PA 305 Law Office ManagementUnit 7 Seminar

Attorney Trust Accounts

Written Assignment Your written assignment this week is a bit unique. You are asked to prepare an office design for the firm described in the Unit 6 fact set. You may add facts that add depth to the existing facts, but do not change the facts. If you have added anything to the facts, you must explain what you added in the prose description you prepare for submission and grading. The prose description should be no longer than four pages and may be arranged in any way you feel most effectively describes the design and ergonomics of the office. Your description should include the following information:

The philosophy of your law office design (how it is consistent with the mission statement you prepared in part one of the four-part project)

Why you designed the office in the manner you chose How you believe that the office is ergonomic and conveys the appropriate mood,

based on the firm's mission statement and the possible clients in the office How you believe that the design of the office will achieve maximum efficiency In addition, prepare a list of factors you will consider in determining the location of the

office. This document should be no more than two pages in length. After listing the factors, write a brief paragraph describing what each factor means and how and why you chose it.

Written Assignment

The assignment instructs you to prepare a drawing of the office design, but the drawing is NOT part of the graded assignment. The drawing is for your use, to aid you in preparing your text description of the design.

One of the key factors in your grade will be your ability to make the reader understand your intentions in the design of the office. You will also be graded on the basis of your ability to create an ergonomic office consistent with the

facts you have been provided.

Written Assignment

QUESTIONS?

Law Firm Accounting

Nearly all private law practices have at least two checking accounts, one account from which normal business deposits and expenses are paid and a separate trust account, typically a checking account as opposed to a savings account, where only client funds are kept. Some law firms may have several different checking accounts, for different purposes. For example, a firm might have one “General Account” that is used to pay the office rent, office supplies, etc; a second “Expense” account used to pay postage, travel expenses, and other costs that will be billed to clients; and other accounts for specific purposes.

Law Firm Accounting

But EVERY law office must maintain a “Trust Account” into which all client funds are deposited.

Ethical rules in every jurisdiction prohibit the commingling of client funds and law office funds in the same account. This rule cannot be overemphasized, and there is virtually no flexibility regarding it.

Law Firm AccountingIOLTA

You may have heard or seen stories about “IOLTA” accounts. “IOLTA” = Interest On Lawyer’s Trust Accounts, and is an acronym commonly used (improperly) to refer to such accounts.

The issue arose in the early 80’s when banks introduced interest-bearing checking accounts. An ethics question arose: who owns the interest on funds held in an interest bearing trust account? The accounting necessary to credit interest to each client would be expensive and time consuming, and banks wanted no part of being responsible for anything having to do with that. Lawyers just wanted a uniform answer, and most jurisdictions adopted a simple solution: if a lawyer’s trust account earns interest, the bank pays the interest not to the lawyer or the clients, but to a fund created by the state bar, frequently for the benefit of clients who have been harmed by lawyer’s ethics violations, or other valuable public purposes.

Law Firm Accounting

As you learned in Unit 6, clients may pay a cash advance or an unearned retainer to an office to apply against future fees and expenses. Until the lawyer or law firm has actually earned these monies, it must keep these funds in the trust account.

The reason is simple: if client funds are commingled in the same bank account with general law practice funds, creditors could seize these funds to repay debts of the law practice.

Law Firm Accounting

But retainers aren’t the only way a law firm might come into possession of client funds.

For example, suppose that an attorney represented a client in a personal injury case and the matter was settled out of court for $10,000. Suppose that the defendant issued a $10,000 check made payable to both the attorney and the client, and that the attorney was entitled to $2,000 and the client to $8,000. The proper way to handle this situation as for both the attorney and the client to endorse the settlement check. Then, the attorney will deposit the $10,000 settlement check in the trust account and write two checks from the trust account: an $8,000 check from the trust account to the client and a $2,000 check from the trust account to the law office.

Law Firm Accounting

Most courts treat misappropriation of client funds as an ethical violation warranting [attorney] disbarment. Even inadvertent breaches frequently result in discipline by regulatory authorities. The rules offer protection for clients by imposing three obligations:

(1) the lawyer must segregate funds and property of clients, (2) keep careful and correct financial records, and (3) make timely notification to clients of the receipt of funds on their behalf.

Law Firm AccountingExample 1

Attorney Smith is a well respected sole practitioner, with 25 active clients, each of whom have deposited differing amounts in the trust account. He has only one employee, an experienced office manager/paralegal who has been with him since he started the practice. Smith keeps a detailed accounting of all funds deposited to and withdrawn from the trust account, as required. Smith also has a General Account that is used for all office expenses except payroll, which is handled by a payroll service. The payroll service is also a client.

Law Firm AccountingOn the 15th of the month, Smith’s office manager is working on the firm accounts, as usual. She makes out two deposit slips, one for deposits to the trust account and one for deposits to the general account. She properly writes ten checks from the trust account to the firm, for payment of client’s fees according to the last monthly statement. But when she is preparing the checks and deposit slips, she is interrupted by an emergency. When she gets back to her accounting work, she accidentally includes a $10,000 retainer check received from the payroll company in the deposit to the general account, instead of in the trust account deposit. The payroll company does not have a current fee balance to be paid.

After preparing the deposits, the office manager writes checks for rent, office supplies, and other expenses, as well as a $10,000 check to the payroll company for the monthly payroll. She drops the checks into the mail on her way to her car after work.

Law Firm AccountingWhen the bank statements arrive two weeks later, the manager realizes her error. Before she made the deposit, the General Account had $5,000 more than was necessary to cover all of the checks she wrote, so the $10,000 that should have been deposited in the Trust Account was not used to pay office expenses, it had simply been sitting in the wrong account for two weeks.

Is there an ethics problem?

Law Firm AccountingYES!!

It makes no difference whether the client’s money was actually used inappropriately. Lawyers are required to segregate client funds from firm funds, and ANY commingling, whether intentional or unintentional, harmless or fraudulent, is considered a serious breach of ethics.

Because of the length of time the funds were commingled, it is possible that Smith will be subject to serious discipline, even disbarment, for this error. Part of the analysis of an ethics review would focus on whether the office had reasonable procedures in place to guard against such error. But even if appropriate procedures were in place, the fact that the error occurred and was not discovered for two weeks could result in disciplinary action against Smith.

Law Firm Accounting

How might the firm have avoided this problem?

Law Firm AccountingExample 2

Jones, Robbins, Edwards, & Calhoun is a mid-sized firm with 35 employees. It employs a highly experienced paralegal who is also a CPA as Accounting Manager. She has more than 25 years experience in law office accounting, and is a regular guest speaker at Bar Association ethics training events.

Yesterday at 2:15 pm she realized that the firm’s office rent is due today. It wasn’t paid earlier because there was a problem with setting up the automatic payment between the bank and landlord. But she also noticed that, because a major client has not yet paid her outstanding fee balance, which was due 10 days ago, the General Account is $100 short of the amount needed to cover the $25,000 rent.

Law Firm AccountingExample 2

Monthly statements will go out to clients tomorrow. It is the firm’s practice to withdraw funds from the Trust Account to pay fees five days after statements are mailed. May the Accounting Manager write a check in payment of the fee due the firm from one of the clients, and deposit that check in the morning, to cover the $100 shortfall?

Law Firm AccountingExample 2

This one is more difficult!

The answer will likely depend upon a combination of what the firm normally does, and what the fee agreements say. If fee agreements provide the five days between mailing the statement and withdrawing funds from the client’s trust fund account, clearly it would be an ethics violation to do so before that time. But even if the fee agreement is silent on the matter, paying a fee from the fund earlier than is the firm’s standard practice might be considered an ethics violation, and subject the firm to sanctions.

Law Firm AccountingKeep in mind that attorney trust accounts MUST be used to hold some funds, but CANNOT be used to hold others. This can become complex!

For example, once the attorney earns a fee, most jurisdictions require that the fee be promptly paid from the trust account unless the client informs the attorney that he or she wishes to pay for it separately. Once earned, the fee is no longer the client’s money, and the trust account cannot be used to hold funds of the lawyer or employees.

Law Firm AccountingFunds that must be held in a client trust account include:

client funds third-party funds funds that belong partly to a client and partly to an attorney (such as

settlement funds) retainers for legal services that are unearned and that are the client’s property

until they are earned

Funds that cannot be held in a client trust account include: personal funds of the attorney or staff business funds of the law firm investment funds of the law firm earned fee payments that have become the property of the attorney or law

firm