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. Safeguarding 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 (R.P.C. 1.15) as a part of the annual licensing process with the Disciplinary Board of the Supreme Court of Pennsylvania. Recent concerns about the safety of funds entrusted to attorneys by the public have prompted significant changes to the Rules of Professional Conduct and the Rules of Disciplinary Enforcement. These changes impose a heightened vigilance upon attorneys through strict rules on how attorneys maintain client funds, as well as increased accountability through additional recordkeeping and reporting requirements.

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

Both R.P.C. 1.15 and general law impose fiduciary duties upon attorneys who hold funds on behalf of clients and other third parties. R.P.C. 1.15 applies to any property that belongs to a client or third party that comes into a lawyer’s possession (“Rule 1.15 Funds”). 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 legal representation; and
5. Retainers or advance payment of fees or expenses which have not been earned.

Fees and costs paid in advance are considered trust funds in the absence of an agreement to the contrary and must be maintained in a trust account separate from the attorney’s funds until they are earned or become payable and can be withdrawn with the client’s consent.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 how it expects attorneys to deal with advances of fees and expenses.  In addition, PBA Formal Opinion 95-100 provides that in the absence of a clear written statement or agreement to the contrary, client retainers must be deposited into a proper attorney trust account.  This PBA opinion also distinguished between refundable and nonrefundable retainers and concluded that nonrefundable retainers are permissible if the arrangement is properly documented.  The opinion made clear that any arrangement that includes a nonrefundable retainer must be confirmed by a clear and unambiguous written statement provided to the client, or by a written agreement between the attorney and client.  Rules of construction of such agreements always favor the client, and it is the lawyer’s responsibility to assure that non-refundability language is agreed to and understood by the client.  In most attorney-client fee arrangements, the lawyer must refund the unearned balance of fees paid in advance once the representation has concluded. Therefore, the lawyer who claims a retainer is non-refundable bears the burden to ensure that the client understands and agrees to such terms.

R.P.C. 1.15 imposes five (5) basic requirements upon 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 lawyer has a duty to keep funds and property separate from the lawyer’s own property.
2. The lawyer has a duty to give notice of the receipt of any funds or other property.
3. The lawyer has a duty to maintain appropriate records of any property, particularly money, held on behalf of another.
4. The lawyer has a duty to render an accounting of any funds held in a fiduciary capacity on request.
5. The lawyer has a duty to promptly deliver funds or other property to the person who is legally entitled to them.

RPC 1.15 requires that a lawyer who holds funds or other property of a client or third party do so with the care of a professional fiduciary and keep it separate from the lawyer’s own property.  Such funds may never be commingled with money belonging to the law office or to the lawyer.  While the Explanatory Comment to Rule 1.15 suggests that a client may give informed consent, confirmed in writing, to a different manner of handling funds advanced to cover fees and expenses, the text of Rule 1.15 (b) is clear:  A lawyer shall hold all Rule 1.15 Funds and property separate from the lawyer’s own property.  Since this language is unequivocal and the risks are great, it is strongly recommended that client funds never be comingled with attorney funds regardless of a client’s waiver.  Whenever a lawyer holds funds belonging to clients or third parties, the lawyer must maintain at least two types of separate accounts:  trust accounts in which client or third party funds are held, and an operating account in which funds belonging to the lawyer or law firm are held.  Trust accounts typically are of two types:  one or more non-IOLTA accounts for funds expected to be retained for longer periods of time with accrued interest to be paid to the client, and an IOLTA account for client funds that are nominal in amount or are expected to be held for a short period of time.  Accrued interest on an IOLTA account is paid directly to the IOLTA Board.

Separate trust accounts may be maintained for each client or matter.  Alternatively, a single account may serve as the repository of funds belonging to more than one person, provided that the attorney maintains appropriate and adequate records identifying the balance of funds attributable to each person or matter.  A lawyer must not place personal funds in a trust account. The only exception is funds that are necessary to pay service charges on the account.  Funds deposited for service charges must be carefully documented.  If earned fees are combined with costs or advanced fees, then the attorney must immediately transfer earned fees to the operating account to avoid commingling.

The language of R.P.C. 1.15 does not include any qualifiers regarding intent.  It should be viewed as imposing strict liability upon attorneys. Observing this strict fiduciary duty is intrinsic to handling funds of another and should be automatic and unequivocal.  Serious disciplinary consequences can result from deliberate or careless mishandling of client funds, which can include referral to the Office of Disciplinary Counsel and criminal prosecution.  In an age when the social value of lawyering and the integrity of lawyers are often severely criticized, increased awareness and control over handling funds belonging to third persons can yield dividends in the form of much needed public recognition of the profession’s self-policing efforts.

Funds may be withdrawn from a trust account only when fees are earned or when expenses are incurred.  Withdrawal or transfer of earned funds or funds for expenses may only be made with the actual knowledge and authorization of the client, by way of a fee agreement or by notice and acquiescence.  A lawyer shall never make disbursements of unearned or funds for expense reimbursement from a trust account for personal or office purposes.

All transfers of earned funds or funds for expense reimbursement from a trust account to the lawyer should be made by check, electronic transfer, or other recorded transaction to an account that is clearly identified as belonging to the lawyer.  A lawyer shall never under any circumstances withdraw cash from a trust account.

A lawyer should never execute an instrument transferring trust account funds without clear journal and ledger entries identifying the client funds from which  the transfer is made, the purpose of such transfer (e.g., for fees earned according to a billing or fee statement), and the identity of the transferee.  Client funds must remain in a trust account for 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.

R.P.C. 1.15(g) specifically requires attorneys to identify client trust accounts to the banking institution where such accounts are held. Attorneys must assure that each account is given the special distinctive title identifying it as a trust account.  Checks and deposit slips must bear the trust account designation.

Questions sometimes arise as to whether a lawyer is holding client funds in a fiduciary capacity.  A lawyer acts in a fiduciary capacity when serving as a personal representative, guardian, conservator, receiver, trustee, agent under a power of attorney, or other similar position.  “Fiduciary funds” are defined simply as Rule 1.15 Funds which the lawyer holds as a fiduciary.  If fiduciary funds are strictly subject to the IOLTA account requirements discussed below, the proper performance of fiduciary investment duties would be difficult.

Rule 1.15 and Rule 221 each provide that fiduciary funds must be placed in a trust account, or in another investment or account which is authorized by law or which is authorized by the agreement governing the fiduciary relationship.  Accordingly, a lawyer may maintain fiduciary funds in vehicles other than trust accounts or IOLTA Accounts (as these terms are defined in Rule 1.15).  However, if fiduciary funds are held in a trust account, the trust account must be maintained in an “eligible institution.”  If fiduciary funds held in a trust account and are “qualified funds” as discussed below, such fiduciary funds must be held in an IOLTA Account.

An agreement, such as an agreement of trust, may provide the requisite authorization for the lawyer acting as a fiduciary to make non-trust account investments.  Alternative investments and accounts are authorized by law in the fiduciary context by Pennsylvania’s Prudent Investor Rule, which gives the fiduciary authority to invest in every kind of property and type of investment, including, but not limited to, mutual funds and similar investments.  20 Pa. C.S.A. § 7203(b).  The Prudent Investor Rule thus serves as an “umbrella” authorizing wide investment latitude in the fiduciary context.  It should also be noted that Comment 6 to Rule 1.15 states that funds that are controlled by a non-lawyer professional co-fiduciary are not considered Rule 1.15 funds.  This means that funds controlled by an institutional co-fiduciary, such as an institutional trustee, are not subject to Rule 1.15.  Institutional co-fiduciaries are subject to industry specific laws and regulations.  Notwithstanding the foregoing, a lawyer’s handling of fiduciary funds remains subject to Pennsylvania law governing fiduciary relationships.

The lawyer’s responsibilities under Rule 1.15 apply when the lawyer acts as an escrow agent, settlement agent, or representative payee.  Money or property received while wearing any of these hats is Rule 1.15 Funds that must be held in an appropriate trust account.

A lawyer must 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.