SBM - State Bar of Michigan

R-22

July 24, 2015

SYLLABUS

A lawyer cannot ethically abdicate the lawyer's responsibilities under MRPC 1.15 and 1.15A by establishing and relinquishing control of a dedicated client trust account to a client that happens to be the Bank at which such accounts are maintained.

There are no exceptions provided under MRPC 1.15 and MRPC 1.15A, which permit a lawyer to be absolved from liability for overdrafts to his trust account. In fact, MRPC 1.15A makes it clear that a lawyer's ethical violation of his safekeeping duties automatically subjects him to potential disciplinary action.

The lawyer is subverting the intent and spirit of MRPC 1.15(a)(3) by establishing a dedicated IOLTA account as requested by his Bank client and relinquishing control of the account such that it becomes overdrawn.

References: MRPC 1.15; 1.15A; 1.16; 5.1; 5.3; R-7; RI-107; RI-185.

TEXT

This opinion considers the question of whether a lawyer violates Michigan Rules of Professional Conduct 1.15 and 1.15A by permitting a client to have direct access to the lawyer's IOLTA account to withdraw funds belonging to the client, causing overdrafts to the lawyer's trust account. The Committee's consideration of this issue is based on the facts below.

The inquiring lawyer's practice focuses primarily on the provision of legal services to collect debts for its clients' delinquent accounts. One of the lawyer's major clients is a financial institution ("Bank client") that regularly engages in lending transactions. Bank client retained the lawyer to collect delinquent accounts. To secure this major client, the lawyer acceded to the establishment of an IOLTA account with the Bank client to be used solely by the lawyer for receiving all deposits resulting from the lawyer's collections efforts on behalf of Bank client ("dedicated IOLTA account"). In addition, Bank client required lawyer to authorize Bank client's unfettered access to the dedicated IOLTA account to withdraw or deposit funds.

As a result of lawyer's debt collection representation, payments from the Bank client's debtors are received via regularly scheduled debits against the debtor's bank account and are automatically deposited into the lawyer's dedicated IOLTA account using the Automated Clearing House (ACH) electronic network system. After the ACH deposits are received, lawyer prepares an ACH payment transaction report for Bank client, which lists all payments deposited into the dedicated IOLTA account and transactions that were reversed due to insufficient funds in the debtor's bank account. Upon receipt of the ACH transaction report, Bank client "sweeps" or electronically withdraws funds via an ACH debit from the lawyer's IOLTA account.

In some instances, the lawyer receives debtor payments via cashier checks. The lawyer deposits the checks into the dedicated IOLTA account and then advises Bank client. Bank client sweeps the account to withdraw the funds without regard for whether the checks have cleared.

In accordance with its obligations under MRPC 1.15A, Bank client issued three overdraft notices (February 1, 2012, January 17, 2013, and April 15, 2013) to the Grievance Administrator of the Attorney Grievance Commission regarding the lawyer's dedicated IOLTA account. It was later determined that Bank client caused the February 2012 overdraft when it swept the dedicated IOLTA account and treated a reversal in the amount of $200 listed on the lawyer's ACH report as a $200 payment. Consequently, Bank client withdrew $400 in excess of the amount actually deposited into the account causing a negative balance and automatically assessed the lawyer's dedicated IOLTA account its usual $25 overdraft fee. Thereafter, Bank client issued an explanatory letter to the lawyer describing how its mistake caused the overdraft. The January 2013 overdraft in the amount of $1,358.41, was caused by the Bank client's withdrawal of funds from the dedicated IOLTA account after it unilaterally decided that a reversal it had agreed to in October 2012 was invalid. Bank client withdrew the funds without advance notice to lawyer. Ultimately, Bank client paid the transactions that created the overdraft, waived the overdraft fee, and again issued an explanatory letter to the lawyer describing how its mistake caused the overdraft. The April 2013 overdraft in the amount of $9,041.57 resulted from a sweep by Bank client to withdraw funds deposited by lawyer into the dedicated IOLTA account via a cashier's check. Subsequent to the sweep, the cashier's check was not paid by the debtor's bank against which it was drawn creating an overdraft of the lawyer's dedicated IOLTA account. The Bank client paid the transactions presented for payment and waived the overdraft.

The lawyer asserts that his arrangement with Bank client is commonly used by lawyers providing legal services to collect debts for lending institutions to assure that collected funds are timely remitted. The lawyer further states that his arrangement with Bank client and the overdrafts of his dedicated IOLTA account should not be construed to violate MRPC 1.15 and 1.15A for the reasons that: (1) his dedicated IOLTA account was established with Bank client consistent with its requirements; (2) his dedicated IOLTA account is used solely for funds belonging to Bank client, (3) all transactions are performed pursuant to Bank client's requirements; (4) any overdrafts to his dedicated IOLTA account are a result of Bank client's own actions; (5) Bank client is comfortable with the process and the possibility of negative balances; and (6) there is no client interest to be protected. For these reasons, lawyer further asserts that a separate set of rules or guidelines need to be implemented for these types of circumstances.

Both MRPC 1.15 and 1.15A establish obligations lawyers must adhere to when managing their trust accounts. For example, MRPC 1.15(b)-(d) require a lawyer to safeguard client or third person funds by placing them into a trust account, promptly notify the client or third person that the lawyer has received the funds, preserve complete records documenting the lawyer's management of the funds, and promptly disburse the funds to the client or third party. MRPC 1.15(b)-(d) state as follows:

(b) A lawyer shall:

(1) promptly notify the client or third person when funds or property in which a client or third person has an interest is received;

(2) preserve complete records of such account funds and other property for a period of five years after termination of the representation; and

(3) promptly pay or deliver any funds or other property that the client or third person is entitled to receive, except as stated in this rule or otherwise permitted by law or by agreement with the client or third person, and, upon request by the client or third person, promptly render a full accounting regarding such property.

(c) When two or more persons (one of whom may be the lawyer) claim interest in the property, it shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

(d) A lawyer shall hold property of clients or third persons in connection with a representation separate from the lawyer's own property. All client or third person funds shall be deposited in an IOLTA or non-IOLTA account. Other property shall be identified as such and appropriately safeguarded.

The above-cited provisions of Rule 1.15 articulate that lawyers, who serve as fiduciaries when managing their trust accounts, are expected to perform their safekeeping property duties without regard to whom the funds belong or their relationship with the owner of the funds. The Comments to MRPC 1.15 further emphasize this point by stating that "A lawyer should hold property of others with the care required of a professional fiduciary . . . . The obligations of a lawyer under this rule are independent of those arising from activity other than rendering legal services."

MRPC 1.15A serves as a strong reminder to lawyers of the importance of upholding their fiduciary obligations in handling funds, because it clarifies the parameters for when a lawyer must establish a trust account, creates a mandatory notification system for every overdraft of a lawyer trust account regardless of the circumstances, and requires a disciplinary investigation to be conducted regarding every overdraft notification. MRPC 1.15A(a), (f), and (g) provide as follows:

(a) Scope. Lawyers who practice law in this jurisdiction shall deposit all funds held in trust in accordance with Rule 1.15. Funds held in trust include funds held in any fiduciary capacity in connection with a representation, whether as trustee, agent, guardian, executor or otherwise

(f) Notification by Lawyers. Every lawyer who receives notification that any instrument presented against the trust account was presented against insufficient funds or that any other debit to such account would create a negative balance in the account, whether or not the instrument or other debit was honored, shall, upon receipt of a request for investigation from the Grievance Administrator, provide the Grievance Administrator, in writing, within 21 days after issuance of such request, a full and fair explanation of the cause of the overdraft and how it was corrected.

(g) Every lawyer practicing or admitted to practice in this jurisdiction shall, as a condition thereof, be conclusively deemed to have consented to the requirements mandated by this rule and shall be deemed to have consented under applicable privacy laws, including but not limited to those of the Gramm-Leach-Bliley Act, 15 USC 6801, to the reporting of information required by this rule.

In Informal Ethics Opinion RI-185 (January 19, 1984), this Committee, in considering an inquiry regarding whether a lawyer had a duty to "shop" among financial institutions for the best rate, opined that "A lawyer in possession of funds belonging to a client occupies the role of fiduciary with respect to such funds. Consistent with that fiduciary duty, the lawyer must exercise reasonable care . . . under the circumstances as required."

In Formal Ethics Opinion R-7 (April 27, 1990), the Committee discussed the ethical duties lawyers must consider in establishing a lawyer trust account and specifically addressed the issue of signatories on the accounts. It opined as follows:

Signatories. The account should be established in the name of the lawyer or law firm. In a solo practice, the lawyer may be the only account signatory. In a firm with more than one principal, accounting controls should be in place to handle trust account deposits and withdrawals in keeping with the lawyers' fiduciary, ethical and supervisory duties. See MRPC 5.1 and 5.3. Lawyers are not absolved of liability for trust account misconduct by delegating accounting and recordkeeping responsibilities to an employee or agent. (Emphasis added.)

Similarly, in Informal Ethics Opinion RI-107 (December 3, 1991), the Committee again addressed the issue of signatories on a lawyer's trust account reaffirming its conclusion that "Pursuant to MRPC 5.1 and 5.3, the law firm has responsibility to supervise and monitor the handling of the trust account whether the signatories are lawyer or nonlawyer employees."

The provisions of MRPC 1.15 and 1.15A and the ethics opinions interpreting them require the lawyer to serve as a fiduciary in managing his trust accounts irrespective of the client or the client's wishes. Although MRPC 1.15 is silent on whether a lawyer may ethically permit a nonlaywer to be a signatory on his trust account and thereby create an opportunity for unfettered access as in this case, the Committee has indicated that best practices would dictate against such an approach in light of the lawyer's ethical and fiduciary duties and associated liability for any violations of them. Moreover, MRPC 5.1 and 5.3 make it equally clear that to the extent the lawyer employs, retains, or associates with nonlawyers to assist him in carrying out his fiduciary duties, the lawyer is not absolved of liability for trust account misconduct by delegating those duties.

Based on the facts of this inquiry, it appears that the lawyer has delegated his fiduciary duties to Bank client by allowing it unfettered access to the dedicated IOLTA account to withdraw and deposit funds. Bank client caused repeated overdrafts to the lawyer's dedicated IOLTA account in violation of MRPC 1.15 and MRPC 1.15A. Without exception, MRPC 1.15 and 1.15A require a lawyer to ensure that his trust accounts are never overdrawn. As the Committee stated in Formal Ethics Opinion R-7, p 7, "it is unethical for a lawyer to allow the trust account balance to fall below the amount which the lawyer is required to maintain for the client's matter." The fact that the funds in the lawyer's dedicated IOLTA account belong to the Bank client, who caused the overdrafts, and the Bank client was not harmed does not absolve the lawyer of breaches in his fiduciary duties and/or violations of his ethical obligations regarding the overdrafts.

Under the circumstances, it is not surprising that Bank client seems to be treating the dedicated IOLTA account as its own account based on its agreement with lawyer that only funds belonging to Bank client will be deposited into the account. Similarly, lawyer is not upholding his mandatory

fiduciary and ethical obligations regarding the dedicated IOLTA account based on his perspective that the funds belong to the Bank client.

The Committee also notes that an IOLTA account, as defined by MRPC 1.15(a)(3), contemplates a pooled trust account, meaning a single account that contains funds for multiple clients or third persons. Based on the facts presented by this inquiry, the lawyer is subverting the intent and spirit of MRPC 1.15(a)(3) by establishing a dedicated IOLTA account solely for the benefit of one client. Because of the potential harm to other clients or third persons, the lawyer would not allow Bank client unfettered access to his pooled IOLTA account established in full compliance with the MRPC 1.15(a)(3).1

In summary, a lawyer cannot ethically abdicate the lawyer's responsibilities under MRPC 1.15 and 1.15A by establishing and relinquishing control of a dedicated client trust account to a client that happens to be the Bank at which such accounts are maintained.

1 MRPC 1.16(a) requires a lawyer to withdraw from the representation of a client that results in violation of the MRPC.

(a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:

(1) the representation will result in violation of the Rules of Professional Conduct or other law;

(2) the lawyer's physical or mental condition materially impairs the lawyer's ability to represent the client; or

(3) the lawyer is discharged.

In the instant situation, the Bank client requires the lawyer to allow it unfettered access to the dedicated IOLTA account to serve as its collection attorney. Bank client's conduct has caused repeated overdrafts to lawyer's dedicated IOLTA account in violation of MRPC 1.15 and 1.15A. MRPC 1.16 requires the lawyer to withdraw, if he fails to rectify the situation by refusing Bank client's access to his lawyer trust account.

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