Bridget Gernander Legal Services Grant Manager Minnesota Supreme Court Patrick R. Burns First Assistant Director Office of Lawyers Professional

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1 Bridget Gernander Legal Services Grant Manager Minnesota Supreme Court Patrick R. Burns First Assistant Director Office of Lawyers Professional Responsibility

2 Understand how Interest on Lawyer Trust Accounts (IOLTA) Program came about in Minnesota Understand the basics of managing a trust account Understand the importance of IOLTA in providing resources to legal aid and pro bono programs

3 American Bar Association Video Link to Video

4 MSBA Led the Way Special Interest on Lawyer Trust Accounts Committee formed in 1981, chaired by Allen Saeks First bar to recommend mandatory IOLTA Filed petition with the Minnesota Supreme Court July 1, 1982 Minnesota Supreme Court first in the country to adopt mandatory IOLTA by court rule, which became effective July 1, 1983

5 Worked with the banks to educate them about the rule change and create process for remitting interest. Education for lawyers on how to manage trust accounts under the new rules.

6 Advance fee payments except 1.5(b) advances Advances for costs & expenses Funds in dispute awaiting resolution Settlement funds to be paid Escrow and closing funds Funds for remittance to third parties Rule 1.15, Minnesota Rules of Professional Conduct, requires a lawyer to deposit client funds into an interest-bearing trust account.

7 Using trust account for funds held other than in connection with a representation. Rule 1.15, MRPC Using trust account to shield personal funds from creditors. In re Overboe Using trust account as a check cashing service. In re Varriano

8 Commingling endangers fiduciary nature of a trust account A lawyer may not maintain more than a nominal amount of his/her own funds in a trust account. Generally $200 or less. Rule 1.15(a)(1), MRPC, permits amount reasonably sufficient to cover service charges.

9 Fees that have been earned and are sitting in the trust account for some time. Rule 1.15 (b), MRPC, requires the withdrawal of earned fees within a reasonable time. Reasonable time typically next regular billing cycle. Does not apply to fees being disputed by client.

10 Client funds should generally be deposited into IOLTA account. Interest on IOLTA accounts automatically transferred to LSAC (Legal Services Advisory Committee). LSAC distributes accrued interest to various legal services programs

11 When the amount of client funds and the length of time that the funds will be held generates interest in EXCESS of the service charges and administrative fees associated w/ opening a separate account. Interest on individual client accounts, less transaction costs, belongs to the client. Commonly occurs in family law when holding homestead proceeds for duration of divorce proceedings.

12 IOLTA accounts must be maintained at an approved financial institution. Approved institutions are those that agree to pay interest to IOLTA program and report overdrafts. Credit unions are not approved financial institutions. OLPR maintains a list of approved financial institutions on our website:

13 Generally, all disbursements should be made by check. Telephone transfers are not permitted. Wire transfers to/from the trust account are permissible. Wire/electronic transfers require written memo signed by attorney in the firm. Memo must be kept for requisite six-year period.

14 Every trust account check must be signed by at least one lawyer employed by the firm. Rubber stamped signatures of lawyers are not sufficient for issuance of trust account checks.

15 Bank statements Cancelled checks if returned to you with the Bank s monthly statement - should be annotated with the identity of the affected client. Deposit slips - must be similarly annotated. Counter-signed receipts required for cash payments. Withdrawals by wire transfer confirmation statements.

16 Checkbook register Client subsidiary ledgers Monthly trial balance Monthly reconciliation

17 Chronological listing of trust account activity. Each entry must include date, amount, payee, identity of affected client and purpose. Running balance required.

18 Reflects trust account activity for individual client. Every single transaction must appear on the subsidiary ledger. Must include date, amount, purpose and resulting client balance. Check entries must include check number and payee. A client subsidiary ledger should never have a negative balance.

19 Part of the monthly trust account reconciliation process. Listing of all individual client month-end balances from subsidiary ledgers. No balance for a client matter may be negative at any time.

20 Comparison of the month-end checkbook balance, client subsidiary ledger trial balance and bank statement balance, adjusted for outstanding checks and deposits. Monthly means every month See In re Reiter, 567 N.W.2d 699 (Minn. 1997).

21 Trust account records (including manual records) must be kept for six years; Electronic records require monthly printing of hard copy of the register, ledger trial balance and reconciliation report; Electronic records must be backed up regularly by an appropriate storage medium. ocuments/maintaining%20trust%20accounts%2 0Using%20Quicken%20(2006).pdf MSBA

22 Sometimes lawyers cannot locate clients and are left w/client funds. Make diligent, documented effort to locate client. Minnesota Unclaimed Property Statute See Minn. Stat. Chapter 345

23 Must retain copies for all cash payments. Receipts must be countersigned by client or payor of client fees. Prevents client accusations of additional cash payments. Helps protect against EE theft.

24 If the right of lawyer to receive funds is disputed by client/third party, the disputed portion cannot be withdrawn until dispute resolved. If the client disputes the disbursement within a reasonable time after the funds have been withdrawn, the disputed portion must be returned to the trust account until the dispute is resolved. Rule 1.15(b), MPRC. Undisputed portion should be promptly disbursed to client.

25 Anytime trust account balance falls below zero at close of business overdraft report is made. Lawyer required to explain basis for overdraft and provide records in support of explanation.

26 Failure to monitor service charges Automatic check charges Failure to regularly reconcile No client ledgers Bad endorsements NSF deposit item Bank error Premature disbursement of funds

27 Theft Shortages of client funds or surplus of law firm funds No evidence of account reconciliation Failure to maintain trust records

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29 What would your reaction be if you received an from a government functionary in Nigeria telling you that he has access to several million dollars of unused oil pipeline funds and requires your assistance, for a generous fee, in transferring the funds out of the country?

30 A new and more sophisticated variation of this scheme is targeting lawyers. This scheme, often utilizing the cover of what appear to be legitimate businesses or parties to a legal dispute. Involves s sent to lawyers asking that they assist in the collection of debts owed to them by other businesses or persons.

31 Typically, the will appear to originate from a legitimate foreign business and will ask the lawyer to assist in collecting a debt owed from another legitimate business. The scammers will, of course, provide fake contact information to the lawyer and have even been known to direct the lawyer to fake company Web sites that have been set up to give the air of added legitimacy.

32 The scammers agree to pay the lawyer a substantial retainer for their collection services and ask that an appropriate retainer agreement be sent to them. Shortly thereafter the lawyer gets word that the debtor company has agreed to make a substantial payment towards the alleged debt. The scammers then instruct the lawyer to deposit that payment into their trust account, pay themselves their retainer, and then wire the balance of the funds to the scammers account.

33 The lawyer subsequently receives what appears to be a legitimate check drawn on the corporate account of a legitimate business or even a money order or certified check. These checks are forgeries. Unfortunately, it may take as much as two to three months for the fraudulent check to be discovered. In the meantime, the lawyer victim disburses funds from the trust account to themselves for the retainer promised and to the scammer as the proceeds of the collection action.

34 Once the nominal issuer of the check reports it as a fraud, the bank upon which the trust account disbursements were drawn will debit the trust account to recover the funds. Often the result is that the trust account is overdrawn and the lawyer is out the money sent to the scammers.

35 Be suspicious. Exercise extreme caution when dealing with a client you have never personally met. Ask the potential client for references and check with third parties. Ask them how it is they found you and decided that you would be the attorney they wish to retain. If the substantial payment from the debtor follows quickly upon the heels of your retention, ask yourself why a lawyer intermediary is even necessary in the transaction

36 Contact the issuer of the check and/or the bank upon which the check is drawn to inquire whether the check is legitimate. When doing so, do not use the phone numbers printed on the face of the check scammers have been known to alter these phone numbers so that you will end up speaking with them rather than the actual company involved. Look up the true contact information in the phone book or on the Internet. Finally, the FBI and others maintain Web sites detailing various frauds being perpetrated

37 A Chinese company ed a MN lawyer seeking assistance in collecting a $450,000 debt from a MN company. The company agreed to pay the lawyer a $10,000 retainer for all funds he collected. The Chinese company provided the lawyer with a $298,000 check that had been tendered to it by the MN company. The lawyer deposited it into his TA and paid himself $10,000. The check was determined to fraudulent and a resulting $269,000 overdraft occurred. $1,000 in client funds was negligently misappropriated to pay the fraudulent check. The lawyer was placed on two years private probation and faces an ongoing lawsuit by the bank.

38 Scammers have used real estate transactions to target lawyers and realtors jointly. Scammers will use identify theft and steal a real person s identity in order to pose as a buyer. The buyer will solicit a local real estate agent about purchasing property. The real estate agent will be asked to contact a lawyer they trust to assist. The scam involves telephone contact with the buyer as opposed to just . Buyer provides a cashier check at closing that exceeds purchase price. Buyer will ask lawyer to wire transfer excess funds to a third party b/c of exigent circumstances. Cashier check turns out to be fraudulent.

39 If you re still not sure whether an solicitation by is legitimate, contact the OLPR and request an advisory opinion. If you have any other professional responsibility iussues. The Director s Office takes requests by telephone at (651) or you may submit your request online at

40 IOLTA funds first distributed as grants to nonprofits in 1984 (Happy 30 th Anniversary!) Over past 30 years, IOLTA revenue resulted in over $48 million in grants to legal aid and pro bono programs

41 $4,500,000 IOLTA Revenue History $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $

42 Prime Partner Program to Increase Revenue Recognition of banks agreeing to pay.5% over the safe harbor rate in Rule 1.15 (currently.7%) Recognition of lawyers who bank at Prime Partner banks is coming with I Bank on Justice campaign More information at Currently Four Prime Partner Banks: Community Bank (Amboy, Mankato, Vernon Center) Riverland Bank (Jordan) Stonebridge Bank (Minneapolis, Shakopee) Unity Bank North (Red Lake Falls, Mentor)

43 How have Rule 1.15 and Rule 6.1 worked together? Investments from IOLTA in high funding years created greater capacity for pro bono programs. Pro bono growth has helped when low income Minnesotans needed it most (20% increase in eligible clients between 2007 and 2013)

44 Pro Bono Cases Closed by LSAC Grantees Advice Only Brief Service Extended Rep

45 Important that IOLTA funds reach all counties in the state. With funding declines, LSAC looking for ways to continue to have impact. Minnesota Legal Advice Online First statewide pro bono tool, which allows attorneys to do pro bono from any location and serve clients at any location More information on how to volunteer at

46 Bridget Gernander Lawyers Professional Responsibility Board website