguarded. (a)(2) Approved institution; consent to overdraft reporting. 11

12 RULE SAFEKEEPING PROPERTY (CONTINUED) (a)(3) Only a lawyer admitted to practice law in MO or person under the direct supervision of the lawyer shall be authorized as a signatory or authorize transfers from client trust account. (See Comment [2] lawyer has a non-delegable duty to protect & preserve the funds in a client trust account and can be disciplined for failure to supervise subordinates who misappropriate client funds. - See also Rule 4-5.3) (a)(4) Receipts shall be deposited intact and records of deposits shall be sufficiently detailed to identify each item. (See Comment [4] No split deposits) 12

13 RULE SAFEKEEPING PROPERTY (CONTINUED) (a)(5) Withdrawals shall be made only by check payable to named payee, not to cash, or by authorized electronic transfer. Note: Electronic transfers are permitted, see Comment [3] (a)(6) Must wait a reasonable period of time for funds to actually be collected by the financial institution where the trust account is held, and cannot make a disbursement if the lawyer has a reasonable belief that the funds have not yet been collected by the financial institution. (See Comment [5]) 13

14 GOOD FUNDS VS. CLEARED FUNDS Good Funds = Funds that have been collected and are usable immediately by the owner of the account. It may take several days for the full amount of the deposit to be collected by your bank. Cleared Funds = The bank has not yet fully collected the deposited amount. It will show as an available balance, but should not be disbursed until the amount is considered good funds. See Comment [5] to Rule Practice Point: Check with your financial institution for the appropriate time period to become good funds before making disbursements from your trust account. 14

15 RULE SAFEKEEPING PROPERTY (CONTINUED) (a)(7) Reconciliation of the account shall be performed in a reasonably prompt time each time an official statement from the financial institution is provided or available. (b) Lawyer may only deposit his or her own funds in a client trust account for the purpose of paying bank service charges, and only in the amount necessary for that purpose. (See Comment 2) 15

16 RULE SAFEKEEPING PROPERTY (CONTINUED) (f) Trust Account Records Keep at least 5 years after termination of representation or after the date of the last disbursement of funds, whichever is later. May keep records by electronic, photographic, or other media, so long as it complies with Rules , and printed copies can be produced. Upon dissolution of firm or sale of law practice, the partners or seller shall make reasonable arrangements for the maintenance of records. 16

17 RULE SAFEKEEPING PROPERTY (CONTINUED) Records Shall Include at a MINIMUM: (f)(1) Receipt & Disbursement Journals for client trust accounts with: All deposits & withdrawals. Must identify date, source, & description of each item deposited, as well as the date, payee, & purpose of each disbursement. (f)(2) Ledger Records for all client trust accounts showing for each separate trust client or beneficiary: Source of all funds deposited; Names of persons for whom funds are or were held; Amount of such funds; Descriptions and amounts of charges or withdrawals; and Names of all persons or entities to whom such funds were disbursed. 17

18 RULE SAFEKEEPING PROPERTY (CONTINUED) (f)(3) Fee agreements, engagement letters, retainer agreements, and compensation agreements with clients (f)(4) Accountings to clients or third persons showing disbursement of funds to them or on their behalf (f)(5) Bills for legal fees and expenses (f)(6) Records showing disbursements on behalf of clients (f)(7) Physical or electronic checkbook registers, bank statements, records of deposit, prenumbered canceled checks, and substitute checks by a financial institution (See Comment [15]) 18

19 RULE SAFEKEEPING PROPERTY (CONTINUED) (f)(8) Records of all electronic transfers from trust accounts, including: Name of person authorizing transfer; Date of transfer; Name of recipient; and Confirmation from financial institution showing trust account number from which money was withdrawn, date and time transfer was completed. o (f)(9) Reconciliations of the client trust accounts maintained by the lawyer o (f)(10) Portions of client file reasonably related to trust account transactions o (f)(11) Records of credit card transactions with clients 19

20 RULE COMMENT [19] Depending on the situation, additional documentation may be necessary for a complete understanding of the trust account transaction. Reasonably related documents must be kept. 20

21 RULE COMMENT [17] 5 TYPES OF CHECK CONVERSIONS WHERE A LAWYER SHOULD BE PARTICULARLY CAREFUL TO MAINTAIN GOOD RECORDS 1. Point of Purchase Conversion paper check converted into a debit at the point of purchase and the paper check is returned to the issuer. 2. Bank-office Conversion paper check is presented at the point of purchase, converted to a debit at a later time, and paper check is destroyed. 3. Account-receivable Conversion paper check is converted into a debit and paper check is destroyed. 21

22 RULE COMMENT [17] 5 TYPES OF CHECK CONVERSIONS WHERE A LAWYER SHOULD BE PARTICULARLY CAREFUL TO MAINTAIN GOOD RECORDS (CONTINUED) 4. Telephone-initiated debit or Check-byphone Conversion bank account information is provided via phone, and information is converted to a debit. 5. Web-initiated Debit electronic payment is initiated through a secure web environment. Practice point from Comment [17] - Care should be taken not to re-use a check number that has been used in an electronic transfer. 22

23 OVERDRAFT REPORTING TO OCDC Rule (a)(2) provides for mandated consent to overdraft reporting to OCDC OCDC received 168 overdraft notifications in 2012 (Source: OCDC Annual Report) Various levels of disciplinary action were taken as a result of these notifications 23

24 REASONS FOR OVERDRAFT Bank error Accounting error Failure to properly or timely reconcile accounts Premature disbursement not yet good funds Comingling or misuse Misappropriation by Attorney Other 24

25 THE MOST COMMON CLIENT COMPLAINT AREAS TO OCDC OF THE 842 FORMAL INVESTIGATIONS DURING 2013 (MANY INVOLVE MORE THAN ONE RULE): Rule (Communication) 375 Rule (Diligence) 347 Rule (Safekeeping Property) 235 Rule (Excessive Fees) 95 Rule 4-8.4(c) (Dishonesty, Fraud, Deceit, Misrepresentation) 94 Rule (Improper Withdrawal) 61 Rule (Conflicts) 45 Rule (Unauthorized Practice) 29 Rule (Advertising) 27 Rule (Confidentiality) 26 25

26 26 RULE FILE RETENTION

27 RULE FILE RETENTION Store a client s file securely for 10 years after completion or termination of the representation Can make an agreement otherwise with the client If client does not request within 10 years, it is deemed abandoned and may be destroyed unless: A legal malpractice claim related to the representation is pending; A criminal or other governmental investigation is pending related to the representation; A complaint is pending under Rule 5 related to the representation; or Other litigation is pending related to the representation. 27

28 Do not destroy items of intrinsic value. Store securely; or Deliver to the state unclaimed property agency pursuant to applicable State law. Destroy files in a manner that preserves confidentiality. Note: Formal Opinion 127 Storing files electronically 28

29 IOLTA BACKGROUND & SPECIAL CONSIDERATIONS 29

30 THE WHY & HOW OF IOLTA 1984 Supreme Court creates the Missouri Lawyer Trust Account Foundation Interest earned on IOLTAs provides legal services to the poor and enhances access to justice programs Properly established IOLTAs are accounts at Eligible Financial Institutions that bear the MLTAF TIN 30

31 HOW DO I FIND OUT IF MY BANK IS AN ELIGIBLE FINANCIAL INSTITUTION? Must be approved by the Missouri Supreme Court Advisory Committee. A list is available at: 31

32 FDIC CONSIDERATIONS Frequently Asked Questions Regarding the Expiration of Temporary Unlimited Coverage for Noninterest-Bearing Transaction Accounts 2. How will the expiration of the Dodd-Frank Deposit Insurance Provision affect deposit insurance coverage for Interest on Lawyer Trust Accounts (IOLTAs)? After December 31, 2012, funds deposited in IOLTAs will no longer be insured under the Dodd-Frank Deposit Insurance Provision. However, because IOLTAs are fiduciary accounts, they generally qualify for pass-through coverage on a per-client basis. FDIC regulations provide that deposit accounts owned by one party but held in a fiduciary capacity by another party are eligible for pass-through deposit insurance coverage if (1) the deposit account records generally indicate the account's custodial or fiduciary nature and (2) the details of the relationship and the interests of other parties in the account are ascertainable from the deposit account records or from records maintained in good faith and in the regular course of business by the depositor or by some person or entity that maintains such records for the depositor. 32

33 FDIC CONSIDERATIONS (CONTINUED) If an IOLTA does qualify for pass-through coverage as a fiduciary account, then each separate client for whom a law firm holds funds in an IOLTA may be insured up to $250,000 for his or her funds. For example, if a law firm maintains an IOLTA with $250,000 attributable to Client A, $150,000 to Client B, and $75,000 to Client C, the account would be fully insured if the IOLTA meets the requirements for passthrough coverage. If the clients have other funds at the same IDI, those funds would be added to their respective shares of the funds in the IOLTA for insurance coverage purposes. Source for this quoted material & full text of document with other FAQs may be found at: piration.html 33

34 CREDIT CARD TRANSACTION IRS REGULATIONS FOR 2013 Effective January 1, 2013 The IRS now requires that credit card processors report all gross credit card transactions processed for businesses (including lawyers and law firms) and will impose a 28 percent withholding penalty on all transactions if the taxpayer identification number (TIN) and the legal name on each account does not match exactly. (Read Article with Details and Advice from LawPay) Source: 34

35 TRUST ACCOUNT VS. OPERATING ACCOUNT 35

36 WHAT GOES INTO THE TRUST ACCOUNT? Funds such as: Settlements Escrow type funds Advance payment of expenses or fees Contingent fee before final statement to client Funds that are in dispute 36

37 WHAT GOES INTO THE OPERATING ACCOUNT? Fees you have earned that are not in dispute by the client or a third person. 37

38 REGULAR TRUST ACCOUNT VS. IOLTA TRUST ACCOUNT Consider factors to determine what is in the best interest of the client (Rule (a)(3)): (A) amount of interest funds would earn during period deposited; (B) cost of establishing and administering account; (C) capability to calculate and pay interest to client or third person; and (D) Other circumstances that affect ability of client or third person to earn income in excess of the costs incurred or secure such income for the client or third person. An account can only be non-iolta if: The interest goes to the client; or Exempt account under (a)(6) 38

39 39 THE DO S AND DON TS

40 SOME EXAMPLES FROM MICHAEL GUNN S PRACTICE 40

41 RECENT CASES RELATED TO TRUST ACCOUNTS State ex. rel. Koster v. Cain, 383 S.W.3d 105 (Mo. W.D. App. 2012). In re Ehler, 319 S.W.3d 442 (Mo. banc 2010). In re Coleman, 295 S.W.3d 857 (Mo. banc 2009). 41

42 COMMON TRUST ACCOUNT PROBLEMS A DISCUSSION 42

43 43 HOW TO KEEP RECORDS

44 SAMPLE DOCUMENTS Receipts & Disbursements Journal Pursuant to Rule (f)(1) Client Trust Account Name: ABC Law Firm Trust Account Client Trust Account Number: Period of Time: February 2013 Deposits Disbursements Balance Date Check Number Source Description Amount Date Check Number Payee Purpose Amount 44

45 SAMPLE DOCUMENTS Sample Trust Account Ledger Pursuant to Rule (f)(2), effective July 1, 2013 Client Trust Account Name: ABC Law Firm Trust Account Client Trust Account Number: Name of Client or Person for Whom Funds are Being Held: (Name of Legal Matter or Adverse Party: ) (File or Case Number: ) Date Description of Transaction Check # Amount of Funds Deposited Source of Funds Deposited Amount of Funds Disbursed Source of Funds Disbursed Person or Entity to Whom Funds Disbursed Running Balance 45

46 MINIMUM THREE WAY RECONCILIATION Bank Statement Receipt & Ledger Disbursement 46 Journal

47 47 ACCEPTING CREDIT CARDS

48 THINGS TO WATCH: Trust Account vs. Operating Account? Chargebacks Processing Fees 48

49 49 FLAT FEES & TRUST ACCOUNTS

50 FLAT FEES Flat fees are permissible, but are always subject to refund if not earned. Subject to reasonableness standard of Rule 4-1.5(a). Should go into trust account until earned. See Formal Opinion

51 ANY QUESTIONS? 51