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Common CTA and IOLTA mistakes

Published: 05/17/2019

Published in: Business

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Common CTA and IOLTA mistakes

Mistakes are an inevitable part of life, but as a new lawyer, mismanaging client funds or making errors with Client Trust Accounts (CTAs) and Interest on Lawyer Trust Accounts (IOLTAs) can have severe consequences, ranging from financial losses and ethics violations to disciplinary hearings and potential disbarment.

With the costs of these potential mistakes being so high, it’s not surprising that many lawyers experience anxiety when working with these accounts. The good news is, there are things you can do to help alleviate that fear.

By being proactive, learning about common mistakes lawyers make when it comes to trust account management, and knowing where to turn for help, you can move forward with confidence.

Below are some of the more common mistakes lawyers can make with CTAs and IOLTAs, plus what to do if you’re concerned your accounts may not be in compliance.

Commingling client and business funds

A critical and fundamental principle of client trust accounting is keeping a lawyer’s funds separate from client funds, but if a lawyer does not have a solid understanding of how a trust account is supposed to work, this rule can be accidentally broken.

“Many attorneys don’t understand what does and does not go into the trust account,” Laura A. Calloway, a law practice management consultant at the Alabama State Bar, was quoted as saying in Attorney William Pfeifer’s Jan. 22, 2019 article, “Common Lawyer Trust Account Mistakes.” “Some run everything, including earned fees, through the trust account, using it as a single general journal for their firms. Others take ‘retainers’ without understanding that, at least in some jurisdictions, there is no such thing as a non-refundable retainer. So they don’t put a deposit against future work into trust as they should, particularly if they need it now to keep the lights on.”

Illinois Rule of Professional Conduct 1.15 states that, “A lawyer shall hold 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. Funds shall be deposited in one or more separate and identifiable interest- or dividend- bearing client trust accounts maintained at an eligible financial institution in the state where the lawyer’s office is situated, or elsewhere with the informed consent of the client or third person. For the purposes of this Rule, a client trust account means an IOLTA account … or a separate, interest-bearing non-IOLTA client trust account established to hold the funds of a client or third person.”

Simply put, a lawyer is prohibited from using funds in a CTA or IOLTA to pay for a firm’s operating expenses, including payroll or taxes. Attorneys are also not allowed to use money from the CTA or IOLTA of a client to pay for expenses associated with another client’s representation. Additionally, an attorney cannot deposit any of their own funds into a CTA or IOLTA.

The commingling rule also stipulates that timely disbursements are made from the CTA and IOLTA accounts, according to an April 3, 2019 American Bar Association online article, “IOLTAs and Client Trust Accounts.” “A lawyer should withdraw fees earned by the lawyer from the CTA at the earliest reasonable time once the fees become fixed, so that none of the funds the lawyer is entitled to are kept in the CTA,” writes attorney Carole J. Buckner. “Also, the lawyer should promptly pay to the client any settlement proceeds that the client is entitled to receive. Finally, funds associated with costs and expenses paid for the client’s benefit should be withdrawn from the CTA in a timely manner.”

Charging clients for payment fees

The passing on of fees – including bank service charges for wire transfers, paper statements and re-ordering checks, as well as fees pertaining to other clients’ cases, etc. – is a common and inadvertent mistake lawyers can make in terms of managing trust accounts, says Grant Franklin, an executive vice president and chief sales officer with Town and Country Bank and Peoples Prosperity Bank.

“Because of the nature of (CTA and IOLTA) accounts, service charges for banking services cannot be charged against the principle account,” Franklin explained via email. “A wire transfer fee is a good example of the type of fee that might occasionally be encountered on an IOLTA or client trust account. Town and Country Bank realizes the importance of that requirement,” and in an effort to prevent that kind of error, can charge a firm’s operating account for those fees, invoice for those services, or check to see if that fee could be supported by compensating balances in one of the firm’s other business or operating accounts.

No one is perfect, however, and in the event of an inadvertent charge, Town and Country Bank and Peoples Prosperity Bank will do all they can to correct the mistake.

“We stand prepared to reverse the charge immediately, which has always been an acceptable resolution,” wrote Franklin.

Attorneys can also work with the financial institutions that house their operating accounts, CTAs and IOLTAs to set up alerts that will keep them abreast of potential charges. This convenience is something Randy Cox, an attorney and partner with Feldman Wasser in Springfield, appreciates.

“Feldman Wasser has a long-standing relationship with Town and Country Bank, and that personal relationship is very important to us,” said Cox. “Their online portal is really user-friendly, and you can customize the kind of (banking) alerts you get,” whether through email or text message.

Cox noted that the bank’s willingness to help in any matter is invaluable, as well.

“They have given us such great service over the years,” said Cox. “But it’s not just that – it’s not just that we have someone to talk to and answer our questions – it’s that they’re always on it. They typically act with appropriate urgency … and generally speaking, there’s always someone I can call and talk to or email that can point me in the right direction.”

Bad bookkeeping

Failure to keep detailed records of each client’s trust account transactions is another way lawyers can compromise their client’s funds.

While record-keeping requirements for IOLTA accounts vary by state, the American Bar Association recommends that, at the bare minimum, IOLTA account records “should track all deposits and disbursements through the account, and each such transaction should be associated with a particular client.”

“Every single transaction in and out of your IOLTA must be accounted for,” agrees reporter Nick Zarzycki in his Oct. 10, 2018 article “Common IOLTA Mistakes (and How to Fix Them),” noting that, “[f]ailing to keep good records for each client’s account – by forgetting to write your client’s reference number on their trust account checks, not keeping a separate ledger for each client, or simply by misplacing a record – is another common way attorneys break IOLTA rules.”

Being able to show how much money each of your clients has at any given time is critically important, says Cox.

“You have to account by client (for funds in CTAs and IOLTAs),” Cox explains, “and at any given time, any day, you have to have the money in there that you deposited in there, other than what you’ve accounted for going out for an appropriate purpose.”

“Borrowing” money from a CTA or IOLTA account

While some mistakes surrounding trust accounts are inadvertent, one of the most egregious and intentional acts an attorney can make is withdrawing or “borrowing” money from an IOLTA or CTA account before it is earned.

Why would a lawyer do this? Zarzycki explains that, often, the reason is financial stress.

“Attorneys (‘borrow’) for many reasons: because they have cash flow problems due to unexpected expenses, or simply because they’ve told themselves they’ll replace the funds right away,” writes Zarzycki. “Whatever the reason, borrowing from an IOLTA account carries stiff penalties, and is one of the most common ways to get disbarred.”

Cox agrees, noting that there is no excuse for “borrowing” from a CTA or IOLTA.

“This (managing trust accounts) is an area that is highly regulated, and the rules are pretty clear,” says Cox. “Where attorneys get into trouble, though, is if they ‘borrow’ money from a trust account and re-pay it, if you will, before anybody catches them, such as taking $10,000 out of a trust account to pay a bill in the short term, and then putting that amount of money back in the trust account the following week. Sometimes lawyers will do this if they’re already in financial trouble.”

Cox emphasizes that this kind of action is not a mistake.

“That’s the most common scenario or example (for ‘borrowing’ from a trust account),” said Cox, “but it’s not a mistake because there’s training on (managing client trust accounts) and it’s something that someone would do intentionally.”

Pfeifer agrees.

“There is no legitimate way to borrow from a trust account,” writes Pfeifer. “Sometimes attorneys … might take trust account money before it’s earned because (he or) she’s having cash flow problems … so she takes more from the trust than she actually has a right to take at that point in time. An attorney ‘borrowing’ these funds might have every intention of paying it back, but this kind of situation usually snowballs and ends very badly for the lawyer – as well as the client.”

Even if it’s not a lawyer doing this, but rather, a paralegal or bookkeeper with access to the trust account, the lawyer is still liable and responsible for repaying the funds, adds Pfeifer.

Getting help

Human beings make mistakes, and attorneys are no exception. If you fear or suspect your CTAs or IOLTAs may not be in compliance, the Illinois Attorney Registration & Disciplinary Commission Ethics Inquiry Program is a helpline that can provide general information on where to find sources to help resolve hypothetical questions and scenarios. The American Bar Association also offers an Ethics Search research service option that can help lawyers who need information on ABA rules. The Illinois State Bar Association website is another resource lawyers can turn to if they need to consult ethics advisory opinions.

Managing client trust accounts and IOLTAs can be tedious and time-consuming, but if lawyers arm themselves with a good understanding of the rules, keep careful records and ensure that a CPA and reputable bank are overseeing their business and client trust accounts, they can avoid potential problems, financial losses and disciplinary action in the future.

For information on opening a CTA or IOLTA account, visit townandcountrybank.com or call 787-3100.