Section 8.1: Trust Accounts, Segregation, and Recordkeeping

Trust Accounts, Segregation, and Recordkeeping (Rule 1.15)

The Core Duty of Safekeeping

Under ABA Model Rule 1.15(a), a lawyer must hold the property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. This principle, known as the duty of safekeeping, is a fundamental fiduciary obligation. The rule applies not only to money, but to all forms of property, including stock certificates, deeds, jewelry, and physical evidence. The baseline requirement is absolute: a lawyer must never treat client property as their own, use it for personal or business purposes, or expose it to the claims of the lawyer’s personal or firm creditors.

The Prohibition Against Commingling

Commingling occurs when a lawyer mixes their own funds with those of a client or a third party. This is a strict liability offense under the rules of professional conduct. It does not matter if the lawyer had no intent to steal, if the funds were mixed only briefly, or if no client suffered an actual financial loss. The act of commingling itself is a disciplinary violation that frequently leads to severe sanctions, including suspension or disbarment.

To prevent commingling, a lawyer must maintain two distinct types of bank accounts:

1. Operating Account (or Office Account): This is the lawyer’s or firm’s business account. It is used to pay rent, salaries, utility bills, and other business expenses. All earned legal fees and business revenues are deposited here.
2. Client Trust Account: This is a separate bank account designated specifically for holding client or third-party funds. The bank must be informed that the account is a trust account.

The Sole Exception for Bank Service Charges

There is only one narrow exception to the strict prohibition against commingling. Under Rule 1.15(b), a lawyer may deposit their own funds into a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose. For example, if the bank charges a monthly maintenance fee of $25, the lawyer may keep a small buffer of their own money (e.g., $100) in the trust account to cover these charges and prevent the account from being overdrawn. Any amount beyond what is reasonably necessary to cover these service charges constitutes impermissible commingling.

Depositing Advances: Fees vs. Expenses

A common area of testing on the MPRE involves how lawyers must handle prepayments from clients. Rule 1.15(c) states that a lawyer must deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.

Advanced Legal Fees

When a client pays an advance fee (often referred to as an "advance retainer" or "prepaid fee"), the money does not belong to the lawyer yet. The lawyer has not performed the work. Therefore, the advance fee must be deposited into the client trust account. As the lawyer performs the work and bills the client, the fee is "earned." Once earned, the lawyer must promptly withdraw the earned portion from the trust account and transfer it to the operating account. Leaving earned fees in the trust account for an unreasonable period is a form of commingling (commingling lawyer funds with client funds in the trust account).

Expense Advances

If a client advances money to cover filing fees, expert witness fees, or travel expenses, these funds must also be deposited into the client trust account. The lawyer may withdraw these funds only to pay the expenses as they are incurred.

The "True Retainer" Distinction

It is critical to distinguish an advance fee from a "true retainer" (sometimes called a classic, general, or availability retainer). A true retainer is a fee paid by a client solely to secure the lawyer’s availability to represent the client over a specified period. In a true retainer agreement, the lawyer is being paid simply for promising to be available and, conversely, forgoing the opportunity to represent the client's adversaries. A true retainer is earned immediately upon receipt, regardless of whether the lawyer performs any actual legal services. Consequently, a true retainer must be deposited directly into the lawyer's operating account, not the client trust account. Depositing a true retainer into a trust account would commingle the lawyer's earned money with client funds.

Recordkeeping and Reconciliations

Rule 1.15(a) requires that complete records of trust account funds and other property must be kept and preserved by the lawyer.

• Retention Period: The Model Rules specify that these records must be preserved for a period of five years after termination of the representation. Some jurisdictions require longer periods, but the MPRE tests the five-year standard.
• Required Records: A lawyer must maintain detailed, up-to-date ledgers for the trust account. This includes a general journal recording all receipts and disbursements, a separate ledger for each individual client showing the balance of that client's funds, bank statements, check registers, and regular monthly reconciliations. The lawyer must be able to account for every single dollar in the trust account at any given moment.

Safekeeping Non-Monetary Property

When a lawyer receives property other than money (such as deeds, stock certificates, jewelry, or physical evidence), the lawyer must:

1. Identify the property as belonging to the client or third party.
2. Safeguard it with the care of a professional fiduciary.
3. Place it in a secure location separate from the lawyer’s own property (such as a bank safe deposit box or a fireproof office safe).

If a client delivers a valuable painting to the lawyer to secure a fee, the lawyer cannot hang it in the office lobby for decoration. It must be kept in secure, segregated storage.

Prompt Notification, Delivery, and Accounting

Under Rule 1.15(d), when a lawyer receives funds or other property in which a client or a third person has an interest, the lawyer must:

• Promptly notify the client or third person of its receipt.
• Promptly deliver the funds or property to which the client or third person is entitled.
• Render a full accounting of the funds or property upon request by the client or third person.