By Molly F. Dilbeck, Esq.

From the April 9, 2007, Michigan Lawyers Weekly. Used with permission.

Managing Your Practice

Managing money is always tricky, especially when it belongs to someone else.

That's why, in 2006 alone, more than 20 lawyers found themselves before the State of Michigan Attorney Discipline Board after having grievances filed against them for mismanagement of their clients' funds.

However, in Michigan, there is an infrastructure in place that allows attorneys to insulate themselves from the consequences of accounting errors - both accidental and otherwise.

Specifically, Michigan Rule of Professional Conduct (MRPC) 1.15 provides guidelines for the two types of client accounts: Interest on Lawyers Trust Accounts (IOLTAs) and non-IOLTAs.

The rule defines an IOLTA as "an interest or dividend bearing account" that "shall include only client or third person funds that cannot earn income for the client or third person in excess of the costs incurred to secure such income while the funds are held."

Though interest is earned on this type of account, the client does not receive those proceeds. Instead, the interest is paid to the Michigan Bar Foundation.

Conversely, a non-IOLTA under MRPC 1.15 also earns interests or dividends, however, that "net interest or dividend will be paid to the client."

MRPC 1.15 applies to both pooled and individual client trust accounts. But, because "it is common for a lawyer only to maintain one pooled client trust account," said Professor Lawrence A. Dubin - who teaches Professional Responsibility at the University of Detroit School of Law - IOLTAs, rather
than non-IOLTAs, may be easier for attorneys to work with.

However, that doesn't mean that IOLTA administration is without its own pitfalls.

In fact, with penalties ranging from a slap on the wrist to a permanent loss of license, learning the ins and outs of proper client trust management is fast becoming an integral part of effective practice management.

Proceed With Caution

Detroit attorney Dina P. Dajani - who is an associate counsel with the Attorney Grievance Commission - told Lawyers Weekly there is a wide range of activity that is prohibited by the MRPC when it comes to handling IOLTAs.

"Mismanagement of IOLTAs can run the range of outright theft of client funds, which generally results in disbarment, to careless bookkeeping, which could result in a reprimand," she said.

However, Dajani noted, "what is interesting about MRPC 1.15 is that you will not see the words 'misappropriation' or 'mismanagement' anywhere" in the rule.

Therefore, attorneys have to be quite careful to follow the rules, as "the Attorney Discipline Board, the Supreme Court's adjudicative arm in the attorney discipline system, has defined misappropriation in very broad terms," she warned.

Agreeing with this sentiment, Michigan State University College of Law Professor Frank S. Ravitch added, the "one thing for which there is virtually no forgiveness in most jurisdictions is mismanagement of client funds, even if accidental."

Indeed, the Discipline Board has held that "misappropriation is the unauthorized use of the client's funds entrusted to the lawyer, including not only stealing, but also unauthorized temporary use for the lawyer's own purpose, whether or not the lawyer derived any personal gain or benefit from it," Dajani explained.

Because "theft of client funds is one of the worst types of misconduct a lawyer can engage in," the Detroit attorney observed, "misappropriation is a per se offense, so intent is not an element to prove [it]. For example, once the running balance of the IOLTA falls below the amount held in trust, misappropriation has occurred, even if this is due to an accounting error."

By the Book

With such stringent regulations - and penalties - in place, Dubin cautioned attorneys to keep a few key provisions of MRPC 1.15 in mind when administering client trust accounts.

First, he said, "it is important that the client trust account be completely separate from the business, office or personal accounts of the lawyer. The trust accounts - whether IOLTA or non-IOLTA - must be with certain types of financial institutions as stated in MRPC 1.15(a)(2) & (a)(4)."

Next, he advised attorneys to remember that "commingling lawyer funds with client funds is prohibited."

However, he did note that under MRPC 1.15(f), "the lawyer may deposit the lawyer's funds in a client trust account if the amount is reasonably necessary to cover service charges or fees of the financial institution."

What's more, "when a dispute might arise between the lawyer and a client or third party as to the right to trust funds," the professor stated, "the lawyer must deliver those funds not in dispute to the client or third party."

In addition, he explained, "the lawyer then must place the disputed funds in a separate client trust account until the dispute has been resolved."

Lastly, Dubin observed, a lawyer must be mindful of his duty to "promptly notify a client or third party upon receipt of their funds; maintain records of such accounts for five years after a representation ends; and promptly pay the funds that the person is entitled to receive."

Simple Solution?

Even with these rules in mind, third-party money management is often outside the scope of an attorney's practice.

And, because administration of "an IOLTA is not generally taught in law school," Dajani acknowledged that handling "an IOLTA can be a daunting proposition."

But, proper IOLTA organization does not have to be a difficult task, she suggested.

"Avoiding mismanagement of an IOLTA is probably as simple as ensuring that the lawyer's office has in place a system of sound accounting practices," she said

Ravitch agreed, and noted that "it is essential that lawyers be meticulous in their accounting and never take fees prematurely."

Finally, recommending that attorneys maintain an eagle eye over IOLTAs, the professional responsibility professor advised lawyers to "carefully document the interest that is subject to IOLTA and make sure that the full amounts due go to the IOLTA fund - but no more, as the rest is the client's."

If you would like to comment on this story, please contact Todd C. Berg at (248) 865-3113 or todd.berg@mi.lawyersweekly.com.

Michigan Rules of Professional Conduct: Client Trust Account Check List

To determine whether client funds should be deposited into an IOLTA or non-IOLTA account, ethics professor Lawrence A. Dubin recommends attorneys keep the following rules of conduct in mind:

MRPC 1.15(e)(1) - "The amount of interest or dividend the funds would earn during the period that they are expected to be deposited in light of (a) the amount of funds to be deposited; (b) the expected duration of the deposit, including the likelihood of delay in the matter for which the funds are being held; and (c) the rates of interest or yield at financial institutions where the funds are to be deposited."

MPRC 1.15(e)(2) - "The cost of establishing and administering non-IOLTA accounts for the client or third person's benefit, including service charges or fees, the lawyer's services, preparation of tax reports, or other associated costs."

MRPC 1.15(e)(3) - "The capability of financial institutions or lawyers to calculate and pay income to individual client s or third persons."

MRPC 1.15(e)(4) - "Any other circumstances that affect the ability of the funds to earn a net return for the client or third person."

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