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  • A GUIDE TO SETTING UP AND USING YOUR LAWYER TRUST ACCOUNT

    Published by

    2016

  • Oregon State Bar Professional Liability Fund

    16037 S.W. Upper Boones Ferry Road, Suite 300 Tigard, Oregon 97224

    P.O. Box 231600 Tigard, Oregon 97281

    www.osbplf.org

    503-639-6911 1-800-452-1639

    2016 Board of Directors and Officers Robert D. Newell Chair Portland

    Teresa A. Statler Vice Chair Portland Tim Martinez Secretary-Treasurer (Public Member) Salem

    Julia I. Manela Eugene Dennis H. Black Medford

    Saville W. Easley Portland Robert S. Rachio Canyon City

    Mary Jo Mullen Portland Tom Newhouse (Public Member) Portland

    Chief Executive Officer

    Carol J. Bernick

    Director of Personal and Practice Management Assistance Barbara S. Fishleder

    Practice Management Advisors

    Beverly Michaelis Sheila M. Blackford Jennifer Meisberger

    Hong Dao

    IMPORTANT NOTICES

    This material is provided for informational purposes only and does not establish, report, or create the standard of care for attorneys in Oregon, nor does it represent a complete analysis of the topics presented. Readers should conduct their own appropriate legal research. The information presented does not represent legal advice. This information may not be republished, sold, or used in any other form without the written consent of the Oregon State Bar Professional Liability Fund except that permission is granted for Oregon lawyers to use and modify these materials for use in their own practices. 1986, 1994, 1999, 2003, 2005, 2009, 2014, 2016 OSB Professional Liability Fund.

    http://www.osbplf.org/

  • OSB

    ProfessionalLiabi l ity Fund

    CAROL J. BERNICK

    CHIEF EXECUTIVE OFFICER

    March 2016

    Dear Oregon Lawyer:

    This edition of A Guide to Setting Up and Using Your Lawyer Trust Account replaces the green-covered handbook of the same name previously published by the Professional Liability Fund in 2014.

    This handbook was created to help you understand and fulfill your ethical obligation to protectthe funds and property of your clients, pursuant to Rule 1.15 of the Oregon Rules of ProfessionalConduct.

    A Guide to Setting Up and Using Your Lawyer Trust Account explains when to establish a trustaccount and what type to use, and it provides practical information about how to open and operate a trustaccount - including how to correctly reconcile the trust journal with the bank trust account statement.

    Correctly protecting your clients' funds and property is critical to retaining your license topractice law in Oregon. The Professional Liability Fund has provided this handbook to aid you in yourpractice of law and to help ensure the protection of your clients' property. In addition, the ProfessionalLiability Fund offers free and confidential practice management assistance through our PracticeManagement Advisor Program. Call the Professional Liability Fund and ask for a practice managementadvisor if you wish to take advantage of this service.

    We hope this handbook will be of assistance to you and that you will utilize our practicemanagement advisors.

    Sincerely yours.

    Jarbara S. Fishleder

    PLF Director of Personal and Practice Management AssistanceProfessional Liability Fund

    16037 SW Upper Boones Ferry Road, Suite 300Tigard, Oregon 97224 phone: 503-639-69ii I toll free: 800.452.1639PO Box 231600 \ Tigard, Oregon 97281-1600 fax: 503.684.7250 \ www.osbplf.org

  • ACKNOWLEDGMENTS

    The Oregon State Bar Professional Liability Fund gratefully acknowledges the assistance of those who helped prepare this handbook:

    Beverly Michaelis Principal Editor, Professional Liability Fund Practice Management Advisor

    Sheila Blackford

    Professional Liability Fund Practice Management Advisor

    Jennifer Meisberger Professional Liability Fund Practice Management Advisor

    Hong Dao

    Professional Liability Fund Practice Management Advisor

    Barbara S. Fishleder Professional Liability Fund Director of Personal and Practice Management Assistance

    Tanya Hanson

    Professional Liability Fund Loss Prevention Attorney

    Helen Hierschbiel Oregon State Bar Chief Executive Officer/Executive Director

    Amber Hollister

    Oregon State Bar General Counsel

    Mark Johnson Roberts Oregon State Bar Deputy General Counsel

    DeAnna Shields

    Professional Liability Fund Loss Prevention Assistant

  • TABLE OF CONTENTS I. INTRODUCTION..............................................................................................................1 II. THE IMPORTANCE OF THE LAWYER TRUST ACCOUNT ..................................1

    A. Ethical Obligations B. Disciplinary Action Resulting from Mismanagement of Client Funds or Property

    III. WHAT IS A LAWYER TRUST ACCOUNT? ................................................................2

    A. IOLTA (Interest on Lawyer Trust Accounts) Interest to Oregon Law Foundation B. Pooled Accounts Interest to Each Client C. Separate Accounts for Particular Clients or Client Matters Interest to Each Client D. Estate or Conservatorship Accounts

    IV. ESTABLISHING AN IOLTA LAWYER TRUST ACCOUNT ....................................5

    A. Setting Up the IOLTA Account B. OSB Operating Regulations and Procedures C. Annual Compliance D. New Lawyer Trust Accounts E. Mandatory Trust Account Overdraft Notification Program F. Bank Charges

    V. TRUST ACCOUNTING CONCEPTS .............................................................................8 A. Each Client Should Be Considered a Separate Account B. Dont Spend What You Dont Have C. Maintain an Audit Trail D. There Is No Such Thing as a Negative Balance E. Safety Measures

    VI. TRUST ACCOUNTING ESSENTIALS ........................................................................10

    A. Property Held in the Lawyer Trust Account B. Retention of Unclaimed Client Funds and Property C. Trust Property Other Than Cash D. Maintain Records for Five Years

    VII. TRUST ACCOUNTING PROCEDURES .....................................................................13

    A. Opening the Trust Account B. Trust Account Records C. Depositing Trust Account Funds D. Accepting Credit Cards E. Disbursing Trust Account Funds F. Reconciling Account Records with Monthly Bank Statements G. Closing the Trust Account H. Death of Sole Signatory on the Trust Account I. Sample Trust Account Transactions, Trust Account Trial Balances, and

    Trust Account Reconciliation

    VIII. FREQUENTLY ASKED TRUST ACCOUNT QUESTIONS .....................................25

  • APPENDIX SAMPLE REPORT USING QUICKBOOKS ........................................................................31 SAMPLE REPORT USING QUICKEN ................................................................................32 CHART OF ACCOUNTS ...........................................................................................................33 INDEX OF FORMS .....................................................................................................................34

  • A Guide to Setting Up and Using Your Lawyer Trust Account Page 1

    I. INTRODUCTION

    This handbook:

    1. describes the rules for handling client funds and property; 2. provides a practical guide to creating and maintaining a trust account; and 3. gives guidance on handling client funds.

    We hope this handbook will help you safeguard client funds, assure greater

    accountability, and reduce the number of complaints received each year relating to the maintenance of client funds. However, this handbook does not address all the intricate legal issues that might arise when handling complex legal matters involving client property. II. THE IMPORTANCE OF THE LAWYER TRUST ACCOUNT

    A. Ethical Obligations

    The ethical obligations for those who set up lawyer trust accounts are rooted in the principle that a lawyer who holds funds of a client or third person in trust, even for a brief time or intermittently, has the duty as a fiduciary to safeguard and segregate those assets from the lawyers personal and business assets. Oregon Rules of Professional Conduct (ORPC) 1.15-1 and ORPC 1.15-2 set forth the ethical duties and obligations of a lawyer who is holding client or third person funds. The duties set forth in ORPC 1.15-1 and ORPC 1.15-2 are intended to eliminate not only the actual loss of client funds but also their risk of loss while in the lawyers possession.

    Lawyers must account for every penny of these funds as long as the funds remain in their possession. This responsibility cannot be delegated, transferred, or excused by the ignorance, inattention, incompetence, or dishonesty of the lawyer or the lawyers employees or associates. A lawyer may employ others to help carry out this duty but must provide adequate training and supervision to ensure that all ethical and legal obligations to account for those monies are being met. In re Mannis, 295 Or 594, 668 P2d 1224 (1983) (lawyer reprimanded although he was unaware employee was commingling funds).

    The need to handle a clients funds with extreme care should be self-evident. Even so, cases continue to arise in which practicing lawyers, whether inadvertently or intentionally, mishandle their clients money, thus subjecting those clients to the risk of economic hardship and seriously undermining public confidence in the legal profession. Mishandling client funds can also subject the lawyer to disciplinary action, which may result in the lawyer losing his or her license to practice law.

    B. Disciplinary Action Resulting from Mismanagement of Client Funds or Property

    The Oregon Supreme Court has consistently required strict compliance with the ethical

    rules governing client funds and property. The court has also developed a significant body of case law interpreting these rules. The rules distinguish between a charge of dishonesty by

  • Page 2 A Guide to Setting Up and Using Your Lawyer Trust Account

    misappropriation under ORPC 8.4(a)(3) and a charge of failing to maintain funds in a trust account under ORPC 1.15-1. As the court pointed out in In re Phelps, 306 Or 508, 760 P2d 1331 (1998), conduct leading to a charge of failing to maintain client funds in trust often precedes conduct leading to a charge of dishonesty by misappropriation, but the two are not the same. A lawyer may remove money from a trust account before intentionally appropriating the money for his or her own purposes (a violation of the prohibition against dishonesty), but removal of money from a trust account does not necessarily constitute an intentional misappropriation. The difference between the two is reflected in the sanction imposed. If the Oregon State Bar (OSB) proves a lawyer guilty of dishonesty by intentionally appropriating client funds to the lawyers own use, the sanction is disbarment. Failing to maintain funds in a trust account does not require intent, and it carries a lesser sanction. See In re Starr, 326 Or 328, 952 P2d 1017 (1998).

    The disciplinary rules also require that a lawyer promptly notify a client of receipt of client funds, securities, or other properties. Client property that is not cash or another form of money must be labeled and identified upon receipt and placed in a safe, a safe deposit box, or other place of safekeeping as soon as practicable. Lawyers must also maintain complete records of all funds, securities, and other property of a client coming into the lawyers possession and must render appropriate accounts to the client regarding the property. Failure to provide a client with a proper accounting of his or her property will result in discipline. In re Gildea, 325 Or 281, 936 P2d 975 (1997) (lawyer suspended for, among other things, failing to inventory a clients personal property, failing to tender a proper accounting of funds inadvertently placed in his personal account rather than his trust account, and failing to maintain adequate records of clients funds). A lawyers failure to promptly pay or deliver, at a clients request, the funds, securities, or other property in the lawyers possession to which the client is entitled will also result in discipline. See In re Arbuckle, 308 Or 135, 775 P2d 832 (1988). III. WHAT IS A LAWYER TRUST ACCOUNT?

    ORPC 1.15-1 requires a lawyer to hold property of clients or third persons that is in a lawyers possession separate from the lawyers own property. Funds, including advances for costs and expenses and escrow and other funds held for another, shall be kept in a separate Lawyer Trust Account maintained in the jurisdiction where the lawyers office is situated. Lawyers are required to identify trust accounts by the phrase lawyer trust account. Lawyer trust accounts must be separate from the lawyers business account. A lawyer may deposit the lawyers own funds into the lawyer trust account for the sole purpose of paying bank service charges or meeting minimum balance requirements on that account, but only in amounts necessary for those purposes. ORPC 1.15-1(b). See OSB Legal Ethics Op No 2005-145 (The rule contains no exception that allows cushions, and the placement of such funds in a lawyer trust account would therefore constitute impermissible commingling.)

    Each lawyer trust account shall be an insured, interest-bearing trust account in a financial

    institution selected by the lawyer or law firm in the exercise of reasonable care. ORPC 1.15-1(a); ORPC 1.15-2(h)(2). Depositor accounts, including trust accounts, are insured by the FDIC up to the standard maximum deposit insurance amount ($250,000), for each deposit insurance ownership category. If you are holding more than the insured limit in trust for any one client, you should allocate funds between multiple institutions and remind clients of the aggregate federal insurance

  • A Guide to Setting Up and Using Your Lawyer Trust Account Page 3

    limits to assure that each clients funds are fully protected. See Sylvia Stevens, Trust Accounts and the FDIC, Oregon State Bar Bulletin (October 2008).

    Furthermore, a lawyer or law firm may only maintain a lawyer trust account at a financial

    institution that has entered into an agreement with the Oregon Law Foundation (OLF) to (1) remit interest earned on IOLTA funds; (2) provide remittance reports; and (3) notify Disciplinary Counsel when any properly payable instrument is presented against such account containing insufficient funds, whether or not the instrument is honored. ORPC 1.15-2(h)(3)-(4).

    A lawyer trust account may be set up in several ways. See ORPC 1.15-2. These include

    (1) lawyer trust accounts in which earnings from the lawyer trust account, net any transaction costs, are remitted to the OLF; (2) pooled interest-bearing lawyer trust accounts with subaccounting that provides for computation of interest earned by each clients funds and a payment to clients of interest earned, net any bank service charges; and (3) separate interest-bearing lawyer trust accounts for each particular client or client matter. ORPC 1.15-1(a) requires that all lawyer trust accounts be maintained in compliance with ORPC 1.15...