When an attorney receives money from a client, such as a retainer for attorney’s fees to be earned in the future, or receives money on behalf of a client, such as in payment of a settlement or jury award, that money belongs to the client, not the attorney personally. Under the Rules of Professional Responsibility, the attorney must not commingle; i.e., combine the client’s money with his or her own money. Rather, the attorney has a fiduciary duty to the client on receipt of the money to hold it in trust for him or her until such time as it can be appropriately disbursed to whoever it ultimately belongs to. Attorneys generally handle this situation by maintaining two separate law firm bank accounts.
The Law Firm Trust Account
One account is a trust account, often called an escrow account, into which the attorney deposits money received by or on behalf of clients. In the case of a retainer, this money is disbursed to the attorney’s law firm as the attorney’s fees are earned. In the case of a personal injury settlement check, the money is disbursed first to the client’s doctor, hospital, pharmacy, etc. in payment of accumulated unpaid bills. Then the attorney disburses to his firm the attorney’s fees that the attorney-client employment contract calls for. Finally the attorney disburses the remaining balance to the client.
The Law Firm Operating Account
The other law firm bank account is an operating account into which the attorney deposits the attorney’s fees earned by the firm. This money is then used to pay the firm’s operating expenses, including office rent, equipment, utilities, supplies, salaries, bonuses, etc.
Attorneys have the following five distinct fiduciary duties to the clients for whom they are holding money in their trust account:
- To keep the money secure
- To keep it separate from their own funds and those of their law firm
- To notify the client when a settlement check, etc. comes in
- To appropriately disburse the money to those to whom it belongs
- To maintain accurate records reflecting all such receipts and disbursements
If the attorney commingles trust funds with operating funds or his or her personal funds, this breaches the fiduciary duty and the affected client can sue him or her for legal malpractice and/or bring an ethics complaint against him or her to the state Bar Association. There the attorney faces disciplinary action, up to and including disbarment, if the complaint is found to be valid.
Some commingling offenses rise to the level of criminal activity. Just last month an Islip, New York, attorney was convicted of stealing over $187,000 from one of her clients on whose behalf she had received and was holding settlement funds. The jury convicted her of second degree grand larceny and she faces a prison sentence of from five to fifteen years. She also has been disbarred from practicing law in New York.
Commingling and Malpractice Insurance
Most attorney-client commingling of funds is not the result of deliberate acts on the part of the attorney. Instead, it happens because the attorney misunderstands how his or her trust account should be maintained and/or because he or she negligently maintains it. The most common way commingling occurs is when the attorney disburses trust account funds to the firm before they actually are earned. Another common occurrence is when the attorney, via poor bookkeeping and tracking, inadvertently “borrows” trust account funds belonging to one client to pay the bills of another client and/or disburse funds to him or her.
Professional liability insurance; i.e., attorney malpractice insurance, covers an attorney’s negligent acts and those of his or her employees. Usually mistaken and/or inadvertent misappropriation of client funds is covered. Thus, should a client sue the attorney for malpractice, it is the attorney’s insurance company that will pay the client’s damages if he or she prevails in the malpractice suit.
As in any type of negligence case, the plaintiff must prove the following four things in order to prevail:
The attorney owed the client a duty.
- The attorney breached that duty by acting carelessly; i.e., negligently.
- The breach caused the client injury; i.e., harm.
- The harm was a financial loss.
Additional Policy Types
Many attorneys also have a business owners policy that likewise covers misappropriation of client funds by the attorney and/or his or her employees. Some policies include theft as well as inadvertent misappropriation of client funds. Still other attorneys, although very few, have a crime insurance policy that covers such things as the following:
- Fraudulent electronic funds transfers
- Fraudulent and/or forged credit and debit card transfers
- Fraudulent, forged and/or counterfeited checks, money orders, etc.
- Fraudulent investigation expense claims
- Identity theft transfers
There may, however, be policy limits on any or all of these policies regarding the amount of damages the client can recover. If so, the attorney is personally responsible for paying the balance. Whether or not the client ever receives this portion of the malpractice award depends on the attorney’s own financial resources.