CLIENT TRUST ACCOUNTS: REQUIREMENTS, RULES, AND RECOMMENDATIONS

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1 CLIENT TRUST ACCOUNTS: REQUIREMENTS, RULES, AND RECOMMENDATIONS Introduction An attorney-client relationship involves many matters of trust and confidence. 1 A client confides in his or her lawyer. In return, the attorney is duty bound to protect those confidences. Likewise when a client or third party entrusts money to his or her lawyer for payment on client matters, the attorney is required to keep those funds safe. 2 Hawai`i has three rules which govern client trust accounts or CTAs. Those rules are found in the Hawai`i Rules Governing Trust Accounting issued by the Hawai`i Supreme Court; Supreme Court Rule 11 pertaining to Interest- Bearing Trust Accounts Program or IOLTA; and 1.15 of the Hawai`i Rules of Professional Conduct (HRPC). 3 Almost without exception a lawyer who fails to protect client funds is disciplined solely under Rule 1.15, HRPC. In general and in particular, these rules require an attorney maintain a separate client trust account which bears interest in an eligible financial institution. There are additional requirements regarding reconciling the accounts and maintaining records. In addition, under HRPC 1.4, 1.5 and 1.16 there are other duties owed to the clients that include: the duty to communicate, to account for funds, and to refund. 4 1 The attorney-client relationship involves the highest degree of trust and confidence. The duty of an attorney to the client must be discharged honorably and faithfully, governed by the most exacting principles of morality and justice.... Office of Disciplinary Counsel v. Lau, 85 Haw. 212 at 215, (1997). 2 In Office of Disciplinary Counsel v. Lau, 85 Haw. 212, (1997), the Supreme Court stated, HRPC 1.15 sets out strict, specific, and detailed rules with regard to the handling of clients funds. Rule 1.15 reinforced our prior case law regarding the importance of handling clients and third persons funds and other property appropriately. Compliance with Rule 1.15 is mandatory. 85 Haw. at Proposed amendments to the HRPC have been submitted to the Hawaii Supreme Court HRPC including to Rule However, basic concepts of the client trust account remain unchanged in the proposed amendments. Both versions of the HRPC rules are found in the appendix along with a comparison chart. The trust accounting rules and IOLTA rules are also included. 4 A significant number of complaints received by ODC involve mishandling of client funds and property.

2 2 When Do I Need a Trust Account? If a lawyer receives funds or property from a client or third party other than for payment of legal services or costs which have already been performed, the attorney needs to open a trust account. It doesn t matter what the amount is or how infrequently the attorney receives such funds from a client or third party. Having a separate trust account protects client funds from the attorney s creditors or personal financial obligations. Examples of client funds include advance fees or retainers, deposits for costs, settlements, and escrow funds. Advance fees or retainers: When a client pays for future fees, those fees belong to the client until the attorney earns the fees. Once the fees are earned, those fees must be taken out of the trust account within a reasonable time. Leaving fees in the client trust account is commingling which is a separate ethical violation under HRPC 1.15(c). The earned fees shall be distributed by check to the named lawyer, law partnership, or professional law corporation. Check should never be made payable to cash. Note: All fee retainers are refundable until earned. Non-refundable fee retainers are prohibited. Flat fees: Until the fee is earned, a flat fee should remain in the client trust account not the attorney s business account. Unless the fee agreement specifies bench marks or stages of the representation that have been completed and the corresponding amount of the legal fee that has been earned for each stage, no portion of the flat fee can be withdrawn until the representation has been completed or fulfilled. Deposits for costs: Likewise when a client pays in advance for costs, that payment belongs to the client until the costs are incurred. Therefore, an advance payment for costs needs to be deposited into a client trust account. Real estate conveyance funds: Real estate conveyance funds must be deposited into the client trust account. Settlements or awards: Settlements are, until distribution, client funds. When a settlement is received, it must be deposited into a client trust account. In the event the settlement is from a contingency case, the attorney must provide the client with a written accounting of the funds. See, HRPC 1.5. Funds Paid to the Lawyer for Distribution by Court Order: Funds collected from the client for payment of a court order must be deposited into the client trust account and the court will have to issue instructions for disbursement.

3 3 Escrow funds: account. Escrow funds must be deposited into the client trust Any amount which is in dispute: When there is a dispute as to whether the attorney should receive client funds or the amount, then the disputed portion shall not be withdrawn until the dispute is resolved except for the undisputed amounts. Entrusted funds must be deposited and they must be deposited "intact". HRPC "Intact" means "untouched especially by anything that harms or diminishes." Merriam Webster's Dictionary. Additionally, personal property that the attorney might receive needs to also be segregated from the attorney's own property. Examples of such property include securities and corporate books, original wills, and deeds. Such property needs to be kept in a safe deposit box or other place of safekeeping to prevent loss or disappearance. What should I NOT deposit into a client trust account? Payment of fees: If a client pays a bill, that amount should not be deposited into the client trust account. That money represents fees earned and should be deposited into a business account. Reimbursement for costs incurred: If a lawyer advances costs out of his or her own business account and the client reimburses the client, those payments should not be deposited into the client trust account. If reimbursements for costs are to be paid from the settlement, then the entire amount of the settlement must be deposited into the client trust account. Once the settlement proceeds are available, then the lawyer should deduct the amount to cover fees and/or costs. An accounting should be provided to the client. How many client trust accounts do I need? Only one client trust account needs be opened but subsidiary ledgers must be kept with respect to each client. That ledger must show all receipts, disbursements, and transfers and any unexpended balance. What kind of client trust account must I have? Client trust accounts must bear interest under Supreme Court Rule 11. These types of trust accounts are known as IOLTA or Interest on Lawyers Trust Accounts. The interest provides funds for the Hawaii Justice Foundation, a non-profit organization, and the programs that it funds.

4 4 Participation is mandatory. How do I open an IOLTA account? Generally banks and, savings and loan associations in the State of Hawaii offer IOLTA accounts. However, credit unions do not qualify. The Hawaii Justice Foundation certifies the particular financial institutions that are eligible. See Information for Lawyers; IOLTA Approved Banks. What instructions should I give? Only a Hawai`i licensed attorney can be the authorized signatory on a trust account. How should the checks and deposit slips be labeled? The account must be clearly labeled as a client trust account. CTA checks and deposit slips must bear preprinted consecutive numbers. Examples of checks and deposit slips are found in the Sample Forms section. May I have ATM or debit cards? No, ATM and debit cards are prohibited. Are there any requirements concerning the withdrawals? All withdrawals must be by authorized bank transfer or by a check to a named payee. Checks should never be payable to cash. Are there other prohibitions? Yes, the attorney should never pay personal or non client business expenses directly from the trust account even if those funds represent earned fees. See HRPC Rule 1.15(e). Examples of checks that should never be written from the client trust account are found in the Sample Forms section. Are there fees? Who pays them? A lawyer may deposit additional sums into the client trust account to cover financial institution fees. Funds should be in an amount reasonably sufficient. Under the proposed amendment to HRPC 1.15, the amount must be reasonably necessary for that purpose.

5 5 What happens if there is an overdraft? The Office of Disciplinary Counsel is automatically notified of any overdrawn funds. Client Trust Accounts may not be set up with overdraft protection. See Rule 11(c)(F) of the Rules of the Supreme Court of State of Hawaii. Every attorney or law firm shall notify the Hawai`i Justice Foundation after learning of any discrepancy in the trust account of $100 or more or if any trust account check is returned for insufficient funds. See Section VI of the Rules Governing Trust Accounting. The notification must be in writing and must explain the event and its causes if known and shall be sent by certified mail to the Hawai`i Justice Foundation. What records must be kept? Under HRPC 1.15 (g)(1) (a) through (d), the following must be kept: cash receipts and disbursements journals for each trust and business account including receipts, disbursements, and transfers which contain identification of the client matter for which trust funds were received, disbursed or transferred; the date on which trust funds were received, disbursed, or transferred; the check number for each disbursement; and the payor or payee for which the trust funds were received disbursed or transferred. Examples are included in the Sample Forms section. Under HRPC 1.15(g) (2) (a) through (d), a subsidiary ledger containing either a separate page for each client or an equivalent computer analysis showing: all individual receipts, disbursements, or transfers and any unexpended balance and also containing identification of the client or matter for which trust funds were received, disbursed, or transferred; the date on which trust funds were received, disbursed, or transferred;

6 6 the check number for each disbursement; and the payor or payee for which trusts funds were received, disbursed, or transferred. Examples are included in the Sample Forms section. These financial books and other records shall be maintained on a cash method consistently applied from year to year. Under HRPC 1.15 (4) copies of any statements to clients showing the disbursement of funds to them or on their behalf must be kept. Examples are included in the Sample Forms section. HRPC 1.15(6) copies of records showing all payments to attorneys, investigators, or other person, not in the lawyer s regular employ for services rendered or performed must be kept. Examples are included in the Sample Forms section. HRPC 1.15(7) requires all checkbooks, check stubs, bank statements, pre-numbered cancelled checks and deposit slips be kept. HRPC 1.15(8) copies of all monthly trust account reconciliations must be kept. Examples are included in the Sample Form section. HRPC 1.15(9) copies of all records showing at least quarterly (i) a listing of trust accounts (names and related balances), the grand total of which agrees with (equals) (ii) the reconciled trust account bank balance of even date a printed copy of the listing and the reconciled trust account balance shall be maintained for 6 years. Examples are included in the Sample Forms section. What other records must I keep? Under HRPC 1.15 (3) copies of any retainers and compensation agreements must be kept. Under HRPC 1.15 (5) copies of all bills rendered to clients must be kept. Under proposed HRPC 1.15, those portions of the client files necessary to understand the financial transactions must be kept. How long must I keep these records? Records must be maintained for at least six (6) years after completion of the matter to which they relate.

7 7 What form must the records be in? The required books and records may be maintained by computer. If not maintained on a computer, then manual records must be kept. Where must I keep these records? These records must be kept at the principal Hawaii office of each attorney or firm and be available for inspection, compliance checks and copying at that location by the ODC. What other responsibilities do I have concerning the client trust account? Monthly and/or quarterly reconciliations with bank statements are required. Monthly reconciliations with client transaction summaries are also required. Copies of those reconciliations must be kept. An annual certification as part of the lawyer s registration renewal that the lawyer or the lawyer s law firm maintains books and records in compliance with HRPC Rule 1.15 is also required. See A Matter of Trust: Lawyers, Clients and Whose Money Is It? Evan Shirley, October 2010, Hawaii Bar Journal, a copy of which is included in the Appendix. Can I rely on my accountant or office manager? No. You personally must review the reconciliations. Your trust account responsibility CANNOT be delegated to anyone else. An attorney is responsible for other s mistakes. Under HRPC 5.3 an attorney is responsible for non lawyer assistants. Is there an automated way to handle trust accounts? Yes. A number of computer programs handle law office trust accounts. In addition, Westlaw and LexisNexis offer programs. Other programs like Quicken can also be adapted to handle client trust accounting. See A Matter of Trust: Lawyers, Clients and Whose Money Is It? Evan Shirley, October 2010, Hawaii Bar Journal, a copy of which is included in the Appendix. What if a client wants to make payment with a credit card? You have 3 choices: 1) deal with a banking institution which allows the attorney to direct the deposit of these funds into specific accounts; 2) have two credit card plans: one solely for the CTA for retainers and flat fees, and one for business or other non trust account; or

8 8 3) accept only credit card payments for earned fees to be deposited into a business or other non-trust account. RECOMMENDATIONS At the outset of the engagement, it is best to communicate with the client regarding how the client funds will be managed. Inform the client promptly when funds are received. Also periodically notify clients and third parties whose funds are held in trust about the status of their funds. Under HRPC 1.4 the attorney has a duty to communicate to the client regarding how the funds will be managed, when the funds are received and disbursed, as well as provide periodic notifications concerning the status of those funds. Under HRPC 1.16 the attorney has a duty to account to clients and a duty to refund. Upon termination of representation, the attorney should return files, documents and refund any advance of payment fee that has not been earned. RESOURCES EasyTrust software. EasyTrust client trust accounting system sample reports at:

9 APPENDIX 9

10 10 APPENDIX RULES Current Hawaii Rule of Professional Responsibility 1.15 Proposed Hawaii Rule of Professional Responsibility 1.15 Chart comparing the proposed HRPC 1.15 to the current HRPC 1.15 Hawai`i Rules Governing Trust Accounting issued by the Hawai`i Supreme Court Hawai`i Supreme Court Rule 11 pertaining to Interest-Bearing Trust Accounts Program or IOLTA ARTICLE Shirley, Evan, A Matter of Trust: Lawyers, Clients and Whose Money Is It?, Hawaii Bar Journal, October 2010.

11 RULES 11

12 HAWAI'I RULES OF PROFESSIONAL CONDUCT Rule 1.15 [4] If the lawyer represents the guardian as distinct from the ward, and is aware that the guardian is acting adversely to the ward's interest, the lawyer may have an obligation to prevent or rectify the guardian's misconduct. See Rule 1.2(d). Disclosure of the Client's Condition [5] Rules of procedure in litigation generally provide that minors or persons suffering mental disability shall be represented by a guardian or next friend if they do not have a general guardian. However, disclosure of the client's disability can adversely affect the client's interests. For example, raising the question of disability could, in some circumstances, lead to proceedings for involuntary commitment. The lawyer's position in such cases is an unavoidably difficult one. The lawyer may seek guidance from an appropriate diagnostician. Hawai'i Code Comparison There was no counterpart to this rule in the Disciplinary Rules of the Hawai'i Code. EC 7-11 stated that the "responsibilities of a lawyer may vary according to the intelligence, experience, mental condition or age of a client.... Examples include the representation of an illiterate or an incompetent." EC 7-12 stated that "[a]ny mental or physical condition of a client that renders [the client] incapable of making a considered judgment on [the client's] own behalf casts additional responsibilities upon [the client's] lawyer. Where an incompetent is acting through a guardian or other legal representative, a lawyer must look to such representative for those decisions which are normally the prerogative of the client to make. If a client under disability has no legal representative, [the client's] lawyer may be compelled in court proceedings to make decisions on behalf of the client. If the client is capable of understanding the matter in question or of contributing to the advancement of [the client's] interests, regardless of whether [the client] is legally disqualified from performing certain acts, the lawyer should obtain from [the client] all possible aid. If the disability of a client and the lack of a legal representative compel the lawyer to make decisions for his [or her] client, the lawyer should consider all circumstances then prevailing and act with care to safeguard and advance the interests of [the lawyer's] client. But obviously a lawyer cannot perform any act or make any decision which the law requires his [or her] client to perform or make, either acting for [the client] if competent, or by a duly constituted representative if legally incompetent." Rule PRESERVING IDENTITY OF FUNDS AND PROPERTY OF A CLIENT OR THIRD PERSON. (a) Every lawyer in private practice in the State of Hawai'i who receives or handles client funds shall maintain in one or more bank or savings and loan association accounts maintained in this state, in the lawyer's own name, or in the name of a partnership of lawyers, or in the name of the professional corporation of which the lawyer is a member, or in the name of the lawyer or partnership of lawyers by whom employed: (1) a trust account or accounts, separate from any business and personal accounts, into which all funds entrusted to the lawyer's care shall be deposited; and (2) a business account into which all earned trust funds for professional services shall be deposited. (b) Each trust account, as well as deposit slips and checks drawn thereon, shall be prominently labeled "client trust account." Nothing herein shall prohibit any additional descriptive designation for a specific trust account. Client trust account checks shall bear preprinted consecutive numbers. Each business account, as well as deposit slips and checks drawn thereon, shall be prominently labeled "business account," "office account," or (Release: 06/04) HRPC--35

13 Rule 1.15 HAWAI'I RULES OF PROFESSIONAL CONDUCT appropriate business-type account. (c) A lawyer in possession of any funds or other property belonging to a client or third person, where such possession is incident to the lawyer's practice of law, is a fiduciary and shall not commingle such funds or property with his or her own or misappropriate such funds or property to his or her own use and benefit. A lawyer may deposit into a trust account funds reasonably sufficient to either pay bank charges or avoid paying bank charges on the account. Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited into the trust account, but the portion belonging to the lawyer or law firm must be withdrawn when due unless the right of the lawyer or law firm to receive the funds is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved. (d) All funds entrusted to a lawyer shall be deposited intact into a trust account. The deposit slip shall be sufficiently detailed to identify each item. All fee retainers shall be maintained in trust until earned. All fee retainers are refundable until earned. (e) All trust account withdrawals shall be made only by authorized bank transfer or by check made payable to a named payee and not to cash. Only an attorney admitted to practice law in this state shall be an authorized signatory on an attorney trust account. Earned fees withdrawn from a trust account shall be distributed by check to the named lawyer, law partnership, or professional law corporation. No personal or non-client business expenses of the lawyer, law partnership, or professional law corporation shall be paid directly from the trust account. (f) A lawyer shall: (1) promptly notify a client or third person of the lawyer's receipt of funds, securities, or other properties in which the client or third person has an interest; (2) identify and label securities and properties of a client or third person promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable; (3) maintain complete computerized or manual records of all funds, securities, and other properties of a client or third person coming into the possession of the lawyer and promptly render appropriate accounts to the client or third person regarding them. The books and records shall be preserved for a [sic] least six years after completion of the employment to which they relate. Every lawyer in private practice shall certify, in connection with the annual renewal of the lawyer's registration, that the lawyer or the lawyer's law firm maintains books and records in compliance with this rule, HRPC Rule 1.15; and (4) promptly pay or deliver to the client or third person, as requested by the client or third person, the funds, securities, or other properties in the possession of the lawyer which the client or third person is entitled to receive. (g) A lawyer shall, at a minimum, maintain for at least six years after completion of the employment to which they relate, the following computerized or manual books and records demonstrating compliance with this rule, HRPC Rule 1.15: (1) Cash receipts and disbursements journals for each trust and business account, including entries for receipts, disbursements, and transfers, and also containing at least: (A) identification of the client matter for which trust funds were received, disbursed, or transferred; (B) the date on which trust funds were received, disbursed, or transferred; (C) the check number for each disbursement; and (D) the payor or payee for which the trust funds were received, disbursed, or transferred. (2) A subsidiary ledger containing either a separate page for each client (for manual records only) or an equivalent computer analysis showing all individual receipts, disbursements, or transfers and any unexpended balance, and HRPC--36 (Release: 06/04)

14 HAWAI'I RULES OF PROFESSIONAL CONDUCT Rule 1.15 also containing: (A) identification of the client or matter for which trust funds were received, disbursed, or transferred; (B) the date on which trust funds were received, disbursed, or transferred; (C) the check number for each disbursement; and (D) the payor or payee for which trust funds were received, disbursed, or transferred. (3) Copies of any retainer and compensation agreements with clients. (4) Copies of any statements to clients showing the disbursement of funds to them or on their behalf. (5) Copies of all bills rendered to clients. (6) Copies of records showing all payments to attorneys, investigators, or other persons, not in the lawyer's regular employ, for services rendered or performed. (7) All checkbooks, check stubs, bank statements, prenumbered cancelled checks (or access to cancelled checks), and deposit slips (or access to deposit slips). (8) Copies of all monthly trust account reconciliations. (9) Copies of all records showing at least quarterly (i) a listing of trust accounts (names and related balances), the grand total of which agrees with (equals) (ii) the reconciled trust account bank balance of even date (a printed copy of the listing and the reconciled trust account balance shall be maintained for 6 years). (10) A record showing all property, specifically identified, other than cash, held in trust, provided that routine files and documents which are not expected to be held indefinitely need not be so recorded. (h) The financial books and other records required by this rule shall be maintained on a cash method consistently applied from year to year. Bookkeeping records may be maintained by computer, provided that they otherwise comply with this rule and provided further that printed copies can be made on demand. Bookkeeping records shall be located at the principal Hawai'i office of each lawyer, law partnership, or professional law corporation and shall be available for inspection, checks for compliance with this rule, and copying at that location by a duly authorized representative of the Office of Disciplinary Counsel. COMMENT: See Rule 1.5(a) for the factors to be considered in determining the reasonableness of an earned attorney's fee. Hawai'i Code Comparison ABA Model Rule 1.15 and its comments were rejected in favor of DR of the Disciplinary Rules of the Hawai'i Code. (Amended June 22, 1994, effective July 1, 1994; further amended October 9, 2001, effective January 1, 2002.) (Release: 06/04) HRPC--37

15 RULE 1.15: SAFEKEEPING PROPERTY (a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account clearly identified as a client trust account which shall be maintained in the state where the lawyer's office is situated. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of six years after termination of the representation. (b) A lawyer may deposit the lawyer's own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose. (c) A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred. All fees paid in advance are refundable until earned, and fees earned and expenses incurred shall be promptly withdrawn from the client trust account. All disbursements from the client trust account must identify the payee, none can be made to cash, and checks must be used for all disbursements from the client trust account except those that are made by electronic bank transfer. (d) Upon receiving or disbursing funds or other property in which a client or third person has a financial or ownership interest, a lawyer shall promptly provide the client or third person with written notification of receipt or disbursement. Except as stated in this Rule, by agreement in conformity with this Rule, or otherwise permitted by law, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full written accounting regarding such property. (e) When in the course of representation, a lawyer in possession of funds or other property of which two or more persons (one of whom may be the lawyer) claim an interest, the funds or other property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the funds or other property as to which the interests are not in dispute. (f) A lawyer who practices in this jurisdiction shall maintain current financial records as provided in this Rule. A lawyer shall retain the following records for each particular legal engagement or representation for a period of six years after termination of the representation: (1) Receipt and disbursement journals containing a record of deposits to and withdrawals from bank accounts which concern or affect the lawyer s practice of law, specifically identifying the date, source, and description of each item deposited, as well as the date, payee, and purpose of each disbursement;

16 (2) Ledger records for all trust accounts required by this Rule showing, for each separate trust client or beneficiary, the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons to whom such funds were disbursed; (3) Copies of retainer and compensation agreements with clients as required by this Rule; (4) Copies of accountings to clients or third persons showing the disbursement of funds to them or on their behalf; (5) Copies of bills for legal fees and expenses rendered to clients; (6) Copies of records showing disbursements on behalf of clients; (7) Checkbook registers or check stubs, bank statements, records of deposit, and prenumbered canceled checks or their equivalent which clearly bear the legend client trust account; (8) Copies of monthly trial balances and quarterly reconciliations of the lawyer s trust accounts; and (9) Copies of those portions of clients files that are reasonably necessary for an understanding of the financial transactions pertaining to them. (g) With respect to trust accounts required by this Rule: (1) Only a lawyer admitted to practice law in this jurisdiction shall be an authorized signatory on the account; (2) Receipts shall be deposited intact and records of deposit should be sufficiently detailed to identify each item; and (3) Withdrawals shall be made only by check payable to a named payee and not to cash or by electronic bank transfer. (h) Records required by this Rule may be maintained by electronic, photographic, computer, or other media provided that they otherwise comply with this Rule and provided further that printed copies can be produced. These records shall be located at the lawyer s principal office in the jurisdiction or in a readily accessible location. (i) Upon dissolution of any partnership of lawyers or any legal professional corporation or other entity, the partners, shareholders, or other principals shall make appropriate arrangements for the maintenance of the records specified in Paragraph (f)

17 above. Upon the sale of a law practice, the seller shall make appropriate arrangements for the maintenance of the records specified in Paragraph (f) above. (j) Every lawyer in private practice shall certify, in connection with the annual renewal of the lawyer s registration, that the lawyer or the lawyer s law firm maintains books and records in compliance with this Rule, HRPC Rule (1) Copies of all records showing at least quarterly (i) a listing of trust accounts (names and related balances), the grand total of which agrees with (equals) (ii) the reconciled trust account bank balance of even date (a printed copy of the listing and the reconciled trust account balance shall be maintained for six years). (2) A record showing all property, specifically identified, other than cash, held in trust, provided that routine files and documents which are not expected to be held indefinitely need not be so recorded. (k) The financial books and other records required by this Rule shall be maintained on a cash method consistently applied from year to year. Bookkeeping records may be maintained by computer, provided that they otherwise comply with this Rule and provided further that printed copies can be made on demand. Bookkeeping records shall be located at the principal Hawai'i office of each lawyer or law firm and shall be available for inspection, checks for compliance with this Rule, and copying at that location by a duly authorized representative of the Office of Disciplinary Counsel. Comment: [1] A lawyer should hold property of others with the care required of a professional fiduciary. Securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property that is the property of clients or third persons, including prospective clients, must be kept separate from the lawyer's business and personal property and, if monies, in one or more trust accounts. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities. A lawyer should maintain on a current basis books and records in accordance with generally accepted accounting practice and comply with any recordkeeping Rules established by law or court order. [2] While normally it is impermissible to commingle the lawyer's own funds with client funds, paragraph (b) provides that it is permissible when necessary to pay bank service charges on that account. Accurate records must be kept regarding which part of the funds are the lawyer's. Sections (f) through (i) of this Rule address financial recordkeeping. [3] Lawyers often receive funds from which the lawyer's fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees earned and owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.

18 [4] A mere debtor-creditor relationship is generally itself insufficient to establish a financial interest in funds or property within the meaning of paragraphs (d) and (e). Paragraphs (d) and (e) recognize, however, that third parties may have lawful entitlement to funds or other property in a lawyer's custody, such as a client's creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third-party entitlements against wrongful interference by the client. In such cases, the lawyer must refuse to surrender the funds or property to the client until the dispute is resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute. [5] The obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal services. For example, a lawyer who serves only as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction and is not governed by this Rule. [6] The Lawyers' Fund for Client Protection provides a means through the collective efforts of the Hawai'i bar to reimburse persons who have lost money or property as a result of a lawyer's dishonest conduct and lawyer participation in the fund is mandatory. See Rules & Regulations Concerning the Lawyers' Fund for Client Protection of the Bar of Hawai'i attached as Appendix A to RSCH. [7] Paragraph (f) enumerates the basic financial records that a lawyer must maintain with regard to the business and trust accounts of a law firm. These include the standard books of account, and the supporting records which are necessary to safeguard and account for the receipt and disbursement of client funds as required by this Rule. These records shall be maintained by the lawyer for a period of six years after termination of each particular legal engagement or representation. [8] The potential of these records to serve as safeguards is realized only if the procedures set forth in Paragraph (f)(8) are regularly performed. The trial balance is the sum of balances of each client's ledger card (or the computerized equivalent). Its value lies in comparing it on a monthly basis to a control balance. The control balance starts with the previous month's balance, then adds receipts from the Trust Receipts Journal and subtracts disbursements from the Trust Disbursements Journal. Once the total matches the trial balance, the reconciliation readily follows by adding amounts of any outstanding checks and subtracting any deposits not credited by the bank at month's end. This balance should agree with the bank statement. Quarterly reconciliation is recommended only as a minimum requirement; monthly reconciliation is the preferred practice given the difficulty of identifying an error (whether by the lawyer or the bank) among three months' transactions. [9] Paragraph (g) enumerates minimal accounting controls for lawyer trust accounts. It also enunciates the requirement that only a lawyer admitted to the practice of law in the jurisdiction be an authorized signatory or agent on a lawyer trust account.

19 [10] Paragraph (h) allows the use of alternative media for the maintenance of bookkeeping records if printed copies of necessary reports can be produced. If trust records are computerized, a system of regular and frequent back-up procedures is essential. [11] Paragraph (i) provides for the preservation of a lawyer's financial records in the event of dissolution or sale of a law practice. [12] Paragraph (j) requires every lawyer in private practice to annually certify, in connection with renewal of the lawyer s registration, that the lawyer or lawyer s law firm maintains books and records in compliance the requirements of HRPC Rule See RSCH Rules 11(f)(1) and 17(d)(1). See Rule 1.5(a) for the factors to be considered in determining the reasonableness of an earned attorney's fee.

20 COMPARISON CHART EXISTING HRPC 1.15 TO PROPOSED HRPC 1.15

21 REQUIREMENT EXISTING HRPC 1.15 PROPOSED HRPC 1.15 Lawyer in private practice who receives or handles client funds or property must maintain a separate trust account(s) Must be labeled client trust account Checks must have preprinted consecutive numbers May not commingle; amounts earned must be withdrawn; funds subject to dispute shall not be withdrawn until dispute resolved May deposit separate funds sufficient to pay bank charges Fee retainers must remain in trust until earned All fee retainers are refundable until earned Withdrawal made only by authorized bank transfer or check payable to named payee (not cash) Only licensed Hawaii attorney shall be authorized signatory 1.15 (a) and 1.15(a)(1) 1.15(b) 1.15(b) 1.15(c) 1.15(c) 1.15(d) 1.15(d) 1.15(e) 1.15(e) 1.15(a) 1.15(a) clearly identified as a client trust account 1.15(f)(1) 1.15(f)(7) ( prenumbered ) 1.15(c) and 1.15(e) 1.15(b) only in an amount necessary to pay service charges 1.15(c) 1.15(c) 1.15(c) 1.15(g)(3) 1.15(g)(1) 1

22 REQUIREMENT No personal or non client business expenses shall be paid directly from the trust account Promptly provide client with written notification of receipt or disbursement of trust funds Must maintain computerized or manual records of all funds and render prompt accountings Books and records must be preserved for 6 years after completed engagement** Attorney must certify as part of annual attorney registration renewal that the books and records are in compliance Also maintain for at least six years:** Cash receipts and disbursement journals for each trust and business account, including receipts, disbursements and transfers which contain: (A) Identification of client matter for which trust funds were received, disbursed or transferred EXISTING HRPC (e) 1.15(f)(1) (notify client or third person of receipt, not disbursement) 1.15(f)(3) 1.15(f)(3) 1.15(f)(3) 1.15(g)(1) 1.15(g)(1)(A) PROPOSED HRPC (d) 1.15(a) 1.15(d) 1.15(a) 1.15(f) 1.15(j)(1) 1.15(j) 1.15(f)(1) 1.15(f)(2) 1.15(f)(2) 2

23 REQUIREMENT (B) Date on which trust funds were received, disbursed or transferred (C) Check number for each disbursement (D) Payor or payee for which trust funds were received, disbursed or transferred Subsidiary ledger containing a separate page for each client (for manual records only) or an equivalent computer analysis showing all individual receipts, disbursements, or transfers and any unexpended balance and containing: (A) Identification of the client or matter for which trust funds were received, disbursed, or transferred (B) Date on which trust funds were received, disbursed or transferred (C) Check number for each disbursement (D) Payor or payee for which trust funds were received, disbursed or transferred EXISTING HRPC (g)(1)(B) 1.15(g)(1)(C) 1.15(g)(1)(D) 1.15(g)(2) 1.15(g)(2)(A) 1.15(g)(2)(B) 1.15(g)(2)(C) 1.15(g)(2)(D) PROPOSED HRPC (f)(1) 1.15(f)(2) 1.15(f)(6) 1.15(f)(2) 1.15(f)(6) 1.15(f)(2) 1.15(f)(2) 1.15(f)(6) 3

24 REQUIREMENT Copies of any retainer or compensation agreements with clients Copies of any statements to clients showing the disbursement of funds Copies of all client bills Copies of all records showing payments to attorneys, investigators or others persons not in the lawyer s regular employ, for services All checkbooks, check stubs, bank statements, prenumbered cancelled checks and deposit slips Copies of all monthly trust account reconciliations* EXISTING HRPC (g)(3) 1.15(g)(4) 1.15(g)(5) 1.15(g)(6) 1.15(g)(7) 1.15(g)(8) PROPOSED HRPC (f)(3) 1.15(f)(4) 1.15(f)(6) 1.15(f)(5) 1.15(f)(7) 1.15(f)(8) monthly trial balances and quarterly reconciliations 4

25 REQUIREMENT EXISTING HRPC 1.15 PROPOSED HRPC 1.15 Copies of all records showing at least quarterly listing of trust account (names and related balances), grand total of which agrees with the reconciled trust account bank balance of even date; printed copy of the listing and reconciled trust account balance 1.15(g)(9) 1.15(j)(1) Copies of portions of clients files that are reasonably necessary to understand the financial transactions A record showing all property other than cash, held in trust The financial books and other records shall be maintained on a cash method consistently applied from year to year 1.15(g)(10) 1.15(h) 1.15(f)(9) 1.15(j)(2) 1.15(k) 5

26 REQUIREMENT EXISTING HRPC 1.15 PROPOSED HRPC 1.15 Bookkeeping records may be maintained by computer; printed copies must be able to be made on demand 1.15(h) 1.15(h) 1.15(k) Bookkeeping records shall be located at the principal Hawaii office of each lawyer, law partnership or professional law corporation and shall be available for inspections and copying by ODC 1.15(h) 1.15(a) 1.15(h) 1.15(k) Upon dissolution, principals shall make arrangements for the maintenance of the records 1.15(i) NOTES: *Hawaii CTA Rule Section V specifies reconciliations to occur within 45 days of receiving bank statements; discrepancies to be fixed in 60 days. HRPC implies reconciliations; rules only speak to keeping copies of reconciliations. **Section IV of the Hawaii CTA Rules: Records must be kept for 6 years or last transaction whichever occurs later. HRPC specifies at least 6 years without noting any extensions. Section VI of the Hawaii CTA Rules: In the event of a discrepancy in excess of $100 Hawaii Justice Foundation must be notified. 3/25/12 Draft Chart Comparing Existing HRPC 1.15 with Proposed HRPC 1.15 and references to Hawaii Client Trust Accounting Rules (CTA) 6

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31 Rule RULES OF THE SUPREME COURT Automatic suspension. (a) Upon payment by the Fund of any claim, the Trustees shall file proof of the payment with the supreme court. (b) When proof of the payment is filed with the supreme court, the supreme court shall, unless the interests of justice indicate otherwise, immediately suspend the attorney involved from the practice of law in this state until the Fund receives payment for all reimbursements made by the Fund, together with interest and the Fund s costs and attorney s fees. (c) The supreme court may set aside such order suspending the attorney from the practice of law in the interest of justice and for good cause shown. (Added February 7, 1992, effective February 7, 1992; amended January 24, 2008, effective July 1, 2008.) Rule 11. INTEREST-BEARING TRUST ACCOUNTS PROGRAM. (a) Purpose. The purpose of the Interest-Bearing Trust Accounts Program (the Program) is to provide for funds for Hawai i Justice Foundation programs designed to improve the education of the public and the practicing bar on matters of legal significance, to provide legal aid to the poor, to enhance delivery of competent legal services, to make student loans, and to implement other programs aimed at improving the administration of justice in Hawai i. (b) Required participation. Participation in the Program for attorneys shall be mandatory. Unless exempted under Rule 11(e), every attorney admitted to practice law in the State of Hawai i or every law firm composed in whole or in part of such attorneys that receives client funds shall establish and maintain an interest- or dividend-bearing trust account for pooled clients' funds (IOLTA Trust Account or IOLTA account) that complies with the provisions of Rule 11(c)(1) and (2). In addition, lawyers and law firms shall establish additional interest-bearing trust accounts (Client Trust Account) for individual clients, as provided by Rule 11(c)(1) and (3). (c) Administration. (1) DEPOSITS OF CLIENTS' FUNDS. (A) All funds of clients paid to an attorney or law firm, including advances for costs and expenses, shall be deposited and maintained in one or more identifiable interest- or dividend-bearing trust accounts (Trust Accounts) in the State of Hawai i. No funds belonging to the attorney or law firm shall be deposited into a Trust Account except: (i) Funds reasonably sufficient to pay account charges not offset by interest shall be deposited therein; and (ii) Funds belonging in part to a client and in part presently or potentially to the attorney or law firm must be deposited therein but the portion belonging to the attorney or law firm shall be withdrawn when due unless the right of the attorney or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved. (B) With respect to all Trust Accounts, the attorney or law firm shall comply with the Hawai i Rules of Professional Conduct relating to preserving the identity of funds and property of a client. (C) Every IOLTA Trust Account shall be established with an eligible financial institution. To qualify as eligible, the financial institution must: (i) be certified by the Hawai i Justice Foundation to be in compliance with Rule 11(c); (ii) be a federally-insured and state or federally-regulated financial institution authorized by federal or state law to do business in Hawai i, or an open-end investment company registered with the federal Securities and Exchange Commission and authorized by federal or state law to do business in Hawai i; and (iii) allow funds in each Trust Account to be subject to withdrawal upon request and without delay. (D) Participation by banks, savings and loan associations, and investment companies in the IOLTA program is voluntary. An eligible financial institution that elects to offer and maintain IOLTA accounts shall meet the following requirements: (i) The eligible financial institution shall pay no less on its IOLTA accounts than the highest interest rate or dividend generally available from the institution to its non-iolta customers when the IOLTA account meets or exceeds the same minimum balance or other eligibility qualifications on its non- IOLTA accounts. For this purpose, an eligibility qualification shall be disregarded if it is inconsistent with Rule 11(c)(1)(D)(iv) or if it otherwise unreasonably discriminates against IOLTA accounts. Interest and dividends shall be calculated in accordance with the eligible institution s standard RSCH--46 (Release: 09/10)

32 RULES OF THE SUPREME COURT Rule 11 practices for non-iolta customers. In determining the highest interest rate or dividend generally available from the institution to its non-iolta customers, an eligible institution may consider, in addition to the balance in the IOLTA account, factors customarily considered by the institution when setting interest rates or dividends for its non-iolta customers, provided that such factors do not discriminate between IOLTA accounts and non- IOLTA accounts and that these factors do not include the fact that the account is an IOLTA account. For example, if a bank s sweep account qualifies for IOLTA investment under Rule 11(c)(1)(D)(iii) and carries the highest rate of interest or dividends available to an IOLTA customer under the foregoing rules, the bank must pay at least that rate (discounted for allowable reasonable fees under Rule 11(c)(1)(D)(iv)) on that customer s IOLTA account, whether or not it is in fact established as a sweep account. Nothing in this rule shall preclude an eligible institution from paying a higher interest rate or dividend than described above or electing to waive any fees and service charges on an IOLTA account. (ii) An eligible institution may choose to pay the highest interest or dividend rate in Rule 11(c)(1)(D)(i), less allowable reasonable fees as set forth in Rule 11(c)(1)(D)(iv), if any, on an IOLTA account in lieu of establishing it as a higher rate product. (iii) The IOLTA Trust Account shall be an interest- or dividend-bearing account. Interest- or dividend-bearing account means: (a) an interestbearing checking account; (b) a checking account paying preferred interest rates, such as money market or indexed rates; (c) a government interest-bearing checking account such as accounts used for municipal deposits; (d) a business checking account with an automated investment sweep feature which is a daily (overnight) financial repurchase agreement or an open-end money market fund; or (e) any other suitable interest-bearing deposit account offered by the institution to its non-iolta customers. A daily financial institution repurchase agreement must be fully collateralized by securities, of which at least 80% shall be U.S. Government Securities, and may be established only with an eligible institution that is well-capitalized or adequately capitalized as those terms are defined by applicable federal statutes and regulations. An open-end money-market fund must be comprised of at least 80% U.S. Government Securities, (or repurchase agreements fully collateralized by securities, of which at least 80% shall be U.S Government Securities), must hold itself out as a money-market fund as that term is defined by federal statutes and regulations under the Investment Company Act of 1940, and, at the time of the investment, must have total assets of at least $250,000,000. United States Government Securities are defined to include debt securities of Government Sponsored Enterprises, such as, but not limited to, securities of, or backed by, the Federal National Mortgage Association, the Government National Mortgage Association, and the Federal Home Loan Mortgage Corporation. (iv) Allowable reasonable fees are the only fees and service charges that may be deducted by an eligible institution from interest earned on an IOLTA account. Allowable reasonable fees are defined as per check charges, per deposit charges, a fee in lieu of minimum balances, sweep fees, FDIC insurance fees, and a reasonable IOLTA account administrative fee. Allowable reasonable fees may be deducted from interest or dividends on an IOLTA account only at the rates and in accordance with the customary practices of the eligible institution for non-iolta customers. No fees or service charges other than allowable reasonable fees may be assessed against the accrued interest or dividends on an IOLTA account. No fees or service charges shall be collected from the principal balance deposited in an IOLTA account. Any fees and service charges other than allowable reasonable fees shall be the sole responsibility of, and may only be charged to, the lawyer or law firm maintaining the IOLTA account, including bank overdraft fees and fees for checks returned for insufficient funds. Fees and service charges in excess of the interest or dividends earned on one IOLTA account for any period shall not be taken from interest or dividends earned on any other IOLTA account or accounts or from the principal of any IOLTA account. (Release: 09/10) RSCH--47