Following is the seventh in a series of posts from Parker Taylor Law Group reflecting recent changes to the California Bar Association’s Rules of Professional Conduct (RPC).
As with our earlier posts, this one comes under the category of “Lawyer-Client Relationship,” but was formerly under “Financial Relationship with Clients” – related to a client’s funds and property.
The Rule of Professional Conduct, as revised, is as follows:
Rule 1.15 Safekeeping Funds and Property of Clients and Other Persons
(a) All funds received or held by a lawyer or law firm for the benefit of a client, or other person to whom the lawyer owes a contractual, statutory, or other legal duty, including advances for fees, costs and expenses, shall be deposited in one or more identifiable bank accounts labeled “Trust Account” or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client’s business and the other jurisdiction.
(b) Notwithstanding paragraph (a), a flat fee paid in advance for legal services may be deposited in a lawyer’s or law firm’s operating account, provided:
(1) the lawyer or law firm discloses to the client in writing (i) that the client has a right under paragraph (a) to require that the flat fee be deposited in an identified trust account until the fee is earned, and (ii) that the client is entitled to a refund of any amount of the fee that has not been earned in the event the representation is terminated or the services for which the fee has been paid are not completed; and
(2) if the flat fee exceeds $1,000.00, the client’s agreement to deposit the flat fee in the lawyer’s operating account and the disclosures required by paragraph (b)(1) are set forth in a writing signed by the client.
(c) Funds belonging to the lawyer or the law firm shall not be deposited or otherwise commingled with funds held in a trust account except:
(1) funds reasonably sufficient to pay bank charges; and
(2) funds belonging in part to a client or other person and in part presently or potentially to the lawyer or the law firm, in which case the portion belonging to the lawyer or law firm must be withdrawn at the earliest reasonable time after the lawyer or law firm’s interest in that portion becomes fixed. However, if a client or other person disputes the lawyer or law firm’s right to receive a portion of trust funds, the disputed portion shall not be withdrawn until the dispute is finally resolved.
(d) A lawyer shall:
(1) promptly notify a client or other person of the receipt of funds, securities, or other property in which the lawyer knows or reasonably should know the client or other person has an interest;
(2) identify and label securities and properties of a client or other person promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable;
(3) maintain complete records of all funds, securities, and other property of a client or other person coming into the possession of the lawyer or law firm;
(4) promptly account in writing to the client or other person for whom the lawyer holds funds or property;
(5) preserve records of all funds and property held by a lawyer or law firm under this rule for a period of no less than five years after final appropriate distribution of such funds or property;
(6) comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar; and
(7) promptly distribute, as requested by the client or other person, any undisputed funds or property in the possession of the lawyer or law firm that the client or other person is entitled to receive.
(e) The Board of Trustees of the State Bar shall have the authority to formulate and adopt standards as to what “records” shall be maintained by lawyers and law firms in accordance with paragraph (d)(3). The standards formulated and adopted by the Board, as from time to time amended, shall be effective and binding on all lawyers.
Pursuant to this rule, the Board of Trustees of the State Bar adopted the following standards, effective November 1, 2018, as to what “records” shall be maintained by lawyers and law firms in accordance with paragraph (d)(3).
(1) A lawyer shall, from the date of receipt of funds of the client or other person through the period ending five years from the date of appropriate disbursement of such funds, maintain:
(a) a written ledger for each client or other person on whose behalf funds are held that sets forth:
(i) the name of such client or other person;
(ii) the date, amount and source of all funds received on behalf of such client or other person;
(iii) the date, amount, payee and purpose of each disbursement made on behalf of such client or other person; and
(iv) the current balance for such client or other person;
(b) a written journal for each bank account that sets forth:
(i) the name of such account;
(ii) the date, amount and client or other person affected by each debit and credit; and
(iii) the current balance in such account;
(c) all bank statements and cancelled checks for each bank account; and
(d) each monthly reconciliation (balancing) of (a), (b), and (c).
(2) A lawyer shall, from the date of receipt of all securities and other properties held for the benefit of client or other person through the period ending five years from the date of appropriate disbursement of such securities and other properties, maintain a written journal that specifies:
(a) each item of security and property held;
(b) the person on whose behalf the security or property is held;
(c) the date of receipt of the security or property;
(d) the date of distribution of the security or property; and
(e) person to whom the security or property was distributed.
The CBA’s new RPC, which took effect November 1, 2018, changed Rule 4-100 (“Preserving the Identify of Funds and Property of a Client”) to Rule 1.15 (“Safekeeping Funds and Property of Clients and Other Persons”). The first paragraph in the new rule, as set forth above, simplifies the previous rule, including providing one sample label for a client’s trust account. But, subdivisions (b) and (c) are generally new.
Subd. (b) says a “flat fee paid in advance for legal services may be deposited in a lawyer’s or firm’s operating account, provided ….” Two provisions are given:
(1) A lawyer or firm must disclose to a client in writing that the client can require the flat fee be deposited in an identified trust account until the fee is earned, and that the client is entitled to a refund of any part of the fee not yet earned.
(2) If the flat fee exceeds $1,000, the client’s agreement to deposit the flat in the attorney’s operating account must be in writing and signed.
Subd. (c) says funds belonging to an attorney or firm shall not be distributed or commingled with funds held in a trust account except for funds used to pay bank charges or belonging in part to the firm. If a client disputes the firm’s right to funds, that portion should not be withdrawn until the dispute is resolved.
Subd. (C) of the old rule is almost identical to subd. (e) of the new rule, except now the rule provides it is the State Bar’s Board of “Trustees” (instead of “Governors”) who set the standards. The remaining standards are the same.
The American Bar Association (ABA)’s Rule 1.15(b) and (c) say basically the same thing the CBA’s new RPC says in subdivisions (b) and (c), but more succinctly (one paragraph instead of three paragraphs). The last part of CBA’s 1.15(c)(2), relating to disputed funds, is addressed in ABA’s 1.15(e).
Potential Benefit: Generally speaking, the changes provide further clarification of duties owed with respect to flat fee engagements, the commingling of client funds and preserving funds in the event of a dispute.
The information provided herein is informational only and should not be construed as legal advice or as an agreement for representation. This is not an advertisement. If you have an issue or dispute with your attorney, or are seeking advice with respect to your obligations, you should consult with an experienced attorney. Parker Taylor Law Group is a full-service litigation and transactional law firm. Mr. Parker has represented clients in professional malfeasance disputes for over 22 years. If you would like to schedule an initial consultation with Mr. Parker or his team, you can reach them at 916/996-0400 or at firstname.lastname@example.org. (An email to the law firm requesting a consultation does not create an attorney-client relationship or any agreement for representation by the firm.)