Trust Account Overdraft Notification
What We Know So Far
By Gina Hendryx, General Counsel
When the Oklahoma Rules of Professional Conduct (ORPC) were amended in 2008, a provision to Rule 1.15 was added requiring lawyers to maintain their trust accounts in financial institutions which agree to notify the Office of the General Counsel in the event any properly payable instrument is presented against a lawyer trust account containing insufficient funds, irrespective of whether or not the instrument is honored. Trust Account Overdraft Notification (TAON) agreements were mailed to approximately 220 banks throughout the state. Most have signed and returned the forms acknowledging they will advise the general counsel’s office directly if there is an overdraft in a trust account.
Oklahoma joins a majority of jurisdictions that employ some form of overdraft notification. When a financial institution sends notice of an overdraft, an inquiry is mailed to the lawyer requesting an explanation for the negative balance. It is important to note that this is an “inquiry” and not a “grievance.” Notification does not automatically equate with a bar complaint. The lawyer is asked to respond and include any documents which might be of assistance in understanding the error.
From Jan. 1, 2010, through Sept. 15, 2010, the Office of the General Counsel has received 247 notices of trust account overdrafts. In most cases, the explanation is sufficient and the inquiry closed. In others, such as where a lawyer has had multiple overdrafts, a more detailed examination of the trust account records may be necessary. One option available for a lawyer with multiple overdrafts is a trust account review course taught by the OBA Ethics Counsel. Records of funds in the trust account must be kept in accordance with generally accepted accounting procedures. The trust account program employs these practices and trains lawyers to keep proper records of account activity.
The most common explanations for trust account overdrafts include:
- I forgot to make the deposit. Most leave the bank deposit until the end of the day. Routinely, the deposit is overlooked and doesn’t go to the bank until the next day. Set a specific time and person to make bank deposits. It should be a priority and not left until the time of day when other deadlines are looming.
- I deposited the money into the wrong account. Depositing trust funds into an operating account is commingling. Care should be taken to use the proper deposit slips. Often the deposit books look similar. Something as simple as color coding the deposit books may solve this problem. A more drastic but effective solution is to have the trust account at a different financial institution from the operating account.
- I recorded the deposit twice. Other variations of this include forgetting to subtract a withdrawal. Failure to keep good records often is indicative of serious problems with a trust account. Whether you use a computer program or a Big Chief tablet, it is imperative that the lawyer maintain good trust account documentation. At any given time, at a minimum, the lawyer should be able to identify the source of the funds in the trust account, the names of all persons for whom the funds are held and the amounts attributable to same.
- The client beat me to the bank. This occurs most often when a lawyer receives a check made payable to lawyer and client. Client endorses the check and receives his portion in the form of a trust account check made payable to the client. Even though you repeatedly caution the client to wait a few days before negotiating the trust account check, the client will invariably leave your office and drive to the nearest check cashing outlet causing an overdraft of the trust account. You should never disburse funds that are not in the account. Wait for the deposit to clear before writing the client’s check.
- The client’s retainer check was returned causing overdrafts in my account. The same rule applies as in the previous explanation. Do not disburse funds until the deposit has cleared and the funds are available. If you have doubt about the deposit, discuss it with your bank officer. Deposits may be presented for payment in a manner that will ensure the availability of the funds.
If you receive an inquiry regarding an overdraft from the Office of the General Counsel, respond promptly and fully. The likelihood is that the matter will go no further. However, if you continue to have repeated issues with overdrafts, a more extensive investigation will be undertaken to fully explore the causes for same and to identify remedial solutions.
ABA’s Model Standards for Record Keeping in Client Trust Accounts
At a minimum, the following records should be maintained:
Receipt and disbursement documentation detailing deposits and withdrawals
Client ledger sheets indicating source of client funds, amount of funds, and withdrawals and deposits on behalf of the client
Monthly balance sheets for each client
Copies of the written retainer agreement with each client
Copies of disbursement and/or settlement statements documenting funds disbursed to clients and/or third parties
Copies of billing statements sent to the clients
Copies of expenses paid on behalf of the clients
Check stubs, deposit slips, bank statements and any bank document reflecting activity in the trust account
Financial statements and reconciliation documents for the trust account
Maintain the financial records for a period of five years after the representation ends.
ABOUT THE AUTHOR
Gina Hendryx is the general counsel for the Oklahoma Bar Association. A licensed attorney for the past 25 years, she received her J.D. and B.S. degrees from OCU. She supervises a staff of 12 and serves as the association’s counsel on other legal matters. She works with the Professional Responsibility Commission and serves as a liaison to the OBA Board of Governors, OBA committees, the courts, and other local and national entities concerning lawyer ethics issues.
Originally published in the Oklahoma Bar Journal -- Dec. 11, 2010 -- Vol. 81, No. 33