COLORADO SUPREME COURT. Office ofattorney Regulation TRUST CC UNT ANUAL. The Colorado Supreme Court

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1 COLORADO SUPREME COURT Office ofattorney Regulation TRUST CC UNT ANUAL Presented by: The Colorado Supreme Court Office ofattorney Regulation 1560 Broadway Suite 1800 Denver, Colorado

2 BASIC TRUST ACCOUNTING /FOR lawyers =AGENDA COLORADO SUPREME COURT OFFICE OF AnORNEY REGULATION COUNSEL 8:30 a.m. - 8:45 a.m. Overview (James S. Sudler) How Course is Set Up Purpose of Trust Account Who Must Have a Trust Account Rules Covering Trust Account 8:45 a.m. -10:00 a.m. Trust Account Principles (James S. Sudler) COLTAF Account or Other Trust Account 1/ Interest on Funds In Trust Account Commingling What It Is and Why Prohibited Small Amount May be Kept in Trust Account - No Cushions Cannot Use Trust Account as Personal Account Even If There Is No Client Money in The Account Deposit of Funds Intact Even When Lawyer Has Claim to Portion of The Funds Always Deposit Advance Fees, Costs, Fees Not Earned Into Trust Account How to Handle Disputes Over Funds in Your Trust Account Disputes With Your Client 1/ Disputes With Others Not Your Client Delegation of Duties To Handle Trust Account - Supervision and Training Use Of Client Credit Cards for Advance Payment Miscellaneous Pointers As To Every Day Handling Trust Account Notifications 10:00 a.m. -10:15 a.m. Break 10:15 a.m. -11:30 a.m. Common Problems (Daphne Salone of law & Equity, ltd.)

3 JAMES S. SUDLER Jamie Sudler is an Assistant Regulation Counsel with the Supreme Court Office of Attorney Regulation. Mr. Sudler graduated from the University of Denver College of Law. He has been with the Office of Attorney Regulation since Prior to this he was a.prosecutor in the Colorado Attorney General's Special Prosecutions Unit, and the Antitrust Unit. In earlier years, Mr. Sudler was in private practice with the firm of Rothgerber, Appel, Powers & Johnson. DAPHNE SALONE Daphne Salone has worked in the legal field for approximately 15 years. She has a paralegal certificate from Denver University School of Law, and her education is in accounting.. She currently does consulting work for law firms. She has worked in law firms doing administration, bookkeeping and paralegal tasks.

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6 SUMMARY OF TRUST ACCOUNT CONCEPTS AND PROCEDURES Colorado Supreme Court Office of Attorney Regulation Counsel 2007 Colorado Supreme Court Office of Attorney Regulation Counsel 1

7 TABLE OF CONTENTS 1. Introduction 4 Purpose of a Trust Account 4 Who Must Have a Trust Account? 4 2. Basic Requirem.entsfor TrustAccounts 5 What is a Trust Account? 5 Where May Lawyer Have a Trust Account? 5 Types oftrust Accounts: the COLTAF Trust Account 5 Establishment ofseparate Trust Accounts 6 Trust Accounts Must Be Separate From All Office or Professional Accounts 6 Name oftrust Accounts 6 Management oftrust Accounts 1.15(i) 6 Bookkeeping Requirements 1.150) 6 3. Lawyer's Basic Obligations Re: The TrustAccount 7 Duty to Safeguard 7 Duty to Account 7 Duty ofconfidentiality 7 Duty ofacting in Good Faith 7 Duty to Refund or Pay Funds Promptly 7 4. Interest Earned on Funds in a Trust Account 7 Interest Earned is Never the Lawyer's Property 7 Interest Paid to COLTAF 8 ~~~~~ 8 What is commingling? 8 Lawyers Cannot Use Trust Accounts for Personal Finances. 8 Why Is Commingling Prohibited? 8 Small Amounts to Cover Service Charges, but NO Cushions 9 6. Advanced Fees, Costs 9 Advanced Fees and Removal ofearned Fees from Trust Accounts 9 Costs: Advanced, and Reimbursed Depositing and Withdrawing Fundsfrom Trust Accounts 10 2

8 Lawyers Must Deposit Funds Intact into Trust Accounts 10 Disbursement offunds Disputes Over Funds in a TrustAccount 11 Disputes With A Client 11 Disputes With Third Parties 11 Third Party Claims to Funds in a Trust Account Use ofcredit Cards for Payments by Clients ofadvanced Retainers, Flat Fees or Earned Fees 12 Payment ofadvanced Fee by Credit Card 12 Payment offlat Fee by Credit Card 12 Payment ofearned Fees by Credit Card 12 Bank Card Agreements With Lawyers RequiredAccounting Records Delegation oftrustaccountduties 14 Training Others 14 Supervision 14 Problems ofjunior Attorneys Pointers on Everyday TrustAccount Management The Problem ofthe Missing Client For Whom Lawyer Has Money in Trust Account. 16 3

9 1. Introduction This manual is based upon the Colorado Rules of Professional Conduct effective January 1, The main rule with regard to trust accounts is Colo. RPC 1.15, which was amended by the Supreme Court in Whenever a lawyer holds the property of a client or a third party, the lawyer must keep that property in a separate trust account,. in accordance with the Rules of Professional Conduct. The most important rule relating to financial accounts for Colorado lawyers is Colo. RPC 1.15: Safekeeping Property. Colo. RPC 1.15 covers many topics, including who must have a trust account, disputes over funds held in trust, service charges on the account, and bookkeeping requirements. Every licensed lawyer in private practice or who is required to have trust account should read and know the requirements of this rule, which is located in the Colorado Revised Statutes (Colorado Court Rules Book 1). Purpose ofa Trust Account The purpose of a trust account is 1) to keep a client's money or a third party's money that the lawyer is in possession of separate from the lawyer's own money and 2) to safeguard a client's orthird party's money. Who Must Have a Trust Account? Every lawyer in private practice doing business in the state of Colorado who accepts fees for work not yet performed or for expenses not yet incurred, who holds money of a third party, or who receives settlement funds for clients must have a trust account. The need for a trust account most commonly arises when a lawyer is paid a retainer or a flat fee for work to be done in the future. The lawyer must deposit any such funds in a trust account and 'remove them only as they are earned. House-counsel,government lawyers such as deputy district attorneys, and other similar types of lawyers probably never hold funds belonging to a client or a third party and, therefore, likely do not need a trust account. 4

10 2. Basic Requirements for Trust Accounts What is a Trust Account? A trust account is an interest-bearing bank account that contains those funds entrusted to the lawyer's care and any advance payment of fees that have not been earned or advance payment of expenses that have not been incurred. A lawyer may also deposit funds sufficient to pay anticipated service charges or other fees for maintenance or operation of the trust account. Such funds shall be identified in the lawyer's records of the account. Where May Lawyer Have a Trust Account? A trust account must be maintained at a financial institution doing business in Colorado. The Office of Attorney Regulation Counsel (ARC) must approve the financial institution, and only those institutions that have entered into a written agreement with ARC are approved. The agreement requires that the institution report to the ARC in the event that any properly payable trust account instrument is presented to the institution when there are insufficient funds in the account to pay it. The ARC annually publishes a list of such approved financial institutions. All attorneys must file a statement with their annual attorney registration payment that includes the name of the institution where their trust accounts are maintained and identification numbers of each account. For each COLTAF account, the statement must indicate the account number, the name of the account, and the depository institution. Types of Trust Accounts: the COLTAF Trust Account One or more of a lawyer's trust accounts may be, but need not be, a Colorado Lawyer Trust Account Foundation ("COLTAF") account, kept in accordance with Colo. RPC 1.15(e)(1) and 1.15(h). A COLTAF trust account is a pooled interest-bearing insured depository account for funds of clients or third persons that are nominal in amount or are expected to be held for a short period of time. The interest earned on a COLTAF account is paid to the Foundation, which in turn donates the money to charitable causes. No interest from such an account is payable to a lawyer or law firm. It is up to the lawyer's good faith judgment to determine whether the client's or third party's funds are of such a nominal amount or are expected to be held for such a short period of time that the establishment of a COLTAF account is appropriate. In some cases, a client or a third party may give a lawyer funds that are more than nominal, in which case a COLTAF account is likely NOT i?ppropriate. 5

11 Establishment ofseparate Trust Accounts There is no limit on the number of trust accounts a lawyer may maintain. The establishment of separate trust accounts may be warranted when a lawyer is administering estate monies or acting in a similar fiduciary capacity for clients, or when a lawyer has accepted large flat fees or a large retainer. In such circumstances, the lawyer should establish a trust account that is only for those funds. Trust Accounts Must Be Separate From All Office or Professional Accounts A lawyer's professional or office account, in which all funds received for professional services are deposited, shall be kept separate from the trust account. Name of Trust Accounts All trust accounts or COLTAF accounts must be prominently designated as a "trust account" or a "COLTAF Trust Account," respectively. Additionally, the lawyer's business account must be designated as either "professional accounf' or "office account," and not as "operating" or "business" account. Management of Trust Accounts 1.15(i) As an agent, a lawyer is a fiduciary and must appropriately manage client's or third party's money. In accordance with Rule 1.15(i): A lawyer may not use any debit card or ATM card to withdraw funds from a trust account, and cash withdrawals and checks made payable to cash are prohibited. Only a lawyer admitted to practice law in Colorado or a person supervised by such lawyer may be an authorized signatory on a trust account or may withdraw ortransfer funds from orto a trust account. At least quarterly, a lawyer should reconcile all trust accounts to ensure that all accounting is up to date. Bookkeeping Requirements 1.15(j) Keeping complete records of the trust account can assist the lawyer in showing that all uses of the client's or third person's money are proper and that the lawyer has kept his or her own money appropriately segregated from client funds. Upon request, the lawyer is required promptly to render a full accounting of what the lawyer has done with money held in a trust account, Colo. RPC 1.15(b); accordingly, adequate record keeping is essential. See Section 10 below for a complete discussion ofthe required accounting records. 6

12 Besides clients, other people, including the lawyer's creditors, tax agencies, or heirs of a client, may be entitled to review the lawyer's finances. For example, creditors may try to show that the lawyer is keeping his or her own money in the trust account. Complete records are essential to show what the lawyer has done with other people's money. ' 3. Lawyer's Basic Obligations Re: The Trust Account Duty to Safeguard The lawyer must protect the funds (or other property) entrusted to him or her. This means thelawyer must segregate the funds in an approved financial institution. Duty to Account The lawyer is obligated to notify the client or third party when he or she puts money into the trust account or removes money from it. Generally, such notification takes place when the lawyer sends a bill or invoice to the client. Notification can be, and in some situations should be, made sooner than the monthly billing cycle. Duty ofconfidentiality Unless the client waives confidentiality, all dealings with client funds are confidential. Whether there is a duty of confidentiality with regard to third party funds is an issue not covered by the Colorado Rules of Professional Conduct. Duty ofacting in Good Faith As a fiduciary, the lawyer must act in good faith when dealing with funds of others. The lawyer cannot take advantage of a situation to the detriment of the beneficiary. Duty to Refund or Pay Funds Promptly The lawyer must promptly refund unearned fees at the end of a case. Additionally, the lawyer must promptly pay over to clients or third parties funds that belong to them. 4. Interest Earned on Funds in a Trust Account Interest Earned is Never the Lawyer's Property {::xceptfor COLTAF tru~t account~,.ailinterest earned on funds that the lawyer holds in trust belongs to the client or to the third person for whom the lawyer holds the funds. Colo. RPC 1.15(h) states that th,e lawyer is never entitled to this interest. 7

13 In many situations, the lawyer will have more than one client's funds in one trust account. The lawyer must allocate interest to each client, which can be very difficult. This is one reason why a COLTAF account is an attractive alternative. All the interest in a COLTAF account goes to COLTAF, thereby avoiding the allocation problem.. Interest Paid to COL TAF Interest on a COLTAF account is paid directly to COLTAF. Colo. RPC 1.15(h) states that a COLTAF account should contain only those funds that are "nominal" in amount or that the lawyer expects to hold for a short period of time with the intent that such funds not earn interest in excess of the reasonably estimated cost of establishing, maintaining, and accounting for trust accounts for the benefit ofclients or third parties. 5. Commingling What is commingling? Colo. RPC 1.15(a) requires that a lawyer keep funds of third parties or clients separate from his or her own funds. A lawyer commingles funds when he or she places client funds or funds of a third party in the same account with his or her own funds. Commingling can occur in trust account or in a business or personal account. Lawyers Cannot Use Trust Accounts for Personal Finances. A lawyer can never use his or her trust account as a personal account for holding or hiding personal assets. Likewise, it would be inappropriate for a law firm to deposit in a trust account the money the firm plans to use on a firm holiday party, for example. Another example of such a problem is a lawyer who has his stock market sales receipts wired into his trust account. Even if there are no client funds in the trust account, meaning that the account has a zero balance, it is still improper to use the trust account as a personal account. Why Is Commingling Prohibited? Commingling places the funds of a client or, a third party at risk. The risk arises because the lawyer's funds can be attached, garnished or seized when the lawyer or the lawyer's estate is responsible to a creditor or heir. If the heir or creditor looks for money belonging to the lawyer and finds it in the lawyer's trust account, then it is quite possible that all of the trust account will be taken until it is determined what portion of the money belongs to the lawyer and what portion belongs to the client or third party. 8

14 As agents of their clients, lawyers cannot do anything to harm or worsen their client's situation. Accordingly, lawyers must keep their money separate from their client's money. In the past, the IRS, among other creditors, has seized lawyer trust accounts containing client funds in order to satisfy the lawyer's debts. The IRS will do this when it discovers that the lawyer has his or her own funds in the trust account. If this occurs, the lawyer must take steps to protect the client's funds; however, it is not uncommon for the lawyer to be out-of-town, unreachable, or mentally incapable of protecting the client funds. Thus, the rule of professional conduct requires that funds of clients or third parties be segregated from the lawyer's own property. Small Amounts to Cover Service Charges, but NO Cushions Colo. RPC 1.15(g) permits a lawyer to keep funds in the trust account reasonably sufficient to pay anticipated service charges or other fees for maintenance or operation of the trust account so long as those funds are clearly identified in the lawyer's records. In other words, a lawyer can deposit and keep a small amount of money in the trust account to cover those charges. However, this allowance does not authorize the lawyer to keep a "cushion" of his/her own money in the account. Some very well-intentioned lawyers have mistakenly thought that they could keep a cushion of ~heir own funds in the trust account in case they made a bookkeeping error and did not have enough money in the trust account. The rules do not allow such a cushion and it is considered to be commingling. To reiterate: a lawyer's trust account can never have more in it than what the lawyer holds for clients or third parties and a small amount to cover service charges. As discussed below, the lawyer should periodically remove amounts for earned fees from the trust account. 6. Advanced Fees, Costs Advanced Fees and Removal ofearned Fees from Trust Accounts Lawyers arrange payment for their services in many different ways. One of the most common payment arrangements is for a lawyer to receive a retainer for wqr.k toe be.done.in the future.. If a.lawyer receives,moneyiil advance for work to be done in the future, he or she must place that money in a trust account. According to Colo. RPC 1.5(f), legal fees are not earned until the lawyer confers 9

15 a benefit on the client or performs a legal service for the client. Accordingly, the lawyer may remove money from a trust account only as it is earned. The same holds for a lawyer who receives a flat fee for work to be done in the future. There are different ways to arrange with a client about when a flat fee is earned in totality or partially. Some lawyers will use an hourly rate to determine when portions of a flat fee are earned. Others will use a 'task-based' method to determine when a portion or the whole fee is earned. Costs: Advanced, and Reimbursed Any time a client gives money to a lawyer to be used for costs in a matter, the lawyer must put those funds in the trust account. When the lawyer uses those funds to pay for costs, the lawyer must write a check on the trust account specifically identifying the date, payee, and purpose of each disbursement. If the lawyer has paid a cost for the client from the lawyer's own funds and then the client pays the lawyer for those costs, the lawyer should deposit those funds into the lawyer's office account, not the trust account. 7. Depositing and Withdrawing Funds from Trust Accounts Lawyers Must Deposit Funds Intact into Trust Accounts Lawyers often receive funds from third parties in which the lawyer has an interest. The most common example of this occurs when a plaintiff's lawyer in a personal injury case receives a settlement check from an insurance company. The lawyer commonly has a contingent fee agreement with the client giving the lawyer a percentage of the settlement proceeds. Before the funds are disbursed, Colo. RPC 1.150)(1) requires that all trust account monies intended for deposit shall be deposited intact, meaning that the entire sum of the check is deposited in the trust account. Depositing the entire sum intact, even though the attorney is owed a portion of the funds, does not constitute commingling according to rule 1.150)(1). Disbursement offunds As soon as the check from the third party, e.g., an insurance company, has cleared his or her bank, then the lawyer should disburse the funds to the client, to those persons who are owed money, such as any experts or court reporters in that case, and to him/herself for legal fees. The lawyer makes this disbursal by making checks to the client and to himself payable to the lawyer's office or professional account for the earned fees. 10

16 Note: a lawyer must understand the terminology used by his or her bank. Banks will allow funds to be withdrawn from an account by check, whether it is a trust account or a regular account, even if. the bank can still reverse the transaction for a missing endorsement or some other problem. A lawyer should not disburse funds from his or her trust "account until such reversal is' not possible. Banks use different terms for this event such as "the funds are available," or "the transaction is complete". Check with your particular bank. 8. Disputes Over Funds in a Trust Account Disputes With A Client If there is a dispute between the lawyer and his or her client regarding the ownership of the money in a trust account, then the lawyer should keep the money in trust and should take timely steps to resolve the dispute. Such a situation occurs, for example, where a lawyer receives an advance retainer of $2,500. A dispute can arise between the lawyer and the client if the lawyer believes that he or she is entitled to take out $1,500 from the advanced retainer in the trust account, but the client has a different point of view, claiming that the lawyer did not do any work. Faced with such a dispute, the lawyer cannot take outthe $1,500. Rather, he or she must leave the money in trust and must take steps to resolve the dispute via negotiation with the client, mediation, or fee arbitration. (In the fee arbitration situation, the lawyer. would probably withdraw under Colo. RPC 1.16; however, he or she is still obligated to resolve the dispute while holding the money in trust.) In the last resort, the lawyer would have to initiate an action to determine who is entitled to the money. If a portion of the amount held in trust is not disputed, then the lawyer should disburse that amount to whomever it is owed. Disputes With Third Parties If a lawyer holds money of a third party in his trust account, and a dispute arises between over what should be done with that money, then the lawyer must ~keep the disputed amount of money in the trust account and take steps to resolve the dispute in a timely manner. Third Party Claims to Funds in a Trust Account Third parties, such as a client's creditors, may have just claims against funds in a trust account. Life can get even more difficult for a lawyer when the lawyer's client c;lisag(e~s with the third party as to how the money should be' distributed: Because the lawyer is a fiduciary to the third party as well as to his or her client, the lawyer may have a duty to protect such third-party claims against wrongful interference by the client. Therefore, the lawyer may refuse to surrender 11

17 the funds or property to the client. When a lawyer has been notified that a third party has an interest in money the lawyer holds or will hold for the benefit of a client, the lawyer must either honor that interest or explicitly and timely inform the interested party ofhis or her intent not to honor the interest. This situation arises most commonly when medical providers notify a lawyer that their medical expenses should be paid out of any settlement for the client. If the dispute between the client and the third party claimant cannot be negotiated or mediated, then the lawyer will have to file an action in the district court and deposit the disputed funds in the registry of the court. The lawyer must act in a timely fashion to get the dispute resolved. 9. Use of Credit Cards for Payments by Clients of Advanced Retainers, Flat Fees or Earned Fees Lawyers in Colorado may accept payment by credit card; however, there are various problems that arise in doing so. The specific agreement that a lawyer has with his or her bank may affect the lawyer's ethical obligations. Payment ofadvanced Fee by Credit Card When a lawyer accepts payment by credit card for advanced fees, those fees must go into the trust account. Some banks will not permit this arrangement. In the event that a bank does not do so, then the lawyer must take immediate steps to see that the funds are transferred to the trust account from the account in which the bank deposits them. Furthermore, banks will usually charge the lawyer a percentage of the credit card amount as a fee. For instance, on a $1,000 charge, the bank may charge the lawyer $40. Generally, such a charge is considered overhead to the lawyer and is not chargeable to the client. (See C.R.S ). Payment offlat Fee by Credit Card If a client pays a flat fee by credit card for work to be done in the future, then all of that payment must be placed in the lawyer's trust account. Because a flat fee for work in the future is equivalent to a payment of an advanced fee, the issues discussed immediately above apply. (Some banks may not allow a lawyer or any vendor to use a credit card for services to be rendered in the future.) Payment ofearned Fees by Credit Card If a lawyer accepts payment of an earned fee by credit card, then that payment must be deposited in the lawyer's professional or office account. If the credit card agreement that the lawyer has with the bank requires deposits into the lawyer's trust account, then the lawyer needs to withdraw the credit card 12

18 payment for earned fees from the trust account as soon as possible and no later than the next billing cycle, presumably within 30 days. Bank Card ~greementswith Lawyers Some banks require that the lawyer sign a merchant agreement that authorizes the bank to reverse a transaction if the "customer" or client objects to the charge. A reversal like this can have serious ethical implications. If the lawyer has already withdrawn funds from the trust account believing that they are earned, a bank reversal from the trust account can result in another client's money being taken. The lawyer who has the bank deposit charges to the trust account must be extremely careful of a reversal. If a reversal occurs, the lawyer in this situation must replace the funds in the trust account immediately so that no other client funds are at risk. 10. Required Accounting Records Colo. RPC 1.150) is very specific as to the records a lawyer must keep relating to trust accounts and to any other bank account associated with the lawyer's practice of law. The lawyer's record keeping system for both the trust account and any accounts that "concern" the lawyer's practice of law, must contain: (1) Appropriate receipt and disbursement records of all deposits in and withdrawals from all trust accounts and any other bank account that concerns the lawyer's practice of law, specifically identifying the date, payor and description of each item deposited as well as the date, payee, and purpose of each disbursement. (2) An appropriate record-keeping system identifying each separate person or entity for whom the lawyer holds money or property in trust, for all trust accounts, showing the payor of all funds deposited in such accounts, the names and addresses of all persons for whom the funds are or were held, the amount of s.uch funds, the description and amounts of charges or withdrawals from such accounts, and the names of all persons to whom any such funds were disbursed; (3) Copies of all retainer and compensation agreements with clients (including written communications setting forth the basis or rate for the fees charged by the lawyer as required by Colo. RPC 1.5(b).; (4) Copies of all statements to clients showing the disbursement of funds to them or on their behalf; (5) Copies of all bills issued to clients; 13

19 (6) Copies of all records showing payments to any persons, not in the lawyer's regular employ, for services rendered or performed; (7) All bank statements and photo static copies or electronic copies of all canceled checks; and, (8) Copies of those portions of each client's case file reasonably necessary for a complete understanding of the financial transactions pertaining thereto. These records must be kept for SEVEN years after the event they record. Note: Banks do not return cancelled checks anymore, and each lawyer must keep a photo static copy or and electronic copy of each trust account check. 11. Delegation of Trust Account Duties It is common practice for a lawyer to delegate the day-to-day bookkeeping duties associated with his or her trust account. Usually, the person to whom the lawyer delegates these duties is a non-lawyer. Although delegating bookkeeping duties is an acceptable practice, the lawyer must remember that he or she cannot delegate the ultimate responsibility for administering- the trust account properly. Accordingly, the lawyer must take steps to properly train and supervise employees who handle the day-to-day trust account duties. Training Others When a lawyer delegates the day-to-day trust account duties, the lawyer must train and educate the person about the proper way to handle client or third party funds. A lawyer should emphasize the importance of keeping client or third party funds separate from the lawyer's or firm's funds. Supervision The lawyer must routinely supervise and check the work of the person in charge of the day-to-day bookkeeping of the trust account. In other words, it is not enough for the lawyer to train someone to run the trust account, and then never review that person's work or procedures again. A non-lawyer may be a signatory on a trust account; however, a lawyer licensed in Colorado must supervise that person. Supervision means that the lawyer must take an active role in overseeing What that hoh-lawyer does. 14

20 Even when the lawyer dele'gates the duties for maintaining the trust account, the lawyer must be directly involved on a no less than monthly basis. At a minimum, the lawyer who delegates should do the following: Review monthly bank statements. Review trust account general ledger and client ledgers monthly. Review images of cancelled checks monthly. o Review the trust account reconciliation monthly. The following reconciliation should be done on a monthly basis: 1) There should be a reconciliation of all the client ledgers against the check register to ensure that: a) Deposits shown in ledger are shown in register. b) Withdrawals in ledger are shown in register. c) Total of client ledgers must equal balance in trust account register. 2) Then the check register should be reconciled against the bank statement by using a normal balancing procedure. Problems ofjunior Attorneys It is not unusual for junior attorneys, whether partners or associates in a law firm, to have no contact with the trust account. Often, a seni9r partner or a firm manager who is supervised by a senior partner controls the management of the trust account. In this situation, it is important for the junior lawyer to realize that for ethical purposes, he or she is still responsible for money they receive from a client or on behalf of a client. For instance, an associate may accept a settlement check from an insurance company on, behalf of a client. That associate must take steps to see that the money is properly deposited into the trust account until disbursed. The associate must ensure that further dealings with the client funds are done properly. Obviously, this can place a junior lawyer in a difficult situation. 12. Pointers on Everyday Trust Account Manage,ment a. Do not sign blank trust account checks. If you do so, you risk someone, fil/ing them in and using them for improper,purposes..., 15

21 b. Receive trust account bank statements unopened. You can then review the statement before someone could tamper with it. c. Checks on the trust account can never be made payable to cash. Checks from the trust account should never be used for the lawyer's personal expenses. d. If you delegate duties, do not have one person responsible for all trust account duties. The person who balances the bank statement should not be the person who writes checks on the account. e. Use different colored checkbook covers for your trust account and your professional account so as not to confuse the two when you are in a hurry. f. Notify the client or third party by bill, letter, or otherwise when you take money you held for them out of trust. g. Trust accounts must be labeled ''TRUST ACCOUNT" or "COLTAF TRUST ACCOUNT." h. Office accounts (business or firm account) must be labeled "PROFESSIONAL ACCOUNT" or "OFFICE ACCOUNT." 13. The Problem of the Missing Client For Whom Lawyer Has Money in Trust Account. Sometimes a lawyer will have money in his or her trust account that belongs to a client or a third party who cannot be found. Colorado Bar Association Formal Ethics Opinion 95 provides thoughtful guidance and states: A lawyer may request in advance, as part of a written retainer agreement, that a client consent to the donation of unexpended funds if the client subsequently cannot be located provided that such consent is given freely and without any pressure exerted upon the client. In the alternative, a lawyer may ethically permit nominal amounts of client funds to remain in his or her COLTAF account. The lawyer may make reasonable expenditures from the fund to attempt to locate the client. If such efforts are unavailing, the lawyer may hold indefinitely in the COLTAF account funds wnich are' nominal in amount. Alternatively, the lawyer may proceed under the Unclaimed Property Act, C.R.S , et seq., to have the 16

22 funds be considered as abandoned property and delivered to the Colorado state treasurer. In the case of funds which are not nominal but are expected to be held for a short period of time, the lawyer may be required to proceed under the Unclaimed Property Act.. 17

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26 RULE SAFEKEEPING PROPERTY General Duties oflawyers Regarding Property ofclients and Third Parties (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 trust account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such funds and other property of clients or third parties shall be kept by the lawyer and shall be preserved for a period of seven years after termination of the representation. (b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall, promptly or otherwise as permitted by law or by agreement with the client or third person, deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, promptly upon request by the client or third person, render a full accounting regarding such property. (c) When in connection with a representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interests, the 'portion in dispute shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute. Required Bank Accounts (d) Every lawyer in private practice in this state shall maintain in a financial institution doing business in Colorado, in the lawyer's own name, or in the name of a partnership of lawyers, or in the name of an entity authorized pursuant to C.R.C.P. 265 of which the lawyer is a member, or in the name of the lawyer or entity by whom the lawyer is employed or with whom the lawyer is associated: (1) A trust account or accounts, separate from any business and personal accounts and from any fiduciary accounts that the lawyer may maintain as executor, guardian, trustee, or receiver, or in any other fiduciary capacity, into which the lawyer shall deposit funds 1

27 entrusted to the lawyer's care and any advance payment of fees that has not been earned or advance payment of expenses that have not been incurred. A lawyer shall not be required to maintain a trust account if the lawyer never receives such funds or payments; and, (2) A business account or accounts into which all funds received for professional services shall be deposited. All business accounts, as well as all deposit slips and all checks drawn thereon, shall be prominently designated as a "professional account" or an "office account". (e) With respect to trust accounts established pl:lrsuant to this Rule: (1) One or more of the trust accounts may be a Colorado Lawyer Trust Account Foundation ("COLTAF") account or accounts, as described in Rule 1.15(h)(2). All COLTAF accounts shall be designated "COLTAF Trust Account." (2) All such trust accounts, whether general or specific, as well as all deposits slips and checks drawn thereon, shall be prominently designated as a "trust account." Nothing herein shall prohibit any additional descriptive designation for a specific trust account. (3) Trust accounts shall be maintained only in financial institutions doing business in Colorado that are approved by the Regulation Counsel based upon policy guidelines adopted by the Board of Trustees of the Colorado Attorneys' Fund for Client Protection. Regulation Counsel shall annually publish a list of such approved institutions. A financial institution shall be approved if it shall file with the Regulation Counsel an agreement, in a form provided, to report to the Regulation Counsel in the event any properly payable trust account instrument is presented against insufficient funds, irrespective of whether the instrument is honored; any such agreement shall apply to all branches of the financial institution and shall not be canceled except on thirty-days notice in writing to the Regulation Counsel. The agreement shall further provide that all reports made by the financial institution shall be in the following format: (1) in the case of a dishonored instrument, the report shall be identical to the overdraft notice customarily forwarded to the depositqr; (2) in the case of an instrument that is presented against insufficient funds but which instrument is honored, the report shall identify the financial institution, the lawyer or law firm, the account number, the date of presentation for payment, and the date paid, as 2

28 well as the amount of the overdraft created thereby. Such reports shall be made simultaneously with, and within the time provided by law for, notice of dishonor, if any; if an instrument presented against insufficient funds is honored, then the report shall be made within five banking days of the date of presentation for payment against insufficient funds. In addition, each financial institution approved by the Regulation Counsel must cooperate with the COLTAF program and must offer a COLTAF account to any lawyer who wishes to open one. In addition to the reports specified above, approved financial institutions shall agree to cooperate fully with the Regulation Counsel and to produce any trust account or business account records on receipt of a subpoena there~ore in connection with any proceeding pursuant to C.R.C.P Nothing herein shall preclude a financial institution from charging a lawyer or law firm for the reasonable cost of producing the reports and records required by this Rule, but such charges shall not be a transaction cost to be charged against funds payable to the COLTAF program. Every lawyer or law firm maintaining a trust account in this state shall, as a condition thereof, be conclusively deemed to have consented to the reporting and production requirements by financial institutions mandated by this Rule and shall indemnify and hold harmless the financial institution for its compliance with such reporting and production requirement. A financial institution shall be immune from suit arising out of its actions or omissions in reporting.overdrafts or insufficient funds or producing documents under this Rule. The agreement entered into by a financial institution with the Regulation Counsel shall not be deemed to create a duty to exercise a standard of care and shall not constitute a contract for the benefit of any third parties that may sustain a loss as a result of lawyers overdrawing lawyer trust accounts. (4) The name of institutions in which such accounts are maintained and identification numbers of each account shall be recorded on a statement filed with the annual attorney registration payment pursuant to C.R.C.P. 227(2). Such information shall be available for use in accordance with paragraph 0) of this Rule. For each COLTAF account, the statement shall indicate the account number, the name the account is under, and the depository institution. Trust Account Requirements and Management; COL TAF Accounts (f) All trust accounts shall be maintained in interest-bearing, insured depository accounts; provided, that with the consent of the client or third 3

29 person whose funds are in the account, an account in which interest is paid to the client or third person need not be an insured depository account. All COLTAF accounts shall be insured depository accounts. For the purpose of this Rule, "insured depository accounts" shall mean government insured accounts at a regulated financial institution, on which withdrawals or transfers can be made on demand, subject only to any notice period which the institution is required to reserve by law or regulation. (g) A lawyer may deposit funds reasonably sufficient to pay anticipated service charges or other fees for maintenance or operation of such account into trust accounts. Such funds shall. be clearly identified in the lawyer's records of the account. (h) COLTAF Accounts: (1) Except as may be prescribed by subparagraph (2) below, interest earned on accounts in which the funds are deposited (less any deduction for service charges or fees of the depository institution) shall belong to the clients or third persons whose funds have been so deposited; and the lawyer or law firm shall have no right or claim to such interest. (2) If the funds are not held in accounts with the interest paid to clients or third persons as provided in subsection (h)(1) of this Rule, a lawyer or law firm shall establish a COLTAF account, which is a pooled interest-bearing insured depository account for funds of clients or third persons that are nominal in amount or are expected to be held for a short period of time in compliance with the following provisions: (a) No interest from such an account shall be payable to a lawyer or law firm. (b) The account shall include funds of clients or third persons that are nominal in amount or are expected to be held for a short period of time with the intent that such funds not earn interest in excess of the reasonably estimated cost of establishing, maintaining and accounting for trust accounts for the benefit of such clients or third parties. (c) A lawyer or law firm depositing funds in a COLTAF account shall direct the depository institution: 4

30 (i) To remit interest, net of service charges or fees, if any are charged, computed in accordance with the institution's standard accounting practice, at least quarterly, to COLTAF; and (ii) To transmit with each remittance to COLTAF a statement showing the name of the lawyer or law firm on whose account the remittance is sent and the rate of interest applied. (d) The provisions of this subparagraph (h)(2) shall not apply in those instances where it is not feasible to establish a trust account for the benefit of COLTAF for reasons beyond the control of the lawyer or law firm, such as the unavailability of a financial institution in the community that offers such an account. (3) If a lawyer or law firm discovers that funds of any client or third person have mistakenly been held in a trust account for the benefit of COLTAF in a sufficient amount or for a sufficiently long time so that interest on the funds being held in such account exceeds the reasonably estimated cost of establishing, maintaining and accounting for a trust account for the benefit of such client or third person (including without limitation administrative costs of the lawyer or law firm, bank service charges, and costs of preparing tax reports of such income to the client or third person) the lawyer or law firm shall request COLTAF to calculate and remit trust account interest already received by it to the lawyer or law firm for the benefit of such client or third person in accordance with written procedures that COLTAF shall publish and make available through its website and shall provide to any lawyer or law firm upon request. (4) Information necessary to determine compliance or justifiable reasons for noncompliance with subparagraph (h)(2) shall be included in the annual attorney registration statement. COLTAF shall assist the Colorado Supreme Court in determining whether lawyers or law firms have complied in establishing the trust account required under subparagraph (h)(2). If it appears that a lawyer or law firm has not complied where it is feasible to do so, the matter may be referred to the Regulation Counsel for investigation and' proceedings in accordance with C.R.C.P

31 (i) Management oftmst Accolmts. (1) ATM or Debit Cards. A lawyer shall not use any debit card or automated teller machine card to withdraw funds from a tmst account. (2) All tmst account withdrawals and transfers shall be made only by a lawyer admitted to practice law in this state or by a person supervised by such lawyer and may be made only by authorized bank or wire transfer or by check payable to a named payee. (3) Cash withdrawals and checks made payable to "Cash" are prohibited. (4) Cancelled Checks. A lawyer shall request that the lawyer's tmst account bank return to the lawyer, photo static or electronic images ofcancelled checks written on the tmst account. Ifthe bank provides electronic images, the lawyer shall either maintain paper copies ofthe electronic images or maintain the electronic images in readily obtainable format. (5) Persons Authorized to Sign. Only a lawyer admitted to practice law in this state or a person supervised by such lawyer shall be an authorized signatory on a tmst account; (6) Reconciliation oftmst Accounts. No less than quarterly, a lawyer shall reconcile the tmst account records both as to individual clients and in the aggregate with the lawyer's tmst accolmt bank statement(s). Required Accounting Records; Retention of Records; Availability of Records U) A lawyer, whether practicing as a sale practitioner, in a partnership, or through an entity authorized pursuant to C.R.C.P. 265, shall maintain in a current status and retain for a period of seven years after the event that they record: (1) Appropriate receipt and disbursement records of all deposits in and withdrawals from all trust accounts and any other bank account that concerns the lawyer's practice of law, specifically identifying the date, payor and description of each item deposited as well as the date, payee, and purpose of each disbursement. All trust account monies intended for deposit shall be deposited intact without deductions or "cash out" from the deposit and the duplicate deposit slip that evidences the deposit must be sufficiently detailed to identify each item deposited; 6

32 (2) An appropriate record-keeping system identifying each separate person or entity for whom the lawyer holds money or property in trust, for all trust accounts, showing the payor of all funds deposited in such accounts, the names and addresses of all persons for whom the funds are or were held, the amount of such funds, the description and amounts of charges or withdrawals from such accounts, and the names of all persons to whom any such funds were disbursed; (3) Copies of all retainer and compensation agreements with clients (including written communications setting forth the basis or rate for the fees charged by the lawyer as requir~d by Rule 1.5(b); (4) Copies of all statements to clients showing the disbursement of funds to them or on their behalf; (5) Copies of all bills issued to clients; (6) Copies of all records showing payments to any persons, not in the lawyer's regular employ, for services rendered or performed; (7) All bank statements and photo static copies or electronic copies of all canceled checks; and, (8) Copies of those portions of each client's case file reasonably necessary for a complete understanding of the financial transactions pertaining thereto. (k) The financial books and other records required by this Rule shall be maintained in accordance with one or more of the following recognized accounting methods: the accrual method, the cash basis method, and the income tax method. All such accounting methods shall be consistently applied. Bookkeeping records may be maintained by computer provided they otherwise comply with this Rule and provided further that printed copies can be made on demand in accordance with this Rule. They shall be located at the principal Colorado office of each lawyer, partnership, professional corporation, or limited liability corporation. (I) Dissolutions. Upon the dissolution of any partnership of lawyers or of any. professional corporation or limited liability corporation, the former partners or shareholders shall make appropriate arrangements for the maintenance by one of them or by a successor firm of the records specified in subsection 0) of this Rule. 7

33 (m) Availability Of Records. Any of the records required to be kept by this Rule shall be produced in response to a subpoena duces tecum issued by the Regulation Counsel in connection with proceedings pursuant to C.R.C.P When so produced, all such records shall remain confidential except for the purposes of the particular proceeding and their contents shall not be disclosed by anyone in such a way as to violate the attorney-client privilege of the lawyer's client. 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 should be kept separate from the lawyer's business and personal property and, if monies, in one or more trust accounts. [2] Trust accounts containing funds of clients or third persons held in connection with a representation must be interest-bearing for the benefit of the client or third person or for the benefit of the Colorado Lawyer Trust Account Foundation where the funds are nominal in amount or expected to be held for a short period of time. A lawyer should exercise good faith judgment in determining initially whether funds are of such nominal amount or are expected to be held by the lawyer for such a short period of time that the funds should not be placed in an interest-bearing account for the benefit of the client or third person. The lawyer should also consider such other factors as (i) the costs of establishing and maintaining the account, service charges, accounting fees, and tax report procedures; (ii) the nature of the transaction(s) involved; and (iii) the likelihood of delay in the relevant proceedings. A lawyer should review at reasonable intervals whether changed circumstances require further action respecting the deposit of such funds, including without limitation the action described in subparagraph 1.15(h)(3). [3] Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities. [4] Lawyers often receive funds from third parties from which the lawyer's fee will be paid. If there is risk that the client may divert funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds should be kept in trust and the lawyer should suggest means for 8