The IOLTA Board expresses its gratitude to a drafting committee for the effort and expertise they generously donated in drafting this pamphlet. The following lawyers comprised the drafting committee:

Robert H. Davis., Jr., Esq. (Harrisburg), Chair

Samuel D. Miller, III, Esq. (Norristown)

Edwin R. Frownfelter, Esq. (Lemoyne)

In addition, the Board thanks Elyse E. Rogers, Esq., of the firm of Mette, Evans & Woodside (Harrisburg), and Brian L. Melgary, a student at the Dickinson School of Law (Carlisle), for their research and drafting contribution to this pamphlet. Finally, the Board expresses its appreciation to the Committee on Professional Discipline of the Association of the Bar of the City of New York for its kind permission to use portions of its pamphlet Other People's Money: Procedures and Pitfalls in Handling Client Funds (Michael Garrett, drafter), on which this pamphlet is based.

One of the most common reasons for the imposition of serious discipline against a lawyer is the lawyer's failure to handle fiduciary funds properly. It is important to note that the safeguarding of money held for clients and others is of such importance that all lawyers are required to certify compliance with the provisions of Rule 1.15 of the Rules of Professional Conduct (RPC 1.15) as a part of the annual licensing process with the Disciplinary Board of the Supreme Court of Pennsylvania. ⁽¹⁾ Recent changes in the law, including mandatory overdraft notification, direct notification to clients of insurance payments, and mandatory IOLTA requirements indicate the wide range of concern within the courts, the legislature, and the public as to the importance of proper handling of fiduciary funds.

Pennsylvania has few official guidelines and requirements to help attorneys comply with the Rules of Professional Conduct. This pamphlet provides attorneys with guidance for managing and safeguarding entrusted funds and other property belonging to clients and third parties.

Both RPC 1.15 and general law relating to fiduciary obligations require that certain property be held in fiduciary capacity. RPC 1.15 applies to any property in which a client or third party has a property interest which comes into a lawyer's possession in connection with representation of a client. Examples of funds normally subject to these requirements are: 1) Deposits and proceeds for distribution in a real estate transaction;

2) Estate assets in connection with administration of an estate;

3) Settlements and recoveries collected as damages in personal injury, property damage, contract, and other monetary claims;

4) Funds received as prepayment of expected costs and expenses of the representation; and

5) Retainers or advance payment of fees which have not been earned.

Fees paid in advance are considered trust funds in the absence of an agreement to the contrary and should be maintained in trust until they are earned and can be withdrawn with the client's consent. In In Re Anonymous No. 98 DB 92, 23 Pa. D.& C.4th 452 (1994), the Disciplinary Board set forth at length the way in which it expects attorneys to deal with advances of fees and advances for costs and/or filing fees. See also, PBA Formal Opinion 95-100, which specifically opines that in the absence of a clear written statement or agreement to the contrary, retainer payments must be deposited into a proper attorney trust account. That formal opinion also distinguishes between refundable and nonrefundable retainers. The opinion concludes that nonrefundable retainers are permissible, but any arrangement for a nonrefundable retainer must be confirmed by the clear and unambiguous language of a written statement provided to the client or a written agreement between the attorney and client. Rules of construction of the client-attorney contract all favor the client. It is the responsibility of the lawyer to assure that the contractual term of nonrefundability is clear, unambiguous, and understood by the client. At the conclusion of the representation the lawyer must refund the unearned balance of fees paid in advance. ⁽²⁾ Therefore, the lawyer who seeks to abrogate the expectation that unearned fees will be returned by charging a fee that is nonrefundable bears the burden to assure that nonrefundability is a clear term of the fee agreement.

THE BASIC RULES

RPC 1.15 imposes five (5) basic requirements on any lawyer who, in the course of representing a client, comes into possession of property, including money, belonging to a client or third party:

1. The duty to keep separate from the lawyer's own property.

2. The duty to give notice of the receipt of any funds or other property.

3. The duty to maintain appropriate records of any property, particularly money, held on behalf of another.

4. The duty to render an accounting of any funds held in a fiduciary capacity on request.

5. The duty to promptly deliver funds or other property to any party legally entitled to them.

A lawyer who holds funds or other property of a client or third party in connection with the lawyer's professional practice must separate it from the lawyer's own property. ⁽³⁾ This money may never be commingled with money belonging to the law office or to the lawyer.

Observing this strict fiduciary duty is basic to the handling by an attorney of the funds of another and ought to be automatic and unequivocal. Serious disciplinary consequences can result from either deliberate or careless mishandling of funds. In an age in which the social value of lawyering and the ethics of lawyers are being severely criticized, increased awareness and control over handling of client funds can yield dividends in the form of much needed public approval of the profession's self-policing efforts.

No withdrawal or transfer of the funds may be made, unless consistent with the client's ownership interest in the funds. A lawyer shall never make disbursements for his/her personal or office purposes directly from a trust account. All transfers of funds from trust funds to the lawyer's own use or possession (e.g., for deduction of fees from proceeds received) should be made by check or other recorded transaction to an account which is clearly the property of the lawyer, and should be made only with the client's clear knowledge and authorization, by fee agreement or by notice and acquiescence. A lawyer shall never under any circumstances withdraw cash from an account containing client funds. A lawyer should never execute an instrument transferring trust funds to him or herself, without clear journal and ledger entries identifying the client funds against which such withdrawals are made and the purpose of such transfer (e.g., for fees earned according to a billing or fee statement). Client funds must remain intact in trust the entire time they are in the lawyer's possession and may not be "borrowed" even for a moment or applied to interests of the lawyer or other clients without the express and informed permission of the client. Such transactions are suspect and are subject to strict scrutiny under RPC 1.8, which requires that any such disclosure and permission be memorialized in writing.

The attorney must identify to the banking institution those accounts intended to hold money that belongs to clients or third parties. The lawyer must also assure that the account is given the special distinctive title identifying it as a trust account, and that checks and deposit slips bear the special designation. In light of requirements imposed by RPC 1.15(d) through (h) and Pennsylvania Rules of Disciplinary Enforcement (Pa. R.D.E.) Rule 221, it is essential for all attorneys to confirm to each of the applicable banks which of their accounts are fiduciary and therefore subject to the rules.

A separate trust account may be maintained for each client or matter, or a single account may serve as the repository of funds belonging to many clients provided that the attorney maintains appropriate and adequate records of the account.

Furthermore, since the language of R.P.C. 1.15(a) does not include any qualifiers regarding intent, it should be viewed as providing strict liability. ⁽⁴⁾

Promptly notify the client or third party of receipt of funds in which the person has an interest. "Prompt" notification should take place in a matter of days rather than weeks or months.

RPC 1.15(b) requires that "appropriate records" of trust account funds be maintained. There is no definitive statement of recordkeeping requirements in effect in Pennsylvania. However, the lack of such specific guidelines will not prevent the imposition of discipline for failure to maintain appropriate records where the attorney's system is found to be clearly inadequate. See In Re Anonymous No. 81 DB 90, 15 Pa. D.& C.4th 254 (1992). The following are records and recordkeeping procedures which are generally necessary and useful.

Under generally accepted accounting standards and practices, "appropriate records" include at a minimum:

1) A ledger system showing all funds received from and disbursed to each client or for the benefit of each client;

2) A journal system showing all transactions in each trust account and the client or clients to whose interest those transactions apply;

3) Periodic bank statements and reconciliations;

4) Originals or copies of bank records including canceled checks, deposit slips and items, and notices;

5) Copies of all accountings and distribution statements issued to clients or others.

1. Signatory: Only an attorney admitted to practice in Pennsylvania should be a signatory for a Pennsylvania fiduciary account. A lawyer should never use a signature stamp or delegate to anyone authority to sign for the signatory.

2. Thoroughness. Records of all deposits in and withdrawals from all trust accounts and all other accounts subject to these requirements should reflect the date and amount of the transaction, the source of the funds, the description of deposit items, identification of payees, the purpose of the transaction, and the client or matter to which the transaction relates.

3. Reconciliation. Reconciliations of balances of all journals, ledgers, and checkbooks, and other financial records should be prepared monthly, if not more frequently. The balance of the journal entries should always exactly equal the sum of all ledger balances, and should be reconciled with balances reported on bank statements. Any discrepancy in these reconciliations is an indication of potentially serious problems, and should be addressed immediately by the law office. Monthly or periodic bank statements should be opened immediately and reconciled with the internal records. An attorney should carefully and critically review both internal and bank statement reconciliations.

4. Missing client or third party: If money held by the attorney is payable to a party who cannot be found, the money may become subject to custody and control by the Commonwealth. ⁽⁵⁾ Once payment has been made, the Commonwealth assumes all liability for the funds. ⁽⁶⁾ Under no circumstances should the attorney deal with the funds of a missing party as the attorney's own property.

5. Dissolved firm: Upon the dissolution of any law firm, one of the members of that firm or a successor firm should maintain the required records for five years. Any client or third party for whom funds are being held should be notified who will hold the funds.

6. Interest: Any interest payable on a trust account belongs to the client or other person whose money earned the interest. The only exception is the interest on "qualified funds" which were deposited in an IOLTA. That interest is payable directly by the banking institution to the IOLTA Board. ⁽⁷⁾

7. Advanced legal fees, costs, and expenses: Advanced legal fees, costs and expenses must be deposited into a fiduciary account and then be withdrawn as incurred. Advanced legal fees, costs, and expenses must be maintained in accordance with Rule 1.15. ⁽⁸⁾ If earned fees are combined with costs or advanced fees, then the attorney should divide the deposit to avoid commingling. ⁽⁹⁾

9. Confidentiality. If outside billing, accounting, or collection services are used, care should be taken to assure the protection of client confidentiality. ⁽¹⁰⁾

Paper accounting systems are notoriously susceptible to errors, omissions, and manipulation by staff which can result in serious problems. Commercial paper-based systems are available which reduce the risk of such errors, but software packages designed for computerized offices often serve as complete systems which automate and standardize many of these requirements. Whatever system is used, the attorney remains responsible for the proper management and review of the recordkeeping process.

A lawyer must maintain complete records for at least five years after the termination of the representation. ⁽¹¹⁾ Retention of records for longer periods of time may be prudent for considerations related to malpractice defense, availability for minors, tax audits, and other purposes.

On request, appropriate accounting must be provided. Any request from a client or party on whose behalf funds are held for information as to the status of those funds should be considered a request for an accounting and should be answered promptly and thoroughly. It is suggested that an accounting should indicate at a minimum:

1) All funds received, including date, source, amount, and disposition (i.e., deposited in trust account, endorsed over to client, etc.);

2) All disbursements made, including date, payee, amount, and purpose;

3) Interest, charges, and other credits or debits accrued; and

4) Amounts still held, location, and purpose for which they are held or contingencies which must be met before final disbursement.

When the client or third party is entitled to payment of funds held by the attorney, the lawyer has a duty to deliver the funds as promptly as possible. Delivery to a client of funds in which a third party has a legally enforceable interest can result in both civil liability and disciplinary sanctions against the lawyer. Withdraw or disburse funds from fiduciary accounts only by authorized wire transfer or by check payable to a named payee, never in cash. ⁽¹²⁾

Where there is a dispute between lawyer and client as to the ownership of funds (e.g., a dispute over fees the lawyer proposes to withhold), the disputed amount must be kept in trust until the dispute is resolved. The fact that neither the lawyer nor the client is entitled to possession while the resolution process is underway creates an incentive for both to participate in resolution of the dispute. Under no circumstances should a lawyer withhold delivery of the undisputed portion of the funds pending resolution of a dispute.

Attorney trust accounts must be maintained in a financial institution approved by the Supreme Court of Pennsylvania. ⁽¹³⁾ An approved institution is defined as one which has agreed to abide by the mandatory overdraft notification requirements of Rule 221 of the Rules of Disciplinary Enforcement. ⁽¹⁴⁾ Your selection of a financial institution must also take into account the insitution's willingness to comply with the IOLTA requirements of RPC 1.15 (d) through (i). It is important to note that the attorney is responsible to assure that the banking institutions that (s)he utilizes meet these requirements.

The bank in which the fiduciary account is maintained must provide dishonored check reports to the Lawyers Fund for Client Security Board. A report must be generated whenever a check that would otherwise be properly payable is dishonored because of insufficient available funds. The report must be sent to the Board within five working days. A designated representative of the Lawyers Fund for Client Security Board shall conduct a preliminary inquiry and shall, when appropriate, refer the matter to the office of Disciplinary Counsel for further investigation. ⁽¹⁵⁾ A report filed with the Lawyers Fund for Client Security Board according to this rule or a referral of such a report to the Office of Disciplinary Counsel should not alone be considered a disciplinary complaint. ⁽¹⁶⁾

IOLTA (Interest on Lawyer Trust Account) Requirements

The IOLTA program was established in 1988 by act of the General Assembly. In 1996, the Supreme Court adopted Rule 1.15(d)-(i) which established a comprehensive IOLTA program. It serves to provide funds for the delivery of civil legal services to the poor and disadvantaged, to improve the administration of justice in Pennsylvania, and for educational legal clinical programs and internships administered by law schools located in Pennsylvania. The IOLTA program is administered by the Pennsylvania IOLTA Board and is funded by the interest earned on attorneys' fiduciary accounts used to hold pooled deposits of qualified funds. ⁽¹⁷⁾

Every Pennsylvania attorney who receives funds belonging to clients or a third person must deposit them in an interest bearing account. "Qualified funds" as defined under RPC 1.15(d)(1) must be kept in an Interest on Lawyer Trust Account (IOLTA). A lawyer may request an exemption from the requirement of maintaining an IOLTA. ⁽¹⁸⁾ A lawyer will not be liable for damages or held to have breached any fiduciary duty because monies were deposited into an IOLTA pursuant to a lawyer's judgment in good faith that the monies were qualified funds. ⁽¹⁹⁾

The interest earned on an IOLTA must be remitted to the Pennsylvania IOLTA Board at least every quarter. ⁽²⁰⁾ Moreover, the depository institution must send to the IOLTA Board and to the attorney a report showing the interest earned as well as the other pertinent information involving the account. ⁽²¹⁾

Non-Qualified Funds. Funds which in a lawyer's judgment are not "qualified funds" shall be placed in an interest bearing account for the benefit of the client or third person or in another investment vehicle specifically agreed upon by the lawyer and the client or third party. All interest generated by these accounts or investments is the property of the client or third party to whom the funds belong, and all duties arising from RPC 1.15 flow to the client or third party in question.

Master escrow accounts: As a practical alternative, some banks now offer Master Escrow Attorney Trust Accounts. The Master Escrow is a non-interest-bearing disbursement checking account. Tied into this disbursement account are any number of individual interest-bearing sub-accounts for each client or matter. Each sub-account is maintained under the social security number or federal taxpayer ID number of the client, with the bank sending individual 1099 tax forms to report the interest. A zero balance may be maintained in the disbursement account until it is necessary to make a payment from one of the sub-accounts. At that point a telephone authorization is made to the bank to transfer the requisite funds from the sub-account to the disbursement account. A check is then drawn on the disbursement account for the payment. The bank supplies the attorney with monthly statements showing the activity in the disbursement account and all sub-accounts, including balances, deposits, withdrawals and interest credited.

As stated at the outset, the basic rules are simple. Attorneys must hold client and third party funds in separate accounts at qualified banking institutions. They must notify the owner of all funds received. They must keep appropriate records, including journals and ledgers. They must reconcile bank statements and correct errors. They must provide accounting for funds upon request, and they must deliver funds to the entitled owner promptly. With Rule 221 in place, the clarity of the rule is supplemented by an automatic alarm system which alerts the Lawyers Fund for Client Security Board of possible violations. Accordingly, a modest amount of attention to these simple principles should assist the practitioner in avoiding disciplinary and other liability for incorrect handling of fiduciary funds.

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1. 1. Pennsylvania Rule of Disciplinary Enforcement (Pa. R.D.E.) 219(d)(1)(iii). On filing for renewal, the lawyer must specify the location, name and account number for each trust account held.

2. RPC 1.16(d).

3. 3. Pennsylvania Rule of Professional Conduct (Pa. R.P.C.) 1.15(a).

4. 4. In Re Anonymous No. 98 DB 92, 23 Pa. D. &. C. 4th 452 (1994).

5. 5. 72 Pa.C.S. §1301.2(a)(1) (1996).

6. 6. 72 Pa.C.S. §1301.14 (1996).

7. 7. Pa. R.P.C. 1.15(d)(3)(i).

8. See PBA Formal Opinion 95-100.

9. 9. In Re Anonymous No. 98 DB 92, 23 Pa. D. &. C. 4th 452 (1994).

10. RPC 1.6(a); RPC 5.3(b).

11. 11. Pa. R.P.C. 1.15(a).

12. 12. Pa. R.P.C. 1.15(b).

13. 13. Pa. R.D.E. Rule 221.

14. 14. Pa. R.D.E. Rule 221 (c); Pa. R.D.E. Rule 221 (o).

15. 15. Pa. R.D.E. Rule 221(n).

16. 16. Pa. R.D.E. Rule 221(n).

17. 17. PA R.P.C. 1.15(g).

18. 18. Pa. R.P.C. 1.15(e).

19. 19. Pa. R.P.C. 1.15(f).

20. 20. Pa. R.P.C. 1.15(d)(3)(i)

21. 21. Pa. R.P.C. 1.15(d)(3)(ii); Pa. R.P.C. 1.15(d)(3)(iii).