Chapter 4. Ethics & Professionalism - Trust Accounts
A high percentage of State Bar discipline cases arise from mismanagement of trust accounts, particularly among financially stressed sole practitioners who may be tempted to “borrow” from client funds, and thus step onto a slippery slope that can lead to disbarment, disgrace, and disaster. Thus, close adherence to Rule of Professional Conduct 1.15 is not just a matter of what should be done. It is a matter of professional survival.
Many practitioners delegate bookkeeping duties to an employee. Where this is done, it is important to make sure the employee is well trained in trust account rules and procedures. A lawyer should not assume that a staff person with long experience in another firm has any understanding of ethical rules regarding trust accounts or of accounting procedures. Either the attorney or an outside accountant should review or audit the account on a regular schedule.
Rule 1.15(I) requires that a lawyer maintain a separately identified trust account in an approved institution, and maintain records of trust account funds for at least six years. It requires that a lawyer hold property of clients or third persons in a separate account maintained in an approved institution and maintain complete records of such account funds for six years after termination of the representation. Of particular concern for personal injury lawyers dealing with health insurance lien claims are the following paragraphs:
(b) For the purposes of this Rule, a lawyer may not disregard a third person's interest in funds or other property in the lawyer's possession if:
(1) the interest is known to the lawyer, and
(2) the interest is based upon one of the following:
(i) A statutory lien;
(ii) A final judgment addressing disposition of those funds or property; or
(iii) A written agreement by the client or the lawyer on behalf of the client guaranteeing payment out of those funds or property.
(b) The lawyer may disregard the third person's claimed interest if the lawyer reasonably concludes that there is a valid defense to such lien, judgment, or agreement.
(c) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, 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 accounting regarding such property.
(d) When in the course of representation a lawyer is in possession of funds or other property in which both the lawyer and a client or a third person 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
This rule was amended in late 20111 to provide clarification as to which third-party interests must be protected. The language was adapted from an ethics rulings in Connecticut.2 Unlike the prior version of the Rule, the current version places an affirmative duty on attorneys only where there is a statutory lien, judgment, or written agreement to pay a third party from the proceeds of a verdict or settlement. While this is a substantial improvement from the prior law, attorneys must still be diligent in determining whether any claims made by third parties fall within the categories set forth in the Rule, and if so, taking appropriate actions, including filing an interpleader, if a dispute remains as to claim proceeds.
There is no case law interpreting the interaction between this new rule and the treatment of subrogation and reimbursement claims under O.C.G.A. §§33-24-56.1 (medical insurance/benefits subrogation) and 34-9-11.1 (workers' compensation subrogation). However, the lead author of this book was a drafter of both the new version of Rule 1.15(I) and the first draft of what is now O.C.G.A. §33-24-56.1. An attorney may argue that because both statutes require that the claimant be completely compensated before an insurer or other benefit provider is entitled to reimbursement, the attorney can disburse the settlement proceeds without paying the insurer or interpleading the disputed funds (assuming, of course, that the facts support a reasonable conclusion that the insurer would not be likely to recover on the claim). This does not, however, affect the legal enforceability of any such alleged lien, which could still attach to any recovery to the extent that the lienholder could prove the claimant was made whole, notwithstanding that the rule, as revised, offers protection to the attorney from an ethical standpoint. Where state law is preempted by virtue of ERISA, however, a health benefits plan's reimbursement provisions could be deemed an agreement and thus be subject to the rule requiring the third-party's interests to be protected, at least where the client specifically agreed to reimbursement. There is room for debate whether boilerplate language in a summary plan description to which the client did not specifically agree would be construed as such an agreement, though it may not be safe to assume that a court would not so construe it.3 Neither the rule nor its comments provide express guidance as to these issues and therefore attorneys should continue to be cautious when third parties assert claims against a client's settlement proceeds.
Rule 1.15(II) sets forth detailed rules regarding segregation of trust account funds from private funds of the lawyer. It provides that “all client's funds shall be placed in either an interest-bearing account with the interest being paid to the client or an interest-bearing (IOLTA) account with the interest being paid to the Georgia Bar Foundation.” Funds which are not nominal in amount, or are not to be held for a short period of time, should be placed in an interest bearing account with the income going to the client. The lawyer may open a separate account for each client whose funds will be held in this manner, or may use a pooled account. For funds which are nominal in amount or are to be held for a short period of time, a lawyer shall, with or without notice to the client, place the funds in an IOLTA account. In either situation, interest on client funds may not inure to the benefit of the lawyer or law firm.
If a client has paid a retainer for hourly billings or made a deposit for litigation expenses, such funds must be held in the lawyer's trust account, and may be removed from the trust account fees on a regular basis which coincides with the lawyer's billing cycles.
Rule 1.5(III) requires that all such accounts, whether general or specific, must be denominated as an “Attorney Trust Account,” “Attorney Escrow Account,” or “Attorney Fiduciary Account.” This must be kept separate from the lawyer's business accounts, which may be designated as a “Business Account,” “Professional Account,” “Office Account,” “General Account,” “Payroll Account,” “Operating Account,” or “Regular Account.” A lawyer may also use other descriptions or designations for a specific business or trust account including fiduciary accounts maintained by the lawyer as executor, guardian, trustee, receiver, agent, or in any other fiduciary capacity.
Just as a real estate or foreclosure attorney may maintain multiple escrow accounts for different mortgage company clients, a plaintiffs' personal injury lawyer may need to maintain two or more trust accounts, e.g., an “IOLTA Attorney Trust Account” for routine processing of settlements where the funds will be held for only long enough to clear checks and disburse proceeds, and a separate “Non-IOLTA Attorney Trust Account” for pooled funds held for a longer time on behalf of clients. Alternatively, if a very significant amount of one client's funds must be held for a substantial period of time, and this occurs only occasionally, the lawyer may prefer to simplify record keeping by opening a separate account for that client's funds, e.g., “Attorney Trust Account for File #10-0516” or “Attorney Trust Account for Jones Case.”
Plaintiffs' personal injury lawyers typically hold client funds for only a very short time, usually ten days or less, so routine use of the IOLTA account is appropriate. But if funds must be held for a longer time, as in situations where all or part of a substantial recovery must be held pending entry of a court order regarding allocation of a wrongful death recovery between estranged parents of a decedent, or establishment of a trust or guardianship, the interest to be earned on such funds may be significant enough to require use of a non-IOLTA account. Interest rates at the time of settlement may be considered in determining whether it is worthwhile to establish such a separate account.
IOLTA accounts must be maintained in an approved financial institution. A list of approved institutions that have agreed to follow the IOLTA rules is maintained by the State Bar of Georgia and can be found on the State Bar's web site.4
All trust accounts are subject to an “audit for cause” by the State Disciplinary Board.5 While an earlier proposal for random audits was rejected, the Rule authorizes audits when information comes to light regarding potential harm from misuse of client funds. Such information may be developed when a bank reports that IOLTA account checks are used to pay the lawyer's own bills, that IOLTA checks are returned due to insufficient funds, or when an incredibly self-destructive lawyer uses a trust account check to pay State Bar dues. The audit requirement is intended to uncover errors and omissions before the public is harmed, deter those lawyers who may be tempted to misuse client's funds, and educate and instruct lawyers as to proper trust accounting methods. An audit for cause may be conducted at any time and without advance notice if the Office of General Counsel receives sufficient evidence that a lawyer poses a threat of harm to clients or the public, with approval from the Chairman of the Investigative Panel of the State Disciplinary Board and the President-Elect of the State Bar of Georgia.
1 The Rule reproduced here is the current Rule, as amended.
2 Connecticut Bar Assn. Committee on Professional Ethics, Informal Opinion No. 99-41 (9/17/1999).
3 See §§9:5 et seq., infra.
4 State Bar of Georgia, IOLTA Approved Banks, http://www.gabar.org/attorneyresources/upload/iolta_approved_banks.pdf.
5 See State Bar of Georgia, Rules of Professional Conduct, Rule 1.15(III) and cmt. 4, 5.