This post was written by Megan Zavieh and originally published on Lawyerist.com on September 30, 2014.
Handling client funds correctly is critical to the success of your law practice, not only for business reasons but for ethical ones. It is essential to properly handle a check which contains a mix of fund types.
Related: Billing to Avoid an Ethics Complaint
Mishandling client funds is a sure ticket to a disciplinary action. It used to be that a bookkeeping error with no real impact on a client could go unnoticed. However, as random trust account audits gain popularity, those “harmless” errors are more likely to be discovered and lead to prosecution. Among the issues that come up in handling funds received from clients is what to do with a check that represents both fees already earned and advance payment of as-yet-unearned fees.
How the Situation Arises
Mixed checks frequently occur when a retainer agreement requires the replenishment of an initial deposit. For example, a retainer agreement may say that the client is to deposit in trust an initial advancement of fees of $5,000, against which monthly bills will be drawn, and that the client will keep the fees on deposit at $5,000 at all times. This means that at the end of the month, the client will make another deposit into the lawyer’s trust account to keep the balance at $5,000. If the monthly bill was less than $5,000, then the client’s check is simply advanced fees; if the bill exceeded $5,000, though, then part of the check will be to pay the balance of fees owed for the month and the rest will be advanced fees. It is the second situation which gives many lawyers pause.
How to Handle Earned Fees
What to do with earned fees is quite simple – they never get deposited in a trust. Trust accounts are only for money belonging to clients, and earned fees do not belong to clients, they belong to the lawyer. So a check exclusively for earned fees goes straight to the firm’s operating account. This comports with the rules against commingling and against depositing of personal funds (beyond those reasonably necessary to pay bank fees) into trust.
How to Handle Advanced Fees
Whether advanced (as-yet-unearned) fees must be placed in trust depends on your jurisdiction. In California, advanced fees do not have to be put in trust, but they may be if you choose to put them there. Many lawyers feel this is the most prudent route to take, but ethically, if you choose to deposit advanced fees into the operating account, you will not be violating any rules.
In DC, advanced fees must be placed in trust unless otherwise agreed by the client. See In re Mance, 980 A.2d 1196 (D.C.) 2009. Advanced fees must be placed in trust in Florida, and in many other states. See Professional Ethics of the Florida Bar Op. 93-2.
The Mixed Check
Since earned fees do not go into trust, you can put the whole check in the firm’s operating account in states where advanced fees do not have to be put into trust. If you do, the portion representing as-yet-unearned fees needs to be earmarked in the books as still being subject to refund to the client if it is never earned.
Even in these states, another perfectly permissible course of action is to put the whole check in trust, then write a check from trust to the operating account representing the funds already earned, because it is permissible to put the advanced fees in trust even though this is not required. The State Bar of California’s Handbook on Client Trust Accounting for California Attorneys explicitly addresses the related issue of the client sending one check containing both advanced costs (which are required to be held in trust) and a non-refundable retainer (which belongs to the lawyer like an earned fee and should not be placed in trust). In this situation, the State Bar of California instructs lawyers to deposit the check in trust, and as soon as the check clears and funds are available, withdraw from trust the amount of the non-refundable retainer The same handling of a check with earned and unearned fees is permissible.
In states where advanced fees must be placed in trust, the correct course of action is to place the whole check in trust, then when the funds are available, you should withdraw the earned fees to prevent commingling.