Monday, 14 April 2008

Improper Handling of Client Trust Accounts

Managing money is always tricky, especially when it belongs to someone else. That's why, in 2006 alone, more than 20 lawyers found themselves before the State of Michigan Attorney Discipline Board after having grievances filed against them for mismanagement of their clients' funds.

However, in Michigan, there is an infrastructure in place that allows attorneys to insulate themselves from the consequences of accounting errors - both accidental and otherwise.

Specifically, Michigan Rule of Professional Conduct (MRPC) 1.15 provides guidelines for the two types of client accounts: Interest on Lawyers Trust Accounts (IOLTAs) and non-IOLTAs.

The rule defines an IOLTA as "an interest or dividend bearing account" that "shall include only client or third person funds that cannot earn income for the client or third person in excess of the costs incurred to secure such income while the funds are held."

Though interest is earned on this type of account, the client does not receive those proceeds. Instead, the interest is paid to the Michigan Bar Foundation.

Conversely, a non-IOLTA under MRPC 1.15 also earns interests or dividends, however, that "net interest or dividend will be paid to the client."

MRPC 1.15 applies to both pooled and individual client trust accounts. But, because "it is common for a lawyer only to maintain one pooled client trust account," said Professor Lawrence A. Dubin - who teaches Professional Responsibility at the University of Detroit School of Law - IOLTAs, rather than non-IOLTAs, may be easier for attorneys to work with.

However, that doesn't mean that IOLTA administration is without its own pitfalls.

In fact, with penalties ranging from a slap on the wrist to a permanent loss of license, learning the ins and outs of proper client trust management is fast becoming an integral part of effective practice management.