Blog Post

Client Trust and IOLTA Accounts: Managing Money and Avoiding Risk

Introduction

Most lawyers will tell you that they prefer practicing law to managing the day-to-day operations of a law firm. Although many business-related tasks may be delegated to support staff and third-party vendors, lawyers must play scrupulous attention to, as well supervise both subordinates and outsourcing providers in a responsible manner in order to ensure that duties to clients are fulfilled and that the law firm may continue to function. One of the primary responsibilities that lawyers must consider when evaluating law firm operations concerns a lawyer’s responsibility to protect client funds and property. Commingling law firm funds with client funds and conversion of client funds constitute two of the leading causes of lawyer discipline and may lead to liability issues as well.  Therefore, if lawyers seek to continue to practice law, they must devote time and resources to instituting sound banking and trust accounting procedures and supervising the parties entrusted with the authority to handle client funds.

What types of bank accounts should law firms maintain?

Almost all jurisdictions require law firms to maintain three types of bank accounts: an operating account, a client trust account, and an Interest on Lawyer Trust Account (“IOLTA”) account. State supreme courts and state bar associations will designate the financial institutions in the jurisdiction eligible for law firm establishment of client trust accounts and IOLTA accounts. These selected financial institutions are obligated to alert the relevant bar disciplinary authority when a law firm’s client trust account or IOLTA account is overdrawn. Let’s review the type of funds that should be deposited in each account.

• Operating account: Client funds that the law firm has earned and monies from others that are not being held in escrow should be placed in the law firm’s operating account. Funds from clients that have not been earned must not be placed in this account.
• Client trust account: Client funds intended to pay the law firm’s fee that have not yet been earned should be deposited in a client trust account. For example, if the client pays the law firm a $5,000 retainer to work on a legal matter or on an hourly basis, and the law firm has only earned $1,000, the $4,000 balance should remain in the client trust account until earned or returned to the client.
• IOLTA trust account: Client funds or funds of third persons, which are either nominal in amount or expected to be held for a short period of time, should be placed in and IOLTA account in the vast majority of jurisdictions. The interest generated from these accounts is used to fund charitable institutions, typically legal aid entities that serve indigent clients. No jurisdiction has defined “nominal” or “short term” pertaining to IOLTA accounts with any specificity. Generally, the determination of whether a the funds of a client or third party are nominal or short term rests within the discretion of the lawyer. If the lawyer exercises sound judgment, no disciplinary action will be taken against the lawyer.

In deciding whether to deposit client funds in a trust account or IOLTA account, lawyers should consider the anticipated amount of net interest such funds are expected to generate. If the net interest is expected to be nominal, due to either the nominal amount of the principal or the limited amount of time the funds are anticipated to remain in the account, the funds should be placed in the IOLTA account, If the net interest is expected to be more than nominal, the funds should be placed in the client trust account. Any interest earned in the client trust account should go to the client, rather than the law firm.

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You Missed a Deadline?? How to Avoid that Nightmare

Introduction

The foundation of the attorney-client relationship is providing competent legal advice. In this era, competent lawyering includes the use of “relevant technology.” See ABA Model Rule of Professional Conduct (“MRPC”) 1.1, comment [7]. Most courts now send notices of court actions by email and require attorneys to file documents electronically. What happens if you miss an email or fail to check an electronic docket? The scenarios in a recent case are similar to a bad dream, but the consequences are real and quite severe.

A “Cautionary Tale” Leading to Dismissal of a Case – Rollins v. Home Depot USA

Rollins v Home Depot USA, Inc., 8 F. 4th 393 (5th Cir. 2021), presents a “cautionary tale for every attorney who litigates in the era of e-filing.” The facts are simple. The parties agreed on a deadline for dispositive motions in a pending personal injury suit. The defendant filed the motion. Counsel for the plaintiff received an electronic notification of the filing, but he never saw it. Purportedly, the email was placed automatically in a folder the attorney did not regularly monitor. He never checked the docket and, therefore, never filed a response to the motion for summary judgment. The court granted the motion. Counsel for the plaintiff learned of that decision from his opponent about a week after the decision was entered. The lower court denied Rollins’ motion to alter or amend the court’s judgment under Federal Rule of Civil Procedure 59(e).

Rollins received no relief on appeal. The Circuit Court ruled that Rule 59(e) permits parties to “correc[t] manifest errors of law or factor presen[t] newly discovered evidence” or argue that there has been an intervening change in the controlling law. Those reasons for the application of the rule did not apply in this case. The failure to file a response was in counsel’s reasonable control. The Court cited a prior decision which upheld a district court’s grant of an unopposed motion to dismiss where the opposing party explained that its failure to respond was due to “defective antivirus software” that “diverted court emails into a spam folder.” Trevino v City of Fort Worth, 944 F.3d 567, 570 (5th Cir. 2019)

How Should Lawyers Avoid Errors Such As Those in the Rollins Case?

The Rollins case led to a terrible result for the client. The acts of the attorney essentially ended the case when additional court review otherwise may have been available. Opening and reading all court communications are imperative. Reading the text of all court orders – rather than relying on a description in an electronic notification – is essential. Having the case dismissed on summary judgment may have been completely avoided had the lawyer maintained simple but necessary docketing and monitoring systems.

Maintaining a reliable calendar system is critical. Of course, you should have appropriate calendar maintenance and install updates as they become available. You also should have a backup calendar, which would activate in the event that the primary system becomes unavailable. In addition, maintaining calendars in a confidential manner on personal data equipment such as cell phones can also serve as a back-up.

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Scope Limitations and Legal Ghostwriting

Background

As financial pressure from the Great Recession becomes the new normal and even the least tech-savvy Americans tackle most errands from behind a computer screen, consumers have cast a critical eye toward the traditional attorney-client relationship. For many, the cost of a full-service representation creates a barrier to any legal services at all, resulting in a growing army of pro se litigants who frustrate lawyers, exhaust court personnel, and seldom achieve their goals.

Enter the limited scope representation (“LSR”), often referred to as “unbundling,” “limited legal assistance” or “discrete task representation,” where an attorney provides certain services and excludes others for a lower overall fee. This arrangement has long existed in the transactional realm but has become increasingly common in litigation, particularly in family law, landlord-tenant, and small personal injury and property damage claims.

In reality, the scope of every representation is limited to some degree. Every engagement letter should contain a provision on scope, whether it clarifies that a workers’ compensation lawyer will not advise on potential third-party claims, or that a divorce lawyer will not draft a qualified domestic relations order. An LSR in the context of a would-be pro se, consumer client, however, refers to a relationship where the attorney and client split tasks in the case, or the client agrees to handle the lion’s share.

A full-service representation typically consists of fact-gathering, legal advice, discovery, legal research, correspondence, document drafting and filing, negotiation, and in-court appearances. An LSR might include any one or combination of these duties, during a defined phase of the matter or as a one-time event. The LSR is a powerful tool that allows attorneys to generate business that they could not otherwise reach and clients to access a level of service that they could not otherwise afford. Attorneys must tread carefully however, especially in areas where these more severe limitations on scope have only recently taken hold.

Client and Case Selection

American Bar Association Model Rule 1.2(c) permits an attorney to limit the scope of a representation as long as the limitation is “reasonable” and the client gives informed consent. This rule,
which has been adopted in all but a handful of states, provides the basis, and defines the boundaries, of any LSR.

What is a “reasonable” limitation on a lawyer’s services? Two broad categories inform the reasonableness of a limitation: the complexity of the matter and the capabilities of the client. The
purposes behind easing ethical and court rules to allow for more LSRs—to help pro se individuals achieve their legal goals and ease the burden on the court system—are not fulfilled where a client is left stranded midway through an engagement with no reasonable chance for success.

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The Blurred Boundaries of Office Sharing: Officemate and Co-Defendant?

The daily practice of law comes with many challenges, not the least of which is the bottom line. Attorneys want to provide their clients with the best possible representation and still be able to pay their own bills. One of the methods to address this juxtaposition is sharing office space. In today’s legal market, attorneys share space with other attorneys, various types of professionals, or anyone able to rent the office next door. There are many benefits for practitioners in sharing office space beyond saving on rent. The shared office environment provides social interaction with other attorneys, cost-saving benefit of sharing office equipment and allowing attorneys to vent about challenges with clients or seek advice on how to deal with a client representation. However, with those benefits may come a heightened risk of legal malpractice claims from clients and from non-clients.

Consider the Client’s Perspective

Attorneys have a clear understanding that their law office is a separate business entity from the attorney in the law office next door in a shared space office. Attorneys know they have separate client trust accounts, operating accounts, employee payroll, and insurance. But what is clear to the attorneys likely is not obvious to a prospective or current client. It is the client’s understanding and perspective that will matter in a claim of legal malpractice. When taking steps to avoid any confusion as to who is representing a client, consider the client’s perspective and experience with the attorney representing them and other attorneys in the shared office space.

How did the prospective client come into contact with his/her attorney? Was it an advertisement that complied with ABA Model Rules of Professional Conduct 7.1 (Communication Concerning a Lawyer’s Services) and 7.2 (Communication Concerning a Lawyer’s Services: Specific Rules)? Did the client find the attorney on a consumer website that clarified which attorneys make up the law firm? Did the client find a unique website for the law firm that listed the attorneys in practice? When the prospective client called the law firm, was the phone answered with a generic “Law Firm” or with “Law Offices of Larry Lawyer”?

When the prospective client first visited the shared office space, did they see signage that clarified that separate law offices were in the shared space? Was there signage in the lobby that listed the separate entities rather than “Law Offices”? When assessing the image being presented to prospective clients, the attorneys need to “step into the shoes of the client” and consider what they see and experience when dealing with attorneys in the shared office space.

Shared Office Spaces May Implicate Several Model Rules of Professional Conduct

It is essential that clients understand who is and is not involved in their representation. A prospective client may look around a busy office and agree to representation due to their misunderstanding of who is representing them. The prospective client may feel more assured in hiring a law firm with multiple attorneys rather than a solo practitioner. It is the responsibility of the attorney to make sure the client understands who is representing them, and the terms of that representation should be documented in a clearly-written engagement agreement.

If an attorney goes beyond the engagement agreement and decides without express client authorization to discuss his or her client’s case with an unaffiliated officemate, “Paul down the hall,” the disclosing attorney is risking a lot of problems. Depending on the circumstances, unauthorized conversations with unaffiliated cotenant lawyers could waive the attorney-client and work product privileges, create a conflict of interest, or even violate the ABA Model Rules of Professional Conduct. For example, see ABA Model Rule of Professional Conduct Rule 1.6 (a lawyer generally may not reveal information about the representation without the client’s consent, and the lawyer must takes reasonable efforts to prevent inadvertent disclosure), and Rule 1.2 (a lawyer may take only such action as the client implicitly authorizes, and the client must give informed consent for any limitation on the scope of that attorney’s representation). The attorney also could be sending the client the wrong message about who really is involved in the case. For instance, if the attorney recommends a course of action and comments that s/he discussed that recommendation with “Paul down the hall,” who agrees, the client may be justifiably confused about Paul’s involvement in the case.

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Are You Ready to Commit to Client Intake and Proper Client Selection?

Client intake should never be dismissed as an unimportant but necessary task when taking on a new client. Creating a thorough client intake process is essential in order to establish a strong foundation for an attorney-client relationship – whether the relationship lasts for weeks or years.

By investing the necessary time and effort at the outset, attorneys may save time, money and even help to avoid legal malpractice claims. When used appropriately, the client intake process may reveal a stark reality that a prospective client should not become a current client. View the full article from CNA to learn more…

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While it has seemed that Spring has been a bit late in fully arriving to us in Michigan, we all know that May will bring more Spring-like weather. Spring is a time for planting and renewal. It’s no wonder that people get the itch to do some Spring cleaning this time of year. It just feels like the right time to get more organized, clean up, and make some changes.

Speaking of changes, this is also a good time to consider your law practice’s malpractice insurance. Many attorneys think that it would be a big hassle to shop around for alternative policies when it comes to professional liability insurance. However, Paragon Underwriters makes that process quick, simple and hassle-free. We know that change is worrisome for many people. It’s easy to become unduly content with your malpractice insurance over the years and forget that there may very well be better coverage out there. But, it is out there!

A few months before your current coverage is set to expire, we encourage you to reach out to us for a discussion about options that will help protect you and your colleagues should you face the unfortunate experience of a client suing you for legal malpractice. Our insurance agency spends much time researching the new policies available to attorneys like you and we’d love the opportunity to share these details with you (or a representative from your law firm).

We became the best Professional Liability choice for Michigan Law Firms because of our reputation among attorneys like you. For nearly 50 years, we have demonstrated a commitment to providing Michigan lawyers with top-quality, customized professional liability insurance. Call us today, or at least 3 months before your current policy’s expiration date, so we can work together to find you the best coverage.

Most occupational groups have some amount of stress and anxiety as a result of a heavy workload,  and the challenges of daily requirements at the office. For 21st century attorneys, the pressure of representing clients and completing daily work tasks can have negative effects on the quality of work and significantly compromise the successful delivery of services to the clients who pay the law firm.
 
While it is often said that air traffic controllers suffer the most workplace-related stress, studies have shown that attorneys have much more stress than previously thought. The long hours that lawyers have to grind at the office coupled with the weight of responsibility that clients place on them leads to mistakes and grave errors. Being tired and not able to fully pay attention results in a failed representation that can lead to legal malpractice claims.
 

 
Studies underscore lawyers’ personal problems that interfere with their ability to ably represent clients in accordance with a recognized standard of care. This can be a recipe for disaster and can severely affect a lawyer’s reputation and that of the law firm. Lawyers in Michigan who have had malpractice lawsuits brought against them have cited exhaustion and case overload as reasons for their errors. Representing clients can be difficult when there are extenuating circumstances causing attorneys to fall short in the office.
 
Caffeine might be helpful in keeping you awake, but the pressures of daily life can lead to incompetence. This, in turn, leads to potential malpractice claims. At Paragon Underwriters in West Bloomfield, Michigan, we help lawyers protect their interests with professional liability insurance, but we also work with our clients in risk management — finding ways to lessen the exposure to malpractice claims.
 
 
Tags: Attorneys, Lawyers, Professional Liability Insurance, Paragon Underwriters, Malpractice, Law Firms, Risk Management