Understanding Law FirmOperations & Client Funds – VAL34Nancy Duhon, Esq.

Duhon Technology Solutions, LLC

*With special thanks and collaboration credit to

Deanne Ikard of Ikard Consulting

CPE Credit• In order to receive CPE credit for this session you must

be present for the entire session. – Session code: VAL34

– Recommended CPE credit = 1.5

– Delivery Method = Group Live

– Field of Study = Specialized Knowledge and Applications

• Visit the Continuing Professional Education kiosks to enter CPE credit during the conference.

Preliminaries• This presentation will be available online after the

conference. You will receive an email for the Insights session Website approximately 4 weeks after Insights.

Learning Objectives

After participating in this session, you will be able to:

• Understand the daily operations of a law firm to help you better prepare and properly implement accounting and billing software.

• Understand common law firm procedures and attitudes unique to law firm culture.

• Set up and reconcile IOLTA/Funds/Trust accounts.

Key Concepts and Terms

• IOLTA – Interest on Lawyer’s Trust Account

• ALA – Association of Legal Administrators

• ABA – American Bar Association

What Makes Law Firm Billing Special?

• Details, details, details.

• Various fee arrangements

• “Lawyer-think”

• Trust Accounting/IOLTA

They’ve Come To The Expert

• You are prepared to present the features of Timeslips that will best suit the client’s needs and offer suggestions to improve their practice.

• You are the expert witness.

Attorney Client Privilege and Confidentiality

• For an attorney to represent someone effectively, they need to know ALL the gory details.

• They, their staff, and YOU, then have an ethical obligation to safeguard those client secrets from others.

Initial Questions• #1 What type(s) of law do you

practice?

• #2 How do you plan to divide the profits?

• #3 What do you want your bill to look like?

• #4 Do you have an IOLTA account or take retainers?

Practice Areas and How They Bill

Straight Hourly – by the value of the slip (hours x rate). Common with:

• Family Law (Divorce, Custody, Support)

• Business/Civil Litigation

• Insurance Defense

– The firms that work for the insurance companies

• Anything else that’s not a niche practice.

Practice Areas and How They Bill

Straight Hourly – by the value of the slip (hours x rate)

• May also involve a prepaid deposit/retainer that is billed against on an hourly basis

– ALWAYS in Family Law

– Most law firms underutilize the replenish feature. Also known as an “evergreen retainer.”

• Bills have a high degree of detail on them.

Practice Areas and How They Bill

Flat Fee – usually an Absolute Flat Fee (amount is $X no matter how much time accrues). Common with:

• Trusts and Estates – Simple Wills, Powers of Attorney, Health Care POA

• Business Incorporations

• Immigration

• Real Estate Closings

• Bankruptcy

Practice Areas and How They BillFlat Fee – usually an Absolute Flat Fee (amount is $X no

matter how much time accrues)

• You can probably disable most of the other flat fee types under Features Enabled.

• Criminal Defense is a slightly different variation

– ALWAYS paid up front before work begins.

Practice Areas and How They BillContingency – a flat amount that will be determined at the

END of the representation. Common with:

• Personal Injury

• Workers Compensation

• Medical Malpractice

• Class Actions

• Any kind of Speculative Litigation

Practice Areas and How They Bill

Contingency – a flat amount that will be determined at the END of the representation.

• VERY misunderstood by most Timeslips users.

• Expenses CAN be billed directly during the case.

• Many won’t send any bill out until the very end of the case.

Practice Areas and How They Bill

Split Billing – tracked hourly, but split between multiple parties for payment. Common with:

• Guardian Ad Litem/Special Guardian – court appoints an attorney to represent the kids in a divorce situation

• Mediators/Arbitrators – often former judges who are hearing/deciding the case privately.

• Insurance Defense – where more than one policy may apply if a judgment is entered.

Mental Cases – insights into “legal think”

• “Lawyer mentality” can really frustrate us as consultants.

• Whether law firms really are an entirely different species of business, THEY think that they are.

• If you’re going to have lawyers and law firms as clients, you need to appreciate what is unique or different about them.

“Hmm, this is an interesting new problem. How should we resolve this?”

Lawyers are trained to look BACKWARDS for answers

X

Lawyers are trained to look BACKWARDS for answers

“Hmm, I wonder how this issue has been decided in the past? Let’s do it the same way today!”

The Concept of Precedent• 1) a) An act or instance that may be used as

an example in dealing with subsequent similar instances.

• 1) b) Law A judicial decision that may be used as a standard in subsequent similar cases: a landmark decision that set a legal precedent.

• 2) Convention or custom arising from long practice: The President followed historical precedent in forming the Cabinet.

The Concept of Precedent

• The Doctrine of Stare Decisis

Main Entry: sta·re de·ci·sisPronunciation: 'ster-E-di-'sI-sis, 'stär-E-; 'stä-rA-dA-'kE-sEsFunction: nounEtymology: New Latin, to stand by things that have been settled: the doctrine under which courts adhere to precedent on questions of law in order to insure certainty, consistency, and stability in the administration of justice with departure from precedent permitted for compelling reasons (as to prevent the perpetuation of injustice)

Merriam-Webster's Dictionary of Law, © 1996 Merriam-Webster, Inc.

The Concept of Precedent

• The Doctrine of Stare Decisis

Main Entry: sta·re de·ci·sisPronunciation: 'ster-E-di-'sI-sis, 'stär-E-; 'stä-rA-dA-'kE-sEsFunction: nounEtymology: New Latin, to stand by things that have been settled: the doctrine under which courts adhere to precedent on questions of law in order to insure certainty, consistency, and stability in the administration of justice with departure from precedent permitted for compelling reasons (as to prevent the perpetuation of injustice)

Merriam-Webster's Dictionary of Law, © 1996 Merriam-Webster, Inc.

The Concept of Precedent

• The Doctrine of Stare Decisis

Main Entry: sta·re de·ci·sisPronunciation: 'ster-E-di-'sI-sis, 'stär-E-; 'stä-rA-dA-'kE-sEsFunction: nounEtymology: New Latin, to stand by things that have been settled: the doctrine under which courts adhere to precedent on questions of law in order to insure certainty, consistency, and stability in the administration of justice with departure from precedent permitted for compelling reasons (as to prevent the perpetuation of injustice)

Merriam-Webster's Dictionary of Law, © 1996 Merriam-Webster, Inc.

The Concept of Precedent

• The Doctrine of Stare Decisis

Main Entry: sta·re de·ci·sisPronunciation: 'ster-E-di-'sI-sis, 'stär-E-; 'stä-rA-dA-'kE-sEsFunction: nounEtymology: New Latin, to stand by things that have been settled: the doctrine under which courts adhere to precedent on questions of law in order to insure certainty, consistency, and stability in the administration of justice with departure from precedent permitted

for compelling reasons (as to prevent the perpetuation of injustice)

Merriam-Webster's Dictionary of Law, © 1996 Merriam-Webster, Inc.

The Concept of Precedent

• When you are suggesting a change to a law firm, you are essentially asking them to deviate from the established precedent.

• You better have a “compelling reason” as to why that change should happen.

– It can’t just be a different way

– It has to be a much better way.

Risk Aversion

• Lawyers are incredibly risk averse. This is because lawyers are trained to look for the hidden pitfalls/opportunities for liability.

• In the law, you never want to be what is called a a case of first impression. Why?

– There is no precedent!

– That’s “risky” because no one knows, or can predict the outcome.

Liability

• The first thing any lawyer seeks to do when situations go awry is:

– establish liability.

– Essentially, it’s a quest to find out who will be held responsible for paying for this screw-up.

• Our challenge as consultants is to get them refocused on solving the problem.

Personnel Issues

Personnel Issues

• 1-3 attorneys

• Usually appoint a powerful paralegal to handle the office stuff - occasionally you will get a micro managing lawyer who also wants to do this.

Personnel Issues

• These firms also are prone to entrusting the billing and accounting functions of their business to a receptionist from the local high school, or the managing partner's wife/son/daughter.

Personnel Issues• 4 - 20 attorneys

Personnel Issues

• Usually have the 'Office Manager' or 'Controller' or 'Law Office Administrator' and possibly a billing person.

• Almost always a conflict between a billing person and the office manager when they are not embodied in the same person.

Personnel Issues

• 20 or more attorneys

Personnel Issues

• 20 or more attorneys

• Accounting Department with – Controller AND – Office Manager AND

– Billing Department

Client Costs Advanced - Hard vs. Soft Costs

• Hard Costs = payments made to 3rd party vendors

• Soft Costs = charge backs for things like photocopies, fax and postage where the firm didn’t write a specific check.

• IRS treats Costs Advanced as a Loan Receivable, NOT merely an expense.

Law Practice Management Advisors

• Employees of your individual state bar.

– HIGHLY influential.

• Not all states have them, but the trend is growing. Check your state bar website if you don’t know.

• What does this mean for you?

– KNOW their names, BE NICE to them

– They can both help or hurt you.

IOLTA

• Interest On Lawyer’s Trust Accounts

• www.iolta.org is a great place to go for links to all the state programs.

– Each program is state specific, and rules do differ by jurisdiction, but many of them share similar features.

– You should contact all the states where you consult and ask if they have any materials for you.

IOLTA

• The idea is to allow lawyers/firms to take $$$ from multiple clients, and hold it in a single bank account instead of opening a separate account for each client.

• Exception: ***IF a deposit is large enough that it could earn enough interest to pay the monthly bank charge and still increase in value, then that deposit MUST be put in a separate account.

IOLTA

• Interest earned on the $$$ goes directly to a state bar fund. – The bank transfers it directly, the firm doesn’t write a

check.

• However, the funds are considered a form of a trust and therefore are subject to all of the laws, rules, duties and regulations regarding trusts.– These are the requirements that get lawyers in trouble

and disbarred.

Trusts 101

Definition of a Trust

• The confidence reposed in a trustee when giving the trustee legal title to property to administer for another, together with the trustee's obligation regarding that property and the beneficiary.

Trusts 101

Trusts 101

Trusts 101

Trusts 101

Trusts 101

Trusts 101

Trusts 101

Trusts 101

DonMoney

Trudy

Ben

Trusts 101

DonBook

Trudy

Ben

Trusts 101

DonPocket Watch

Trudy

Ben

Trusts 101

DonMoney

Trudy

Ben

Trusts 101 - Legalese

Donor/Settlor

Res

Trustee

Third Party Beneficiary(TPBene)

Fiduciary Duties

• Duty of Care

– Must care for and protect the Res, and not waste it.

– Must not do anything with it that is contrary to the terms of the trust.

• Duty of Loyalty

– Must subvert their own interests to that of the Beneficiary.

Conflict of Interest

• The Trustee must always act:

– in the interest of the Beneficiary,

– never in a way that would create a conflict either with him/herself

– or with another Beneficiary.

• This is the fundamental problem with IOLTA funds. The potential for a conflict of interest is serious.

Trusts 101 – How does it relate to retainers?

Donor/Settlor

Res

Trustee

Third Party Beneficiary(TPBene)

Trusts 101 – How does it relate to retainers?

Sue/Client

Res

Trudy/Trustee

Trusts 101 – How does it relate to retainers?

Sue/Client

Res

Trudy/Trustee

Third Party Beneficiary(TPBene)

Potential TPBenes

Potential Conflict of Interest

Potential Conflict of Interest

Trudy as Trustee Trudy as Beneficiary

Trusts 101 – How does it relate to retainers?

ClientRes

Trudy/Trustee

Third Party Beneficiary(TPBene)

How Does That Translate to Timeslips?

Res

= Client Funds/Account

Failing to Use Client Funds Transactions

• Possible to simply enter a A/R Payment.

• No reporting available.

• NO WAY to reconcile with the bank.

• Negative A/R numbers drive the accountants nuts.

• It is NOT technically unethical or a violation of the bar/IOLTA rules to do so.

Using Client Funds to Track IOLTA

• Only four Funds transactions.

• Two for increasing the balance:

– Payment to Account

– Deposit (to Account)

• Two for decreasing the balance:

– Payment from Account

– Withdrawal (from Account)

The IOLTA account checkbook

• Track as a separate checking account

• Do not use the transfer function in your accounting program to pay firm

• Debit/credit the bank account and the opposing debit/credit is ALWAYS to Client Trust Liability

The IOLTA account checkbook

• Reconcile every month.– Against the bank

– THEN against Timeslips

• Bank Account and Trust Liability must be the same, and balance to Timeslips Funds Account total.

Payment To Account

• This should be used when the CLIENT (and only the client) gives the firm trust/retainer money.

• It will have the effect only of increasing the amount of client funds.

• You should have a corresponding bank deposit item.

Deposit • This is similar to the Payment to Account, except the deposit is coming from a third party source, such as a settlement check from an insurance company.

• It also has the effect only of increasing the amount of client funds.

• You should have a corresponding bank deposit item.

Payment From Account

• This transaction is how you pay your firm with funds in the IOLTA account.

• This transaction will deduct the amount from the client's funds, and reduce the A/R balance due to the firm.

• You should have either a corresponding IOLTA check payable to the firm, or a wire transfer into your bank account.

Withdrawal• Used to reflect ANY type of payment out of

the client funds account that is NOT a payment to the firm.

• It only has the effect of decreasing the amount of client funds.

• You should have either a corresponding IOLTA check payable to anyone OTHER than the firm, or a wire transfer out of your IOLTA bank account.

A Little Graphic Help

Fund Reports

• Funds With Running Balances = The firm’s ledger as to how much of the IOLTA bank account money belongs to each client.

– You should run it every month after balancing the checking account against the bank statement.

– Balance the Timeslips report against the reconciled checking account balance.

Funds Reports

• Negative Funds Balances are NOT a good thing. You have overdrawn an individual client’s account. This is a red flag to a bar auditor.

Tips Re: Using Client Funds

• It is highly unusual to need more than one bank account.

• Don’t bother changing the account name, just edit Phrases in the layout file so it doesn’t use the token.

Tips Re: Using Client Funds

• Ensure the default value for whether to show Client Funds on a client’s bill is set to DETAIL on the firm’s default new client template, AND that those settings are inherited by new entries.

• These settings cannot be exported.

Tips Re: Using Client Funds

•Automatically pay new charges on a bill should ONLY be checked when the person fully understands the importance of doing so. I.e., uncheck it for beginners.

Set up your evergreen retainer triggers here.

Example of Personal Injury Settlement

Summary

• Having law firms as clients can add extra stress to your already harried consulting practice.

• Being able to speak their language and understand their unique needs and obligations can assist you in achieving successful implementations.

• Remember IOLTA isn’t that hard, and you’re there to help!

Because In The End,

We Really Just Want It To All Reconcile

Questions?

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