Ethics Counsel on www.OKbar.org

Money and Ethics: Trust Accounts, Expenses, Loans, Gifts, Fee Divisions and Liens

By Gina L. Hendryx

TRUST ACCOUNTS

A lawyer who receives money or other property from a client or third party has a fiduciary duty to protect, account for and notify upon receipt of the property. Funds should be placed in a trust account separate and apart from the lawyer’s operating account or private account. Furthermore, property such as securities, deeds, titles, etc. should be safeguarded in a secure and protected environment such as a safe deposit box. Rule 1.15 of the Oklahoma Rules of Professional Conduct (ORPC) sets forth the requisites for the establishment of such accounts, document retention and dispute resolution responsibilities.

IOLTA

On May 10, 2004, the Oklahoma Supreme Court amended ORPC 1.15(d) making participation in the Interest on Lawyers’ Trust Account (IOLTA) program mandatory for all Oklahoma Bar Association members that hold client funds in connection with a representation. Effective July 1, 2004, client funds that are nominal in amount or to be held for a short period of time must be placed in an interest-bearing pooled trust account with the interest going to the Oklahoma Bar Foundation. The OBF’s tax I.D. number will be assigned to the IOLTA account.

Nominal in Amount or Held for Short Period of Time. To determine whether the client funds are “nominal in amount” or “to be held for a short period of time,” the lawyer should consider whether the funds could be invested to provide a positive net return or benefit to the client taking the following factors into consideration:

  1. the amount of interest the funds would earn during the period the funds are expected to be deposited;
  2. the cost of establishing and administering the account, including the cost of lawyer’s services, bookkeeping costs and the cost of preparing any tax reports required for interest accruing to a client’s benefit; and,
  3. the capability of the financial institution to calculate and pay interest to individual clients.

Client funds that do not meet the nominal or short term definitions may be placed in a separate account that may earn interest for the client’s benefit. The client’s tax I.D. number should be used on such an account.

Bank Fees. Only reasonable applicable service fees may be netted or deducted from interest earned by the IOLTA account. Applicable service fees are routine maintenance fees only. Service charges directly attributable to the IOLTA account are deductible solely from interest earned by the account. Other bank fees such as check and deposit slip printing charges, wire transfer fees and online access fees are considered ordinary business expenses of the lawyer and must not be deducted from the interest earned by the account. The lawyer may deposit personal funds into the trust account in an amount necessary to pay these ordinary business expenses and to comply with the bank’s minimum balance requirements for the maintenance of the account. The principal of the account cannot be used to pay or offset service charges of any kind.

Prior to July 2004, participation in the IOLTA program was voluntary. However, with the 2004 changes, all OBA members that practice within the state of Oklahoma and hold applicable client funds are required to complete an annual trust accounting certificate attesting compliance or a justifiable reason for non-compliance with the rule.

Advanced Fees and Costs

Legal fees and expenses that have been paid in advance are to be deposited into the lawyer’s trust account. “Rule 1.15(a) requires a lawyer to hold clients’ property separate from the lawyer’s property. Because an advance fee retainer remains the client’s property until it is earned, it must be segregated.1

Discrepancies in the definition arise when the fee is labeled “flat,” “non-refundable” or “retainer.” Regardless of its vernacular, the fee belongs to the client until it is earned by the lawyer. All fees must be reasonable and earned.2 “A lawyer may require advance payment of a fee, but is obligated to return any unearned portion.”3 The unearned fee must be deposited into the trust account and withdrawn when earned. Likewise, advances for litigation costs and expenses must be deposited into the trust account to be withdrawn when needed for payment of the expenditure.

Document Retention

Complete records of trust account funds and other client property shall be kept for a period of five years after termination of the representation.4 While the rule does not specifically state what types of documents should be generated and retained, the lawyer should maintain on a current basis records in accordance with generally accepted accounting practices. The lawyer should be able to trace the source of all funds deposited into the account whether by check or cash. Withdrawals from the account should be identifiable by purpose and client. Bank statements, account ledgers, deposit and withdrawal information, as well as receipts and billing records, should be included in the retained records.

Receipt, Notification and Distribution

Rule 1.5(b) provides that when a lawyer receives funds or property in which a client or third party has an interest, the lawyer shall promptly 1) notify the client or third party, 2) deliver the funds or property and 3) render a full accounting upon request. If the lawyer is in possession of property in which the lawyer and another person claim interests, the property is to be kept separate by the lawyer until there is an accounting and severance of their interests. If dispute arises about how to divide the funds, the lawyer should distribute any undisputed portion and hold the disputed funds in trust until the matter is resolved.5

The lawyer may be in possession of property in which the client and third parties claim an interest as in the case of client’s creditors. A portion of the comment to Rule 1.15 states:

Third parties, such as client’s creditors, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

“Further, where there is a legitimate dispute over entitlement to funds in a lawyer’s possession the attorney cannot simply hold the funds indefinitely.”6 The lawyer should take the initiative to have the matter resolved through the underlying case or by an interpleader action.

Commingling, Conversion and Misappropriation

The lawyer’s trust account is for client funds only and should be kept separate from the general or operating account or the lawyer’s general funds. Likewise, client funds should not be deposited into the operating account even if the lawyer keeps accurate records and disburses the money when the fee is earned or the expense paid. The risk of mismanagement is too great when the lawyer fails to segregate these funds.

Three levels of culpability are employed when an attorney mishandles client funds with ascending degrees of seriousness. The least offensive — commingling — occurs when an attorney fails to keep client moneys in an account separate from that of the attorney. The next serious offense — simple conversion – exists when the attorney uses client funds for a purpose other than that for which they are intended. Finally, an attorney commits misappropriation when the lawyer purposefully deprives a client of moneys through deceit and fraud.7

Commingling. Commingling occurs when client funds and attorney moneys are mixed in the same account. This happens most frequently when the attorney fails to withdraw earned fees from the trust account or when the attorney does not have a trust account and deposits client funds directly into his/her operating account. “When other people’s money is mixed with money belonging to the lawyer or the law firm, it is in danger of being used for the lawyer’s own expenses, as well as vulnerable to claims by the lawyer’s creditors.”8

Conversion. Simple conversion occurs when the lawyer applies client money to a purpose other than for which it was entrusted. It includes temporary use and it includes use that does not result in personal gain to the lawyer.9 Examples of conversion include paying one client out of the funds of another, applying all client funds to the client’s bill and paying one client’s court costs with the moneys of another.

Misappropriation. Oklahoma has labeled the most serious taking of client property as “misappropriation.” This occurs when the lawyer intentionally takes or uses client funds for his own or his law firm’s use. This, the most severe of infractions, usually results in the harshest of penalties including suspension and disbarment.

FINANCIAL ASSISTANCE TO CLIENTS

Attorneys generally have been prohibited from providing financial assistance to clients with the exception of advancing courts costs and the expenses of litigation. Other forms of financial assistance such as loans are usually prohibited, and gifts to clients are strictly scrutinized for intent and requirement of repayment. The prohibitions are in place to discourage clients from “shopping for the best deal” and to prevent lawyers from having a propriety interest in the litigation.

Court Costs and Expenses of Litigation

ORPC 1.8(e) states “A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that the lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter.”

The exception for court costs and litigation expenses covers the majority of expenditures directly associated with the litigation. Court costs have been defined as filing fees, service fees and other expenditures that are taxable as costs to the judgment.10 Litigation expenses include costs of investigation, costs associated with obtaining and presenting evidence, medical examinations and expert witness fees.11 Advancing legitimate travel related costs to attend a trial or a deposition, has been held to be proper.12 However, the advancement of funds for travel to a medical office for treatment has been held to violate ethical rules.13

Prior to the adoption of the ORPC, the client remained ultimately liable for court costs and litigation expenses. As a practical matter, few attorneys sought reimbursement for these advanced costs when the litigation was unsuccessful due largely in part to their client’s financial status. Repayment may now be contingent upon the outcome of the litigation.14 ORPC 1.5(c) requires a contingent fee agreement to be in writing and state “...whether the client is to be liable for reimbursement of litigation and other expenses to be deducted from the recovery...” Therefore, you need not require your client to remain ultimately responsible for advanced costs, but you must include in your written fee agreement a statement reflecting how costs will be treated.

Loans to Client

It is not uncommon during the course of litigation for a client, especially one with a pending injury claim, to ask for financial assistance from his or her attorney. The request may be for an “advance,” “loan” or “guarantee.” Regardless of the form, ORPC 1.8(e) prohibits such transactions. Clients often ask the attorney for an advance to pay rent or utilities. In State ex rel. Oklahoma Bar Ass’n v. Smolen, 2000 OK 95,17 P.3d 456, the respondent was disciplined for advancing living expenses to a client. Respondent argued that he advanced the funds only after the attorney/client relationship was established with repayment to be made from benefits which had already been awarded, that the loan was for “humanitarian purposes” and was interest free.

The court declined to make an ad hoc exception to Rule 1.8(e) citing the potential ethical problems which can arise from a lawyer advancing clients’ money for living expenses, as well as the explicit language of the rule.

The rule prohibits an attorney from “making” a loan to a client and likewise prohibits the “guaranteeing” of same. The attorney, subject to attorney/client confidence considerations, may confirm the pendency of a settlement and recognize any lawfully obtained liens or encumbrances. However, it is improper to serve as a guarantee on behalf of a client.

Gifts to Client

The ethics rules clearly prohibit the advancing or loaning of funds to the client. However, they are less clear on the appropriateness of an outright gift to a client. Gifts will be carefully scrutinized to ascertain if it truly is a “gift” without the expectation of repayment. In jurisdictions that allow charitable gifts, they are generally restricted to existing clients and prohibited to potential clients. Otherwise, gifts would be used as a lure or inducement to attract clients rather than as a humanitarian act to an existing client in need. The Restatement of the Law Governing Lawyers states that gifts should be allowed providing that the gift is unconditional and given in cases of a client’s extreme need.

FEE DIVISION BETWEEN LAWYERS

Fee division among lawyers most commonly occurs when one lawyer refers a case to another lawyer. Other scenarios may include when a client’s original attorney withdraws and is replaced by a successor, or a lawyer withdraws or retires from a firm. Regardless of the circumstances, lawyers from different firms who work on the same case may agree to split the legal fees earned on the case.

“A division of fee between lawyers who are not in the same firm may be made only if:

  1. the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
  2. the client is advised of and does not object to the participation of all of the lawyers involved; and
  3. the total fee is reasonable.”15

Rule 1.5(e) permits fee division based upon the proportion of work performed or if the lawyers jointly assume responsibility for the representation and the client agrees in writing to the attorneys’ arrangement. The attorney is not required to disclose to the client the percentage share each attorney is to receive. Whichever fee agreement the attorneys choose, the total fee must be reasonable.

Joint responsibility entails the obligations required of the lawyer in ORPC 5.1. This rule places the attorney in a “supervisory capacity” to be responsible for the other lawyer’s work and to make reasonable efforts to ensure the other lawyer conforms to the rules of professional conduct. Joint responsibility includes assumption of responsibility to client “comparable to that of a partner in a law firm under similar circumstances, including financial responsibility [and] ethical responsibility to the extent a partner would have ethical responsibility for actions of other partners in a law firm in accordance with Rule 5.1.”16

The best practice is to have fee division agreements in writing specifying the referring attorney’s role in the case and the terms of the split. However, agreements to divide fees may be expressed orally or in writing, or may be inferred from the lawyers’ customary working relationship.

LIENS

A lien is a claim or charge on property for the payment of some debt, obligation or duty. Lawyers generally assert liens to secure the payment of legal fees. Likewise, third parties also assert liens to secure payment from clients for services rendered.

Attorney Liens

There are two principal types of liens by which lawyers may secure payment for services. The statutory charging lien may be claimed when the attorney has commenced an action on behalf of the client or filed an answer containing a counterclaim and endorsed the pleading with the words “lien claimed” or has served notice of the lien upon the defendants. The common law retaining lien may be asserted against a client’s property only when properly chargeable fees are owing and due and the lawyer is in possession of property not otherwise designated for a specific purpose.17

Statutory Charging Lien. Oklahoma has incorporated the common law charging lien into its statutory law at Title 5 O.S. §6. The charging lien is asserted on a cause of action, judgment or settlement that the client has recovered through the lawyer’s efforts. The lawyer claiming the lien must have commenced the lawsuit or counterclaim on the client’s behalf in order for there to be a “cause of action” for the lien to attach.18 To properly assert a charging lien, the attorney must have:

  1. Commenced the action or filed an answer containing a counterclaim,
  2. Served notice upon the defendant or defendants,
  3. Notice is not necessary provided attorney filed a pleading in a court of record and endorsed same with his/her name and the words “lien claimed.”19

Most of the cases that cite this statute involved contingency fee contracts wherein the client discharged his first attorney, hired a successor attorney and then settled the claim. An instructive case with this scenario is Martin v. Buckman, 1994 OK CIV APP 89, 883 P.2d 185. In Martin, the court held that attorney Buckman perfected his attorney’s charging lien by signing his name on the face of the petition along with the words “attorney lien claimed.”19

The court further determined how a “discharged” attorney should be compensated in a contingency fee matter. “If an attorney is discharged without cause, the lawyer working on a contingent fee basis is entitled to receive for his services a proportionate share of any contingent fee fund eventually created. And, where the discharged attorney has substantially performed the terms of the contract, he is entitled to the full contract fee even though the contingency does not take place until after the discharge.”20

An action to enforce an attorney’s lien is an equitable matter. Martin v. Buckman, supra. The court determines how to legally divide an attorney fee when one lawyer is asserting a charging lien. The court looks to the specific factors of the case and may apply both the contract fee and/or a quantum meruit determination. In Martin v. Buckman, supra, the first attorney was terminated “without cause.” However, cause does not appear to be a factor in deciding fee division. In Duffy v. Cope, 2000 OK CIV APP 140, 18 P.3d 366, the court stated:

“In the instant case, the trial court had to determine how to legally and equitably divide the $340,000 attorney fee fund between the two law firms. It is true that the trial court concluded Hoover’s termination was for ‘just cause,’ but there is no controlling authority that would preclude Hoover from recovering a portion of the fees... The main objective is to evaluate the totality of the involved lawyers’ efforts in terms of their proportional contribution to the creation of the fund to be divided.”

Public policy supports the proposition that an attorney lien has priority over the liens of clients’ creditors. If the attorney lien cannot prevail over the subsequent lien of a creditor, clients might be deprived of legal representation due to economic factors rather than the merits of their claims. In Oklahoma, a lien claimed by an attorney that had placed the words “lien claimed” on the petition was prior to that of plaintiff’s creditors.21

Pursuant to the workers’ compensation statutes, an attorney’s claim for legal services becomes a lien upon the compensation award if it is approved by the Industrial Commission and only in the manner fixed by the commission.22

Common Law Retaining Lien. Oklahoma recognizes the common law retaining lien, also known as a general lien or possessory lien. The retaining lien is an attorney’s claim to hold a client’s file, money or property until the fee is satisfied. The retaining lien may be applicable when a client’s failure to comply with a fee agreement has led to a lawyer’s withdrawal or when a client has discharged an attorney and there remains an outstanding fee balance.

In a recent decision, the Oklahoma Court of Civil Appeals reviewed the retaining lien and set forth guidelines to assist in determining when it is proper to assert and enforce a retaining lien. “Oklahoma law recognizes two types of lien by which a lawyer may secure payment for services: 1) a statutory charging lien and 2) a common-law general possessory or retaining lien.... The retaining lien generally attaches to all property, papers, documents, securities and monies of the client coming into the hands of the attorney in the course of the professional employment.”23 However, “a lawyer [may not] take money or property entrusted to him for a ‘specific purpose’ and apply it to the attorney’s fee claim.”24

When money or other property has been entrusted to an attorney for a specific purpose, the attorney must apply it for that purpose. For example, money paid to an attorney for the “specific purpose” of taking a deposition would not be subject to a retaining lien. Likewise, moneys being paid into an attorney’s trust account for a filing fee would not be properly held pursuant to a claim of a retaining lien. However, in State ex rel. Oklahoma Bar Ass’n v. Briggs, 1999 OK 76, 990 P.2d 869, 872-873 the sale of stock to pay the attorney’s fee was permitted since the stock was given for that purpose.

The specific purpose analysis of retaining liens when dealing with property other than money requires a determination of whether the client’s original documents were delivered to the attorney for a specific purpose different from that representation for which the attorney was hired.

The attorney’s common law right to a retaining lien must be weighed against the potential harm or prejudice to the former client. The Oklahoma Rules of Professional Conduct state:

“Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by other law.”25

The court held in the Britton case that the assertion of a retaining lien that is prejudicial to the client is inconsistent with the lawyer’s continuing duty to the client. When determining whether or not to claim a retaining lien to original documents, you should assess 1) whether the client will suffer serious consequences without the documents and 2) whether any prejudice to the client can be mitigated by means other than a return of the documents.

A valid retaining lien will only attach when there are reasonable fees due and owing. It may not be asserted for legal services not yet performed, whether or not the client has agreed to pay for the future services. The attorney claiming the lien has the burden of proof on reasonableness and indebtedness. Once met, it is upon the client to prove prejudice.

The attorney’s legal rights to secure payment for services rendered must be balanced with the ethical responsibilities not to harm the client. Before you hold a client’s file “hostage,” weigh the competing factors:

  • Why do I have this document or property in my possession?
  • By holding the property, do I prejudice the client’s ability to go forward with the matter?
  • Can the client get the retained material by other means?
  • Are my fees reasonable?
  • Are my claimed fees for completed work?

Most states, including Oklahoma, permit lawyers to assert liens to secure payment of client bills. It gives the lawyer power to coerce payment from recalcitrant clients. However, this power must be tempered by your ethical responsibilities to your clients and the profession.

Third Party Liens

In Oklahoma, a lawyer may have a statutory duty to protect the claims of third parties against client funds or property in the lawyer’s possession. ORPC 1.15(b) and (c) provide:

(b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(c) When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.

The most prevalent example is when a medical provider files a lien for services rendered. If a medical lien comports with the applicable statutory requirements, an attorney must recognize the validity of the lien and safeguard the funds. In Saint Francis Hospital v. Vaughn, 1998 OK CIV APP 167, 971 P.2d 401, the hospital foreclosed its lien against attorney Vaughn. Vaughn was the attorney for a woman that was treated at Saint Francis. Vaughn settled her tort claim and distributed the proceeds to the client. Since he did not protect the hospital’s lien, it was foreclosed against the lawyer.

If there is a legitimate dispute over the distribution of the funds or ownership of the property, the lawyer should not unilaterally assume to arbitrate a dispute between the client and a third party. Further, where there is a dispute over entitlement to the funds, the attorney cannot simply hold the funds indefinitely. The attorney should seek, if necessary, a formal proceeding such an interpleader or the underlying court case for resolution of the dispute.26

The lawyer may be required to protect the interests of a third party that does not have a valid lien. For example, if a client signs an agreement to pay a medical provider out of settlement proceeds, the attorney may be required to recognize the agreement and not follow the client’s subsequent instructions to do otherwise. ABA Informal Ethics Opinion 1295 (1974) determined it was proper for a lawyer to allow the client to sign an agreement with a physician directing the lawyer to withhold from future recovery funds necessary to pay the physician’s bill. Before agreeing to such an arrangement, the attorney should get written, informed consent from the client to honor claim’s of a third party.

CONCLUSION

Neglect is the most often cited reason for client discontent. However, money disputes are more likely to result in harsher discipline with greater scrutiny of the lawyer. A lawyer’s fiduciary duty to the client is paramount and should reflect the highest ideals of ethics and professionalism.

1. State ex rel. Oklahoma Bar Ass’n v. Sheridan, 2003 OK 80, 84 P3d 710.
2. ORPC 1.5.
3. ORPC 1.5 comment.
4. ORPC 1.15(a).
5. ORPC 1.15(c).
6. State ex rel. Oklahoma Bar Association v. Taylor, 2003 OK 56, 71 P.3d 18.
7. State ex rel. Oklahoma Bar Ass’n v. Phillips, 2002 OK 86, 60 P.3d 1030.
8. Black v. California State Bar, 368 P.2d 118 (Calif SupCt 1962).
9. In re Harrison, 461 A2d 1034 (DC CtApp 1983).
10. Sellers v. Johnson, 1986 OK CIV APP 6, 719 P.2d 476.
11. Bennett v. Home Insurance Co., 347 F.Supp 451, 452 (DC S.Fla.1972).
12. Superior Testers Inc. v. Daneco Testers, Inc., 336 F.Supp 37,41 (DC E.La.1971).
13. Attorney Grievance Commission of Maryland v. Kandel, 563 A.2d 387, 389 (Md. CtApp1989).
14. ORPC 1.8(e).
15. ORPC 1.5(e).
16. ABA Informal Ethics Op. 85-1514 (1985).
17. State ex rel. Oklahoma Bar Ass’n v. Meek, 1994 OK 118, 895 P.2d 692.
18. Wilcox v. Mid-Continent Casualty, 1998 OK CIV APP 189, 971 P.2d 405.
19. 5 O.S. §6.
20. Martin v. Buckman @ ¶33.
21. Shook v. Cooper, Okla., 1964 OK 145, 393 P.2d 842.
22. Carr v. State Indus. Com’n, Okla., 157 Okla. 140, 11 P.2d 134 (1932).
23. Britton and Gray, P.C. v. Shelton, 2003 OK CIV APP 40, 69 P3d. 1210.
24. State ex rel. Oklahoma Bar Ass’n v. Cummings, 1993 OK 27, 863 P.2d 1164, 1170.
25. ORPC 1.16(d).
26. State of Oklahoma ex rel. Oklahoma Bar Association v. Taylor, 2003 OK 56, 71 P.3d 18.

Have an ethics question? It’s a member benefit, and all inquiries are confidential. Contact Ms. Hendryx at ginah@okbar.org or (405) 416-7083; (800) 522-8065.

About the Author

Gina Hendryx is the ethics counsel for the Oklahoma Bar Association. Ms. Hendryx received her juris doctor and undergraduate degrees from Oklahoma City University and has spent the last 20 years working in both the private and nonprofit legal sectors. She is a frequent lecturer and contributor to continuing legal education programs on the subject of professional responsibility.

Originally published in the Oklahoma Bar Journal -- Dec.10, 2005 -- Vol. 76; No.34