On April 14 I wrote Attorney Fees, a piece about the several types of fee arrangements between clients and their attorneys. I did not, however, discuss the trust account, an essential part of the fee relationship.
In many businesses service providers and sellers of goods receive deposits. Take, for example, a custom furniture manufacturer. You want a dining room table and chairs. You select the style, wood, and finish. You place your order. You’ll probably have to send a 50% deposit, with the balance due on delivery. What happens to your money? To the bank it goes, where it’s comingled with rest of the money the business takes in. Fire at the plant? No insurance? Pennies on the dollar in the bankruptcy, and eating standing up is the hot new thing!
Attorneys march to a different drummer. In Arizona we follow Rule 43, Rules of the Supreme Court (Trust Accounts). The first sentence of the rule states the fundamental principle behind trust accounts. The rest, per Rabbi Hillel, is commentary. The sentence states:
Funds belonging in whole or in part to a client or third person in connection with a representation shall be kept separate and apart from the lawyer’s personal and business accounts.
Attorneys often require a deposit when they start working for you; however, unlike the furniture manufacturer, the deposit is yours until your attorney earns it by providing legal services. (Earned upon receipt arrangements are different and rare; the April 14 piece explains how they work.)
Deposits aka retainers must be placed in the attorney trust account. The money sits there until the attorney can draw on it. Commonly, you and your attorney agree on a system where the attorney uses the deposit to pay the prior month’s bill. Sometimes, though, the deposit remains in the trust account until the case is over, to make sure the last bill gets paid. (Some people—not you, of course—will fail to pay the last bill, if the outcome is not satisfactory.) Or you may have an evergreen arrangement, where you agree to keep at least $xx in the trust account.
Settlement or judgment payments also end up in the trust account if the attorney’s fee is part of the payment. After the check gets deposited it must clear. The default period is 14 days, but checks from insurers and governmental bodies, and cashier’s checks, may be drawn on immediately.
Trust account accounting has some peculiarities. Money is pooled, unless likely earnings—determined by your balance, the likely time period over which it will be held, and the prevailing interest rate—will exceed costs associated with opening the account. Pooled earnings in Arizona are paid to the Arizona Foundation for Legal Services and Education, which uses the money to support legal services for the poor and civics education for children. (I chaired the AFLSE Board of Directors in 2002.)
Because money is pooled, attorneys must reconcile the account balance to the monthly bank statement and each client’s ledger. The trust account’s total balance must equal the total of all client deposits. Attorneys can leave a small sum in the account to cover bank charges. They cannot leave a bunch of money to cover any accounting missteps.
Because each client’s money must be in the account until it’s withdrawn for proper purposes, wise attorneys do not accept credit card deposits. Credit card companies can chargeback, and if the chargeback is against a deposit which has been partially or fully withdrawn, the money coming out of the account belongs to someone else. That’s bad! (Credit card payments for outstanding bills are fine, for that money goes into the attorney’s business account.)
Trust accounting trips up many an attorney. It’s not an especially difficult task, and for attorneys who practice in law firms of any size, one firm member is generally responsible for the account, and managing the account gets delegated to an employee (although responsibility for errors rests with the attorney.)
Finally, the State Bar of Arizona operates a Client Protection Fund—I served as a trustee for five years—which has as one of its purposes mitigating losses when an attorney’s trust fund comes up short.