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Proper care of client funds essential for attorneys

iStock image used with permission.

iStock image used with permission.

With the amount of money lawyers handle, it may be easy to understand how they could mix accounts.

It may be difficult to keep finances straight, but it’s a must.

Improper care of client funds represents “a fair number” of the 2,300 to 2,500 complaints about attorneys received annually by the Attorney Grievance Committee of the Fourth Judicial Department, according to Chief Counsel Gregory J. Huether, who oversees the 22 counties in the three judicial districts within the department.

“The rules are somewhat complicated, but they’re required to be able to ensure the integrity of all money held in trust for clients,” he said. “Typically, attorneys have a trust account and an operating account, at a minimum. They’re required to keep the money separated and accounted for and not co-mingle funds.”

Huether, who works out of the Rochester office, said many of the complaints are unfounded, but sometimes they are an indicator of potential problems and may trigger an investigation which could result in private letters of caution or discipline, or a court referral for public discipline.

One of his attorneys, Anthony J. Gigliotti, principal counsel in the Fifth Judicial District in Syracuse, has written a column to offer “gentle reminders” to lawyers.

Gigliotti said attorney grievance investigations continue to show there are very common misconceptions lawyers have about the rules regarding the maintenance of other people’s funds and that a lot unintentionally get into trouble or violate the rules because they don’t understand and fulfill their roles as a fiduciary.

Gigliotti said the typical lawyer will have an office account for conducting most of their business and at least one attorney trust account for client funds.

He said one of the more common mistakes is lawyers issuing checks from their attorney trust accounts without verifying that funds previously deposited by check or wire transfer are actually available.

They are able to do so in many instances because there is money in the account, but they are actually paying obligations to one client with the money of another. In addition, every withdrawal must be made by check to a named payee and not to “cash.”

Another violation could result from mixing advance fees with trust accounts. Gigliotti said most lawyers are able to collect a certain amount of their fee in advance of actually doing the work. He said their natural intuition is to put it into an attorney trust account because they haven’t yet earned it, but it is actually their money and is illegally co-mingling with client funds if placed in the trust account.

He said some lawyers separate the funds to avoid spending the entire retainer. They consider the unearned portions as still belonging to the client and draw on them only as work progresses. That way, if a refund is due, they still have money available, but the practice is not permitted.

“There’s always a look of shock and surprise and concern when we inform them that they’ve been co-mingling funds under those circumstances,” Gigliotti said. “I think it’s very common. I wouldn’t necessarily say a majority of lawyers make that common mistake, but I would say a substantial portion of the practicing bar makes that mistake from time to time, and quite innocently.”

That can be solved through a retainer agreement stipulating how and when funds are to be used or simply by depositing the retainer in another separate account.

Gigliotti said the co-mingling rule serves an important purpose and relates to the intentional misuse of funds to hide money from people such as creditors, spouses or the Internal Revenue Service.

He said the committee had a situation with a lawyer who had a lot of creditors and was putting his money in an attorney trust account. He said the creditor figured it out and brought an action to freeze the account, which then blocked access to client funds.

Gigliotti said most lawyers learn how to run a law office if they go into practice with someone else who has been doing it properly.

“Tragically, an increasing number of law school graduates who are being admitted to the bar have no place to go, but to hang up their own shingle,” he said. “Increasing numbers of people without that mentoring are ending up in front our committee.”

Attorneys are caught when someone complains or maybe a check bounces, setting off an investigation which may uncover a series of problems. Gigliotti compared a dishonored check setting off a grievance investigation to a broken taillight prompting a traffic stop and uncovering other violations.

Roderick Quebral, principal counsel in the Eighth Judicial District in Buffalo, said a lot of the problems could be solved with good record keeping.

He said there are three main areas in which lawyers handle other people’s money: Real estate transactions, estates, and litigation settlements. Those funds should go into an attorney trust account.

For example, he said, if an attorney represents a seller in a real estate transaction, he or she will receive proceeds from the sale. The money will be used to pay attorney fees, taxes, closing expenses, other incidentals and to pay the seller.

He’s also noticed problems with lawyers relying on computers. He said that is fine, but that the software doesn’t do everything.

“The lawyer is responsible for reconciling accounts and making sure the money that comes in and goes out is accounted for,” Quebral said. “The computer program doesn’t do that for you. You’ve got everything entered and the computer’s computing everything, but you’re not actually checking it yourself.”

He said most attorneys are honest, but many are ignorant when it comes to handling other people’s money.

The grievance counselors recommend attorneys educate themselves. Quebral said there is so much available now on the Internet and through Continuing Legal Education courses, which have been mandatory for several years.

Gigliotti said records must also be kept for at least seven years, something else not all attorneys are aware of or practice. He suggests attorneys talk to a bookkeeper or an accountant to review the rules and make sure their accounts are set up correctly.

“If lawyers have questions, they shouldn’t regard our office in the same way that some organizations regard Internal Affairs,” Gigliotti said. “We’re not scary. We want to be helpful.”

He said success, to them, is making sure lawyers comply with the rules and they are happy to clarify them and show lawyers where they might find resources to comply with the rules and avoid problems.

Gigliotti also reminds attorneys that the Disciplinary Rules in the Code of Professional Responsibility are superseded by the Rules of Professional Conduct, issued April 1, 2009 by the New York State Unified Court System and available on its website ( Ethics rules on attorney trust account requirements are found in Rule 1.15. A link is also available on the New York State Bar Association’s website ( which also publishes a detailed “Attorney Escrow Accounts” reference guide by attorneys Peter V. Coffey and Anne Reynolds Copps.