HOW TO WIN IN TRUST ACCOUNT MANAGEMENT LEANOR BAILEY HODGE TRUST ACCOUNT COMPLIANCE COUNSEL NC STATE BAR

Transcription

1 HOW TO WIN IN TRUST ACCOUNT MANAGEMENT LEANOR BAILEY HODGE TRUST ACCOUNT COMPLIANCE COUNSEL NC STATE BAR

2 HOW TO WIN IN TRUST ACCOUNT MANAGEMENT Know the Rules Get Training Start Strong Play by the Rules Properly Record Be Accountable Review Your Progress Stay the Course Until the End Beware of Roadblocks to Success

3 KNOW THE RULES WHERE THEY ARE FOUND

4 KNOW THE RULES NC Rule of Prof l Conduct : Definitions NC Rule of Prof l Conduct : General Rules NC Rule of Prof l Conduct : Records and Accountings NC Rule of Prof lconduct : Trust Account Management in a Multi-Member Firm 27 N.C. Admin. Code 1D N.C. Admin. Code 1B.0132

5 START STRONG GENERAL REQUIREMENTS All entrusted funds shall be identified, held and maintained separate from the property of the lawyer All entrusted funds shall be deposited and distributed only in accordance with Rule 1.15 NC Rule of Prof l Conduct (a)

6 A FEW IMPORTANT DEFINITIONS Trust account an account, designated as such, maintained by a lawyer for the deposit of trust funds Trust funds funds belonging to someone other than the lawyer that are received by or placed under the control of the lawyer in connection with the performance of legal service Entrusted property trust funds, fiduciary funds and other property belonging to someone other than the lawyer which is in the lawyer s possession or control in connection with the performance of legal services or professional fiduciary services Legal services services (other than professional fiduciary services) rendered by a lawyer in a client-lawyer relationship

7 Fiduciary account an account, designated as such, maintained by a lawyer for the deposit of fiduciary funds or other entrusted property of a particular person or entity Fiduciary funds funds belonging to someone other than the lawyer that are received by or placed under the control of the lawyer in connection with the performance of professional fiduciary services Professional fiduciary services compensated services (other than legal services) rendered by a lawyer as a trustee, guardian, personal representative of an estate, attorney-in-fact, or escrow agent, or in any other fiduciary role customary to the practice of law

8 MORE DEFINITIONS Trust funds funds belonging to someone other than the lawyer that are received by or placed under the control of the lawyer in connection with the performance of legal service A trust or fiduciary account may only hold entrusted property. Third party funds that are not received by or placed under the control of the lawyer in connection with the performance of legal services or professional services may not be deposited or maintained in a trust or fiduciary account. NC Rule of Prof l Conduct (f)

9 TYPES OF TRUST ACCOUNTS Dedicated trust account a trust account that is maintained for the sole benefit of a single client or with respect to a single transaction or series of integrated transactions General trust account any trust account other than a dedicated trust account

10 DEPOSIT OF TRUST FUNDS All funds received or placed under the control of a lawyer shall be promptly deposited into either General trust account holds those funds that, in the lawyer s good faith judgment are nominal or short-term Dedicated trust account a trust account that is maintained for the sole benefit of a single client or with respect to a single transaction or series of transactions Fiduciary account NC Rule of Prof l Conduct (b) and (c)

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12 GET TRAINING IT MAY BE REQUIRED PRIOR TO EXERCISING SIGNATURE OR ELECTRONIC TRANSFER AUTHORITY FOR A TRUST ACCOUNT, A LAWYER OR SUPERVISED EMPLOYEE SHALL TAKE A ONE-HOUR TRUST ACCOUNT MANAGEMENT CONTINUING LEGAL EDUCATION COURSE APPROVED BY THE STATE BAR FOR THIS PURPOSE THE CLE COURSE MUST BE TAKEN AT LEAST ONCE FOR EVERY LAW FIRM AT WHICH THE LAWYER OR THE SUPERVISED EMPLOYEE IS GIVEN SIGNATURE OR TRANSFER AUTHORITY

13 PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT A lawyer shall promptly notify his or her client of the receipt of any entrusted property belonging in whole or in part to the client NC Rule of Prof l Conduct (m)

14 PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT All records listing the source and date of receipt of any funds deposited in the account (bank receipts, deposit slips and wire and electronic transfer confirmations) In the case of a general trust account, the deposit records must list the name of the client or other person to whom the funds belong NC Rule of Prof l Conduct (b)(1)

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16 START STRONG GENERAL REQUIREMENTS All trust accounts shall be maintained at a bank in North Carolina or a bank with branch offices in North Carolina except that, with the written consent of the client, a dedicated trust account may be maintained at a bank that does not have offices in North Carolina or at a financial institution other than a bank in or outside North Carolina A lawyer may maintain a fiduciary account at any bank or other financial institution in or outside North Carolina selected by the lawyer in the exercise of the lawyer s fiduciary responsibility NC Rule of Prof l Conduct (e)

17 START STRONG GENERAL REQUIREMENTS General trust accounts must be IOLTA accounts Interest or dividend-bearing account Funds must be available for withdrawal upon request and without delay (subject to any notice period that the bank is required to reserve by law or regulation) Maintained only at banks and savings and loan associations chartered under North Carolina or federal law, as required by Rule 1.15 of the Rules of Professional Conduct, that offer and maintain IOLTA Accounts that comply with the requirements set forth in Subchapter 1D Every lawyer/law firm or settlement agent maintaining IOLTA Accounts shall advise NC IOLTA of the establishment or closing of each IOLTA Account 27 N.C. Admin. Code 1D.1300 and 1D.1316

18 START STRONG GENERAL REQUIREMENTS

19 START STRONG GENERAL REQUIREMENTS NSF Directive Every lawyer maintaining a trust account or fiduciary account with demand deposit at a bank or other financial institution shall file with the bank or other financial institution a written directive requiring the bank or other financial institution to report to the executive director of the North Carolina State Bar when an instrument drawn on the account is presented for payment against insufficient funds No trust account or fiduciary account shall be maintained in a bank or other financial institution that does not agree to make such reports NC Rule of Prof l Conduct (l)

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21 START STRONG GENERAL REQUIREMENTS All general trust accounts, dedicated trust accounts, and fiduciary accounts must use business-size checks that contain an Auxiliary On- Us Field in the MICR line of the check NC Rule of Prof l Conduct (a)

22 Auxiliary On-US Field MICR LINE

23 PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT No funds belonging to the lawyer shall be deposited or maintained in a trust account or fiduciary account of the lawyer except: Funds sufficient to open or maintain an account, pay any bank service charges, or pay any tax levied on the account Funds belonging in part to a client or other third party and in part currently or conditionally to the lawyer NC Rule of Prof l Conduct (f)

24 PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT When funds belonging to the lawyer are received in combination with funds belonging to the client or other persons, all of the funds shall be deposited intact The amounts currently or conditionally belonging to the lawyer shall be identified on the deposit slip or other record After the deposit has been finally credited to the account, the lawyer shall withdraw the amounts to which the lawyer is or becomes entitled If the lawyer s entitlement is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved NC Rule of Prof l Conduct (g)

25 General Retainer Advance Payment Flat Fee Hybrid Fee Contingent Fee Non-Refundable fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES

26 General Retainer/Minimum Fee Consideration paid at the beginning of a representation to reserve the exclusive services of a lawyer but not used to pay for actual representation Generally used when a corporate or business client has a specific need to a consult a lawyer on a regular basis May also be used in domestic matters Earned: upon payment PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES Deposited: into operating account

27 Advance Fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES A deposit by the client of money that will be billed against, usually on an hourly basis, as legal services are provided Earned: as legal services are rendered Deposited: into trust account Unearned portion: refunded upon termination of the client-lawyer relationship

28 Flat Fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES Fee paid at the beginning of a representation for specified legal services on a discrete legal task or isolated transaction to be completed within a reasonable amount of time Fee pays for all legal services regardless of the amount of time the lawyer expends on the matter Earned: immediately, if the client consents Deposited: generally, into operating account Unearned portion is refunded to the client

29 Hybrid Fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES Paid at the beginning of the representation and is in part a general retainer or flat fee and in part an advance payment to secure the payment of fees yet to be earned Earned: one portion of the fee is earned immediately and the other remains the client s property Deposited: Retainer/flat fee into operating account Client s property into the trust account

30 Contingent Fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES A fee that is contingent on the outcome of the matter for which the service is rendered Earned: at the conclusion of representation Deposited: into trust account

31 Non-refundable Fee PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT FEES All fees are subject to possible refund there is no such thing as a non-refundable fee in North Carolina

32 PLAY BY THE RULES DISBURSING ENTRUSTED FUNDS A lawyer shall promptly pay or deliver to the client, or to third persons as directed by the client, any entrusted property belonging to the client and to which the client is currently entitled NC Rule of Prof l Conduct (n)

33 PLAY BY THE RULES DISBURSING ENTRUSTED FUNDS Every trust account check must be signed by A lawyer An employee who is not responsible for performing monthly or quarterly reconciliations and who is supervised by a lawyer Every electronic transfer from a trust account must be initiated by A lawyer An employee who is not responsible for performing monthly or quarterly reconciliations and who is supervised by a lawyer Trust account checks may not be signed by Signature stamps Preprinted signature lines on checks Electronic signatures other than digital signatures as defined in 21 CFR 11.3(b)(5) NC Rule of Prof l Conduct (s)

34 PLAY BY THE RULES HANDLING FUNDS UPON RECEIPT The Story of Harmony Young A Cautionary Tale

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38 Planning to disburse trust account funds from a provisionally credited item? 1. Are you reasonably certain the instrument will be honored? 2. Is it for an amount that your assets can fund if it is dishonored?

39 PLAY BY THE RULES DISBURSING ENTRUSTED FUNDS Any item drawn on a trust account or fiduciary account for the payment of the lawyer s fees or expenses shall be made payable to the lawyer and shall indicate on the item by client name, file number, or other identifying information the client from whose balance the item is drawn Any item that does not include this information may not be used to withdraw funds from a trust account or fiduciary account for payment of the lawyer s fees or expenses NC Rule of Prof l Conduct (h)

40 PLAY BY THE RULES DISBURSING ENTRUSTED FUNDS Use of a debit card to withdraw funds from a general or dedicated trust account or fiduciary account is prohibited NC Rule of Prof l Conduct (j)

41 PLAY BY THE RULES DISBURSING ENTRUSTED FUNDS No item shall be drawn on a trust account or fiduciary account made payable to cash or bearer and no cash shall be withdrawn from a trust account or fiduciary account by any means NC Rule of Prof l Conduct (i) A lawyer shall not use or pledge any entrusted property to obtain credit or other personal benefit for the lawyer or any person other than the legal or beneficial owner of that property NC Rule of Prof l Conduct (k)

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44 PROPERLY RECORD Every deposit into and disbursement from a general trust account that shows that current balance of funds held in the trust account general ledger Every receipt and disbursement for each person or entity from whom and for whom funds are received and showing the current balance of funds held in the trust account for each such person or entity client or subsidiary trust account ledger For all deposits, the source, date, and client Deposit slips Bank receipts Wire and electronic transfer confirmations

45 PROPERLY RECORD On all disbursements identify the client by name, file number or other identifying information from whose balance each item is drawn Checks Wire transfers Electronic transfers Every deposit and disbursement of the lawyer s funds deposited in accordance with Rule (f)(1)

46 PROPERLY RECORD General ledger

47 PROPERLY RECORD Manual ledger

48 PROPERLY RECORD Excel ledger

49 PROPERLY RECORD Quickbooks ledger

50 PROPERLY RECORD Client ledgers

51 Client A Client B Client C INDIVIDUAL CLIENT LEDGERS

52 PROPERLY RECORD Administrative ledger

53 PROPERLY RECORD Trust Account Checks

54 REVIEW YOUR PROGRESS TRUST ACCOUNT RECONCILIATION

55 Review balance of trust account shown on lawyer s records Review current bank statement balance for trust account Reconcile balances reviewed MONTHLY RECONCILIATION Sign, date and retain a copy of the reconciliation Balance of trust account as shown on lawyer s records Current bank statement for the trust account Sign, date and retain a copy of the reconciliations

56 General ledger balance Total of Client ledgers with a positive balance Adjusted bank balance QUARTERLY RECONCILIATION Sign, date and retain a copy of the reconciliation General ledger balance Total of subsidiary (client) ledgers with a positive balance Adjusted bank balance Sign, date and retain a copy of the reconciliations

57 THREE-WAY RECONCILIATION IS REQUIRED Total of Client s Trust Ledgers with Positive Balances Bank Statement Balance with adjustment for outstanding checks and outstanding deposits Trust General Ledger/Check Register

58 THREE-WAY RECONCILIATION General ledger balance Total of subsidiary (client) ledgers with a positive balance Adjusted bank balance Ending bank statement balance Plus all outstanding deposit amounts Minus all outstanding disbursement amounts Step 3 Add outstanding deposit amounts to ending bank statement balance and subtract all outstanding check amounts Step 2 Add all subsidiary (client) ledgers with a positive balance and record Reconciled when balances calculated in steps 1-3 result in the same number Step 1 Identify and record general ledger balance

59 10/10/2018 9/30/2018 $62,015

60 REVIEW YOUR PROGRESS QUARTERLY RECONCILIATION Total of subsidiary client ledgers with a positive balance Client A -$500 Client B -$1,500 Client C -$10,000 Client D -$15 Client E -$50,000 Total of subsidiary client ledgers with a positive balance: $62,015

61 10/10/2018 9/30/2018 $62,015 9/30/2018 $62,015

62 REVIEW YOUR PROGRESS QUARTERLY RECONCILIATION Total of subsidiary client ledgers with a positive balance Client A: $500 Client B: $1,500 Client C: -$50 Client D: $10,000 Client E: $15 Client F: -$150 Client G: $50,000 Total of subsidiary client ledgers with a positive balance: $62,015

63 10/10/2018 9/30/2018 $62,015 9/30/2018 $62,015

64 REVIEW YOUR PROGRESS QUARTERLY RECONCILIATION Ending bank statement balance $135,061 Plus all outstanding deposit amounts + 1,038 Minus all outstanding checks - 74,084 Adjusted Bank Balance: $62,015

65 10/10/2018 9/30/2018 $62,015 9/30/2018 $62,015 9/30/ $135,061 $1,038 $74,084 $62,015

66 REVIEW YOUR PROGRESS TRUST ACCOUNT REVIEWS

67 Bank Statement Cancelled checks Sign, date an retain a copy of the reconciliation MONTHLY REVIEW Bank statement Cancelled checks

68 MONTHLY REVIEW

69 Random sample of transactions consisting of multiple disbursements Statement of costs and receipts Client ledger Canceled checks QUARTERLY REVIEW GENERAL AND DEDICATED TRUST ACCOUNTS Random sample of transactions (minimum of three) consisting of multiple disbursements Sign, date an retain a copy of the reconciliation Statement of Costs and Receipts Client ledger Canceled checks

70 QUARTERLY REVIEW Lawyer must randomly select the transactions Transactions should include multiple disbursements, if possible (ie, closings, settlements)

71 For each fiduciary account Random sample of transactions consisting of multiple disbursements Statement of costs and receipts Client ledger Canceled checks Sign, date an retain a copy of the reconciliation More than ten fiduciary accounts may perform reviews on random sample of at least ten fiduciary accounts QUARTERLY REVIEW FIDUCIARY ACCOUNT Random sample of transactions (minimum of three) consisting of multiple disbursements Statement of Costs and Receipts Client ledger Canceled checks

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73 The lawyer shall render to the client a written accounting of the receipts and disbursements of all trust funds Upon complete disbursement of the trust funds At such other times as may be reasonably requested by the client At least annually if the funds are retained for a period of more than one year NC Rule of Prof l Conduct (e) Inventories and accountings of fiduciary funds and other entrusted property received in connection with professional fiduciary services shall be rendered to judicial officials or other persons as required by law If an annual or more frequent accounting is not required by law, a written accounting of all transactions concerning the fiduciary funds and other entrusted property shall be rendered to the beneficial owners, or their representatives, at least annually and upon termination of the lawyer s professional fiduciary services NC Rule of Prof l Conduct (f) BE ACCOUNTABLE TO CLIENTS AND OTHERS

74 Random Audit Subject randomly chosen Records produced pursuant to subpoena at subject s office Records reviewed by auditor Investigative Audit Subject specifically chosen for reasonable cause Records produced pursuant to subpoena to appear at State Bar Offices in Raleigh Records reviewed by State Bar investigator and deputy counsel Reviewed primarily for procedural compliance Auditor may allow reasonable time to correct procedural violation in lieu of reporting Review is typically of transactions occurring within one year from audit Reviewed for procedural and substantive compliance Violations found are reported to Grievance Committee to determine whether probable cause to believe lawyer engaged in misconduct Review can span transactions occurring over several years 27 NC Admin. Code 1B.0132(b) 27 NC Admin. Code 1B.0132(a) BE ACCOUNTABLE TO THE STATE BAR NC RULE OF PROF L CONDUCT (H)

75 STAY THE COURSE UNTIL THE END A lawyer shall maintain, in accordance with Rule 1.15, complete and accurate records of all entrusted property received by the lawyer for Six Years

76 BEWARE OF ROADBLOCKS TO SUCCESS Misappropriation of entrusted funds by others Rule of Prof lconduct 5.3 requires lawyers to make reasonable efforts to supervise nonlawyer staff to ensure such staff s conduct is compatible with the professional obligations of the lawyer This includes any staff assisting the lawyer with trust account management

77 BEWARE OF ROADBLOCKS TO SUCCESS Neglect of trust account management duties Don t over rely on software -software is a tool that may be helpful in trust account management it cannot reconcile your trust account Don t over rely on staff and do not permit removal of trust account records from the office Ultimately, it is your professional responsibility DEVELOP AN OFFICE POLICY

78 BEWARE OF ROADBLOCKS TO SUCCESS Fraud Remember Harmony Young Guard Against Fraud Beware of messages that use general salutations Beware of messages that use cliché statements and lots of legal lingo Hover cursor over suspicious addresses (don t click) Do not hover on links within s this may execute commands Regularly check your account for new rules such as forwarding and/or auto delete Be cautious of new clients that seek to communicate only by

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80 BEWARE OF ROADBLOCKS TO SUCCESS Wire Fraud SLOW DOWN Call a known/trusted phone number or meet in person to confirm wire instructions Verify the wire instructions you to your clients are accurate for both the pertinent bank and pertinent account Regularly check your account for new rules such as forwarding and/or auto delete Do not permit changes to wire instructions by Consider a safe word or password Consider Cyber Insurance

81 YOU VE BEEN HACKED!

82 Don t Panic Contact your financial institution and request a recall of the funds Contact your local FBI office and report the fraudulent transfer File a complaint with IC3 at Report the fraudulent transfer to trust account compliance counsel as required by Rule of Professional Conduct (p)

83 QUESTIONS?