Handle client funds properly — or else

By Diane Karpman

Karpman

Dire economic reports indicate that many lawyers may be changing their employment, and because of unprecedented law firm layoffs, some might be hanging a shingle for the first time. That means that they might directly handle trust funds, which imposes a “strict liability” duty of accounting. That duty to maintain pristine detailed records cannot be delegated, and discipline has been imposed on lawyers who delegated the obligations of Rule 4-100 to staff persons, spouses or CPAs.

Since lawyers are fiduciaries as a matter of law, the fact that little or no harm resulted from a violation, or the funds have been restored, is of little consequence at the State Bar, although these circumstances play a major role in the mitigation process that will determine the proper sanction. Sevin v. State Bar (1973) 8 Cal. 3d 641.

In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17, a secretary inadvertently deposited a $500 check, which should have gone into trust, into the general operating account. “As a consequence, the balance in respondent’s trust account fell $10.77 below the amount it should minimally have contained for a period of less than six weeks.” Yes, $10.77 for six weeks! You are probably thinking that “attorneys cannot be held responsible for every detail of office operations.” Palomo v. State Bar (1984) 36 Cal.3d 785, 795. But the duty to account is not in the same league. In Respondent F, proper office trust account monitoring procedures were in place and the error nevertheless remained undetected for several years.

In Palomo v. State Bar, supra 36 Cal. 3d 785, the attorney gave the office manager “no supervision, never instructed her on trust account requirements and procedures and never examined either her records or the bank statements for any of the office accounts.” Id. p. 796. Such pervasive carelessness amounted to “gross negligence involving serious violations of an attorney’s duty to oversee client funds entrusted to his care, and to keep detailed records and accounts thereof.” Respondent F at p. 34.

Remember, this is one of two rules that cannot be waived by a client (the other is prospective malpractice, Rule 3-400). A lawyer argued that since the client consented, it was permissible for him to keep the proceeds of a personal injury action in his refrigerator. Cunningly, he hid it in a box of peas. Back in the day, refrigerators were defrosted and the housekeeper threw out the peas.

Rule 4-100 requires that lawyers maintain a paper trail of their trust account transactions for five years. A failure to keep proper books and records is in itself a suspicious circumstance, and coupled with other factors, can support an inference of misappropriation.

A bounced trust account check is a “reportable action.” The bank is statutorily obligated to report the incident to the State Bar. Often the bar knows before the lawyer and will not hesitate to send a love letter. Also, don’t think this can be avoided by keeping a cushion or buffer in the account. That can constitute commingling.

• Diane Karpman, a legal ethics expert, can be reached at 310/887-3900 or at karpethics@aol.com.