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2. What financial records should I maintain for my trust accounts?
A lawyer must maintain the following documentation for a period of seven years after the date of the last transaction performed on behalf of the client:
- a receipt and disbursement journal identifying all deposits in, and withdrawals from, the account, with a running balance
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a separate accounting page for each client or third person for whom funds are held showing all receipts and disbursements, with a running balance,
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at least a quarterly reconciliation of the trust account journals, client ledgers and the bank statements,
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a list of all accounts in which money is held in trust as defined in Section 2-27(b) of the Connecticut Practice Book and
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all check books, bank statements and cancelled or voided checks.
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3. What is a “three point reconciliation?”
When a bank account is reconciled (the rules require quarterly reconciliation at a minimum) it indicates that your financial records match the totals found on the bank statement and that your financial records accurately reflect the amount of money held on behalf of your clients in the clients' funds account. By “your financial records”, we mean your individual client ledger summary sheet (showing how much money belonging to each individual client is being held with a total) and, your
receipts and disbursement journal totals (showing how much money belonging to all clients is being held), your
receipts and disbursement ledger
and your individual client ledgers. These records are required to be maintained pursuant to
Section 2-27(b) of the Connecticut Practice Book.
To perform three point reconciliations you need these items: your bank statement, your individual client ledgers, your individual client ledger summary sheet and your receipts and disbursement journal.
- The first part of the reconciliation involves taking the bank statement ending balance for the given month, then
- subtract any outstanding checks that were written but not cashed, then
- adding in any deposits-in-transit to reach a
final figure which represents the exact amount of money you are holding in the clients’ funds account on the bank statement’s ending date.
- That final figure is then traced to the total you have on your receipts and disbursement journal for same date as the bank statement’s ending date. The receipts and disbursement journal lists each and every deposit made and each check disbursed in date order with a
running balance.
- Your balance on the receipts and disbursement journal for same date as the bank statement’s ending date should match the
final figure.
- Lastly, the final figure should be compared to the individual client ledger summary sheet total for same date as the bank statement’s ending date. The client ledger total is the total of all balances held for each individual client on all open balances on the same date as the bank statement’s ending date.
- Your balance on the client ledger summary sheet for same date as the bank statement’s ending date should match the
final figure.
- If your figures do not reconcile to the bank, you should compare each line item on the receipts and disbursement journal to each line item on the individual client ledgers and then to the bank statements to make sure that nothing was entered in error, or omitted from any of your own created records.
- If this process is performed on a quarterly basis, any errors or omissions made will be captured and cured in a timely manner. Further, you will not have any outstanding checks unaccounted for, any deposits or wires not completed or made to the wrong
account or earned fees not taken.
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4. Can an attorney use funds from a trust account to pay the costs and expenses associated with a client’s case?
In some circumstances yes, in others, no. Attorneys should remember that it is improper to provide financial assistance to a client in connection with pending or contemplated litigation except court costs and expenses of litigation. Rule 1.8(e) of the Rules of Professional Conduct.
If a client has provided the attorney with funds to cover future costs and expenses, including the payment of a retainer, these funds should be deposited into a clients’ funds account (e.g. the attorney’s IOLTA account) to be drawn against as the attorney earns his or her fee or uses the funds to pay for costs and expenses. In these circumstances, the attorney may pay costs and expenses for the client out of the clients’ funds account holding the retainer unless or until the retainer is exhausted because the attorney is using the particular client’s funds to cover the costs and expenses.
On the other hand, if the client has not yet provided the attorney with a retainer or funds to cover costs and expenses, then using funds from a clients’ funds account to cover the client’s costs and expenses would violate Rule 1.15 of the Rules of Professional Conduct. In these circumstances, the attorney would be misusing funds in which another client or third party has an interest. The attorney will need to advance the costs and expenses from an operating account or some other source that is not a clients’ funds account.
Even in circumstances where the client has provided funds to cover costs and expenses, the use of a debit card connected with a clients’ funds account is strongly discouraged. Unlike checks, debit cards generate little supporting documentation when used and can be used without signature verification. They are also much more vulnerable to misuse generally, either by the attorney who obtained the debit card or a third person who misappropriates one. If the payee of the costs and expenses requires payment by a debit card, the attorney should make a payment with a debit card connected to an account that is not a clients’ funds account, then receive reimbursement from the clients funds account.
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5. My bank just told me I have an overdraft and it has been reported to the Statewide Grievance Committee. What should I do?
First, figure out why you had an overdraft and fix the problem. Second, gather the documents needed to substantiate your explanation. You will receive a letter from the Statewide Bar Counsel’s office requiring you to explain the overdraft. Answer the letter! You will always need to supply bank statements and the disciplinary authorities will ask questions about any unusual transactions even if it had nothing to do with the overdraft. Be prepared to provide client ledgers, HUD-1s and any other supporting documentation that is requested.
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6. My client does not want me to pay his doctor with his settlement funds even though my firm gave the doctor a letter of protection. What should I do?
If you determine that the letter of protection was directly related to the settlement funds and the letter of protection was signed in order to aid you in obtaining the settlement funds, then do not disburse the money to your client. You cannot disburse the disputed funds until both the client and the doctor have reached an agreement.
Rule 1.15(f) of the Rules of Professional Conduct states “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 commentary notes that
interests include “a valid judgment concerning disposition of the property, a valid statutory or judgment lien, or other lien recognized by law, against the property;
a letter of protection or similar obligation
that is both (a) directly related to the
property held by the lawyer, and (b) an
obligation specifically entered into to aid the
lawyer in obtaining the property; or a written assignment, signed by the client, conveying an interest in the funds or other property to another person or entity….(emphasis added) Commentary to Rule 1.15
(2008).
The
commentary also notes that the lawyer may have a
duty to third persons, when a third person has a
specific interest in property held by the lawyer.
When that occurs, “the lawyer must refuse to surrender the property to the client until the claims are resolved”. (Emphasis added)
Id.
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7. At a real estate closing there was a dispute and I held an escrow of $5,000 as the buyer’s attorney. I believe that the seller has fulfilled the terms of the escrow and I should disburse the money but my client said not to disburse. What should I do?
If the terms of the escrow agreement are clear, and there is no good faith basis for you to hold the funds, then you need to disburse those funds to the owner. If you believe there is a valid argument in favor of your client’s position, you may interplead the funds to the court or hold the disputed funds in the IOLTA account until the dispute is resolved (see Rule 1.15(f))
of the Rules of Professional Conduct. A separate ledger should be created to track these funds.
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8. I regularly receive sizeable retainers. Can I put the retainers in my IOLTA account?
Maybe. It depends on how long you plan to hold these funds. Rule 1.15
of the Rules of Professional Conduct and its commentary indicate that you should perform a good faith cost benefit analysis to judge whether the funds would produce interest that goes to the client or third party. Factors to consider are the amount of the funds, the time you reasonably expect to hold them, bank fees and interest rates. See Rule 1.15(g)(7)(B)
of the Rules of Professional Conduct.
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9. I’m an associate at a large firm. I have never seen the firm’s IOLTA checkbook or bank statements and I do not have signing authority. Do I have to report the IOLTA account on my annual registration?
Yes. If you or the firm that you work for maintains one or more fiduciary accounts, you must submit the information for any account in which the funds of more than one
Connecticut client are kept. See Sections 2-27(d), 2-28(c)
of the Connecticut Practice Book.
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10. I did a reconciliation and found five very old checks that were never cashed. What should I do with the money?
Stop payment on the checks; even though the checks are old, a bank may honor the checks if they are cashed. Attempt to contact the payees on the checks and offer to provide them with a new check. You may transfer the money to a separate account, if appropriate, or you may keep the funds in the clients' funds account. Whatever you do, keep a written record of the outstanding checks since you need them for your reconciliations. Once it has been more than seven years since you heard from the payee, you may escheat the money to the State of Connecticut pursuant to
Section § 3-61a of the Connecticut General
Statutes.
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11. We recently reconciled our books in accordance with the quarterly reconciliation requirements and discovered there is $5000 in our account that does not appear to belong to any client and is not represented by an outstanding check. Can we assume that the money is earned fees we forgot to transfer out?
No. The only time you should take funds from the clients' funds account for fees is when you know that the funds represent fees earned. Since the funds may be fees, in part, you should undertake a complete accounting of the clients' funds account. The unaccounted for funds should be tracked in a separate ledger. As the accounting identifies interest-holders, you should endeavor to return the identified funds to the appropriate interest-holder. When, in good faith, you reach a point where you can no longer identify an interest holder, those funds should be tracked in the clients' funds account in its own ledger and held for the statutory period to be escheated to the state as abandoned property.
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12. I am just an associate at a law firm. The firm is not going to let me review their bank accounts or financial records. Am I responsible if they are not doing the proper recordkeeping?
No. You are responsible, however, for reporting any Rule violations by another member of the bar which “raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects…” Rule 8.3. If you are personally asked to do anything unethical in connection with the IOLTA account, you must decline and report that behavior to the Statewide Grievance Committee.
