ETHICS & PROFESSIONAL RESPONSIBILITY
The Trustworthy Trust Account
By Melissa DeLacerda and Dan Murdock

Lawyers generally do an excellent job of getting their work done in a professional and timely manner. The general public harbors many misconceptions about the inner workings of law offices. So their impression is based in large part upon the folklore and the "wives' tales" that circulate about lawyers.

There is nothing new about this phenomenon.

In 1770, Grafton County, New Hampshire provided the following census report to King George III:

Your Royal Majesty, Grafton County… contains 6489 souls, most of whom are engaged in agriculture, but included in that number are 69 wheelwrights, 8 doctors, 29 blacksmiths, 87 preachers, 20 slaves, and 90 students at the new college. There is not one lawyer, for which fact we take no personal credit, but thank an Almighty and Merciful God.

Rhode, Too Much Law, Too Little Justice, 11 Georgetown Journal of Legal Ethics 989.

Lawyers do have that perception to combat (in their spare time, when they are not practicing law and operating a business). And nothing fuels those negative perceptions like trust account problems. A small degree of preventive maintenance can minimize, if not eliminate, trust account problems.

Simple negligence accounts for many trust account violations. Who can you trust regarding your trust account statements? Only someone to whom you would entrust your license.

A lawyer receives notice from the California state bar accepting his resignation from bar. The only problem is that he never resigned. He calls the bar association outraged. An investigation reveals that his trusty and loyal secretary has embezzled $265,000 from his trust account over a five year period. She was so efficient that she kept him unaware of client complaints and bar disciplinary proceedings by intercepting phone calls, filing responses and requesting delays. Finally when she was unable to fake his appearance at a deposition, she agreed on his behalf to resign and forged his signature on the resignation. "B" has stated that he has spent more than two hundred and fifty thousand dollars in restitution and legal fees to date and at last report still faces the possible disciplinary action by the California state bar for having allowed his secretary to steal his client's funds.

Simple oversight and minimal diligence would have prevented this lawyer's problem.

It does not take very long in reviewing disciplinary complaints against lawyers to determine that many of them involve the attorney's trust account. In the Oklahoma Bar Association's most recent accounting, approximately 5 percent of all grievances received by the Office of General Counsel involve trust account violations, 74 OBJ 8 (3/8/03). Trust account violations are the most serious of all of all ethical infractions. "Theft by conversion or otherwise of the funds of a client shall, if proved, result in disbarment," Rule 1.4(c), Rules Governing Disciplinary Proceedings ("RGDP"), 5 O.S. 2002, Ch. 1, App. 1 - A (emphasis added).

Trust account violations fall into two broad general categories. In one category are intentional wrongdoers. There are attorneys who succumb to a temptation that there are significant sums of money sitting in the bank that are totally within the attorney's control even though they don't belong to him. These attorneys may "borrow" from the trust account intending to quickly repay it. Or perhaps, dispensing with semantics and cutting to the chase, they simply and intentionally misappropriate the funds, gambling that the risk (of being caught) is worth the financial reward. In another category are lawyers who make mistakes, exercise poor judgment, or are sloppy bookkeepers.

The Supreme Court has defined three levels of applicable culpability when evaluating the mishandling of client fund: commingling, simple conversion, and misappropriation, i.e., theft by conversion or otherwise.

"Commingling takes place when client monies are combined with the attorney's personal funds. Pursuant to Rule 1.4(b), RGDP, conversion occurs when a lawyer applies a client's money to a purpose other than that for which it was entrusted to that attorney. Under the rule, monies or property may be retained if the lawyer has a valid lien for services rendered. The third, and most serious infraction, occurs when funds are misappropriated - there is a theft by conversion or otherwise. This happens when an attorney purposefully deprives a client of money by way of deceit and fraud. Lawyers found guilty of intentionally inflicting grave economic harm through mishandling of clients fund are guilty of this offense. A finding that the attorney intentionally committed such an act requires imposition of the harshest discipline - disbarment," Oklahoma Bar Association v. Meek, 1994 OK 118, 9, 895 P.2d 692, 698.

Commingling is the least serious of these three offenses and happens when client monies are combined with the attorney's personal funds. In Oklahoma Bar Association v. Payne, 1988 OK 1, 748 P.2d 989, the respondent collected $1500 in child support and deposited those funds into her business account and not her trust account. For simple commingling, the respondent was publicly censured. Commingling can be prevented if a lawyer insures that only client or third parties funds are deposited into the trust account.

Conversion is more serious than commingling. Pursuant to Rule 1.4(b), RGDP, conversion occurs when a lawyer applies a client's money to a purpose other than that for which it was entrusted. In Oklahoma Bar Association v. Wilkins, 1995 OK 59, 898 P.2d 147, the respondent's trust account was overdrawn and client funds were applied towards other purposes than the purpose for which it was intended. The respondent would also retain client funds received in his trust account without notifying his client or forwarding the funds to her. This was merely "simple conversion" because the respondent's conduct was not attributable to purposeful fraud or deceit. In Oklahoma Bar Association v. Johnston, 1993 OK 91, 863 P.2d 1136, funds earmarked for medical bills were placed in the respondent's personal account and applied towards his attorney fees. This was deemed "simple conversion" because he did not intend to misappropriate.

"The third, and most serious infraction, occurs when funds are misappropriated - there is a theft by conversion or otherwise. This happens when an attorney purposefully deprives a client of money by way of deceit and fraud. Lawyers found guilty of intentionally inflicting grave economic harm through mishandling of clients fund are guilty of this offense.," Oklahoma Bar Association v. Meek, supra, at 9.

In Oklahoma Bar Association v. Busch, 1998 OK 103, 976 P.2d 869, the respondent received $76,000 of client funds. He evidently applied those funds towards his personal use. When he attempted to wire transfer $50,000 as the client instructed, that transfer was not successful due to insufficient funds. The Court found that "When a client's money is entrusted to an attorney, the latter's fiduciary duty is to apply strictly the funds to the specific purpose intended. Where money has been entrusted to any attorney for a specific purpose, he must apply it to that purpose. He may not avail himself of a counterclaim or set-off for fees by interposing demands against any money of his client coming into his hands for such specific purpose," at 43. The respondent was disbarred.

Being a bad bookkeeper can result in discipline. Bad bookkeeping alone is not unethical, of course, but it is a breeding ground for Rule violations, as reflected in Oklahoma Bar Association v. Stow, 1998 OK 105, 975 P.2d 869. Therein, the Supreme Court suspended the respondent for a period of three years for misconduct which included the mismanagement of his trust account. It was determined that "the respondent did not even attempt to keep an account of the funds that remained in his trust account. By his own admission, he withdrew funds whenever he needed them… he has no understanding of the necessity of maintaining separate records of funds deposited into his trust account for the benefit of his clients. The checks he wrote to himself out of his trust account do not identify whose funds he was withdrawing," at 12. In Oklahoma Bar Association v. Stormont, 37 P.3d 795, 2001 OK 80, the respondent periodically wrote checks to himself and to pay office and personal expenses without recording the specific source of the funds that covered those checks, at 10.

As demonstrated in the two preceding cases, it is imperative that withdrawals be attributed to a specific client. It is also imperative to attribute deposits to a specific client. In Oklahoma Bar Association v. Patmon, 1997 OK 64, 939 P.2d 1155, the respondent drew on another client's deposits to advance costs for a client who had not advanced expenses.

Attorney trust accounts are among the most simple operations that a law firm may manage. Yet mishandling of trust account funds is a frequent source of attorney disciplinary charges. There is, of course, no office procedure that will thwart an attorney determined to steal his client's money from doing so. However, a few simple procedures may provide an honest attorney with the necessary safeguards against inadvertent violations concerning his trust account.

A. The responsible attorney should insist that the trust account Bank statement is delivered to him immediately in its sealed and unopened form as it is received from the bank. Deposit slips and particularly the checks which are enclosed with the statement should be reviewed. Be particularly alert for checks paid to employees or other unexpected payees, signatures that don't look right, returned checks and telephone transfers in and out of the account. Ask questions about checks so that your employees will be aware that you are looking at your bank statements.

B. Consider having your trust account at an institution where the firm has no other accounts to lessen the possibility of the bank (or an employee) mistakenly making a deposit to the wrong account.

C. After reviewing the trust account bank statement, compare it briefly with the firm records concerning the individual client's ledgers.

D. Carefully review your ledger to ensure that all totals add to the same figure and that there are not a suspiciously large number of deposits in transit or outstanding checks. Do not hesitate to question your employee as to why there would be a large number of deposits in transit.

Probably by spending no more than an hour per month following the procedures outlined above, the attorney can be assured that there are no questionable transactions in the trust account while at the same time making an impression on all employees that the trust account is not subject for pilfering.

Trust account mismanagement can get a lawyer in trouble deeper and quicker than any other area of professional responsibility. "Maintenance of public confidence in this court and in the bar as a whole requires the imposition of severe discipline in misappropriation cases . . . .   A lawyer's license is a certificate of professional fitness to deal with the public as a practitioner of law. That fitness stands terminated after a single act of dishonest dealing with the client's funds. Any other approach would rightly confuse or equate a lawyer's state franchise with a license to cheat the public," Oklahoma Bar Association v. Raskin, 1982 OK 39, 22, 1987 OK 21.

At the same time, proper trust account management is not rocket science. Periodic review of trust account statements and of Rule 1.15, ORPC - an investment of one hour each month - would serve to minimize or eliminate the possibility of the most serious professional ramifications.

ABOUT THE AUTHORS
Melissa DeLacerda has been engaged in the general practice of law with a heavy emphasis on family law in Stillwater for the past decade. She currently serves as OBA president and is a member of the ABA Standing Committee on Client Protection. She is the recipient of the 2003 ABA General Practice, Solo and Small Firm Practice Section Bar Leader of the Year award.

Dan Murdock was appointed General Counsel effective Feb. 1, 1989. He had previously served as an assistant district attorney in Oklahoma County and was a small firm practitioner from 1975 to 1989. Dan is a frequent CLE presenter at both the state and national level. A member of the OBA since 1973, he has served as Interim Executive Director on four occasions and as Interim Director of CLE once.