“Safekeeping Property” Rule 1.15 of the Massachusetts Rules of Professional Conduct (Mass. R. Prof. C.) establishes the standards and guidelines by which attorneys are expected to manage client funds. In addition, the new record keeping rules effective January 1, 2004 provide minimum standards for client fund account record keeping. The new rule requires lawyers to send out itemized bills to clients on or before the date of withdrawing funds from their client trust accounts;^{^[1]} requires that withdrawals not be made by ATM or checks made out to cash;^{^[2]} describes the types of account documentation needed^{^[3]} and mandates that attorneys reconcile accounts at least every sixty days.^{^[4]} This publication explains the new provisions of the record keeping rule and suggests guidelines for attorneys to follow in order to meet their obligations under Mass. R. Prof. C., Rule 1.15.

The Massachusetts Rules of Professional Conduct including Rule 1.15 are based substantially on the American Bar Association Model Rules of Professional Conduct (Model Rules). They were adopted in 1997 by the Supreme Judicial Court Justices effective January 1, 1998, replacing the Disciplinary Rules (DRs) of the Code of Professional Responsibility (CPR).

Rule 1.15(e) was preceded by Disciplinary Rule 9-102 (C) as amended January 1, 1990 which established a comprehensive Interest on Lawyers’ Trust Account (hereinafter referred to as IOLTA) program in Massachusetts. Through interest generated on certain client funds accounts, the IOLTA program funds legal services to the disadvantaged and projects which improve the administration of justice.

B. A Standard of Strict Accountability

Under Mass. R. Prof. C., Rule 1.15, a lawyer should hold the property of others with the care required of a professional fiduciary. This means that a lawyer handling client funds should act for the benefit of the client in the context of a relationship characterized by great confidence and trust on the part of the client and good faith and candor on the part of the lawyer.

The fiduciary nature of the relationship and the need for public confidence in the legal profession places several burdens on a lawyer. First, in handling client funds, the lawyer must not only act properly but must also avoid even the appearance of acting improperly. Therefore, the lawyer is obligated to utilize certain protective procedures to minimize the possibility of wrongdoing. For example, securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property which is the property of clients or of third parties should be kept separate from the lawyer’s business and personal property; monies should be placed in one or more client fund accounts. Separate trust accounts are warranted when administering money from estates or acting in similar fiduciary capacities.

Second, each lawyer is personally responsible for the proper deposit and maintenance of clients’ funds. While necessity often requires delegation of administrative duties within a law practice, the lawyer still must establish, be familiar with and ensure the proper operation of the adequate procedures for the handling of client funds. Specifically, lawyers who delegate any part of their client fund account responsibilities to their staff must provide effective guidelines for the proper handling and maintenance of these accounts and supervise staff activities. The new record keeping provisions must be integrated into the law practice.

In summary, the basic premise which underlies the rule is a lawyer who, as an incident to professional practice, holds money, any part of which belongs to another, whether a client or a third party, must keep that money in a separate account maintained in a banking institution. The funds must be deposited either in a pooled IOLTA account, which pays interest to the Massachusetts IOLTA Committee, or in an interest bearing account for the client’s benefit. This money may not be commingled with money belonging to the law office or to the lawyer personally.

C. What Funds are "Client Funds"?

Mass. R. Prof. C., Rules 1.15 (a) and (e) define client funds as funds which are held in trust for clients or others, or held in any other fiduciary capacity in connection with a representation, except “advances for costs and expenses”. (For a discussion of costs and expenses see page 7.) The rule requires that client funds be deposited in one or more identifiable bank accounts in Massachusetts (assuming the law office is located here) in which no other funds are deposited except those necessary to pay bank service charges or to meet minimum balance requirements.

Among the monies which are to be treated as client funds are:

1. All advances for fees and most retainers^{^[5]} received from clients, until they are actually earned by the lawyer (See section on retainers/advanced fees, pages 5-7);

2. Funds which belong in part to the client and in part to the lawyer;

3. Funds of the client that are being held for disbursement at a later time;

4. Funds of third parties to be distributed at a later time;

5. Personal injury awards including PIP funds, alimony payments, real estate conveyancing monies and litigation settlements .

All client funds must be deposited in one of two types of interest-bearing accounts: a pooled IOLTA account, or an individual client account. A pooled IOLTA account contains all client funds which, in the judgment of the lawyer, are nominal in amount or are to be held for a short period of time. An individual client account, separately established for each client, is used for all other client funds. Interest earned on pooled IOLTA accounts is transferred by the bank to the IOLTA Committee. Interest earned on individual client

account accrues to the benefit of the individual client and is payable as directed by the client.

In contrast to client fund accounts, a lawyer’s operating account is used to hold the lawyer’s earned fees and to pay the lawyer’s operating expenses. A lawyer must not deposit client funds to an operating account, or a personal checking or savings account. As of January 1, 2004, a lawyer is required to maintain a separate business and/or personal account for the lawyer's own funds for clearer record keeping.^{^[6]}

1. Conveyancing accounts. ^{^[7]}

The “conveyancing exception” to the IOLTA rule. There is one narrow exception to the requirement that client funds be deposited to either an IOLTA or individual interest-bearing client account. That exception is for conveyancing accounts, but only in certain limited circumstances. A conveyancing account is exempt from the IOLTA requirements under Mass. R. Prof. C., Rule 1.15(e)(5) if it is an account “in a lending bank in the name of a lawyer representing the lending bank and used exclusively for depositing and disbursing funds in connection with that particular bank’s loan transactions, . . .” (emphasis added).

The rationale behind this exemption is that the interest earned will be retained by the banks making the loans. Note that the exception applies only to banks, not mortgage companies, although a mortgage company which is simply the mortgage arm of a bank would appear to qualify for the exemption.

As an example, a conveyancing account at Bank A does not have to be an IOLTA account if all the monies deposited to and disbursed from the account involve closings for Bank A. However, a closing for Bank B cannot be done from Bank A account unless the account at Bank A is an IOLTA account. Thus, if a lawyer does closings for several lending institutions from the same client account, the account must be an IOLTA account. It is only when closings are being done for the lending bank at which the account is maintained, and only for that lending bank, that the conveyancing exception applies.

Closings for mortgage companies, whether one mortgage company or multiple, must be done through an IOLTA account. As noted above, the only exception might be for closings being done for a mortgage company which is the mortgage arm of a bank. In that case, if the account is maintained at that same bank and only closings for that bank’s mortgage company are transacted through the account, an exempt conveyancing account could be established. In other words, an exempt account could be established at Bank C for closings for Bank C Mortgage Corporation only.

Even if the conveyancing exception is applicable, the rule provides that the lawyer is permitted to establish the account as an IOLTA account. Also, if the conveyancing account is not established as an IOLTA account, it should be a non-interest-bearing client account and not a NOW account or other account earning interest. Finally, the account in all circumstances must be properly denominated as an IOLTA account, conveyancing account, client trust account, or similar designation.

Note, conveyancers sometimes find themselves holding client funds for some period of time after the closing while title problems are resolved. The conveyancing exception is not applicable to this circumstance. Unless the parties direct otherwise, such funds should be moved to an individual interest-bearing client account. To the extent that the funds are retained in either an exempt conveyancing account or an IOLTA account in the expectation that the title will be quickly cleared, the lawyer must monitor the situation and transfer the funds to an individual interest-bearing escrow account when it becomes apparent that resolution of the problem will be delayed.

‘Conveyancing Account’ Confusing

by Paul L. Levine, Esq. Lowell

To the Editor:

As most conveyancing attorneys know, it is mandatory as of Jan. 1 that lawyers establish interest-bearing IOLTA accounts for short-term client funds. However, there seems to be some confusion about the “conveyancing account” exemption, and what it involves.

After talking to several lawyers and hearing several versions of the rules, I decided to call the IOLTA Committee. I found that only a limited type of “conveyancing account” is exempt; the exemption does not apply to all accounts used for conveyancing.

The only accounts exempt from IOLTA are those conveyancing accounts “in a lending bank used exclusively for depositing and disbursing funds in connection with that bank’s loan transactions”.

In simple terms, an account in Bank A does not have to be an IOLTA account if all the monies put through the account involve closings with Bank A. However, a closing with Bank B cannot be put through an account with Bank A unless it is an IOLTA account.

It would seem that all conveyancers will need at least one IOLTA “conveyancing account” to handle any “miscellaneous” lenders with which they have no escrow account. But any current “conveyancing account” which is not interest bearing need not be changed so long as it is limited to closings with only that particular bank.

I hope this will help conveyancers as Jan. 1 approaches.

MLW, December, 1989

2. Advanced fees/Retainers^{^[8]}

Questions about attorneys' fees generate more complaints to the Office of Bar Counsel than any other issue. The handling of "retainers" or "advanced fees" and whether they should be treated as clients funds seems to engender much confusion. The words "advanced fees" and "retainers" are used interchangeably throughout the profession.

An advanced fee or retainer is the payment of funds in advance to a lawyer for a particular service or for a particular case. Most retainers or advanced fees are payments to a lawyer to be earned as services are provided. (See discussion on narrow exception below.) In such cases, the funds belong to the client until they are earned through the services provided by the lawyers. C. Wolfram, Legal Ethics 505-506 (1986). Such advanced fees/retainers are always subject to refund if they are not earned.

Deposit of Retainers. Retainers or advanced fees as defined above, paid in advance for the handling of a particular case, are client funds and must be deposited to an interest-bearing account until earned by the lawyer. Since the lawyer may not commingle personal funds with client funds [Mass. R. Prof. C., Rules 1.15 (b)(2) (ii)], the lawyer must promptly withdraw the fee from the client funds account as it is earned.

Accounting to Client for Fees Earned. The revised 2004 rule requires attorneys, on or before the date of withdrawing funds to pay fees earned, to mail or “deliver” to the client (1) a written itemized bill accounting for services rendered, (2) written notice of the amount and date of withdrawal and (3) a statement of the balance of the client’s fund in the trust account after the withdrawal.^{^[9]} Mass. R. Prof. C., Rule 1.15 (f) requires lawyers to maintain complete records regarding the receipt, maintenance and disposition of client funds. Retainers and advanced fees fall within this category. In addition, the lawyer must render “a full accounting” to the client or third party, upon request, for the disposition of all funds.

Non-Refundable, Flat Fees. There are no fees that are not refundable. Bar Counsel will review whether a portion of the fee should be returned regardless of whether the attorney views the fee as non-refundable or flat. The fee may not interfere with the client’s right to discharge the attorney at any time. Mass. R. Prof. C., Rule 1.16 (d). In Smith v. Binder, 20 Mass. App. Ct. 21 (1985), the attorneys were paid a retainer of $8,500 for representation in a criminal case. Plaintiff-clients sued the attorneys for an accounting and refund three weeks later, after they had discharged the attorneys. Defendant-attorneys claimed the fee was non-refundable and asked the court to take judicial notice that “it is an accepted custom and practice among attorneys of the criminal bar that retainers taken in connection with representation of criminal defendants are non-refundable.” The trial judge granted a Rule 41 motion and found that plaintiffs knew the fee was non-refundable. Appeals Court reversed, finding no evidence to support that finding. In a footnote, the Appeals Court noted authority holding that requiring a client to agree to a non-refundable fee was unethical. In its opinion, the Appeals Court observed that the right to change lawyers at any time was “[e]ssential to the lawyer client relationship” and that, if the lawyer were permitted to keep the unearned portion of the fee, the “right to change lawyers would be of little value.”

There is one narrow exception to the "retainer" discussion. There is one type of retainer, known as a “classic” retainer, in which the client binds the attorney to employment to the exclusion of adverse parties. The retainer is seen as payment for the establishment of this exclusive relationship - not for specific, pending services required. The advantage to the client is in securing the services of the lawyer of choice over a period of time, whereas the lawyer foregoes the possibility of employment by others whose interest might be adverse to the client. The payment is in return for the attorney’s agreement to be bound to the client and is therefore “earned” when paid. Blair v. Columbian Fireproofing Co., 191 Mass. 333 (1906).

D. Depositing Funds into an IOLTA Account or a Separate

Interest Bearing Account

Mass. R. Prof. C., Rule 1.15 provides that client funds must be placed in interest bearing accounts, the interest must be credited to the client’s account, or deposited in an IOLTA account for the benefit of legal services to the poor and the improvement of the administration of justice. Under Mass. R. Prof. C., Rule 1.15 (e)(5), it is the lawyer’s responsibility to exercise good faith judgment in determining initially whether funds of a client are of such nominal amount or are expected to be held by the lawyer for such a short period of time that the funds should be placed in an IOLTA account. If the lawyer determines the amounts are not nominal or short term, the lawyer must establish a separate client fund account for the benefit of the individual client. In this case, the lawyer will need to obtain the client’s social security number or employer identification number to give to the bank so that the tax on any earned interest can be assigned to the client.

Although funds such as advances for costs and expenses are not required to be deposited in client fund accounts, the lawyer has the same accounting, record keeping, and payment responsibilities for these types of funds held in a general office account as for funds held in the client fund accounts. Advances for costs and expenses may be deposited in an IOLTA account.

The obvious question is how do you know when to use the pooled account where the interest is paid to the IOLTA Committee and when to use an account where the interest is paid to the client?

The Guideline to the Rule explains how to determine which account to use. The sole question that the lawyer must answer is whether the client funds “could be utilized to provide a positive net return to the client.” In deciding whether there will be a positive net return, the lawyer must consider (1) the amount of interest the funds would earn during the period they are to be deposited, (2) the cost of establishing and administering the account including a reasonable cost for the lawyer’s services and the cost of preparing the necessary tax reports, and (3) the capability and cost of the financial institution to calculate and pay the interest to the individual client.

There is no “bright line” by which a lawyer can know where to deposit the funds. Instituting procedures to make sure that this issue is considered and resolved when dealing with client funds will help you comply with the Massachusetts Rules of Professional Conduct, and avoid potential financial liability.

E. Deposits to Client Fund Accounts

1) Which Funds? All funds which qualify as client funds as defined on page 3, must be deposited into a client fund account. The law firm should have a clearly expressed written policy, for all attorneys and staff, as to what funds are deposited into a client fund account.

2) When? Promptly. Deposit of client funds should be made daily.

3) Where? Under Mass. R. Prof. C., Rule 1.15 (g) funds must be deposited in a bank, savings and loan association, or credit union authorized by Federal or State law to do business in Massachusetts and insured by the Federal Deposit Insurance Corporation or similar State insurance programs. The financial institution holding the account must have agreed to abide by the dishonored check rule, which became effective October 1, 1995. Client funds should not be deposited, hidden or concealed in the law office. All securities and properties of a client should be identified and labeled and promptly placed in a safe deposit box or other place of safekeeping as soon as practical. The same attentive care and precautionary procedures should be adopted for the receipt, holding and disbursement of these properties as is given to the safe maintenance of client accounts for client funds.

4) How? Sound accounting advice is never transmit money without written communication. A voucher or other documentation for receipt and instruction should be prepared by the attorney, instructing the person performing the bookkeeping function to deposit the funds into the client fund account on behalf of the client named in the voucher or receipt. Written communication avoids later arguments about what deposit instructions were and provides a needed audit trail.

5) Notify Client. Mass. R. Prof. C., Rule 1.15 (c)^{^[10]} requires that clients be notified promptly of the receipt of their funds, securities, or other properties. The rule is particularly needed regarding funds received from third parties. Compliance avoids misunderstanding, mistakes and mistrust.

F. Disbursement of Client Funds

1) Timing. Before disbursement of client funds, the client’s or third party check should have cleared through the banking process. If this precaution is not taken, and the initially receipted check is returned for insufficient funds or a stop payment order is issued, the client funds of other clients will be disbursed wrongfully. Since even cashier checks and certified checks are occasionally dishonored, the best policy is to be assured that the initial receipts have cleared the banking process.

2) Amounts. Client fund disbursements from the client’s ledger must not exceed the funds received from or on behalf of that client. Otherwise, a wrongful taking of other client trust funds occurs, resulting in both civil and disciplinary liability. As a precautionary measure, both the person requesting the disbursement and the individual signing the check should have a copy of the particular client’s subsidiary ledger before requesting or authorizing the disbursement of trust funds.

3) Identify the Transaction. Again, built into the process, by either voucher request or other documentation, there should be a clear description of each disbursement, including the identity of the file to be charged and the reason for the transaction.

4) Signature. Who will sign trust checks is probably best left for each firm to decide. Generally, the person who prepares the checks should not have signatory authority. Regardless, no individual should sign a check unless presented with written documentation indicating that the disbursement is proper, principally that the original receipted funds have cleared the banking process, and that the client’s subsidiary ledger account contains adequate funds. Disbursement procedures should be clearly stated in established rules for the firm. Requiring two signatures for large check amounts is also recommended.

5) Internal Controls. Proper disbursement of client funds is greatly enhanced by a strong system of internal controls. Job functions should be structured to allow for an adequate segregation of all duties relating to the handling of client funds. For example, the reconciliation process should be performed by personnel who are not involved in the bookkeeping process, ideally by the lawyer or the firm administrator. Also, internal controls are weakened when the same person who prepares the check signs the check. Other important control procedures include: proper authorization, recording, and documentation of all client fund transactions, limited access to client fund accounts and client property, periodic independent verification of client accounting records, and sound personnel practices. Finally, no system of internal controls can function effectively without the active involvement of the attorney(s) responsible for the client funds.

6) Interest of Third Parties. The trust and fiduciary obligations imposed by Mass. R. Prof. C., Rule 1.15 extend beyond the client to third parties who have an interest in the disposition of the funds. The rule applies to all clients’ funds accounts, including IOLTA, trust and escrow accounts. In addition, the rule pertains to any funds being held by a lawyer even if the lawyer is holding those funds in another capacity, such as a trustee or conservator for a family member or other person. Please note, if the property is being held on a pro bono basis, as a custodian for a minor family member, the property is not subject to the Operational Requirements for Trust Accounts set out in Rule 1.15 (e) or (f).^{^[11]}

G. Operational requirements (Effective January 1, 2004)

The ability to precisely document the complete history and disposition of all client funds is the central requirement when accounting for trust accounts. Rule 1.15 does not mandate any particular client trust accounting system, but it spells out the required components. The system described below will provide the basics to account for clients= funds.

Rule 1.15 requires two basic kinds of records: (1) records created by the bank that show what went into and out of the attorney’s client trust bank accounts; and (2) records created by the attorney to explain the transactions reflected in the bank documents.

How Long Must Records Be Kept?

Rule 1.15 (f) requires keeping trust accounting records for six years after the funds are paid out and after termination of the representation of the client.

What If The System is Computerized?

A lawyer using a computerized accounting system must maintain the check register, client ledgers, bank charges ledger and reconciliation reports in a form that can be reproduced and printed in hard copy. Because computer data can be lost through electrical storms, fire, power or equipment failure, software malfunction and human error, electronic records must be regularly backed up by an appropriate storage device. (Rule 1.15(f)(1)(G))

What Bank-Created Documents Must Be Kept?

Rule 1.15 (f) requires retention by the attorney of all documents recording transactions that the bank returns to the attorney. This may include such documents as client trust bank account statements, cancelled checks and records of electronic transactions. Banks no longer automatically provide cancelled checks to customers, but attorneys will want to make sure their bank provides either the originals or photo images of cancelled checks (including both sides of the checks).

Suggestion for Filing Bank-Created Documents

A basic system would involve keeping a separate binder (or folder) for each client trust bank account. Each folder should have one section for bank statements, one section for originals or photo images of cancelled checks and records of electronic and other transactions, one section for copies of deposit slips and one section for checkbook stubs or records, computer-generated equivalents or copies of checks created by “one-write” methods as the checks are written. Deposit slips and checkbook stubs or records provide a complete audit trail. In this system, each document is filed in date order in the appropriate section of the binder for the account they refer to. Label each binder with the name of the client trust bank account and the period it covers. Note that binders for a pooled account will have cancelled checks pertaining to all of the clients whose funds are in the pooled account.

What Client Accounting Records Must Be Kept by the Attorney?

Rule 1.15 (f) (1) (A) requires attorneys to record the name and address of the bank or other depository, the account number, the account title, the opening and closing dates, and the type of account (whether it is an IOLTA account or a separate client fund account for the client). For each account, there are three types of accounting records that

must be kept by the attorney. They are; the check register, client ledgers and a ledger for bank fees and charges.

Accounting Record:

The Client Ledger

Rule 1.15 (f) (1) (C) requires keeping individual client records for each separate matter in which the attorney holds funds for the client. This client ledger must give the name of the client, detail all money received and paid out on behalf of the client or third party, and show the client=s balance following every receipt or payment. See Exhibit A.

Maintaining a client ledger is like keeping a separate checkbook for each client, regardless of whether or not the client=s money is being held in the IOLTA account or a separate account. Every receipt and payment of money for a client must be recorded in that client=s client ledger. When depositing more than one check but using a single deposit slip, record each check as a separate deposit in the client ledger. For every receipt, list the date, amount and source of the money. For every payment, list the date, the amount, the check number, the payee and the purpose of the payment. After you record each receipt, add the amount to the client=s old balance and write the new total. After recording each payment, subtract the amount from the client=s old balance and write in the new total.

The following is a description of opening and maintaining a client ledger for a new client, Mark Twain. At the first meeting on January 5, 2004, MT gives a check for $1,500 as an advance fee. If the decision is made to place the funds in an IOLTA account, the attorney will deposit MT=s money into the account and create a new client ledger for him. The new client ledger could look like the one in Exhibit A or like this.

Client Ledger

Client MT

Case #: 77777

Date	Chk No.	Payee or Source of Deposit	Description of Transaction	Amount Paid	Amount Received	Running Balance
1/5/04		Mark Twain	Advance Fee		$1,500.00	$1,500.00

On February 5, the attorney sends the client a description of services provided to him, including an accounting of the $500 fee for which the attorney is writing a check to his or her firm.

Client Ledger

Client MT

Case #: 77777

Date	Chk No.	Payee or Source of Deposit	Description of Transaction	Amount Paid	Amount Received	Running Balance
1/5/04		Mark Twain	Advance Fee		$1,500.00	$1,500.00
2/5/04	217	Law Firm of X	Professional Fee Invoice No. 1	$500.00		$1,000.00

Bank Charges Ledger

Rule 1.15 (f)(1)(D) deals with Bank Fees and Charges. It requires attorneys to record every bank charge against the client trust fund account in the check register and permits the attorney to keep his or her money in the account to pay these charges and fees. Attorneys should keep a bank fees and charges ledger the same way that client ledgers are kept, as part of an check register system. Record every deposit of attorney funds, every charge the bank makes against the account, and the running balance in both the client ledger and the check register.

Bank Charges Ledger

Client: Bank Charges

Case #: N/A

Date	Chk No	Payee or Source of Deposit	Description of Transaction	Amount Paid	Amount Received	Running Balance
10/3/99			Balance Forward			$50.00
10/30/99		Self			$100.00	$150.00