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A New Lawyer’s Guide to Interest on Lawyer Trust Accounts (IOLTA)

Charity Anastasio Practice Management Advisor

Practice & Professionalism Center American Immigration Lawyers Association

canastasio@aila.org | 202-507-7624 July 31, 2018

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Table of Contents Introduction ............................................................................................................................................................................ 3

Model Rule 1.15 Safekeeping Property .................................................................................................................................. 3

MR 1.15 Safekeeping Property - Comments ........................................................................................................................... 4

MR 1.5 Fees ............................................................................................................................................................................. 5

MR 1.5 Fees - Comment .......................................................................................................................................................... 6

How to Open an IOLTA ............................................................................................................................................................ 8

Lawyer Trust Account Procedures .......................................................................................................................................... 9

What goes in? ..................................................................................................................................................................... 9

What comes out? .............................................................................................................................................................. 10

What is a “reasonable time”? ........................................................................................................................................... 10

Where do I put a “hybrid fee”? ......................................................................................................................................... 11

Can I put fees from credit cards, PayPal, and Venmo in my IOLTA? ................................................................................. 11

Opening IOLTA Checklist ....................................................................................................................................................... 11

Where the Money Goes Checklist ........................................................................................................................................ 12

More Complicated Lawyer Trust Account Issues .................................................................................................................. 12

What if I accidentally overdraw my IOLTA? ...................................................................................................................... 12

What if discipline counsel contacts me and requests an accounting of my IOLTA? ......................................................... 13

What if I receive fees from a different jurisdiction than I am barred in? ......................................................................... 13

What if there is a dispute about who is entitled to a refund? .......................................................................................... 14

Who gets the refund when the deposit was paid by a third party? ................................................................................. 14

Select Resources ................................................................................................................................................................... 15

Arizona .............................................................................................................................................................................. 15

California ........................................................................................................................................................................... 15

Florida ............................................................................................................................................................................... 15

Illinois ................................................................................................................................................................................ 15

Michigan ............................................................................................................................................................................ 15

New York ........................................................................................................................................................................... 15

North Carolina ................................................................................................................................................................... 15

Oregon .............................................................................................................................................................................. 16

Pennsylvania ..................................................................................................................................................................... 16

Texas ................................................................................................................................................................................. 16

Washington D.C. ............................................................................................................................................................... 16

Washington ....................................................................................................................................................................... 16

Virginia .............................................................................................................................................................................. 16

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Introduction The Interest on Lawyer Trust Account (IOLTA) became a thing in the 1980s. They were designed to hold client funds when the amount each client was giving would not justify a separate account, but the money wasn’t earned by the lawyer yet or was for costs in the case. There are a few different types of IOLTA. For example, a Pooled IOLTA just means that to the bank, that account is one big one with many sub-accounts. The interest on these accounts usually goes to fund pro bono efforts. Some jurisdictions have special deals with certain financial institutions to give a higher interest rate, as a way for lawyers to do some good passively (e.g. Maryland Honor Roll). In all jurisdictions, there is an agreement between the disciplining body and the financial institution that the latter will report insufficient funds to the former, as well as the lawyer. The Rules of Professional Conduct (RPCs) that govern IOLTAs is primarily Model Rule 1.15, Safekeeping Property, secondarily 1.5, Fees, and often additional statutes both in and out of the RPCs of each jurisdiction that govern the management and lawyer reporting about the accounts.

Model 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 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 account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five 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. (d) 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. (e) When in the course of 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 the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

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MR 1.15 Safekeeping Property - Comments [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. See, e.g., Model Rules for Client Trust Account Records. [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. [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 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. [4] Paragraph (e) also recognizes that third parties may have lawful claims against specific 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 claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are 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] A lawyers' fund for client protection provides a means through the collective efforts of the bar to reimburse persons who have lost money or property as a result of dishonest conduct of a lawyer. Where such a fund has been established, a lawyer must participate where it is mandatory, and, even when it is voluntary, the lawyer should participate.

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MR 1.5 Fees (a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent. (b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client. (c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination. (d) A lawyer shall not enter into an arrangement for, charge, or collect:

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(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or (2) a contingent fee for representing a defendant in a criminal case. (e) A division of a fee between lawyers who are not in the same firm may be made only if: (1) the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation; (2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and (3) the total fee is reasonable.

MR 1.5 Fees - Comment Reasonableness of Fee and Expenses [1] Paragraph (a) requires that lawyers charge fees that are reasonable under the circumstances. The factors specified in (1) through (8) are not exclusive. Nor will each factor be relevant in each instance. Paragraph (a) also requires that expenses for which the client will be charged must be reasonable. A lawyer may seek reimbursement for the cost of services performed in-house, such as copying, or for other expenses incurred in-house, such as telephone charges, either by charging a reasonable amount to which the client has agreed in advance or by charging an amount that reasonably reflects the cost incurred by the lawyer. Basis or Rate of Fee [2] When the lawyer has regularly represented a client, they ordinarily will have evolved an understanding concerning the basis or rate of the fee and the expenses for which the client will be responsible. In a new client-lawyer relationship, however, an understanding as to fees and expenses must be promptly established. Generally, it is desirable to furnish the client with at least a simple memorandum or copy of the lawyer's customary fee arrangements that states the general nature of the legal services to be provided, the basis, rate or total amount of the fee and whether and to what extent the client will be responsible for any costs, expenses or disbursements in the course of the representation. A written statement concerning the terms of the engagement reduces the possibility of misunderstanding. [3] Contingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule. In determining whether a particular contingent fee is reasonable, or whether it is reasonable to charge any form of contingent fee, a lawyer must consider the factors that are relevant under the circumstances. Applicable law may impose limitations on contingent fees, such as a ceiling on the

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percentage allowable, or may require a lawyer to offer clients an alternative basis for the fee. Applicable law also may apply to situations other than a contingent fee, for example, government regulations regarding fees in certain tax matters. Terms of Payment [4] A lawyer may require advance payment of a fee, but is obliged to return any unearned portion. See Rule 1.16(d). A lawyer may accept property in payment for services, such as an ownership interest in an enterprise, providing this does not involve acquisition of a proprietary interest in the cause of action or subject matter of the litigation contrary to Rule 1.8 (i). However, a fee paid in property instead of money may be subject to the requirements of Rule 1.8(a) because such fees often have the essential qualities of a business transaction with the client. [5] An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required, unless the situation is adequately explained to the client. Otherwise, the client might have to bargain for further assistance in the midst of a proceeding or transaction. However, it is proper to define the extent of services in light of the client's ability to pay. A lawyer should not exploit a fee arrangement based primarily on hourly charges by using wasteful procedures. Prohibited Contingent Fees [6] Paragraph (d) prohibits a lawyer from charging a contingent fee in a domestic relations matter when payment is contingent upon the securing of a divorce or upon the amount of alimony or support or property settlement to be obtained. This provision does not preclude a contract for a contingent fee for legal representation in connection with the recovery of post-judgment balances due under support, alimony or other financial orders because such contracts do not implicate the same policy concerns. Division of Fee [7] A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee either on the basis of the proportion of services they render or if each lawyer assumes responsibility for the representation as a whole. In addition, the client must agree to the arrangement, including the share that each lawyer is to receive, and the agreement must be confirmed in writing. Contingent fee agreements must be in a writing signed by the client and must otherwise comply with paragraph (c) of this Rule. Joint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership. A lawyer should only refer a matter to a lawyer whom the referring lawyer reasonably believes is competent to handle the matter. See Rule 1.1.

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[8] Paragraph (e) does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm. Disputes over Fees [9] If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the bar, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should conscientiously consider submitting to it. Law may prescribe a procedure for determining a lawyer's fee, for example, in representation of an executor or administrator, a class or a person entitled to a reasonable fee as part of the measure of damages. The lawyer entitled to such a fee and a lawyer representing another party concerned with the fee should comply with the prescribed procedure.

How to Open an IOLTA First, read the applicable Rules of Professional Conduct before you go to the financial institution. Note any other requirements contained in court rules, legal ethics opinions or bar foundation rules, because there is wide variation in IOLTA rules across the country. For example, Maryland promulgated rules at 19-401 to 19-403 to govern lawyer trust accounts, as well as 19-301.15 (Safeguarding Client Property; equivalent to ABA’s MR 1.15). Maryland Rule 19-406 states:

Name and Designation of Account An attorney or law firm shall maintain each attorney trust account with a title that includes the name of the attorney or law firm and that clearly designates the account as "Attorney Trust Account", "Attorney Escrow Account", or "Clients’ Funds Account" on all checks and deposit slips. The title shall distinguish the account from any other fiduciary account that the attorney or law firm may maintain and from any personal or business account of the attorney or law firm. (Added June 6, 2016, effective July 1, 2016.)

This has been interpreted to mean that every check must have “Attorney Trust Account” in the name and address field. Other states will require that the signature card that is signed opening the account have the term “trust” or “escrow” or similar in the account name. Make sure you know the IOLTA account requirements, so do not rely on the bank clerk.

Second, choose a financial institution you want to have your account. Check that it is on the approved financial institutions list in your state. That list is generally on a website with your bar association or bar foundation or similar organization in your state that manages IOLTA funds. It means that they have an agreement with the lawyer disciplinary body in your jurisdiction that says they will manage the account a certain way, the most important part of which is sending notice of overdrawn lawyer trust accounts to that disciplining body. In other words, they have an agreement that says, “We know this isn’t the lawyer’s money and if that lawyer messes up and overdraws this account, we will let you know.”

The financial institution will usually ask for a copy of your entity formation documents, so you will want to create your entity first. In some jurisdictions, they will require another form to be filled out, which is usually found on the same website as the approved list. Bring a picture ID also.

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Lawyer Trust Account Procedures The first thing to know is: The money is not yours. It belongs to your clients until it is earned, so you must hold it as if it is someone else’s money—carefully—and you have fiduciary duties and obligations to that person or entity in how you maintain it and records you keep. I prefer the term client trust account because I think it better illustrates this fact.

Conversely, very little of the lawyer’s money should be in the lawyer trust account. Only a de minimis amount, or a small deposit, should be put into the account to cover banking and check fees if there are any. If there are no fees, do not deposit a buffer amount into the account. It’s only for client funds. When the money is earned, it needs to be paid to the law firm’s operating account.

Most lawyers use a program like Quickbooks or Xero to manage their accounts. They work in conjunction with practice management programs, or sometimes those programs have something similar that generates the same reports and records auditors and accountants would need. It is important to learn how to set up and manipulate accounts in these programs, even if you will be hiring a bookkeeper or accountant in the future.

What goes in? � Advance fee deposits � Unearned fees

States differ significantly on where flat or fixed fees should be deposited upon receipt. Read your jurisdiction’s equivalent of MR 1.5, Fees, carefully. For example, Washington State permits flat fees so long as there is a written fee agreement with language that informs a client they may still have a right of reimbursement. In that case, Washington disciplinary counsel has found those fees must be placed in the operating account, not the IOLTA. Maryland permits flat fees, but has held they are unearned even if they are fixed, so they must be placed in the lawyer trust account “until earned” (i.e. when the work is completed). For this is reason, it is best to define when a fee is “earned” precisely in your fee agreement.

� Costs and expenses

Costs and expenses should always go into an IOLTA unless the firm has already paid them out on behalf of the client and is collecting them to reimburse the firm after payment. Some lawyers have tried to switch to an all flat fee structure to avoid managing a lawyer trust account, but if they ever collect and pay client expenses and costs they could be in violation of the ethics rules if they are holding onto an undeposited client check or putting it into an operating account before the fee has been paid.

� Retainers if they are not earned upon receipt by written representation/fee agreement

Some jurisdictions use the term “retainers” loosely, to mean an advance payment on fees that will be earned. If this is the meaning, the “retainer” should be put in the IOLTA. On the other hand, if the agreement between client and lawyer includes a traditional “retainer,” a periodic fee for the lawyer to be “available” or work or a certain number of hours each month with any additional legal work to be

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billed, then that is, by some jurisdictions earned upon receipt and should be placed into the operating account.

Two important things to take away from this are:

1. Read the rules of your applicable jurisdiction(s) closely and work to understand them. Ask ethics counsel or an ethics committee for an advisory/ethics opinion if you need more information.

2. Always do a written fee agreement. Write clear, understandable fees and costs clauses that accurately use and define terms such as costs, expenses, and attorneys fees, adhere to the applicable rules, and illustrate in plain language where a client’s money will be at all times.

What comes out? Pay client expenses directly from the IOLTA if it is permitted in your jurisdiction. This can be by check or debit card, if permitted. In Washington, one can pay costs with a debit card, but not withdraw cash at a cash machine from the IOLTA, for example.

After work is completed on a case, invoice the client with a clearly itemized bill. If all the funds are to come from the IOLTA, maybe the invoice says something like, “This invoice is for your information and review. I will pay myself from your advance fee deposit which we discussed in our meeting and is described in the fee agreement. You paid that deposit by check, with the signed fee agreement so you owe me nothing.” Wait a reasonable time for the client to review and object, then pay the firm by check or transfer into operating account. The operating account will pay bills of the firm, including salaries.

By the way, “waiting a reasonable time” may be more than what your state ethics rules require, but it is a best practice that can be built into your procedure, even if it is not required. The ethics rules are a minimum standard, but there is no harm in choosing to add a little friendly customer service on top of that.

What is a “reasonable time”? Many lawyers, being very judicious people, and without a definition of what a reasonable time is, have been known to wait a week or more to pay themselves (the author included). In actuality, three to five days is probably sufficient, especially if the invoice was emailed. Whatever amount of time is deemed reasonable by the firm, withdraw the proper amount from the IOLTA account on that day, absent client objection. If this is hard to remember, calendar it so you timely remember to take the firm’s money out of the lawyer trust account. Do not let it languish there. It is important to not commingle firm/lawyer funds with client funds, and some courts have found leaving fees in after they are earned is commingling. 1

1 See MR 1.15(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[,]” but “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.” (MR 1.15 comment 2)

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Where do I put a “hybrid fee”? A hybrid fee is a combination of a flat fee and hourly. Sometimes a flat/fixed fee with case phases when portions of the fee are earned is also deemed a hybrid fee.

Hybrid fees should be placed in the IOLTA until they are earned, just like other fees. So, if the type of hybrid has an advance that is not considered earned in the fee agreement or by the courts of the applicable jurisdiction, that goes in the IOLTA until the contingent event happens or case phase is completed.

Can I put fees from credit cards, PayPal, and Venmo in my IOLTA? Most, if not all, jurisdictions have found that credit card payments may be placed in a lawyer trust account. But this can sometimes complicate issues of credit card merchant fees. Read the Merchant Account Agreement--some of them do not permit the percentage fee to be passed onto the client. Even if the agreement permits the fee to be passed to the client, decide if you want it to be the client’s responsibility or if it is more customer friendly to make it as part of the firm’s cost of doing business.

If you choose to make the merchant fee the client’s responsibility, this will need to be made explicit in the written fee agreement’s fees section. If it is the firm’s responsibility, there will need to be more firm funds put in the IOLTA, to cover the fee, or arrangements made with the merchant account holder to take the fees from the firm’s operating account. It is a best practice to have the fees come from operating instead of the IOLTA, and it simplifies your accounting process for this important account.

PayPal has been found by some jurisdictions to not be appropriate for IOLTA deposits because the funds do not go directly to the IOLTA, and instead spend time, however miniscule, sitting in a PayPal account until the receiving firm affirmatively moves them to the IOLTA. Check your applicable jurisdiction’s ethics opinions, or ethics hotline, to determine whether IOLTA payments through PayPal are permitted before you use this mechanism. Venmo is analogous to PayPal and would likely have the same result.

Opening IOLTA Checklist � Read Rules of Professional Conduct for applicable jurisdiction(s) � Create entity � Check approved financial institutions list � Check for additional forms � Picture ID � Create account � Put enough in account to cover fees, checks order � Order checks � Order debit card if permitted in jurisdiction (only use for paying fees, not getting cash) � Set up accounting procedure with

o Monthly reconciliation of whole account o Monthly reconciliation of individual client’s balances, like they are separate accounts

� Follow that procedure to the letter on every case, and every month � Maintain records for five years, or designated time in local RPCs

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Where the Money Goes Checklist � Put all payments for costs into the IOLTA unless they are reimbursements to the firm for money

already paid out � Put all advance fee deposits or retainers (unearned fees) into IOLTA � Put all flat fee or fixed fee payments where your jurisdiction specifies � Pay your operating by check or transfer when the work is completed, the client’s been invoiced,

and you waited a reasonable time for the client to object to the bill (between 3 and 14 days—set policy) [paying earned fees]

� Pay client costs (government filing fees, expert fees, etc.) by check straight from IOLTA, or pay with firm funds, then reimburse firm with same procedure as paying earned fees

� Pay yourself a salary out of operating account, never out of trust � Pay business expenses out of operating account, never out of trust � Save amount CPA directs for quarterly taxes in operating account, and pay from there � Don’t leave unclaimed or mystery money in the IOLTA – usually send to state as abandoned

property (Again see your state rules or contact the ethics hotline or bar foundation responsible for IOLTA.)

� Don’t leave a buffer of lawyer’s own money in IOLTA � If a debit card is permitted, don’t use it to take cash out of the IOLTA

More Complicated Lawyer Trust Account Issues That is the scoop for most folks. How to start one and manage it, making sure the right money comes in and goes out is the gist of most IOLTAs. Every once in awhile things can get more complex though. Here are some common questions asked about trust accounts.

What if I accidentally overdraw my IOLTA? Put the funds into the account to cover it quickly. Note the error in the reconciliations, and the reason for the deposit. Attribute it to the proper client reconciliations in the proper amounts. This is essentially a refund of client funds.

Sometimes this happens when a lawyer uses a credit card merchant account that does not notify them of a requested charge back (a dispute of a credit card charge on their bill by a client). The credit card companies generally pull the money from the account it went in to, because they don’t know this is a trust account with other clients’ money (or no money to cover it). Chargebacks can be done months after the charge in some circumstances, depending on the credit card agreement. They will often be refunded to the lawyer after an investigation, but for the time of the investigation they are given back to the credit card holder. For this reason, look for a credit card merchant that will both notify you and pull the funds from your operating account instead. (LawPay does this, as do a couple other smaller companies.)

Another way this commonly happens is the lawyer is hurrying to pay the rent and grabs the wrong checks. Sounds crazy, but I have talked plenty of lawyers who have done this. Make the checks and the

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checkbook look widely different so they cannot be confused. Some lawyers go as far as having the accounts at two separate institutions, to make sure they will never get confused about which one they are using.

This can also happen because an employee is committing fraud. It is imperative that you review and audit the bookkeeper’s or accountant’s work, have a full understanding of it including all accounts, reconciliations, and disbursals, and have procedures to protect the firm from theft and fraud. For example, the bookkeeper may write a check for an actual invoice, but he should also supply the stamped, address envelope and only a lawyer should be the one to sign and send the check.

Sometimes an overdraw is the financial institution’s fault. Have them correct it as soon as possible and be prepared to explain this to discipline if it overdraws the account.

What if discipline counsel contacts me and requests an accounting of my IOLTA? Some discipline entities have a random audit process for lawyer trust accounts in their jurisdiction. Others only review accounts with insufficient funds or bar complaints that relate to accounting or practice management. While discipline feels like the enemy when you are in practice, they are not trying to be. They are trying to raise and maintain the professional standards of the profession. So, be responsive. Give them the records they need timely. If you do not have them, I am a firm believer in being honest. If you use an accounting system, they will be able to tell if you did the reconciliations after they requested the records. They look on the backend of the program to see when everything was entered. If you don’t understand what they are asking for, be honest about that also.

What if I receive fees from a different jurisdiction than I am barred in? Great question, because there is a wide variation in lawyer trust account rules across different jurisdictions, sometimes they conflict, and there is a choice of laws issue with a multijurisdictional practice. (Compare 1.5 Fees rules state comparison chart--35 pages long--to 1.15 rules state comparison chart--143 pages.) What rules apply may not be clear on the face or be instinctual. It is a possibility that more than one set of ethics rules will apply.

First, determine which rules should apply. Look at the Rules of Professional Conduct for where you are barred, and where you practice. Check specific rules for IOLTAs for location of account requirements. For example, MR 1.15(a) states “…Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person….” but less than half the jurisdictions retained this language. New Jersey requires the IOLTA be maintained “in New Jersey.”

Check each state for a choice of laws rule, the equivalent of MR 8.5. Generally, those rules say if there is an action in court, that jurisdiction applies, and no matter what, the jurisdiction you practice in, where you are barred also applies. Some states have a substantially related to a certain jurisdiction exception as well, meaning you can have an account in another state if there is a substantial relationship to that other state and/or you have consent of clients.

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When in doubt, make sure you are in compliance with as many of the states’ rules that could apply as possible. Read the relevant IOLTA rules and ethics opinions for general themes and any potentially conflicting directives. For example, do both states require you to have the lawyer trust account in their state? Or does one say you have to have it in the state you practice in and the other silent on where it is at? In case one, you have a problem, but in case two you are set as long as you put it in the one that requires it to be present. Below are links to a smattering of resources and relevant ethics opinions. See AILA’s Ethics Reference by State to search rules and opinions by state.

What if there is a dispute about who is entitled to a refund? Say you have a married couple come in and the husband pays a retainer or advance fee for an I-485. Half way through representing them the couple files for divorce. The wife calls you weekly to demand her refund. MR 1.15(e) says “When in the course of representation a lawyer is in possession of property in which two or more persons…claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property…not in dispute”(emphasis added). In this instance, the lawyer may want to split the money in half and send a check to both, or think she knows property law of her jurisdiction and send it to the spouse she believes it belongs to. The lawyer should not unilaterally decide where the funds should go.2 When in doubt, hold onto the funds for resolution from a higher authority like mediation, arbitration, or divorce property settlement. If the couple or firm terminates representation, it may not be appropriate to keep the funds in the lawyer’s IOLTA if the clients terminate the relationship, but the funds can be put in an escrow account or possibly and agreement with the couples’ divorce attorneys could be reached for them to hold the funds until distributed by an authority. The time and effort this dispute could take may be resolved by setting out who is entitled to a refund in the fee/representation agreement. It could say something like “I pay all refunds to the party that wrote me the check. If the fee is paid by more than one party the dispute shall be resolved by mediation.” Here that would be husband, but this language also anticipates if the couple paid with a joint account. Some fee agreements even set out a particular mediator or firm, but this is a bit granular and the agreement should also be short and readable. Weigh the likelihood of such things happening in your practice and decide how to proceed for yourself.

Who gets the refund when the deposit was paid by a third party? This can come up when a third party pays for client’s legal services, then client and lawyer part ways before the legal services are completed. The third party says they should get the money back, but the

2 MR 1.15 Comment 4: “Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer's custody…A lawyer may have a duty under…to protect such third-party claims...In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are 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.”

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client says they should. Specify in fee agreements with a third-party payor who is entitled to receive a refund to avoid this dispute. Follow the rules of your jurisdiction if it is specified.

If it was not specified in the agreement beforehand, it would be prudent to follow the procedures of a third-party claimant above.

Select Resources ABA Jurisdictional Rules Comparison Charts, specifically RPC 1.5 Fees (Sept 29, 2017) and RPC 1.15 Safekeeping Property and Vermont 1.15A (April 20, 2018).

Blackford, Sheila M., Trust Accounting in One Hour for Lawyers, publ. ABA, 2016.

Arizona Ethics Opinion 97-03: Client Funds; Trust Accounts; Missing Clients, 1997.

California Formal Opinions 1988-97: May an attorney have a lay signatory on the client trust account? (Note: This opinions concludes lawyer can have lay signatory, but is ultimately responsible. Author understands that most jurisdictions do not allow lay signatories; only lawyers.)

San Francisco Bar Ethics Opinion 1980-1, "Flat" or "fixed" fee advances should be deposited in a firm's general account and should not be deposited in a trustee savings or checking account, 1980.

Florida Rules now require written trust account plans, 2014.

Illinois Client Trust Account Handbook, 2018.

Michigan Ethics Opinion R-7: Duty to Establish IOLTA and Records to Maintain, 1990.

Ethics Opinion RI-70: Multi-jurisdictional Practice IOLTA Compliance, 1991.

Ethics Opinion R-21: Obligation to Determine IOLTA or non-IOLTA and Deposit, 2012.

New York Ethics Opinion 1114: Trust or special accounts; IOLA; authorized signature on special account checks; electronic signature, 2017.

North Carolina 2015 Formal Ethics Opinion 6: Lawyer’s Professional Responsibility When Third Party Steals Funds from Trust Account, 2015.

1997 Formal Ethics Opinion 9: Credit Card Chargebacks Against a Trust Account, 1998.

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Oregon Formal Opinion No. 2005-117: Trust Accounts: Funds Held in IOLTA or Non-IOLTA Account, Types of Depository Institutions, revised 2014.

Pennsylvania Philadelphia Bar Association Professional Guidance Committee, Opinion 2015-1: What to do with unidentified funds in IOLTA at solo lawyer’s death, 2015.

Texas Opinion 606: Can lawyer hold unearned fees in IOLTA he believes were illegally gained by client?, 2012.

Washington D.C. Ethics Opinion 355: Flat Fees and Trust Accounts, 2010.

Ethics Opinion 359: Disposition of Missing Client’s Trust Account Monies in the DC, 2011.

Washington Managing Lawyer Trust Account booklet, 2015.

WSBA Advisory Opinions 1863: Trust account; fees paid by third party, 1999.

WSBA Advisory Opinions 2166: Third party`s claim to client`s portion of funds awarded, 2007.

WSBA Advisory Opinions 2176: Representation agreement provision on uncashed IOLTA checks, 2009.

WSBA Advisory Opinions 2222: Deposit of Flat Fees and Costs, 2012.

WSBA Advisory Opinions 2210: Using Trust Account Debit Card for Payment of Filing Fees, 2012.

Virginia Answering Your Questions about Trust Accounting, Virginia State Bar.

AILA Doc. No. 18073132. (Posted 8/2/18)