7.3 Firm and Trust Bank Accounts, Deposits, Endorsements, Checks & Special Instruments
Key Takeaways
- A firm maintains at least two distinct accounts: an operating account for firm money and a client trust account for client money, and funds never cross between them except as earned fees or authorized disbursements.
- Three-way trust reconciliation matches the bank statement, the trust ledger book balance, and the total of all individual client ledger balances, and all three must agree.
- A blank endorsement makes an instrument payable to the bearer, a restrictive endorsement such as "For Deposit Only" limits its use, a special endorsement names a new payee, and a qualified endorsement adds "without recourse."
- A certified check is drawn on the customer's own account with the bank setting the funds aside, while a cashier's check is drawn by the bank on itself, which is why the two carry different risk profiles.
- Stopping payment works on an ordinary check drawn by the customer but is generally unavailable on a certified or cashier's check, because the bank has already committed its own obligation.
7.3 Firm and Trust Bank Accounts, Deposits, Endorsements, Checks & Special Instruments
[!NOTE] NALS PP Exam Blueprint Focus: The Part 2 Billing and Accounting heading enumerates depositing funds, completing deposit slips, endorsements, firm bank account and trust bank accounts, writing checks, stopping payment on checks, and using special checks including bank drafts, cashier's checks, and certified checks. These are concrete procedural topics with definite correct answers.
The Two-Account Structure
| Operating account | Client trust account | |
|---|---|---|
| Whose money | The firm's | The clients' |
| What goes in | Earned fees, reimbursed costs, capital contributions | Advance fee retainers, cost deposits, settlement proceeds, funds held for third parties |
| What comes out | Payroll, rent, insurance, vendors, partner draws | Disbursements for the specific client whose funds they are, and earned fees transferred out |
| Interest | Belongs to the firm | On a pooled short-term account, remitted to the state IOLTA program |
| Records required | Ordinary business books | Separate ledger for each client, plus a trust journal |
A firm may hold a nominal amount of its own money in trust where the jurisdiction permits, solely to cover bank service charges. That is the only ordinary exception to the no-firm-money rule.
IOLTA — Interest on Lawyers Trust Accounts — applies to client funds that are nominal in amount or held for a short period, where the interest a single client would earn would not exceed the cost of accounting for it. Interest on those pooled accounts goes to the state program that funds legal services for the poor. Funds that are substantial or will be held long enough to earn net interest go into a separate interest-bearing account for that client.
The Three Prohibited Acts
| Act | What it means | Why it is fatal |
|---|---|---|
| Commingling | Mixing firm money with client money in one account | Destroys the segregation the trust account exists to create; sanctionable even with no loss |
| Conversion | Using one client's funds for the firm or for another client | Misappropriation; in most jurisdictions presumptively disbarrable |
| Failure to account | Not maintaining records or not delivering funds promptly | Independent violation of Model Rule 1.15 even where every dollar is present |
A paralegal never has authority to move money between the accounts on their own judgment. Signature authority on a trust account rests with the lawyer, and a paralegal who signs trust checks under delegated authority does so under the lawyer's Rule 5.3 supervisory responsibility.
Three-Way Reconciliation
Monthly reconciliation of a trust account is a three-way match, not the two-way reconciliation used for a personal checking account.
- The adjusted bank statement balance — the bank's ending balance, plus deposits in transit, minus outstanding checks.
- The trust journal book balance — the firm's own running record of the account.
- The sum of all individual client ledger balances.
All three must be equal. The third leg is the one that catches the dangerous errors. If the bank and the book balance agree but the client ledgers total less, some client's money has been disbursed against another client's ledger, and the account is carrying a negative client balance hidden inside a positive account balance.
[!WARNING] No client ledger may ever go negative. A negative individual balance means that client's disbursement was funded by other clients' money, which is conversion regardless of whether the total account balance stayed positive.
Depositing Funds and Completing Deposit Slips
A deposit slip records:
- The account name and number — confirm trust versus operating before writing anything.
- The date.
- Currency and coin totals separately.
- Each check listed individually, identified by the drawer bank's routing or ABA transit number, or by drawer name where the form allows.
- The subtotal, less any cash received back, giving the net deposit.
Rules that apply specifically to trust deposits:
- Never take cash back from a trust deposit. Every trust disbursement is made by check or documented electronic transfer so it leaves an audit trail.
- Deposit each client's funds with a notation identifying the client and matter, so the deposit can be posted to the correct individual ledger.
- Retain the validated deposit receipt with the day's records.
- Do not disburse against an uncollected deposit. A settlement check must clear before the firm disburses the client's share, or the disbursement is funded by other clients' money.
Endorsements
An endorsement is the payee's signature on the back of an instrument, transferring or restricting it.
| Endorsement | Form | Effect | Risk |
|---|---|---|---|
| Blank | Payee's signature alone | Makes the instrument payable to bearer | Anyone in possession can negotiate it |
| Restrictive | "For Deposit Only to Account No. 123456" plus signature | Limits the instrument to deposit into the named account | Low — this is the standard for law-office receipts |
| Special (full) | "Pay to the order of [named party]" plus signature | Transfers to a specific named party, who must then endorse | Requires the named party's endorsement to negotiate further |
| Qualified | "Without recourse" plus signature | Disclaims the endorser's contract liability if the instrument is dishonored | Used where the endorser does not want secondary liability |
A restrictive endorsement can be combined with a special or qualified endorsement.
The rule for a law office is to endorse restrictively, immediately on receipt. A settlement check bearing a blank endorsement sitting in an unlocked drawer is bearer paper.
When a settlement check is made payable jointly to the client and the firm, both payees must endorse. A paralegal may not endorse a client's name, even with oral permission, absent a properly executed power of attorney; doing so is forgery.
Writing Checks
- Complete the stub or register first, so the record survives even if the check is lost.
- Write the date, the payee exactly as the payee's name appears, and the amount in figures placed hard against the dollar sign with no gap.
- Write the amount in words beginning at the far left, and fill the remaining space to the word "Dollars" with a solid line so nothing can be inserted.
- Note the client and matter and the purpose on the memo line — mandatory for trust checks.
- Obtain the authorized signature.
- Never sign a blank check, and never leave a signed check with the payee line open.
- Void errors by writing VOID across the face, retaining the voided check, and recording the voided number. Never erase or write over an amount.
When the words and the figures disagree, the amount written in words controls.
Stopping Payment
A stop payment order instructs the drawer's bank not to pay a check that has not yet been paid. It must describe the check with reasonable certainty — account, number, date, amount, payee — and it must reach the bank in time for the bank to act. Oral orders are effective for a limited period unless confirmed in writing, and written orders lapse and must be renewed.
Two limits matter:
- Stopping payment does not extinguish the underlying obligation. It stops the instrument, not the debt.
- Payment generally cannot be stopped on a certified check or a cashier's check, because the bank has already made the obligation its own.
Special Checks
| Instrument | Who draws it | Drawn on | Practical characteristics |
|---|---|---|---|
| Certified check | The customer | The customer's own account at the certifying bank | The bank certifies and sets the funds aside; the bank becomes obligated on the instrument |
| Cashier's check | The bank | Itself | The bank is both drawer and drawee; backed by bank funds |
| Bank draft (teller's check) | One bank | Another bank where it holds funds | Used where a payee wants an instrument drawn on a specific institution |
| Money order | Issuer (bank, post office, retailer) | The issuer | Prepaid; usually subject to a dollar cap |
All four are more secure than an ordinary check because payment does not depend on the drawer's account balance at presentment. That is why a real estate closing, a settlement disbursement, or a court registry deposit is commonly required in certified or cashier's check form.
[!TIP] The exam distinction: on a certified check the funds come from the customer's account, which the bank has earmarked. On a cashier's check the funds come from the bank's own account. Both are bank-obligated instruments; only the source of funds differs.
A firm receives a $95,000 settlement check payable jointly to the client and the firm. Which handling sequence is correct?
A firm's monthly trust reconciliation shows an adjusted bank balance of $84,300 and a trust journal book balance of $84,300, but the individual client ledgers total $81,900. What does this indicate?
A client asks the firm to obtain an instrument for a real estate closing that is drawn by the bank on the bank's own funds, so the seller need not rely on the client's account balance. Which instrument fits, and can payment on it later be stopped?