Handbook on Client Trust Accounting for California Attorneys

Acknowledgments

The State Bar of California gratefully acknowledges that the idea for this Handbook arose out of the

exhaustive book on client trust accounting prepared by David Johnson, Jr., the Director of Attorney

Ethics of the Supreme Court of New Jersey. Although the client trust accounting rules in New Jersey

differ from those in California, the same basic principles of accounting apply. As the discussion of the

basic principles in the New Jersey materials is so good, this Handbook borrows extensively from it.

This Handbook was developed by Jay Ladin, Senior Administrative Assistant in the Office of Professional

Competence, Planning and Development, with the assistance of Dominique Snyder, Senior Trial Counsel,

Office of Intake/Legal Advice, and Karen Betzner, Associate Senior Executive for Professional

Competence, Standards and Certification. Production of the Handbook, and subsequent updates were

coordinated by Lauren McCurdy, Sr. Administrative Specialist, as assisted by Felicia Soria, Administrative

Secretary, Office of Professional Competence.

For the 2003 edition, special thanks are given to the following staff of the Office of Professional

Competence: Randall Difuntorum, Director; Jonathan Bishop, Law Clerk; and Lynn Cobb, Susan Der and

Ricardo Patino, Paralegals. In addition, the following other State Bar offices provided input: Office of

General Counsel; and the Office of the Legal Services Trust Fund Program.

For the 2006 edition, special thanks are given to: Katie Allen, law clerk for the Office of Professional

Competence, for researching and drafting the substantive amendments; and Dominique Snyder, Advisor

to the State Bar’s Standing Committee on Professional Responsibility and Conduct, for her guidance and

input on this edition.

For the 2009 edition, special thanks are given to the following State Bar staff: Christopher Fredrich, law

clerk and Mimi Lee, Paralegal for the Office of Professional Competence; Stephanie Choy, Managing

Director of the Legal Services Trust Fund Program; and Heather Irwin, Senior Attorney, Office of General

Counsel.

For the 2011 edition, special thanks are given to following State Bar staff: Mimi Lee and Andrew Tuft,

Paralegals for the Office of Professional Competence and Elena Enzweiler, Senior Accountant for the

Legal Services Trust Fund Program.

For the 2012 and 2014 editions, special thanks are given to following State Bar staff: Mimi Lee, Paralegal

for the Office of Professional Competence and Andrew Tuft, Staff Attorney for the Office of Professional

Competence.

For the 2018 edition, special thanks are given to following State Bar staff: Brenden Do, Summer Intern,

Mimi Lee, Senior Program Analyst for the Office of Professional Competence and Randall Difuntorum,

Director for the Office of Professional Competence.

For the 2021 edition, special thanks are given to following State Bar staff: Andrew Tuft, Supervising

Attorney for the Office of Professional Competence, Mimi Lee, Senior Program Analyst for the Office of

Professional Competence, and Randall Difuntorum, Director for the Office of Professional Competence.

For the 2022 edition, special thanks are given to following State Bar staff: Christal Bundang, Lead

Program Analyst, Office of Access and Inclusion; Erika Doherty, Managing Attorney, Office of

Professional Competence; Mimi Lee, Lead Program Analyst, Office of Professional Competence; and

Randall Difuntorum, Director, Office of Professional Competence.

This Handbook on Client Trust Accounting for California Attorneys is issued

by the State Bar’s Office of Professional Competence, Planning, and

Development. It has not been adopted or endorsed by the State Bar’s

Board of Trustees, and does not constitute the official position or policy of

the State Bar of California. It is advisory only and is not binding upon the

California Supreme Court, the State Bar Court, or any office or person

charged with responsibility for attorney discipline or regulation.

The Handbook contains legal information, not legal advice. Nothing

contained in this Handbook is intended to address any specific legal inquiry,

nor is it a substitute for independent legal research to original sources or

for obtaining the advice of legal counsel with respect to legal problems.

Regarding reproducing or copying some or all of this workbook, or for other

information regarding this workbook, contact the Office of Professional

Competence, State Bar of California, 180 Howard Street, San Francisco,

California 94105, (415) 538-2148.

Originally published by the State Bar of California, Office of Professional Competence in 1992.

Updated in 2003, 2006, 2009, 2011, 2012, 2014, 2016, 2018, 2021, and 2022.

Publisher’s Note: The content provided in Appendix 3 is current as of 2018.

All other appendices are current as of January 1, 2023.

Table of Contents

SECTION I: THE IMPORTANCE OF CLIENT TRUST ACCOUNTING 1

SECTION II: THE RULES 3

California Rule of Professional Conduct 1.15 .............................................................. 3

Duties to Third Parties ................................................................................................ 6

Califonia Rule of Professional Conduct 1.4 ................................................................. 6

Business and Professions Code Sections 6211–6213 .................................................. 6

Other Regulations Relating to Clients and Money ...................................................... 7

SECTION III: KEY CONCEPTS IN CLIENT TRUST ACCOUNTING 8

Key Concept 1: Separate Clients Are Separate Accounts ............................................ 8

Key Concept 2: You Can't Spend What You Don't Have .............................................. 8

Key Concept 3: There's No Such Thing As a “Negative Balance“ ................................. 9

Key Concept 4: Timing Is Everything ........................................................................... 9

Key Concept 5: You Can't Play the Game Unless You Know the Score ...................... 10

Key Concept 6: The Final Score Is Always Zero ......................................................... 11

Key Concept 7: Always Maintain an Audit Trail ........................................................ 11

SECTION IV: OPENING A CLIENT TRUST BANK ACCOUNT 13

General Dos and Don'ts ............................................................................................ 13

Know Your Bank ........................................................................................................ 16

IOLTA Accounts ......................................................................................................... 17

IOLTA Accounts and FDIC Insurance ......................................................................... 18

Reporting Required by the Client Trust Account Protection Program (CTAPP) ......... 19

Unproductive IOLTA Accounts .................................................................................. 20

SECTION V: DEPOSITING MONEY INTO YOUR CLIENT TRUST BANK ACCOUNT 21

What MUST Go into Your Client Trust Bank Account? .............................................. 21

What MUST NOT Go into Your Client Trust Bank Account? ...................................... 21

Limited Exceptions for Certain Funds ....................................................................... 21

What MUST Be Held in Your IOLTA Account? ........................................................... 22

SECTION VI: PAYING MONEY OUT OF YOUR CLIENT TRUST BANK ACCOUNT 24

What Payments CAN You Make? .............................................................................. 24

What Payments CAN'T You Make? ........................................................................... 24

How Should You Make Payments? ........................................................................... 25

Who Should Make Payments? .................................................................................. 25

When Can You Make Payments? .............................................................................. 25

When MUST You Make Payments? ........................................................................... 25

SECTION VII: RECORDKEEPING 28

How Long Must You Keep Records? ......................................................................... 28

Where Can You Keep Your Records? ........................................................................ 28

What If You Have a Computerized System? .............................................................. 29

What Bank-Created Records Do You Have to Keep? ................................................. 30

How Should You File Bank-Created Records? ........................................................... 30

What Records Do You Have to Create? ..................................................................... 31

What Records Do You Have to Keep of Other Properties? ....................................... 36

SECTION VIII: RECONCILIATION 37

Reconcile the Account Journal with the Client Ledgers ............................................ 39

Enter Bank Charges and Interest .............................................................................. 45

Reconcile the Account Journal with the Bank Statement ......................................... 47

Entering the Corrected Month Ending Balance and Corrected Current

Running Balance ....................................................................................................... 52

APPENDIX 1: OTHER REGULATIONS RELATING TO CLIENTS AND MONEY 57

APPENDIX 2: TEXT OF RULES AND LINKS TO STATUTES CITED 60

Relevant California Rules of Professional Conduct ................................................... 60

Relevant Business and Professions Code Sections .................................................... 69

Relevant Civil Code Section ....................................................................................... 70

Relevant Code of Civil Procedure Section ................................................................. 70

Relevant Evidence Code Sections ............................................................................. 70

Relevant Internal Revenue Code Section .................................................................. 70

iii

Rules of the State Bar of California ........................................................................... 71

California Rules of Court ........................................................................................... 79

APPENDIX 3: INDEX OF SELECTED CASES AND OPINIONS BY TOPIC 81

APPENDIX 4: MODEL FORMS 90

Client Ledger ............................................................................................................. 90

Account Journal ........................................................................................................ 91

Other Properties Journal .......................................................................................... 92

Form One: Client Ledger Balance .............................................................................. 93

Form Two: Adjustments to Month Ending Balance .................................................. 94

Form Three: Reconciliation ....................................................................................... 95

APPENDIX 5: WHAT TO DO WHEN THE RECONCILED TOTAL AND THE

BANK STATEMENT BALANCE DON'T EXACTLY MATCH 96

APPENDIX 6: STATE BAR FORMAL OPINIONS 98

State Bar Formal Opinion No. 2005-169 ................................................................... 98

State Bar Formal Opinion No. 2006-171 ................................................................. 105

State Bar Formal Opinion No. 2007-172 ................................................................. 110

State Bar Formal Opinion No. 2008-175 ................................................................. 118

State Bar Formal Opinion No. 2009-177 ................................................................. 128

State Bar Formal Opinion No. 2013-187 ................................................................. 135

APPENDIX 7: “IOLTA-ELIGIBLE” FINANCIAL INSTITUTIONS UNDER

CALIFORNIA BUSINESS AND PROFESSIONS CODE SECTION 6212 140

Foreword

This handbook is intended as a tool to help every California attorney fulfill their statutory and

ethical obligations to clients whose money and other properties they hold in trust. Even if you

never hold money or other properties for clients, it’s imperative that you understand these

obligations. Your license may depend on it.

This handbook assumes that you know very little about client trust accounting and is devoted to

teaching you the basics necessary for you to properly account for your client’s money. It will

explain the rules governing your client trust accounting duties, the concepts behind client trust

accounting, and a simple step-by-step system for accounting for your clients’ money. To keep

from distracting you from basic accounting, the citations have been kept to a minimum. The

text of the relevant authorities, as well as an index of applicable cases, are attached as

Appendices 2 and 3.

This handbook is not intended to address all the complex legal issues related to handling

client funds and other trust money or property. To help you find answers for these and other

questions about your professional responsibilities, the State Bar of California has a variety of

resources available:

• The State Bar publishes a booklet called The California State Bar Act and Rules of

Professional Conduct that contains the provisions of the Business and Professions

Code and California Rules of Court relevant to attorneys, the Rules of Professional

Conduct and other statutes contained in other codes relevant to your professional

responsibilities, including the Evidence Code and the Civil Code. This booklet is

available from the State Bar for a fee. To order a copy, call 415-538-2148.

• The State Bar offers a toll-free, confidential Ethics Hotline, which you can call to

discuss ethics issues with staff who are specially trained to refer you to relevant

authorities. Attorneys may receive assistance by calling 1-800-2-ETHICS or 1-800-238-

4427 in California, or 415-538-2150, or by completing the online Ethics Hotline

Research Assistance Request Form (https://apps.calbar.ca.gov/forms/EthicsHotline).

• The State Bar publishes a multi-volume desk reference called the California

Compendium on Professional Responsibility, which contains ethics opinions issued by

the State Bar, the Los Angeles, San Francisco and San Diego county bar association

ethics committees, the authorities in The California State Bar Act and Rules of

Professional Conduct, the American Bar Association Rules and Code, the Code of

Judicial Conduct, and a detailed subject matter index that will direct you to the

relevant authorities. The Compendium, which costs $145.00 (plus tax), is updated

annually for an additional $50 per year. To order a copy, call 415-538-2148.

• The State Bar publishes the California State Bar Court Reporter, which includes the full

text of published opinions of the State Bar Court Review Department, comprehensive

headnotes, case summaries and a detailed index and digest.

• The Office of Access & Inclusion works with lawyers and financial institutions to make

California’s IOLTA program a success. Staff is available to answer questions and to help

financial institutions and lawyers with their IOLTA accounts. Additional copies of the

relevant statutes, State Bar Rules, and IOLTA forms are available upon request, or may

be downloaded from www.calbar.ca.gov. For assistance or additional information,

please contact the Office of Access & Inclusion, State Bar of California, 180 Howard

Street, San Francisco, CA 94105-1639, or email [email protected].

SECTION I: THE IMPORTANCE OF CLIENT TRUST ACCOUNTING

If you died suddenly, would your clients—or the executors who have to answer to your

clients—be able to tell how much of the money in your various professional accounts

belonged to each client? If a State Bar investigator asked you to account for a particular

client's money, would you be able to do so? Would they find complete, systematic, up-to-

date records showing what's been received and paid out for each client, or would they find a

random assortment of cancelled checks, unopened bank statements, and checkbook registers

full of cryptic notations and rounded-off figures? In these situations, the fact that you “have it

all in your head” isn't going to help your clients find their money or satisfy the State Bar.

There are two completely mistaken ideas about client trust accounting. One idea is that client

trust accounting is a mysterious, complicated process that requires years of training and

innate mathematical ability. The other is that “maintaining a client trust account” simply

means opening a bank account and depositing clients' funds into it.

The truth is that client trust accounting is a simple set of procedures that is easy to learn and

easy to practice. It doesn't require financial wizardry or mathematical genius; all it requires is

consistent, careful application. But as simple as it is, client trust accounting still means more

than keeping money in the bank. A bank account is something you have; client trust

accounting is something you do in order to know—and to show your clients that you know—

how much of the money in your account belongs to each client. To clear up this confusion, in

this handbook, we never say “client trust account.” We say “client trust accounting”—when

we mean what you have to do to account for your clients' money—or “client trust bank

account”—when we mean the bank account where you keep your clients' money.

Whether you find it easy or difficult, the fact is that if you agree to hold money in trust, you

take on a non-delegable, personal fiduciary responsibility to account for every penny as long

as the funds remain in your possession. Whomever you hire to do your books or fill out your

deposit slips, you have full responsibility for his or her actions when you receive money in

trust. This responsibility can't be transferred, and it isn't excused by ignorance, inattention,

incompetence or dishonesty by you, your employees or your associates. The legal and ethical

obligation to account for those monies is yours and yours alone, regardless of how busy your

practice is or how hopeless you are with numbers. You may employ others to help you fulfill

this duty, but if you do you must provide adequate training and supervision. Failure to live up

to this responsibility can result in personal monetary liability, fee disputes, loss of clients and

public discipline.

The essence of client trust accounting is contained in these three words:

Client—These duties arise in the context of an attorney-client relationship, regardless of

whether you are paid for your services, and are as inviolable as your duty to maintain client

confidences. These duties may also be owed to third parties.

Trust—The willingness of people to trust a complete stranger with money just because the

stranger is an attorney is a fundamental aspect of the attorney-client relationship, and

maintaining that trust is the duty of every individual attorney and a matter of supreme public

interest.

Accounting—The way to fulfill your clients' trust is to be able at any time to make a full and

accurate accounting of all money you've received, held and paid out on their behalf.

That's all “client trust accounting” means. If you follow the simple procedures explained

below, you will never have to worry about failing to live up to your duties as a fiduciary no

matter how complex or busy your practice.

SECTION II: THE RULES

California's Rule of Professional Conduct 1.15 is called “Safekeeping Funds and Property of

Clients and Other Persons.” The whole point of rule 1.15—and client trust accounting—is to

make sure you know exactly how much of the money you are holding for clients belongs to

each individual client.

Imagine how you'd feel if you asked your bank how much money was in your personal

account, and they explained that they couldn't tell you because business was booming and

keeping exact records of so much money for so many people would just take too much time.

You'd probably feel that if knowing how much of your money they have is too much trouble,

the bank shouldn't be holding your money. That's exactly how your clients feel about you.

You keep records so you can give your clients an accounting of their money; failing to do so is

a violation of your professional responsibilities.

Keeping track of exactly what's happening with a client's money is your personal, non-

delegable ethical responsibility. The minute you don't keep track, you are in violation of the

client trust accounting rules. The longer you don't know, the more violations you're likely to

stumble into, and if you keep stumbling, sooner or later you're going to stumble into a State

Bar investigation.

And don't think if you keep enough of your own money in the client trust bank account that

everything's alright. Not only doesn't that satisfy your professional responsibility to your

clients, it constitutes an additional violation known as “commingling.” In short, the only

adequate way to fulfill your fiduciary responsibility to your clients is to keep track of, at all

times, how much of their money you have in your client trust bank account.

Maintaining a common client trust bank account in which the funds of more than one client

are held is fine, as long as you keep an accurate record of what belongs to each client. That's

what client trust accounting is all about.

CALIFORNIA RULE OF PROFESSIONAL CONDUCT 1.15

In some states, rules and statutes spell out detailed recordkeeping requirements for

attorneys. California’s approach is to set forth minimum standards under rule 1.15(c). (See

Appendix 2 for the text.)

Rule 1.15 only requires that you maintain sufficient records so that you keep track of how

much money you are holding for each client at all times, and you can later prove that you

knew it.

Rule 1.15 essentially comes down to this:

▪ All funds you receive from or hold for a client must be deposited into a bank account

that is clearly labeled as a client trust bank account.

▪ When you receive other properties on behalf of a client, you have to identify what

you've received in your written records, actually label the properties to identify the

owner, and immediately put them into a safe deposit box or some other place of safe

keeping.

▪ All client trust bank accounts must be maintained in California, unless it is more

convenient for the client for the account to be located elsewhere. In that case, you

have to get the client's consent in writing before you can deposit the client's funds

outside of California.

▪ Whenever you receive money or other property on behalf of a client, absent good

cause, you must notify that client of that fact no later than 14 days of the receipt of

the funds or other property. (The 14-day compliance time period is an amendment to

rule 1.15 that was approved effective January 1, 2023. This amendment was

developed as a companion initiative to the proactive regulation of client trust

accounting under the State Bar’s Client Trust Account Protection Program (CTAPP),

see Reporting Required by the Client Trust Account Protection Program (CTAPP). See

also, California Rule of Court 9.8.5 and State Bar Rule 2.5, Appendix 2.)

▪ You can't deposit any money belonging to you or your law firm into any of your client

trust bank accounts (except for the small amounts of money necessary to cover bank

charges). This is known as commingling.

▪ You can't keep any money belonging to you or your law firm (other than money for

bank charges) in any of your client trust bank accounts. This is also known as

commingling. That means that when you're holding client money that includes your

fees, you have to take those fees out of the client trust bank account as you earn

them. It's not a matter of your convenience; you are ethically required to withdraw

your money from that account as soon as you reasonably can. (In fact, it would be a

good idea for you to withdraw your fees on a regular basis, perhaps when you do your

monthly reconciliation. See Reconciliation. See also, State Bar Formal Op. No. 2005-

169, Appendix 6.)

▪ Money held in a client trust bank account becomes yours and not the client's as soon

as, in the words of rule 1.15(c)(2), your “interest in that portion becomes fixed.”

BUT—and this is a big but—you can't withdraw any fees that the client disputes. As far

as you're concerned, from the moment a client disputes your fee, that money is frozen

in the client trust bank account until the fee dispute is resolved. As soon as your

interest becomes fixed and is not in dispute, you are obligated to withdraw that

money promptly from the client trust bank account. (See Appendix 3 for references to

disciplinary cases and Appendix 6 for State Bar Formal Opinion 2006-171 which

discuss the issue of a redeposit of funds withdrawn from a trust account.)

▪ When your clients are entitled to receive money or other properties that you're

holding for them, you must deliver them promptly. For purposes of determining a

lawyer’s compliance, unless the lawyer, and the client or other person agree in writing

that the funds or property will continue to be held by the lawyer, there is a rebuttable

presumption that a violation of the duty to promptly distribute has occurred if the

lawyer, absent good cause, fails to distribute undisputed funds or property within

45 days of the date when the funds become undisputed. “Undisputed” for purposes of

the rule is defined in paragraph (g) of the rule. (The rebuttable presumption in rule

1.15 is an amendment to the rule approved effective January 1, 2023 and was

developed as a companion initiative to CTAPP. See Reporting Required by the Client

Trust Account Protection Program (CTAPP). See also, California Rule of Court 9.8.5

and State Bar Rule 2.5, Appendix 2.)

▪ When clients ask you how much money you're holding for them or what you've done

with the money while you've had it, you must tell them.

▪ When the State Bar asks you how much money you're holding for the client or what

you've done with it while you've had it, you must tell the State Bar.

▪ For at least five years after disbursement you have to keep complete records of all

client money, securities or other properties that are entrusted to you.

What rule 1.15(d)(3) requires, as the mandatory minimum, is:

▪ Client Ledger. This is a written ledger for each client that details every monetary

transaction on behalf of that client or other person. If you have a common client trust

bank account in which the funds of more than one person are deposited, this is where

you keep track of individual persons’ money.

▪ Account Journal. This is a written journal for each client trust bank account. This is

where you keep track of the money going in and out of a client trust bank account.

When you have a bank account that's designated solely for one person’s money, the

account journal will be identical to the client ledger.

▪ Bank Statements and Cancelled Checks. You must keep all bank statements and

cancelled checks or check imaging for each client trust bank account, individual or

common. These records show that the entries in your client ledger and account

journal are accurate.

▪ Reconciliation. You must keep a written record showing that every month you

“reconciled” or balanced the account journals you keep for each client trust bank

account against the client ledgers you keep for each person and the cancelled checks

and bank statements for those accounts.

▪ Journal of Other Properties. You must keep a written journal of all securities or other

properties you hold in trust for clients or other persons that explains what you are

holding, who you are holding it for, when you received it, when you distributed it, and

who you distributed it to.

DUTIES TO THIRD PARTIES

Throughout rule 1.15, an attorney’s duty is expressly stated as extending to a client or other

person. As used in rule 1.15(a), this formulation of the rule language is intended to make clear

that an attorney may have the same duties to a third-party as to his or her client. One

instance is when there is a statutory lien applicable to the funds received by the attorney on

behalf of the client. For example, an attorney may have a duty to the State Department of

Health Services (DHS) to ensure that a statutory medical lien is honored. An attorney’s

obligations include, but is not limited to, notifying DHS when a matter has settled prior to the

distribution of the settlement proceeds.

This means that an attorney's duty might not end with payment to the client of the client's

ultimate share of the recovery. Where such liens are involved, the attorney might have an

ongoing fiduciary duty to the client to hold in trust the remaining settlement funds subject to

further directions from the client regarding disbursement.

Beyond the specific example of a statutory lien, generally where an attorney assumes the

responsibility to disburse funds as agreed by the parties in an action, the attorney owes an

obligation to the party who is not the attorney's client to ensure compliance with the terms of

the agreement. If there is a dispute between the client and the third party, the attorney must

retain the funds in trust until the resolution of the dispute.

CALIFONIA RULE OF PROFESSIONAL CONDUCT 1.4

An attorney has a general duty to communicate with a client. In part, rule 1.4 requires an

attorney to keep a client reasonably informed about significant developments relating to the

client’s representation (rule 1.4(a)(3)). Comment [1] to rule 1.4, in part, provides that:

“Whether a particular development is significant will generally depend on the surrounding

facts and circumstances. For example, a lawyer’s receipt of funds on behalf of a client

requires communication with the client pursuant to rule 1.15, paragraphs (d)(1) and (d)(4)

and ordinarily is also a significant development requiring communication with the client

pursuant to this rule.” (An amendment to Comment [1] to rule 1.4 was approved effective

January 1, 2023. This amendment was developed as a companion initiative to the proactive

regulation of client trust accounting under CTAPP, see Reporting Required by the Client Trust

Account Protection Program (CTAPP). See also, California Rule of Court 9.8.5 and State Bar

Rule 2.5, Appendix 2.)

BUSINESS AND PROFESSIONS CODE SECTIONS 6211–6213

When a client gives you a “nominal” amount of money, or money that you hold for too short

a period of time to earn income in excess of the costs to hold the funds for the benefit of the

client, you must hold the money in a common client trust bank account, called an “Interest on

Lawyers’ Trust Account” (IOLTA account). (See IOLTA Accounts.) That account is set up so that

your bank pays the interest or dividends the account earns to the State Bar. By law, the State

Bar distributes this money to programs that provide legal services in civil matters to indigent

people, as defined by statute. Your responsibilities with respect to IOLTA accounts are

governed by Business and Professions Code sections 6211-6213. (See Appendix 2 for the text

of those sections and for the State Bar IOLTA rules, Title 2, Division 5 of the Rules of the State

Bar of California.)

OTHER REGULATIONS RELATING TO CLIENTS AND MONEY

There are other rules relating to clients and money that, while not directly related to client

trust accounting, are so fundamental to the attorney-client relationship that we have to

mention them in this handbook. These rules, which relate to setting fees, fee agreements, fee

disputes, loans to and from clients, securing payment of fees and cash reporting

requirements, are discussed in Appendix 1, and the text of these rules can be found in

Appendix 2.

SECTION III: KEY CONCEPTS IN CLIENT TRUST ACCOUNTING

The following seven key concepts are all the background you need in order to understand

your client trust accounting responsibilities.

KEY CONCEPT 1: SEPARATE CLIENTS ARE SEPARATE ACCOUNTS

Client A's money has nothing to do with Client B's money. Even when you keep them in a

common client trust bank account (such as in an IOLTA account), each client's funds are

completely separate from those of all your other clients. In other words, you are NEVER

allowed to use one client's money to pay either another client's or your own obligations.

When you keep your clients' money in a common client trust bank account, the way to

distinguish one client's money from another's is to keep a client ledger of each individual

client's funds (as required by rule 1.15(d)(3) and the recordkeeping standards under rule

1.15(e) ). The client ledger tells you how much money you've received on behalf of each

client, how much money you've paid out on behalf of each client, and how much money each

client has left in your common client trust bank account. If you are holding money in your

common client trust bank account for 10 clients, you have to maintain 10 separate client

ledgers. If you keep each client's ledger properly, you will always know exactly how much of

the money in your common client trust bank account belongs to each client. If you don't, you

will lose track of how much money each client has, and when you make payments out of your

client trust bank account, you won't know which client's money you are using.

Also note, if your client's money can earn income in excess of the costs incurred to hold the

account, either because the funds are large enough in amount or are held for a long period of

time, then you cannot place the funds in an IOLTA account. (See IOLTA Accounts and What

MUST Be Held in Your IOLTA Account?.)

KEY CONCEPT 2: YOU CAN'T SPEND WHAT YOU DON'T HAVE

Each client has only his or her own funds available to cover their expenses, no matter how

much money belonging to other clients is in your common client trust bank account. Your

common client trust bank account might have a balance of $100,000, but if you are only

holding $10.00 for a certain client, you can't write a check for $10.50 on behalf of that client

without using some other client's money.

The following example graphically illustrates this concept. Assume you are holding a total of

$5,000 for four clients in your common client trust bank account as follows:

Client A $1,000

Client B $2,000

Client C $1,500

Client D $ 500

Total $5,000

If you write a check for $1,500 from the common client trust bank account for Client D,

$1,000 of that check is going to be paid for by Clients A, B and C. The funds you are holding in

trust for them are being used for Client D's expenses. You should have a total of $4,500 for

Clients A, B and C, but you only have $3,500 left in the trust account. In State Bar disciplinary

matters, a finding of a failure to maintain a sufficient client trust account balance will support

a finding of misappropriation.

KEY CONCEPT 3: THERE'S NO SUCH THING AS A “NEGATIVE BALANCE“

It's not uncommon in personal checkbooks for people to write checks against money they

haven't deposited yet or hasn't cleared yet, and show this as a “negative balance.” In client

trust accounting, there's no such thing as a negative balance. A “negative balance” is at best a

sign of negligence and, at worst, a sign of theft. (Don't think that because you have

“automatic overdraft protection“ on your client trust bank account and the check doesn't

bounce, you have fulfilled your client trust account responsibilities. See “Automatic overdraft

protection.“)

In client trust accounting, there are only three possibilities:

You have a positive balance (while you are holding money for a client);

You have a zero balance (when all the client's money has been paid out); or

You have a balance of less than zero (a so-called “negative balance”) and a problem.

KEY CONCEPT 4: TIMING IS EVERYTHING

It takes anywhere from a day to several weeks after you make a deposit before the money

becomes “available for use.” A client's funds aren't “available” for you to use on the client's

behalf until they have cleared the banking process and been credited by the bank to your

client trust bank account. (This is especially true when you receive an insurance company's

settlement draft —which cannot clear until the company actually receives the draft at its

home office during the bank collection process and honors the draft. Thus, insurance

company settlement drafts will take longer to clear your account.) If you write a check for a

client at any time before that client's funds clear the banking process and are credited to your

client trust bank account, ordinarily either the check will bounce or you will be using other

clients' money to cover the check.

The time it takes for client trust account funds to become available after deposit depends on

the form in which you deposit them. Every bank has different procedures, so when you open

your client trust bank account, get the bank's schedule of when funds are available for

withdrawal. Depending on the instrument, you may have to wait as many as 15 working days

before you can be reasonably confident that the funds are available. For example, even if you

make a cash deposit, the money may not be available for use until the following day. If you

deposit a personal check from an out-of-state bank, the money will take longer to be

available. Either way, until the bank has credited a client's deposit to your client trust bank

account, you can't pay out any portion of that money for that client.

You also need to know what time your bank has set as the deadline for posting deposits to

that day's business and for paying checks presented to it. Otherwise, even when you have

deposited cash, you may end up drawing on uncollected funds. For example, let's say your

bank credits any deposit made after 3 p.m. on the following day, but stays open for business

until 5 p.m. Your client arrives at 3:30 and gives you $5,000 in cash which you immediately

deposit. At 4 p.m., you write a client trust bank account check to an investigator against that

money. If the investigator presents the check for payment at the bank before it closes at 5

p.m., the check will either bounce or be covered by other clients' money.

You may be tempted to do your client a favor by writing a check to the client for settlement

proceeds before the settlement check has cleared because you know there's money

belonging to other clients in your client trust bank account to cover this client's check.

Depending on the circumstances, your client may insist that you do this. Don't. If you do,

you'll end up writing a check to one client using another clients' money. You shouldn't help

one client at the expense of your obligations to your other clients. In other words, no matter

how expedient or kind or convenient it seems, don't make payments on your clients' behalf

before their deposited funds have cleared. Otherwise, sooner or later, you'll end up spending

money your clients don't have.

Some banks offer an “instant credit“ arrangement where the bank agrees to immediately

credit accounts for deposits while the bank waits for the funds from another financial

institution. Beware of this service because it is, in essence, a loan to the attorney that is

deposited in the client trust bank account, and thus a commingling of funds. (An “instant

credit” arrangement may also be offered as a form of overdraft protection. Refer to the

discussion at page 15.)

KEY CONCEPT 5: YOU CAN'T PLAY THE GAME UNLESS YOU KNOW THE SCORE

In client trust accounting, there are two kinds of balances: the “running balance“ of the

money you are holding for each client, and the “running balance” of each client trust bank

account.

A “running balance“ is the amount you have in an account after you add in all the deposits

(including interest earned, etc.) and subtract all the money paid out (including bank charges

for items like wire transfers, etc.). In other words, the running balance is what's in the

account at any given time. The running balance for each client is kept on the client ledger, and

the running balance for each client trust bank account is kept on the account journal. (A

sample client ledger and a sample account journal are provided in Appendix 4.)

Maintaining a running balance for a client is simple. Every time you make a deposit on behalf

of a client, you write the amount of the deposit in the client ledger and add it to the previous

balance. Every time you make a payment on behalf of the client, you write the amount in the

client ledger and subtract it from the previous balance. The result is the running balance.

That's how much money the client has left to spend.

You figure out the running balance for the client trust bank account the same way. Every time

you make a deposit to the client trust bank account, you write the amount of the deposit in

the account journal and add it to the previous balance. Every time you make a payment from

the client trust bank account, you write the amount in the account journal and subtract it

from the previous balance. The result is the running balance. That's how much money is in

the account.

Since “you can't spend what you don't have” (Key Concept 2: You Can't Spend What You

Don't Have), you should check the running balance in each client's client ledger before you

write any client trust bank account checks for that client. That way, if your records are

accurate and up-to-date, it's almost impossible to pay out more money than the client has in

the account.

KEY CONCEPT 6: THE FINAL SCORE IS ALWAYS ZERO

The goal in client trust accounting is to make sure that every dollar you receive on behalf of a

client is ultimately paid out. What comes in for each client must equal what goes out for that

client; no more, no less.

Many attorneys have small, inactive balances in their client trust bank accounts. Sometimes

these balances are the result of a mathematical error, sometimes they are part of a fee you

forgot to take, and sometimes a check you wrote never cleared or wasn't cashed.

Whatever the reason, as long as the money is in your client trust bank account, you are

responsible for it. The longer these funds stay in the bank, the harder it is to account for

them. Therefore, you should take care of those small, inactive balances as soon as possible,

including, if necessary, following up with payees to find out why a check hasn't cleared.

If you take steps to take care of these small balances and are still unable to pay out the funds,

you should consider whether the unclaimed monies escheat to the state pursuant to Code of

Civil Procedure section 1518. (See Appendix 2 for the text.)

KEY CONCEPT 7: ALWAYS MAINTAIN AN AUDIT TRAIL

An “audit trail“ is the series of bank-created records, like cancelled checks, bank statements,

etc., that make it possible to trace what happened to the money you handled. An audit trail

should start whenever you receive funds on behalf of a client and should continue through

the final check you issue against them. Without an audit trail, you have no way to show that

you have taken proper care of your clients' money, or to explain what you did with the money

if any questions come up. The audit trail is also an important tool for tracking down

accounting errors. If you don't maintain an audit trail, you will find it hard to correct the small

mistakes, like errors in addition or subtraction, and the big mistakes, like miscredited

deposits, that are inevitable when you handle money.

The key to making a good audit trail is being descriptive. Let's say you are filling out a deposit

slip for five checks relating to three separate clients. All the bank requires you to do is write in

the bank identification code for each check and the check amounts. This doesn't identify

which client the money belongs to. If you include the name of the client and keep a copy or

make a duplicate, you will know which client the check was for, which is the purpose of an

audit trail. That will make it easy to answer any questions that come up, even years later.

By the same token, every check you write from your client trust bank account should indicate

which client it's being written for, so that it's easy to match up the money with the client.

That means you should NEVER make out a client trust bank account check to cash, because

there's no way to know later who actually cashed the check. If you are handling more than

one case for the client, indicate which matter the payments and receipts relate to on your

checks and deposit slips.

A good audit trail, one that will make it easy for you to explain what happened to each client's

money and to correct accounting errors, requires that you keep more than just the minimum

records required by rule 1.15(d)(3) and the recordkeeping standards under rule 1.15(e) In the

following list of elements of a good audit trail, records that are required by rule 1.15 are in

bold. (See section What Bank-Created Records Do You Have to Keep?.) Records that aren't in

bold are important for keeping track of your clients' money but are not specified in the

recordkeeping standards under rule 1.15(e).

A good audit trail should include:

▪ The initial deposit slip (or a duplicate copy or bank receipt). This should show the date

the deposit slip was filled out; the amount of the deposit; the name or file number of

the client on whose behalf the money was received; who the money came from; and

the bank's date stamp showing the day the deposit was actually received.

▪ The bank statement which shows when the deposit was actually posted by the bank.

▪ The checkbook stub, which should show when payments were made, how much the

payments were, to whom they were made and in connection with which client matter

they were made.

▪ The cancelled check. In a good audit trail, the check should show the date the check

was drawn; the amount of payment; who the check was made out to; the purpose of

the check (or the matter it relates to); the order in which the check was negotiated

(from the endorsements); and the date it was deposited for collection. (Regarding

check imaging as a substitute for cancelled checks, see Section VII Recordkeeping,

What Bank-Created Records Do You Have to Keep?)

▪ The bank statement which shows the date the trust account was actually charged for

the check.

▪ Copies of the front and back of any executed drafts, especially insurance settlement

drafts, received on behalf of a client.

SECTION IV: OPENING A CLIENT TRUST BANK ACCOUNT

Rule of Professional Conduct 1.15(a) in part states:

All funds received or held by a lawyer or law firm for the benefit of a client, or

other person to whom the lawyer owes a contractual, statutory, or other legal

duty, including advances for fees, costs and expenses, shall be deposited in one

or more identifiable bank accounts labeled “Trust Account” or words of similar

import . . . .

In other words, whenever you receive or hold money for clients—or any other persons with

whom you have a fiduciary relationship—you have to deposit the money into a specifically

labeled client trust bank account. As we detail below, client trust bank accounts are a special

kind of bank account. Bankers who have experience with them can help you set up and

administer your client trust bank account properly. When you first open the account, make

sure the bankers you're dealing with know what a client trust bank account is; if they don't,

ask to work with someone else.

GENERAL DOS AND DON'TS

Client trust bank accounts:

▪ Must be identified as a client trust bank account. Rule 1.15(a) says that the name of

any account where you keep your clients' money must clearly tell the bank, your

clients, your employees, the State Bar, the people you pay out your clients' funds to

and everyone else that it is a client trust bank account. Whatever name you choose,

you can avoid all kinds of problems if the name of the account is prominently

displayed on all your client trust bank account checks, deposit slips and other

documents. Make sure that papers relating to your client trust bank account look

different from those relating to your personal account or your general office account.

For example, you can have your client trust bank account checks printed on paper

that's a different color than your other checks.

▪ Must be maintained in California. Rule 1.15(a) says you are only allowed to keep client

funds outside of California under certain circumstances, including a requirement to

obtain the written consent of your client. Unless most of your clients are from out-of-

state and you routinely get their written consent to keep their funds somewhere else,

your common client trust bank account must be maintained in California.

▪ Should be maintained in a financially stable bank. Consider selecting a bank that is

regulated by a federal or state agency and that carries deposit insurance from an

agency of the federal government. As your client’s fiduciary, you are responsible for

protecting your client funds. Note that FDIC insurance coverage differs depending on

the type of account that you use. If you use a non-IOLTA interest bearing trust

account, the funds deposited may be subject to a $250,000 per client insurance

coverage limit. The per-client limit includes all money the client has on deposit at that

bank. In other words, if you are holding $150,000 for a client at a certain bank, and the

client has another $150,000 on deposit at the same bank, only $250,000 of the

$300,000 the client is holding in the bank may be covered. This is just an example. You

should check with your bank or the FDIC to determine any applicable deposit

insurance.

Even if all your clients' money is covered by insurance, by the time the FDIC pays your

clients their money, your clients could have, for example, missed a business

opportunity. (As we will discuss later, if your bank goes under, you also may have a

hard time getting copies of your client trust bank account records.) Like most client

trust accounting problems, the answer requires thoughtful consideration of all

relevant factors with the basic goal of keeping your client trust accounts in banks that

you're reasonably sure are financially secure.

▪ Should limit accessibility of funds. Exercise due care in authorizing signatories to your

trust account or otherwise authorizing others to sign client trust bank account checks

or to pay out client funds. Many practitioners make their secretaries, bookkeepers or

spouses authorized signatories and reasonably supervise these assistants. This might

be prudent if you lack bookkeeping skills or if acting as the sole signatory on your trust

account detracts from your focus on providing legal services to your clients. However,

do not discount the fact that you are individually, personally accountable for all client

funds you receive or hold in trust, and since this accountability can't be delegated to

anyone else, allowing other people access to your client trust bank account does not

absolve you of your responsibility to supervise the management of your trust account.

In addition, you should never pre-sign client trust bank account checks and leave them

for employees to issue.

▪ Should NOT have ATM access. Your fiduciary responsibility is to account for your

clients' money. When you write a client trust bank account check, you create an audit

trail that makes it easy to trace who the money came from and where it went. (See

Key Concept 7: Always Maintain an Audit Trail.) A client trust bank account with ATM

access makes it possible for you—or anyone who knows the account code—to

withdraw your clients' money in cash, and it's very hard to account for cash. ATM

withdrawals are an audit trail disaster. When you make an ATM withdrawal, the only

record of what happened to the money is a little slip of paper that shows the date and

the amount of the withdrawal; there's nothing that shows which client's money was

withdrawn, who withdrew the money or who the money was paid to. This includes

withdrawing your fees, since there's no indication of which client's fees you were

paying. Even if you put all the descriptive information on an ATM receipt, it won't

prove to your clients or a State Bar investigator what happened to the money. ATM

access should be distinguished from “online” banking. Whether online banking is

offered for common client trust bank accounts is the bank’s prerogative in

determining which financial products it will offer. If online banking is offered, it is your

responsibility to ensure that the online banking mechanisms create an audit trail that

complies with all of your obligations.

▪ May include “automatic overdraft protection,” provided that the bank’s terms do not

result in a commingling violation. (Refer to the discussion of commingling at page 3.)

Automatic overdraft protection can benefit your clients by assuring that the important

checks you’ve written on a client’s matter will not bounce if a bank error or delay causes

an unanticipated shortfall in your client trust bank account. The State Bar’s Committee

on Professional Responsibility and Conduct (COPRAC) has opined that: “An attorney

does not commit an ethical violation merely by obtaining or using overdraft protection

on a Client Trust Account, so long as the protection in question does not entail the

commingling of the attorney's funds with the funds of a client.” (State Bar Formal Op.

No. 2005-169. See Appendix 6 for the text.) Generally, “automatic overdraft protection“

means that whenever you write a check for more money than is in your account, the

bank will automatically make you a personal loan and apply those funds to your account

to keep the check from bouncing. This optional account feature may also be offered as

an “instant credit“ arrangement where the bank agrees to immediately credit accounts

for deposits while the bank waits for the funds from another financial institution. As

discussed in the COPRAC opinion, a commingling problem does not arise if your bank’s

automatic overdraft protection operates according to terms that compensate exactly

for the amount that the overdraft exceeds the funds on deposit. In contrast, overdraft

protection that automatically deposits a set amount (i.e., a deposit or credit of $200 to

cover a $155 overdraft) will leave a residual balance of funds after covering the amount

of insufficient funds. This residue in your client trust bank account is money that belongs

to you and not to any of your clients and creates the commingling problem.

There are additional considerations in deciding whether to use automatic overdraft

protection. With the exception of bank errors, one important consideration is that you should

never have insufficient funds in your client trust bank account in the first place; if you do,

you're in violation of your professional responsibilities. Overdraft protection is not a

substitute for the proper handling of clients’ money. It can, however, help protect your clients

from the effects of accounting errors by you or your bank. You should be aware that

regardless of whether you have overdraft protection to keep a check from bouncing, the

State Bar will find out about it. Business and Professions Code section 6091.1 requires financial

institutions to report these transactions to the State Bar. (See Appendix 2 for the text.) This

means that banks will report not only checks that are rejected for insufficient funds, but also

checks that are paid against insufficient funds. The statute also requires financial institutions to

notify the State Bar when a client trust bank account check is written against an account that is

closed.

By the time you hear from the State Bar, several weeks may have passed since you had the

problem with your client trust bank account. Do not assume that your bank has or will provide

an explanation to the State Bar. When an overdraft of a client trust bank account occurs, it is

possible that your bank made an error or is aware of funds not yet credited to your account.

The bank may owe you, their customer, an explanation, but it is your responsibility to provide

an explanation to the State Bar.

A report to the State Bar pursuant to Business and Professions Code section 6091.1 doesn't

automatically mean that you are being investigated by the State Bar. However, if you fail to

provide the State Bar with a satisfactory explanation or if the problem occurs more than once,

an investigation may result. Remember, banks routinely charge for handling checks returned for

insufficient funds, even if the bank pays them. The bank may also charge you for handling

checks you deposit in your client trust bank account if the check is returned unpaid from the

maker's bank. These charges should be handled like any other bank charges. (See What MAY

Go Into Your Client Trust Bank Account?.)

KNOW YOUR BANK

From the moment you make the first deposit into your client trust bank account, handling your

clients' money means dealing with your bank. Every bank has different procedures; not

knowing those procedures can hurt you and your clients. For every bank in which you maintain

a client trust bank account, make sure you get the answers to the questions in Key Concept 4,

Timing is Everything—what is your bank's schedule for clearing deposits, what is your bank's

daily deadline for crediting deposits and what is your bank's daily deadline for paying checks

drawn on it—and the following:

▪ When does the bank usually provide statements of account activity? When account

activity is occurring, banks provide periodic statements that show what deposits have

been credited to and what payments have been withdrawn from each account. This

might be in the form of mailed statements on a monthly basis or other interval or

offered as electronic statements that can be viewed online, and downloaded or printed

by the account holder. Rule 1.15(d)(3) and recordkeeping standard (1)(d) requires you

to do monthly reconciliations of your client trust bank accounts to make sure that your

records match the bank's records. (See Reconcile the Account Journal with the Bank

Statement.) If you know your banks practice in providing or posting records of account

activity, you can schedule a regular time every month to do the required reconciliations.

In the case of mailed bank statements, knowing when to expect your statement can also

help you guard against theft by an associate or an employee. If someone is stealing from

your client trust bank account, the bank statement should help in uncovering that theft.

An in-house thief may try to hide by concealing incriminating bank statements; if you're

timely in looking for the mailed bank statement, the thief won't be able to hide for long.

Be sure to review both the bank statements and cancelled checks to avoid potential

problems. If you suspect that an employee or other person is maliciously manipulating

mailed bank statements, then comparing those statements to online account records

can help in investigating the suspected theft.

▪ What does your bank charge for and how much will you have to pay? As we've

discussed, you need to know what bank charges to expect so that you can ensure that

you or your clients always have money in the account to cover them. Ask your banker

about bank fees and charges.

IOLTA ACCOUNTS

When a client gives you a “nominal” amount of money, or you will be holding a client's

money for a “short period of time,” Business and Professions Code section 6211 states that

you must hold the money in a common client trust bank account which is set up so that the

interest the account earns will be paid to the State Bar of California.

Since most attorneys at some time hold money for clients that is “nominal in amount” or will

be held for a “short period of time,” the chances are that you will need to set up a common

client trust bank account, which for convenience we've referred to as an IOLTA account.

(IOLTA stands for Interest on Lawyers Trust Accounts.) (For a discussion of how to decide

which client funds should be held in an IOLTA account, see What MUST Be Held in Your

IOLTA Account?.)

The idea behind the IOLTA statute is that attorneys often hold amounts of money for clients

that are so small or will be held for such short periods of time that the interest the money

could earn for the client if it were held in a separate interest-bearing account would be less

than the costs involved in earning or accounting for the interest. However, when these

amounts of money are held in a common client trust account, they collectively can generate

substantial interest. The IOLTA statute requires that this aggregate interest, which would

otherwise benefit only the bank, is used to ensure that indigent Californians have access to

legal services.

Under Business and Professions Code section 6212, attorneys may hold IOLTA accounts only

at eligible financial institutions. To be eligible, the rate of interest or dividends payable on

an IOLTA account by the financial institution must be comparable to the interest or

dividends paid to similarly situated non-IOLTA accounts. (See Appendix 7 for the State Bar’s

list of IOLTA-eligible institutions. This list is continuously updated so you should check the

State Bar’s Web site for the most current list of IOLTA-eligible institutions

(http://www.calbar.org/IOLTA). If your financial institution is not already IOLTA-eligible, you

should direct them to the Office of Access & Inclusion at (415) 538-2046 or

iolta@calbar.ca.gov for information on becoming eligible.

When you open an IOLTA account, the bank will code the account with the State Bar's

taxpayer identification number so you don't have to worry about paying tax on the interest.

The bank automatically transmits the interest to the State Bar, and handles all the reporting

requirements.

The State Bar must check to be sure that the bank sends the interest, so you must report to

the State Bar when you open or close an IOLTA account. (See Reporting IOLTA Compliance

to the State Bar.)

Under Business and Professions Code section 6212(C), reasonable fees may be deducted

from the interest remitted on an IOLTA account. Reasonable service charges include per-

check charges, per-deposit charges, monthly fees such as fees in lieu of minimum balance,

federal deposit insurance fees, or sweep fees. However, the attorney is responsible for

paying account expenses that are incurred in the ordinary course of business, such as

charges for check printing, deposit stamps, collection charges, or insufficient fund charges.

These fees may only be charged to the lawyer or law firm maintaining the IOLTA account

and will not be deducted from the interest remitted on the account.

In the event that fees routinely exceed interest earned and are charged by the bank to the

attorney, an attorney may apply to the Office of Access & Inclusion to convert the IOLTA

account to a non-interest bearing trust checking account. In that case, the State Bar’s

taxpayer identification number will be removed from the account, and the attorney will be

responsible for all fees and charges incurred to maintain the account. (See Unproductive

IOLTA Accounts.)

In addition to an attorney's duties in client trust account management, your bank has

obligations as well. For a more detailed outline of the guidelines applicable to a bank's

administration of IOLTA accounts, please refer to the State Bar’s Guidelines for Financial

Institutions, available online at:

http://www.calbar.ca.gov/Portals/0/documents/iolta/IOLTAGuidelines-for-Financial-

Institutions.pdf.

IOLTA ACCOUNTS AND FDIC INSURANCE

Effective January 1, 2010, Business and Professions Code 6213 was amended to define “IOLTA

account” to mean an account or investment product that is: 1) an interest-bearing checking

account; 2) an investment sweep product that is a daily (overnight) financial institution

repurchase agreement or an open-end money-market fund; or, 3) an investment product

authorized by California Supreme Court rule or order. The legislation provides for strictly

defined conservative safe investment sweep products, which are sometimes held on the

investment side of the bank and therefore are not necessarily deposit accounts covered by the

Federal Deposit Insurance Corporation (FDIC).

If your IOLTA is held in an interest-bearing checking account that is insured by the FDIC, the

funds deposited by you on behalf of one or more principals are insured as the funds of the

principal (the actual owner) to the same extent as if the funds were deposited directly by the

principal, provided all of the following requirements are met:

▪ The fiduciary nature of the account must be disclosed in the account title.

▪ The identities and the interests of the principals for whom the fiduciary is acting must

be ascertainable from either the deposit account records of the bank, or records

maintained in good faith and in the regular course of business by the depositor or by

some person or entity that had undertaken to maintain such records for the depositor.”

An IOLTA account is subject to FDIC insurance limits. For more information, visit the FDIC

website at:

https://www.fdic.gov/resources/deposit-insurance/faq/index.html.

While the presence of FDIC insurance is important, a lawyer should note that even if all of a

client’s funds are covered, by the time the FDIC pays a client their money, that client’s

interests might be adversely impacted.

For example, the delay may result in a missed business opportunity. Similarly, FDIC coverage

will not help with the problem that could arise if a bank goes under and copies of a client’s

trust bank account records need to be retrieved from that bank.

REPORTING REQUIRED BY THE CLIENT TRUST ACCOUNT PROTECTION PROGRAM (CTAPP)

CTAPP is a State Bar program designed to increase public protection. The program focuses on

proactive regulation of attorneys responsible for complying with trust fund duties. A goal of this

program is to promote compliance and avoid misconduct before a client is harmed by

mismanagement of entrusted funds or property. See, California Rule of Court 9.8.5 and State

Bar Rule 2.5, Appendix 2.)

CTAPP will be implemented in phases. Phase One of CTAPP focuses on reporting and

registration. By February 1, 2023, and annually thereafter, licensees are required to report to

the State Bar if they’re responsible for complying with the duties related to the handling trust

funds under rule 1.15 of the Rules of Professional Conduct.

Those responsible attorneys must

then register each account online through their My State Bar Profile or comply with the account

registration requirement by having their firm or organization submit the information through

the State Bar’s agency billing system.

Those responsible attorneys must also complete an annual self-assessment questionnaire

about the duties and practices for the proper handling of entrusted funds. This self-assessment

will help an attorney to identify potential compliance issues and take corrective action as

needed.

See the definition of a “licensee responsible for client funds and funds entrusted by others under the

provisions of rule 1.15 of the Rules of Professional Conduct.” (State Bar Rule 2.5(A)(1) and (A)(2).) This definition

is broad and encompasses more than simply those lawyers who are bookkeepers or signatories for an account.

However, at the same time, the definition does not encompass every lawyer in every practice setting. For

example, a new associate in a large firm who only does document review and never interacts with any client and

does not discharge any of the duties in rule 1.15 (e.g., the duties to consult with a client about advanced fees,

give notice of receipt of funds, or resolve disputes over entrusted funds) is not a lawyer who falls under the

definition. Similar to a government lawyer or a law professor who does not represent clients that involve any

entrusted funds, the new associate is not a “licensee responsible for client funds” under the definition.

This account registration requirement will satisfy the prior annual trust account reporting requirement that

applied only to IOLTA accounts (see rule 2.114 of the Rules of the State Bar of California). However, if there is a

change in IOLTA account information, that change must be reported to the State Bar no later than 30 days after

the change (see rule 2.2, subparagraph (B)(8) and paragraph (C) of the Rules of the State Bar of California).

The last reporting requirement in Phase One of CTAPP is for the responsible attorneys to certify

that they are knowledgeable about, and in compliance with, applicable rules and statutes

governing client trust accounts and the safekeeping of funds.

The CTAPP program exempts certain licensees from all of these requirements. Under State Bar

Rule 2.5(K), an exempt licensee is either a licensee who was not on active status at any point

during the reportable time period or a licensee who is not entitled to practice law at the time of

the reporting deadline for any reason other than a licensee’s enrollment on voluntary inactive

status.

More information about CTAPP, including a FAQ, is available at the State Bar website at:

https://calbar.ca.gov/CTAPP.

UNPRODUCTIVE IOLTA ACCOUNTS

Normally, the bank will deduct reasonable service charges for holding an IOLTA account from

the interest or dividends earned on the account. However, if service charges exceed the

interest earned on an account during a remitting period, your bank has several options in

determining how to deal with those excess fees. The bank may choose to maintain the

account and write off or absorb any uncollected charges or offset the charges against future

interest earnings on the account. However, the bank may instead choose to pass those

service charges and costs to the lawyer. In the event that fees routinely exceed interest

earned and the bank decides to charge the excess fees to the attorney, the attorney may

apply to the Office of Access & Inclusion to convert the IOLTA account to a non-interest

bearing trust checking account. The State Bar’s taxpayer identification number will be

removed from the account and the attorney will be responsible for the fees and charges

incurred to maintain the account. (See Bank Charges.)

SECTION V: DEPOSITING MONEY INTO YOUR CLIENT TRUST BANK ACCOUNT

All funds and property held for the benefit of a client must be deposited into a client trust

account. This includes advances for fees, costs, and expenses.

Your trust accounting duties require you to differentiate between the types of funds: funds

that MUST go into your client trust account; funds that MUST NOT go into your client trust

account; and funds that fall under certain limited exceptions. Failure to differentiate among

these different types of funds may result in commingling or misappropriation.

WHAT MUST GO INTO YOUR CLIENT TRUST BANK ACCOUNT?

Any money received for the benefit of the client must be deposited into the client trust

account and cleared before it can be paid out. This includes: money that belongs to the client

outright (for example, funds from a sale of the client's property); money in which the attorney

and the client have a joint interest (for example, settlement proceeds that includes the

attorney’s contingency fee or fees paid in advance that have not been earned); money in

which the client and a third party have a joint interest (for example, funds from the sale of

community property); and money that doesn't belong to the client at all but which the

attorney is holding as part of carrying out the attorney’s representation of the client (for

example, when the attorney represents a client who is a fiduciary for funds owned by a

beneficiary).

WHAT MUST NOT GO INTO YOUR CLIENT TRUST BANK ACCOUNT?

Funds that belong to an attorney or an attorney’s law firm must never be deposited into your

client trust account. You should never put your personal or office money, including funds like

employee payroll taxes, into your client trust account.

Limited Exceptions for Certain Funds

You are required to hold advance fees in the client trust account, including a “flat fee” paid in

advance. A “flat fee” is a fixed amount that constitutes complete payment for the

performance of described services regardless of the amount of work ultimately involved, and

which may be paid in whole or in part in advance of the lawyer providing those services.

However, an attorney may deposit a flat fee into an attorney’s or the firm’s operating account

provided the attorney complies with the requirements of rule 1.15, paragraph (b). These

requirements include disclosing to the client in writing that the client is entitled to a refund of

any unearned amount of the flat fee. Whenever any fees paid in advance are held in the

client trust account, withdrawal of earned fees should be done on a regular basis perhaps

when monthly reconciliation is performed.

Generally, money that belongs to an attorney or their firm should not be deposited into the

client trust account. However, you may deposit attorney or law firm funds into the client trust

account that are “reasonably sufficient to pay bank charges.” This is permitted because you

must prevent bank charges from being debited against your client’s funds. Some attorneys

arrange with the bank to have those charges assessed against their general office accounts

instead of the client trust account. Remember that a deposit of your own money to cover

bank charges, like every deposit you make to your client trust bank account, must be properly

recorded in the account journal for your client trust bank account, and a special “bank

charges” ledger. (See What Records Do You Have to Create?.)

WHAT MUST BE HELD IN YOUR IOLTA ACCOUNT?

As we've mentioned, Business and Professions Code section 6211 requires you to keep

amounts of money that are “nominal in amount” or “on deposit or invested for a short period

of time” in your IOLTA account. Client funds that can earn revenue for the client in excess of

the costs to hold those accounts must be deposited for the benefit of the client. Thus, you are

required to make the practical determination of whether your clients' money must be held in

your IOLTA account.

The constitutionality of California’s IOLTA statute was upheld in Carroll v. State Bar (1985) 166

Cal.App.3d 1193 [213 Cal.Rptr. 305] (see generally, Brown v. Legal Foundation of Washington

(March 26, 2003) 538 U.S. 216, 123 S.Ct. 1406, 155 L.Ed.2d 376). In Carroll, the court

suggested a convenient rule of thumb for determining whether client funds must be placed in

the IOLTA account: your clients' money is “nominal in amount” or being held “for a short

period of time” if the cost of opening and administering a separate, individual client trust

bank account or otherwise accounting for the funds separately is greater than the amount of

interest the money would earn for your client.

Rule 2.110(A) of the Rules of the State Bar of California includes six factors that an attorney

must consider in determining whether funds can earn income in excess of costs:

▪ the amount of the funds to be deposited;

▪ the expected duration of the deposit, including the likelihood of delay in resolving the

matter for which the funds are held;

▪ the rates of interest or dividends at eligible institutions where the funds are to be

deposited;

▪ the cost of establishing and administering non-IOLTA accounts for the client or third

party’s benefit, including service charges, the costs of the member’s services, and the

costs of preparing any tax reports required for income earned on the funds;

▪ the capability of eligible institutions or the member to calculate and pay income to

individual clients or third parties;

▪ any other circumstances that affect the ability of the funds to earn a net return for the

client or third party.

To help you make this determination, the following chart shows that if you're holding $5,000

for a client for 209 days—about seven months—that money will earn $50 in interest. (The

chart assumes the current highest interest rate of 1.75%, compounded daily. Since interest

rates change constantly, and most are now lower than this you shouldn't rely too heavily on

this chart.) However, if your bank charges $8 a month to keep a separate account open, by

the time your client earns $50, the bank will have charged your client about $56. Therefore,

the $5,000 must be deposited into your IOLTA account because the actual transactional costs

would prevent it from earning net income for your client.

Amount of Client Money

You’re Holding

Time Needed to Earn $50

Interest (At 1.75%

Compounded Daily

$ 5,000

209 days

$10,000

106 days

$15,000

71 days

$20,000

54 days

$25,000

43 days

What if the money you are holding is not “nominal in amount” or not being held for “a short

period of time”? While you are not required to earn interest for the client, in no case are you

allowed to keep the interest your clients' money earns. In light of the fact that the funds

would generate interest income for the client if held in a separate interest-bearing account

and you are in a fiduciary relationship with the client, you should ordinarily place the funds in

an interest-bearing account for the benefit of the client. Tell the bank to code the account

with your client's taxpayer identification number. In addition, make sure the type of account

you choose doesn't limit access to your client's money in any way that will harm your client.

Your banker can help you figure out whether the amount of money a client has given you

could generate net income for that client in a separate interest-bearing client trust bank

account during the time you hold it, if you're having trouble deciding. Under rule 2.110(B),

the State Bar will not bring disciplinary charges against an attorney for determining in good

faith whether or not to place funds in an IOLTA account. However, rule 2.112 requires an

attorney to review IOLTA accounts at reasonable intervals to determine whether changed

circumstances warrant moving the funds out of the account.

SECTION VI: PAYING MONEY OUT OF YOUR CLIENT TRUST BANK ACCOUNT

Before you write your first client trust bank account check, there are five things you should

know.

WHAT PAYMENTS CAN YOU MAKE?

You can make any payments on behalf of your client out of your client trust bank account,

including paying client costs and expenses (e.g., court filing fees or deposition transcript

costs), disbursing settlement proceeds, paying yourself earned and undisputed legal fees, etc.

You may also pay bank charges for the account. Those are the only payments you're allowed

to make out of your client trust bank account.

Bank charges. For individual client trust bank accounts, paying bank charges is simple: since

all of the charges are incurred for the client for whom you have the account, you can pay the

charges out of that client's money.

For IOLTA accounts, paying bank charges is a little more complicated. Under amended

Business and Professions Code section 6212(c), reasonable fees may be deducted from the

interest remitted on an IOLTA account. Reasonable service charges include per-check charges,

per-deposit charges, monthly fees such as fees in lieu of minimum balance, federal deposit

insurance fees, or sweep fees. However, the attorney is responsible for paying account

expenses that are incurred in the ordinary course of business, such as charges for check

printing, deposit stamps, collection charges, or insufficient fund charges. These fees may only

be charged to the lawyer or law firm maintaining the IOLTA account and will not be deducted

from the interest remitted on the account. That’s why rule 1.15(c)(1) allows you to keep a

little of your own money–an amount “reasonably sufficient to cover bank charges”–in your

client trust bank accounts without violating the rules against commingling. However, when

the bank charges for a service (e.g., for wiring money) for a specific client, you can treat the

charge as you would any other cost and pay for it out of money you are holding for that client

in the IOLTA account.

WHAT PAYMENTS CAN'T YOU MAKE?

You can't make payments out of your client trust bank account to cover your own expenses,

personal or business, or for any other purpose that isn't directly related to carrying out your

duties to an individual client. You also can't pay money out of your client trust bank account

on behalf of a client if the client doesn't have money available in the account to cover those

payments. (See Key Concept 2: You Can't Spend What You Don't Have.)

You should also remember that you can't pay yourself legal fees that your client is disputing,

whether or not you feel you've earned them. The moment a client disputes your fees, the

disputed amount is frozen in your client trust bank account until the dispute is settled. When

the amount of your fees is no longer in dispute, you have an ethical obligation to take those

fees out of the client trust bank account as soon as you reasonably can.

HOW SHOULD YOU MAKE PAYMENTS?

You should always pay out money from your client trust bank account by using a check, a wire

transfer or another instrument that specifies who is getting the money and who is paying it

out. You should never pay out money in cash, or with checks or other instruments made out

to cash because you have no evidence of payment. (See Key Concept 7: Always Maintain an

Audit Trail.) If you do make a payment in cash (or another instrument that doesn't give you a

record of the transaction), you must get a receipt, or you have violated your professional

responsibilities.

Some attorneys carry blank client trust bank account checks around to pay client expenses

that come up when they're out of the office. Don't. This is a bad practice which results in

checks being written out of numerical order (i.e., lower numbered checks being dated later

than higher numbered checks), and, more often than not, a few checks disappearing

altogether. That can make it hard to keep orderly records and reconcile your books. If you're

out of the office and a client expense comes up, pay it out of your general office account and,

when you get back to the office, write a client trust bank account check to reimburse yourself.

WHO SHOULD MAKE PAYMENTS?

As we've discussed, your clients have entrusted you with their money, and you are personally

accountable for it. Giving other people access to your clients' money is even riskier than

giving them access to your own money. If your money is stolen because you trusted the

wrong person, all you lose is the money. If your clients' money is stolen because you trusted

your employees or your spouse to sign client trust bank account checks, you can lose your

clients' money, your professional reputation and even your license to practice law. Don't

make a signature block or stamp for your client trust bank account checks; don't pre-sign

blank client trust bank account checks. If you do, sooner or later some of your clients' money

will be missing, and whether the cause is dishonesty or incompetence, you will bear

responsibility for both the financial loss and the violation of your fiduciary responsibility.

WHEN CAN YOU MAKE PAYMENTS?

As we've discussed, you can only pay out money from your client trust bank account when the

client you're making the payment for has money to cover the payment in the account. (See Key

Concept 2: You Can't Spend What You Don't Have and Key Concept 4: Timing Is Everything.)

WHEN MUST YOU MAKE PAYMENTS?

Rule 1.15, subparagraph (d)(7) provides that you must “promptly distribute any undisputed

funds or property in the possession of the lawyer or law firm that the client or other person is

entitled to receive.” The former, now repealed, version of this requirement provided that

distribution should be made upon a request from a client or other person entitled to the

funds. Effective January 1, 2023, rule 1.15(d)(7) was amended to delete the element of a

request from a client or other person so that a lawyer’s duty to promptly distribute funds

would not be dependent on a client or other person making a request to the lawyer that their

funds be distributed. This change in the rule was made as a companion initiative to the State

Bar’s CTAPP program.

These CTAPP rule changes also include new paragraphs (f) and (g), which add a rebuttable

presumption in rule 1.15 that entrusted funds or property must be distributed within 45 days

of the time that the funds or property become undisputed as defined in the rule.

Unless the lawyer, and the client or other person agreed in writing that the funds or property

would continue to be held by the lawyer, there is a rebuttable presumption affecting the

burden of proof in a disciplinary action that a violation has occurred if the lawyer, absent

good cause, failed to distribute undisputed funds or property within 45 days of the date when

the funds became undisputed. (See rule 1.15(f).)

Undisputed funds or property refers to funds or property, or a portion of any such funds or

property, in the possession of a lawyer or law firm where the lawyer knows or reasonably

should know that the ownership interest of the client or other person in the funds or

property, or any portion thereof, has become fixed and there are no unresolved disputes as

to the client’s or other person’s entitlement to receive the funds or property. (See rule

1.15(g).)

Comment [7] to rule 1.15 provides examples of disputes that would need to be resolved

before the clock starts ticking on the 45-day deadline. The examples include: medical liens;

statutory liens; prior attorney liens; and any legal proceeding on the entitlement to funds,

such as an interpleader action.

Comment [4] clarifies that the presumption does not apply to release of a client’s file or a

refund of a fee paid in advance as those situations are governed by more specific rules.

Comment [6] clarifies that lawyers have a general duty to act diligently in resolving disputes

that are delaying the distribution of funds or property.

The presumed violation is rebuttable and paragraph (f) provides that it may be rebutted by

proof by a preponderance of the evidence that there was good cause for not distributing the

funds by the 45-day deadline. In addition, Comment [5] provides that if the presumption is

rebutted, then a violation of subparagraph (d)(7) must be established by the State Bar by

clear and convincing evidence and without the benefit of the rebuttable presumption.

Attorney fees. As we've discussed, when you're holding client money that includes your

undisputed fees, you have to take those fees out of the client trust bank account promptly

after you've earned them.

Third party claims. You also may have a duty to promptly pay expenses due to a third party

incurred on behalf of a client. In some cases, the client may dispute a third party's claim to

the money. This situation most often arises in connection with a medical lien which the

attorney and client have both signed. After the recovery is received, the client instructs you

not to pay the doctor. Since you signed the lien, turning the funds over to the client may

expose you to potential civil liability and may violate your fiduciary duty to the doctor. On the

other hand, paying the doctor against the express instructions of the client also presents

difficulties. You should consider writing to the client and the doctor to inform them of the

problem, and your intention to hold the disputed funds in your client trust bank account until

the dispute is resolved. If the parties cannot resolve their dispute, you should advise them of

your intent to file an interpleader action. In no case should you use the disputed funds, which

would constitute misappropriation.

SECTION VII: RECORDKEEPING

The next two sections will describe a simple, effective system for accounting for your clients'

money. Whenever something in this section is mandatory, we'll cite the applicable rule,

statute or case. Otherwise, we're giving you practice pointers, not law.

Rule of Professional Conduct 1.15(e) does not mandate any particular client trust accounting

system. (However, keep in mind that an absence of records can subject you to discipline.) You

can hire consultants to set up a system, buy computer accounting software—whatever works

for you—as long as you get the results and keep the records that the rules require. If your

client trust accounting system will accomplish what our client trust accounting system does,

then it's probably alright. However, the system described below will give you everything you

need to do in order to account for your clients' funds.

Our client trust accounting system is designed for sole practitioners and attorneys in small

law firms. It assumes that you will be directly involved in every aspect of handling your clients'

money. However, whatever size firm you work in and whatever client trust accounting system

you use, you still have full personal fiduciary responsibility for accounting for your clients'

money.

Keeping records is the way you do the “accounting” part of client trust accounting.

Recordkeeping must be done consistently and keeping incomplete records is just as great a

breach of your professional responsibility as keeping no records at all.

As we've discussed, rule 1.15(d)(3) and (e) requires you to keep two kinds of records: records

created by the bank that show what went into and out of your client trust bank accounts; and

records created by you to explain the transactions reflected in the bank documents.

HOW LONG MUST YOU KEEP RECORDS?

Rule 1.15(d)(5) requires you to keep trust accounting records for five years after you pay out

the money the records refer to. To be on the safe side, you should keep the records of all

money you handled for a client for a minimum of five years after you closed that client's case,

unless they relate to a matter under disciplinary investigation. In that case, you must retain

the records until the investigation is concluded as part of your duty under Bus. & Prof. Code

sec. 6068(I) to cooperate and participate in a State Bar investigation.

WHERE CAN YOU KEEP YOUR RECORDS?

If you have a practice involving a lot of clients, you have to hold on to a lot of paper. Since

office space is limited and expensive, you may find it makes more sense to keep some client

trust accounting records off-site rather than in your office. That's OK, as long as you can

produce the records within a reasonable time after receiving notice that you're the subject of

a disciplinary inquiry. If you keep orderly files, label each box with the names of the client

trust bank accounts the records apply to and the dates covered by the records, and keep an

index listing the names of all the boxes you send into storage, this won't be a problem. If you

don't, you're going to have to retrieve all the boxes from storage and sort through all the

records they contain in order to respond to the disciplinary inquiry. This can be expensive,

time-consuming, and, if you have to request a time extension, can create the wrong

impression.

WHAT IF YOU HAVE A COMPUTERIZED SYSTEM?

A computerized accounting system, applications, or other technology tools are an option for

helping you with your trust accounting duties, including required recordkeeping. However,

you should consider generating and keeping hard copies of all the records required by the

rule (including bank-created records). You can use computer printouts instead of hand-

written ledgers for the records you are responsible for creating, but just having the data

stored electronically in the cloud, on a drive (local or external), or saved to storage media is

risky. It's a good idea to have these printouts dated and signed by the preparer to show when

and by whom they were generated.

When using a computerized accounting system, applications, or other technology tools, be

mindful of the fact that computer data can be lost in the event of a natural disaster, power or

equipment failure, cyberattack, or human error. For your own protection, make hard copies

regularly and have all of your computer records regularly backed up to the cloud, on a drive

(local or external), or on storage media. In addition, remember that if computer records are

offered as evidence, they must be authenticated as business records pursuant to Evidence

Code sections 1270-1272. (See Appendix 2 for the text for those sections and Evidence Code

sections 1552 and 1553.)

Beyond preservation of the computer data, you also should be careful when changing or

upgrading your specific accounting software application, your overall computer operating

system, and the computer hardware itself. Different software applications and newer

versions of your same software application may not be fully compatible with the data

generated by your current software application. Similarly, changing computers or operating

systems can cause compatibility problems. These days, it is not unusual for computer

technology to advance dramatically in a short time period, rendering some applications or

data obsolete and problematic to use. In addition, a special note for web-based applications is

that browsers change over time and it is not unusual for a common component or

functionality of a browser to be discontinued or no longer be supported at some point in the

future. An example is the 2020 end of life for Adobe Flash support that impacted many

browser-based applications in 2021.

To avoid problems, a person’s ordinary use of a smartphone requires responsible steps, such

as regularly backing up data, and this is true of accounting technology. Accounting technology

should not be avoided simply because there are potential problems as it offers the

advantages of efficiency and reliability and can avoid the errors that arise from manual

entries on hard copy accounting forms.

WHAT BANK-CREATED RECORDS DO YOU HAVE TO KEEP?

Rule 1.15(d)(3) and (e) requires you to keep two kinds of bank-created records: client trust

bank account statements and cancelled checks. Some attorneys don't take their duty to keep

bank-created records seriously because they can always get copies from their bank. This is a

clear violation of rule 1.15(d)(3) and (e); it also isn't true. If your bank fails, merges with or is

taken over by another bank, you may find that copies of your four-year-old cancelled client

trust bank account checks just aren't available. As previously noted, finding a bank that still

offers “cancelled checks” may take some searching and, if you’re unable to find such a bank,

be sure to access and maintain “cancelled check“ information by requesting check imaging or

other electronic or online accessible statement documentation from your bank. At its

website, the Federal Reserve Board posts answers to Frequently Asked Questions about

Check 21, explaining in part that:

“The Check Clearing for the 21st Century Act (Check 21) was signed into law on

October 28, 2003, and became effective on October 28, 2004. Check 21 is

designed to foster innovation in the payments system and to enhance its

efficiency by reducing some of the legal impediments to check truncation. The

law facilitates check truncation by creating a new negotiable instrument called

a substitute check, which permits banks to truncate original checks, to process

check information electronically, and to deliver substitute checks to banks that

want to continue receiving paper checks. A substitute check is the legal

equivalent of the original check and includes all the information contained on

the original check.”

(https://www.federalreserve.gov/paymentsystems/regcc-faq-check21.htm)

While it isn't required by the rule, you should also keep your client trust bank account deposit

slips and checkbook stubs so you will have a complete audit trail. (See Key Concept 7: Always

Maintain an Audit Trail.) These records will make it much easier to balance your books and to

show what you did with your clients' money.

HOW SHOULD YOU FILE BANK-CREATED RECORDS?

To ensure that you have a complete set of bank-created records, and to save you time when

you need to find a particular record, you should have a simple, consistent filing system. One

good system is to keep separate binders for each of your client trust bank accounts. Each

binder should have one section for bank statements, one section for cancelled checks, one

section for deposit slips and one section for checkbook stubs. File each record in date order in

the appropriate section of the binder for the account they refer to. Just label each binder with

the name of the client trust bank account and the period it covers, and you should be able to

find any record in one or two minutes.

WHAT RECORDS DO YOU HAVE TO CREATE?

As we've discussed, rule 1.15(d)(3) and (e) requires you to create three kinds of records to

show that you know at all times what you're doing with your clients' money. We'll discuss

each of these records in detail below, but a few general points apply to all of them:

▪ Like bank-created records, rule 1.15(d)(5) requires you to retain these records for a

minimum of five years after you pay out the money the records refer to.

▪ Never round off figures in these records. Rule 1.15(d)(3) and (e) says that you must

record “all funds” received on behalf of a client. That means all receipts and payments

must be recorded to the penny.

▪ These records can be handwritten, typed or printed out from a computer file.

However, they should be complete, neat and legible, and stored in such a way that

you can find them—and read them—as many as five years later. Handwritten records

should be kept in ink—not pencil or magic marker—in bound accounting books, and

typed records or computer printouts should be filed in binders. As with bank-created

records, you can save yourself time and trouble by labeling the covers of the books

and binders with complete account or client names and the dates the records cover.

▪ All deposits and payments should be recorded to the account journal and client ledger

within 24 hours. Waiting longer increases the chance that you will forget to record a

transaction or will record it wrong. It also means that your records aren't up-to-date,

and that you might be spending money your clients don't have. (See Key Concept 5:

You Can't Play the Game Unless You Know the Score.)

The client ledger. Rule 1.15(d)(3) and (e) says you must keep a “written ledger” for each

client whose money you hold. This client ledger must give the name of the client, detail all

money you receive and pay out on behalf of the client, and show the client's balance

following every receipt or payment.

Maintaining a client ledger is like keeping a separate checkbook for each client, regardless of

whether or not the client's money is being held in your common client trust bank account.

(See Key Concept 1: Separate Clients Are Separate Accounts.) The only difference between

properly maintaining a client ledger and properly maintaining your personal checkbook is that

you can be disciplined if you fail to properly maintain your client ledger.

Every receipt and payment of money for a client must be recorded in that client's client

ledger. For every receipt, you must list the date, amount and source of the money. For every

payment, you must list the date, the amount, the payee (who the payment went to) and

purpose of the payment. After you record each receipt, you must add the amount to the

client's old balance and write in the new total. After you record each payment, you must

subtract the amount from the client's old balance and write in the new total. Leave a number

of blank lines after the last entry of each month, so that you can make additional entries

during the monthly reconciliation process.

When you deposit more than one check at a time for a client (i.e., using one deposit slip for

all the checks), you should record each check as a separate deposit in your account journal. If

you don't, it will be harder to reconcile your books and to answer any questions that may

come up later.

You will find it much easier to keep your records straight if you don't put more than one

client's records on a given page. Also, you shouldn't use the front of a page for one client and

the back of the page for another. This means wasting some paper, but it will enable you to file

all the client ledger pages that refer to a given client in chronological order and find those

pages faster if you need them. If you're handling more than one case for the same client, it

may be helpful to maintain a separate client ledger for each matter. If you don't, make sure

that it's clear to which case the transaction is related when you record your client's receipts

and payments.

Let's go through the motions of opening and maintaining a client ledger for a new client, KB.

At your first meeting, on Thursday, July 9, KB gives you a check for $1,500 as an advance

against costs and expenses. The first question is whether you should open an individual client

trust bank account for KB, where it will earn interest for her, or deposit this money into your

IOLTA account, where it will earn interest for the Legal Services

Trust Fund Program. When you apply the requirements of Business and Professions Code

section 6211, you decide that the $1,500 couldn't earn interest for KB after costs are

deducted. (See What MUST Be Held in Your IOLTA Account?.) Therefore, you deposit KB's

money into your IOLTA account and create a new client ledger for her, starting on the front of

an unused page in the book you use for client ledgers. The new client ledger looks like this:

CLIENT LEDGER

CLIENT: KB

CASE#: 920137

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

1,500.00

As rule 1.15(d)(3) and (e) requires, you've recorded the date you received KB's money, who

the money came from, the amount of money and the balance you're holding for KB. Notice

that the “Payee, # & Purpose” and “Checks (Subtract)” columns are left blank, since they are

only used when you are recording a payment out of the account.

The first thing KB needs is a private investigator to locate witnesses for her case. Since you

know that your bank won't clear KB's check (which is drawn on an out-of-town bank) until the

third working day after the deposit, you wait until then to hire one. (If the matter required

immediate attention, you could have paid the private investigator with a check drawn on your

general office account, and then reimbursed yourself for the expense after KB's check had

cleared.)

On Tuesday, July 14, when the check has cleared, you look up KB's balance to make sure she

has enough money in the account (you can't keep every client's balance in your head) and

then make out a client trust bank account check, #437, for $500 to FS, a private investigator.

You record the payment in KB's client ledger, subtract the amount of the check from her

running balance and write in the new balance. KB's client ledger now looks like this:

CLIENT LEDGER

CLIENT: KB

CASE#: 920137

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

1,500.00

7/14/06

FS, #437 Investigation

500.00

1,000.00

As rule 1.15(d)(3) and (e) requires, you've recorded the date you paid out KB's money, who

you paid the money out to, why you spent the money, the amount of money you spent and

the balance you're holding for KB. You also recorded the number of the check you wrote, to

make it easier to reconcile your records at the end of the month. Notice that the “Source of

Deposit” and “Deposits (Add)” columns were left blank, since they are only used when you

are recording a deposit to the account. Also notice that you didn't round off; you recorded

the amount of the payment to “FS” and the new balance to the penny.

During the next couple of weeks, you receive two more checks from KB and (after checking

KB's balance) make one additional payment to cover court costs. Following the procedure

above, you record these transactions in KB's client ledger. When KB calls you at 5:30 p.m. on

Friday, July 24, to ask how much you're still holding for her, you are able to tell her

immediately, even though your secretary has already gone home. When KB's case is closed at

the end of the month, per your written fee agreement, you pay yourself your legal fees. At

the time you close the matter, KB's client ledger looks like this:

CLIENT LEDGER

CLIENT: KB

CASE#: 920137

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

1,500.00

7/14/06

FS, #437 Investigation

500.00

1,000.00

7/15/06

325.00

1,325.00

7/15/06

SF Muni Court, #446

Filing Fee

50.00

1,275.00

7/19/06

225.00

1,500.00

8/01/06

Self, #448 Legal Fee

1,500.00

If KB questions your fees, or if a State Bar investigator asks you to explain what you did with

KB's money, this client ledger gives you a complete, clear record to account for the funds you

held in trust. In the course of keeping this client ledger, you've completely fulfilled the client

ledger requirements of rule 1.15(d)(3) and (e). You've also fulfilled six of the seven key

concepts. You've kept KB's money separate from all your other clients', even though it's being

held in your common client trust bank account (Key Concept 1: Separate Clients Are

Separate Accounts); you haven't spent more money than KB had and have thus avoided a

“negative balance“ (Key Concept 2: You Can't Spend What You Don't Have and Key Concept

3: There's No Such Thing as a “Negative Balance”); you waited until KB's check cleared

before paying out any of the money (Key Concept 4: Timing Is Everything); you've been able

to tell at all times exactly how much of KB's money you're holding (Key Concept 5: You Can't

Play the Game Unless You Know the Score); and you've zeroed out KB's balance (Key

Concept 6: The Final Score Is Always Zero). As for Key Concept 7: Always Maintain an Audit

Trail, your goal of maintaining an audit trail is not complete until you have identified and

corrected any accounting errors that can be ascertained by reviewing and reconciling your

records (see Reconciliation).

The account journal. Rule 1.15(d)(3) and (e) says you must keep a “written journal“ for each

client trust bank account. This account journal must give the name of the bank account, detail

all money you receive and pay out, say which clients you received or paid out the money for,

and give the account balance after every receipt or payment.

Maintaining an account journal is very similar to keeping a client ledger. In fact, for your

individual client trust bank accounts (i.e., accounts in which you keep only one client's

money), you only need to keep the client ledger in order to comply with rule 1.15(d)(3) and

(e). But for your common client trust bank account, keeping the account journal is the only

way you can know how much you have in the account at any given time. If you maintain the

account journal properly, you will never bounce a client trust bank account check unless

there's been a bank error.

In the account journal, you must record every deposit into and payment out of the client trust

bank account. For every deposit, you must record the name of the client you received the

money for, the date you deposited the money, and the amount of money you deposited.

After you record each deposit, you have to add the amount to the account's old balance and

write in the new total. For every payment, you must list the client for whom you paid out the

money, the date and the amount of the payment. Although it's not required by the rule, you

will find it a lot easier to balance your books if you also record the number of the check and

the payee or source of the money. After you record each payment, you have to subtract the

amount from the account's old balance and write in the new total. As with the client ledger,

leave a number of lines blank after the last entry of each month, so that you can make

additional entries during the monthly reconciliation process.

When you deposit more than one check at a time (i.e., using one deposit slip for all the

checks), you must record each check as a separate deposit in your account journal. If you

don't, you won't be able to indicate how much was deposited for each client, thus you won't

be in compliance with rule 1.15(d)(3) and (e).

If you are keeping your own money in the account to cover bank charges, you must also

record every deposit of your own funds and every bank charge. In the account journals for

interest-bearing client trust bank accounts, you must also record any interest the bank credits

to or charges the bank takes from the account.

Let's look at an example of an account journal for a common client trust bank account. To

show you how the account journal relates to the client ledger, we'll look at the account

journal page for the day you deposited KB's first check, July 9, 2006:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

FB, #423 Prof. Fee

1,800.00

13,000.00

7/09/06

1,500.00

14,500.00

7/09/06

Insurance Co.

3,500.00

18,000.00

7/09/06

DC, #424

Settlement Proceeds

6,500.00

11,500.00

As you can see, at the time you deposited KB's first check, there was already a substantial

amount of money in the account that belonged to other clients. The account journal doesn't

show you how much of this money belonged to each client. To find that out, you have to look

in the client ledgers for those clients. What the account journal does tell you is how much, to

the penny, was in your common client trust bank account at any given time.

As rule 1.15(d)(3) and (e) requires, for each transaction you've recorded the date you

received or paid out the money, which client you received or paid out the money for, how

much you received or paid out and what your client trust bank account balance was after

each deposit or payment. As with the client ledger, you've recorded who the money came

from (in the “Source of Deposit” column), who the money went to, why you paid out the

money and the number of the client trust bank account check you used to make each

payment (in the “Payee, # and Purpose” column). You recorded the amount of each deposit

in the “Deposits (Add)” column, the amount of each payment in the “Checks (Subtract)”

column, and, after adding in each deposit and subtracting each payment, you recorded a new

running balance in the “Balance” column.

Bank charges ledger. Rule 1.15(d)(3) and (e) requires you to record every bank charge against

your client trust bank account in the account journal and permits you to keep your own

money in your common client trust bank account to pay these bank charges. If you keep your

own money in the client trust bank account to pay these charges, you should create a

separate ledger where this money, and all the bank charges you pay with it, are recorded.

We'll call this the “bank charges ledger.” You should keep the bank charges ledger the same

way you keep your client ledgers, recording every deposit, every charge the bank makes

against the account, and the running balance of money you have left to cover the charges.

The bank charges ledger should look like this:

BANK CHARGES LEDGER

CLIENT: Bank Charges

CASE#: N/A

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

6/30/06

CORRECTED MONTH ENDING BALANCE

50.00

7/01/06

Self

100.00

150.00

7/31/06

Check printing

10.00

140.00

WHAT RECORDS DO YOU HAVE TO KEEP OF OTHER PROPERTIES?

Rule 1.15(d)(3) and requires you to keep a written journal of all securities and other

properties you hold in trust for clients that explains what you were holding, who you were

holding it for, when you received it, when you distributed it, and who you distributed it to.

You have to maintain this written record, which we'll call the other properties journal, from

the day you receive the properties until five years after the day you disburse them. (Naturally,

if these properties become the subject of a disciplinary investigation, you have to keep the

records until the investigation is completed.) As with the other records we've discussed, it's

prudent to retain these records for five years after you closed the matter of the client for

whom you held the other properties.

While you can keep a separate other properties journal for each client, the simplest thing to

do is maintain a single journal in which you record all other properties. Here's a sample of

such a journal:

OTHER PROPERTIES JOURNAL

CLIENT/ CASE#

ITEM

DATE RECEIVED

DATE DISBURSED

DISBURSED TO

KB/920137

Emerald Brooch

7/09/06

8/01/06

DS/920123

AT&T stock

7/16/06

GC/920125

Red Porsche

8/07/06

8/15/06

Rule 1.15(d)(2) requires you to actually label the properties to identify the owner (i.e., put a

tag on them with the owner's name) and put them into a “safe deposit box or other place of

safe keeping as soon as practicable.” In this case, a safe deposit box is fine for the brooch and

the stock certificates, but you'll need to find a secured garage or similar “place of

safekeeping” for the Porsche.

As rule 1.15(d)(3) and e) requires, the sample journal lists the client you're holding the

properties for, what properties you're holding for the client, when you received the

properties, when you disbursed them, and who you disbursed them to. If you're holding

many properties for a single client, you may want to keep a separate other properties journal

for that client; otherwise, a single journal like the one shown above is sufficient.

SECTION VIII: RECONCILIATION

Rule 1.15(d)(3) and (e) requires you to keep records of your “monthly reconciliation

(balancing)” of your client ledgers, account journals and bank statements. “Reconciliation“

means checking the three basic records you are required to keep—the bank statements, the

client ledgers, and the account journal—against each other so you can find and correct any

mistakes.

Rule 1.15(d)(3) and (e) requires you to reconcile your client trust bank account records

because mistakes always happen when people keep track of money. Even banks make

mistakes when it comes to recording money transactions. That's because when you're

working with numbers, mistakes are easy to make and difficult to notice. No amount of

training can eliminate these mistakes.

To make sure that you find and correct these mistakes, rule 1.15(d)(3) and (e) requires that

you record every client trust bank account transaction twice (in your client ledger and your

account journal), check these records against each other and against the bank's records. For

example, let's say you deposit a check for $1,000 into your common client trust bank account

but mistakenly record it as “$10,000” in your client ledger and add $10,000 to your client's

running balance. In your account journal, you record the check correctly and add $1,000 to

your client trust bank account's running balance. How will you find the mistake? The account

journal balance is right, so you won't find the mistake by bouncing a check. The numbers in

the client ledger all add up—there's no way to tell you made a mistake. Unless you compare

your client ledger balance to your account journal balance, you won't be able to find the

recording error. And unless you compare your client ledger and account journal against the

bank statement, you won't know which entry was right—$10,000 or $1,000.

We've just described the reconciliation process. The theory is that it's unlikely that the same

mistakes will be made in three different records—the client ledgers, the account journal and

the bank statement—so if those records are all checked against each other, any mistakes will

show up.

Rule 1.15(d)(3) and (e) requires that your client trust bank account records be reconciled

every month and that you create a written record that shows you went through the

reconciliation process. It's alright to use accounting software applications and to hire a

properly supervised bookkeeper or the equivalent, especially if you lack accounting skills, but

you are still personally responsible for accounting to your clients and to the State Bar for the

money in your client trust bank accounts. Therefore, even if you do not personally carry out

the monthly reconciliation, you should understand the process and exercise supervisorial

oversight. (Regarding software and other accounting technology, see the discussion of

computerized systems in Section VII: Recordkeeping.)

You can't do a reconciliation for one month until you're sure you have correct balances in all

your client ledgers and account journals for the previous month. If you haven't recently

reconciled your books, or if you are worried that they're wrong, you may want to bring in a

bookkeeper to straighten them out before you take on the monthly reconciliations yourself.

Once you have correct balances for the previous month, you are ready to reconcile.

There are four main steps in reconciling your books:

1. Reconciling the account journal with the client ledgers to make sure they agree with

one another.

2. Entering bank charges and interest shown on the bank statement into your account

journal and client ledgers as appropriate.

3. Reconciling the account journal and client ledgers with the bank statement to make

sure that your records agree with the bank's.

4. Entering Corrected Month Ending Balances and Corrected Current Running Balances

into your account journal and client ledgers.

As you can see, the third step of the reconciliation process is comparing your monthly bank

statement with the account records you've created. A bank statement is a list of all the

withdrawals, deposits, charges and interest that the bank has credited to your account during the

month. (For IOLTA accounts, the bank statement may also show interest paid to the State Bar,

and amounts charged to the State Bar, which should not be entered into your account journal.) It

takes some banks several weeks to prepare and mail out statements for the previous month; that

means you may be reconciling your books as much as three or four weeks after the month in

which the deposits or withdrawals are made. (In the example that follows, you are reconciling

your records for July on August 22.) Also, as we've discussed, it can take days or weeks for checks

to be presented for payment. These delays mean that you can't just compare the balance in your

account journal to the balance shown on the bank statement to see if anything is wrong. You

have to “adjust” your account balance by backing out all the transactions that weren't debited or

credited by the time the bank statement was prepared. This adjustment process may seem

complicated, but if you carefully follow the instructions for filling out the forms below, you

shouldn't have any problems.

The goal of the reconciliation process is to figure out the Corrected Month Ending Balance for the

month you are reconciling (that is, the amount of money that was actually in the account on the

last day of the month) and the Corrected Current Running Balance as of the date you complete

the reconciliation (that is, the amount of money that is actually in the account now) by entering

interest, bank charges and mistake corrections into your account journal and client ledgers. (You'll

put these entries in the space you left after the last entry of the month so that you could add

entries during the reconciliation process.) Since you can't be sure you've found every mistake

until you've finished reconciling, you can't enter a Corrected Month Ending Balance or a

Corrected Current Running Balance into your account journal and client ledgers until you've

finished the reconciliation process.

The following is a recommended three-form system that makes reconciliation simple. Remember

that each of the three forms—the Client Ledger Balance form, the Adjustments to Month Ending

Balance form, and the Reconciliation form—should be filled out every month for every client trust

bank account.

When filling out these forms, it's a good idea to use an adding machine or other calculator that

will produce a printed record of the calculation you performed. That way, if your records don't

match, you can easily check to see if the reason is a mathematical mistake made while preparing

the form.

RECONCILE THE ACCOUNT JOURNAL WITH THE CLIENT LEDGERS

The first step in reconciliation is to reconcile the account journal with the client ledgers. The

purpose of this step is to make sure that the entries in your client ledgers agree with the entries in

your account journal. Here's an example:

FORM ONE

CLIENT LEDGER BALANCE

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

CLIENT

CLIENT LEDGER BALANCE

1,500.00

200.00

8,500.00

250.00

Bank Charges

125.00

TOTAL CLIENT LEDGER BALANCE:

10,575.00

MONTH ENDING ACCOUNT JOURNAL BALANCE:

10,575.00

TOTAL MISTAKE CORRECTION ENTRIES (+ or -): _______

(From Form Two)

ADJUSTED MONTH ENDING ACCOUNT JOURNAL BALANCE:

________

In the space after “Reconciliation Date,” write the day, month and year you are doing the

reconciliation; in the space after “Client Trust Bank Account Name,” write the name of the

client trust bank account (e.g., “Common Client Trust Bank Account”); in the space after

“Period Covered by Bank Statement,” write the dates of the period covered by your most

recent bank statement (e.g., 7/1/06 to 7/31/06, if you are doing your July 2006

reconciliation).

On the lines under “Client,” write the name of each client whose money you are holding in

the client trust bank account. On the lines under “Client Ledger Balance,” write the running

balance as of the last day covered by the bank statement (in this case, July 31, 2006) from

each client ledger next to the name of that client. (For your common client trust bank

account, this may require more lines than shown here. For an individual client trust bank

account, you will only need the first line.) Add up the client ledger balances in the “Client

Ledger Balance” column and write in the total after “Total Client Ledger Balance.” Even if only

one client's money is in the client trust bank account, you have to write that client's balance

on this line. In the space after “Month Ending Account Journal Balance,” write in the running

balance for the client trust bank account as of the last day covered by the bank statement.

Notice that the “Total Client Ledger Balance” exactly matches the “Month Ending Account

Journal Balance.” That means that your client ledger balance entries for the month agree with

your account journal entries, and you're ready to move on to the next step of the

reconciliation process. For the moment, leave the last two lines, “Total Mistake Correction

Entries (+ or -)” and “Adjusted Month Ending Balance,” blank; you might find mistakes during

the rest of the reconciliation process.

When the “Total Client Ledger Balance” doesn't exactly match the “Month Ending Account

Journal Balance,” don't panic; you've found a mistake, and that's what reconciliation is for (see

Finding and correcting mistakes, below). Bookkeepers and other accounting professionals may

have skills that you do not personally possess so relying on a properly supervised assistant to

identify and correct mistakes may be prudent and offer a reasonable option for compliance

with your recordkeeping duties. When a mistake is found and corrected by you, your

bookkeeper, or other assistant, move on to step 2.

Finding and correcting mistakes. What do you do if you add up all your client ledger balances

and the total doesn't match the month ending account journal balance?

Since rule 1.15(d)(3) and (e) requires you to record every deposit and withdrawal twice, if you

systematically compare each entry in the account journal with the corresponding entry in the

client ledger, and check the new balance you entered after each entry, you will always find

the mistake.

For example, let's say that the sample form shown above had looked like this:

FORM ONE

CLIENT LEDGER BALANCE

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

CLIENT

CLIENT LEDGER BALANCE

1,500.00

200.00

8,500.00

250.00

Bank Charges

125.00

TOTAL CLIENT LEDGER BALANCE:

10,575.00

MONTH ENDING ACCOUNT JOURNAL BALANCE:

10,550.00

TOTAL MISTAKE CORRECTION ENTRIES (+ or -): _____

(From Form Two)

ADJUSTED MONTH ENDING ACCOUNT JOURNAL BALANCE:

________

The Total Client Ledger Balance and Month Ending Account Journal Balance differ by $25.00.

This difference could be the result of a single mistake, or of several mistakes; it could be in a

client ledger, the account journal, or both. It could be that you forgot to record a deposit or

withdrawal, or that you recorded the amounts incorrectly; or it could be the result of

incorrectly adding a deposit or subtracting a withdrawal.

You open your account journal to the page that shows the corrected month ending balance

for the previous month and the first entries for the month you are reconciling, which looks

like this:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

6/30/06

CORRECTED MONTH ENDING BALANCE

9,500.00

7/01/06

FB, #408 Prof. Fee

500.00

9,000.00

7/01/06

Self, #409 Atty Fees

1,500.00

7,500.00

7/01/06

2,000.00

9,500.00

7/02/06

1,000.00

10,500.00

Since you reconciled this account last month, you know that the corrected month ending

balance shown for June 30, 2006, is right, and agrees with the total client ledger balance for

that date; whatever is causing the $25.00 difference between the account journal balance

and the total client ledger balance must have happened since then. Therefore, you look at the

first entry for July 1, 2006, check #408 which you wrote for DS to FB for $500, which gave you

a new running balance of $9,000.00. You make sure that you correctly subtracted $500 from

the 6/30/06 corrected month ending balance to get this new running balance, then open DS's

client ledger to the page where you recorded check #408:

CLIENT LEDGER

CLIENT: DS

CASE#: 920123

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

6/30/06

CORRECTED MONTH ENDING BALANCE

600.00

7/01/06

FB. #408 Prof. Fee

500.00

100.00

7/02/06

1,800.00

1,900.00

You compare the entry in the client ledger with the entry in the account journal; they are

both for the same check and the same amount. You subtract the amount of the check—

$500—from the client ledger's 6/30/06 corrected month ending balance of $600.00, and see

that the new running balance of $100.00 you entered was right. You have now determined

that the $25.00 difference you are trying to correct wasn't caused by recording the check to

FB, and that the balances in the account journal and in this client ledger after you wrote this

check are right.

You put a light pencil mark (shown as an asterisk) next to these balances and repeat this

process with each entry in the account journal. Everything is right until you get to the deposit

of $3,500.00 on July 9, 2006 for GC:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

FB, #423 Prof. Fee

1,800.00

13,000.00*

7/09/06

1,500.00

14,500.00*

7/09/06

Insurance Co.

3,500.00

18,000.00*

7/09/06

DC, #424

Settlement Proceeds

6,500.00

11,500.00*

Notice the asterisks you put next to each balance that you have already verified. You add the

$3,500.00 to the last verified balance, and see that the new running balance of $18,000.00

you entered was right. You open GC's client ledger to the page where you recorded this

deposit:

CLIENT LEDGER

CLIENT: GC

CASE#: 920125

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

6/30/06

CORRECTED MONTH ENDING BALANCE

13,000.00*

7/01/06

Self, #409 Atty Fees

1,500.00

11,500.00*

7/09/06

Insurance Co.

3,525.00

15,025.00*

You compare the entry in the client ledger with the entry in the account journal; the deposit

was recorded, but the amount of the deposit is $3,525.00, not $3,500.00. You subtract one

amount from another and find that the difference is exactly $25.00. You add $3,525.00 to the

previous client ledger balance and verify that the new running balance is right. That means

the mistake was made by entering the amount of the deposit incorrectly; but which entry is

wrong, the account journal entry or the client ledger entry?

To find out, you can compare the account journal and client ledger entries to the deposit slip,

which you filed in the appropriate binder, or to your most recent bank statement. The bank

statement shows one deposit on 7/9/06 of $5,025.00, which doesn't match either number.

But your account journal shows that you made two deposits on July 9:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/09/06

FB, #423 Prof. Fee

1,800.00

13,000.00*

7/09/06

1,500.00

14,500.00*

7/09/06

Insurance Co.

3,500.00

18,000.00*

7/09/06

DC, #424

Settlement Proceeds

6,500.00

11,500.00*

Since the bank statement shows only one deposit for July 9, 2006, that means you deposited

both checks on the same deposit slip. You add these two deposits together, and get

$5,000.00, not $5,025.00, as the bank statement shows. You subtract the smaller amount

from the larger amount, and get $25.00, the exact difference you're looking for. That means

that the entry in the account journal—$3,500.00—is wrong, and the entry in the client ledger,

$3,525.00 is right. (If you'd kept a copy of the deposit slip you filled out on July 9, which listed

the two deposits separately, you could have found the mistake without doing the math.)

Now that you've found the mistake, you need to correct it so that your account journal

reflects the right amount of the July 9, 2006 deposit. Since you keep your records in ink, not

in pencil, you can't just erase and write in the correct deposit amount and balance. You don't

want to scratch out the incorrect amount and write in the new one. This is messy, and it

means you'll have to scratch out all the running balances from the July 9 deposit on; they

were all based on the mistaken entry, and they are all wrong. The easiest—and clearest—way

to correct the mistake is to mark the wrong entry (you can use any prominent notation that

doesn't make it hard to read the entry), make a mistake correction entry using the lines you

left blank for entering the Corrected Month Ending Balance, and make the same mistake

correction entry after your most recent entry to correct your current running balance. (Since

the mistake was in the account journal, not the client ledger, you don't have to make any

mistake corrections entries there.) This means that you have to record the correction twice;

at the end of the month in which you made the mistake, so that it's included in the Corrected

Month Ending Balance, and after your last entry, so that it's included in the Corrected Current

Running Balance. In this example, the mistake correction entry for the Corrected Month

Ending Balance would look like this:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/31/06

FB, #447 Prof. Fee

250.00

8,000.00

7/31/06

2,500.00

10,500.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

7/31/06

CORRECTED MONTH ENDING BALANCE

8/01/06

Self, #448 Atty. Fees

1,500.00

9,000.00

To show that you've backed out the wrong amount and inserted the correct amount, the

mistake correction entry shows that you have subtracted the wrong amount from the

account balance, and added the right amount to the account balance. (If you make a mistake in

recording a withdrawal, you do the same thing.) You could have corrected the mistake with a

mistake correction entry that just added the missing $25.00; however, that entry wouldn't tell

you what the mistake was, or help you track it down if any questions come up in the future.

Notice that you haven't filled in the Corrected Month Ending Balance yet; you won't do that

until you complete all the steps in the reconciliation process. Now let's look at the mistake

correction entry that corrects the account's current running balance:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

8/21/06

Bank

Chg.

Self

100.00

11,500.00

8/22/06

FB, #447 Prof. Fee

1,000.00

10,500.00

8/22/06

6,500.00

17,000.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

This entry ensures that when you enter the Corrected Current Running Balance at the end

of the reconciliation process, it will reflect the correct deposit, instead of the mistake.

Now that you've corrected the mistake and the account journal entries agree with the

client ledger entries, go back to Form One and fill out the last two lines with the total of

the mistake correction entries you made and the Adjusted Month Ending Account

Balance:

FORM ONE

CLIENT LEDGER BALANCE

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

CLIENT

CLIENT LEDGER BALANCE

1,500.00

200.00

8,500.00

250.00

Bank Charges

125.00

TOTAL CLIENT LEDGER BALANCE:

10,575.00

MONTH ENDING ACCOUNT JOURNAL BALANCE:

10,550.00

TOTAL MISTAKE CORRECTION ENTRIES (+ or -) : 25.00

(From Form Two)

ADJUSTED MONTH ENDING ACCOUNT JOURNAL BALANCE

10,575.00

When we get to step 3, we'll record these mistake correction entries, and any others we

have to make, on Form Two, “Adjustments to Month Ending Balance.”

What if the mistake had been in the entry in GC's client ledger instead of in the account journal

entry? In that case, you would put mistake correction entries in the client ledger the same way

you would in the account journal, once in the space above the Corrected Month Ending Balance

and once after the most recent entry. However, on Form One, instead of recording the mistake

on the “Total Mistake Correction Entries (+ or -)” line, you would simply cross out the incorrect

client ledger balance for GC and write the correct balance beside it. Since GC's balance was

wrong, the Total Client Ledger Balance you recorded is wrong. Cross it out and write in the

correct total; it should exactly match the Month Ending Account Journal Balance. Put a zero on

the “Total Mistake Correction Entries (+ or -)” line; this line is only for recording mistakes in the

account journal, not for mistakes in client ledgers. Fill in the “Adjusted Month Ending Account

Journal Balance” line.

When you're done, Form One should look like this:

FORM ONE

CLIENT LEDGER BALANCE

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

CLIENT

CLIENT LEDGER BALANCE

1,500.00

200.00

8,525.00

8,500.00

250.00

Bank Charges

125.00

10,550.00

TOTAL CLIENT LEDGER BALANCE:

10,575.00

MONTH ENDING ACCOUNT JOURNAL BALANCE:

10,550.00

TOTAL MISTAKE CORRECTION ENTRIES (+ or -) : 0.00

(From Form Two)

ADJUSTED MONTH ENDING ACCOUNT JOURNAL BALANCE

10,550.00

ENTER BANK CHARGES AND INTEREST

The purpose of this step is to make sure that bank charges and interest credits reflected on

the bank statement are also reflected in your records. Since you don't know what these bank

charges or interest credits are until you receive the bank statement, you need to enter them

into your records after you receive the bank statement.

All bank charges must be recorded in the account journal. If a bank charge was incurred on

behalf of a specific client (as, for example, a charge for wiring money to a client), the charge

must also be entered in that client's client ledger. (This ensures that the account journal

balance will continue to match the total of the individual client ledger balances.) If the charge

was not for a specific client (for example, a charge for printing common client trust bank

account checks), the charge must also be entered in the bank charges ledger.

Since all interest earned on money held in an individual interest-bearing client trust bank

account belongs to the client, interest must always be entered in the account journal and the

client ledgers. (Since the interest on IOLTA accounts is transmitted by the bank to the State

Bar, it shouldn't be entered into your records.)

Like mistake correction entries, bank charge and interest entries must be recorded twice; at

the end of the month in which the transaction occurred, so that they are included in the

Corrected Month Ending Balance, and after your last entry, so that they are included in the

Corrected Current Running Balance.

This example will deal with an IOLTA account which pays interest to the State Bar.

(Remember, interest which is paid to the State Bar should not be entered in your account

journal.) In the account journal for our sample common client trust bank account, the bank

charges (other than the regular service charges to the State Bar) for July are entered twice,

once in the space above the Corrected Month Ending Balance:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/31/06

FB, #447 Prof. Fee

250.00

8,000.00

7/31/06

2,500.00

10,500.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

7/31/06

BANK CHARGE - new checks

- wire for DS

10.00

15.00

7/31/06

CORRECTED MONTH ENDING BALANCE

8/01/06

Self, #448 Atty. Fees

1,500.00

9,000.00

And once after the most recent entry:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

8/21/06

Bank Chg.

Self

100.00

11,500.00

8/22/06

FB, #457 Prof. Fee

1,000.00

10,500.00

8/22/06

6,500.00

17,000.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

13,500.00

17,025.00

7/31/06

BANK CHARGE - new checks

- wire for DS

10.00

15.00

As you can see, there were two bank charges during July; one for printing new checks, which is not specific

to an individual client and must be recorded in the bank charges ledger; and one for sending money by

wire for DS, which is specific to an individual client and must be recorded in DS's client ledger. (Notice that

we still haven't filled in the “Corrected Month Ending Balance“ for July; as we've discussed, we won't do

that until we've finished the reconciliation process.)

The bank charge entry in DS's client ledger should look like this:

CLIENT LEDGER

CLIENT: DS

CASE#: 920123

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/31/06

FB, #447 Prof. Fee

250.00

1,000.00

7/31/06

BANK CHARGE – wiring $ to FB

15.00

7/31/06

CORRECTED MONTH ENDING BALANCE

8/03/06

250.00

1,250.00

8/07/06

FS, #451 Investigation

500.00

775.00

8/15/06

250.00

1,000.00

8/22/06

FB, #456 Prof. Fee

750.00

250.00

7/31/06

BANK CHARGE – wiring $ to FB

15.00

The entry in the bank charges ledger should look like this:

BANK CHARGES LEDGER

CLIENT: Bank Charges

CASE#: N/A

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

6/30/06

CORRECTED MONTH ENDING BALANCE

50.00

7/01/06

Self

100.00

150.00

7/31/06

Check Printing

10.00

140.00

7/31/06

CORRECTED MONTH ENDING BALANCE

RECONCILE THE ACCOUNT JOURNAL WITH THE BANK STATEMENT

The purpose of this step is to make sure that the bank's records of the deposits and

withdrawals you've made to your client trust bank account during the past month match your

records. Since you've already reconciled the client ledgers with the account journal, you know

that the entries in the client ledger agree with the ones in the account journal. Therefore,

unless you find a mistake, during this stage of the reconciliation process you only have to

compare the bank statement with the account journal.

Adjustments to Month Ending Balance. First, record any mistake correction entries that you

made in the account journal and all uncredited deposits and undebited withdrawals on the

“Adjustments to Month Ending Balance“ form, as shown on the following page:

FORM TWO

ADJUSTMENTS TO MONTH ENDING BALANCE

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

A. DEPOSITS AND WITHDRAWALS NOT POSTED ON BANK STATEMENTS

UNCREDITED DEPOSITS

Date Amount

UNDEBITED WITHDRAWALS

Date Amount

7/31/06 2,500.00

7/09/06 1,800.00

0/00/00 0,000.00

7/31/06 250.00

0/00/00 0,000.00

6/30/06 30.00

TOTAL: 2,500.00

2,080.00

B. MISTAKE CORRECTION ENTRIES (from Account Journal)

DATE

AMOUNT

NET MISTAKE

Additions

Subtraction

(+ OR -)

7/09/06

3,525.00

3,500.00

25.00

0/00/00

0,000.00

25.00

TOTAL MISTAKE CORRECTION ENTRIES:

25.00

In the space after “Reconciliation Date,” write the day, month and year you do the

reconciliation; in the space after “Client Trust Bank Account Name,” write the name of the

client trust bank account (e.g., “Common Client Trust Bank Account”); in the space after

“Period Covered by Bank Statement,” write the dates of the period covered by your most

recent bank statement (e.g., 7/1/06 to 7/31/06, if you are doing your July 2006

reconciliation).

Deposits and withdrawals not posted on bank statement. Generally, the bank sends out

statements one to three weeks after the end of the month. As a result, by the time you

reconcile the account, you will usually have made deposits or withdrawals that aren't shown

on the bank statement. In addition, checks you wrote or deposits you made may not have

cleared by the time the bank produced the statement, and therefore the amounts of those

checks or deposits won't be reflected in the account balance shown on the bank statement.

Thus, in order to compare the balance the bank statement says is in the account at the end of

the month with the balance your account journal shows for the end of the month, you have

to adjust the account journal balance by subtracting all uncredited deposits and adding all

undebited withdrawals.

These unposted transactions should be listed under “Deposits and Withdrawals Not Posted by

the Bank.” To find out which transactions haven't been posted, you have to compare the

entries on the bank statement with the entries in your account journal.

Go through each entry on the bank statement and compare it to the corresponding entry in

your account journal. If the entry in the account journal exactly matches the entry on the

bank statement, mark off the entry in the account journal to show that the money has

cleared the banking process, and mark off the entry on the bank statement to show that you

have verified it against the account journal. The marks in the account journal will help you

keep track of items like checks that are never cashed, which otherwise can become those

small, inactive balances that make your account harder to reconcile. (See Key Concept 6: The

Final Score is Always Zero.) The marks should be permanent (i.e., in ink) and clearly visible,

but shouldn't make it harder to read the entries. You should use the same mark consistently,

to avoid confusion later.

When you are finished, all the entries on the bank statement should be checked off to show

that you have verified them against the corresponding entries in the account journal. Now go

back through the account journal to find any entries that are unmarked; these transactions

haven't yet been debited or credited by the bank, and should therefore be listed in the

appropriate column on the Adjustments to Month Ending Balance form. All entries in your

account journal must either be marked to indicate that they have appeared on a bank

statement, or recorded on this form.

Write the date and amount of the entry in the appropriate column on the Adjustments to

Month Ending Balance form. Write uncredited deposits in the “Uncredited Deposits” column

and undebited withdrawals in the “Undebited Withdrawals“ column. (For busy client trust

bank accounts, you may need more lines than the sample form gives to list all the unposted

transactions. If you do, you can add lines to the copies of the forms you use, or attach

additional pages that list the transactions that didn't fit on the form.)

When you've listed all the unposted transactions, add up the amounts in the “Uncredited

Deposits” column and write the total in the space at the bottom of that column. Then add up

the amounts in the “Undebited Withdrawals“ column and write the total in the space at the

bottom of that column.

As you go through the bank statement, there are two kinds of mistakes you may find:

1. You find a deposit or withdrawal listed on the bank statement that isn't in your

account journal. To correct this mistake, go through your cancelled checks (if it's a

withdrawal) or deposit slips (if it's a deposit) until you find the one that reflects the

transaction on the bank statement. If you can't find a cancelled check or deposit slip

that matches the entry on the bank statement, contact your banker and ask him or

her to help you track down the transaction. DON'T record the bank statement entry in

your records until you verify that the transaction occurred; banks make mistakes too.

When you find the cancelled check or deposit slip that shows the transaction, record

the transaction in both your account journal and in the client ledger of the client for

whom the money was deposited or paid out. Remember that you have to enter the

transaction twice in the account journal and twice in the client ledger; once above the

“CORRECTED MONTH ENDING BALANCE” line, and once after the latest entry. The

entries should be the same as when recording any other transaction, but include a

notation indicating that you'd forgotten to enter the transaction at the time it

occurred.

After you correct the mistake in your client ledger and account journal, record it on

Form Two under “Mistake Correction Entries,” as described below.

2. An entry in the bank statement is different from the corresponding entry in the

account journal. You correct this mistake the same way you correct a transaction you

forgot to record. First, find the cancelled check or deposit slip that shows the

transaction to figure out which record is correct, the account journal or the bank

statement. If you can't find a cancelled check or deposit slip for this transaction,

contact your banker and ask him or her to help you track it down before you make any

changes in your records.

If the cancelled check or deposit slip shows that the bank statement is wrong, write a

note on the bank statement that clearly describes the mistake, then contact your

banker and tell him or her to correct their records. If it shows that your account

journal is wrong, record the correction in the account journal and the appropriate

client ledgers using the same kind of mistake correction entries we used in our

example. Like all mistake correction entries, these must be entered twice in both the

account journal and the client ledger for the client on whose behalf you deposited or

paid out the money; once above the “Corrected Month Ending Balance“ line, and once

after the latest entry.

After you correct the mistake in your client ledger and account journal, record it on

Form Two under “Mistake Correction Entries,” as described below.

Mistake correction entries. Under “MISTAKE CORRECTION ENTRIES,” list all mistake

correction entries you entered in the space above the Corrected Month Ending Balance in

your account journal. In the “Date” column, write the date of each mistake. In the “Amount”

column, write the amount of each mistake correction entry. As you remember, each mistake

correction entry requires two notations; one to back out the incorrect amount, and one to

add in the correct amount. If the mistake correction entry amount was entered under the

“Deposits (Add)” column in your account journal, write the amount under the “Additions”

column. If the mistake correction entry amount was entered under the “Withdrawals

(Subtract)” column in your account journal, write the amount under the “Subtractions”

column. Then write in the net amount of the mistake under the “Net Mistake (+ or -)”

column. (If the amount in the “Subtractions” column is larger than the amount in the

“Additions” column, the net mistake will be negative and should be recorded with

parentheses around it. If the amount in the “Additions” column is larger than the amount in

the “Subtractions” column, the net mistake will be positive and should be recorded without

parentheses around it.) When you have recorded all the mistake correction entries, total the

amounts in the “Net Mistake (+ or -)” column and enter it in the space after “Total Mistake

Correction Entries.” If this amount is negative, put parentheses around it. If it's positive,

don't.

If you found mistakes while you were going through the bank statement (in other words,

after you finished filling out Form One), you have to go back to Form One, enter the new

“Total Mistake Correction Entries” and a new “Adjusted Month Ending Account Balance”

before you go on to the next step.

Reconciliation form. The next step is to reconcile the balance the bank statement shows for

the end of the month you are reconciling with the balance your account journal shows for the

date by filling out the “Reconciliation“ form:

FORM THREE

RECONCILIATION

RECONCILIATION DATE: 8/22/06

CLIENT TRUST BANK ACCOUNT NAME: COMMON CLIENT TRUST BANK ACCOUNT

PERIOD COVERED BY BANK STATEMENT: 7/1/06 TO 7/31/06

ADJUSTED MONTH ENDING BALANCE:

(From Form One)

10,575.00

MINUS TOTAL BANK CHARGES

(From Bank Statement)

(25.00)

PLUS TOTAL INTEREST EARNED

(From Bank Statement)

IOLTA

CORRECTED MONTH ENDING BALANCE:

(Total)

10,550.00

MINUS UNCREDITED DEPOSITS:

(From Form Two)

(2,500.00)

PLUS UNDEBITED WITHDRAWALS:

(From Form Two)

2,080.00

RECONCILED TOTAL:

10,130.00

BANK STATEMENT BALANCE:

10,130.00

1. In the space after “Reconciliation Date,” write the day, month and year you did the

reconciliation; in the space after “Client Trust Bank Account Name,” write the name of

the client trust bank account (e.g., “Common Client Trust Bank Account”); in the space

after “Period Covered by Bank Statement,” write the dates of the period covered by

your most recent bank statement (e.g., 7/1/06 to 7/31/06, if you are doing your July

2006 reconciliation).

2. In the space after “Adjusted Month Ending Balance,” write the balance shown in the

“Adjusted Month Ending Account Journal Balance” space on the Client Ledger Balance

form.

3. In the space after “Minus Total Bank Charges,” write in the total of all bank charges to

the account shown on the bank statement. For IOLTA accounts, don't include amounts

charged to the State Bar. (Note the parentheses around this number show it is

negative and should be subtracted.)

4. If this is an individual interest-bearing individual client trust bank account, in the space

after “Plus Total Interest Earned,” write in the total interest shown on the bank

statement. Write “IOLTA” in this space if this is an IOLTA account, and “non-interest

bearing” if it is a non-interest bearing client trust bank account.

5. To the amount in the “Month Ending Balance“ space:

Subtract the amount you wrote in the “Total Bank Charges” space;

Add the amount in the “Total Interest Earned” space; and

Write the result in the “Corrected Month Ending Balance“ space.

6. In the “Minus Uncredited Deposits” space, write the total of the “Uncredited

Deposits” column you listed on Form Two.

7. In the “Plus Uncredited Withdrawals” space, write the total of the “Uncredited

Withdrawals” column you listed on Form Two.

8. To the amount in the “Corrected Month Ending Balance“ space:

Add the undebited withdrawals;

Subtract the uncredited deposits; and

Write the total in the “Reconciled Total” space.

9. Write the balance shown on the bank statement in the space after “Bank Statement

Balance.” This amount should exactly match the reconciled total above it. If it does,

you have successfully reconciled the account and are ready to proceed to the last

step. (If it doesn't, call in a bookkeeper or refer to Appendix 5, What to Do When the

Reconciled Total and the Bank Statement Balance Don't Exactly Match, and use the

process it describes to find and correct the mistake.)

ENTERING THE CORRECTED MONTH ENDING BALANCE AND CORRECTED CURRENT

RUNNING BALANCE

When you have completed all three forms and the Corrected Month Ending Balance is exactly

the same as the Bank Statement Balance, the account is reconciled. Now you are ready to

enter the Corrected Month Ending Balance for July and the Corrected Current Running

Balance in the account journal and in each client ledger.

Here's how the Corrected Month Ending Balance entry would look in the account journal:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/31/06

FB, #447 Prof. Fee

250.00

8,000.00

7/31/06

2,500.00

10,500.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

7,000.00

10,525.00

7/31/06

BANK CHARGE - new checks

- wire for DS

10.00

15.00

10,515.00

10,500.00

7/31/06

CORRECTED MONTH ENDING BALANCE

10,500.00

8/01/06

Self, #448 Legal Fee

1,500.00

9,000.00

As you can see, you got the Corrected Month Ending Balance by subtracting the amount of

the wrong deposit from the old July 31 balance of $10,500.00, adding the amount of the

correct deposit and subtracting the amounts of the bank charges. Notice that the Corrected

Month Ending Balance is identical to the balance after the interest entry.

This is how the Corrected Current Running Balance entry looks in the account journal:

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME: Common Client Trust Bank Account

DATE

CLIENT

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

8/21/06

Bank Chg.

Self

100.00

11,500.00

8/22/06

FB, #457 Prof. Fee

1,000.00

10,500.00

8/22/06

6,500.00

17,000.00

7/09/06

ERROR

- backing out wrong deposit

- adding in correct deposit

3,500.00

3,525.00

13,500.00

17,025.00

7/31/06

BANK CHARGE - new checks

- wire for DS

10.00

15.00

17,015.00

17,000.00

8/22/06

CORRECTED CURRENT RUNNING BALANCE

17,000.00

As you can see, you got the Corrected Current Running Balance by subtracting the amount of

the wrong deposit from the old August 22 balance of $17,000.00, adding the amount of the

correct deposit and subtracting the amounts of the bank charges.

Now you have to go into each client ledger and enter the Corrected Month Ending Balance for

July and Corrected Current Running Balance for each client. Let's look at DS's ledger to see

what these entries should look like:

CLIENT LEDGER

CLIENT: DS

CASE#: 920123

DATE

SOURCE OF

DEPOSIT

PAYEE, # & PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

RUNNING

BALANCE

7/31/06

FB, #447 Prof. Fee

250.00

1,000.00

7/31/06

BANK CHARGE – wiring $ to FB

15.00

985.00

7/31/06

CORRECTED MONTH ENDING BALANCE

985.00

8/03/06

250.00

1,235.00

8/07/06

FS, #451 Investigation

500.00

735.00

8/15/06

250.00

985.00

8/22/06

FB, #456 Prof. Fee

750.00

235.00

7/31/06

BANK CHARGE – wiring $ to FB

15.00

220.00

8/22/06

CORRECTED CURRENT RUNNING BALANCE

220.00

As you can see, you got the Corrected Month Ending Balance by subtracting the amount of the

bank charge from the old July 31 balance of $1,000.00. You got the Corrected Current Running

Balance by subtracting the amount of the bank charge from the old August 22 balance of

$235.00.

When you write in the Corrected Month Ending Balance for July and the Corrected Current Running

Balance for KB, DC and GC, you will have reconciled this trust account and fully complied with rule

1.15(d)(3) and (e). These steps are particularly important since you may have written a client trust

account check based on an erroneous balance shown on one or more of your written records. If, at

some point in the future the State Bar asks you about the issuance of that check, you can respond

by showing that it was an isolated mistake in posting an entry; and that you found and corrected

the entry when you reconciled the account.

Now clip all the pages that relate to the reconciliation process together (all three forms, any

attached pages, and any adding machine tapes) and file them away.

Afterword

If you've read all the way through this handbook, you should now know

everything you need in order to properly receive, pay out and account for

money you hold for your clients. However, your professional responsibility isn't

to know client trust accounting, it's to do client trust accounting. There are

three final points without which your best efforts to properly account for your

clients' money will be in vain:

1. Set up a complete client trust accounting system;

2. Consistently and rigorously follow your client trust accounting system;

and

3. Don't rely on others to do your client trust accounting. It's your

responsibility.

APPENDIX 1: OTHER REGULATIONS RELATING TO CLIENTS AND MONEY

There are a few basic rules relating to clients and money that, while not directly related to

client trust accounting, are so fundamental to the attorney-client relationship that we have to

mention them here. (The text of these rules can be found in Appendix 2.)

Amount of Fees. The amount you can charge for your services is regulated by Rule of

Professional Conduct 1.5, which in part provides that: “A lawyer shall not make an agreement

for, charge, or collect an unconscionable or illegal fee.” The rule lays out thirteen of the many

factors that might go into determining whether or not a fee is unconscionable, including the

amount of the fee in proportion to the value of the services, the relative sophistication of

attorney and client, the novelty and difficulty of the case and skill necessary to handle it,

whether the fee is fixed or contingent, and the time and work involved. This rule also

prohibits the charging of a “non-refundable” fee unless it is a “true retainer” fee

arrangement. Rule 1.5(d) provides that:

(d) A lawyer may make an agreement for, charge, or collect a fee that is

denominated as “earned on receipt” or “non-refundable,” or in similar

terms, only if the fee is a true retainer and the client agrees in writing*

after disclosure that the client will not be entitled to a refund of all or part

of the fee charged. A true retainer is a fee that a client pays to a lawyer to

ensure the lawyer’s availability to the client during a specified period or on

a specified matter, but not to any extent as compensation for legal services

performed or to be performed.

Fee Agreements. There are three provisions of the Business and Professions Code relating to

fee agreements. Section 6148 requires that whenever you can reasonably foresee that the

total expense to the client, including attorney's fees, will exceed $1,000, you must enter into

a written fee agreement with your client. The written fee agreement must contain the hourly

rate and any standard rates, fees and charges applicable to the case, the general nature of

the services to be provided to the client, and the responsibilities you and the client have with

respect to performance of the contract. Consider utilizing the fee agreement to advise your

client of your duties to third parties in the presence of an executed medical lien.

All bills for services rendered must include the basis for the bill, including the amount, rate,

and the basis for calculation or other method of determining your fee. You are obligated to

give a bill to your client no later than 10 days after your client requests one. Your client is

entitled to request a bill every 30 days.

If you fail to enter into a written agreement with your client, the fee agreement is voidable at

the client's option, after which you are entitled to collect a reasonable fee. The provisions of

section 6148 don't apply if you render legal services in an emergency, if the services are of

the same general kind you've already provided to and been paid for by the client, if the client

APPENDIX 1

knowingly states in writing after full disclosure that a written fee agreement isn't required, or

if the client is a corporation.

Business and Professions Code section 6149 makes the required written fee agreement a

confidential communication within the meaning of Business and Professions Code section

6068, subdivision (e) and Evidence Code section 952.

When you and your client enter into a fee agreement on a contingency fee basis, you must

comply with the provisions of Business and Professions Code section 6147. You and your

client must sign the fee agreement and you must give the client a duplicate copy. The

contract must be in writing and must include the contingency rate, how disbursement and

costs will be handled, whether your client will be required to pay any compensation arising

out of matters not covered by the agreement, notice that the fee is not set by law but is

negotiable, and a statement that the rates set forth pursuant to section 6146, which applies

in medical malpractice actions, sets the maximum contingency fee limits. If you fail to comply

with the provisions of this section, the agreement is voidable at your client's option, after

which you are entitled to collect a reasonable fee.

Business and Professions Code section 6146 sets the limits on the fee you can charge a client

on a contingency basis where your client is seeking damages in connection with an action for

an injury or damage against a health care provider based on the health care provider's alleged

professional negligence. For example, section 6146 provides that you can only charge up to

40% of the first $50,000 recovered, 33.3% of the next $50,000, and so forth. The limits in

section 6146 apply regardless of whether the recovery is by settlement, arbitration or

judgment, and whether the person for whom the recovery is made is a responsible adult, an

infant, or a person of unsound mind.

Fee Disputes. Fee disputes with your client are regulated by Business and Professions Code

section 6200 et seq., which sets forth the fee arbitration program. This section requires you

to participate in fee arbitration if your client requests it. When you file a fee collection action

against your client, you must forward a written notice to the client before or at the time of

service of the summons. Failure to give this written notice is a grounds for dismissal of your

fee collection action. If the client fails to request fee arbitration within 30 days of receipt of

this notice, the client is deemed to have waived the right to arbitration. Most fee arbitrations

are conducted by the county bar association in the county where the fee dispute took place.

However, if the county bar association isn't equipped to carry out the fee arbitration, the

State Bar will conduct it. If an attorney fails to pay a binding award to the client of fees or

costs, the attorney can be placed on inactive status and would not be eligible to practice law

until the award is paid.

Loans To and From Clients and Securing Payments from Clients. You are permitted to

borrow money from or lend money to your client, or obtain a security interest to ensure

payment of fees, provided that you fully comply with Rule of Professional Conduct 1.8.1. This

rule requires that:

APPENDIX 1

1. The transaction and terms of the acquisition are fair and reasonable to the client and

are transmitted to the client in a manner and under terms which should have been

reasonably understood by the client;

2. The client is given a reasonable opportunity to seek the advice of independent counsel

on the transaction; and

3. The client consents in writing to the transaction.

Cash Reporting Requirement. The Internal Revenue Code (26 U.S.C. § 6050I) requires that

when you receive more than $10,000 in cash, you report that fact to the IRS on form 8300

within 15 days of the date of the transaction. This section appears to apply to both cash you

receive for fees, and cash you hold in trust.

APPENDIX 2: TEXT OF RULES AND LINKS TO STATUTES CITED

Relevant California Rules of Professional Conduct

The rules provided in Appendix 2 are current as of January 1, 2023. Please refer to the State

Bar’s website: http://rules.calbar.ca.gov for the current and former Rules of Professional

Conduct.

Rule 1.4 Communication with Clients

(Approved by order of Supreme Court, effective November 1, 2018.

Amended by the Supreme Court, effective January 1, 2023)

(a) A lawyer shall:

(1) promptly inform the client of any decision or circumstance with respect to which

disclosure or the client’s informed consent* is required by these rules or the State Bar

Act;

(2) reasonably* consult with the client about the means by which to accomplish the client’s

objectives in the representation;

(3) keep the client reasonably* informed about significant developments relating to the

representation, including promptly complying with reasonable* requests for

information and copies of significant documents when necessary to keep the client so

informed; and

(4) advise the client about any relevant limitation on the lawyer’s conduct when the lawyer

knows* that the client expects assistance not permitted by the Rules of Professional

Conduct or other law.

(b) A lawyer shall explain a matter to the extent reasonably* necessary to permit the client to

make informed decisions regarding the representation.

believes* that the client would be likely to react in a way that may cause imminent harm to

the client or others.

(d) A lawyer’s obligation under this rule to provide information and documents is subject to any

applicable protective order, non-disclosure agreement, or limitation under statutory or

decisional law.

Comment

[1] A lawyer will not be subject to discipline under paragraph (a)(3) of this rule for failing to

communicate insignificant or irrelevant information. (See Bus. & Prof. Code, § 6068, subd. (m).)

Whether a particular development is significant will generally depend on the surrounding facts

APPENDIX 2

and circumstances. For example, a lawyer’s receipt of funds on behalf of a client requires

communication with the client pursuant to rule 1.15, paragraphs (d)(1) and (d)(4) and ordinarily

is also a significant development requiring communication with the client pursuant to this rule.

[2] A lawyer may comply with paragraph (a)(3) by providing to the client copies of significant

documents by electronic or other means. This rule does not prohibit a lawyer from seeking

recovery of the lawyer’s expense in any subsequent legal proceeding.

[3] Paragraph (c) applies during a representation and does not alter the obligations applicable

at termination of a representation. (See rule 1.16(e)(1).)

[4] This rule is not intended to create, augment, diminish, or eliminate any application of the

work product rule. The obligation of the lawyer to provide work product to the client shall be

governed by relevant statutory and decisional law.

Rule 1.5 Fees for Legal Services

(Approved by order of Supreme Court, effective November 1, 2018)

(a) A lawyer shall not make an agreement for, charge, or collect an unconscionable or illegal

fee.

(b) Unconscionability of a fee shall be determined on the basis of all the facts and

circumstances existing at the time the agreement is entered into except where the parties

contemplate that the fee will be affected by later events. The factors to be considered in

determining the unconscionability of a fee include without limitation the following:

(1) whether the lawyer engaged in fraud* or overreaching in negotiating or setting the

fee;

(2) whether the lawyer has failed to disclose material facts;

(3) the amount of the fee in proportion to the value of the services performed;

(4) the relative sophistication of the lawyer and the client;

(5) the novelty and difficulty of the questions involved, and the skill requisite to perform

the legal service properly;

(6) the likelihood, if apparent to the client, that the acceptance of the particular

employment will preclude other employment by the lawyer;

(7) the amount involved and the results obtained;

(8) the time limitations imposed by the client or by the circumstances;

(9) the nature and length of the professional relationship with the client;

APPENDIX 2

(10) the experience, reputation, and ability of the lawyer or lawyers performing the

services;

(11) whether the fee is fixed or contingent;

(12) the time and labor required; and

(13) whether the client gave informed consent* to the fee.

(1) any fee in a family law matter, the payment or amount of which is contingent upon

the securing of a dissolution or declaration of nullity of a marriage or upon the

amount of spousal or child support, or property settlement in lieu thereof; or

(2) a contingent fee for representing a defendant in a criminal case.

(d) A lawyer may make an agreement for, charge, or collect a fee that is denominated as

“earned on receipt” or “non-refundable,” or in similar terms, only if the fee is a true

retainer and the client agrees in writing* after disclosure that the client will not be

entitled to a refund of all or part of the fee charged. A true retainer is a fee that a client

pays to a lawyer to ensure the lawyer’s availability to the client during a specified period

or on a specified matter, but not to any extent as compensation for legal services

performed or to be performed.

(e) A lawyer may make an agreement for, charge, or collect a flat fee for specified legal

services. A flat fee is a fixed amount that constitutes complete payment for the

performance of described services regardless of the amount of work ultimately involved,

and which may be paid in whole or in part in advance of the lawyer providing those

services.

Comment

Prohibited Contingent Fees

[1] Paragraph (c)(1) does not preclude a contract for a contingent fee for legal representation

in connection with the recovery of post-judgment balances due under child or spousal

support or other financial orders.

Payment of Fees in Advance of Services

[2] Rule 1.15(a) and (b) govern whether a lawyer must deposit in a trust account a fee paid in

advance.

[3] When a lawyer-client relationship terminates, the lawyer must refund the unearned

portion of a fee. (See rule 1.16(e)(2).)

APPENDIX 2

Division of Fee

[4] A division of fees among lawyers is governed by rule 1.5.1.

Written* Fee Agreements

[5] Some fee agreements must be in writing* to be enforceable. (See, e.g., Bus. & Prof. Code,

§§ 6147 and 6148.)

Rule 1.8.1 Business Transactions with a Client and

Pecuniary Interests Adverse to a Client

(Approved by order of Supreme Court, effective November 1, 2018)

A lawyer shall not enter into a business transaction with a client, or knowingly* acquire an

ownership, possessory, security or other pecuniary interest adverse to a client, unless each of

the following requirements has been satisfied:

(a) the transaction or acquisition and its terms are fair and reasonable* to the client and the

terms and the lawyer’s role in the transaction or acquisition are fully disclosed and

transmitted in writing* to the client in a manner that should reasonably* have been

understood by the client;

(b) the client either is represented in the transaction or acquisition by an independent lawyer

of the client’s choice or the client is advised in writing* to seek the advice of an

independent lawyer of the client’s choice and is given a reasonable* opportunity to seek

that advice; and

or acquisition, and to the lawyer’s role in it.

Comment

[1] A lawyer has an “other pecuniary interest adverse to a client” within the meaning of this

rule when the lawyer possesses a legal right to significantly impair or prejudice the client’s

rights or interests without court action. (See Fletcher v. Davis (2004) 33 Cal.4th 61, 68 [14

Cal.Rptr.3d 58]; see also Bus. & Prof. Code, § 6175.3 [Sale of financial products to elder or

dependent adult clients; Disclosure]; Fam. Code, §§ 2033-2034 [Attorney lien on community

real property].) However, this rule does not apply to a charging lien given to secure payment

of a contingency fee. (See Plummer v. Day/Eisenberg, LLP (2010) 184 Cal.App.4th 38 [108

Cal.Rptr.3d 455].)

[2] For purposes of this rule, factors that can be considered in determining whether a lawyer

is independent include whether the lawyer: (i) has a financial interest in the transaction or

acquisition; and (ii) has a close legal, business, financial, professional or personal relationship

with the lawyer seeking the client’s consent.

APPENDIX 2

[3] Fairness and reasonableness under paragraph (a) are measured at the time of the

transaction or acquisition based on the facts that then exist.

[4] In some circumstances, this rule may apply to a transaction entered into with a former

client. (Compare Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 370-71 [“[W]hen an attorney

enters into a transaction with a former client regarding a fund which resulted from the

attorney’s representation, it is reasonable to examine the relationship between the parties

for indications of special trust resulting therefrom. We conclude that if there is evidence that

the client placed his trust in the attorney because of the representation, an attorney-client

relationship exists for the purposes of [the predecessor rule) even if the representation has

otherwise ended [and] It appears that [the client] became a target of [the lawyer’s]

solicitation because he knew, through his representation of her, that she had recently

received the settlement fund [and the court also found the client to be unsophisticated].”]

with Wallis v. State Bar (1942) 21 Cal.2d 322 [finding lawyer not subject to discipline for

entering into business transaction with a former client where the former client was a

sophisticated businesswoman who had actively negotiated for terms she thought desirable,

and the transaction was not connected with the matter on which the lawyer previously

represented her].)

[5] This rule does not apply to the agreement by which the lawyer is retained by the client,

unless the agreement confers on the lawyer an ownership, possessory, security, or other

pecuniary interest adverse to the client. Such an agreement is governed, in part, by rule 1.5.

This rule also does not apply to an agreement to advance to or deposit with a lawyer a sum to

be applied to fees, or costs or other expenses, to be incurred in the future. Such agreements

are governed, in part, by rules 1.5 and 1.15.

[6] This rule does not apply: (i) where a lawyer and client each make an investment on terms

offered by a third person* to the general public or a significant portion thereof; or (ii) to

standard commercial transactions for products or services that a lawyer acquires from a client

on the same terms that the client generally markets them to others, where the lawyer has no

advantage in dealing with the client.

Rule 1.15 Safekeeping Funds and Property of Clients and Other Persons*

(Approved by order of Supreme Court, effective November 1, 2018.

Amended by the Supreme Court, effective January 1, 2023)

(a) All funds received or held by a lawyer or law firm* for the benefit of a client, or other

person* to whom the lawyer owes a contractual, statutory, or other legal duty, including

advances for fees, costs and expenses, shall be deposited in one or more identifiable bank

accounts labeled “Trust Account” or words of similar import, maintained in the State of

California, or, with written* consent of the client, in any other jurisdiction where there is a

substantial* relationship between the client or the client’s business and the other

jurisdiction.

APPENDIX 2

(b) Notwithstanding paragraph (a), a flat fee paid in advance for legal services may be

deposited in a lawyer’s or law firm’s operating account, provided:

(1) the lawyer or law firm* discloses to the client in writing* (i) that the client has a right

under paragraph (a) to require that the flat fee be deposited in an identified trust

account until the fee is earned, and (ii) that the client is entitled to a refund of any

amount of the fee that has not been earned in the event the representation is

terminated or the services for which the fee has been paid are not completed; and

(2) if the flat fee exceeds $1,000.00, the client’s agreement to deposit the flat fee in the

lawyer’s operating account and the disclosures required by paragraph (b)(1) are set

forth in a writing* signed by the client.

commingled with funds held in a trust account except:

(1) funds reasonably* sufficient to pay bank charges; and

(2) funds belonging in part to a client or other person* and in part presently or potentially

to the lawyer or the law firm,* in which case the portion belonging to the lawyer or

law firm* must be withdrawn at the earliest reasonable* time after the lawyer or law

firm’s interest in that portion becomes fixed. However, if a client or other person*

disputes the lawyer or law firm’s right to receive a portion of trust funds, the disputed

portion shall not be withdrawn until the dispute is finally resolved.

(d) A lawyer shall:

(1) absent good cause, notify a client or other person* no later than 14 days of the receipt

of funds, securities, or other property in which the lawyer knows* or reasonably

should know* the client or other person* has an interest;

(2) identify and label securities and properties of a client or other person* promptly upon

receipt and place them in a safe deposit box or other place of safekeeping as soon as

practicable;

(3) maintain complete records of all funds, securities, and other property of a client or

other person* coming into the possession of the lawyer or law firm;*

(4) promptly account in writing* to the client or other person* for whom the lawyer holds

funds or property;

(5) preserve records of all funds and property held by a lawyer or law firm* under this

rule for a period of no less than five years after final appropriate distribution of such

funds or property;

(6) comply with any order for an audit of such records issued pursuant to the Rules of

Procedure of the State Bar; and

APPENDIX 2

(7) promptly distribute any undisputed funds or property in the possession of the lawyer

or law firm* that the client or other person* is entitled to receive.

(e) The Board of Trustees of the State Bar shall have the authority to formulate and adopt

standards as to what “records” shall be maintained by lawyers and law firms* in

accordance with paragraph (d)(3). The standards formulated and adopted by the Board,

as from time to time amended, shall be effective and binding on all lawyers.

(f) For purposes of determining a lawyer’s compliance with paragraph (d)(7), unless the

lawyer, and the client or other person* agree in writing that the funds or property will

continue to be held by the lawyer, there shall be a rebuttable presumption affecting the

burden of proof as defined in Evidence Code sections 605 and 606 that a violation of

paragraph (d)(7) has occurred if the lawyer, absent good cause, fails to distribute

undisputed funds or property within 45-days of the date when the funds become

undisputed as defined by paragraph (g). This presumption may be rebutted by proof by a

preponderance of evidence that there was good cause for not distributing funds within 45

days of the date when the funds or property became undisputed as defined in paragraph

(g).

(g) As used in this rule, “undisputed funds or property” refers to funds or property, or a

portion of any such funds or property, in the possession of a lawyer or law firm* where

the lawyer knows* or reasonably should know* that the ownership interest of the client

or other person* in the funds or property, or any portion thereof, has become fixed and

there are no unresolved disputes as to the client’s or other person’s* entitlement to

receive the funds or property.

Standards:

Pursuant to this rule, the Board of Trustees of the State Bar adopted the following standards,

effective November 1, 2018, as to what “records” shall be maintained by lawyers and law

firms* in accordance with paragraph (d)(3).

(1) A lawyer shall, from the date of receipt of funds of the client or other person* through

the period ending five years from the date of appropriate disbursement of such funds,

maintain:

(a) a written* ledger for each client or other person* on whose behalf funds are held

that sets forth:

(i) the name of such client or other person;*

(ii) the date, amount and source of all funds received on behalf of such client or

other person;*

(iii) the date, amount, payee and purpose of each disbursement made on behalf of

such client or other person;* and

APPENDIX 2

(iv) the current balance for such client or other person;*

(b) a written* journal for each bank account that sets forth:

(i) the name of such account;

(ii) the date, amount and client or other person* affected by each debit and

credit; and

(iii) the current balance in such account;

(d) each monthly reconciliation (balancing) of (a), (b), and (c).

(2) A lawyer shall, from the date of receipt of all securities and other properties held for

the benefit of client or other person* through the period ending five years from the

date of appropriate disbursement of such securities and other properties, maintain a

written* journal that specifies:

(a) each item of security and property held;

(b) the person* on whose behalf the security or property is held;

(d) the date of distribution of the security or property; and

(e) person* to whom the security or property was distributed.

Comment

[1] Whether a lawyer owes a contractual, statutory or other legal duty under paragraph (a) to

hold funds on behalf of a person* other than a client in situations where client funds are

subject to a third-party lien will depend on the relationship between the lawyer and the third-

party, whether the lawyer has assumed a contractual obligation to the third person* and

whether the lawyer has an independent obligation to honor the lien under a statute or other

law. In certain circumstances, a lawyer may be civilly liable when the lawyer has notice of a

lien and disburses funds in contravention of the lien. (See Kaiser Foundation Health Plan, Inc.

v. Aguiluz (1996) 47 Cal.App.4th 302 [54 Cal.Rptr.2d 665].) However, civil liability by itself

does not establish a violation of this rule. (Compare Johnstone v. State Bar of California (1966)

64 Cal.2d 153, 155-156 [49 Cal.Rptr. 97] [“‘When an attorney assumes a fiduciary relationship

and violates his duty in a manner that would justify disciplinary action if the relationship had

been that of attorney and client, he may properly be disciplined for his misconduct.’”] with

Crooks v. State Bar (1970) 3 Cal.3d 346, 358 [90 Cal.Rptr. 600] [lawyer who agrees to act as

escrow or stakeholder for a client and a third-party owes a duty to the nonclient with regard

to held funds].)

APPENDIX 2

[2] As used in this rule, “advances for fees” means a payment intended by the client as an

advance payment for some or all of the services that the lawyer is expected to perform on the

client’s behalf. With respect to the difference between a true retainer and a flat fee, which is

one type of advance fee, see rule 1.5(d) and (e). Subject to rule 1.5, a lawyer or law firm* may

enter into an agreement that defines when or how an advance fee is earned and may be

withdrawn from the client trust account.

[3] Absent written* disclosure and the client’s agreement in a writing* signed by the client as

provided in paragraph (b), a lawyer must deposit a flat fee paid in advance of legal services in

the lawyer’s trust account. Paragraph (b) does not apply to advance payment for costs and

expenses. Paragraph (b) does not alter the lawyer’s obligations under paragraph (d) or the

lawyer’s burden to establish that the fee has been earned.

[4] Subparagraph (d)(7) is not intended to apply to a fee or expense the client has agreed to

pay in advance, or the client file, or any other property that the client or other person* has

agreed in writing that the lawyer will keep or maintain. Regarding a lawyer’s refund of a fee or

expense paid in advance, see rule 1.16(e)(2). Regarding the release of a client’s file to the client,

see rule 1.16(e)(1).

[5] Upon rebuttal by proof by a preponderance of the evidence of the presumption set forth in

paragraph (f), a violation of paragraph (d)(7) must be established by clear and convincing

evidence without the benefit of the rebuttable presumption.

[6] Whether or not the rebuttable presumption in paragraph (f) applies, a lawyer must still

comply will all other applicable provisions of this rule. This includes a lawyer’s duty to take

diligent steps to initiate and complete the resolution of disputes concerning a client’s or other

person’s* entitlement to funds or property received by a lawyer.

[7] Under paragraph (g), possible disputes requiring resolution may include, but are not limited

to, disputes concerning entitlement to funds arising from: medical liens; statutory liens; prior

attorney liens; costs or expenses; attorney fees; a bank’s policies and fees for clearing a check

or draft; any applicable conditions on entitlement such as a plaintiff’s execution of a release and

dismissal; or any legal proceeding, such as an interpleader action, concerning the entitlement of

any person to receive all or a portion of the funds or property.

APPENDIX 2

Relevant Business and Professions Code Sections

§ 6069 Authorization for Disclosure of Financial Records; Subpoena; Notice; Review

§ 6091.1 Client Trust Fund Accounts—Investigation of Overdrafts and Misappropriations

§ 6091.2 Definitions Applicable to Section 6091.1

§ 6106.3 Mortgage Loan Modifications: Violation of Civil Code Sections 2944.6 or 2944.7–

Grounds for Discipline

§ 6146 Limitations; Periodic Payments; Definitions

§ 6147 Contingency Fee Contract: Contents; Effect of Noncompliance; Application to

Contracts for Recovery of Workers' Compensation Benefits

§ 6147.5 Contingency Fee Contracts; Recovery of Claims between Merchants

§ 6148 Written Fee Contract: Contents; Effect of Noncompliance

§ 6149 Written Fee Contract Confidential Communication

§ 6149.5 Insurer Notification to Claimant of Settlement Payment Delivered to Claimant's

Attorney

§ 6200 Establishment of System and Procedure; Jurisdiction; Local Bar Association Rules

§ 6201 Notice to Client; Request for Arbitration; Client's Waiver of Right to Arbitration

§ 6202 Disclosure of Attorney-Client Communication and Work Product; Limitation

§ 6203 Award; Contents; Finality; Petition to Court; Award of Fees and Costs

§ 6204 Agreement to be Bound by Award of Arbitrator; Trial After Arbitration in Absence of

Agreement; Prevailing Party; Effect of Award and Determination

§ 6204.5 Disqualification of Arbitrators; Post-arbitration Notice

§ 6206 Arbitration Barred if Time for Commencing Civil Action Barred; Exception

§ 6211 Maintenance of Interest Bearing IOLTA Account; Payment of Interest and Dividends

into Fund

§ 6212 Requirements in Establishing Client Trust Accounts; Amount of Interest; Remittance to

State Bar; Statements and Reports

§ 6213 Definitions

§ 6242 Definitions

APPENDIX 2

§ 22442.5 Immigration Consultants–Client Trust Account for Immigration Reform Act Services

§ 22442.6 Immigration Consultants–Immigration Reform Act Services; Refunding of Advance

Payment; Statement of Accounting

Relevant Civil Code Section

§ 2944.6 Mortgage Loan Modifications–Person Offering to Perform Modification for a Fee;

Notice to Borrower; Violations

§ 2944.7 Mortgage Loan Modifications–Person Offering to Perform Modification for a Fee;

Prohibitions; Violations

Relevant Code of Civil Procedure Section

§ 1518 When Fiduciary Property Escheats to State

Relevant Evidence Code Sections

§ 1270 “A business”

§ 1271 Business record

§ 1272 Absence of entry in business records

§ 1552 Printed Representation of Computer-Generated Information or Computer Program

§ 1553 Evidence—Printed Representation of Images Stored on Video or Digital Medium;

Burden of Proof

Relevant Internal Revenue Code Section

§ 6050I Returns relating to cash received in trade or business

APPENDIX 2

RULES OF THE STATE BAR OF CALIFORNIA

Title 2. Rights and Responsibilities of Licensees

Division 1. Licensee Record

Rule 2.5 Client Trust Account Protection Program Annual Reporting, Account Registration

and Self-Assessment Completion Requirements

As authorized by California Rule of Court, rule 9.8.5, a licensee must comply with certain

annual reporting requirements under the Client Trust Account Protection Program (CTAPP).

(A) Definitions

(1) A licensee “responsible for client funds and funds entrusted by others under the

provisions of rule 1.15 of the Rules of Professional Conduct” is:

(a) a licensee who: (i) represents a client in a matter in which funds have been

received by the licensee or licensee’s firm on behalf of the client during the

reportable time period; and (ii) has responsibility for complying with any of the

requirements or prohibitions in rule 1.15 of the Rules of Professional Conduct—

such requirements and prohibitions are not limited to recordkeeping duties and

include, for example, the responsibility for giving notice to the client that funds

were received on behalf of the client under rule 1.15(d)(1) of the Rules of

Professional Conduct; or

(b) a licensee who acted as a signatory on a trust account or a licensee who exercised

managerial or primary administrative oversight for a trust account.

(2) A “trust account” is the bank account or accounts opened to comply with rule

1.15(a) of the Rules of Professional Conduct and includes: (a) an IOLTA account

under Business and Professions Code section 6211, subdivision (a) where the interest

is paid to the State Bar; and (b) any interest bearing bank trust deposit accounts, or

dividend-paying trust investment accounts established under Business and

Professions Code section 6211, subdivision (b) where the interest is payable to a

client.

(3) An “annual self-assessment” is a survey about client trust accounting duties and

practices and includes, but is not limited to, questions and affirmations regarding a

licensee’s trust account recordkeeping under rule 1.15(d)(3) of the Rules of

Professional Conduct and the recordkeeping standards adopted by the Board under

rule 1.15(e) of the Rules of Professional Conduct.

(4) A “firm” means a law partnership; a professional law corporation; a lawyer acting as

a sole proprietorship; an association authorized to practice law; or lawyers employed

APPENDIX 2

in a legal services organization or in the legal department, division or office of a

corporation, of a government organization, or of another organization.

(5) The “reportable time period” for the information to be annually reported under

paragraph (B) of this rule is the calendar year immediately preceding a licensee’s due

date for paying their annual license fees under Title 2, Division 2, rule 2.11 of the

State Bar Rules.

(B) CTAPP Reporting Requirements

Unless a licensee is exempt under paragraph (K), a licensee must annually comply with the

following reporting requirements:

(1) Annual Trust Account Certification—A licensee must annually (a) report whether or

not, at any time during the reportable time period, they were a licensee responsible

for client funds and funds entrusted by others under the provisions of rule 1.15 of

the Rules of Professional Conduct and (b) if they were a licensee responsible for

client funds and funds entrusted by others under the provisions of rule 1.15 of the

Rules of Professional Conduct, then those licensees must also certify that they are

knowledgeable about, and in compliance with, applicable rules and statutes

governing a trust account and the safekeeping of funds entrusted by clients and

others;

(2) Annual Trust Account Registration—A licensee who was responsible for client funds

and funds entrusted by others under the provisions of rule 1.15 of the Rules of

Professional Conduct must, annually, register each and every trust account in which

the licensee held such funds at any time during the reportable time period by

identifying account numbers and financial institutions in a manner prescribed by the

State Bar for such reporting. A licensee will be considered in compliance with this

subparagraph if the licensee’s firm submits account registration information on

behalf of one or more licensees affiliated with the firm that identifies the licensee as

one on whose behalf the registration information is submitted; and

(3) Annual Self-Assessment—A licensee responsible for client funds and funds entrusted

by others under the provisions of rule 1.15 of the Rules of Professional Conduct must

complete an annual self-assessment and report the completion of the self-

assessment in a manner prescribed by the State Bar for such reporting.

The deadline for submitting the information to be annually reported under paragraph (B) of

this rule is the licensee’s due date for paying their annual license fees under Title 2, Division 2,

rule 2.11 of the State Bar Rules.

APPENDIX 2

(D) CTAPP Reporting Required Even if a Licensee is Not Responsible for Trust Funds at the Time

of Reporting

The annual reports required under paragraph (B)(1) and paragraph (B)(3) of this rule must

be submitted when a licensee, at any time during the reportable time period, has been a

licensee responsible for client funds or funds entrusted by others under the provisions of

rule 1.15 of the Rules of Professional Conduct, and this includes circumstances where the

licensee at the time of submitting their report is no longer responsible for client funds or

funds entrusted by others under the provisions of rule 1.15 of the Rules of Professional

Conduct. The registration of a trust account under paragraph (B)(2) of this rule also is

required even if a licensee is not responsible for funds held in the trust account at the time

of reporting so long as the licensee remains in practice with the firm that controls the trust

account. A licensee is not required to register a trust account controlled by a firm with

which the licensee no longer practices.

(E) Reporting that is Required by a Licensee Who is Not Responsible for Client Funds and Funds

Entrusted by Others under the Provisions of Rule 1.15 of the Rules of Professional Conduct

Under paragraph (B)(1), a licensee who is not exempt under paragraph (K) must report

whether or not, at any time during the reportable time period, they were a licensee who

was responsible for client funds and funds entrusted by others under the provisions of rule

1.15 of the Rules of Professional Conduct. To comply with paragraph (B)(1), a licensee who

was not responsible for client funds and funds entrusted by others under the provisions of

rule 1.15 of the Rules of Professional Conduct must submit a report indicating that fact.

(F) Noncompliance

Noncompliance with the requirements of this rule is failure to:

(1) complete annual trust account certification, registration, or self-assessment

requirements under paragraph (B); or

(2) pay fees for noncompliance.

(G) Notice of CTAPP Reporting Noncompliance

A licensee who is sent a notice of noncompliance with any reporting required by this rule

must comply as instructed in the notice or be involuntarily enrolled as inactive. An inactive

licensee is not eligible to practice law.

(H) Enrollment as Inactive for Noncompliance

A licensee who fails to comply with a notice of CTAPP reporting noncompliance is enrolled

as inactive and is not eligible to practice law. The enrollment is administrative and no

hearing is required.

APPENDIX 2

(I) Reinstatement Following Noncompliance

Enrollment as inactive for CTAPP reporting noncompliance terminates when a licensee

submits proof of compliance and pays noncompliance and reinstatement fees.

(J) Fees for Noncompliance

Fees for noncompliance with any of the requirements in paragraph (B), including a

reinstatement fee to terminate CTAPP inactive enrollment, are set forth in the Schedule of

Charges and Deadlines.

(K) Licensees Who are Exempt from Compliance with this Rule

The following category of licensees are exempt from compliance with the reporting

requirements in paragraph (B):

(1) A licensee who was not on active status for the entirety of the reportable time

period; or

(2) A licensee who is not entitled to practice law at the time of the reporting deadline

for any reason other than voluntary inactive enrollment.

Rule 2.5 adopted effective January 1, 2023.

Division 5. Trust Accounts

Chapter 1. Global provisions

Rule 2.100 Definitions

(A) A “Chargeable fee” is a per-check charge, per-deposit charge, fee in lieu of minimum

balance, federal deposit insurance fee, or sweep fee.

(B) A “Client” is a person or a group of persons that has engaged the attorney or firm for a

common purpose.

limited to, securities issued by Government Sponsored Enterprises.

(D) An “Exempt Account” is exempt from IOLTA requirements because it does not meet the

productivity criteria established by the Legal Services Trust Fund Commission.

(E) “Funds” are monies held in a fiduciary capacity by a licensee for the benefit of a client or a

third party.

APPENDIX 2

(F) An “IOLTA account” is an Interest on Lawyers’ Trust Account as defined in Business and

Professions Code section 6213(j).

(G) An “IOLTA-eligible institution” is an eligible institution as defined in 6213(k) that meets

the requirements of these rules, State Bar guidelines, and the State Bar Act.

(H) “IOLTA funds” are the interest or dividends generated by IOLTA accounts.

(I) A “licensee” is a licensee and a licensee’s law firm.

(J) A “licensee business expense” is an expense that a licensee incurs in the ordinary course

of business, such as charges for check printing, deposit stamps, insufficient fund charges,

collection charges, wire transfer fees, fees for cash management, and any other fee that is

not a chargeable fee.

Chapter 2. Licensees’ duties

Rule 2.110 Funds to be held in an IOLTA account

(A) Licensees must establish IOLTA accounts for funds that cannot earn income for the client

or third party in excess of the costs incurred to secure such income because the funds are

nominal in amount or held for a short period of time. In determining whether funds can

earn income in excess of costs, a licensee must consider the following factors:

(1) the amount of the funds to be deposited;

(2) the expected duration of the deposit, including the likelihood of delay in resolving the

matter for which the funds are held;

(3) the rates of interest or dividends at eligible institutions where the funds are to be

deposited;

(4) the cost of establishing and administering non-IOLTA accounts for the client or third

party’s benefit, including service charges, the costs of the licensee’s services, and the

costs of preparing any tax reports required for income earned on the funds;

(5) the capability of eligible institutions or the licensee to calculate and pay income to

individual clients or third parties;

(6) any other circumstances that affect the ability of the funds to earn a net return for the

client or third party.

(B) The State Bar will not bring disciplinary charges against a licensee for determining in good

faith whether or not to place funds in an IOLTA account.

APPENDIX 2

Rule 2.111 Funds not to be held in an IOLTA account

(A) If a licensee determines that the funds can earn income for the benefit of the client or

third party in excess of the costs incurred to secure such income, the funds must be

deposited in a trust account in accordance with the provisions of Section 6211(b) of the

Business and Professions Code and Rule 4-100 of the Rules of Professional Conduct or as

the client or third party directs in writing.

(B) A licensee should not designate an exempt account as an IOLTA account.

Rule 2.112 Review of funds in an IOLTA account

A licensee must review an IOLTA account at reasonable intervals to determine whether

changed circumstances require funds be moved out of the IOLTA account.

Rule 2.113 Charges against IOLTA funds

A licensee may allow an IOLTA-eligible institution to deduct chargeable fees permitted by

Business and Professions Code 6212(c) from IOLTA funds. A licensee must pay any licensee

business expense and may not allow the bank to deduct such expenses from IOLTA funds. If

the State Bar becomes aware that a licensee business expense is erroneously deducted from

IOLTA funds, the State Bar will inform the IOLTA-eligible institution and request that the error

be corrected.

Rule 2.114 Reporting to the State Bar

A licensee must report compliance with these rules.

Rule 2.115 Consent to reporting

By establishing funds in an account, a licensee consents to the eligible institution’s furnishing

account information to the State Bar as required by these rules, State Bar guidelines, and the

State Bar Act.

As defined in rule 2.100(D).

APPENDIX 2

Rule 2.116 Liquidity requirements

IOLTA accounts must allow prompt withdrawal of funds, except that such accounts may be

subject to notification requirements applicable to all other accounts of the same class at the

eligible institution so long as the notification requirement does not exceed thirty days.

Rule 2.117 Institution eligibility requirements

A licensee may place an IOLTA account only in an IOLTA-eligible institution. The State Bar will

maintain a list of IOLTA-eligible institutions.

Rule 2.118 No change to other duties and obligations of a licensee

Nothing in these rules shall be construed as affecting or impairing the duties and obligations

of a licensee pursuant to the statutes and rules governing the conduct of licensees of the

State Bar including, but not limited to, provisions of Rule 1.15 of the Rules of Professional

Conduct requiring a licensee to promptly notify a client of the receipt of the client’s funds and

to promptly pay or deliver to the client, as requested by the client, the funds in the

possession of the licensee which the client is entitled to receive.

Chapter 3. Duties of an IOLTA eligible institution

Rule 2.130 Comparable Interest Rate or Dividend Requirement

(A) An IOLTA-eligible institution must pay comparable interest rates or dividends as required

under Business and Professional Code 6212(b) and 6212(e) and may choose to do so in

one of three ways:

(1) allow establishment of IOLTA accounts as comparable-rate products;

(2) pay the comparable-product rate on IOLTA deposit accounts, less chargeable fees, if

any; or

(3) pay the Established Compliance Rate determined by the Legal Services Trust Fund

Commission.

(B) “Accounts of the same type” in section 6212(b) refers to comparable-rate products

described in sections 6212(e) and 6212(j) for which the IOLTA-eligible institution pays no

less than the highest interest rate or dividend generally available from the institution to

non-IOLTA account customers when the IOLTA account meets the same minimum balance

or other eligibility qualifications.

APPENDIX 2

Rule 2.131 Payments to the State Bar

An IOLTA-eligible institution must remit payments to the State Bar in accordance with

Business and Professions Code 6212(d)(1-3) and State Bar rules and guidelines.

APPENDIX 2

CALIFORNIA RULES OF COURT

Title 9. Rules on Law Practice, Attorneys, and Judges

Chapter 2. Attorney Admissions

Rule 9.8.5 State Bar Client Trust Account Protection Program

(a) Client trust account protection program requirements

The State Bar of California must establish and administer a Client Trust Account Protection

Program for the protection of client funds held in trust by a licensee that facilitates the State

Bar’s detection and deterrence of client trust accounting misconduct.

(1) The State Bar must impose the following requirements under this program:

(A) Annual Trust Account Certification—All licensees must annually (1) report whether

or not, at any time during the prior year, they were responsible for client funds

and funds entrusted by others under the provisions of rule 1.15 of the Rules of

Professional Conduct and (2) if they were responsible, certify that they are

knowledgeable about, and in compliance with, applicable rules and statutes

governing client trust accounts and the safekeeping of funds entrusted by clients

and others; and

(B) Annual Trust Account Registration—All licensees who were responsible for client

funds and funds entrusted by others under the provisions of rule 1.15 of the Rules

of Professional Conduct must, annually, register each and every trust account in

which the licensee held such funds at any time during the prior year by identifying

account numbers and financial institutions in a manner prescribed by the State Bar

for such reporting that will securely maintain the information submitted.

(2) Among the other requirements the State Bar may impose under this program are the

following:

(A) Annual Self-Assessment—All licensees who were responsible, at any time during

the prior year, for a client trust account under the provisions of rule 1.15 of the

Rules of Professional Conduct must complete an annual self-assessment on client

trust accounting duties and practices;

(B) Compliance Review—If selected by the State Bar, a licensee must complete and

submit to the State Bar a client trust accounting compliance review to be

conducted by a certified public accountant at the licensee’s expense; and

APPENDIX 2

based on the results of a compliance review may include an investigative audit, a

notice of mandatory corrective action, and a referral for disciplinary action.

(b) Authorization for the Board of Trustees of the State Bar to adopt rules and regulations

The Board of Trustees of the State Bar is authorized to formulate and adopt such rules and

regulations as it deems necessary and appropriate to comply with this rule, including a rule or

regulation that defines a licensee who is responsible for client funds and funds entrusted by

others under the provisions of rule 1.15 of the Rules of Professional Conduct.

A licensee who fails to satisfy the requirements of this program must be enrolled as an

inactive licensee of the State Bar under the rules to be adopted by the Board of Trustees of

the State Bar. Inactive enrollment imposed for noncompliance with the requirements of this

program is cumulative and does not preclude a disciplinary proceeding or other actions for

violations of the State Bar Act, the Rules of Professional Conduct, or other applicable laws.

(d) Fees and penalties

The State Bar has the authority to set and collect appropriate fees and penalties.

Rule 9.8.5 adopted effective January 1, 2023.

APPENDIX 3: INDEX OF SELECTED CASES AND OPINIONS BY TOPIC

Selected Recent Cases

In the Matter of Song (Review Dept. 2013) 5 Cal. State Bar Ct. Rptr. 273

In the Matter of Lawrence (Review Dept. 2013) 5 Cal. State Bar Ct. Rptr. 239

In the Matter of Connor (Review Dept. 2008) 5 Cal. State Bar Ct. Rptr 93

In the Matter of Seltzer (Review Dept. 2013) 5 Cal. State Bar Ct. Rptr. 263

Duties, In General

In the Matter of Wells (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr. 896. While practicing outside

of California, attorney violated rule 4-100 by not depositing in a client trust account

settlement benefits that were received for the benefit of the client. A finding that attorney

was culpable of unauthorized practice of law compels a conclusion that the attorney charged

and collected illegal fees under rule 4-200(A).

In the Matter of Robins (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 708. The duty to keep

client's funds safe is a personal obligation of the attorney which is nondelegable. (See also

Palomo v. State Bar (1984) 36 Cal.3d 785 [685 P.2d 1185, 205 Cal.Rptr. 834].)

Giovanazzi v. State Bar (1980) 28 Cal.3d 465 [619 P.2d 1005, 169 Cal.Rptr. 581]. The mere fact

that the balance in an attorney's trust account has fallen below the total of amounts

deposited and purportedly held in trust supports a conclusion of misappropriation.

Advanced Fees

S.E.C. v. Interlink Data Network of Los Angeles (9th Cir. 1996) 77 F.3d 1201, 1206. An attorney

must keep advances for fees in a client trust account if the attorney’s fee agreement

specifically provides that the attorney must do so.

T & R Foods, Inc. v. Rose (1996) 47 Cal.App.4th Supp.1. The appellate department of the

Superior Court in Los Angeles held that an attorney has a duty to deposit advanced fees,

which are not yet earned, into a client trust account.

Baranowski v. State Bar (1979) 24 Cal.3d 139. The Supreme Court held that rule 8-101

(current rule 4-100) requires that advanced costs be placed in a designated trust account.

However, the court declined to resolve the issue of whether an advanced fee payment is

required to be placed in an identifiable trust account until such time a s it is earned.

Settlement Drafts

In the Matter of Robert Steven Kaplan (Rev. Dept. 1993) 2 Cal.State Bar Ct. Rptr. 509. An

attorney is obligated to act promptly to release funds to a former client by endorsing the

APPENDIX 3

settlement draft. A delay has the effect of withholding funds the client is entitled to receive

pursuant to Rule 4-100(B)(4).

Maintain Actual Records of Trust Account Activity

In the Matter of Rae Blum (Rev. Dept. 2002) 4 Cal. State Bar Ct. Rptr. 403. Attorney’s reliance

on her husband/law partner to manage the client trust account does not relieve attorney of

her personal, non-delegable duty to monitor client funds and her trust account. An attorney is

not relieved from professional responsibility when he or she relies on a partner to maintain

client trust accounts.

In the Matter of Doran (Rev. Dept. 1998) 3 Cal. State Bar Ct. Rptr. 871, 876. Where an

attorney made no effort to understand the responsibilities involved in maintaining a trust

account, never determined the balance in the trust account, and did not maintain a ledger or

confirm deposits made to the trust account, the attorney’s conduct is no less than gross

negligence and supports a finding of moral turpitude.

Dixon v. State Bar (1985) 39 Cal.3d 335 [702 P.2d 590, 216 Cal.Rptr. 432]. The purpose of

keeping proper books of account, vouchers, receipts, and checks is to be prepared to make

proof of the honesty and fair dealing of attorneys when their actions are called into question.

(See also Clark v. State Bar (1952) 39 Cal.2d 161 [246 P.2d 1].)

Fitzsimmons v. State Bar (1983) 34 Cal.3d 327 [667 P.2d 700, 193 Cal.Rptr. 896]. An attorney's

failure to keep adequate records warrants discipline.

Weir v. State Bar (1979) 23 Cal.3d 564 [591 P.2d 19, 152 Cal.Rptr. 921]. The failure to keep

proper books of accounts, vouchers, receipts and checks is a breach of an attorney's duty to

his clients.

Maintain Copies of Other Materials Relating to the Attorney's Financial

Relationship with the Client

Accounting for Fees

In the Matter of Brockway (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr 944. An attorney must

satisfy the accounting requirements of rule 4-100 even in the absence of a demand for such

an accounting from the client.

In the Matter of Cacioppo (Rev. Dept. 1992) 2 Cal. St. Bar Ct. Rptr. 128, 146. An attorney

committed misconduct by providing a confusing, belated accounting to a client. The attorney

also did not follow an acceptable procedure to ensure informed consent of the client to the

application of her recovery to pay attorney’s fees. In this case, the court found that the

attorney must give the client an opportunity to review a bill before applying the client’s

recovery to pay attorney fees.

APPENDIX 3

In the Matter of Fonte (Rev. Dept. 1994) 2 Cal.State Bar Ct. Rptr. 752. An attorney was

obligated to maintain adequate records of monies drawn against a $5,000 advanced fee

despite his claim that the fee was a retainer and “earned upon receipt.” By failing to provide

the client with an accounting regarding these funds, the attorney violated rule 4-100(B)(3),

the client trust accounting rule, even though the rule does not refer specifically to attorney’s

fees.

Matthew v. State Bar (1989) 49 Cal.3d 784 [781 P.2d 952, 263 Cal.Rptr. 660]. An attorney

should maintain time records or billing statements and account for unearned fees.

All Retainer and Compensation Contracts

In the Matter of Brockway (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr 944. The Court found the

fee to be an advance against future services even though it had been designated “True

Retainer Fee.” The designation was not determinative of the obligations of the parties

because the fee did not state that it was due and payable regardless of whether professional

services were actually rendered.

In the Matter of Respondent F (Rev. Dept. 1992) 2 Cal. State Bar Rptr. 17. Attorneys must

retain funds in trust when the attorney's right to the funds is disputed by the client. The funds

are required to be kept in trust until the resolution of the dispute.

In the Matter of Koehler (Rev. Dept. 1991) 1 Cal. State Bar Rptr. 615, headnote 5. An attorney

applied advanced costs to his legal fees, thereby violating the requirement that advanced

costs be held in trust. The failure to return the unused portion of such funds promptly when

requested violated the rule requiring prompt payment of client funds on demand.

Friedman v. State Bar (1990) 50 Cal.3d 235 [786 P.2d 359, 266 Cal.Rptr. 632]. The failure to

have a written contingency fee contract and to provide a copy to the client constitutes a

failure to maintain records of or render appropriate accounts to the client. (See also

Fitzsimmons v. State Bar (1983) 34 Cal.3d 327 [667 P.2d 700, 193 Cal.Rptr. 896].)

Palomo v. State Bar (1984) 36 Cal.3d 785 [685 P.2d 1185, 205 Cal.Rptr. 834]. General

language in fee agreement will not convey general power of attorney to sign checks on

client's behalf.

Grossman v. State Bar (1983) 34 C.3d 73 [664 P.2d 542, 192 Cal.Rptr. 397]. Attorney

misappropriated client funds where he initially agreed to represent his client in a personal

injury matter on a 33 1/3 contingent fee basis, and after settling the case, unilaterally

increased the fee to 40 percent.

Academy of CA Optometrists v. Superior Court (1975) 51 Cal.App.3d 999 [124 Cal.Rptr. 668].

Contracts which violate the canons of professional ethics of an attorney may for that reason

be void.

APPENDIX 3

Brody v. State Bar (1974) 11 Cal.3d 347 [521 P.2d 107, 113 Cal.Rptr. 371]. An attorney may

not unilaterally determine his own fee and withhold trust funds to satisfy it, even though he

may be entitled to reimbursement for his fees. (See also Crooks v. State Bar (1970) 3 Cal.3d

346 [75 P.2d 872, 90 Cal.Rptr. 60].)

All Statements to Clients Showing Disbursements

Murray v. State Bar (1985) 40 Cal.3d 575 [709 P.2d 480, 220 Cal.Rptr. 677]. A finding of wilful

misappropriation where the attorney failed to respond to his client's queries regarding funds

held in trust.

Attorney's Liens

In re Popov (N.D.Cal. 2007, No. C-06-2696 MMC) 2007 WL 1970102. District court affirmed a

bankruptcy court order finding that attorney did not violate rule 3-300 by not disclosing how

an attorney’s lien provision in the fee contract might impact the client in the future.

Fletcher v. Davis, (2004) 33 Cal.4th 61 [14 Cal.Rptr.3d 58]. The Supreme Court held that a

charging lien, securing payment of attorney's fees and costs against the client's future

recovery, is an adverse interests and triggers the requirements of rule 3-300, including the

requirements of written client consent and notice to seek the advice of an independent lawyer.

The court found that compliance with rule 3-300 was lacking and ruled that the agreement for a

charging lien was not enforceable. In a footnote, the court clarified that its decision was limited

only to a charging lien securing an hourly fee and expressly declined to address situations

involving contingency fees.

In the Matter of Feldsott (Rev. Dept. 1997) 3 Cal. St. Bar Ct. Rptr. 754, 756-758. Where a prior

attorney took reasonable and appropriate steps to protect his lien on a former client’s

recovery, the prior attorney did not violate rule 4-100(B)(4) by refusing to sign a settlement

check which was in the possession of the former client’s successor attorney and which

was payable to the former client, the prior attorney, and the successor attorney. The

prior attorney agreed to release all funds not in dispute to his former client. He

suggested binding fee arbitration and, while the dispute was pending, requested that

the disputed part of the recovery be placed in an account requiring both his and his

former client’s signatures or be deposited in court until the resolution of the dispute.

In the Matter of Respondent H (Rev. Dept. 1992) 2 Cal. State Bar Ct. Rptr. 234. An

attorney is a general creditor of the client and cannot reach monies held by the client’s

attorney absent an enforceable lien or judgment.

Baca v. State Bar (1990) 52 Cal.3d 294. The WCAB awarded recovery to the applicant

and attorney’s fees to both prior and subsequent counsel. The WCAB’s adjudication

caused the settlement funds to have client trust fund status. The attorney’s conversion

of the funds and failure to pay the prior attorney’s liens constituted misappropriation,

an act of moral turpitude.

APPENDIX 3

Weiss v. Marcus (1975) 51 Cal.App.3d 390. A valid lien may be created by contract and

will survive the prior attorney’s discharge. The attorney was permitted to maintain an

action against subsequent counsel for constructive trust, interference with contractual

relationship, and conversion.

Copies of all bills

Dreyfus v. State Bar (1960) 54 Cal.2d 799 [356 P.2d 213, 8 Cal.Rptr. 469]. No receipt

given to client for monies deposited with attorney.

Clark v. State Bar (1952) 39 Cal.2d 161 [246 P.2d 1]. The purpose of keeping vouchers

and receipts is to be prepared to make proof of the honesty and fair dealings of

attorneys when their actions are called into question.

Maintain “Books” Showing the Trust Account Activity Relating to Each Client or Matter

In the Matter of Respondent F (Rev. Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17. An attorney

cannot be held responsible for every detail of office operations. Nevertheless, an

attorney is held responsible if the attorney fails to manage funds, regardless of the

attorney's intent or the absence of injury to anyone. (See also Palomo v. State Bar

(1984) 36 Cal.3d 785 [685 P.2d 1185, 205 Cal.Rptr. 834]; Guzzetta v. State Bar (1987) 43

Cal.3d 962 [741 P.2d 172, 239 Cal.Rptr. 675].)

Maintain Books And Account To Third Parties

In the Matter of Kaplan (Rev. Dept. 1996) 3 Cal. State Bar Ct. Rptr. 547. Where a client

asks the attorney to distribute trust account funds claimed by both the client and a third

party to whom the attorney owes a fiduciary duty, the attorney must promptly take

affirmative steps to resolve the competing claims in order to disburse the funds.

Guzzetta v. State Bar (1987) 43 Cal.3d 962 [741 P.2d 172, 239 Cal.Rptr. 675]. An

attorney's fiduciary obligation to account and pay funds extends to both parties claiming

interest therein. Duty extends to opposing party spouse.

Maintain Separate Ledger Page or Card for Each Client

In the Matter of Yagman (Rev. Dept. 1997) 3 Cal. State Bar Ct. Rptr. 788. An attorney

must maintain for a period of five years a written ledger for each client for whom funds are

held detailing the date, the amount, and source of all funds received on behalf of the client, in

compliance with the Trust Account Record Keeping Standards adopted by the Board of

Governors of the State Bar. An attorney must promptly withdraw any undisputed portion of

the funds pursuant to rule 4-100(A)(2), at the earliest reasonable time after the attorney's

right to those funds becomes fixed.

Weir v. State Bar (1979) 23 Cal.3d 564 [591 P.2d 19, 152 Cal.Rprt. 921]. Fee ledger sheet used

as evidence that all fees and costs had been paid by clients.

APPENDIX 3

Vaughn v. State Bar (1972) 6 Cal.3d 847 [494 P.2d 1257, 100 Cal.Rptr. 713]. Attorney's records

failed to show receipt of client funds. Holding client's funds in cash or cashier's checks

disapproved without client's written consent to do so.

Medical Liens

Kaiser Foundation Health Plan v. Aguiluz (1996) 47 Cal.App.4th 302. The Court of Appeal held

an attorney civilly liable for conversion for failing to honor a medical lien. The attorney, after

attempting unsuccessfully to negotiate a reduction of the lien amount, paid the funds to the

client. The court held that the insurer was entitled to its judgment against the attorney for

the full amount owed by the client for health care costs. An attorney on notice of a third

party’s contractual right to funds received on behalf of a client disburses those funds to

the client at his or her own risk.

In the Matter of Riley (Rev. Dept. 1994) 3 Cal. State Bar Ct. Rptr. 91. An attorney must

make efforts to determine how the client’s medical bills have been paid. Ignorance of the

client’s statutory liens is gross negligence rather than good faith error. The attorney should

have known of the existence of liens had a reasonable inquiry of the client been conducted.

In the Matter of Respondent P (Rev. Dept. 1993) 2 Cal. State Bar Ct. Rptr. 622. An attorney has

a fiduciary obligation to the State Department of Health Services to ensure DHS has an

opportunity to collect the money due under a medical lien created by operation of law

(Welfare and Institutions Code section 14124.79). The attorney violated former rule 8-

101(B)(4) (current rule 4-100(B)(4)) by distributing the settlement funds to the client. An

attorney has a duty to notify DHS when a matter has settled prior to the distribution of the

settlement proceeds.

In the Matter of Dyson (Rev. Dept. 1990) 1 Cal. State Bar Ct. Rptr. 280. An attorney is

obligated to segregate funds in a trust account, maintain, and render complete records and

pay or deliver the funds promptly on request in the presence of a medical lien. An attorney

has no excuse for placing funds subject to medical liens in a general account because at no

time do the funds belong to the attorney.

In the Matter of Mapps (Rev. Dept. 1990) 1 Cal. State Bar Rptr. 1. An attorney must keep

sufficient funds in a trust account to pay the undisputed portion of treating doctor's

medical lien. Gross negligence in record keeping and handling funds, affecting non-clients,

constituted moral turpitude. (See also Vaughn v. State Bar (1972) 6 Cal.3d 847 [494 P.2d

1257, 100 Cal.Rptr. 713].)

Simmons v. State Bar (1969) 70 Cal.2d 361 [450 P.2d 291, 74 Cal.Rptr. 915]. When an

attorney receives client money on behalf of a third party, he has a fiduciary duty to the

third party.

APPENDIX 3

Other Documentary Support for All Disbursements and Transfers

In the Matter of Koehler (Rev. Dept. 1991) 1 Cal. State Bar Rptr. 615. Respondent

committed moral turpitude in violation of Business and Professions Code section 6106 by

intentionally secreting his own funds in a client trust account in order to conceal them

from the Franchise Tax Board.

In the Matter of Heiner (Rev. Dept. 1990) 1 Cal. State Bar Rptr. 301. An attorney who

repeatedly withdraws small amounts of cash for personal use from a trust account

indicates that the attorney is improperly treating the trust account as a personal or

general office account, and either allowing the attorney's own funds to remain in the trust

account longer than they should, or misappropriating funds that properly belong to the

clients. This is true regardless of the means by which the withdrawals are accomplished—

check, ATM card, withdrawal slip, or other means.

Receipts for fees

Fitzsimmons v. State Bar (1983) 34 Cal.3d 327 [667 P.2d 700, 193 Cal.Rptr. 896].

Attorney’s failure to give client receipts for attorney’s fees disapproved.

Reconciliation (monthly/quarterly)

Friedman v. State Bar (1990) 50 Cal.3d 235 [786 P.2d 359, 266 Cal.Rptr. 632]. Attorney

had no method by which he could reconcile or verify balances.

Records Showing Payments to Attorneys, Investigators, Third Parties

Fitzsimmons v. State Bar (1983) 34 Cal.3d 327 [667 P.2d 700, 193 Cal.Rptr. 896]. Failure to

obtain a receipt for the disbursement of cash on a client's behalf constitutes a violation of

an attorney's oath and involves moral turpitude.

Redeposit of Funds Withdrawn from a Client Trust Account

In the Matter of Respondent E (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716.). A lawyer was

disciplined for failing to hold funds in a client trust account where the lawyer’s initial

withdrawal of funds was based upon a belief that the disbursement was proper but that

belief was subsequently discovered to be erroneous.

Guzzetta v. State Bar (1987) 43 Cal.3d 962 [741 P.2d 172, 239 Cal.Rptr. 675]. To restore funds

wrongfully withdrawn from a trust account, an attorney may deposit personal funds into the

trust account so long as evidence supports a finding that once deposited the attorney

believes that the funds belong to the client and do not belong to the attorney.

State Bar Formal Opinion No. 2006-171. Attorney who has properly withdrawn fees from a

client trust account in compliance with rule 4-100(A)(2) is not obligated to return to the trust

account amounts that are later disputed by clients.

APPENDIX 3

Regularly Perform Accounting Procedures

In the Matter of Respondent E (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716. Where fiduciary

violations occur as the result of serious and inexcusable lapses in office procedure, they may

be deemed “wilful” for disciplinary purposes, even if there was no deliberate wrongdoing.

(See also Palomo v. State Bar (1984) 36 Cal.3d 785 [686 P.2d 1185, 205 Cal.Rptr. 834].)

Miscellaneous

Mardirossian & Associates, Inc. v. Ersoff (2007) 153 Cal.App.4th 257. Contingency fee law firm

discharged prior to settlement may recover in quantum meruit for the reasonable value of

services rendered as determined by testimony of the attorneys as to the amount of time

spent on and complexity of legal issues involved in the matter despite absence of billing

records.

In re Silverton (2005) 36 Cal.4th 81 [29 Cal.Rptr.3d 766]. Attorney violated rule 4-100 by giving

clients settlement checks drawn from a client trust account before the opposing party had

actually paid the settlement. The court also found violations of rules 3-300 and 4-200 based

on the attorney’s practice of seeking authorization from his clients in personal injury actions

to compromise the clients’ medical bills as part of an agreement in which attorney would

increase his clients’ recoveries in return for the right to keep any of the negotiated savings of

the clients’ medical bills. Such agreements were not fair and reasonable and the fees

collected were unconscionable.

In the Matter of Davis (Rev. Dept. 2003) 4 Cal. State Bar Ct. Rptr. 576. An attorney

representing a corporation must follow the instructions of appropriate corporate officers in

the handling of trust funds. Where there is an intractable dispute among board members

concerning distribution of trust funds, an attorney may interplead the funds to resolve

conflicting instructions.

Farmers Insurance Exchange v. Smith (1999) 71 Cal. App.4th 660, 662 [83 Cal. Rptr.2d 911]. In

an action to establish an equitable lien interest, the court found an insurer has no right to

“press-gang a policyholder’s personal injury attorney into service as a collection agent when

the policyholder receives medical payments from the insurer and then later recovers from a

third party tortfeasor. . . . The attorney is not the client’s keeper.”

In the Matter of Kroff (Rev. Dept. 1998) 3 Cal. State Bar Ct. Rptr. 838, 854. Where a client asks

an attorney to distribute trust funds and the attorney claims an interest in the funds, the

attorney must promptly take appropriate substantive steps to resolve the dispute, such as fee

arbitration.

In the Matter of Respondent F (Rev. Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17. An attorney is

permitted to keep in a client trust account his or her own funds reasonably sufficient to cover

bank charges.

APPENDIX 3

In the Matter of Bleeker (Rev. Dept. 1990) 1 Cal State Bar Rptr. 113. Gross carelessness and

negligence in maintaining a client trust account constitutes a violation of the oath of an

attorney to faithfully discharge his duties to the best of his knowledge and ability, and

involves moral turpitude as they breach the fiduciary relationship owed to clients. (See also

Giovanazzi v. State Bar (1980) 28 Cal. 3d 465 [619 P.2d 1005, 169 Cal.Rptr. 581].)

In the Matter of Trillo (Rev. Dept. 1990) 1 Cal. State Bar Rptr. 59. All funds held for a client's

benefit, including the costs received must be placed in a proper trust account.

Jackson v. State Bar (1979) 25 Cal.3d 398 [600 P.2d 1326, 158 Cal.Rptr. 869]. Attorney

engaged in practice of depositing personal funds and unearned fees into client trust account

to provide “margin“ against overdraft is a violation.

Signatories on Client Trust Account

In the Matter of Malek-Yonan (Rev. Dept. 2003) 4 Cal. State Bar Ct. Rptr. 627. Where an

attorney did not sign checks drawn on her client trust account, but instead authorized her

staff to do so using a rubber stamp of her signature, attorney failed to supervise the

management of the client trust account, resulting in the theft by her employees of $1.7

million which belonged to attorney, her clients, and their medical providers. Attorney did not

review any client trust account statement herself, never reconciled the client trust account,

and never compared the settlement checks received with the deposits in the account and

thus, failed to ensure that client funds were protected.

In the Matter of Steele (Rev. Dept. 1997) 3 Cal. State Bar Ct. Rptr. 708. An attorney was not

absolved of his own duty to monitor the client trust account where attorney delegated

responsibility of supervising the client trust account to his legal assistant and legal assistant

became a signatory on attorney’s general and client trust account. Legal assistant failed to

balance both the client trust account and business account and embezzled funds from the

client trust account.

In re Basinger (1988) 45 Cal.3d 1348 [756 P.2d 833, 249 Cal.Rptr. 110]. Attorney gave

secretary/office manager a general power of attorney to handle firm's accounts and issue

checks. Secretary and attorney convicted of grand theft of client and partnership monies.

Waysman v. State Bar (1986) 41 Cal.3d 452 [714 P.2d 1239, 224 Cal.Rptr. 101]. Supreme

Court disapproved use of presigned checks left with secretary.

APPENDIX 4: MODEL FORMS

CLIENT LEDGER

CLIENT:

CASE #:

DATE

SOURCE OF

DEPOSIT

PAYEE, #,

& PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

REMAINING

BALANCE

APPENDIX 4

ACCOUNT JOURNAL

CLIENT TRUST BANK ACCOUNT NAME:

DATE

CLIENT

SOURCE

DEPOSIT

PAYEE, # &

PURPOSE

CHECKS

(SUBTRACT)

DEPOSITS

(ADD)

REMAINING

BALANCE

APPENDIX 4

OTHER PROPERTIES JOURNAL

CLIENT/CASE #:

ITEM

DATE

RECEIVED

DATE

DISBURSED

DISBURSED TO

APPENDIX 4

FORM ONE: CLIENT LEDGER BALANCE

RECONCILIATION DATE:

CLIENT TRUST BANK ACCOUNT NAME:

PERIOD COVERED BY BANK STATEMENT:

CLIENT

CLIENT LEDGER BALANCE

TOTAL CLIENT LEDGER BALANCE:

MONTH ENDING ACCOUNT JOURNAL BALANCE:

TOTAL MISTAKE CORRECTION ENTRIES (+ or -)

(From Form Two)

ADJUSTED MONTH ENDING ACCOUNT JOURNAL BALANCE:

APPENDIX 4

FORM TWO: ADJUSTMENTS TO MONTH ENDING BALANCE

RECONCILIATION DATE:

CLIENT TRUST BANK ACCOUNT NAME:

PERIOD COVERED BY BANK STATEMENT:

A. DEPOSITS AND WITHDRAWALS NOT POSTED ON BANK STATEMENTS

UNCREDITED DEPOSITS

Date Amount

UNDEBITED WITHDRAWALS

Date Amount

TOTAL:

B. MISTAKE CORRECTION ENTRIES (from Account Journal)

AMOUNT

DATE

Additions

Subtractions

NET MISTAKE

(+ or -)

TOTAL MISTAKE CORRECTION ENTRIES:

APPENDIX 4

FORM THREE: RECONCILIATION

RECONCILIATION DATE:

CLIENT TRUST BANK ACCOUNT NAME:

PERIOD COVERED BY BANK STATEMENT:

ADJUSTED MONTH ENDING BALANCE:

(From Form One)

MINUS TOTAL BANK CHARGES:

(From Bank Statement)

PLUS TOTAL INTEREST EARNED:

(From Bank Statement)

CORRECTED MONTH ENDING BALANCE:

(Total)

MINUS UNCREDITED DEPOSITS:

(From Form Two):

PLUS UNDEBITED WITHDRAWALS:

(From Form Two)

RECONCILED TOTAL:

BANK STATEMENT BALANCE:

APPENDIX 5: WHAT TO DO WHEN THE RECONCILED TOTAL AND THE BANK

STATEMENT BALANCE DON'T EXACTLY MATCH

If, after you've filled out Forms One, Two and Three, the Corrected Month Ending Balance for

the client trust bank account doesn't exactly match the balance the bank statement shows for

the account, it means that either your records are wrong, or the bank's records are wrong.

Follow the steps detailed until you find the mistake; when you find it, go to “Correcting the

mistake,” below:

1. Subtract the Bank Statement Balance from the Corrected Month Ending Balance so

you know exactly what the difference is. If there's only one mistake, knowing this

number will help you recognize it. If there's more than one mistake, knowing this

number will ensure that you don't stop looking too soon. Remember that until the

whole difference is explained, you have to keep looking for mistakes.

2. Check your copying. In preparing the Reconciliation form, you may have copied

numbers from the Adjustments to Month Ending Balance form incorrectly. That's the

easiest mistake to detect, so first, check to see that you copied those numbers

correctly.

3. Check your math. You probably did a lot of adding and subtracting to get those

numbers, so check your math. (This will be a lot quicker if you kept an adding machine

tape or other clear written record of your calculations.)

4. Check each uncredited deposit and withdrawal you listed. Go back through the

account journal and, using the date on the Adjustments to Month Ending Balance

form, find each unposted deposit and withdrawal you listed and check to make sure

you copied it correctly onto the form. Make a light pencil mark on the form next to

each item after you've made sure it's right so you don't miss any.

Next, go through the account journal and make sure that every uncredited deposit and

undebited withdrawal has been listed on the Adjustments to Month Ending Balance form.

Since you marked every entry in the account journal that you found on the bank

statement, this should be easy. Go back at least two months; you may have missed an old

check that was never deposited.

5. Compare the bank statement to the account journal and make sure that you have

correctly marked all the items that had been credited. You may have incorrectly

marked off as credited an entry in the account journal that wasn't on the bank

statement. Go through the bank statement item by item, and in the account journal

put a clear additional mark next to every entry that matches the bank statement.

When you're done, make sure that every item for the month you're reconciling has

two marks: the one you put when you first prepared the Account Journal Balance

form, and the one you just put next to every item you verified.

APPENDIX 5

6. Get last month's Adjustments to Month Ending Balance form and check the

unposted deposits and withdrawals against the current month's bank statement.

Since you successfully reconciled your client trust bank account last month, any

mistake must have happened in this month's records. Take out last month's

Adjustments to Month Ending Balance form and compare the list of uncredited

deposits and undebited withdrawals to this month's bank statement. With a light

pencil mark, check off all the items in last month's list of unposted transactions that

show up on this month's bank statement. Any that aren't checked off are still

unposted; therefore, they should be listed on this month's Adjustments to Month

Ending Balance form. Make sure they are.

7. Call in a bookkeeper. You have now gone through all of the steps necessary to check

your own records. The mistake is in there, but the chances are that you aren't going to

find it. It's also possible that the difference between the reconciled balance and the

bank statement balance is caused by something you can't find this way. Don't waste

any more of your valuable time hunting; call in a professional. If you have never

sought assistance with your client trust account, then an unresolvable issue is the time

to seriously consider consulting or retaining a professional. You should remember that

a bookkeeper or other accounting professional who is properly supervised may be a

prudent option for generally handling all of your recordkeeping duties. Especially if

you find yourself repeatedly wrestling with accounting problems, choosing to retain

and rely on a properly supervised professional to generally manage your trust account

might even result in more time to focus on rendering legal services to your clients.

Correcting the mistake. If the mistake is on the bank statement, write a note on the bank

statement that clearly explains what the mistake is, then contact your banker and tell them to

correct their records. Then go back to Form Three, put a line through the Bank Statement

Balance (making sure that the original number is still legible) and write in the corrected Bank

Statement Balance, which should be exactly the same as the Corrected Month Ending

Balance, above it.

If the mistake is in your records, correct it in the account journal and appropriate client

ledgers using the same kind of mistake correction entries we described. Like all mistake

correction entries, these must be entered twice in both the account journal and the client

ledger for the client on whose behalf you deposited or paid out the money; once above the

“Corrected Month Ending Balance“ line, and once after the latest entry.

After you correct the mistake in your client ledger and account journal, record it on Form Two

under “Mistake Correction Entries” and change the “Total Mistake Correction Entries” on

Form Two. Then go back to Form One, write in the new “Total Mistake Correction Entries”

and new “Adjusted Month Ending Account Journal Balance.” Then go to Form Three, write in

the new “Adjusted Month Ending Balance,” the new “Corrected Month Ending Balance“ and

the new “Reconciled Total.” If you make so many corrections that the numbers are getting

hard to read, rewrite the form.

APPENDIX 6: STATE BAR FORMAL OPINION NO. 2005-169

THE STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT

FORMAL OPINION NO. 2005-169

ISSUES

1. Does an attorney commit an ethical violation merely by obtaining or using overdraft

protection on a Client Trust Account?

2. What are an attorney’s ethical obligations when a check is issued against a Client Trust

Account with insufficient funds to cover the amount of the check?

3. Must an attorney immediately withdraw earned fees once funds deposited into a Client

Trust Account have become fixed in order to comply with the attorney’s ethical obligations?

DIGEST

1. An attorney does not commit an ethical violation merely by obtaining or using overdraft

protection on a Client Trust Account, so long as the protection in question does not entail the

commingling of the attorney’s funds with the funds of a client. Overdraft protection that

compensates exactly for the amount that the overdraft exceeds the funds on deposit (plus

funds reasonably sufficient to cover bank charges) is permissible, whereas overdraft

protection that automatically deposits an amount leaving a residue after the overdraft is

satisfied is not. In all cases, banks must report to the State Bar any presentment of a check

against a Client Trust Account without sufficient funds, whether or not the check is honored.

Although overdraft protection will not avoid State Bar notification, nor exculpate any

unethical conduct that caused the overdraft, it may avoid negative consequences to a client

resulting from a dishonored check.

2. When a check is issued against a Client Trust Account with insufficient funds to cover the

amount of the check, an attorney must deposit funds sufficient to clear the dishonored check

or otherwise make payment, must take reasonably prompt action to ascertain the condition

or event that caused the check to be dishonored, and must implement whatever measures

are necessary to prevent its recurrence. In addition, if a client will experience negative

consequences from the dishonoring of the check, the attorney may have to advise the client

of the occurrence.

3. An attorney must withdraw earned fees from a Client Trust Account at the earliest

reasonable time after they become fixed in order to comply with the attorney’s ethical

obligations, but need not do so immediately.

APPENDIX 6

AUTHORITIES INTERPRETED

Rule 4-100 of the Rules of Professional Conduct of the State Bar of California.

STATEMENT OF FACTS

Attorney, a solo practitioner who is about to begin a three-month trial, has recently

transferred accounts to Bank, which has just opened for business. The accounts transferred

are the office business account and the Client Trust Account (CTA).

Attorney arranges for

overdraft protection for the CTA by linking it to the office business account.

A month later, while Attorney is in the midst of trial, a settlement check arrives for Client.

Attorney obtains Client’s approval of disbursements and Client’s signature on the settlement

check, Attorney’s fee becomes fixed, and Attorney deposits the settlement check into the

CTA, but Bank misposts the check into the office business account. After making the deposit

and waiting a sufficient period for the settlement check to clear, Attorney issues a check

against the CTA for expenses related to Client’s case. Because of its misposting of the

settlement check, Bank determines that the expense check exceeds the amount on deposit.

Bank honors the expense check by debiting the linked office business account and notifies the

State Bar and Attorney that the check was paid against insufficient funds.

Three months after the arrival of the settlement check for Client, the trial having concluded,

Attorney issues two checks on the CTA account: The first check is payable to Client for Client’s

portion of the settlement; the second check is payable to Attorney for fees, and is

immediately deposited by Attorney into the office business account. Because of its not-yet-

corrected misposting of the settlement check, Bank determines that the two disbursements

exceed the amount on deposit, but makes inquiry of Attorney. As a result, Bank discovers,

and corrects, its misposting, and honors the checks to the Client and to Attorney for fees.

DISCUSSION

1. Overdraft protection is not prohibited by Rule 4-100.

When a bank is presented with a check that is greater in amount than the combination of

cash in the account on which it is drawn and checks deposited but not collected, the bank has

the option of honoring or dishonoring the check.

If a bank elects to honor the check, the

In addition to clients’ funds, a client trust account may contain other funds that have client trust fund status,

such as court-awarded fees belonging to the attorney, medical lien money, etc. For a discussion of client trust

fund status, see Handbook on Client Trust Accounting for California Attorneys (State Bar of California 2003).

California Commercial Code section 4401, subdivision (a).

APPENDIX 6

100

payment from its funds is an overdraft and is considered to be in the nature of a loan.

overdraft is not necessarily the result of negligence or wrongdoing by the depositor. For

example, an overdraft can be the result of the bank’s delay in crediting a deposit or as a result

of the bank’s dishonoring of a check submitted by the depositor in the good faith belief it

would be paid,

or by an inadvertent bank computer or accounting error.

In recent years, many banks have instituted overdraft protection to avoid the dishonoring of a

depositor’s checks. In order to cover checks written against insufficient funds, overdraft

protection can entail the making of payments by the bank on a voluntary basis

or as a result of

a contract with the depositor for extensions of credit or for the linking of accounts.

Whether it is permissible to obtain and use overdraft protection for a CTA depends on

whether the protection in question entails the commingling of the attorney’s funds with the

funds of a client. Rule 4-100 of the Rules of Professional Conduct

strictly limits the funds

belonging to an attorney that may be deposited into a CTA to (1) funds reasonably sufficient

to cover bank charge

and (2) undifferentiated funds belonging in part to a client and in part

to the attorney.

10/

The California Supreme Court has held that maintaining the personal funds

of an attorney in a CTA as a cushion against overdrafts is not allowed by rule 4-100 and may

therefore expose an attorney to discipline.

11/

Although rule 4-100 does not define commingling, judicial decisions provide a definition.

“[C]ommingling is committed when a client’s money is intermingled with that of his attorney

and its separate identity lost so that it may be used for the attorney’s personal expenses or

subjected to claims of his creditors.”

12/

Employing an overdraft protection program, such as a line

Hoffman v. Security Pacific National Bank (1981) 121 Cal.App.3d 964, 969 [176 Cal.Rptr. 14]. See 1 Brady on

Bank Checks: The Law of Bank Checks (Sept. 2004) § 19.01: “An overdraft is the payment by a bank from its

funds of a check drawn on it by a depositor who does not have sufficient funds on deposit to pay the check.”

Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 932, footnote 18 [216 Cal.Rptr. 345].

12 C.F.R. § 225.52(c)(1).

Davis and Mabbit, Checking Account Bounce Protection Programs (2003) 57 Consumer Finance Law Quarterly

Report 26.

Interagency Guidance on Overdraft Protection Programs, 70 Fed.Reg. 9127, 9128 (Feb. 24, 2005) (speaking of

overdraft protection by means including “line[s] of credit” and “linked accounts”).

Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of

California.

Rule 4-100(A)(1). See In the Matter of Respondent F (1992) 2 Cal. State Bar Ct. Rptr. 17.

10/

Rule 4-100(A)(2)-with the caveat that “the portion belonging to the [attorney] must be withdrawn at the

earliest reasonable time after the [attorney’s] interest in that portion becomes fixed.”

11/

Jackson v. State Bar (1979) 25 Cal.3d 398, 404 [158 Cal.Rptr. 869]. See, e.g., L.A. County Bar Ass’n, Formal

Opinion No. 485 (1996); Peck, Managing Clients’ Trust Accounts (1994) 517 PLI/Lit 197, 207.

12/

Clark v. State Bar (1952) 39 Cal.2d 161, 167 [246 P.2d 1].

APPENDIX 6

101

of credit or linkage to another account, that compensates exactly for the amount that the

overdraft exceeds the funds on deposit in a CTA does not threaten the separate identity of a

client’s funds, does not subject the client’s funds to claims of the attorney’s creditors,

13/

and

does not permit the attorney to use the client’s funds.

14/

Furthermore, the California

Supreme Court has held that an attorney’s deposit of personal funds to restore funds that

have been improperly withdrawn does not constitute a separate wrongful act of

impermissible commingling.

15/

A different situation is presented by an overdraft protection program that automatically

deposits a fixed amount into a CTA leaving a residue after the overdraft is satisfied. The

excess funds, which belong to the attorney, are not required to remedy an error. There is no

meaningful distinction between depositing excess funds to cure an overdraft and maintaining

a cushion of attorney funds in a CTA beyond an amount reasonably sufficient to cover bank

charges, a practice that has been prohibited.

16/

Leaving excess funds belonging to the

attorney in a CTA in order to avoid the negative effect of error, even if it causes no harm to a

client or any other person or entity with an interest in the trust funds, may expose an

attorney to discipline.

17/

Banks are required by law to report to the State Bar the presentment of any properly payable

instrument against a CTA containing insufficient funds, whether or not the instrument is

honored.

18/

Although overdraft protection will not avoid notification of the State Bar, nor

exculpate any unethical conduct that caused the overdraft, it may avoid negative

consequences to a client resulting from a dishonored check. Therefore, rather than violating

13/

A bank may not offset an attorney depositor’s debt against his CTA. “The bank’s right of offset . . . exists only

if the depositor is indebted to the bank in the same capacity as he holds the account. Thus, a bank may not ‘apply

the trust funds to a personal indebtedness of the trustee.’ [Citations omitted.]” (Chazen v. Centennial Bank (1998)

61 Cal.App.4th 532, 541 [71 Cal.Rptr.2d 462].)

14/

Of course, if an attorney were to employ an overdraft protection program that compensates exactly for the

amount that the overdraft exceeds the funds on deposit in a CTA as part of a scheme to siphon off a client’s

funds for the attorney’s own use, the attorney would thereby misappropriate the client’s funds.

15/

Guzzetta v. State Bar (1987) 43 Cal.3d 962, 978-979 [239 Cal.Rptr. 675].

16/

Silver v. State Bar (1974) 13 Cal.3d 134, 145, footnote 7 [117 Cal.Rptr. 821].

17/

Guzzetta v. State Bar, supra, 43 Cal.3d at

p. 976: “However, as the State Bar Court correctly noted, ‘good faith of an attorney is not a defense involving

Rules of Professional Conduct 8-100(A)(B).’ [Citation omitted.] Rule 8-101 is violated where the attorney

commingles funds or fails to deposit or manage the funds in the manner designated by the rule, even if no

person is injured. [Citation omitted.]”

18/

"A financial institution . . . which is a depository for attorney trust accounts . . . shall report to the State Bar in

the event any properly payable instrument is presented against an attorney trust account containing insufficient

funds, irrespective of whether or not the instrument is honored." (Bus. & Prof. Code, § 6091.1.)

APPENDIX 6

102

an attorney’s fiduciary duties to a client under rule 4-100, overdraft protection is a recognized

method of protecting the client’s funds from loss.

19/

It follows that, under the facts presented, Bank was required to notify the State Bar that the

expense check drawn on the CTA was paid against insufficient funds, even though subsequent

events would reveal that its action resulted from its misposting. Attorney, however, should

not be subject to discipline with respect to the triggering of overdraft protection for the

expense check. Of course, an attorney has a “personal obligation of reasonable care to

comply with the critically important rules for the safekeeping and disposition of client

funds.”

20/

That obligation is nondelegable.

21/

“[W]here fiduciary violations occur as a result of

the serious and inexcusable lapses in office procedure, they may be deemed ‘wilful’ for

disciplinary purposes, even if there was no deliberate wrongdoing.”

22/

Moreover, if an

attorney were to make use of overdraft protection for an impermissible purpose such as

issuing checks prior to the availability of the funds against which they were to be paid, the

attorney could be found culpable of failure to maintain the CTA in violation of rule 4-100.

Under the facts presented, however, there was no violation by Attorney because there was

no lapse in office procedure or repeated use of overdraft protection for an impermissible

purpose.

23/

There were indeed mistakes and errors, but they were attributable to Bank and

not to Attorney.

24/

19/

“Overdraft protection for your client trust account is a good idea. Client retainer checks may bounce, clerical

errors may occur in drafting checks, and even banks sometimes make errors. At a minimum, overdraft

protection ensures that clients will not be harmed by a drop in the client trust account.” (Vapnek et al., Cal.

Practice Guide: Professional Responsibility (The Rutter Group 2004) § 9:153 (italics in original).) As the foregoing

quotation indicates, overdraft protection for a client trust account is a good idea not only against errors by banks

and other third parties, but also against errors by the attorney’s staff and the attorney him- or herself.

20/

Palomo v. State Bar (1984) 36 Cal.3d 785, 795 [205 Cal.Rptr. 834]. See, e.g., Tatlow v. State Bar (1936) 5

Cal.2d 520, 524 [55 P.2d 214] (fundamental rule of ethics is common honesty, “without which the profession is

worse than valueless in the place it holds in the administration of justice”).

21/

Coppock v. State Bar (1988) 44 Cal.3d 665, 680 [244 Cal.Rptr. 462].

22/

Palomo v. State Bar (1984) 36 Cal.3d 785, 795 [205 Cal.Rptr. 834].

23/

An attorney’s personal, and nondelegable, obligation of reasonable care to protect client funds requires the

attorney to supervise the attorney’s employees. In the Matter of Malek-Yonan (2003) 4 Cal. State Bar Ct. Rptr.

627.

24/

If Bank were to continue to make mistakes and errors with respect to the CTA, and if such mistakes and

errors were to threaten the integrity of the client funds deposited, Attorney might be required to take

appropriate action in response, which might include transferring the CTA to another financial institution.

APPENDIX 6

103

2. An attorney who issues a CTA check against insufficient funds is required to make any

dishonored check good or otherwise make payment, take reasonably prompt action to

ascertain what caused the problem, and correct or change whatever led to the occurrence.

Since an attorney has an obligation that is both personal and nondelegable to take reasonable

care to protect client funds, the attorney has attendant obligations: (1) to deposit funds

sufficient to clear any check drawn on the CTA that is dishonored for insufficient funds

25/

depositing personal funds into a CTA to remedy an overdraft does not constitute impermissible

commingling

26/

- or to make payment by other means; (2) to take reasonably prompt action to

ascertain the condition or event that caused the check to be dishonored; and (3) to implement

whatever measures are necessary to prevent its recurrence.

27/

In addition, since an attorney

has an obligation to keep clients advised of significant developments relating to the

employment or representation, the attorney may also have an obligation to advise the affected

client of the overdraft of the client’s funds if the client will experience negative

consequences.

28/

Under the facts presented, the expense check drawn on the CTA was not dishonored. As a

result, there was no check that Attorney had to make good or provide for payment otherwise;

neither were there any practices or procedures Attorney had to change or any lapses

Attorney had to correct. Likewise, there was no significant development about which

Attorney had to advise Client. As its name declares, overdraft protection protected Client

from experiencing any negative consequences from the dishonoring of the expense check by

preventing dishonoring of the check. It follows that, under these circumstances, Attorney has

no obligation to advise Client of this occurrence.

3. Earned fees need not be withdrawn immediately from a CTA after they become fixed, but

instead must be withdrawn at the earliest reasonable time.

Rule 4-100(A)(2) provides: “In the case of funds belonging in part to a client and in part presently

or potentially to the [attorney], the portion belonging to the [attorney] must be withdrawn at the

earliest reasonable time after the [attorney’s] interest in that portion becomes fixed.”

Nothing in rule 4-100 or related judicial decisions defines “earliest reasonable time.” But the

rule does indeed give some indications in this regard. As noted, it provides that an attorney

must withdraw from a CTA the portion of funds belonging to the attorney at the earliest

reasonable time “after the [attorney’s] interest in that portion becomes fixed.” In so providing,

25/

Cf. Waysman v. State Bar (1986) 41 Cal.3d 452, 458 [224 Cal.Rptr. 101] (attorney immediately notified client

of misappropriation and assumed responsibility).

26/

Guzzetta v. State Bar, supra, 43 Cal.3d at pp. 978-979.

27/

See Greenbaum v. State Bar (1976) 15 Cal.3d 893, 905 [126 Cal.Rptr. 785]; Bradpiece v. State Bar (1974) 10

Cal.3d 742, 748 [111 Cal.Rptr. 905].

28/

See Waysman v. State Bar, supra 41 Cal.3d at p. 458.

APPENDIX 6

104

the plain language of rule 4-100 suggests that an attorney is not required to withdraw the

attorney’s fees from a CTA “immediately.” But it also suggests that an attorney is not allowed to

delay until he or she finds it “convenient” to make the withdrawal. If the attorney delays

unreasonably, the client’s funds may be “endanger[ed],” as by “attachment” in a case where

the attorney’s “creditors [are led] to believe the funds belong to the [attorney] rather than the

client.”

29/

Although the phrase “earliest reasonable time” contains the word “reasonable” and therefore

counsels that all relevant circumstances should be taken into account, including especially the risk

to the client’s interest, a rule of thumb is suggested by the standards for preserving the identity of

funds and property of a client adopted by the Board of Governors of the State Bar. Those standards

require a monthly reconciliation of a CTA, which identifies the portion of the funds belonging to the

attorney.

30/

It follows, therefore, that an attorney should withdraw the attorney’s fees from the CTA

at the time of the monthly reconciliation after that portion has become fixed.

Under the facts presented, Attorney appears not to have withdrawn Attorney’s fees from the CTA

at the “earliest reasonable time.” Attorney’s fees had become fixed about three months earlier.

Attorney’s preoccupation with trial may have made such a period of time seem reasonable. But a

delay of this length of time might have proved harmful to Client-and Attorney’s other clients-if, for

example, Attorney’s creditors had attached the funds in the CTA on the belief they belonged to

Attorney.

31/

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of

the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of

California, its Board of Governors, any persons, or tribunals charged with regulatory

responsibilities, or any member of the State Bar.

29/

Vapnek et al., [(Cal. Practice Guide: Professional Responsibility)], supra, § 9:179 (citing Vaughn v. State Bar

(1972) 6 Cal.3d 847, 852-853 [100 Cal.Rptr. 713] [CTA was attached as a result of actions brought against

attorney for personal debts]).

30/

Standards for Client Trust Account, Std.(1)(d) adopted by the Board of Governors of the State Bar, effective

January 1, 1993, pursuant to rule 4-100(C).

31/

Whether Attorney disbursed Client’s portion from the CTA in timely fashion is beyond the scope of this

opinion, and is accordingly neither addressed nor resolved herein.

105

APPENDIX 6: STATE BAR FORMAL OPINION NO. 2006-171

THE STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT

FORMAL OPINION NO. 2006-171

ISSUES

Is an attorney who has withdrawn a fee from a client trust account in compliance with rule 4-

100(A)(2), ethically obligated to return any of the withdrawn funds to the client trust account

when the client later disputes the fee?

DIGEST

Once an attorney has withdrawn a fee from a client trust account in compliance with rule 4-

100(A)(2), those funds cease to have trust account status. As such, there is no obligation to

return to the trust account amounts that are later disputed by the client.

AUTHORITIES INTERPRETED

Rule 4-100 of the Rules of Professional Conduct of the State Bar of California.

STATEMENT OF FACTS

Attorney represents Client in a litigation matter that Client has brought against Adversary. A

written fee agreement between Attorney and Client states that Attorney will be paid a

contingent fee equal to a percentage of Client’s “net recovery” in the matter, if any.

Consistent with the State Bar’s Sample Written Fee Agreement Form for a contingency fee

agreement, Client’s “net recovery” is defined as the total of all amounts received by

settlement or judgment less certain scheduled costs and disbursements. Under the terms of

the fee agreement, Attorney is entitled to 25% of Client’s net recovery if the matter is

resolved prior to the filing of a lawsuit, and one-third (33 1/3%) of Client’s net recovery if the

matter is resolved at any time thereafter. The agreement complies with California Business

and Professions Code section 6147 in all respects, and includes a valid charging lien, and

stating that Attorney is entitled to take his fee from the Client’s recovery, whether by

judgment, award or settlement.

The case settles after the filing of the lawsuit but before the commencement of trial. Client

executes and delivers a settlement agreement with Adversary pursuant to which Adversary

agrees to pay Client $100,000. Upon execution and delivery of the settlement agreement,

APPENDIX 6

106

Adversary sends Attorney a check for $100,000 payable jointly to Attorney and Client. As

required by rule 4-100(B)(1), Rules of Professional Conduct of the State Bar of California,

Attorney notifies the Client of receipt of the funds, and pursuant to rule 4-100(B)(3) Attorney

provides Client a written accounting setting forth the following proposed distribution:

1. Total settlement amount of $100,000;

2. Itemized list of costs and disbursements in the aggregate amount of $7,000;

3. Amount to be paid to Attorney as his fee - one-third of the net recovery of $93,000 or

$31,000; and

4. Net amount to be paid to Client - the remaining balance of $62,000.

Client comes to Attorney’s office, goes over the accounting with Attorney, endorses the

settlement check and signs off on the accounting approving the proposed distribution. As

required by rule 4-100(A), Attorney deposits the $100,000 settlement check in Attorney’s

Client Trust Account (“CTA”). Promptly upon confirming that the $100,000 check has cleared,

and reasonably believing the representation concluded and the fee “fixed” within the

meaning of rule 4-100(A)(2), Attorney writes two checks out of the CTA as follows: a check to

Client in the amount of $62,000 and a check payable to Attorney’s general account in the

amount of $38,000 as reimbursement of $7,000 in costs and payment of $31,000 in fees.

Pursuant to Client’s instructions, Attorney immediately mails the $62,000 check to Client.

Attorney also immediately deposits the $38,000 check into Attorney’s general account. A

week later, Attorney receives a telephone call from Client who tells Attorney that the

$31,000 fee is too high for the amount of work actually performed and that Attorney

should send Client a check for an additional $10,000.

DISCUSSION

Trust Account Status

Rule 4-100(A) states that “[a]ll funds received or held for the benefit of clients by a member

or law firm, including advances for costs and expenses, shall be deposited in one or more

identifiable bank accounts labeled “Trust Account,” “Client’s Funds Account” or words of

similar import....” Money that an attorney holds “for the benefit of clients” includes:

1. Money that belongs to a client;

2. Money in which the attorney and client have a joint interest;

3. Money in which a client and a third party have a joint interest; and

All rule references are to the Rules of Professional Conduct of the State Bar of California.

APPENDIX 6

107

4. Money that doesn’t belong to a client, but which counsel is nevertheless holding as

part of the subject representation.

Such funds (“trust account funds,” or funds having “trust account status”) are subject to

various requirements regarding disbursement, payment of interest, record keeping and the

like as set forth in rule 4-100 and authorities interpreting it. Principal among these restrictions

is a flat prohibition on the commingling of trust account funds and an attorney’s personal or

office funds. In fact, regarding withdrawal of trust account funds for payment of fees, rule 4-

100(A)(2) states that any portion of trust account funds that belong to counsel “must be

withdrawn at the earliest reasonable time after [his or her] interest in that portion becomes

fixed,” unless the attorney’s portion is disputed by the client for any reason. In such event,

rule 4-100(A)(2) further instructs that “the disputed portion shall not be withdrawn until the

dispute is finally resolved.”

However, rule 4-100 is silent regarding the situation where a fee properly withdrawn from a

CTA is later disputed. In that regard, we believe that the inquiry is whether funds properly

withdrawn from a CTA under rule 4-100(A)(2) and later disputed by the client retain or regain

its trust account status once the dispute is communicated to the attorney. Based on a plain

reading of the rule we answer this question in the negative. Attorney, in the situation

presented, neither “received” nor “holds” the withdrawn funds for the benefit of the client.

Quite the contrary, at the moment of withdrawal, the withdrawn funds are Attorney’s

personal property by operation of rule 4-100(A)(2). As such, Attorney is both obligated to

withdraw the funds from the CTA and free to do with those funds as she or he pleases. At the

moment of withdrawal, none of the indicia of trust account status are present: the withdrawn

funds do not belong to the client, are not subject to a joint interest of attorney and client, are

not subject to a joint interest of the client and any third party, and are not being held by the

Attorney as part of the subject representation.

Likewise, the fact that Attorney has withdrawn the fee from a CTA (as opposed to having

received it by way of the client’s personal check or by accepting cash from the client) is

analytically irrelevant. There is no authority in the text of rule 4-100 or elsewhere to suggest

that funds with trust account status, properly “fixed” and withdrawn under rule 4-100(A)(2),

regain trust account status simply because the client later disputes the fee. Such a conclusion

would also create a host of problems for the practical administration of a law office, if, for

example, the withdrawn funds were used to pay staff salaries or bona fide office expenses, or,

if the withdrawal happens in one tax year while the client’s challenge occurs in the next.

As such, absent trust account status, the withdrawn funds are analytically equivalent to

money paid by client to Attorney for charged fees by any other means. The fact that the client

The State Bar of California, Handbook on Client Trust Accounting for California Attorneys (2003) at pg. 13.

[Publisher’s Note: Information that appears on page 13 of the Handbook on Client Trust Accounting for California

Attorneys (2003), now appears on page 15 of the Handbook on Client Trust Accounting for California Attorneys

(2014).]

APPENDIX 6

108

later expresses remorse, regret or other dissatisfaction with the amount of Attorney’s fee is a

matter of contract to be resolved by an analysis of the engagement agreement and the

respective performance of the parties.

Misappropriation Distinguished

It is worth repeating that the Statement of Facts presupposes a proper withdrawal of the fee.

We are mindful of the substantial authority relating to the misappropriation of trust account

funds.

In that regard, we note simply that funds misappropriated from a CTA, or withdrawn

before an attorney’s fee becomes “fixed” within the scope of rule 4-100(B)(2), are funds in

which the client has a whole or part ownership interest.

As such, misappropriated funds are

ones that have never lost their trust account status and remain subject to rule 4-100 in all

respects.

CONCLUSION

Funds properly withdrawn from a CTA under rule 4-100(A)(2) and later disputed by the client

neither retain nor regain their trust account status, and therefore do not need to be re-

deposited into the attorney’s CTA. Based on a plain reading of rule 4-100, we believe that

such funds bear none of the indicia of trust account status at the moment of withdrawal, i.e.,

the withdrawn funds do not belong to the client, are not subject to a joint interest of attorney

and client, are not subject to a joint interest of the client and any third party, and are not

being held by the Attorney as part of the subject representation. As such, absent trust

account status, the withdrawn funds are analytically equivalent to money paid by Client to

Attorney for charged fees by any other means. The fact that Client later expresses remorse,

regret or other dissatisfaction with the amount of Attorney’s fee is a matter of contract to be

resolved by an analysis of the engagement agreement and the respective performance of the

parties.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct

of the State Bar of California. It is advisory only. It is not binding upon the courts, the State

See, e.g., Sternlieb v. State Bar (1990) 52 Cal.3d 317, 328 [276 Cal.Rptr. 346]; Bates v. State Bar (1990) 51

Cal.3d 1056 [275 Cal.Rptr. 381]; Walker v. State Bar (1989) 49 Cal.3d 1107 [264 Cal.Rptr. 825]; and Garlow v.

State Bar (1988) 44 Cal.3d 689 [244 Cal.Rptr. 452]; (failure to restore misappropriated funds warrants discipline).

Misappropriation of client trust funds may occur without an intent to commit a conversion of client funds.

(See: McKnight v. State Bar (1991) 53 Cal.3d 1025 [281 Cal. Rptr. 766]; Giovanazzi v. State Bar (1980) 28 Cal.3d

465 [169 Cal. Rptr. 581]; In the Matter of Doran (Rev. Dept. 1998) 3 Cal. State Bar Ct. Rptr. 871; and In the

Matter of Bleecker (Rev. Dept. 1990) 1 Cal. State Bar Ct. Rptr. 113.) Readers are cautioned that a lawyer has

been disciplined for failing to hold funds in a CTA where a withdrawal of funds was based upon a belief that the

disbursement was proper, at the time of the disbursement, but that belief was subsequently discovered to be

erroneous. (See In the Matter of Respondent E (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716.)

APPENDIX 6

109

Bar of California, its Board of Governors, any persons, or tribunals charged with regulatory

responsibilities, or any member of the State Bar.

110

APPENDIX 6: STATE BAR FORMAL OPINION NO. 2007-172

THE STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT

FORMAL OPINION NO. 2007-172

ISSUES

1. May an attorney ethically accept payment of earned fees from a client by credit card?

2. May an attorney ethically accept payment of fees not yet earned from a client by credit

card?

3. May an attorney ethically accept payment of advances for costs and expenses from a

client by credit card?

DIGEST

1. An attorney may ethically accept payment of earned fees from a client by credit card. In

doing so, however, the attorney must discharge his or her duty of confidentiality.

2. Likewise, an attorney may ethically accept a deposit for fees not yet earned from a client

by credit card, but must discharge his or her duty of confidentiality.

3. By contrast, an attorney may not ethically accept a deposit for advances for costs and

expenses from a client by credit card because the attorney must deposit such advances

into a client trust account and cannot do so initially because they are paid through an

account that is subject to invasion.

AUTHORITIES INTERPRETED

Rules 1-320, 3-100, 3-700, 4-100, and 4-200 of the Rules of Professional Conduct of the State

Bar of California.

Business and Professions Code section 6068.

STATEMENT OF FACTS

Attorney desires to accept payments and deposits from her clients by credit card for (1)

earned fees, (2) fees not yet earned, and (3) advances for costs and expenses. Attorney

APPENDIX 6

111

intends to absorb the service charge debited by the credit card issuer, which would

accordingly result in reducing the amount netted.

DISCUSSION

1. An Attorney May Ethically Accept Payment of Earned Fees by Credit Card.

The first question is whether an attorney may ethically accept payment of earned fees from a

client by credit card.

By way of background, a typical transaction involving a credit card issued by a bank operates

as follows: “Issuing banks are members of [various] . . . not-for-profit associations of member

banks that operate a worldwide communication system for financial transfers using credit

cards. Issuing banks issue credit cards to consumers, enabling those consumers to make

credit-card purchases at participating businesses. To accept credit cards, businesses must

open an account with a merchant bank. Merchant banks, like issuing banks, are members of

[the same not-for-profit associations], but merchant banks have accounts with businesses,

not consumers. Once a business is electronically connected with a merchant bank, it can

accept a consumer’s credit card by processing the credit card through a point-of-sale terminal

provided to it by the merchant bank. If the merchant bank approves the sale, it immediately

credits the business for the amount of the consumer’s purchase. The merchant bank then

transmits the information regarding the sale to [the not-for-profit association in question],

who in turn forward[s] the information to the bank that issued the card to the consumer who

made the purchase. If the issuing bank approves the sale, it notifies [the not-for-profit

association] and then pays the merchant bank at the end of the business day. The issuing

bank carries the debt until the cardholder pays the bill.”

From all that appears, credit card

issuers deposit funds on use of a credit card into the merchant account established for that

purpose at the merchant bank; the merchant bank may invade the funds via chargebacks,

that is, the imposition of debits, in the event that the credit card holder disputes the charge.

Whether and, if so, under what conditions a merchant account might be rendered not subject

It should be noted that “earned fees” include fees paid pursuant to a “classic ‘retainer fee’ arrangement. A

retainer is a sum of money paid by a client to secure an attorney’s availability over a given period of time. Thus,

such a fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether

he [or she] actually performs any services for the client.” (Baranowski v. State Bar (1979) 24 Cal.3d 153, 164,

fn. 4.)

United States v. Ismoila (5th Cir. 1996) 100 F.3d 380, 385-386. The law governing credit card transactions is

largely based on individual contracts between credit card issuers, credit card holders, and others, and not on

general statutory provisions. (See Maggs, Regulating Electronic Commerce (2002) 50 Am. J. Comp. L. 665, 678

[“Private contracts rather than legislative enactments establish most of the rights and duties of cardholders,

card issuers, and merchants.”].) As a result, the specifics of credit card transactions vary greatly the one from

the other.

APPENDIX 6

112

to invasion is unknown to the Committee. But to the extent that a merchant account is

subject to invasion, it is not, and cannot be deemed, a client trust account.

More than 25 years ago, in California State Bar Formal Opn. No. 1980-53, the Committee

opined that an attorney may ethically charge interest on past due receivables from a client,

provided that the client gives his or her informed consent in advance. In the course of its

analysis, the Committee stated: “The Commitee [sic] on Ethics and Professional Responsibility

of the American Bar Association initially concluded that use of credit cards for payment of

legal fees was unprofessional because it was ‘wrong’ to put professional services in the same

category as ‘sales of merchandise and sales of nonprofessional services,’ especially when all

credit card publicity was directed to such sales. (ABA Committee on Ethics and Prof.

Responsibility, informal opn. No. 1120 (1969).) The Committee reiterated that this conclusion

applied even when the law firm agreed not to display promotional material and where

collection of accounts by the banks was without recourse. (See ABA Committee on Ethics and

Prof. Responsibility, informal opn. No. 1176 (1971).) [¶] However, upon adoption of the Code

of Professional Responsibility by virtually all fifty states, the American Bar Association

Committee on Ethics and Professional Responsibility overruled the latter two decisions and

approved use of credit cards subject to [various] conditions for services actually rendered.”

(Cal. State Bar Formal Opn. No. 1980-53.)

In California State Bar Formal Opn. No. 1980-53, the Committee did not resolve the question

whether an attorney may ethically accept payment of earned fees from a client by credit

card.

The Committee is now of the opinion that the question should be answered in the

affirmative. An attorney may ethically accept payment of earned fees by check or cash. By

parity, an attorney may do the same by credit card. To be sure, a generation ago, the “use of

credit cards for payment of legal fees” was deemed “unprofessional.” (ABA Committee on

Ethics and Prof. Responsibility, Informal Opn. No. 1120 (1969).) But for many years, that has

not been the case.

Although the Committee is of the opinion that an attorney may ethically accept payment of

earned fees from a client by credit card, in doing so, the attorney must nevertheless be

careful to comply with various ethical obligations.

See F.T.C. v. Overseas Unlimited Agency, Inc. (9th Cir. 1989) 873 F.2d 1233, 1233-1234. By parity, to the

extent that a merchant account is not subject to invasion, it may be a client trust account.

See, e.g., State Bar Policy Statement on Use of Credit Cards for Payment of Legal Services and Expenses (Feb.

11, 1975); San Diego County Bar Association Formal Opn. Nos. 1972-10, 1972-13, & 1974-6; Bar Association of

San Francisco Formal Opn. No. 1970-1; cf. ABA Formal Opn. No. 00-419 (2000) (withdrawing Informal Opn. Nos.

1120 and 1176); Colorado Bar Association Formal Ethics Opn. No. 99 (1997); Mass. Bar. Association Ethics Opn.

78-11 (1978); New Mexico State Bar Association Advisory Opn. 2000-1 (2000); North Carolina State Bar Formal

Ethics Opn. 97-9 (1998).

APPENDIX 6

113

For example, an attorney must discharge his or her duty of confidentiality to clients under

Business and Professions Code section 6068, subdivision (e), and under rule 3-100 of the

Rules of Professional Conduct of the State Bar of California.

Credit card issuers require a

description on the credit card charge slip of the goods or services provided. In furnishing such

a description, the attorney may not disclose confidential information without the client’s

informed consent.

To that end, the description should be general in nature, such as “for

professional services rendered.”

By contrast, an attorney does not implicate his or her duty not to charge the client an

unconscionable fee in violation of rule 4-200 simply by accepting payment of earned fees

from a client by credit card. To be sure, by accepting such payment, the attorney allows the

client to subject him- or herself to interest and late charges imposed by the credit card issuer.

There are many credit card issuers; each may set its own interest rates and late charges

separately from the rest, and in addition, each may set interest rates and late charges

separately for various classes of holders.

If the attorney were attempting to subject the

client to interest and late charges, the attorney would be ethically obligated to obtain the

client’s informed consent and comply with applicable law broadly defined,

including the

prohibition of rule 4-200 against unconscionability. But the attorney is subject to no such

obligation if the client chooses to subject him- or herself to interest and late charges imposed

by the credit card issuer. The attorney may choose to advise the client that the client’s credit

card issuer sets interest rates and late charges and that the client would do well to determine

such rates and charges before using the credit card, but is not ethically obligated to do so.

Likewise, an attorney does not implicate his or her duty not to share fees with a non-attorney

in violation of rule 1-320 simply by accepting payment of earned fees from a client by credit

card and thereby making a payment to the credit card issuer through a debit of a service

charge. The purpose of rule 1-320 is “to protect the integrity of the attorney-client

relationship, to prevent control over the services rendered by attorneys from being shifted to

lay persons, and to ensure that the best interests of the client remain paramount.”

service-charge debit, which amounts to the attorney’s payment for a convenient method of

Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State of

California.

Cf. Hooser v. Superior Court (2000)

84 Cal.App.4th 997, 1005 (stating that even the fact that an attorney is representing a client may fall within the

protection of the attorney-client privilege).

See footnote 1, ante.

California State Bar Formal Opn. No. 1980-53; see Bar Association of San Francisco Formal Opn. No. 1970-1;

Los Angeles County Bar Association Formal Opn. Nos. 370 (1978), 374 (1978) & 499 (1999); San Diego County

Bar Association Formal Opn. No. 1983-1; cf. ABA Formal Opn. No. 388 (1974).

Los Angeles County Bar Association Formal Opn. No. 510 (2003); accord, Gafcon, Inc. v. Ponsor & Associates

(2002) 98 Cal.App.4th 1388, 1418; see, e.g., Gassman v. State Bar (1976) 18 Cal.3d 125, 132.

APPENDIX 6

114

receiving funds owed the attorney, does not frustrate the purpose of rule 1-320, and for that

reason does not come within the rule’s proscription.

It follows that Attorney in the Statement of Facts may ethically accept payment of earned

fees from her clients by credit card. Attorney may also ethically absorb the service charge

debited by the credit card issuer. But as noted above, Attorney would have to be careful to

discharge her duty of confidentiality to her clients.

2. An Attorney May Ethically Accept a Deposit for Fees Not Yet Earned by Credit Card.

The second question is whether an attorney may ethically accept a deposit for fees not yet

earned from a client by credit card.

At the outset, the Committee is of the opinion that just as the former hostility to the

“unprofessional” use of credit cards for payment of legal fees does not justify a conclusion

that an attorney may not ethically accept payment of earned fees from a client by credit card,

neither does it justify such a conclusion with respect to accepting a deposit for fees not yet

earned—so long as the deposit, as will be explained, does not include advances for costs and

expenses.

Under rule 4-100, an attorney is subject to an ethical obligation to “deposit[]” “[a]ll funds

received or held for the benefit of clients” into a client trust account. (Rule 4-100(A).) This

ethical obligation is not qualified, conditional, or avoidable, and therefore does not allow the

attorney, with or without the client’s consent, to take such actions as depositing client funds

initially into an account other than a client trust account and subsequently transferring them

into a client trust account if or when reasonable or practicable. The attorney is subject to a

concomitant ethical obligation, which is “both personal and nondelegable,” to “take

reasonable care to protect client funds” deposited into a client trust account.

10/

Under rule 4-100, as it has been construed by the courts, an attorney is ethically permitted,

but not required, to deposit fees not yet earned into a client trust account.

11/

10/

California State Bar Formal Opn. No. 2005-169.

11/

Securities and Exchange Commission v. Interlink Data Network of Los Angeles, Inc.

(9th Cir. 1996) 77 F.3d 1201, 1205-1207 (semble); see generally Vapnek et al., Cal. Practice Guide: Professional

Responsibility (The Rutter Group 2006) §§ 9:107-9.108.

In Baranowski v. State Bar, supra, 24 Cal.3d at p. 164, the Supreme Court left open the question whether the

substantially identical predecessor of rule 4-100 required an attorney to deposit payment of fees not yet

earned—so-called advance fees—into a client trust account. The Supreme Court has not given an answer in any

subsequent decision. But it has nevertheless effectively articulated its views. “Although expressly not deciding

the advance fee issue in Baranowski, . . . the Cal. Supreme Court did approve current [Rule] 4-100 as proposed

by the State Bar. In recommending the current Rule, the State Bar specifically noted that it did not intend the

Rule to require advance fees to be deposited in a client’s trust account: [¶] ‘The concept of including in

paragraph (4-100)(A) a requirement that “advances for fees” be placed in the client trust account was

considered but rejected because it is believed that such a provision is unworkable in light of the realities of the

APPENDIX 6

115

If an attorney were required to deposit fees not yet earned into a client trust account, the

attorney would not be permitted to accept such a deposit from a client by credit card to the

extent that the credit card issuer deposits funds into a merchant account that is subject to

invasion. That is because to that extent: (1) the credit card issuer deposits the funds into a

merchant account; (2) the attorney, however, must deposit the funds into a client trust

account; (3) the attorney must take reasonable care to protect the funds deposited into a

client trust account; and (4) before the attorney can assert control over the funds, the

merchant bank may invade the funds in the merchant account, thereby putting the funds at

risk beyond the attorney’s protection. As a consequence, the attorney could not immediately

deposit such fees into a client trust account or take care to protect them, but would have to

cede control to the merchant bank, at least initially.

12/

But because an attorney need not deposit fees not yet earned into a client trust account, the

attorney may accept such a deposit by credit card, resulting in a deposit into a merchant

account.

The fact that an attorney need not deposit fees not yet earned into a client trust account

does not mean that, solely as a matter of prudence, the attorney should decline to do so.

Upon termination of employment, an attorney is subject to an ethical obligation under rule

3-700(D)(2) to “[p]romptly refund any part of a fee paid in advance that has not been

earned.” Failure to deposit such fees into a client trust account risks their unavailability at the

time, if any, at which they must be refunded. After they are deposited in a merchant account

practice of law.’ [In the Matter of the Proposed Amendments to the Rules of Professional Conduct, California

Supreme Court Case No. Bar Misc. 5626, at ‘Request that the Supreme Court of California Approve Amendments

to the Rules of Professional Conduct of the State Bar of California, and Memorandum and Supporting

Documents in Explanation,’ at Memorandum, Dec. 1987, p. 42 (parentheses added)]” (Vapnek et al., Cal.

Practice Guide: Professional Responsibility (The Rutter Group 2006) § 9:107.2.) In approving rule 4-100 as

recommended, the Supreme Court allowed an attorney not to deposit advance fees into a client trust account.

Since that time, it has “declined to approve a proposed rule amendment requiring advance fees to be paid into

client trust accounts.” (Ibid.; see “Request for Approval of Amendments to Rules 3-700 and 4-100 of the Rules of

Professional Conduct,” No. S029270 (May 11, 1995).)

It may be noted that, in T & R Foods, Inc. v. Rose (1996) 47 Cal.App.4th Supp. 1, 7, the Appellate Department of

the Superior Court construed rule 4-100 to require an attorney to deposit payment of fees not yet earned into a

client trust account, but did so without consideration of the Supreme Court’s action, and inaction, with respect

to rule 4-100 following Baranowski.

12/

Of course, even though funds deposited into a client trust account are not subject to invasion as are funds

deposited into a merchant account, they may suffer a similar adverse effect in their amount or availability as a

result of acts or omissions by the attorney—who might, for example, erroneously issue a check against

insufficient funds in the client trust account—or by others—including the bank, which might, for instance,

mispost a check intended for deposit into the client trust account. The possibility of such adverse effects,

however, does not release the attorney from the ethical obligation to deposit funds into a client trust account.

Neither does that possibility allow the attorney to deposit funds into an account other than a client trust

account if he or she is ethically obligated to deposit them into a client trust account.

APPENDIX 6

116

by a credit card issuer, such fees may ethically be transferred into a client trust account. By

means of such a transfer, an attorney would ensure their availability should he or she be

required to refund any or all of them to the client. Although not ethically required to make a

transfer of this sort, the attorney may consider doing so solely as a matter of prudence.

It follows that Attorney in the Statement of Facts may ethically accept a deposit for fees not

yet earned from her clients by credit card. As stated above, she may also ethically absorb the

service charge debited by the credit card issuer. But again, as stated above, she would have to

be careful to discharge her duty of confidentiality to her clients.

3. An Attorney May Not Ethically Accept A Deposit for Advances for Costs and Expenses by

Credit Card.

The third question is whether an attorney may ethically accept a deposit for advances for

costs and expenses from a client by credit card.

Under rule 4-100, among the “funds received or held for the benefit of clients” that an

attorney is ethically obligated to deposit into a client trust account are “advances for costs

and expenses.” (Rule 4-100(A).)

Because an attorney must deposit advances for costs and expenses from a client into a client

trust account, he or she may not ethically accept such a deposit by credit card, as explained

above, to the extent that the credit card issuer deposits funds into a merchant account that is

subject to invasion. It follows that the attorney may not ethically accept any payment or

deposit from a client by credit card, whether for earned fees or fees not yet earned, if the

payment or deposit includes advances for costs and expenses.

13/

The attorney, however, may

accept reimbursement by credit card for costs and expenses already paid. By definition,

reimbursement of costs and expenses already paid does not constitute an “advance” of such

costs and expenses, and consequently it need not—and indeed may not—be deposited into a

client trust account.

It follows that Attorney in the Statement of Facts may not ethically accept a deposit for

advances for costs and expenses from her clients by credit card. She may, however, accept

reimbursement by credit card of costs and expenses already paid.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct

of the State Bar of California. It is advisory only. It is not binding upon the courts, the State

Bar of California, its Board of Governors, any persons, or tribunals charged with regulatory

responsibilities, or any member of the State Bar.

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See footnote 12, ante.

APPENDIX 6

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