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Trust
Account Recordkeeping: Required Reading I didn’t go to law school to be an accountant or a bookkeeper! Why do I
have to maintain all these complicated books and records?” Indeed,
few of us went into law school either knowing a significant amount
about bookkeeping or particularly wanting to. Furthermore, the typical
accounting class that may have been taken in law school focused on
understanding corporate balance sheets, assuming that a client’s accounting
issues were the only ones facing a new lawyer. Recently,
based upon complaints our office has investigated, including trust
account overdraft notices,1 there has arisen
a gnawing sense that too many lawyers have adopted the above lament.
They have forgotten (or never learned) the importance of accurately
keeping and maintaining the required trust account and business account
books and records. Proper record keeping is not just a technical burden
meant to keep lawyers from the real practice of law. It is an integral
part of protecting the public, which is the goal of the lawyer discipline
system. So, perhaps as a reminder, a brief trust account primer is
in order. Perhaps
the most profound symbol of the trust that a client or third person
places in a lawyer is that they entrust their funds or other property
to her. In recognition of the significance of that gesture, the attorney
must exercise the highest degree of corresponding fiduciary care in
safekeeping that property. Proper maintenance of fiduciary accounts,
best exemplified through maintaining the appropriate books and records
for trust accounts, is therefore of critical importance. And while
it’s true that many lawyers at mid- to large-size law firms do not
have to deal personally with the record-keeping requirements that
the Rules of Professional Conduct impose on attorneys, trust account
and business account record keeping is essential for the solo practitioner
or small-firm lawyer who may not employ an accountant or bookkeeper.
In either situation, the lawyer is the responsible party upon whom
the Minnesota Rules of Professional Conduct (MRPC) impose a nondelegable
obligation to ensure and certify that proper books and records are
being kept. Books and Records Rule
1.15(h), MRPC, requires
all lawyers engaged in private practice2 to maintain books and records
sufficient to demonstrate compliance with the rule’s trust account
requirements, business records to show income and expenses from the
lawyer’s practice, and to preserve them for six years. Rule 1.15(i)
requires such lawyers to certify annually that they do in fact maintain
such records. That section also directs the Lawyers Board to publish
annually what books and records are required in order to comply with
subsection (h).3 The Lawyers Board has established and published what
those books and records are in what is known as Appendix 1 to the
MRPC. This is an appendix worthy of taking out and reading, for failure
to maintain the required books and records is, by itself, subject
to discipline. What
are books and records? In very generalized
terms, “records” refers to documents that are part of the normal operation
of a bank account, such as bank statements, canceled checks, deposit
tickets, and notices of transactions, e.g.,
the notice issued when interest is remitted to the Lawyers Trust Account
Board. A record of fees paid into the law office’s business account
also must be maintained. “Books” then are the journals and ledgers
maintained to keep track of client funds, such as a check register,
client subsidiary ledgers, and monthly trial balances and reconciliations. The
client subsidiary ledgers and monthly reconciliations comparing the
total of those ledgers to the adjusted bank statement are the records
most critical to fulfilling the trust account requirements. Maintaining
these is not unlike the periodic balancing of a checkbook or savings
account that almost every lawyer must have done at some time in life.
Nevertheless, the number of lawyers who appear to lack such basic
accounting skills is astounding. A
subsidiary ledger must be prepared for each client on whose behalf
the lawyer deposits funds into a trust account.4 Each
deposit and disbursement on behalf of the particular client must be
recorded, both on a general register and in the client’s subsidiary
ledger. The balance for each client should never be a negative amount.
“Borrowing” funds from one client’s funds to cover an obligation on
behalf of another client constitutes misappropriation, as does failing
to have on hand sufficient funds to cover the amount that should be
held in trust for all clients combined, even if the overall account
does not become overdrawn.5 Such trust account shortages are subject
to discipline. A
monthly reconciliation of these subsidiary ledgers compares the total
amount that should be on hand for all clients to the adjusted bank
statement balance. The numbers should be identical. If not, a shortage
may exist. Lawyers
are allowed to maintain a minimal amount of their own funds in a pooled
trust account sufficient to cover service charges or check-printing
costs. A separate ledger must be created for the lawyer’s funds as
if he were a client. Retaining greater amounts of the lawyer’s own
money in a trust account, including earned fees, is considered commingling
and is a serious violation. As
noted, every year as part of completing the attorney registration
statement, lawyers must certify that they or their law firm maintain
books and records as required by Rule 1.15 and Appendix 1. Many lawyers
likely sign the certification without much real thought as to whether
the statement is in fact true. Signing ought to cause lawyers to reflect
on the state of their records and ascertain whether they are in compliance.
Certifying falsely, certainly when the lawyer has known he kept no
records at all, has been the basis for discipline. “I
did not knowingly take any client funds.” This too is heard from many
lawyers who are the subject of a trust account overdraft inquiry or
who are the subject of a disciplinary investigation concerning their
trust account. In many such instances the statement is true, but from
the perspective of the client whose money is missing, does the distinction
between dishonesty and ineptitude on the part of their lawyer really
matter? Clients want their lawyer to be scrupulously honest, of course,
but also conscientious. And even unintentional or negligent misappropriation
of client funds due to poor record keeping may result in public discipline.6 Informational Resources All
of the information necessary to fully comply with Rule 1.15 and Appendix
1 is available through multiple sources. The Director’s Office and
Lawyers Board’s website7 has an extensive section devoted to trust
account record keeping, including Appendix 1. Also on the website
is a detailed list of frequently asked questions, covering such issues
as how long to wait for checks to clear, how to deal with stale checks,
and how to move or close a trust account. Two instructional booklets
that explain how to manually maintain trust account records and how
to maintain them using Quicken®
are available from the Director’s Office in manuscript form and are
reproduced on the web as well. Both versions include clear illustrations.
The MSBA provides similar information on using QuickBooks®
on its members-only practicelaw.org
website.8 Some of the many ethics-related continuing education seminars
presented each year devote time to the topic of trust account requirements
as well. In sum, there really is no excuse for not knowing how to
maintain records appropriately.
2
Most public lawyers and lawyers employed by corporations do not directly
handle client funds, and therefore are exempt from the record-keeping
obligations of Rule 1.15, MRPC. 3
Somewhat paradoxically, Rule 1.15(h) also states that equivalent books
and records demonstrating the same information in an easily accessible
manner and in substantially the same detail are acceptable. 4
Most lawyers maintain a pooled IOLTA trust account, with the interest
generated paid to the Lawyer Trust Account Board for use in assisting
legal services providers. Rule 1.15(e),
MRPC. Separate interest-bearing accounts for individual clients
are also appropriate in some instances. Rule 1.15(f). 5
See In re Isaacs, 451 N.W.2d 209, 211 (Minn.
1990), in which the Supreme Court defined misappropriation as “whenever
funds belonging to a client are not kept in trust and are used for
any purpose other than that specified by the client.” Intent is not
a necessary element for misappropriation to occur, but does affect
the level of discipline. 6 See fn. 5, supra. 7 http://www.courts.state.mn.us/lprb. 8 http://www.practicelaw.org/members/management/home.php. MARTIN COLE is director of the Office of Lawyers Professional Responsibility.
An alumnus of the University of Minnesota and of the University
of Minnesota Law School, he has served the lawyer disciplinary system
for 21 years. |
