Microsoft Word - 2017 TA Handbook.docx

Lawyer’s Trust

Account Handbook

The North Carolina State Bar

A publication designed to aid lawyers in

understanding the procedures and guidelines

for trust accounts.

Revised 11/2017

DISCLAIMER



Thishandbookcon tain slegalinformation,notlegaladvice.WhiletheStateBarwillmakeeveryeffortto

updatethemanualasnecessary,itistheresponsibilityofthemembertomakesurethattheyare

followingthemostcurrentversionoftheRulesofProfessionalConduct.Nothingcontainedinthis

handbook

isintendedtoaddressanyspecific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.



ACKNOWLEDGEMENTS



Selectedportionsofthishandbookwereadopted,adapted,and/orreprintedfromthema teri als

originallyauthoredbythefollowingjurisdictionswiththeirpermission:



TheStateBarofArizona,ClientTrustAccountingforArizonaAttorneys,2010(Forthecurrentonline

versionoftheArizonaHandbook,pleasegoto:myazbar.org/Members /Archives/Trust_Account_

Manual.pdf



NCStateBarTrustAccountHandbookSectionVI,Pages28‐32,SectionVII,Pages33‐42,AppendixB,

Pages90‐107.



TheStateBarofCalifornia,HandbookonClientTrustAccountingforCaliforniaAttorneys©2009Allrights

reserved.Nopartofthisworkmaybereproduced,storedin

aretrievalsystem,ortransmittedinany

mediumwithoutpriorwrittenpermissionofTheStateBarofCalifornia.(Forthecurrentonlineversionof

theCaliforniaHandbook,pleasegoto:ethics.calbar.ca.gov)atNCStateBarTrustAccountHandbook

SectionII,Pages11‐14.

Table of Contents

Introduction1



SectionI:TrustAccountingRules2

Rule1.15‐1,Definitions2

Rule1.15‐2,GeneralRules3

Rule1.15‐3,RecordsandAccountings5

Rule1.15‐4,AlternativeTrustAccount

ManagementProcedureforMulti‐MemberFirm  7

Rule.1316,IOLTAAccounts14

Rule.1317,Comparability RequirementsforIOLTAAccounts 15



SectionII:KeyConceptsinClientTrustAccounting  16

KeyConcept1:SeparateClientsareSeparateAccounts 16

KeyConcept2:YouCan’tSpendWhatYouDon’tHave 17

KeyConcept3:There’sNoSuchThingasa“NegativeBalance” 17

KeyConcept4:TimingisEverything17

KeyConcept5:YouCan’tPlaytheGameUnlessYou

Knowthe

Score18

KeyConcept6:TheFinalScoreisAlwaysZero  18

KeyConcept7:AlwaysMaintainanAuditTrail  19



SectionIII:TrustAccountBasics19

A.TrustAccounts:WhatAreTheyandHowManyDoYouNeed? 19

B.OpeningaTrustAccount20

C.TrustAccountManagement22

D.AbandonedorUnclaimedFunds/Property 23

E.ClosingaTrustAccount24



SectionIV:FundsGoIn24

A.WhatGoesIntoaTrustAccount?24

B.WhatDoesNotGointheTrustAccount25

C.DepositingFundsintoaTrustAccount26



SectionV:FundsGoOut27

A.WhatDisbursementsareInappropriate?27

B.OverdraftsandChecksPresentedAgainstInsufficientFunds 29

C.ACHTransactions30



SectionVI:Recordkeeping30

A.WhatRecordsareRequired?30 

B.AccountingSystemsandResources:ElectronicversusManual 31 

Manual31

Software32 



SectionVII:ReconciliationsandReviews32 

A.MonthlyReconciliation33 

B.QuarterlyReconciliation33 

C.ExampleofThree‐WayReconciliation34

D.QuarterlyReview41 



SectionVIII:Trustees,PersonalRepresentatives,

andOtherFiduciaryRoles42

A.FiduciaryAccounts42 

B.SegregationofFiduciaryFunds42 

C.LocationofFiduciaryAccount43 

D.WhenAreFundsHeldbyaLawyerinaFiduciaryCapacitySubject

totheRequirementsoftheRulesofProfessionalConduct? 43 

E.RecordKeepingRequirementsforFiduciaryAccounts 44



SectionIX:SafeguardingFundsfromEmbezzlement 45 



SectionX:Scams46



SectionXI:InterestonLawyersTrustAccount‐IOLTA 47

A.WhatisIOLTA?47 

B.HowitWorks47

C.HowareIOLTAFundsUsed?47 

D.QuestionsandAnswersabouttheManagementofIOLTAAccounts 48 



SectionXII:FDICInsurance50



SectionXIII:TheRandomAuditProgram51

A.Introduction51 

B.AuthorityforRandomAudits51 

C.SelectionProcess51 

D.ScopeofAudit52 

E.TrustAccountComplianceProgram(TAC)52 

F.ExemptionfromAudit53 

G.Confidentiality53 

H.Discipline53 

I.Workshops53 

J.AuditChecklist53 



Appendices

AppendixA:EthicsOpinions57

1.RPC4759

2.RPC5159 

3.RPC6660 

4.RPC7560 

5.RPC7861 

6.RPC12562

7.RPC12762

8.RPC15064

9.RPC19165

10.1997FEO967

11.2001FEO369

12.2005FEO1370

13.2006FEO871

14.2006FEO1572

15.2006FEO1673

16.2008FEO1074

17.2009FEO478

18.2011FEO779

19.2013FEO1381

20.2015FEO682

21.

EA221785

22.EA229585



AppendixB:ExampleForms87

1.KeyConceptsInfographic88

2.SampleClientLedger89

3.BankDirectiveonNSFTrustChecks90

4.OpeninganAccountChecklist91

5.TrustAccountCheck92

6.TrustAccountCheckDetail93

7.DepositSlipforOneClient94

8.DepositSlipforMultipleClients95

9.General

Ledger96

10.AdministrativeFundsLedger97

11.ZeroBalanceWrittenAccounting98

12.AnnualWrittenAccounting(NoActivity)99

13.ReconciliationReport100

14.QuarterlyReviewReport101

15.IOLTAStatusUpdateForm102

16.RandomAuditExemptionDocuments103



AppendixC:JournalArticles110

1.EscheatHappens110

2.TopTipsonTrustAccounting:GetActivewithYour  

InactiveBalances!111

3.Bruno’sTopTipsforTipTopTrustAccounting  113

4.TopTipsonTrustAccounting:SafeguardingFunds

FromEmbezzlement115

5.TopTipsOnTrustAccounting:Do’sandDon’tsofAccepting

CreditCards

117

6.TrustAccountPlanningfortheSolePractitioner’sWithdrawal

FromPractice118

ProposedRuleAmendmentstoPreventandDetectInternalTheft 119



1



INTRODUCTION

Onadailybasis,alawyerinprivatepracticewillreceive,hold,anddisbursemoneythatbelongstothe

lawyer’sclientsandtothirdpartiesinconjunctionwiththerepresentationofclients.Millionsofdollarsflow

throughthehandsoflawyerswhileservingclients—makingthehandlingofclientfundsoneof

themost

significantfiduciaryobligationsoflawyerstotheirclients.Toreducethepossibilityoftheft,misappropriation,

ormishandlingofclientfunds,theNorthCarolinaStateBarestablishedtrustaccountingstandardsinRule

1.15oftheRulesofProfessionalConduct,andimplementedaprogramofrandomauditsoflawyers’trust

accounts.Thishandbookexplainstherequirementsforsegregating,safekeeping,andrecordkeepingfor

clientfunds,andhowtherandomauditprogramworks.Thepurposeofthehandbookistoanswerqu estions

aboutestablishingatrustaccount,depositsanddisbursementsfromatrustaccount,recordkeepingfora

trustaccount,andwhat

toexpectwhenyouareselectedforauditbytheStateBarauditor.Ifthehandbook

failstoansweryourspecificquestion,pleasecontacttheStateBarforfurtherassistance.

2



SECTION I: TRUST ACCOUNTING RULES



NCRuleofProfessionalConduct1.15,SafekeepingProperty—Thisrulehasfoursubparts:Rule1.15‐1,Definitions;

Rule 1.15‐2, General Rules; Rule 1.15‐3, Records and Accountings; and Rule 1.15‐4 Alternative Trust Account

ManagementProcedureforMulti‐MemberFirm.Thecommenttotherulesappearsafterthetextfor

Rule1.15‐4.

Rules.1316and.1317ofSubchapter1DofChapter27oftheNCAdministrativeCodealsoappearinthissection.

These rules require a lawyer's trust accounts to be established as IOLTA accounts and explain comparability

requirementsforIOLTAaccounts.



Rule1.15‐1Definitions

ForpurposesofthisRule1.15,thefollowingdefinitionsapply:

(a) “Bank” denotes a bank savings and loan association, or credit unionchartered under North Carolina or

federallaw.

(b)"Client"denotesaperson,firm,orotherentityforwhomalawyerperforms,orisengagedtoperform,any

legalservices.



(c)"Dedicatedtrustaccount"denotesatrustaccountthatismaintainedforthesolebenefitofasingleclientor

withrespecttoasingletransactionorseriesofintegratedtransactions.

(d)“Demanddeposit”denotesanyaccountfromwhichdepositedfundscanbewithdrawnatanytimewithout

noticeto

thedepositoryinstitution.

(e) "Entrusted property" denotes trustfunds, fiduciary funds andother property belonging to someone other

than the lawyer which is in the lawyer's possession or control in connection with the performance of legal

servicesorprofessionalfiduciaryservices.

(f)"Fiduciaryaccount"denotesanaccount,designatedassuch,maintained

byalawyersolelyforthedepositof

fiduciaryfundsorotherentrustedpropertyofaparticularpersonorentity.

(g)"Fiduciaryfunds"denotesfundsbelongingtosomeoneotherthanthelawyerthatarereceivedbyorplaced

underthecontrolofthelawyerinconnectionwiththeperformanceof

professionalfiduciaryservices.

(h)"Funds"denotesanyformofmoney,includingcash,paymentinstrumentssuchaschecks,moneyorders,or

salesdrafts,andreceiptsfromelectronicfundtransfers.

(i)"Generaltrustaccount"denotesanytrustaccountotherthanadedicatedtrustaccount.

(j) "Item" denotes any means or method by which

 funds are credited to or debited from an account; for

example:acheck,substitutecheck,remotelycreatedcheck,draft,withdrawalorder,automatedclearinghouse

(ACH)orelectronictransfer,electronicorwirefundstransfer,electronicimageofanitemand/orinformationin

electronicformdescribinganitem,orinstructionsgiveninperson

orbytelephone,mail,orcomputer.

(k)“Legalservices”denotesservices(otherthanprofessionalfiduciaryservices)renderedbyalawyerinaclient‐

lawyerrelationship.

(l) "Professional fiduciary services" denotes compensated services (other than legal services) rendered by a

lawyerasatrustee,guardian,personalrepresentativeofanestate,attorney‐in

‐fact,orescrowagent,orinany

otherfiduciaryrolecustomarytothepracticeoflaw.

(m) "Trust account" denotes an account, designated as such, maintained by a lawyer fo r the deposit of trust

funds.

(n) "Trust funds" denotes funds belonging to someone other than the lawyer that are received

by or placed

underthecontrolofthelawyerinconnectionwiththeperformanceoflegalservices.

HistoryNote:StatutoryAuthorityG.S.84‐23

3



AdoptedJuly24,1997

AmendedMay4,2000;March1,2003;March6,2008,October8,2009;August23,2012;June9,2016



Rule1.15‐2GeneralRules

(a) Entrusted Property. All entrusted property shall be identified, held, and maintained separate from the

property of the lawyer, and shall be deposited, disbursed, and distributed only in accordance with this Rule

1.15.

(b)DepositofTrustFunds.Alltrustfundsreceivedbyorplacedunderthecontrolofalawyer

shallbepromptly

depositedineitherageneraltrustaccount or a dedicated trustaccountofthelawyer.Trustfunds placedin a

generalaccountarethosewhich,inthelawyer'sgoodfaithjudgment,arenominalorshort‐term.Generaltrust

accountsaretobeadministeredinaccordancewiththe

RulesofProfessionalConductandtheprovisionsof27

NCACChapter1,SubchapterD,Sections.1300.

(c) Deposit ofFiduciary Funds. All fiduciary funds received byorplacedunder the controlof alawyer shallbe

promptlydepositedinafiduciaryaccountorageneraltrustaccountofthelawyer.

(d)

 Safekeeping of Other Entrusted Property. A lawyer may also hold entrusted property other than fiduciary

funds (such as securities) in a fiduciary account. All entrusted property received by a lawyer that is not

deposited in a trust account or fiduciary account (such as a stock certificate) shall be promptly identified,

labeledaspropertyofthepersonorentityforwhomitistobeheld,andplacedinasafedepositboxorother

suitableplaceofsafekeeping.Thelawyershalldisclosethelocationofthepropertytotheclientorotherperson

forwhomitisheld.Anysafedeposit

boxorotherplaceofsafekeepingshallbelocatedinthisstate,unlessthe

lawyerhasbeenotherwiseauthorizedinwritingbytheclientorotherpersonforwhomitisheld.

(e) Location of Accounts. All trust accounts shall be maintained at a bank in North Carolina or a

bank with

branchofficesinNorthCarolinaexceptthat, withthewritten consent oftheclient, adedicated trustaccount

maybemaintainedatabankthatdoesnothaveofficesinNorthCarolinaoratafinancialinstitutionotherthan

abankinoroutsideofNorthCarolina.Alawyer

maymaintainafiduciaryaccountatanybankorotherfinancial

institution in or outside of North Carolina selected by the lawyer in the exercise of the lawyer's fiduciary

responsibility.

(f)FundsinAccounts.Atrustorfiduciaryaccountmayonlyholdentrustedproperty.Thirdpartyfundsthatare

not

receivedbyorplacedunderthecontrolofthelawyerinconnectionwiththeperformanceoflegalservices

or professional fiduciary services may not be deposited or maintained in a trust or fiduciary account.

Additionally,nofunds belonging to a lawyer shall be d epositedor maintained in a trust account or

 fiduciary

accountofthelawyerexcept:

(1)fundssufficienttoopenormaintainanaccount,payanybankservicecharges,orpayanytaxleviedonthe

account;or

(2)fundsbelonginginparttoaclientorot herthirdpartyandinpartcurrentlyorconditionallytothelawyer.

(g)MixedFundsDepositedIntact.Whenfundsbelongingtothelawyerarereceivedincombinationwithfunds

belonging to the client or other persons, all of the funds shall be deposited intact. The amounts currently or

conditionally belongingto thelawyer shall beidentifiedon thedeposit slip orother record.

 After thedeposit

has been finally credited to the account, the lawyer shallwithdraw the amounts to which the lawyer is or

becomes entitled. If the lawyer’s entitlement is disputed, the disputed amounts shall remain in the trust

accountorfiduciaryaccountuntilthedisputeisresolved.

(h) Items Payable

to Lawyer. Any item drawn on a trustaccount or fiduciary account for thepayment of the

lawyer’sfeesorexpensesshallbemadepayabletothelawyerandshallindicate ontheitembyclientname,file

number,orotheridentifyinginformationtheclientfromwhosebalancetheitemis

drawn.Anyitemthatdoes

notincludethisinformationmaynotbeusedtowithdrawfundsfromatrustaccountorafiduciaryaccountfor

paymentofthelawyer’sfeesorexpenses.

4



(i) No Bearer Items. No item shall be drawn ona trustaccount orfiduciary account made payable to cash or

bearerandnocashshallbewithdrawnfromatrustaccountorfiduciaryaccountbyanymeans.

(j)DebitCardsProhibited.Useofadebitcardtowithdrawfunds

fromageneralordedicatedtrustaccountora

fiduciaryaccountisprohibited.

(k)NoBenefittoLawyerorThirdParty.Alawyershallnotuseorpledgeanyentrustedpropertytoobtaincredit

orotherpersonalbenefitforthelawyeroranypersonotherthanthelegalorbeneficialowner

ofthatproperty.

(l)BankDirective.Everylawyermaintainingatrustaccountorfiduciaryaccountwithdemanddepositatabank

or other financial institution shall file with the bank orother financial institution a written directive requiring

the bank or other institution to report to the executive director of

the North Carolina State Bar when an

instrument drawn on the account is presented for payment against insufficient funds. No trust account or

fiduciaryaccountshallbemaintainedinabankorotherfinancialinstitutionthatdoesnotagreetomakesuch

reports.

(m) Notification of Receipt. A lawyer shall promptly

 notify his or her client of the receipt of any entrusted

propertybelonginginwholeorinparttotheclient.

(n) Delivery of Client Property. A lawyer shall promptly pay or deliver to the client, or to third persons as

directed by the client, any entrusted property belonging to

the client and to which the client is currently

entitled.

(o)PropertyReceivedasSecurity.Anyentrustedpropertyordocumentoftitledeliveredtoalawyerassecurity

forthepaymentofafeeorotherobligationtothelawyershallbeheldintrustinaccordancewiththisRule1.15



and shall be clearly identified as property held as security and not as a completed transfer of beneficial

ownershiptothelawyer.Thisprovisiondoesnotapplytopropertyreceivedbyalawyeronaccountoffeesor

other amounts owed to the lawyer at the time of receipt; however,

such transfers are subject to the rules

governinglegalfeesorbusinesstransactionsbetweenalawyerandclient.

(p)DutytoReportMisappropriation.Alawyerwhodiscoversorreasonablybelievesthatentrustedpropertyhas

been misappropriated or misapplied shall promptly inform theTrust Account Compliance Counsel (TACC) in

theNorthCarolina

State BarOfficeofCounsel.Discovery ofintentionaltheftorfraud mustbereportedtothe

TACC immediately. When an accounting or bank error results in an unintentional and inadvertent use of one

client’s trust funds to pay the obligations of another client, the event must be reported unless the

misapplicationisdiscoveredandrectifiedonorbeforethenextquarterlyreconciliationrequiredbyRule1.15‐

3(d)(1). Thisrule requires disclosureofinformationotherwiseprotectedbyRule 1.6 ifnecessarytoreportthe

misappropriationormisapplication.

(q)InterestonDepositedFunds.Undernocircumstancesshallthelawyerbeentitledtoany

interestearnedon

fundsdepositedinatrustaccountorfiduciaryaccount.ExceptasauthorizedbyRule.1316of subchapter1Dof

theRulesand Regulationsof theNorth Carolina State Bar,anyinterest earnedon atrust accountorfiduciary

account, less any amounts deducted for bank service charges

and taxes, shall belong to the client or other

personorentityentitledtothecorrespondingprincipalamount.

(r)Abandoned Property. If entrusted property is unclaimed, the lawyer shall make due inquiry of his or her

personnel,recordsandothersourcesof informationinanefforttodetermine theidentityand

location ofthe

owneroftheproperty.Ifthateffortis successful,theentrustedpropertyshall bepromptly transferredtothe

personorentitytowhomitbelongs.IftheeffortisunsuccessfulandtheprovisionsofG.S.116B‐53aresatisfied,

thepropertyshallbedeemedabandoned,andthe

lawyershallcomplywiththerequirementsofChapter116B

oftheGeneralStatutesconcerningtheescheatofabandonedproperty.

(s)SignatureonTrustChecks.

(1)Checksdrawnonatrustaccountmustbesignedbyalawyer,orbyanemployeewhoisnotresponsiblefor

performing monthly or quarterly reconciliations

 and who is supervised by a lawyer. Prior to exercising

signature authority, a lawyer or supervised employee shall take a one‐hour trust account management

continuinglegaleducation(CLE)courseapprovedbytheStateBarforthispurpose.TheCLEcoursemustbe

5



taken at least once for every law firm at which the lawyer or the supervised employee is given signature

authority.

(2)Trustaccount checksmaynotbesignedusingsignature stamps,preprintedsignaturelines onchecks,or

electronicsignatures.

HistoryNote:StatutoryAuthorityG.S.84‐23

AdoptedJuly24,1997

AmendedMarch1,2003;March6,2008;February5,2009;August23,2012;June9,2016



Rule1.15‐3RecordsandAccountings

(a) Check Format. All general trust accounts, dedicated trust accounts, and fiduciary accounts must use

business‐sizechecksthatcontainanAuxiliaryOn‐UsfieldintheMICRlineofthecheck.

(b) Minimum Records for Accounts at Banks. The minimum records required for general trust accounts,

dedicatedtrustaccounts,and

fiduciaryaccountsmaintainedatabankshallconsistofthefollowing:

(1)allrecordslistingthesourceanddateofreceiptofanyfundsdepositedintheaccountincluding,butnot

limited to, bank receipts, deposit slips and wire and electronic transfer confirmations, and, inthe case of a

general

trust account, all records also listing the name of the client or other person to whom the funds

belong;

(2)allcanceledchecksorotheritemsdrawnontheaccount,ordigitalimagesthereoffurnishedbythebank,

showing the amount, date, and recipient of the disbursement, and, in the case

 of a general trust account,

theclient name,filenumber, orother identifyinginformationoftheclientfromwhosebalanceeachitem is

drawn,provided,that:

(A)digital images mustbelegiblereproductionsofthefrontand backoftheoriginalitemswith no

morethansiximagesperpage

andnoimagessmallerthan1‐3/16x3inches;and

(B)thebankmustmaintain,foratleastsixyears,thecapacitytoreproduceelectronicallyadditional

orenlargedimagesoftheoriginalitemsorrecordsrelatedtheretouponrequestwithinareasonable

time.

(3)allinstructionsorauthorizationstotransfer,

disburse,orwithdrawfundsfromthetrustaccount(including

electronic transfers or debits), or a written or electronic record of any such transfer, disbursement, or

withdrawal showing the amount, date, and recipient of the transfer or disbursement, and, in the case of a

generaltrustaccount,alsoshowingthename

oftheclientorotherpersontowhomthefundsbelong;

(4) all bank statements and other documents received from the bank with respect to the trust account,

including, but not limited to notices of return or dishonor of any item drawn on the account against

insufficientfunds;

(5)inthe

caseofageneraltrustaccount,aledgercontainingarecordofreceiptsanddisbursementsforeach

personorentityfromwhomandforwhomfundsarereceivedandshowingthecurrentbalanceoffundsheld

inthetrustaccountforeachsuchpersonorentity;and

(6)anyother

recordsrequiredbylawtobemaintainedforthetrustaccount.

(c)MinimumRecordsforAccountsatOtherFinancialInstitutions.Theminimumrecordsrequiredfordedicated

trustaccountsandfiduciaryaccountsatfinancialinstitutionsotherthanabankshallconsistofthefollowing:

(1) allrecordslistingthe sourceand date

of receiptof all funds deposited in the account including,but not

limitedto,depositoryreceipts,depositslips,andwireandelectronictransferconfirmations;

6



(2) a copy of all checks or other items drawn on the account, or digital images thereof furnished by the

depository,showingtheamount, date,and recipientof the disbursement, provided, thatthe imagessatisfy

therequirementssetforthinRule1.15‐3(b)(2);

(3) all instructions or authorizations to transfer,

disburse, or withdraw funds from the account (including

electronic transfers or debits) or a written or electronic record of any such transfer, disbursement, or

withdrawalshowingtheamount,date,andrecipientofthetransferordisbursement;

(4)allstatementsandotherdocumentsreceivedfromthedepositorywithrespecttotheaccount,

including,

butnotlimitedtonoticesofreturnordishonorofanyitemdrawnontheaccountforinsufficientfunds;and

(5)anyotherrecordsrequiredbylawtobemaintainedfortheaccount.

(d)ReconciliationsofGeneralTrustAccounts.

(1)QuarterlyReconciliations.Foreachgeneraltrustaccount,areconciliation

reportshallbepreparedatleast

quarterly.Eachreconciliationreportshallshowallofthefollowingbalancesandverifythattheyareidentical:

(A)Thebalancethatappearsinthegeneralledgerasofthereportingdate;

(B)Thetotalofallsubsidiaryledgerbalancesinthegeneraltrustaccount,determined

bylistingand

totaling the positive balances in  the individual client ledgers and the administrative ledger

maintainedforservicingtheaccount,asofthereportingdate;and

(C)Theadjustedbankbalance,determinedbyaddingoutstandingdepositsandothercreditstothe

ending balance in the monthly bank statement and

subtracting outstanding checks and other

deductionsfromthebalanceinthemonthlystatement.

(2)MonthlyReconciliations.Eachmonth,thebalanceofthetrustaccountasshownonthelawyer'srecords

shallbereconciledwiththecurrentbankstatementbalanceforthetrustaccount.

(3)Thelawyershallreview,sign,date,and

retainacopyofthereconciliationsofthegeneraltrustaccountfo r

aperiodofsixyearsinaccordancewithRule1.15‐3(g).

(e)Accountingsfor TrustFunds. Thelawyershallrenderto theclient awrittenaccountingof thereceipts and

disbursementsofalltrustfunds(i)uponthe

completedisbursementofthetrustfunds,(ii)atsuchothertimes

asmaybereasonablyrequestedbytheclient,and(iii)atleastannuallyifthefundsareretainedforaperiodof

morethanoneyear.

(f) Accountings for Fiduciary Property. Inventories and accountings of fiduciary funds and other entrusted



property received in connection with professional fiduciary services shall be rendered to judicial officials or

other persons as required by law. If an annual or more frequent accounting is not required by law, a written

accountingofalltransactionsconcerningthefiduciaryfundsandotherentrustedpropertyshallberendered

to

the beneficial owners, or their representatives, at least annually and upon the termination of the lawyer's

professionalfiduciaryservices.

(g)MinimumRecordKeepingPeriod.Alawyershallmaintain,inaccordancewiththisRule1.15,completeand

accuraterecordsofallentrustedpropertyreceivedbythelawyer,whichrecordsshallbe

maintainedforatleast

thesix(6)yearperiodimmediatelyprecedingthelawyer'smostrecentfiscalyearend.

(h)AuditbyStateBar.ThefinancialrecordsrequiredbythisRule1.15shallbesubjecttoauditforcauseandto

randomauditbytheNorthCarolinaStateBar;andsuch

recordsshallbeproducedforinspectionandcopyingin

NorthCarolinauponrequestbytheStateBar.

(i)Reviews.

(1) Each month, for each general trust account, dedicated trust account, and fiduciary account, the lawyer

shallreviewthebankstatementandcancelledchecksforthemonthcoveredbythebankstatement.



(2) Eachquarter, foreachgeneral trust account, dedicated trust account, andfiduciary account, the lawyer

shallreviewthe statementof costsandreceipts, clientledger, andcancelledchecksofa randomsampleof

7

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representative transactions completed during the quarter to verify that the disbursements were properly

made. The transactions reviewed must involve multiple disbursements unless no such transactions are

processed through the account, in which case a single disbursement is considered a transaction for the

purposeofthisparagraph.Asampleofthree

representativetransactionsshallsatisfythisrequirement,buta

largersamplemaybeadvisable.

(3) The lawyer shall take the necessary steps to investigate, identify, and resolve within ten days any

discrepanciesdiscoveredduringthemonthlyandquarterlyreviews.

(4) A report of each monthly and quarterly review, including a description of

 the review, the transactions

sampled,andanyremedialactiontaken,shallbe prepared.Thelawyershall sign,date,andretain acopyof

thereportandassociateddocumentationforaperiodofsixyearsinaccordancewithRule1.15‐3(g).

(j)Retention of Records in Electronic Format.Records required by

Rule 1.15‐3 may be created, updated, and

maintainedelectronically,provided:

(1)therecords otherwisecomply withRule1.15‐3,to wit:electronicallycreated reconciliationsand reviews

thatarenot printedmustbereviewed by thelawyer and electronically signedusing a“digital signature”as

definedin21CFR11.3(b)(5);

(2)

printedandelectroniccopiesoftherecordsinindustry‐standardformatscanbemadeondemand;and

(3)therecordsareregularlybackedupbyanappropriatestoragedevice.

HistoryNote:StatutoryAuthorityG.S.84‐23

AdoptedJuly24,1997;AmendedMarch1,2003,October6,2004;March6,2008;

June9,2016



Rule1.15‐4AlternativeTrustAccountManagementProcedureforMulti‐MemberFirm



(a)TrustAccountOversightOfficer(TAOO).

Lawyersinalawfirmoftwoormorelawyersmaydesignateapartnerinthefirmtoserveasthetrustaccount

oversight officer (TAOO) for any general trust account into which more than one firm lawyer deposits trust

funds. The TAOO and

the partners of the firm, or those with comparable managerial authority (managing

lawyers), shall agree in writing that the TAOO will oversee the administration of any such trust account in

conformity with the requirements of Rule 1.15, including, specifically, the requirements of this Rule 1.15‐4.

Morethanonepartnermay

bedesignatedasaTAOOforalawfirm.

(b)LimitationsonDelegation.

DesignationofaTAOOdoesnotrelieveanylawyerinthelawfirmofresponsibilityforthefollowing:

(1)oversightoftheadministrationofanydedicatedtrustaccountorfiduciaryaccountthatisassociatedwith

alegal

matterforwhichthelawyerisprimarylegalcounselorwiththelawyer’sperformanceofprofessional

fiduciaryservices;and

(2) reviewofthe disbursement sheetsorstatementsof costs andreceipts, client ledgers,and trustaccount

balancesforthoselegalmattersforwhichthelawyerisprimarylegalcounsel.

(c)Training

oftheTAOO.

(1)WithinthesixmonthspriortobeginningserviceasaTAOO,alawyershall,

(A) read all subparts and comments to Rule 1.15, all formal ethics opinions of the North Carolina

StateBarinterpretingRule1.15,andtheNorthCarolinaStateBarTrustAccountHandbook;

(B)

completeonehourofaccreditedcontinuinglegaleducation(CLE)ontrustaccountmanagement

approvedbytheStateBarforthepurposeoftrainingalawyertoserveasaTAOO;

8



(C)completetwohoursoftraining(live,online,orself‐guided)presentedbyaqualifiededucational

provider on one or more of the following topics: (i) financial fraud, (ii) safeguarding funds from

embezzlement, (iii) risk assessment and management for bank accounts, (iv) information security

andonlinebanking,or(v)accounting

basics;and

(D)becomefamiliarwiththelawfirm’saccountingsystemfortrustaccounts.

(2) During each year of service as a TAOO, the designated lawyer shall attend one hour of accredited

continuinglegaleducation(CLE)ontrustaccountmanagementapprovedbytheStateBarforthepurposeof

traininga

TAOOoronehouroftraining,presentedbyaqualifiededucationalprovider,ononeormoreofthe

subjectslistedinparagraph(c)(1)(C).

(d)DesignationandAnnualCertification.

ThewrittenagreementdesignatingalawyerastheTAOOdescribedinparagraph(a)shallcontainthefollowing:

(1) A statement by the

TAOO that the TAOO agrees to oversee the operation of  the firm’s general trust

accounts in compliance with the requirements of all subparts of Rule 1.15, specifically including the

mandatoryoversightmeasuresinparagraph(e)ofthisrule;

(2)IdentificationofthetrustaccountsthattheTAOOwilloversee;

(3) An

 acknowledgement that the TAOO has completed the training described in paragraph (c)(1) and a

descriptionofthattraining;

(4) A statement certifying that the TAOO understands the law firm’s accounting system for trustaccounts;

and

(5)Anacknowledgementthatthelawyers inthefirmremain professionallyresponsiblefortheoperation

of

thefirm’strustaccountsincompliancewithRule1.15.

Eachyear ontheanniversaryoftheexecution oftheagreement, the TAOOandthemanaging lawyersshall

executeastatementconfirmingthecontinuingdesignationofthelawyerastheTAOO,certifyingcompliance

withtherequirementsofthisrule,describingthe

trainingundertakenbytheTAOOasrequiredbyparagraph

(c)(2), and reciting the statements required by subparagraphs (d)(1), (2), (4), and (5). During the lawyer’s

tenure as TAOOand for sixyears thereafter,theagreement and all subsequent annual statements shall be

maintainedwiththetrustaccountrecords(seeRule

1.15‐3(g)).

(e)MandatoryOversightMeasures.

Inadditiontoanyotherrecordkeepingoraccountingrequirementsetfo rthinRule1.15‐2andRule1.15‐3,the

firmshalladoptawrittenpolicydetailingthefirm’strustaccountmanagementprocedureswhichshallannually

bereviewed,updated,and signedby the

TAOOand themanaging lawyers.Eachversionof the policy shallbe

retainedfortheminimumrecordkeepingperiodsetforthinRule1.15‐3(g).

HistoryNote:StatutoryAuthorityG.S.84‐23

AdoptedJune9,2016



CommentstoRule1.15andAllSubparts



[1] The purpose of alawyer’s trust

 account or fiduciary account is to segregate the funds belonging toothers

from those belonging to the lawyer. Money received by a lawyer while providing legal services or otherwise

servingasafiduciaryshouldneverbeusedforpersonalpurposes.Failuretoplacethefundsofothersinatrust

orfiduciaryaccountcan subjectthefundsto claimsofthe lawyer’screditorsor placethe funds inthelawyer’s

estateintheeventofthelawyer’sdeathordisability.



9



PropertySubjecttotheseRules



[2]Anypropertybelongingtoaclientorotherpersonorentitythatisreceivedbyorplacedunderthecontrolof

a lawyerin connectionwith the lawyer’s furnishingof legal services or professionalfiduciary services mustbe

handledandmaintainedinaccordancewith

thisRule1.15.Theminimumrecordstobemaintainedforaccounts

in banks differ fromthe minimum records to be maintained for accounts in other financial institutions (where

permitted),toaccommodatebrokerageaccountsandotheraccountswithdifferingreportingpractices.



ClientProperty



[3]Everylawyerwhoreceivesfundsbelonging

toaclientmustmaintainatrustaccount.Thegeneralruleisthat

everyreceiptofmoneyfromaclientorforaclient,whichwillbeusedordeliveredontheclient’sbehalf,isheld

intrustandshouldbeplacedinthetrustaccount.Allclientmoneyreceivedby

alawyer,exceptthattowhichthe

lawyerisimmediatelyentitled,mustbedepositedinatrustaccount,includingfundsforpaymentoffuturefees

andexpenses.Clientfundsmustbepromptlydepositedintothetrustaccount.Clientfundsmustbedepositedin

a general trustaccount ifthereis

no duty to invest onbehalf of the client.Generally speaking, if a reasonably

prudentpersonwouldconcludethatthefundsinquestion,eitherbecausetheyarenominalinamountorareto

be held for a short time, could probably not earn sufficient interest to justify the cost of investing,

 the funds

shouldbedepositedinthegeneraltrustaccount.Indeterminingwhetherthereisadutytoinvest,alawyershall

exercisehisorherprofessionaljudgmentingoodfaithandshallconsiderthefollowing:



a)Theamountofthefundstobedeposited;



b)Theexpectedduration

ofthedeposit,includingthelikelihoodofdelayinthematterforwhichthefundsare

held;



c)Theratesofinterestoryieldatfinancialinstitutionswherethefundsaretobedeposited;



d)Thecostofestablishingandadministeringdedicatedaccountsfortheclient'sbenefit,includingtheservice



charges, the costs of  the lawyer's services, and the costs of preparing any tax reports required for income

accruingtotheclient'sbenefit;



e)Thecapabi lityoffinancialinstitutions,lawyers,orlawfirmstocalculateandpayincometoindividualclients;



f)Anyothercircumstancesthataffecttheabilityof

theclient'sfundstoearnanetreturnfortheclient.



When regularly reviewing the trust accounts, the lawyer shall determine whether changed circumstances

requirefurtheractionwithrespecttothefundsofanyclient.Thedeterminationofwhetheraclient'sfundsare

nominal or short‐term shall rest in

thesound judgmentof thelawyer orlaw firm. No lawyershall becharged

withanethicalimproprietyorbreachofprofessionalconductbasedonthegoodfaithexerciseofsuchjudgment.



[4]Alawfirmwithoffices inanotherstatemaysendaNorthCarolinaclient’sfundstoa

firmofficeinanother

stateforcentralizedprocessingprovided,however,thefundsarepromptlydepositedintoatrustaccountwitha

bank that has branch officesin NorthCarolina, and further provided, the funds are transported and held in a

safe place until deposited into the trustaccount. Ifthisprocedure

is followed, client consenttothe transferof

thefunds toanout‐of‐stateofficeof thefirmisnotrequired. However,allsuchclientfundsaresubjecttothe

requirementsoftheserules.Fundsdeliveredtothelawyerbytheclientforpaymentoffuturefeesorexpenses

should never be used bythe lawyer for personalpurposes or subjectedto the potential claims ofthe lawyer’s

creditors.



[5]Thisruledoesnotprohibitalawyerwhoreceivesaninstrumentbelongingwhollytoaclientorathirdparty

from delivering the instrument to the appropriate recipient without

first depositing the instrument in the

lawyer’strustaccount.



PropertyfromProfessionalFiduciaryService



[6] The phrase “professional fiduciary service,” as used in this rule, is service by a lawyer in any one of the



various fiduciary roles undertaken by a lawyer that is not, of itself, the practice of law, but is frequently

undertaken in conjunction with the practice of law. This includes service as a trustee, guardian, personal

representative of an estate, attorney‐in‐fact, and escrow agent, as well as service in

other fiduciary roles

“customarytothepracticeoflaw.”



[7] Property held by a lawyer performing a professional fiduciary service must also be segregated from the

lawyer’spersonalproperty,properlylabeled,andmaintainedinaccordancewiththeapplicableprovisionsofthis

rule.



[8] When property is entrusted to a lawyer

 in connection with a lawyer’s representation of a client, this rule

applieswhetherornotthelawyer iscompensatedfortherepresentation.However,theruledoesnot applyto

property received in connection with a lawyer’s uncompensated service as a fiduciary such as a trustee or

personalrepresentativeofan

estate.(Ofcourse,thelawyer’sconductmaybegovernedbythelawapplicableto

fiduciary obligations in general, including a fiduciary’s obligation to keep the principal’s funds or property

separatefromthefiduciary’s personal funds orproperty,to avoidself‐dealing,and toaccountforthefunds or

propertyaccuratelyand

promptly).



[9]Compensationdistinguishesprofessionalfiduciaryservicefromafiduciaryrolethatalawyerundertakesasa

familyresponsibility,as acourtesytofriends,orforcharitable,religious,orcivicpurposes.Asusedinthisrule,

“compensatedservices”meansservicesforwhichthelawyerobtains orexpectstoobtainmoney

oranyother

valuableconsiderati on .Thetermdoesnotrefertoorincludereimbursementforactualout‐of‐pocketexpenses.



PropertyExcludedfromCoverageofRules



[10] This rule also does not apply when a lawyer is handling money for a business or for a religious, civic, or

charitable

organization as an officer, employee, or other official regardless of whether the lawyer is

compensated for this service. Handling funds while serving in one of these roles does not constitute

“professionalfiduciaryservice,”andsuchserviceisnot“customarytothepracticeoflaw.”



BurdenofProof



[11]When a

 lawyer is entrusted with property belonging toothers anddoes not comply with these rules, the

burden of proof is on the lawyer to establish the capa city in which the lawyer holds the funds and to

demonstratewhytheserulesshouldnotapply.



PrepaidLegalFees



[12] Whethera fee

 that is prepaid by the client should be placed in the trust account depends upon the fee

arrangementwiththeclient.Aretainerfeeinitstruestsenseisapaymentbytheclientforthereservationofthe

exclusiveservices ofthelawyer, whichis notused topay

forthelegal services providedbythe lawyerand, by

agreementoftheparties,isnonrefundableupondischargeofthelawyer.Itisapaymenttowhichthelawyeris

immediatelyentitledand,therefore,shouldnotbeplacedinthetrustaccount. A “retainer,”which isactuallya

deposit by the

 client of an advance payment of a fee to be billed on an hourly or some other basis, is not a

paymenttowhichthelawyerisimmediatelyentitled.Thisisreallyasecuritydepositandshouldbeplacedinthe

trustaccount.Asthelawyerearnsthefeeor

billsagainstthedeposit,thefundsshouldbewithdrawnfromthe

account.Rule1.16(d)requirestherefundtotheclientofanypartofafeethatisnotearnedbythelawyeratthe

timethattherepresentationisterminated.



AbandonedProperty



[13]Shouldalawyerne edtechni calassistance

concerningtheescheatofpropertytotheStateofNorthCarolina,

the lawyer should contact the escheat officer at the Office of the North Carolina State Treasurer in Raleigh,

NorthCarolina.



DisputedFunds



[14] A lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees

owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The

disputedportionofthefundsmustbekeptinatrust

accountandthelawyershouldsuggestmeansforprompt

resolution of the dispute, such as the State Bar’s program for fee dispute resolution. See Rule 1.5(f). The

undisputedportionofthefundsshallbepromptlydistributed.



[15]Thirdpartiesmayhavelawfulclaimsagainstspecificfundsorotherpropertyin

alawyer’scustody,suchasa

client’screditorwhohasalienonfundsrecoveredinapersonalinjuryaction.Alawyermayhaveadutyunder

applicablelawtoprotectsuchthird‐partyclaimsagainstwrongfulinterferencebytheclient.Insuchcases,when

thethird‐partyclaimis

notfrivolousunderapplicablelaw,thelawyermustrefusetosurrenderthepropertyto

theclientuntiltheclaimisresolved.Alawyershouldnotunilaterallyassumetoarbitrateadisputebetweenthe

client andthethirdparty, but, whenthereare substantial groundsfordispute asto the personentitled

tothe

funds,thelawyermayfileanactiontohaveacourtresolvethedispute.



ResponsibilityforRecordsandAccountings



[16]Itisthelawyer'sresponsibilitytoassurethatcompleteandaccuraterecordsofthereceiptanddisbursement

of entrustedproperty aremaintained in accord ance with this rule. The

 requiredrecordretention period of six

years set forth in this rule does not preclude the State Bar from seeking records for a period prior to the

retention period and, if obtained, from pursuing a disciplinary action based thereon if such action is not

prohibitedbylaworotherrules

oftheStateBar.



[17]Therulespermittheretentionofrecordsinelectronicform.Astoragedeviceisappropriateforbackingup

electronicrecordsifitreasonablyassuresthattherecordswillberecoverabledespitethefailureordestruction

of theoriginal storage device on which the records are

stored. For a discussion of storage methods not solely

underthecontrolofthelawyer,see2011FEO6.



[18] Manybusinessesare now converting papercheckstoautomatedclearinghouse (ACH) debitsto decrease

costsandincreaseoperating efficiencies.Whenacheckisconverted,the checkistakeneitherat

thepoint‐of‐

sale or through the mail for payment, the account information is captured from the check, and an electronic

transactioniscreatedforpaymentthroughtheACHsystem.Theoriginalphysicalcheckistypicallydestroyedby

the converting entity (although an image of the checkmay be stored

for a certain period of time). If a check

drawn on atrust account isconvertedto ACH,thelawyer willnot receiveeitherthe physical checkor acheck

image. The transaction will appear on the lawyer's trust account statement as an ACH debit with limited

informationaboutthepayment

(e.g.,dollaramount,dateprocessed,originatoroftheACHdebit).



[19]TopreventconversionofachecktoACHwithoutauthorization,alawyerisrequiredtousecheckswithan

"AuxiliaryOn‐Usfield."Acheckwillnot beeligible forconversionto  ACHifitcontains anAuxiliaryOn

‐Usfield,

which is an additional field that appears in the left‐most position of the MICR (magnetic ink character

recognition)lineonabusinesssizecheck.Thelawyershouldconfirmwiththelawyer'sfinancialinstitutionthat

theAuxiliary On‐Usfield isincluded onthelawyer'strustaccountchecks.

IncludinganAuxiliaryOn‐Us fieldon

thecheckwillrequireusingchecksthatarelongerthansixinches.AswiththeotherinformationintheMICRline

ofacheck,therouting,accountandpaymentnumbers,thefinancialinstitutionissuingthecheckdeterminesthe

contentoftheAuxiliaryOn‐Us

field.



[20]AuthorizedACHdebits thatareelectronictransfersoffunds(inwhichnochecksare involved)areallowed

providedthelawyermaintai nsarecordofthetransactionasrequiredbyRule1.15‐3(b)(3)and(c)(3).Therecord,

whetherconsistingoftheinstructionsorauthorizationtodebittheaccount,a

recordorreceiptfromtheregister

of deeds or a financial institution, or the lawyer's independent record of the transaction, must show the

amount, date, and recipient of the transfer or disbursement, and, in the case of a general trust account, also

showthenameoftheclientorother

persontowhomthefundsbelong.



[21] The lawyer is responsible for keeping a client, or any other person to whom the lawyer is accountable,

advised of the status of en trusted property held by the lawyer. In addition, the lawyer must take steps to

discover any unauthorized transactionsinvolving trustfunds as soon as possible. Therefore,

it is essentialthat

thelawyerregularlyreconcileageneraltrustaccount.This meansthat,atleastonceamonth,thelawyermust

reconcile the current bank statement balance with the balance shown for the entire account in the lawyer's

records,suchasacheckregisteroritsequivalent,asof

thedateofthebankstatement.Atleastonceaquarter,

the lawyer must reconcile the individual client balances shown on the lawyer's ledger with the current bank

statement balance. Monthly reconciliation will help to uncover unauthorized ACH transactions promptly. The

currentbankbalanceisthebalanceobtainedwhensubtracting

outstandingchecksandotherwithdrawalsfrom

the bank statement balance and adding outstanding deposits to the bank statement balance. With regard to

trust fundsheld in any trust account, thereis also anaffirmative duty toproduce awritten accounting for the

clientandtodeliverittotheclient,either

attheconclusionofthetransactionorperiodicallyiffundsareheldfor

an appreciable period. Such accountings must be made at least annually or at more frequent intervals if

reasonablyrequestedbytheclient.



BankNoticeofOverdrafts



[22] A properly maintained trust account should not have any

items presented against insufficient funds.

However,eventhebest‐maintainedaccountsaresubjecttoinadvertenterrorsbythebankorthelawyer,which

may be easily explained. The reporting requirement should not be burdensome and may help avoid a more

seriousproblem.



FraudPreventionMeasures

[23] The mandatory monthly and quarterly

 reviews and oversight measures in Rule 1.15‐3(i) facilitate early

detection of internal theft and early detection and correction of errors. They are minimum fraud prevention

measuresnecessaryfortheprotectionoffundsondepositinafirmtrustorfiduciaryaccountfromtheftbyany

personwithaccessto

theaccount.Internaltheftfromtrustaccountsbyinsidersatalawfirmcanonlybetimely

detected if the records of the firm’s trust accounts are routinely reviewed. For this reason, Rule 1.15‐3(i)(1)

requiresmonthlyreviewsofthebankstatementsandcancelledchecksforallgeneral,dedicated,andfiduciary



accounts.Inaddition,Rule1.15‐3(i)(2)requiresquarterlyreviewsofarandomsampleofthreetransactionsfor

eachtrustaccount, dedicated trustaccount, and fiduciary account including examination of thestatement of

costs and receipts, client ledger, and cancelled checks for the transactions. Review of these documents will

enable the

lawyer toverifythatthedisbursements weremade properly. Althoughnot required by the rule,a

largersamplethanthreetransactionsisadvisabletoincreasethelikelihoodthatinternaltheftwillbedetected.

[24]AnotherinternalcontroltopreventfraudisfoundinRule1.15‐2(s)whichaddressesthesignatureauthority



fortrustaccountchecks.Theprovisionprohibitsanemployeewhoisresponsibleforperformingthemonthlyor

quarterly reconciliations for a trust account from being a signatory on a check for that account. Dividing the

check signing and reconciliation responsibilities makes it more difficult for one employee to hide fraudulent

transactions. Similarly, signature stamps, preprinted signature lines on checks, and electronic signatures are

prohibitedtopreventtheiruseforfraudulentpurposes.

[25] In addition to the recommendations in the North Carolina State Bar Trust Account Handbook (see the

chapter on Safeguarding Funds from Embezzlement), the following fraud prevention measures are

recommended:



(1)Enrollingthetrustaccountinanautomatedfrauddetectionprogram;

(2)Implementationofsecuritymeasurestopreventfraudulentwiretransfersoffunds;

(3) Activelymaintaining end‐user security at thelaw firmthrough safety practices such as strong password

policies and procedures, the use of encryption and security software,

and periodic consultation with an

informationtechnologysecurityprofessionaltoadvisefirmemployees;and

(4)Insuring thatallstaffmembers whoassistwiththemanagementofthetrustaccountreceivetrainingon

andabidebythesecuritymeasuresadoptedbythefirm.



Lawyersshouldfrequentlyevaluatewhetheradditionalfraudcontrolmeasuresarenecessaryandappropriate.

DutytoReportMisappropriationorMisapplication

[26] A lawyer is required by Rule 1.15‐2(p) to report to the Trust Account Compliance Counsel of the North

Carolina State Bar Office of Counsel if the lawyer knows or

reasonably believes that entrusted property,

including trust funds, has been misappropriated or misapplied. The rule requires the reporting of an

unintentional misapplication of trust funds, such as the inadvertent use of one client’s funds on deposit in a

generaltrustaccounttopaytheobligationsofanotherclient,unlessthelawyer

discoversandrectifiestheerror

onorbeforethenextscheduledquarterlyreconciliation.Alawyerisrequiredtoreporttheconductoflawyers

and non‐lawyers aswell as the lawyer’sown conduct. Areport is required regardless ofwhether information

leadingtothediscoveryofthemisappropriationormisapplication

wouldotherwisebeprotectedbyRule1.6.If

disclosureofconfidentialclientinformationisnecessarytocomplywiththisrule,thelawyer’sdisclosureshould

belimitedtotheinformationthatisnecessarytoenabletheStateBartoinvestigate.SeeRule1.6,cmt.[15].

DesignationofaTrustAccountOversightOfficer



[27]Inafirmwithtwoormorelawyers,personaloversightofalloftheactivitiesinthegeneraltrustaccounts

by allof the lawyers inthefirmisofte n impractical. Nevertheless, any lawyer inthe firm who depositsinto a

generaltrustaccountfundsentrustedtothelawyer

byoronbehalfofaclientisprofessionallyresponsiblefor

theadministrationofthetrustaccountincompliancewithRule1.15regardlessofwhetherthelawyerdirectly

participatesintheadministrationofthetrustaccount.Moreover,Rule5.1requiresalllawyerswithmanagerial

orsupervisory authority over the other lawyers

 in a firm tomake reasonableefforts toensurethattheother

lawyersconform totheRulesof ProfessionalConduct. Rule 1.15‐4provides aprocedurefor delegationofthe

oversight of the routine administration of a general trust account to a firm partner, shareholder, or member

(see Rule 1.0(h))

 in a manner that is professionally responsible. By identifying, training, and documenting the

appointmentofatrustaccountoversightofficer(TAOO)forthelawfirm,thelawyersinamultiple‐lawyerfirm

mayresponsiblydelegatetheroutineadministrationofthefirm’sgeneraltrustaccountstoa qualified lawyer.

Delegationconsistent

withtherequirementsofRule1.15‐4isevidenceofalawyer’sgoodfaithefforttocomply

withRule5.1.

[28]Nevertheless,designationofaTAOOdoesnotinsulatefromprofessionaldisciplinealawyerwhopersonally

engaged in dishonest or fraudulent conduct. Moreover, a lawyer having actual or constructive knowledge of



dishonest or fraudulent conduct or the mismanagement of a trust account in  violation of the Rules of

Professional Conduct by any firm lawyer or employee remains subject to professional discipline if the lawyer

fails to promptly take reasonable remedial action to avoid the consequences of such conduct including

reportingthe

conductasrequiredbyRule1.15‐2(p)orRule8.3.SeealsoRule5.1andRule5.3.

LimitationsonDelegationtoTAOO

[29]DespitethedesignationofaTAOOpursuanttoRule1.15‐4,eachlawyerinthefirmremainsprofessionally

responsible for the trust account activity associated with the legal

 matters for which the lawyer provides

representation. Therefore, for each legal matter for which the lawyer is primary counsel, the lawyer must

reviewandapproveanydisbursementsheetorsettlementstatement,trustaccountentryintheclient ledger,

and trust account balance associated with the matter. Similarly, a lawyer who

establishes a dedicated trust

account orfiduciary accountin connection withtherepresentationofaclient isprofessionally responsiblefor

theadministrationofthededicatedtrustaccountorfiduciaryaccountincompliancewithRule1.15.

TrainingforServiceasaTAOO

[30]Aqualifiedprovideroftheeducationaltrainingprogramsfor

aTAOOdescribedinRule1.15‐4(c)(1)(C)need

notbeanaccreditedsponsorofcontinuinglegaleducationprograms(see27NCAC1D,Rule.1520),butmustbe

knowledgeable and reputable in the specific field and must offer educational materials as part of its usual

courseofbusiness.Trainingmaybe

completedvialivepresentations,onlinecourses,orself‐guidedstudy.Self‐

guidedstudymayconsistofreadingarticles,presentationmaterials,orwebsitesthathavebeencreatedforthe

purposeofeducationintheareasoffinancialfraud,safeguardingfundsfromembezzlement,riskmanagement

forbankaccounts,informationsecurityandon‐line

banking,orbasicaccounting.



HistoryNote:StatutoryAuthorityG.S.84‐23

AmendedMarch1,2003;March6,2008;June9,2016



27N.C.A.C.1D,Rule.1316,IOLTAAccounts



(a)IOLTAAccountDefined.PursuanttoorderoftheNorthCarolinaSupremeCourt,everygeneraltrustaccount,

asdefinedintheRu les ofProfessionalConduct,mustbeaninterestordividend‐bearingaccount.(Asusedherein,

“inter est”shallrefertobothinterestanddividends.)Fundsdepositedinageneral,interest

‐bearingtrustaccount

mustbeavailableforwithdrawaluponrequestandwithoutdelay(subjecttoanynoticeperiodthatthebankis

required to reserve by law or regulation). Additionally, pursuant to N.C.G.S. 45A‐9, a settlement agent who

maintains atrust or escrow account for the purposes of receiving

and disbursing closing fundsand loan funds

shalldirectthatanyinterestearnedonfundsheldinthataccountbepaidtotheNCStateBartobeusedforthe

purposesauthorizedundertheInterestonLawyersTrustAccountProgramaccordingtosection.1316(d)below.

For the purposes of these

 ru les, all such accounts shall be known as “IOLTA Accounts” (also referred to as

“Accounts”).



(b)Eligible Banks. Lawyers may maintain one or more IOLTA Account(s) only at banks and savings and loan

associationscharteredunderNorthCarolinaorfederallaw,asrequiredbyRule1.15oftheRules

ofProfessional

Conduct,thatofferandmaintainIOLTAAccountsthatcomplywiththerequirementssetforthinthissubchapter

(EligibleBanks).SettlementagentsshallmaintainanyIOLTAAccountasdefinedbyN.C.G.S.45A‐9andparagraph

(a) above only at an Eligible Bank;however, a settlement agent that is not a

 lawyer may maintain an IOLTA

Account at any bank that is insured by the Federal Deposit Insurance Corporation and has a certificate of

authoritytotran sactbusinessfromtheNorthCarolinaSecretaryofState,provided thebankisapprovedbyNC

IOLTA.Thedeterminationofwhetherabankiseligible

shallbemadebyNCIOLTA,whichshallmaintain(i)alist

ofparticipatingEligibleBanksavailabletoallmembersoftheStateBarandtoallsettlementagents,and(ii)alist

ofbanksapprovedfornon‐lawyersettlementagentIOLTAAccountsavailabletonon‐lawyersettlementagents.A

bank

thatfailstomeettherequirementsofthissubchaptershallbesubjectonlytoterminationofitseligibleor

approvedstatusbyNCIOLTA.Aviolationofthisruleshallnotbethebasisforcivilliability.



(c) Notice Upon Opening or Closing IOLTA Account. Every lawyer/law firm or

settlement agent maintaining

IOLTAAccountsshalladviseNCIOLTAoftheestablishmentorclosingofeachIOLTAAccount.Suchnoticeshall

include(i)thenameofthebankwheretheaccountismaintained,(ii)thenameoftheaccount,(iii)theaccount

number,and(iv)thenameandbar numberof

thelawyer(s)inthefirmand/orthename(s)ofanynon‐lawyer

settlementagent(s)maintainingtheaccount.TheNorthCarolinaStateBarshallfurnishtoeachlawyer/lawfirm

or settlement agent maintaining an IOLTA Accounts a suitable plaque explaining the program, which plaque

shallbeexhibitedintheofficeof

thelawyer/lawfirmorsettlementagent.



(d)DirectivetoBank.Everylawyerorlawfirmandeverysettlement agentmaintainingaNorthCarolinaIOLTA

AccountsshalldirectanybankinwhichanIOLTAAccountismaintainedto:



(1)remitinterest,lessanydeductionforallowablereasonablebankservicecharges

orfees,(asusedherein,

"service charges" shall include any charge or fee charged by a bank on an IOLTA Account) as defined in

paragraph(e),atleastquarterlytoNCIOLTA;



(2)transmitwitheachremittancetoNCIOLTAastatementshowingforeachaccount:(i)thenameofthe

law

firm/lawyer or settlement agent maintaining the account, (ii) the lawyer/law firm’s or settlement agent’s

IOLTA Account number, (iii) the earnings period, (iv) the average balance of the account for the earnings

period,(v)thetypeofaccount,(vi)therateofinterestappliedincomputingtheremittance,(vii)the

amount

ofanyservicechargesfortheearningsperiod,and(viii)thenetremittancefortheearningsperiod;and



(3)transmittothelawfirm/lawyerorsettlementagentmaintainingtheaccountareportshowingtheamount

remittedtoNCIOLTA,theearningsperiod,andtherateofinterestappliedincomputing

theremittance.



(e)AllowableReasonableServiceCharges.EligibleBanksmayelecttowaiveanyorallservicechargesonIOLTA

Accounts. If a bank does not waive service charges on IOLTA Accounts, allowable reasonable service charges

maybeassessedbut onlyagainst interestearnedontheIOLTA Accountorfundsdeposited by

thelawyer/law

firmor settlement agent in the IOLTA Account for the purpose of paying such charges. Allowable reasonable

servicecharges maybededucted frominterest on an IOLTAAccount onlyat therates andinaccordance with

the bank's standard practice for comparable non‐IOLTA accounts. Allowable reasonable service

charges for

IOLTAAccountsare:(i)areasonableAccountmaintenancefee,(ii) percheckcharges,(iii) perdepositcharges,

(iv)afeeinlieuofaminimumbalance,(v)federaldepositinsurancefees,and(vi)automatedtransfer(Sweep)

fees.Allservicechargesotherthanallowablereasonableservicechargesassessedagainstan

IOLTAAccountare

the responsibility of and shall be paid by the lawyer or law firm.No service charges in excess of the interest

earned on the Account for any month or quarter shall be deducted from interest earned on other IOLTA

AccountsorfromtheprincipaloftheAccount.



HistoryNote:StatutoryAuthorityG.S.84‐23

ReadoptedEffectiveDecember8,1994



Amendments Approved by the Supreme Court:March 6, 2008; February 5, 2009; January 28, 2010; March 8,

2012;August23,2012



27N.C.A.C.1D,Rule.1317,ComparabilityRequirementsforIOLTAAccounts



(a)ComparabilityofInterestRate.EligibleBanksthatofferandmaintainIOLTAAccountsmustpaytoanIOLTA

Accountthehighest interest rategenerallyavailable fromthebankto non‐IOLTAAccounts (ComparableRate)

when the IOLTA Account meets or exceeds the same minimum balance or other account eligibility

qualifications,

if any. In determining the highest interest rate generally available fromthe bank to non‐IOLTA

accounts, an Eligible Bank may consider factors, in addition to the IOLTA account balance, customarily

considered by the bank when setting interest rates for its customers, provided that such factors do not

discriminatebetweenIOLTA

accountsandnon‐IOLTAaccounts.



(b) Options for Satisfying Requirement. An Eligible Bank may satisfy the Comparable Rate requirement by

electingoneofthefollowingoptions:



(1)useanaccountproductthathasaComparableRate;



(2)withoutactuallychangingtheIOLTAAccounttothebank'sComparableRateproduct,

paytheComparable

RateontheIOLTAAccount;or



(3)paythebenchmarkrate(Benchmark),whichshallbedeterminedbyNCIOLTAperiodically,butnotmore

frequently than every six months, to reflect the overall Comparable Rate for the NC IOLTA program. The

Benchmarkshallbearateequalto

thegreaterof:(i)0.65%or(ii)65%oftheFederalFundsTargetRateasof

thefirstbusinessdayoftheIOLTAremittingperiod,andshallbenetofallowablereasonableservicecharges.

Whenapplicable,NCIOLTAwillexpresstheBenchmarkinrelationtotheFederalFundsTargetRate.



(c)OptionsforAccountTypes.AnIOLTAAccountmaybeestablishedas:



(1) subject to paragraph (d), a business checking account with an automated investment feature (Sweep

Account), such as an overnight investment in financial institution daily repurchase agreements or money

market funds invested solely in or fully collateralized by

 US government securities, which are US Treasury

obligations and obligations issued or guaranteed as to principal and interest by the United States or any

agencyorinstrumentalitythereof;



(2)acheckingaccountpayingpreferredinterestrates,suchasmarketbasedorindexedrates;



(3) a public funds interest‐bearing

checking account, such as accounts used for governmental agencies and



othernon‐profitorganizations;



(4)aninterest‐bearingcheckingaccountsuchasanegotiableorderofwithdrawal(NOW)account,orbusiness

checkingaccountwithinterest;or



(5)anyothersuitableinterest‐bearingdepositaccountofferedbythebanktoitsnon‐IOLTAcustomers.



(d) Financial Requirements for Sweep Accounts.

 If a bank establishes an IOLTA Account as described in

paragraph(c)(1),thefollowingrequirementsmustbesatisfied:anovernightinvestmentinafinancialinstitution

dailyrepurchaseagreementshallbefullycollateralizedbyUnitedStatesgovernmentsecurities,asdescribedin

thisRule,andmaybeestablishedonlywithanEligible

Bankthatis"wellcapitalized"or"adequatelycapitalized"

as those terms are defined by applicable federal statutes and regulations. A "money market fund" is an

investment company registeredunder theInvestment Company Actof 1940,as amended, thatis qualified to

holditselfouttoinvestorsasamoneymarketfund

underRulesandRegulationsadoptedbytheSecuritiesand

Exchange Commission pursuant to said Act. A money market fund shall be invested solely in United States

governmentsecuritiesorrepurchaseagreementsfullycollateralizedbyUnitedStatesgovernmentsecurities,as

described inthis Rule,and,at thetimeoftheinvestment,

shallhavetotal assets ofatleast two hundred fifty

milliondollars($250,000,000.00).



(e) InterestCalculation.Interestshall becalculatedinaccordance withanEligible Bank'sstandard practicefor

comparablenon‐IOLTAAccounts.



(f)HigherRatesandWaiverofServiceChargesAllowed.Nothinginthisruleshallprecludeaparticipating

bank

from paying a higher interest rate than described above or electing to waiv e any service charges on IOLTA

Accounts.



History:OrderoftheN.C.SupremeCourt

AdoptedJanuary28,2010



SECTION II: KEY CONCEPTS IN CLIENT TRUST ACCOUNTING



Thefollowingsevenkeyconceptsprovidethebackgroundyouneed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generaltrustaccount

(also known as 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 another client'sor your own

obligations.



Inageneraltrustaccount,thewaytodistinguishoneclient'smoneyfromanother'sistokeepaclientledgerof

eachindividual client'sfunds. A client ledger tells you how much money you've received on behalf of aclient,

how much money you've paid out on behalf of that client, and how much money that client has left in your

general trust account. If you are holding money in your general trust account for ten clients, you have to

maintaintenseparateclientledgers.Ifyoukeepeachclient'sledger

properly,youwillalwaysknowexactlyhow

muchofthemoneyinyourgeneraltrust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generaltrustaccount,youwon'tknow

whichclient's

moneyyouareusing.



Alsonote,ifyourclient'smoneycanearnincomebecausethefundsarelargeenoughinamountorareheldfor

alongperiodoftime,thenyoucannotplacethefundsinageneraltrustaccount.Thefundsmustbedepositedin

an account dedicated

to that client or transaction. [For more information on dedicated trust accounts, see

SectionIII,TrustAccountBasics.]



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 generaltrustaccount. Your general trust account migh thave abalance of

$100,000,butifyouareonlyholding$10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generaltrust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generaltrust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, the failure to maintain a sufficient cli en t 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acheckthathasnot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.

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PROBLEMbecausethebalanceislessthanzero(aso‐called“negativebalance”).



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general

trust 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 general trust account, ordinarily either the

checkwillbounceoryouwillbeusingotherclients'moneytocoverthech eck.



Thetimeit takesfor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 trust 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deposittoyourgeneraltrust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fo r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PMonthefollowingday,

but stays open for business until 5 PM. Your client arrives

at 3:30 and gives you $5,000 in cash, which you

immediatelydeposit.At4PMyouwriteageneraltrustaccountcheckagainstthatmoneytopayaninvestigator.

If the investigator presents the check for payment at the bank before it closes at 5 PM, 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 from your trust account to the client for

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

other clients in your general trust

 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shouldnever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spen ding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.Formoreinformationon“Instant

Credit,”seeSectionV“FundsGoOut.”



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thegeneraltrust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 trust accountis kep ton the account journal. [A

sampleclientledgerisshowninAppendixB2.]



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generaltrustaccountthesameway.Everytimeyoumakeadepositto

thegeneraltrust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

generaltrust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,” you should check the running balance in each client's ledger

beforeyouwriteanygeneraltrusta ccount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Al ways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 to the client at the conclusion of the representation or to third parties on the client’s behalf. What

comesinforeachclientmustequalwh at

goesoutforthatclient;nomore,noless.



Many lawyers have small, inactive balances in their general trust 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generaltrust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mustbeescheatedtothestate.Formoreinformation

onabandonedor

unclaimedfunds,seeSectionIII,PartD.



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down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 general trust account should identify on the face of the

check the client on whose behalf it is written, so that it is easy to match up the money with the client. That

meansyoushouldNEVERmakeoutageneraltrustaccountchecktocash,becausethere

is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.



SECTION III: TRUST ACCOUNT BASICS



A.TrustAccounts:WhatAreTheyandHowManyDoYouNeed?



Whatisatrustaccount?



Atrustaccountisabankaccountmaintainedincidenttoalawyer'slawpracticeinwhichthelawyerholdsfunds

receivedinafiduciarycapacityonbehalfoforbelongingtoaclient.SeeRule1.15‐1.



Whomusthaveatrustaccount?



Anylawyerwhoreceivesfundsinafiduciarycapacityinthecontextofhisorherlawpracticemusthaveaccess

toormaintainatrustaccount.Thelawyermusthaveaccesstoorestablishatrustaccountbeforereceivingsuch

funds.SeeRule1.15‐2(a),(b),and(c).Lawyerswho

donotreceivefundsbelongingtooronbehalfofclientsdo

nothavetohaveatrustaccount.



Howmanytrustaccountsdoesalawyerneed?



Generally speaking,alawyerneedsonlyonetrustaccountto handlemoniesreceivedin trustwhich areeither

nominal in amount or held

 for a short period of time. Within this common account—called a "general trust

account"—thefundsof many clientsmaybecommingledsolong asadequaterecordsare keptto identifythe

fundsofeachclient.SeeRule1.15‐1(h)andRule1.15‐2.Ifdesired,alawyermayhavemultiple

trustaccountsfor

administrativepurposes.For example,lawyersoften have trust accou nts for real estatetransactions which are



distinctfromthetrustaccountsusedforotherclientmatters.



Doeseachlawyerinafirmneedaseparatetrustaccount?



No.Eachlawyer inafirmmayethicallyusethe firm'sgeneraltrustaccount solongas adequaterecordsof the

funds of each client are maintained. However,

multiple accounts are permissible. A lawyer may personally

maintainseveraltrustaccountsifheorshedesires.SeeRule1.15‐2.



Isalawyereverrequiredtoestablishatrustaccountforoneclient,onetransaction,oraseriesofintegrated

transactions?



Yes.Thesizeofthedepositorthe

lengthoftimethedepositedfundsaretobeheldcouldbesuchthataprudent

personactinginafiduciarycapacitywould beexpectedtoinvest thefunds on behalf ofthebeneficiary,anda

lawyerreceivingfundsundersuchcircumstanceswouldhaveacorrespondingobligationtodepositthe

fundsin

a separate interest‐bearing or "dedicated trust account." Rule 1.15‐1(c). Comment [3] following Rule 1.15‐4

contains a list of factors to be considered when determining whether there is a duty to deposit funds into a

separateinterest‐bearingdedicatedtrustaccount.Anyinterestgeneratedistheproperty

oftheclient.SeeRule

1.15‐2(q).



Whatsortofbankaccountmustbemaintained?



Sincealawyerhasanethicalobligationtopayordeliverclie ntfundspromptlyasinstructedbytheclient,trust

accounts are generally demand accounts with check writing privileges. Pursuant to an order of

the North

Carolina Supreme Court, beginning January 1, 2008, every general trust account must be an interest‐bearing

account, and the establishment of any such general trust account must be reported to the North Carolina

Interest on Lawyers Trust Accounts program (NC IOLTA) for inclusion in NC IOLTA. See Rule 1.15

‐2(b) and 27

NCAC1D,Section.1300.Theinterestearnedonsuchaccountsisremittedbythedepositorybankdirectlytothe

IOLTABoardofTrusteeswhichsubsequentlydistributesthefundsintheformofgrantstopersonsorentitiesfor

variouspublicpurposesinaccordancewiththerulesof

NCIOLTA.[FormoreinformationonIOLTAaccounts,see

Secti o nX.] 



B.OpeningaTrustAccount



ChoosingaTrustAccountBank



Rule1.15oftheNorthCarolinaRulesofProfessionalConduct,anditssubparts,containsmanyprovisionsabout

thedutytodepositclientfunds inatrustaccounttoprotectandsecurethe funds.Forexample,Rule1.15‐2(b)

admonishes:“Alltrustfundsreceivedbyor

placedund erthecontrolofalawyershallbepromptlydepositedin

eitherageneraltrustaccountoradedicatedtrustaccountofthelawyer.”Theruledoesnotsaywherealawyer

shouldestablishatrustaccountexceptthatitmust“bemaintainedat abankinNorthCarolina.”

Uponwritten

consentoftheclient,adedicatedtrustaccountcanbemaintainedataninstitutionoutsideofthestate.SeeRule

1.15‐2(e).“Bank”isdefinedinRule1.15‐1(a)as“abank,savingsandloanassociation,orcreditunionchartered

underNorthCarolinaorfederallaw.”



Thedepository

bankforalawyer’strustaccountmustagreetothefollowing:



 ReporttotheNorthCarolinaStateBarwhenanitemdrawnonthetrustaccountispresentedforpayment

againstinsufficientfunds. SeeRule1.15‐2(l).A lawyermaynotmaintaina trustorfiduciary accountata



bankthatdoesnotagreetomakethereports.SeeAppendixB3foracopyofthedirective.

 Providethelawyerwithallcancelledchecksorotheritemsdrawnonthetrustaccountordigitalimagesof

thechecks.Thedigitalimagesmustbelegiblereproductionsofthefrontandbackoftheoriginalitemwith

nomorethansixitemsperpageandnoimagessmallerthan13/16x3inches.SeeRule1.15‐3(b)(A).

 If the bank provides only digital images of canceled checks and items, it must maintain the capacity to

reproduceadditionalorenlarged

imagesoftheoriginalitemsuponrequestforaperiodofsixyears.See

Rule1.15‐3(b)(B).



 AgreetopayIOLTAaccountsthehighestinterestrateavailabletothatbank’sothercustomerswhenthe

IOLTA accounts meet the same minimum balance or other account qualifications (also known as the

“comparability requirement”). See Rule .1317. Banks will be certified as “eligible” by NC IOLTA upon a

finding

thattheyareincompliancewiththiscomparabilityrequirement,andNCIOLTAwillmaintainalist

of eligible banks. Banks not found on theeligible list must submit a compliance statement and receive

approvalbeforeIOLTAaccountsmaybeopenedwiththem.



Please review the “Opening a General (IOLTA) Trust

 Account: Information Packet” before opening a trust

account.Itincludesahelpfulchecklistforitemstobringwithyoutothebankandcontainsimagesofimportant

documents.SeeAppendixB4foracopyofthechecklist.



If your bank is not doing these things, you are professionally responsible—notthe

 bank. Compliance with the

requirements varies substantially from bank to bank and from branch office to branch office. Some banks

regularly fail to notify the State Bar when a trust account check is presented against insufficient funds. This

occursdespitethefactthelawyerproperlyfiledadirectivewiththe

bank,pursuanttoRule1.15‐2(l),instructing

thebanktonotifytheStateBar.



Howdoyoufulfillyourprofessionalresponsibilitytochoosetherightbank?



Sinceyouareresponsibleforthebank’scompliancewiththenoticeandrecord‐keepingrequirements,theonly

wayfo ryoutoactina

professionallyresponsiblemanneristoinvestigatethebanksinyourcommunitytofind

out which banks understand the requirements and are willing to comply. If the bank maintains only digital

imagesofcancelledchecks,youmustensurethatthesizeandfront/backrequirementsarebeingmetandthat

thebank

maintainstheabilitytoreproducetherecordsforaperiodofatleastsixyears.Onceyouchooseabank

(www.nciolta.org/eligible‐banks

),monitorthe bank’scomplianceand,ifthebankchangesitsprocedures,insist

upon compliance or move your trust account to a bank that will comply. If a local branch manager does not

understand the notice and recordkeeping rules, or the IOLTA comparability requirement, encourage the

managertocontactthehome

officeforinstructionsorcalltheStateBar.Thelawyersintheethicsdepartment

andthestaffauditorwouldbegladtoexplaintherulesandrequirements.



Arethererestrictionsconcerningthekindsofinstitutionswheretrustaccountsmaybemaintained?



Yes. Trust accounts may only be maintained at federally

 or North Carolina chartered banks savings and loan

associations,andcreditunionslocatedinNorthCarolinaorwithbranchofficesinNorthCarolina.SeeRule1.15‐

2(e) and Rule 1.15‐1(a).Dedicatedtrust accounts may be maintained at an institution outside the stateupon

writtenconsentoftheclient.



 law firmwithoffices in NorthCarolinaandanother statemay senda NorthCarolinaclient's funds to afirm

office in another state for centralized processing without client consent provided the funds are promptly

depositedintoatrustaccountwithabankthathasbranchofficesinNorthCarolina.

SeeRule1.15‐4,Comment

[4].



DedicatedTrustAccounts



Withthewrittenconsentoftheclient,atrustaccountdedicatedtooneclient'sfunds(seeRule1.15‐1(c))maybe

maintainedatabankoutsideofNorthCarolinaoratafinancialinstitutionotherthanabankinsideor

outsideof

NorthCarolina.SeeRule1.15‐2(e).



LabelingaTrustAccount



Atrustaccountmustbeclearlylabeledanddesig natedasa"trustaccount,"andallchecksdrawnontheaccount

mustbesoidentified.Forinstance,anappropriatetitleforageneraltrustaccountmightbe"TheTrust

Account

ofJohnSmith,Lawyer"or"Smith,Jones&WilliamsTrustAccount."[Foranexampleofaproperlylabeledgeneral

trustaccountcheck,seeAppendixB6.]AlthoughthetaxidentificationnumberofNCIOLTAwillbeassignedtoall

generaltrustaccounts,thetrustaccountchecksshouldbearthename

assignedbythefirmtotheaccount.



Each account in which funds are held by a lawyer pursuant to the lawyer's service as a trustee, guardian,

personalrepresentative,attorney‐in‐fact,orescrowagentmustbe appropriately labeled as afiduciaryaccount

unlesssuchfundsareheldinageneraltrustaccount.SeeRule1.15‐1(c),(e),

(h),(l).Forexample,anappropriate

title for a fiduciary account might be "Trust Account for the Estate of John Doe." Similarly, a dedicated trust

accountthatholdsthefundsofoneclientmustbe properlylabeledas atrustaccount (e.g.,"TrustAccountfor

theBenefitofJaneSmith").



TrustAccountChecks



Rule1.15‐3(b)(2)requiresthatallitemsdrawnonthegeneraltrustaccountindicateclientname,filenumber,or

other identifyinginformationoftheclientfrom whosebalance theitem is drawn.Therefore,anycheckwritten

fromthetrustaccountmusthaveclientreferencedataonthe

check.Theclient’snameoridentificationnumber

mayappearonthecheckstub,checkregister,journal,etc.;however,thisinformationmustalsoappearonthe

faceofthecheck.Ifatrustaccountsoftwareprogramoracheck‐writingprogramcannotrecordthisreference

dataonthecheck,itshouldbe

manuallyrecorded.



Ifacheckdrawnonthetrustaccountincludespaymentoffeesorcostreimbursementformorethanoneclient,

thecheckshouldindicatetherespectiveindividualpayments.



Thepurposeforthedisbursementmaybeindicatedaftertheclient’sname(i.e.,fees,costreimbursement,etc.).

[SeeAppendix

B6foranexample.]



Istherearequiredformatfortrustaccountandfiduciaryaccountchecks?



Yes,all generaltrustaccounts,dedicatedtrustaccounts,andfiduciaryaccountsmustusebusiness‐sizedchecks

(longerthansixinches)thatcontainafieldcalledan"AuxiliaryOn‐Us"fieldintheMICR(magnetic

inkcharacter

recognition)lineofthecheck.SeeRule1.15‐3(a).Thespecialcheckformatpreventsconversionofacheckinto

an electronic transaction through the automated clearinghouse network for converting checks drawn on

consumer accounts to which most financial institutions belong. If a check is converted, the paper check is



destroyed,therebypossiblyeliminatingalawyer'srecordofthetransaction.[Foranexampleofabusiness‐sized

trustaccountcheck,seeAppendixB5.]



ProperSignatories



Checksdrawnonatrustaccountmaybe signedby lawyersandsupervised nonlawyeremployees.However,a

nonlawyer employee may not have signatory authority

if he or she is responsible for performing monthly or

quarterly reconciliations. See Rule 1.15‐2(s). Additionally, prior to exercising signature authority, a lawyer or

supervisednonlawyermusttakeaone‐hourtrustaccountmanagementCLEapprovedbytheStateBarforthis

purpose.NOTE:Theinitialdeadlineforcompletingthe

1‐hourCLEistheendofthe2017CLEyear(Feb.’18).



Subject to the restrictions noted above, a lawyer may grant signatory authority to a nonlawyer employee.

However,alawyerisstillprofessionallyresponsiblefortheactionsofthoseunderhisorhersupervision.



SignatureRequirements



Trust

account checks may not be signed by using signature stamps, preprinted signatures, or electronic

signatures.SeeRule1.15‐2(s).



C.TrustAccountManagement



Maytheresponsibilityformanagingafirm’strustaccountsbedelegatedtoonelawyerinafirm?



Yes, however, unless thefirmhas appointed atrust account oversight officer (TAOO)pursuant to Rule1.15‐4

(see below), all managin g lawyers in the firm may be professionally responsible fo r violations

 of the trust

accounting rules that result from failure to have in effect measures giving reasonable assurance thatthe rules

willbefollowed.SeeRule5.1.



May a lawyer delegate the management of a trust account, including check signing authority, to a staff

memberwhoisnotalawyer?



Yes, however, the lawyer is professionally responsible for the supervision of the nonlawyer. See Rule 5.3 and

Rule 8.4(a). A lawyer may be subject to professional

discipline for violations of the trust accounting rules that

resultfromtheinadequatesupervisionofastaffmember.



Rule1.15‐4TrustAccountOversightOfficer(TAOO)



Rule 1.15‐4 allows, but does not require, a multi‐member firm to designate, annually and in writing, one or

morepartnersasoversightofficers

foranygeneraltrustaccount.Therulehelpsafirmensurethatitisproperly

maintainingitstrustandfiduciaryaccounts,andavoidrelianceonanassumptionthattrustaccountsarebeing

maintained by someone else in the firm. Designation as the TAOO requires the lawyer to complete a certain

amount of training to gain proficiency in the trust accounting rules and the firm’s accounting system, and

requires the firm to adopt a written policy detailing the firm’s trust account management procedures. Again,

this rule is optional for multi‐member firms that want to add an extra level of oversight to

 their firm’s trust

accountmanagement.



May a lawyer “link” her trust account with her business account for the purposes of determining interest

earnedorchargesassessed?

Alawyercannotpermitthebanktolinkhertrustandbusinessaccountsforthepurposeofdetermininginterest

earnedorchargesassessedif

suchanarrangementcausesthelawyertouseclientfundsfromthetrustaccount

tooffsetservicechargesassessedonthebusinessaccount.RPC150[AppendixA].



D.AbandonedorUnclaimedFunds/Property



Ifalawyerholdsfundsinageneraltrustaccountanddoesnotknoweithertheidentityorthelocationofthe

ownerofthosefunds,whatshouldbedonewiththemoney?



Thelawyermustfirstmakeadiligentattempttodeterminetheidentityand/orthelocationof

theownerofthe

funds in order that an appropriate disbursement might be made. This me ans questioning personnel and

investigatingrecordsandothersourcesofinformationinanefforttodeterminetheidentityandlocationofthe

owner of the funds. See Rule 1.15‐ 2(q). If that effort is successful, the

 entrusted property shall be promptly

transferredtothepersonorentitytowhomitbelongs.Ifthelawyerisunsuccessfulinascertainingtheidentityor

thelocationoftheownerofthefunds,thelawyermustdeterminewhetherthefundsqualifyforescheatmentto

theState ofNorth Carolinapursuant

to N.C.Gen. Stat. Chap 116B. Pending escheatment,thefunds should be

heldandaccountedforinthelawyer'strustaccount.Ifqualified,suchfundsmustbeescheatedtothestateeven

ifitisbelieved,butcannotbeconclusivelydocumented,thatthefundsbelongtothelawyer. 



Howdo

Iescheatunidentifiedorunclaimedfundsinmytrustaccount?



If you have diligently attempted to determine the identity and location of the owner of the funds without

success, the funds should be sent to the Escheat and Unclaimed Property Section of the Office of the North

Carolina State Treasurer.

Contact the State Treasurer's Office for theforms necessary to transfer funds or for

assistanceincompletingtheforms:



NCDepartmentofStateTreasurerUnclaimedPropertyProgram

325NorthSalisburyStreet

Raleigh,NC27603‐1385

Phone:(919)508‐1000;5085979

Email:unclaimed.property@nctreasurer.com



Website:www.nctreasurer.com



Theprimarypurpos eoftheescheatfundistoprovideameansbywhichunclaimedpropertycanbebroughtunder

thecontrolofthestateandconvertedtoth ebenefitofthepeopleofNorthCarolina.Thestatetreas ur erinveststh e



escheatedmoneysinthesamemann erthatthestateretirementfundsareinvested.Theincomederivedfromthis

investmentisdistributedannuallytotheStateEducationAssistanceAuthoritytobeusedtomakeloanstoworthy

andneedyNorthCarolinastudentswhoareenro l ledinstatepublicinstitutionsofferingpost‐

secondaryeducation.

IftherearequestionsconcerninganyaspectoftheEscheatandUnclai medPropertyProgram,inquiriesshouldbe

directedtotheDep artmentofth eStateTreasurer,Unclai medPropertyProgram.



For more information about escheating funds, please see Appendix C and the NC Holder Reporting Guide,

availablehere:https://www.nctreasurer.com/upp/Resources/NC_Holder_Reporting_Guide.pdf

.



HowdoIhandletrustfundsforadeceasedclient?

Whenthereareexcessfundsleftinalawyer’strustaccountafteraclientdies,thelawyermustcomplywiththe

original fee agreement for the representation of the client and disburse the funds accordingly. See EA 2295

[Appendix

A].



MayIchargeadormancyfeeagainstunclaimedfunds?



Alawyermaychargeareasonabledormancyfeeagainstunclaimedfundsiftheclientagreesinadvanceandthe

feemeetsotherstatutoryrequirements.See2006FEO15[AppendixA].



E.ClosingaTrustAccount



ClosingAccountwithRemainingFunds



Ifyouhaveanaccountthatyounolongeruse,butfundsremaingintheaccount,theneithertransferthefunds

fromtheoldaccountintoanewaccountordisbursethefundstotheowne rsasshownontheclientledgersforthe

account.

SeeRu le1.15‐3( b)(5).Anyfundsondepositforaclientwhoisnolongerrepresentedbythelawyerorthelaw

firmshouldbedisbursedtotheownersthereof .Iftransfertoanewaccountisappropriate,youmustdocumentthe

transfer of the funds from the old account

to the new account and accurately note the deposit of funds on the

appropriateclients'ledgers.SeeRule1.15‐3(b)(5).If anyinterest wascreditedtothe dormantaccount,thismoney

should be sent to the NC IOLTA program. If there are unclaimed or unidentified fund s in the account, see the



discussi onofabandonedfund sintheprecedingpages.



LawFirmDissolutionandWithdrawalfromPractice



The property of clients entrustedto the firm shouldbe protectedduring the dissolution of a lawfirm. RPC48

states:



A full and complete accounting of all fiduciary property of clients entrusted to

 the firm should be made to

eachclient,withwrittenrequestfortheirreturnorfuturedisposition.Failureoftheclienttorespondshould

betakenasarequestforthereturnofsaidfiduciarypropertytotheclient,unlessgovernedbyacourtorder

orproceedingtothecontrary.



For information onthewind downof  a missing,incapacitated, deceased, ordisciplined lawyer’ssole practice,

seeAppendixA.



SECTION IV: FUNDS GO IN



A.WhatGoesIntoaTrustAccount?



Thegeneralruleisthateveryreceiptofmoneyfromaclientorforaclientwhichwillbeusedordeliveredonthe

client'sbehalfshouldbeplacedin thetrustaccountorafiduciaryaccountifthefunds arereceivedbyalawyer

whileservingasalawyer

orotherprofessionalfiduciary.Thisincludesfundsreceivedbythelawyerasanescrow

agent.SeeRule1.15‐2(b)and(c),andCommentfollowingRule1.15‐4.







What about funds received by alawyer acting as a court‐appointed fiduciary or pursuant to appointment in

somespecifictrustitem?



A lawyer serving in such a fiduciary role must segregate fiduciary property from his or her personal property,

deposit such funds in a designated fiduciary account, maintain the

 minimum financial records required for a

fiduciary account, and instruct any financial institution in which fiduciary property is held to notify the North

Carolina State Bar of any negotiable items drawn on the account which are presented for payment against

insufficientfunds.Suchfundsshouldnotbedepositedinthe

lawyer'sgeneraltrustaccount.Rules1.15‐1(e)and

(f);Rule1.15‐2(c),(e),(f),(k);Rule1.15‐3.[Formoreinformation,seeSectionVIII,“FiduciaryAccounts.”]



Isitappropriatetodeposititemsotherthancashorcasheq uivalentsinth etrustaccount?



Generally speaking, any negotiable item may be deposited in a trust

 account whether or not it represents

collected funds. Unless specifically permitted by law, the Rules of Professional Conduct or definitive

interpretationsthereof, however, no withdrawal shouldbemade with respect to any depositeditem until the

fundsrepresentedbythatitemarecollected.SeeRules1.15‐1(i)and1.15‐2(g);

seealso,RPC191[AppendixA];

01FEO3[AppendixA];and06FEO8[AppendixA].



Mustalawyerdepositverysmallsumsofmoneyreceivedfromaclientintoatrustaccount?



Yes.Alawyerwhoreceivesfromhisorherclientasmallsumofmoney(for

example,moneywhichistobeused

topaythecostofrecordingadeed)mustdepositthatmoneyinatrustaccount.RPC47[AppendixA].



May a lawyer who receives a lump sum payment in advance, which is inclusive of the costs of litigation,

depositthepaymentin

hisoperatingaccountasfees?



No. Where a lawyer receivesa lump sum payment in advance whi chis inclusive of thecosts of litigation,the

portionrepresentingthecostsmustbedepositedinthetrustaccount.Someofthemoneycollectedbythefirm

as “fees” is actually entrusted fund s

 intended to defray the costs of litigation. The rules require that funds

received in the fiduciary capacity, however characterized, be directly deposited into a trust account. RPC 51

[AppendixA].



May a lawyer closing a residential real estate transaction ask borrowers and sellers to agree in writing to

waivethe

returnofverysmallsums,especiallywherethelawyerbearssimilarriskofloss?



Yes. While Rule 1.15‐2(h) provides that a lawyer must disburse property or trust funds held on behalf of the

clientastheclientdirects,therulesdonotappeartoprohibitalawyerfromrequesting

thatclientsonoccasion

agreetowaivethereturnofcertaininsubstantialordeminimisamounts.Ifthepartyorpartiesinvolvedrefuse

toagree,thenthelawyermustabidebytheirwishesforthereturnofthefunds.EA2217[AppendixA].



B.WhatDoesNotGointheTrustAccount?



Mayalawyerdeposithisorherownfundsinatrustaccount?



Nofundsbelongingtothelawyermaybedepositedinthetrustaccountexceptsuchfundsasarenecessaryto

open or maintain the account, or pay service charges, or are funds belonging in part to a

 client and in part

presentlyorpotentiallytothelawyer,suchaswhereadepositeditemrepresentsboththeclient'srecoveryand

thelawyer'sfee. Insuchacase,theportionofthefundsbelongingto thelawyermustbewithdrawn fromthe

trustaccountassoonasthelawyer

becomesentitledtothefundsunlesstherightofthelawyertoreceivethat

portionisdisputedbytheclient,inwhicheventthedisputedportionmustremaininthetrustaccountuntilthe

disputeisresolved.SeeRule1.15‐2(f).



Shouldretainersbedepositedinthetrustaccount?



Strictly

speaking,no.Aretainer,preferablyreferredtoasa"generalretainer,"initstruestsense,ismoneypaid

tothelawyertoreservetheexclusiveuseofthelawyer'sservicesforaparticulartimeorinregardtoaparticular

matter. See 08 FEO 10 [Appendix A]. Since a general

retainer is deemed earned when paid, it immediately



becomesthepropertyofthelawyerandassuchmustnotbedepositedinthetrustaccount.Generalretainers

mustbedistinguishedfromfeespaidinadvancewhichareintendedtobeheldbythelawyerassecuritydeposits

againstworkwhichisyettobeperformed.Alawyerhas

anethicalobligationtorefundtheunearnedportionof

anyfeepaidinadvanceupondischargeorwithdrawal,therefore,suchfundsarenotconsideredpropertyofthe

lawyerandmustbeheldinthetrustaccountuntiltheyareearned.Rule1.15‐2(a);1.15,Comment[12];andRule

1.16(d). [See 08

 FEO 10 for a complete overview of the different types of fees and where they should be

deposited.AppendixA.]



Whataboutfundsbelongingtoanorganizationinlawyer’spossessionasanofficialoftheorganization?



The trust account rules are not applicable when the lawyer handles money for

a business, religious, civic, or

charitable organization as an officer, employee, or other official of that organization. The lawyer's only

professionalobligationregardingsuchfundsistodealhonestly.Rule8.4(c).Suchfundsshouldnotbedeposited

inthelawyer'sgeneraltrustaccount.SeeRule1.15‐1(d)and(m);Rule

1.15‐2(c);Rule1.15,Comment[10].



C.DepositingFundsintoaTrust Account



Example:DepositingaMixofTrustandNon‐trustFunds



A lawyer advises a client that a domestic matter will involve a legal fee of $150.00, earned upon receipt, as

agreedupfront,arecordingfeeof$30.00,andasherifffeeof$4.00,totaling$184.00.



Alternative(a):The

clientpresentsthelawyerwithacheckfor$184.00.Thecheckisdepositedintothegeneral

trust account. A check for $150.00 is then disbu rsed to the lawyer and the remaining fees are paid when

required(Rule1.15‐2(g)).



Alternative (b):Theclient pays withtwochecks, onefor

$150.00and anotherfor$34.00.The$34.00check is

deposited into the general trust account. The $150.00 is deposited in the firm operationaccount or otherwise

paidtothelawyer.



Alternative(c):Theclientpaysincash.$34.00isdepositedintothegeneraltrustaccount.Theremainingcashis

deposited

inthefirmoperatingaccountorotherwisepaidtothelawyer.



Ifthelawyerpreviouslyadvancedtherecordingandsherif ffees,allfundsreceivedfromtheclientwouldineach

instancebedepositedintotheofficeaccount.

If,however,achecksubmitted byaclientcontains anyfundsthatare

tobeused topay clientexpensesinthe

future,thecheckmustbedepositedintothetrustaccountintact. Somelawyersaskthe banktosplit aclient's

checkatthetimeof deposit(thecostportionisdepositedinthetrustaccountandthefeeportionisdeposited

intheofficeaccount).ThisviolatesRule1.15‐2(g).[ForaSampleDepositSlip,seeAppendixB7andB8.]



CreditCardPaymentsfromClients



Lawyersmayacceptpaymentoflegalfeesbyelectronictransferandcreditcard.Depositstothetrustaccountby

credit card are permitted subject to the

 requirements explained in 97 Formal Ethics Opinion 9 [Appendix A].

Clientfundscannotbedepositedbycreditcardtotheofficeoperatingaccountandthentransferredtothetrust

account.Alawyermustarrangetohaveallcreditcardpaymentsdepositedintothetrustaccountifthelawyer's

bank cannot

orwillnot distingu ishbetweentheoperating account,into whichearned feesaredeposited, and

thetrustaccount,intowhichunearnedfeesandentrustedfundsaredeposited.



CashReimbursements



Whenthecost ofrecording documentsattheRegisterofDeedsisoverestimated,theRegisterofDeeds often

reimburses the lawyer

 in cash. Rule 1.15‐2(b) requiresclient fundsto be promptly deposited ina lawyertrust

account and Rule 1.15‐3(b)requiresalawyer tomaintain a complete recordof allclientfunds receivedbythe

lawyer.Therefore,cashrefundsmustberecordedontheclient'sledgercardanddeposited

inthetrustaccount.

ThereceiptfromtheRegisterofDeedsshouldalsoberetained.



Somelawyersaskclientstoexecutean agreement(sometimescalled"RecordingFeeRefundWaiver")wherein

deminimuscashrefundsfromtheRegisterofDeeds(ofadesignatedamountorless)areretainedbythelawyer

and refunds exceeding that amount are deposited in the trust account for reimbursement to the

 client. This

practice, although permitted, is not encouraged. It is permitted only if the agreement with the client fully

disclosesthearrangementandtheclientconsentsinadvance.Acopyoftheagreementshouldberetained.See

EA2217[AppendixA].



SECTION V: FUNDS GO OUT



A.WhatDisbursementsareInappropriate?



ImmediateDisbursement



Disbursement against a client check should not be made until the check is collected unless the lawyer's

depositorybankgrantsprovisionalcreditfordepositeditemsandtherequirementsofRPC191aremet.Therisk

thatacheckwillnotclearmaynotbebornebyotherclient

fundsinthetrustaccount.



Trust account checks are returned for insufficient funds on occasion because of the failure to make a deposit

beforethecloseofthebankingday(usually2:00PM).Suchdepositsarenotposteduntilthefollowingbusiness

day.Timelydepositsensureav ailabilityoffundsfor

disbursement.



BankCharges



Some lawyers inadvertentlypaythebankservicechargesfor checkprinting,wires,returnedchecks,etc., from

clientfunds.Thisoccurswhena bank debitsthetrustaccountfora servicecharge.Rule 1.15‐2 (f)(1)permitsa

lawyerto deposit inadvance sufficient personal fund sin the

trust account to pay forservice charges,thereby

avoidingtheuseofclientfunds.Whenthisisdone,arecord(i.e.,ledgercard)shouldbemaintainedconcerning

thedepositanddisbursementofthesefunds.Somelawyersdirecttheirbanktobilltheofficeoperatingaccount

for service charges on the trust

 account if both accounts are maintained at the same bank. On occasion, the

bankwill incorrectlydebitthetrustaccount.Ifthetrustaccount isincorrectlycharged,theerrormayresult in

clientfundsbeingusedtopaythechargeandthetrustaccountmustbereimbursedpromptly.



OutstandingChecks



There are several ways to address the problem of trust account checks that are not cashed for a significant

periodoftime.Somelawyersprint"Voidafter90Days"ontrustaccountcheckstopersuadepayeesnottohold

thechecks. The notation does not guarantee that thebank will

 not honor the check after90 days. This issue

should be addressed with the bank in advance. Other lawyers contact all recalcitrant payees who fail to

negotiateatrustaccountcheckafteracertainperiodoftime(usuallysixtoninemonths).Certifiedmailshould

beusedifwarrantedby

theamountofthecheck.Ifthepayeecannotbelocatedorareplyisnotreceivedwithin

areasonabletime,thecheckisvoidedorastoppaymentisplacedonthecheck.Thestoppaymentchargehasto

bepaidandastoppaymentisusuallygoodforonly

sixmonths.Ifthecheckisvoided,itmaystillbenegotiable.

Therefore, a stop payment order may be more appropriate depending on the amount of the check. If a stop

payment order is placed on a check, the check may still be cashed. The bank's procedures for stop payment

ordersshouldbeunderstoodinadvance.Afterpaymentisstoppedonacheck,thefundsarenotedasreturned

on the client's ledger card. There is not a restriction on issuing a second trust account check. If the lawyer

believes that funds have been abandoned, the lawyer must follow the escheat

 requirements set forth in G.S.

116B.SeeRule1.15‐2(r).



May a lawyerunilaterally decideto usefunds heldin trusttopay hisor herlegal feesor theclaims ofother

creditors?



Astheclient'sagent andfiduciary,thelawyerhasanobligationtopayor deliver

thefunds inaccordancewith

theclient'smostrecentinstructions.Unlessthelawyerisauthorizedbytheclienttopay aparticularchargeor

claim,thelawyermaynotdisbursetrustfundsforthosepurposes.SeeRule1.15‐2(m).



Whatifthelawyerhasaninterestinfundsreceivedinsettlementofaclaimorinsatisfactionofajudgment?



Allreceiptsoftrustfundsmustbedepositedintothetrustaccountintact.Ifanitemrepresentsfundsbelonging

inparttotheclientandinpartto

thelawyer,theportionbelongingtothelawyermustbewithdrawnwhenthe

lawyer becomes entitled to the funds unless the right of the lawyer to receive the portion of the funds is

disputed by theclient. Inthatcase, the disp uted portion must remain inthe trust account until the

 dispute is

resolved.SeeRules1.15‐2(f)(2)and(g).



May a lawyer serving as an escrow agent disburse funds in a manner not contemplated in the escrow

agreement?



A lawyer serving as an escrow agent may  not disburse funds in a manner not contemplated in the escrow

agreementunless

allpartiesagree.RPC66[AppendixA].



Whathappensifaclientdirectsalawyernottopaymedicalbillsincidenttothesettlementofatortclaim?



Generally,thelawyermustfollowtheclient'smostrecentdirections.Unlessthehealthcareproviderinquestion

has perfected a statutory lien

 against the funds in the hands of the lawyer, the lawyer must handle the

settlementproceedsasdirectedbytheclient.RPC125[AppendixA].Forsituationswhentheclientprovidesno

directionandthelawyerwantstopayabill,seeRPC75[AppendixA].



May a lawyer

make a conditional delivery of trust account checks to a real estate agent before depositing

loanproceedsagainstwhichchecksweretobedrawn?



No. The lawyer may not ethically deliver trust account checks to thereal estate agent, even if suchdelivery is

made “in trust” or “conditionally,” until

the lawyer has recorded the closing documents and deposited the

closingproceedsinhisorhertrustaccount.Fundsdepositedinatrustaccountarefundsreceivedbythelawyer

as afiduciary,whichmust beheldand disbursed onlyfor the benefit ofthoseentitledtothem,in accordance

with

 appropriate instructions. Accordingly, the lawyer cannot violate or delegate his or her fiduciary duty by

puttingintothehandsofanunrelatedthird‐partyacheckdrawnonatrustaccountcontainingonlythefundsof

others.RPC78[AppendixA].



Is it improper for a lawyer to disburse settlement

 funds conditionally delivered by opposing counsel before

satisfyingthesettlementconditionsunderwhichthelawyerreceivedthesettlementcheck?



Yes. When a lawyer accepts conditional delivery of settlement proceeds from opposi ng counsel, the lawyer

implicitly agrees to abide by the prescribed conditions. While it may not be a violation of

 Rule 1.15, any

deliberatefailuretoabidebythoseconditions,suchasbydisbursingtheproceedswithoutfirsthavingobtained

asignedrelease,wouldbedishonestandviolativeofRule8.4(c),whichprohibits“conductinvolvingdishonesty,

fraud,deceit,ormisrepresentation.”RPC127[AppendixA].



Is it everproper for

a lawyer to makedisbursements from the trustaccountfrom provisionally credited but

uncollectedfundsrepresentedbyadepositeditemwhichhasnotyetclearedbankingchannels?



RPC 191 [Appendix A] allows lawyers to disburse provisionally credited but uncollected funds from the trust

account,butonlyinconsequenceoftrust

accountdepositsintheformofcash,wiredfunds,orcertaintypesof

negotiable items specified in the Good Funds Settlement Act, G.S. 45A. Disbursements against provisionally

creditedfundsshouldbemadeonlywherethelawyerreasonablybelievesthattheunderlyingdepositeditemis

virtually certainto be honored whenpresented

for collection, andthe lawyer has sufficient assetsor creditto

fund any outstanding trust account checks issued in regard to a provisionally credited item which may be

dishonored.Thelawyershouldusecautionwhendisbursingagainstprovisionalcreditduetotherecentincrease

of counterfeit check scams. See also

01 FEO 3 (limitation on disbursements applicable to all transactions

includingdisbursementofpersonalinjurysettlement)[AppendixA],06FEO8(disbursementsinrelianceonbank

fundingschedule)[AppendixA],andanarticleaboutcheckscamsfromtheStateBarJournal[AppendixA].



What should a lawyer do if he or she properly disburses against a provisionally credited item which is

ultimatelydishonored?



RPC 191 provides that the lawyer, upon learning that a deposited item has been dishonored, must act

immediatelytoprotectthepropertyofthelawyer'sotherclientsbypersonallypaying

theamountofthefailed

depositorbysecuringorarrangingforpaymentfromsourcesavailableto thelawyerotherthanthetrustfunds

of other clients. A lawyer should take care not to disburse against uncollected funds in situations where the

lawyer'sassetsorcreditwouldbeinsufficientto

fundthetrustaccountchecksintheeventthataprovisionally

crediteditemisdishonored.



Mayalawyerdisburseagainstprovisionallycrediteditemsincasesotherthanrealestateclosings?



Yes,subjecttotheconditionssetforthinRPC191.Se e01FEO3[AppendixA].



B.OverdraftsandChecksPresentedAgainstInsufficientFunds



Whatshouldalawyerdoifhisorhertrustaccountcheckbounces?



Theoretically,ofcourse,thisshouldneverhappen.Asapracticalmatter,however,mistakesdohappenandbank

errorsoradministrativesnafuswithinthelawyer'sownofficecanresultinanitembeingreturnedforinsuffici ent

funds.If

atrustaccountcheckisdishonored,thelawyershouldimmediatelyascertainthenatureoftheproblem

andpromptlycorrectit,evenifthisrequiresadepositofthelawyer'sownfundsintothetrustaccount.Under

no circumstances should the lawyer allow the trust funds of another client to be

used impermissibly.

Reimbursementofthetrustaccount shouldNOT be held inabeyancepending resolution of the error(e.g., by

locatingtheparty responsible fora badcheck). Anydelay in reimbursing the account mayresult in the use of

otherclientfundstocovertheshortage,whichisnotpermitted.



Finally, the lawyer should immediately document the problem and any corrective action taken in a

memorandumforhisorherownfiles.



MustareportbemadetotheStateBar?



Everylawyermustinstructhisorherbank,atthetimethattheaccountisopened,tonotify

theStateBarwhen

any checkdrawn on atrustaccountor afiduciary account ispresentedfor payment against insufficientfunds.

Rule 1.15‐2(l). Note that the reporting requirement applies to the presentation of an instrument against

insufficientfunds,notjusttothereturnofaninstrumentforinsufficient

funds.



Therulerequiresalawyertomaintaintrustaccountsandfiduciaryaccountsonlyatabankthatagreestonotify

the State Bar pursuant to the directive. The lawyer must ensure that the bank understands that the directive

applies to all trust and fiduciary accounts of the lawyer, not

justto general trust accounts (sometimes called

"IOLTAaccounts"bybanks).[Foracopyofthebankdirective,seeAppendixB3.]Lawyerswithsignatoryauthority

onfiduciaryaccounts,suchasestateaccounts,shouldalsocomplywiththisrequirement.



The purpose of the directive is to prevent defalcations by giving the

Bar notice when a trust account may be

overdrawn. The requirement greatly diminishes the possibility that a lawyer engaged in misappropriation of

trustfundscanhidesuchactivitybydirecting thedepository bank tonotifyhim orherpriortothereturnofa

check for insufficient funds in order that

 the lawyer might deposit funds into the account before the item is

returnedandtherebyavoidthereportingrequirement.

A lawyer who overdraws a trust account or a fiduciary account may soon expect to be contacted by a

representativeoftheStateBarwhowillinformallyrequestanexplanationof

theproblem.Onceitisverifiedthat

aninnocentmistakecausedtheshortageorapparentshortageintheaccount,theinquirywillbeconcludedand

nofurtheractionwillbetaken.If,however,noadequateexplanationisimmediatelyforthcoming,agrievancefile

willbeestablishedandaformalinvestigationconducted.See

Rul e1.15‐2(k).



ArethereothertimesImustreportmistakestotheStateBar? 

Yes. Rule 1.15‐2(p) requires lawyers who discover or reasonably believe that entrusted property has been

misappropriated or misapplied to inform the trust account compliance counsel at the State Bar. When an

accounting or bank error results in

unintentional and inadvertent use of one client’s trust funds to pay the

obligationsofanotherclient,theeventmustbereportedunlessthemisapplicationisdiscoveredandrectifiedon

orbeforethenextquarterlyreconciliationrequiredbyRule1.15‐3(d)(1).



C.ACHTransactions



To reduce the possibility of unauthorized ACH check conversions, all general trust accounts, dedicated trust

accounts, and fiduciary accounts must use business‐size checks with an “Auxiliary On‐Us” field in the MICR

(magnetic ink character recognition) line of the check. See Rule 1.15‐3(a). NACHA rules state that a

check is

ineligible for ACHconversionif thecheckcontainsthe “Auxiliary On‐Us” field, which is an additional fieldthat

appearstotheleftofthebank'sroutingnumberintheMICRline(toaccommodatethefield,thecheckmustbe

longer thansix inches). Most unauthorized ACH conversions of

 trust account checkswill be prevented by the

required use of business‐size checks for all trust accounts. [For more information on business checks and the

“AuxiliaryOn‐Us”field,seeSectionIII,“TrustAccountingBasics.”]



Unauthorized ACH conversions may occur, on occasion, despite the use of the larger business

‐size checks.

Therefore, the trust accounting rules include the requirement that the balance of a general trust account, as

shownonthelawyer'srecords,mustbereconciledonamonthlybasiswiththecurrentbankstatementbalance.

SeeRule1.15‐3(e). In additiontobeingasoundfinancialpractice,monthlyreconciliation

tothebankstatement

helps to  insure that unauthorized ACH conversions recorded on the bank statement are discovered at a time

whenthelawyermayrememberthedisbursementandstillbeabletoobtainthecheckfromthebank.



ACHtransactions,as adirectpaymentfrom atrustaccount, may

bedemandedby clients orthirdparties(e.g.,

theregistrarof deedsorclerkof court) toincreasetheefficiencyof thecollection andreturnprocess. Forthis

reason, the rules do not prohibit authorized ACH transactions initiated by the lawyer. However, the record

keepingrequirementsareexpandedforallauthorization s

totransferordisbursefundsfromatrustaccountby

requiringalawyertoretainthefollowing:



all instructions or authorizations to transfer, disburse, or withdraw funds from the trust account (including

electronic transfers or debits), or a written or electronic record of any su ch transfer, disbursement or

withdrawal showing

 the amount, date, and recipient of the transfer or disbursement, and, in the case of a

general trustaccount, also showing the name of the client or other person to whom the funds belong. See

Rule1.15‐3(b)(3).



SECTION VI: RECORDKEEPING



A.WhatRecordsareRequired?



Alawyermaintainingatrustaccountorafiduciaryaccountatabankmus tkeepthefollowingrecords:



1.Arecordofreceipts.Thiscanbeajournal,fileofreceipts(includingwireandelectronictransfer

confirmations),fileofdepositslips,oracollectionofcheckbookstubs.Therecordof

receiptsmustlistthe

source,client,anddateofthereceiptofalldepositedfunds.Rule1.15‐3(b)(1).[Forexamplesofproperly

composeddepositslips,seeAppendixB7,B8.]



2.Allcanceleditemsdrawnontheaccountordigitalimagesthereof.Rule1.15‐3(b)(2).Digitalimagesstoredon

CD‐ROM

willsatisfytherequirementsofRule1.15‐3(a)(2)and(b)(2).2001FEO14.



3.Allinstructionsorauthorizationstotransfer,disburse,orwithdrawfundsfromtheaccount(including

electronictransfersordebits)orawritten orelectronicre cordofanysuchtransfer,disbursem ent,or



withdrawal.Therecordmustshowtheamount,date,recipientofthetransferordisbursement,andtheclientto

whomthefundsbelonged.Rule1.15‐2(b)(3).



4.Allbankstatementsordocumentsreceivedfromthebankregardingtheaccount.Rule1.15‐3(b)(4).



5.Forageneraltrustaccount,aledger

containingarecordforeachpersonorentityfromwhomorforwhom

fundswerereceivedwhichshallaccuratelymaintainthecu rrentbalanceoffundsheldforthatpersonorentity.

Rule1.15‐3(b)(5).[Forexamplesofgeneraltrustaccountledgers,seeAppendi xB2,B9)].



6.Allrecordspertainingto

thequa rterlyandmonthlyreconciliationsofthegeneraltrustaccountwiththe

statementsprovidedbythebank.Rule1.15‐3(d).



7.Allrecordspertainingtothequarterlyandmonthlyreviews.Rule1.15‐3(i).



8.Allrecordsrequiredbylaw.Rule1.15‐3(b)(6).



Howlongshouldyoukeeprecords?



lawyermustretaintrustaccountandfiduciaryaccountrecordsforthesix‐yearperiodimmediatelypreceding

thelawyer'smostrecentfiscalyearend.Rule1.15‐3(g).



Maytrustaccountandfiduciaryaccountreco rdsbekeptelectronically?



Yes,iftherecordsotherwisecomplywithRule1.15‐3,aremaintainedin

industry‐standardformats,canbe

printedondemand,andareregularlybackedupbyanappropriatestoragedevice.Rule1.15‐3(j).



Howoftenshouldalawyerprovideanaccountingtoaclientfortheclient’strustfunds?



Anaccountingmustbeprovidedtotheclientuponthecompletionofthe

disbursementoftheclient'sfundsand

atsuchothertimesasmaybereasonablyrequestedbytheclient.Iftrustfundsareretainedformorethanone

year,thelawyermustprovideannualaccountings.Allaccountingsmustbeinwriting.Rule1.15‐3(e).[Foran

exampleofawrittenaccounting,

seeAppendixB11,B12.]



Doaccountingsforfundsinatrustaccounthavetobeinaparticularform?



No.Itisoftenpossibletosatisfytheaccountingrequirementbyprovidingcopiesofdocumentsgeneratedduring

therepresentation,suchasasettlementstatementdescribingdisbursementsincidenttotheresolutionof

atort

claimoraHUD‐1statementdescribingthedisbursementoftheproceedsofsaleinarealpropertytransaction.In

addition,theaccountingrequirementcangenerallybesatisfiedbyprovidingtheclientwithacopyofaproperly

maintainedledgercardwhichdescribesallreceip tsanddisbursementsof

theclient'sfunds.[Examplesofaclient

ledgercardandwrittenaccountingsarefoundinAppendixB9‐12.]



Acopyoftheclient'sledgercardmaybeprovidedtotheclientasawrittenaccountingofthereceiptand

disbursementoffunds.Whenthisisdone,theclientshouldsign

anddatetheoriginaltoshowthattheclient

wasgivenawrittenaccountingofhisorherfundsasrequiredbyRule1.15‐3(c).Ifacopyoftheledgercardis

mailed,retainacopyofthetransmittalletter.



B.AccountingSystemsandResources:Electronicversus



ManualRecords



Manual



Abookkeepingsystemforalawyer'strustaccou ntmustdothefollowingthings:

 documentdepositstoanddisbursementsfromthetrustaccount

 documentdepositstoanddisbursementsfromeachclient'sfundsondepositinthetrustaccount

 maintainacurrentbalanceforthefundsofeach

clientondepositinthetrustaccount

 provideameansofreconciling,onamonth lybasis,thecurrentbankstatementbalanceforthetrust

accountwiththebalanceforthetrustaccountshownonthelawyer'srecord



 provideameansofreconciling,onaquarterlybasis,thecurrentbankbalanceforthetrustaccount

withthetotalofthein dividualclientbalances

 provideameansofperformingmonthlyandquarterlyreviewsofthetrustaccount

 retainrecordsofdepositsanddisbursements

 provideannual

accountingstoeachclientforfundsondepositinthetrustaccount.



Whenproperlymaintained,thecheckregistercontainstherecordofeachdeposittoanddisbursementfromthe

trustaccount.Italsoprovidesarunningbalanceforfundsintheaccount.Individualledgercardsrecorddeposits

toanddisbursements

fromthetrustaccountforeachclient,andshowacurrentbalanceforeachclient'sfunds.

Thisinformationisnecessarytoreconcilethetrustaccount.



Whenmultipledepositscannotbepostedonacheckbookstub,theclient’snameandtheamountofeach

depositmayberecordedonthebackside

oftheprecedingpageofthestub.Ifthisisdone,onlythedateand

totalamountdepositedmustbeindicated.Somefirms,insteadofrecordingtheinformationonthebackofthe

precedingcheckbookstubpage,stapleacopyofthedepositslipbehindtherespectivecheckstub.



Software



Automatingyourtrustaccountrecordkeepingprocesscanreducetheamountofdataentryand calculation

errors.Youcansearchandfindtrusta ccountinformationquickly,andperhapsfromremotelocations.

Automatingcanorganizetheroutineprocessofmaintainingyourtrustaccount.Itcansaveyouspace,but

ALWAYSprintcopies

ofyourclientledgers,generalledger,andmonthlyandquarterlyreconciliations.



SECTION VII: RECONCILIATIONS AND REVIEWS



“Reconciliation”meanscheckingthethreebasicrecordsyouarerequiredtokeep—thebankstatements,the

clientledgers,andthegeneralledger/checkbookregister—againsteachothersoyoucanfindandcorrectany

mistakes.



Rule1.15‐3(d)requiresyoutoreconcileyourclienttrustaccountrecordsbecausemistakesareboundtohappen



whenpeoplekeeptrackofmoney.Evenbanksmakemistakeswhenitcomestorecordingmoneytransactions.

Thatisbecausewhenyouareworkingwithnumbers,mistakesareeasytomakeanddifficulttonotice.No

amountoftrainingcancompletelyeliminatethesemistakes.



Tomakesurethatyoufind

andcorrectthesemistakes,youmustrecordeveryclienttrustaccounttransaction

twice(inyourclientledgerandyourgeneralledger/checkbookregister),and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clienttrust

accountbut

mistakenlyrecorditas“$10,000”inyourclientledgerandadd$10,000toyourclient’srunning

balance.Inyourgeneralledger/checkbookregister,yourecordedthecheckcorrectlyandadded$1,000toyour

clienttrustaccount’srunningbalance.Howwillyoufindthemistake?Thegeneralledger/checkbookregister

balanceisright,so

youwon’tfindthemistakebybouncingacheck.Thenumbersintheclientledgeralladdup

sothereisnowaytotellyoumadeamistake.Unlessyoucompareyourclientledgerbalancetoyourgeneral

ledger/checkbookregisterbalance,youwon’tbeabletofindtherecording

error.Andunlessyoucompareyour

clientledgerandgeneralledger/checkbookregisteragainstthebankstatement,youwon’tknowwhichentry

wasright‐$10,000or$1,000.



Wehavejustdescribedthequarterlyreconciliationprocess.Thetheoryisthatitisunlikelythatthesame

mistakeswillbemadeinthree

differentrecords—theclientledgers,thegeneralledger/checkbookregister,and

thebankstatement—soifthoserecordsareallcheckedagainsteachother,anymistakeswillshowup.



Rule1.15‐3(d)requiresbothquarterlyandmonthlyreconciliationsofthetrustaccountbalancetothecurrent

bankstatementforatrustaccount.However,

thereisanimportantdistinctionbetweenthebasicreconciliation

thatmustbedonemonthlyandthemorethoroughreconciliationsthatmustbedoneeachquarter.



A.MonthlyReconciliation



Youcannotdoreconciliationforamonthuntilyouaresureyouhavecorrectbalancesinallyourclientledgers

andgeneralledger/checkbookregisterforthepreviousmonth.Ifyouhavenotrecentlyreconciledyourbooks,

orifyouareworriedthattheyarewrong,youmaywanttobring

inabookkeepertostraightenthemoutbefore

youtakeonthemonthlyandquarterlyreconciliationsyourself.



Onceyouhavecorrectbalancesforthepreviousmonth,youarereadytoreconcile.Thestepsrequiredforthis

typeofreconciliationarenotunlikethosenecessarytobalanceapersonalcheckingaccount.



Therearetwomainstepsinreconcilingmonthly:



1. From the balance shown on the bank statement for the monthly reporting period, subtract all outstanding

checks.Tothisamount,addalldepositsthathavenotclearedthebank.Thisisthecurrentbankbalance.

2.Confirmthatthecurrentbank

balanceequalsthetotalbalanceforthetrustaccountasshownonthelawyer’s

records(ifusingmanualaccounting,thiswouldincludecheckstubsortheaccountregister).



Thecut‐offdateforthebankstatementandthetrustaccountbalancemustbethesameorthetwobalances

may

notreconcile.Notethatthe“ReconciliationSummary”producedbyaccountingsoftwarewilltypicallysatisfy

themonthlyrequirementtoreconcilethecurrentbankbalancetothetotaltrustaccountbalance(adifferent

softwarereportmaybenecessaryforthequarterlyreconciliation).



Allreconciliations—monthlyandquarterly—mustbesignedanddatedbya

lawyer.Remember,nonlawyer

employeeswhoreconcilethetrustaccountmaynotbesignatoriesontrustaccountchecks.



AreconciliationformisavailableinAppendixB13.



B.QuarterlyReconciliation



Rule1.15‐3(d)(1)statesthateachquarterareportmustbepreparedthatshowsallofthefollowingbalancesand

verifiesthattheyareidentical:

(A)Thebalancethatappearsinthegeneralledgerasofthereportingdate;

(B)Thetotalofallsubsidiaryledgerbalancesinthegeneral

trustaccount,determinedbylistingandtotaling

the positive balances in the individual client ledgers and the administrative ledger maintained for servicing

theaccount,asofthereportingdate;and

(C) The adjusted bank balance, determined by adding outstanding deposits and other credits tothe ending

balance in themonthly bank

 statement and subtracting outstanding checks and other deductions fromthe

balanceinthemonthlystatement.

Quarterlyreconciliationspromoteaccurateaccountingforclientfundsbyensuringthattherunningbalancesfor

eachclient,whentotaled,equalthetotalfundsondepositinthetrustaccount.



Rememberthatathree‐wayreconciliation

shouldbeconductedeveryquarterforeveryclienttrustaccount.Itis

recommended,however,thatthree‐wayr econciliationsbeperformedmonthly.



Whencompletingthethree‐wayreconciliation,itis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donotmatch,youcan

easilychecktoseeifthereasonisamathematicalmistakemadewhileperformingthereconciliation.



Quarterlyreconciliationsmustbesignedanddatedbyalawyer,andyouarerequiredtoretaintheserecords

andthereconciliationreportsfor

sixyearstosatisfytherecordkeepingrequirementinRule1.15‐3(d).



Youarepermittedtoretainelectroniccopiesofallreconciliationreports,aslongasyoufollowtherequirements

inRule1.15‐3(j) : 

(1)therecords otherwisecomply withRule1.15‐3,to wit:electronicallycreated reconciliationsand reviews

thatarenot printedmustbereviewed by thelawyer and electronically

signed usinga “digital signature”as

definedin21CFR11.3(b)(5);

(2)printedandelectroniccopiesoftherecordsinindustry‐standardformatscanbemadeondemand;and

(3)therecordsareregularlybackedupbyanappropriatestoragedevice.



Itisfinetohireabookkeeperorthe

equivalent,butyouarestillpersonallyresponsibleforaccountingtoyour

clientsandtotheStateBarforthemoneyinyourclienttrustaccounts.Therefore,evenifyouneverintendtodo

thereconciling,youshouldunderstandtheprocess.Evenifitisyourbookkeeper’smistake,ifyoubouncea



clienttrustaccountcheck,youaretheoneyourclientortheStateBarisgoingtocometoforanexplanation.

Remember,anonlawyeremployeecannotberesponsibleforreconcilingthetrustaccountandbeatrustaccount

signatory.



C.ExampleofThree‐WayReconciliation



The detailed example below illustrates a manual method that can be used to perform the three‐way

reconciliationonageneraltrustaccountrequiredeachquarter.Thisisnottheonlymethodthatcanbeused,as

anymethodthatsatisfiestheruleswillbesufficient.



Thesearetheclient

ledgersthatwillbeusedforthethree‐wayreconciliationexample(Note:the“R”boxisa

check‐boxforuseduringthereconciliation):



Client: Alpha,A. Matter: 111111



R



Number



Date

DescriptionofTransaction

(

)



Payment



Deposit



Balance



Deposit 01

2017 Deposit ‐ fees



$250 $250



1001 01

2017 DeeFender,Esq. – earnedfees $260



(‐$10)



Client: Beta,B



Matter: 222222



R



Number



Date

DescriptionofTransaction

(

)



Payment



Deposit



Balance

 Deposit 1/04/2017 Deposit‐$1,500feesandcosts $1,500 $1,500

 1002 1/8/2017 SuperiorCourt–Nowhere

CountyFilingFee‐Cost

$125 $1,375

 1003 1/11/2017

VitalRecords–BirthCert

$75 $1,300



1004 1

11/2017 DeeFender, Esq. – earned fees $600



$700



1005 1

12/2017 DeeFender, Esq. – earned fees $400



$300







Client: Gamma,G



Matter: 333333



R



Number



Date



DescriptionofTransaction

(

)

Payment

Deposit



Balance



Deposit



1/08/2017



Deposit‐ $1,200 feesandcosts



$1,450



$1,450



1006



1/13/2017



RecordRoundUp‐costs



$150



$1,300



1007 1/15/2017 DeeFender, Esq. – earned fees $1,200



$100





Client: Delta,D

 

Matter: 444444



R



Number



Date

DescriptionofTransaction

(Payor/Payee)



Payment



Deposit



Balance

 Deposit 1/25/2017 Deposit‐$15,000fees(unearned) $15,000 $15,000



1008



1/29/2017

DeeFender,Esq.–earnedfees

8hrs@ $250



$2,000



$13,000



1009

1/30/2017 D.Delta– refund $13,000



$0

Client: Epsilon,E

 

Matter: 555555



R



Number



Date

DescriptionofTransaction

(Payor/Payee)



Payment



Deposit



Balance



Deposit



2017

Deposit ‐ $2,000 fees

(unearned)



$2,000



$2,000



Returned

osit



2017

Returneddepositedcheck

forinsufficient funds



$2,000



Deposit



2017

Deposit ‐ $2,000 fees

(unearned)



$2,000



$2,000

Client:AdministrativeFunds,DeeFender,Esq Matter: 999999



R



Number



Date

DescriptionofTransaction

(Payor/Payee)

Payment Deposit



Balance



Deposit 1

1/2017 Deposittoopenaccount $50 $50



BankFee



1/17/2017

ClientEpsilonReturnedDeposit

Fee



$45



Deposit



1/31/2017

ClientEpsilonreimbursementfor

$5returned de

osit bank char



$5



$50



Thisisthegeneralledger/checkbookregisterthatwillbeusedforthethree‐wayreconciliationexample:



GeneralLedger/CheckbookRegister



R



Number



Date



DescriptionofTransaction

(Payor/Payee)

Paymen



Deposi

t



Balance



Deposit 1

1/2017 Deposit to openaccount



$50 $50



Deposit 1/1/2017 Deposit – Alpha fees



$250 $300

 1001 1/7/2017 DeeFender,Esq.–Alphaearnedfees $260 $40

 Deposit 1/4/2017 Deposit–Beta$1,500 $1,540 

 1002 1/8/2017

SuperiorCourt–NowhereCounty

Filin

Fee‐ Beta

$125 $1,415

 Deposit 1/08/2017

Deposit–Gamma

 $1,450 $2,865

 1003 1/10/2017

NowhereVitalRecords–BirthCert.–

Beta

$75$2,790



1004 1/11/2017 DeeFender, Esq. – Betaearned fees $600



$2,190



1005 1/12//2017 DeeFender, Esq. – Betaearned fees $400



$1,790



1006 1/13/2017 Record Round Up – Gammacosts $150



$1,640

 Deposit 1/15/2017

Deposit

–

Epsilon

 $2,000 $3,640

 1007 1/15/2017 DeeFender,Esq.–Gammaearnedfees $1,200 $2,440



Returned

Deposit

1/17/2017

Epsilon‐returneddeposited checkfor

insufficientfunds

$2,000 $440

 Bank

Fee

1/17/2017 EpsilonReturnedDepositFee $5$435

 Deposit 1/25/2017 Deposit–Delta

$15,000

$15,435

 1008 1/29/2017

DeeFender,Esq.–Deltaearnedfees

$2,000 $13,435

 1009 1/30/2017

Delta

–

refund of unused fee

$13,000 $435

 Deposit 1/31/2017

Deposit

–

Epsilon

 $2,005 $2,440







Thisisthetrustaccountbankstatementthatwillbeusedforthethree‐wayreconciliationexample:



BankofWegottayourmoney



DeeFender,Esq.

DeeFender’sIOLTATrustAccount



1201E.

EasyStreet,Suite#100

Sunnyvale,NC20010



AccountNumber:000200800888

ActivityThrough:1/01/2017–1/31/2017



BeginningBalance $50.00



EndingBalance

 1/31/2017

$510.00



Deposits/Credits



Date

1/01/17

Dollar Amount

$50.00

ype

Deposit

1/01/17 $250.00 Deposit

1/04/17 $1,500.00 Deposit

1/08/17 $1,450.00 Deposit

1/15/17 $2,000.00 Deposit

1/25/17 $15,000.00 Deposit



TotalDeposits/Credits $20,250.00



Withdrawals/Debits

Check#

1001

DollarAmount

$260.00

Date

1/07/17

1002 $125.00 1/08/17

1004* $600.00 1/11/17

1005 $400.00 1/12/17

1006 $150.00 1/13/17

1007 $1,200.00 1/15/17

1008 $2,000.00 1/29/17

1009 $13,000.00 1/30/17



*Indicatesprecedingcheck(orchecks)isoutstanding.



OtherWithdrawals/Debits

ype Dollar

Date

ReturnedDeposit

/15

/17

$2,000.00 1/17/17

ReturnedDepositFee $5.00 1/17/17



TotalWithdrawals/Debits $19,740.00







North Carolina State Bar REPORT DATE:2/5 2017

Trust Account Reconciliation Sheet

General Information





Complete one form for each trust account



Attach the following: list of clients with corresponding balances, copy of general ledger/checkbook register,

list of

outstanding deposits, list of outstanding checks, corresponding bank statement



ReconciliationofLawyer’sTrustAccountRecords



Total of positive client ledger balances as of 01/31/2017

(Attach a list of clients with corresponding balances)

………………… $ 2,450



Do any clients show a negative balance? xYes □ No If yes, attach explanation and corrective action.



General ledger/checkbook register balance as of 01/31/2017 ……………. $ 2,440

(Attach copy of general ledger/checkbook register)



BankStatementReconciliation



Account Balance as of 01/31/2017_ (per appended bank statement)………. $  510



Plus: Deposits in transit (deposits made to the account through end of month yet

not reflected on bank statement)…………………………………………………………….

+$2,005



Number of deposits in transit ……………..

(attach list of outstanding deposits)



Less: Outstanding (uncleared) checks (checks issued through end of month not

reflected in bank statement)…………………………………………. - $

Number of outstanding checks……………



(attach list of outstanding checks)



Subtotal

2,440

Other Adjustments (describe and attach supporting documentation)



Adjusted Trust Account Bank Balance (as of end of report month)……………. $ 2,440



The balance on line #6 □ agreed X did not agree with the balances reflected in lines #1 and #2. If different,

attach

explanation and corrective action.



Reconciliation prepared by: _Employee for Dee Fender

Name and Position Signature

Reconciliation reviewed by:

Dee Fender, Esq

Lawyer Name Signature



ReconciletheGeneralLedger/CheckbookRegisterwiththeClientLedgers



The first part of reconciliation is to reconcile the general ledger/checkbook register 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general

ledger/checkbookregister.



Step1:EnterthetotalofPositive

clientledgerbalancesasofthecut‐offdateonthebankstatement(inthiscase,

January31,2017).Thisincludesanyadministrativefundsledgerorfirmfundsledgerthatyoumaintaintoservice

theaccount.Donotincludebalancesthatarenegative.Ifaclientledgershowsanegative

balance(asitdoesin

thisexample),checkthebox.Onan otherpage,explainthereasonforthenegativebalanceandshowyour

correctiveaction.Attachalistofclientsandtheirrespectivebalancestotheworksheet.



Step2:Listthebalanceshownonyourgeneralledger/checkbookregisterasof

thecut‐offdateonthebank

statement.Usingthesamecut‐offdateonalldocumentsisimperativetoavoidmismatchednumbers.Noticethat

the“TotalofClientLedgerBalancesasof01/31/2017”doesnotmatchthe“GeneralLedger/CheckbookRegister

Balance.”Thatmeansthatyourindividualclientledgerbalance

entriesdonotagreewithyourgeneral

ledger/checkbookregisterentries,andyouaremustdeterminewhybeforeyoumoveontothenextstepofthe

reconciliationprocess.



Whenthe“TotalofClientLedgerBalances”doesnotexactlymatchthe“GeneralLedger/CheckbookRegister

Balance,”donotpanic;youhavefound

amistake,andthatiswhatreconciliationisfor.Youcancallinabookkeeper

tohelpyou,ormakethecorrectionyourself.Sinceyourecordeverydepositandwithdrawaltwice,ifyou

systematicallycompareeachentryinthegeneralledger/checkbookregisterwiththecorrespondingentryinthe

clientledger,and

checkthenewbalanceyouenteredaftereachentry,youwillalwaysfindthemistake.



Whenyouhavefoundandcorrectedanymistakes,attachacopyofyourgeneralledger/checkbookregistertothe

worksheetandmoveontoStep3.



ReconciletheGeneralLedger/CheckbookRegisterwiththeBankStatement



Step3:Listtheendingbalanceasshownontheban kstatement.Onthenextlinelistthedepositsthathaveyetto

appearonthebankstatement(probablybecausetheyweremadeattheendofthemonth).Youshouldprovidea

listoftheseou tstandingdepositsandnote

thenumberofthesedepositsintheprovidedline.Dothesamefor

outstanding/unclearedchecks.Takethistimetoexaminethelistofoutstandingchecksandtoinvestigatewhy

thosecheckshavenotcleared.



Thepurposeofthesestepsistomakesurethatthebank’srecordsofthedeposits

andwithdrawalsyou’vemadeto

yourgeneraltrustaccountduringthepastmonthmatchyourrecords.Sinceyou’vealreadyreconciledtheclient

ledgerswiththegeneralledger/checkbookregister,youknowthattheentriesintheclientledgersagreewiththe

onesinthegeneralledger/checkbookregister.Therefore,unlessyoufinda

mistakeduringthisstageofthe

reconciliationprocessyouonlyhavetocomparethebankstatementwiththegeneralledger/checkbookregister.



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arenotsh own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,tocomparethe

balanceofthebankstatementfortheendofthemonthwiththebalanceyourgeneralledger/checkbookregister

showsfortheendofthemonth,youhavetoadjustthegeneralledger/checkbookregisterbalance

byaddingallun‐

crediteddepositsandsubtractingallundebitedwithdrawals.



Tofindoutwhichtransactionshavenotbeenposted,youhavetocomparetheentriesonthebankstatementwith

theentriesinyourgeneralledger/checkbookregister.



Gothrougheachentryonthebankstatementandcompareit

tothecorrespondingentryinyourgeneral

ledger/checkbookregister.Iftheentryinthegeneralledger/checkbookregisterexactlymatchestheentryonthe

bankstatement,markofftheentryinthegeneralledger/checkbookregister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

generalledger/checkbookregister.Themarksinthegeneralledger/checkbookregister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.Themarksshouldbepermanent(i.e.,inink)andclearlyvisible,butshouldnotmakeit

hard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generalledger/checkbookregister.Nowgobackthroughthegeneral

ledger/checkbookregistertofindanyentriesthatareunmarked;thesetransactionshaven’tyetbeendebitedor

creditedbythebank.



Asyou

gothroughthebankstatement,therearetwokindsofmistakesyoumayfind:



1.Adepositorwithdrawallistedonthebankstatementthatisnotinyourgeneralledger/checkbook

it

isadeposit)untilyoufindtheonethatreflectsthetransactiononthebankstatement.Ifyoucannotfinda

canceled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tran saction.DO

NOTrecordthebankstatemententryinyour

recordsuntilyouverifythatthetransactionoccurred;banksmakemistakes,too.



2.Anentryinthebankstatementisdifferentfromthecorrespondingentryinthegeneral

ledger/checkbookregister.Youcorrectthismistakethesamewayyoucorrectatransactionyou

forgotto

record.First,findthecanceledcheckordepositslipthatshowsthetransactiontofigureoutwhichrecord

iscorrect—thegeneralledger/checkbookregisterorthebankstatement.Ifyoucannotfindacanceled

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canceledcheckordep osit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generalledger/checkbookregisteriswrong,recordthecorrectioninthegeneralledger/checkbook

outthemoney.



Whenyouhavefoundandcorrectedanymistakes,moveontoStep4.



Step4:Addtheoutstandingdepositstotheendingbalanceandsubtracttheoutstandingcheckstofindyour

Subtotal.



Step5:Thissectionisprovidedforlawyerstoexplainanynecessaryadjustmentsto

theirreconciliation.

Adjustment smightberequiredif,forexample,youidentifybankerrorsinyourreviewofthebankstatement.

Adjustmentsthataremadetobalancesmustbeexplainedwithdocumentation.Donotusethissectionto

explain/correctnegativebalances.



Makesurethatbankchargesreflectedonthebankstatement

arealsoreflectedinyourrecords.Sinceyoumaynot

knowwhatthesebankcharges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generalledger/checkbookregister.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ledger.(Thisensuresthatthegeneralledger/checkbookregister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generaltrustaccountchecks),thechargemustalsobeenteredintheAdministrativeFunds/BankCharges

ledger.



CalculatetheAdjustedBalance



Step6:Calculatethefollowingtofindyouradjustedbalance:



1.endingbankstatementbalance



2.plusalloutstandingdepositamounts



3.minusalloutstandingcheckamounts



4.plusorminusanynecessaryadjustmentslistedinStep5.



Step7:ThebalanceslistedinStep1,2,and6shouldallagree.Iftheyaredifferent,attachan

explanationandshow

howthisimbalancehasbeencorrec ted.Thepersonwhocompletedthereconciliation(ifnotthelawyer)shouldsign

theform,aswellasthelawyerwhoreviewedthereconciliationandsupportingdocuments.Lawyersarerequiredto

signanddateallmonthlyandquarterlyreconciliationsandreviews.Save

thisreconciliationforsixyearsas

requiredinRule1.15‐3.



TrustAccountReconciliationSheet



TheStateBarhascreatedaTrustAccountReconciliationSheetforlawyerstousewhenreconcilingtrustaccounts.

Thecompletedsheetshownonapreviouspagereflectsthereconciliationcompletedabove.Acopyofthissheet

canbefoundinAppendixB13andafillableformisavailableonthe

StateBarwebsite,www.ncbar.gov.



MonthlyReview



Rule1.15‐3(i)(1)requireslawyerstoreviewcheckimagesandbankstatementsforalltrustaccountsandfiduciary

accountsonamonthlybasis.Thisreviewrequirementcannotbedelegated,solawyersmustmakesuretolookat

bankstatementsandcorrespondingcheckimageseachmonth.Lawyersmustcertifymonthlythat

theyhave

reviewedthesedocuments.



Thereasonforamonthlyreviewofcheckimagesissothatthelawyermightseeacheckmadeouttoanimproper

payeesuchasanemployee.Ifthelawyerneverreviewscancelledcheckimages,thenthelawyermaynotknowif

someonehas

beenstealingfundsfromthetrustaccountbyvoidinglegitimatechecksandwritingchecksto

themselvesforthesameamount.



D.QuarterlyReview



Rule1.15‐3(j)(2)requireslawyerstoreviewarandomsampleofrepresentativetransactionscompletedduringthe

quartertoverifythatthedisbursementswereproperlymade.Thetransactionsreviewedmustinvolvemultiple

disbursementsunlessnosuchtransactionsareprocessedthroughtheaccount,inwhichcaseasingledisbursement

isconsidereda

transactionforthepurposeofthisparagraph.Asampleofthreerepresentativetransactionsshall

satisfythisrequirement,butalargersamplemaybeadvisable.



Inordertoperformaproperquarterlyreview,thelawyermustselecttherandomtransactionsandconductthe

reviewherself.Thisreviewrequirementcannotbedelegatedto

anonlawyer.



Thelawyermustexamineeachtransaction’ssourcedocuments(settlementstatement,closingdocument,etc.),

clientledger,andcancelledchecksinordertoensurethattheamountandpayeeofthetransactionwascorrectand

thatthecheckactuallyclearedtheaccount.



Afterconductingthereviewonatleastthree

transactions,thelawyermus tsignareportindicatingthatthe

transactionwascompletedandattachthesupportingdocuments.



TheStateBarhasdevelopedaformtohelplawyerscompletethisprocess,availableinAppendixB14oronlineat

www.ncbar.gov

.





SECTION VIII: TRUSTEES, PERSONAL REPRESENTATIVES, AND OTHER

FIDUCIARY ROLES



Alawyerisalwaysactingasafiduciarywhenholdingclientfundssuchasanadvancefeepaymentorthe

settlementcheckforapersonalinjuryclaim.However,therearefiduciaryrolesthatdonotconstitutethepractice

oflawperse,butnonethelessfrequentlyariseoutofaclient

‐lawyerrelationship;forexample:personal

representativeofanestate,guardian,trusteeofatrust,attorney ‐in‐fact,andescrowage nt.Alawyerservinginone

ofthesecustomaryfiduciaryrolesissubjecttotherequirementsofthetrustaccountingrulesifthelawyeris

providingtheserviceasapart

ofhisorherprofessionallegalservices,regardlessofcompensation,orifthelawyer

iscompensatedfortheserviceasafiduciaryeventhoughtheserviceisprovidedoutsideofalawpractice.Funds

receivedbyalawyerwhileservingasanuncompensated“volunteer”fiduciary,suchasthetrusteeofa

trustforthe

lawyer’sfamily,donothavetobemanagedinaccordancewiththerecordkeepingandaccountingrequirementsof

theRulesofProfessionalConduct.Thefollowingexplainsalawyer’sprofessionalresponsibilitieswhenholding

fundspursuanttoprofessionalserviceand/orasacompensatedfiduciary.



A.FiduciaryAccounts



Thetrustaccountingrulesincludeadefi nitionse ctionfoundinRule1.15‐1.Tounderstandtherequirementsofthe

rules,alawyermustbefamiliarwithseveralofthedefinedtermsinthissection.“Entrustedproperty”isdefinedin

Rule1.15‐1as“trustfunds,fiduciaryfunds,andotherproperty

belongingtosomeoneotherthanthelawyerwhich

isinthelawyer’spossessionorcontrolincon nectionwiththeperformanceoflegalservicesorprofessionalfiduciary

services.”“Trustfunds”are“fundsbelongingtosomeoneotherthanthelawyerthatarereceivedbyorplaced

underthecontrolofthelawyerin

connectionwiththeperformanceoflegalservices.”“Fiduciaryfunds”are“funds

belongingtosomeoneotherthanthelawyerthatarereceivedbyorplacedunderthecontrolofthelawyerin

connectionwiththeperformanceofprofessionalfiduciaryservices.”“Professionalfiduciaryservices”refersto

“compensatedservices(otherthanlegalservices)

renderedbyalawyerasatrustee,guardian,personal

representativeofanestate,attorney‐in‐fact,orescrowagent,orinanyotherfiduciaryrolecustomarytothe

practiceoflaw.”A“fiduciaryaccount”is“anaccountdesignatedassuch,maintainedbyalawyersolelyforthe

depositoffiduciaryfunds

orotherentrustedpropertyofaparticularpersonorentity.”Inotherwords,afiduciary

accountisanaccountinwhichalawyerdepositsfundsthatheorshereceivesinconnectionwithcompensated

serviceasatrustee,guardian,person alrepresentative,attorney‐in‐fact,orescrowagent.



Whatsortof

anaccountshouldalawyerwhoisservingasapersonalrepresentativemaintain?



Alawyerwhoisservingastrust ee,guardian,attorney‐in‐fact,orpersonalrepresentativeshouldusuallymaintaina

separate,speciallydenominatedaccountcalleda"fiduciaryaccount."Rule1.15‐1(e).Generallyspeaking,afiduciary

accountshouldbeinterest

‐bearingsincethedepositedfundsaregenerallyheldintrustforsignificantperiod sof

time.Rule1.15‐2(c),(p).Anyinterestgeneratedwouldbethepropertyofthetrust,estate,principal,oroth er

beneficiary.Rule1.15‐2(p).



Howoftenshouldalawyerprovideanaccountingforfiduciaryfundsreceivedin

connectionwiththelawyer’s

servicessuchasapersonalrepresentativeoratrustee?



Inventoriesandaccountingsoffiduciaryfundsreceivedinconnectionwithprofessionalfiduciaryservicesmustbe

giventotheclerkofcourt,orotherappropriatejudicialofficial,asrequiredbylaw.Ifanannualormorefrequent

account

isnotrequiredbylaw,awrittenaccou ntingofalltransactionsconcerningthefiduciaryfundsmustbegiven

tothebeneficialowners,ortheirrepresentativeatleastannuallyandupontheterminationofthelawyer'sservices.

Rule1.15‐3(f) .



B.SegregationofFiduciaryFunds



Rule1.15‐2setsforththegeneralrequirementsapplicabletoentrustedproperty.Allentrustedpropertymustbe

properlylabeledandmaintainedseparatelyfromthepropertyofthelawyer.Thisdutyisbetterknownasthe

prohibitionagainstcomminglingofthelawyer’sfundswithfundsthatbelongtoclientsorthird

parties.Fiduciary

fundsmustbesegregatedandpromptlydepositedinaseparatefiduciaryaccountordepositedwithclientfundsor

otherfiduciaryfundsinageneraltrustaccountofthelawyer.Determiningwhethertodepositthefundsina

generaltrustaccountorinaseparatefiduciaryaccountdependsuponhow

longthefundsaretobeheldandthe

natureofthefunds.SeeRule1.15‐4comment[3].Ifthefiduciaryobligationtomanagethefundswisely



necessitatesprudentinvestmentofthefunds,depositingthefundsintoaseparatefiduciaryaccountisprobably

imperative.Theonlyfundsofthelawyerthatmaybedepositedinafiduciaryaccountarefundssufficient toopen

andmaintaintheaccount,suchasthefundsnecessarytopaybankservicecharges,

andfundsbelonginginpartto

theclientorathirdpartyandinparttothelawyer,suchasadisputedlegalfee.



C.LocationofFiduciaryAccount



Thedepositoryrequirementsforastandardlawyer’strustaccount(designateda“generaltrustaccount”inRule

1.15‐1)differfromthoseforafiduciaryaccount.AlltrustaccountsmustbemaintainedinabankinNorthCarolina

exceptatrustaccountdedicatedtothefundsofoneclient(designateda

“dedicatedtrustaccount”inRule1.15‐1).

AdedicatedtrustaccountmaybemaintainedinabankorotherfinancialinstitutioninoroutsideofNorthCarolina,

butonlywiththewrittenconsentoftheclient.



Bycontrast,alawyerintheexerciseofhisorherfiduciaryresponsibilities(as

apersonalrepresentative,for

example)mayselectabankorotherfinancialinstitutioninoroutsideofNorthCarolinainwhichtodeposit

fiduciaryfunds.Con sentofthebeneficiariesortheclientisnotrequired.Unlikeageneraltrustaccountthatearns

interestfortheIOLTAprogram,afiduciaryaccountcan

andshouldearninterestforitsbeneficiaries.Theauthority

todepositfiduciaryfundsinafinancialinstitutionotherthanabankisimportant.Afiduciaryhasthelegal

obligationtoinvestentrustedfundsprudently.Thechoicesforsoundinvestmentoffiduciaryfundsareexpandedif

thefiduciaryfundscanbe

depositedininvestmentinstitutionsotherthanaNort h Carolinabank.Unfortunately,

permittingalawyertodepositfiduciaryfundsinanout‐of‐statebankorfinancialinstitutionmakesitmoredifficult

fortheStateBartoinvestigateandauditanaccount.Thereisalsothepossibilitythatfederaldepositinsurancewill



notcoverlossesfromaninvestmentaccount.Nevertheless,thebenefitsofenhancedinvestmentopportunities

outweighthecostsofallowingalawyer‐fiduciarytochoosetheappropriatedepositoryfortrustaccounts.



D.WhenAreFundsHeldbyaLawyerinaFiduciaryCapacity



SubjecttotheRequirementsof

theRulesofProfessional



Conduct?



Theanswertothisquestionseemsclearwhenthefiduciaryservicearisesoutofatraditionalclient‐lawyer

relationship.Ifthelawyerreceivescompensation,andprovidestheserviceasapartofhisorherprofessional

services,thelawyer'sconductisclearlysubjecttotheRulesofProfessionalConduct.Therefore,

thedutiessetforth

inthetrustaccountingrulesapplytoanyfundsmanagedbyalawyeractinginoneofthesetraditionalfiduciar y

rolesinthecontextofaclient‐lawyerrelationship.

Unfortunately,thereremainmanyunansweredquestions.

Whatifthelawyerdeclinescompensation?Whatifthelawyerisnotinprivatepracticeandisservingintheroleas

anaccommodationtohisorheremployerorasapartofabusinesstransaction?Whatifthelawyerisservingin

the

rolebecauseofafamilialorpersonalrelationshippreciselybecausethefamilymemberorfriendwantsalawyerto

serve?Whatifthelawyeriscompensatedfortheserviceseventhoughsheismanaginganestateoratrustfora

familymember?Shouldthetrustaccountingrulesapplyto

fundsthatalawyerhandlesinnon‐traditionalfiduciary

roles,suchascookiechairfortheGirlScoutsortreasurerofachurch?



Theproblemishowtocreateabrightlinebetweenfiduciaryfundsheldoutsideofthelawyer'slegalpracticeora

client‐lawyerrelationshipfromfundsheld

inconjunctionwiththelawyer'spracticeoraclient‐lawyerrelationship.

Anappropriateandjustifiabledistinctioncanbemadebetweencompensatedserviceasafiduciaryand

uncompensate d service.



Inmostsituations,alawyerwilldeclinecompensationornonewillbeprovidedwhenthelawyerisvolunteeringher

servicesasa

fiduciaryforthebenefitoffamily,friends,orcharity.Forthisreason,Rule1.15‐1defines"fiduciary

funds"thataresubjecttotherequirementsoftherulesas"fundsbelongingtosomeoneotherthanthelawyerthat

arereceivedbyorplacedunderthecontrolofthelawyerinconnection

withtheperformanceofprofessional

fiduciaryservices.""Professionalfiduciaryservices"aresubs equentlydefinedas"compensatedservices(otherthan

legalservices)renderedbyalawyerasatrustee,guardian,person alrepresentativeofanestate,attorney‐in‐fact,or

escrowagent,orinanyotherfiduciaryrolecustomarytothepracticeoflaw."

Fundsreceivedbyalawyerwhile

servingasanuncompensated"volunteer"fiduciary,whetherasapersonalrepresentativeofanestateorcookie

chair,donothavetobemanagedin accordancewiththetrustaccountingrules.



Endnote:

1.Thesedutiesincludethefollowing:avoidingcomminglingofthelawyer'sfundswith

clients’fundsbydepositing

theclients’fundsinaseparatetrustorfiduciaryaccount;maintainingminimumrecordsofthefundsondepositin



theaccount;makingannualaccountingstotheclient(s)forthefundsondepositintheaccount;reconcilingoftrust

accountbalancesofclientfundsonamonthlyandaquarterlybasis;andproperlydisbursingclientfunds.



WordstotheWise



Therearethreeimportantcaveatstokeepinmind:



 First,ifyouareactingasafiduciarywithinthecontextoftheclient‐lawyerrelationship,yourconductwillbe

subjecttothetrustaccountingruleseventhoughyouarenotcompensatedforyourservices.Itispossiblethat

whetherafiduciaryrolearisesoutofaclient‐lawyer

relationshipmaynowbecomeacontestedissueina

disciplinarycase.Theprudentlawyerwill,however,avoidtheissuealtogetherbyerringonthesideof

complyingwiththerulesinmost,ifnotall,situationsinwhichthelawyerisservingasafiduciary.



 Second,althoughalawyer’s

handlingoffiduciaryfundsmay,insomelimitedinstances,beexemptfromthe

moneymanagementrequirementsofthetrustaccountingrules(recordkeeping,annualaccountings,monthly

andquarterlyreconciliation,etc.),itisnotexemptfromtheprohibitionsonillegalconduct,dishones ty ,fraud,

anddeceitinthemisconductrule,Rule8.4.In

otherwords,alawyerwhostealsfiduciaryfunds,regardlessof

thesourceofthefunds,willbesubjecttoprosecutionun dertheRulesofProfessionalConduct.



 Third,thereareanumberofobligationscreatedbythelawapplicabletofiduciariesingeneralthatare

remarkablysimilartotheobligations

imposedbythetrustaccountingrules.Bylaw,afiduciaryisrequiredto

keeptheprincipal’sfundsorpropertyseparatefromthefiduciary’spersonalfund sorproperty,toavoidself‐

dealing,andtoaccountforthefundsaccuratelyandpromptly.



E.RecordKeepingRequirementsforFiduciaryAccounts



AccountsMaintainedataBank



Forrecordkeepingrequirementsforaccountsmaintainedatabank,seeSectionVII,Recordkeepi ng,PartA.



AccountsMaintainedatOtherFinancialInstitutions



Ifafiduciaryaccountismaintained,bychoiceofthelawyer‐fiduciary,ataninstitutionotherthanabank,the

following

recordsarerequired:



1.Arecordofalldepositoryreceipts,depositslips,andwireandelectronictransferconfirmationsforthe

accountlistingthesourceanddateofreceipt.Rule1.15‐3(c)(1 ).



2.Acopyofallcancelleditemsdrawnontheaccountordigitalimagesofsuchitems.Rule1.15

‐3(c)(2).



3.Allinstructionsorauthorizationstotransfer,disburse,orwithdrawfundsfromtheaccount(including

electronictransfersordebits)orawritten orelectronicre cordofanysuchtransfer,disbursem entor

withdrawal.Therecordmustshowtheamount,date,andrecipientofthetransferordisbursement.Rule1.15‐

3(c)(3).



4.Allstatementsordocumentsreceivedfromthefinancialinstitutionregardingtheaccount.Rule1.15‐3(c)(4).



5.Allrecordsrequiredbylaw.Rule1.15‐3(c)(5).



MinimumRecordKeepingPeriodandAuditbytheStateBar



AllofthewrittenrecordsrequiredinRule1.15‐3,whethertherecords

areforentrustedpropertydepositedina

bankorinafinancialinstitution,mustbemaintainedforatleastsixyears.Similarly,theauthorityoftheStateBarto

audittherequiredwrittenrecordsrandomlyorforcausehasnotchanged.



AccountingsforFiduciaryProperty



Wheneverafiduciary,suchas

personalrepresentativeoratrustee,isrequiredbylawtomakeanannualormor e

frequentaccountingtojudicialofficials,thetrustaccountingrulesdonotrequireseparatewrittenaccountingsto

thebeneficiariesoffiduciaryfunds.However,ifthelawdoesnotrequireanaccounting,alawyer‐fiduciarymust



provideawrittena ccountingofalltransactionsconcerningfiduciaryfundstothebeneficialownersatleastannually

andalsouponterminationofthelawyer’sprofessionalfiduciaryservices.



SECTION IX: SAFEGUARDING FUNDS FROM EMBEZZLEMENT



Thesecurityofatrustaccountisproportionaltotheinterestandattentionthelawyerdevotestotheoperationof

theaccount.Thefollowingsafeguardsaresuggested:



TrustAccountChecks

 Donotactinhastewhensigningcheckstobedisbursedfromordepositedtoatrustaccount.Forexample,

anemployeehadalawyerend

orsechecksfordepositwhenthelawyerwasinahurrytogetoutoftheoffice.

Thelawyerfailedtonotethattheofficedepositstampwasnotonthebackofthecheck.Thecheckswere

depositedintotheemployee'spersonalaccounts.Thisa

ctivitydidnotcometotheattentionofthelawyer

untilclientscomplainedabouttheirbills.

 Don’tsignblankchecks,anddonotmakeacheckouttocashorbearer.

 Usepre‐numberedchecksandperiodicallyexaminethesequentialorderofblank,void,andcanceledchecks.

Questionanyu

nexplainedbreakinnumbers.Voidedchecksshouldberetained.Keepblankchecksundera

responsibleperson'scontrolduringthedayandsecuredatnight.Inaddition,ensurethatallchecksare

accountedforwhenanemployeeresignsoristerminated.Afterresigning,oneemployeewithaccesstotrust

accountchecksneg

otiatedforgedchecksforover$80,000.

 Examinesignature(s)ontrustaccountchecksforforgery.

 Questionanychangeorattemptedchangeofapayee'snameonacheck.

 Comparethenumberofcanceledchecksreceivedfro mthebanktothenumberreturnedasindicatedonthe

monthlybankstatemen

t.

 Confirmthattheamountonacheckcoincideswiththeche ckstubordisbursementjournal.



ControlsandProcedures

 Legalfeespaidincasharedifficulttocontrol.Officepolicyshouldrequirethatareceiptmustbegiventoany

clientwhopaysincash,andthelawyershouldre

gularlyaskclientswhopayincashiftheyreceivedareceipt.

Thenumbersforreceiptsinthereceiptbookshouldalsobeexaminedperiodicallytodetermineifany

receiptswereremovedorvoided.

 Reconcilethetrustaccountpromptlyafterreceivingabankstatement.

 Resolvediscrepanciesinatrustacco

untreconciliationassoonaspossible.

 Makesurethatdepositslipsagreewithdepositspostedonclient'sledger,particularlywhencashisinvolved.

 Ensuredepositsaremadeinatimelymanner,dailyifpossible.

 Aclient'sfileshouldcontaindocumentationsupportingdisbursements.

 Bankstatementsandcorrespondencere

gardingthetrustaccountshouldbeopenedandreviewedbya

lawyer.

 Requiresupportingdocumentation(e.g.,bankstatements,canceledchecks,depositslips,correspondence,

etc.)ofaccountingreportsandreconciliations.

 Prohibitorrestrictremovaloftrustacco untrecordsfromtheoffice.

 Sloppybookkeepingmaybeusedtoconcealem

bezzlement.Iftheresponsibleindividualprocrastinatesin

correctingthecondition,anindependentpartyshouldreconciletheaccount(s).

 Estateaccountingshouldbeverified.Oldorinactiveestatesareprimetargetsforembezzlement.

 Personallyinvestigatequestionableactivitiespertainingtothetrustaccount(e.g.,lackoffeepayments,

missingcorrespondence,etc.).

 Che

ckperiodicallywiththepostofficetodetermineifanyoneotherthandesignatedpersonnelhas

attemptedtopickuptheofficemail.Embezzlerswillpickupthemailtodestroyorremoveincriminating

items.



Personnel:

 Thetasksofposting,depositing,anddisbursingtrustaccountfundsshouldbehandledbydifferentmembers

ofthest

aff.Anemployeeisnotpermittedtosigntrustaccountchecksifthatemployeeisresponsiblefor

reconcilingthetrustaccount.(Note:anexceptiontothisruleisiftrustaccountchecksrequiretwo

signaturesandoneofthemmustbealawyer.Inthiscase,thenonlaw

yercouldbethesecondsignature

becausesignaturealreadysatisfiedtherequirementsoftherule.)

 Questionlifestylechanges(e.g.,increasedsocialactivitiesortravel,newwardrobe,newcar,etc.)of

individualswithaccesstothetrustaccount.



 Personal,professional,orfinancialproblems(e.g.,familyillness,maritalproblems,drinking,bankruptcy,etc.)

maybecauseforembezzlement.

 Questionanegativeattitudeorpoorworkperformanceofanemployeemaintainingthetrustaccount

especiallyiftheemployeewaspassedoverforpromotion.

 Bewareofanemployeewho

isoverlypossessiveofthetrustaccount.Theabsenceofminimuminternal

controlsandsoundaccountingpracticescreatesasituationinwhichthereisastrongpotentialfor

embezzlementtogoundetected.

 Embezzlementoccursmorefrequentlywhenanunsupervisedpersonhastotalresponsibilityforthetrust,

office,and/orpayrollaccounts.



 Embezzlerstendtomakedrawsontheofficeoperatingaccountfirstandlatermakedrawsonthetrust

account.

SECTION X: SCAMS



TheStateBarcontinuestoreceivereportsoffraudsandscamsonlawyertrustaccountsresultinginsix‐figure

losses.Thetwomajortypesofscamsare1)CounterfeitCheckScamsand2)Emailhacking/wireinstructionfraud.

Thefollowingisabriefsummaryofeachscam.



CounterfeitCheckScam

Bynow,alllawyersshouldknowthatcriminalsareusingemailtoactlikepotentialclientsrequesting

representation(typicallycommercialdebtcollectionordivorcesettlementcollection).Oncethelawyerresponds

witharequestformoreinformation,the“client”providesthelawyerwithdocumentationofthe“debt,”often

includingwarehousereceipts,contracts,

billsoflading,etc.Shortlyafteragreeingtopursuetheclaimandoften

beforeademandletterisevendrafted,thelawyerreceivesaletterandcertifiedbankcheckfromthesupposed

debtorwhoispayingthedebtbecausethey“don’twanttodealwiththelaw.”Thelawyerthen

depositsthe

certifiedbankcheck(oftenfromabankupnorthlikeChasesothetellersarelessfamiliarwithit)intothetrust

account.Almostimmediatelytheclientbeginsdemandinghispaymentviawire.Sincethefundsareavailablevia

provisionalcredit(duetotheGoodFundsSettlementAct),the

lawyerwiresoutthemoneytotheclientminusthe

lawyer’sshare.Theclientisneverheardfromagain.Threedayslater,thebanktellsthelawyerthatthecheckwas

counterfeitandremovesthealreadywiredamountfromthetrustaccount.Sincethelawyerdisbursedon

provisionalcredit,the

lawyerisresponsibleforreplenishinganytrustaccountdeficit.Thistypeofscamhascost

lawyershundredsofthousandsofdollarsandatleastonelawlicense.Fortipsondetectingandavoidingthisscam,

viewthisfactsheetcreatedbyCanadianindemnitycompany,LawPro:

http://practicepro.ca/practice/pdf/FraudInfoSheet.pdf





EmailHacking/WireInstructionsFraud

Themostrecentandmostalarmingtypeofscamisonewherethecriminalgainsaccesstotheemailaccountofa

partytoarealestatetransactionandinitiatesafraudulentwiretransfer.Onceanaccounthasbeenhacked,the

criminallearnsthedetailsoftherealestatetransactionand,

actingliketheseller,emailsthelawyer(ortheseller)

withwiringinstructionsfortheseller’sfunds.



Ifthelawfirmdoesnothaveaprocedureinplacetoauthenticatetheemailedwireinstructions,theymay

unknowinglywiretheseller’sproceedstothehacker’sbankaccount.Thebankwilldeny

anyliabilitybecauseit

merelyfollowedthelawyer’sinstructions.Thisschemehascausedmillionsofdollarsoflossessinceitfirst

appearedinNorthCarolinain2015.Inordertoprotectagainstthisscam,lawyersshould:



‐Verifyallemailedwiredinstructionsviaasecondmethodofcommunicationthatthe

lawyerknowsis

authentic(suchasaphonenumberlistedintheclient’sfile).Donotcallaphonenumberprovidedvia

email,becausethatnumbercouldbethehacker’snumber. 



‐Lookforsmalldifferencesinemailaddresses(althoughhackershavealsousedtheactualemailaccounts

ofrealestate

agentsorsellerstoconductthesescams).



‐Notifyclientsofthisscamsothattheymaybeawareofanysuspiciousactivityoremails.



‐Refusetoacceptchangesinwiringinstructionsviaemail(thisisnotaStateBarrule,butitisstrongly



recommended).



‐Trainemployeestobeonthelookoutforthisattemptedscamandimplementapolicythatmustbe

followedforeverysinglewire.



‐Useencryptedemailandsuggestthatallpartiestoatransactionavoidsendinganypersonallyidentifying

informationorfinancialinformationviaunsecuredemail.



‐

Stayuptodatewiththeeverchangingdetailsofthesescams.Thishandbookwillneverbeableto stay

currentwithemergingtrends,solawyersmustseekcurrentinformationandadvicefromtheStateBar,the

FBI,LawyersMutual,andotherorganizations.



Evenlawfirmswithtwo‐levelconfirmation

proceduresforwireinstructionshavebeendefraudedbecausethe

criminalcallsthefirmasthesellerandconfirmsthewiringinstructions.Topreventthistypeoftheft,lawfirms

shouldinitiatethephonecalltoconfirmtheemailedwireinstructions,callingonlythenumberlistedintheclient

fileregardlessof

whetheradifferentnumberisprovidedintheemail.



Whilethesescamsvaryinsophistication,allhavethepotentialtocausesignificantharmandlawyersmustremain

vigilantforanyfraudulenttrustaccountactivity.Ifyouoryourfirmhasbeensubjecttoanyattemptedscams,orif

youhave

anyquestionsregardingthesescams,pleasecontacttheStateBarat(919)828‐4620.



SECTION XI: INTEREST ON LAWYERS TRUST ACCOUNTS- IOLTA



A.WhatisIOLTA?



TheNorthCarolinaStateBarPlanforInterestonLawyers’TrustAccounts(NCIOLTA)isanon‐profitprogram

establishedin1983bytheStateBarandNorthCarolinaSupremeCourttoreceiveinterestincomefromlawy ers'

generaltrustaccountstofundprogramsforthepublicbenefit.NCIOLTAworks

withlawyersandbanksacrossthe

statetocoordinateincomegeneratedfromlawyers'generaltrustaccountsforthepurposeoffundinggrantsto

providersofcivillegalservicesfortheindigentandtoprogramsthatfurthertheadministrationofjustice.Allactive

NClawyersmaintaininggeneraltrustaccountsinNorthCarolina

arerequiredtoestablishallgeneralclienttrust

accountsasinterest‐bearingIOLTAaccounts.



AsofJuly2010,IOLTArulesrequirelawyerstoholdtheirIOLTAaccountsonlyatEligibleBanksthatwillagreetopay

IOLTAaccountsthehighestrateavailabletothatbank’sothercustomerswhentheIOLTA

accountsmeetthesame

minimumbalanceorotheraccountqualifications.NCIOLTAmaintainstheEligibleBankListonitswebsite,

www.nciolta.com

.



B.HowitWorks



Lawyersoftenhandl emoneythatbelongstoclients—suchassettlementchecksormoneytopayvariousfees.

Often,theamountofmoneythatalawyerhandlesforasingleclientisquitesmalland/orisheldforonlyashort

periodoftime.Traditionally,lawyershaveplacedtheseindividualdeposits

togetherintocombined,orpooled,

trustaccounts.Beforetheesta blishmentofIOLTAprogram s,trustfundspooledinthismannerearnednointerest.

Now,byvirtueofIOLTA,lawyersplacethesenominaland/orshort‐termclientfundsintoapooled,interest‐bearing

trustaccountfromwhichbanksforwardtheinterestnetof

allowableservicechargestothestateIOLTAprogram,

whichusesthemoneytofundlaw‐relatedcharitablecauses.



IOLTAadministrationcostsarepaidfromprogramincomeand,fortheNorthCarolinaprogram,haveconsistently

beenundertenpercentofincomesinceitsinception.IOLTAisadministeredandstaffedindependentlyfrom

the

clientsecurityfund,trustaccountauditprogram,andotheractivitiesoftheStateBar.NofundsfromNCStateBar

duesareusedtosupporttheprogram.



C.HowareIOLTAFundsUsed?



NCIOLTAhasbeenavitalsourceoffundingforthep rovisionofcivillegalservicestothepoorthroughgrantsmade

tostaffedlegalservicesprogramsandvolunteerlawyerprogramsthatserveeverycountyinthestateandforother

programsthatworktoimprovetheadministrationofjustice.

Sinceitsfirstgrantsweremadein1985,NCIOLTAhas



providedover$55millionforlegalassistanceforatriskchildren,theelderly,thedisabled,andthepoorinneedof

basicnecessities,andtohelplawyersconnectwiththosewhoneedtheirprobonoassistance.



Othergrantshavesupportedinnovativeprogramssuchasthefollowing:workoftheAdministrative

Officeofthe

Courtstomeettheneedforinterpreterservices;publicinterestsummerinternshipsforlawstudents;trainingof

localofficialsonhowtoprovidesafeandhumanejails;judicialeducation;andtheleveragingofstatefundsto

assistyounglawyersinpublicinterestpracticetopayofflaw

schoolloans.



IOLTAfundsarenotusedfortheClientSecurityFundthatreimbursesclientswhohavesufferedfinanciallossasthe

resultofdishonestconductoflawyersengagedintheprivatepracticeoflawinNorthCarolina.



D.QuestionsandAnswersabouttheManagementofIOLTA



Accounts



WhichofmylawpracticeaccountsmustbeestablishedandmaintainedasIOLTAaccounts?



Allgeneraltrustaccountsmustbeestablishedandmaintainedasinterest‐bearingIOLTAaccounts,interestfrom

whichisremittedtoNCIOLTA.Generaltrustaccountsarethoseaccountsthatholdnominalandshort‐term

depositsof

clientfunds.Forguidanceonwhatfundsshouldbeheldinageneraltrustaccountoradedicatedtrust

accountforaspecificclient,seecomment[3]afterRule1.15‐4.Dedicatedandfiduciaryaccountsestablishedfor

oneclient,entity,ortransactionarenotestablishedasIOLTAaccounts.



Howdo

IcomplywiththerulesgoverningNCIOLTA?



AllactivemembersoftheNorthCarolinaStateBarmus tensurethatallgeneraltrustaccountsinNorthCarolinaare

establishedasinterest‐bearingIOLTAaccountsateligiblebanks.AllactivemembersoftheStateBarmustannually

certifythattheyare

fulfillingthisrequirement.CertificationismadewhenrespondingtotheStateBarDuesNotice

sentatthebeginningofeachcalendaryear.Thecertificationmaybemadeontheduesnoticeorthroughthe

MemberAccess LoginpageoftheStateBarwebsite.Lawyerswhodonotmaintainclienttrust

accountsinNorth

Carolinamustcertifythattheyareexempt.LawyersmustbeincompliancewiththisrequirementnolaterthanJune

30.LawyersmustalsoinformNCIOLTAwhenopeningorclosingIOLTAaccounts.TheNCIOLTAStatusUpdateForm

shouldbeusedforthispurpose.(Acopyof

theformcanbefoundinAppendixB15.)Theformshouldalsobeused

toreportemploymentoraddresschanges.Seewww.ncbar.gov/media/283969/Status‐Update‐Form.pdf

.



WhathappensifIdonotcomplywiththerulesgoverningNCIOLTA?



Accordingtotherulesimplementingthemandatoryprogram,thelawyerwhofailstocomplyshallbereportedto

theNCStateBar'sAdministrativeCommittee,whichmayinitiateproceedingstoadministrativelysuspendthe

lawyer'sactivemembershipstatus

andeligibilitytopracticelaw.



Doesmaintainingmygeneralclienttrustaccountsasinterest‐bearingIOLTAaccountsaffectmytrustaccount

practices?



No.Maintaininggeneralclienttrusta ccountsasinterest‐bearingIOLTAaccounts doesnotaffectalawyer'strust

accountpractices.Thedepositorybankwillcalculateandremitall

accumulatedinterest,lessanyservicecharges,

directlytoNCIOLTA.Theprincipalbalanceoftheaccountwillneverbeaffected.Ofcourse,lawyersstillretain

completediscretiontodeterminewhetheratrustdepositisofsufficientsizeordu rationtojustifyplacementina

separate(dedicated)interestbearingaccount.



How

arebankservicechargesonIOLTAaccountshandled?



NCIOLTApaysallowableservicechargesonIOLTAaccounts.Itispermissibleforbanksthatdonotwaiveservice

chargesonIOLTAaccountstodeductfrominterestorutilizeearningscreditforallowableservicecharges

associatedwiththeaccount.Allowableservicecharges

includemonthlyaccountmaintenancecharges,peritem

checkordepositcharges,etc.Businesscostsorcostsbillabletoothersaretheresponsibilityofthelawfirmand

shouldnotbechargedagainstclientfundsintheaccountoragainsttheinterestortheearningscreditofanIOLTA

account.Thesecharges

maybedeductedfromthefirm’soperatingaccount,billedtothefirm,ordeductedfrom

fundsmaintainedordepositedbythelawyerintheIOLTAaccountforthatpurpose.Examplesofsuchcostsinclude

butarenotlimitedtocheckprinting,NSF/ODfees,stoppaymentorders,wiretransferfees,account

reconciliation,

remotecapturecapability,onlinebanking,digitalimaging,CD‐ROMstatements,orinterestchargedonuncollected

balances(float).



WhatarethetaxconsequencesofIOLTAparticipation?



AccordingtotheInternalRevenueService,maintainingIOLTAaccountsimposesnotaxconsequencestotheclient

orthelawyer.SeeRevenueRuling81‐209.EachIOLTAaccountbearsthetaxidentificationnumberoftheNCIOLTA

BoardofTrusteestoensure

thatallaccumulatedinterestisreportedasincomeoftheIOLTAprogram.Ifyourbank

needsIOLTA’staxIDnumber,pleasecontacttheIOLTAoffice.



HowareclientsinformedaboutIOLTA?



In1988theNorthCarolinaSupremeCourtapprovedthepostingofaClientNoticeCertificatetoinformclients

about

theIOLTAprogram.NCIOLTAprovidesClientNoticestolawyersatnocharge.



DoesmaintainingIOLTAaccountsdepriveclientsofanyfundstowhichtheyareentitled?



No.TrustmoneysofthetypeplacedinIOLTAaccounts(nominalinamountorexpectedtobeheldforashort

duration)

havetraditionallybeendepositedinlawyers'pooledtrustaccounts.PriortoIOLTA,suchaccountsdidnot

earninterest.TheNorthCarolinaStateBarnowrequi resgeneraltrustaccountstoearninterest,whichisremitted

toNCIOLTAforfundinglaw‐relatedcharitablepurposes.Ofcourse,lawyersstillretaincompletediscretionto



determinewhetheratrustdepositisofsufficientsizeordurationtojustifyplacementinaseparate(dedicated)

interestbearingaccount.Iffundsareplacedinageneralclienttrustaccountinerror,NCIOLTAhaspoliciesfor

ensuringtherefundofinterestonthosefunds.



WhichbankshaveIOLTA

accounts?



AlistofeligibleNorthCarolinabanksismaintainedbyNCIOLTA.Seewww.nciolta.com/iolta_banklist.asp

.Ifyou

and/oryourbankerneedassistancetoestablishanIOLTAaccountatabankthatisnotlisted,pleasecontactthe

IOLTAofficeat919‐828‐0477orcontactIOLTAviaitswebsite,www.nciolta.com

.



ThereareanumberofbanksthatgoaboveandbeyondtheeligibilityrequirementsoftheIOLTAruletosupportthe

NCIOLTAprograminitsmissiontoensurethatlow‐incomeNorthCarolinianshaveaccesstocriticallyneededlegal

aid.Thesebanksaregiventhedistinctionof“Prime

PartnerBanks”byNCIOLTA,andalistofthesebankscanbe

foundontheNCIOLTAwebsite.



ManybankswaiveservicechargesonIOLTAaccounts,andsomebanksapplyapolicytoIOLTAaccountsthatresults

inahigherincomeyieldfromthatbank.Banksthatwaiveservice

chargesar enotedonthebanklist.



IfalawfirmholdsfundsofNCclientsinanout‐of‐stateaccount,howshouldthataccountbesetup?



UndertheRulesofProfessionalConduct,allgeneraltrustaccountsmustbemaintainedatabankinNorthCarolina

ora

bankwithbranchofficesinNorthCarolina.Asthecommenttothetrustaccountrulesnotes,alawfirmwith

officesinanotherstatemaysendaNorthCarolinaclient’sfundstoafirmofficeinanotherstateforcentralized

processingthoughtheclientfundsarestillsubjecttothe

requirementsoftheNCRulesofProfessionalConduct.

Therefore,theNCclientfundsshouldbeplacedintoageneraltrustaccount,theinterestfromwhichwillbe

remittedtoNCIOLTA.



WhomakestheIOLTAgrantdecisions?



GrantdecisionsaremadeannuallybytheNCIOLTABoardofTrustees,which

administerstheprogramaccordingto

therulespromulgatedbytheNCStateBarCouncilandapprovedbytheNCSupremeCourt.27NCAC1D.1301‐20

TheboardisastandingcommitteeoftheNCStateBarCouncil,therepresentativegoverningbodyoftheStateBar,

whosemembersareelected

bythebarmembershipthroughthejudicialdistricts.IOLT Atrusteesareappointedby

theNCStateBarCouncil.NCIOLTAgrantsareforthecalendaryear,andallgrantapplicationsarereviewedannually

byallthetrustees.AcurrentlistofmembersoftheIOLTABoardofTrusteescanbefound

ontheStateBar's

website.Seewww.ncbar.gov/for‐lawyers/directories/agencies‐boards‐commissions

.



WherecanIfindrulesgoverningNCIOLTA?



See27NCAC1D,Sections.1301‐.1316andRule1.15‐2(b)oftheRulesofProfessionalConduct.







FormoreinformationaboutNCIOLTA,pleasecontactouroffice.



MaryIrvine,ExecutiveDirector

ClaireMills,AccountsManager

AaliyahPierce,AccountingData



NCIOLTA

217E.EdentonSt.PostOfficeBox25996

Raleigh,NorthCarolina27611

(919)828‐0477

(888)828‐1718Fax

e‐mail:[email protected]v



SECTION XII: FDIC INSURANCE



A.CoverageAmount



TheamountofFDICcoverageavailabletoasingledepositorinanFDICinsuredbankorsavingsassociationis

$250,000.



Whatisalawyer'sprofessionalresponsibilitywhenchoosingthedepositorybankforatrustaccount?



Alawyerisactingasafiduciarywhenholdingclientfundsinhisor

hertrustaccount.Thismeansthatthelawyer

mustbeprudentwhenmakingfinancialdecisionsrelativetothosefundsincludingthedecisionastothedepository

bankforthelawyer'strustaccount.However,intheabsenceofinformationtendingtosuggesttheimminentfailure

ofabank,alawyerispresumed

tobeactingethicallyifthelawyerestablisheshisorhertrustaccountatafinancial

institutioninsuredbytheFederalDepositInsuranceCorporation(FDIC).Inotherwords,ifthegovernmenthas

madethedeterminationthattheinstitutionisinsurable,thelawyermayrelyuponthegovernment'sassessment.



Whatare

therequirementsforinsurability;towhatextentarethefundsinsured?



Alawyer'sgeneraltrustaccount(sometimesreferredtoasan"IOLTAaccount")isafiduciaryaccountand,assuch,

eachclient'sfundsdepositedthereinwillbeinsuredbytheFDIC(uptotheinsurancelimit)providedtheaccount

satisfies

theFDICdisclosurerequirements.Therearetwodisclosurerequirementsforfiduciaryaccounts:(1)the

fiduciarynatureoftheaccountmustbedisclosedinthebank'srecords,and(2)thenameandownershipinterestof

eachownermustbeascertainablefromthedepositaccountrecordsoftheinsuredbankorfrom

records

maintainedbythefiduciary.Itisincumbentonthelawyertomakesurehisorherbankknowsthatanaccountisa

fiduciaryaccountsothattheban kcantitletheaccountassuchinitsrecords.Bankstypicallydonotmaintain

recordsoftheownershipinterestofeach

clientwhosefundsareheldinatrustaccount.Therefore,itisthelawyer's

responsibilitytomaintaintheserecords.Ifyouarecomplyingwiththetrustaccountingandrecordkeeping

requirementsinRule1.15oftheRulesofProfessionalConduct,youhavealreadysatisfiedbothoftheFDIC

"disclosure"requirements.



ContacttheFDIC



FormoreinformationfromtheFDIC,calltoll‐freeat:

1‐877‐ASK‐FDIC(1‐877‐275‐3342)from8AMuntil8PM(EasternTime)HearingImpairedLine:1‐800‐925‐4618



CalculateinsurancecoverageusingtheFDIC'sonlineElectronicDepositInsuranceEstimatorat:fdic.gov/edie



ReadmoreaboutFDICinsuranceonlineat:fdic.gov/deposit/deposits



OrderFDICdepositinsuranceproductsonlineat:fdic.gov/depositinsuranceregister



Sendquestionsbye‐mailusingtheFDIC'sonlineCustomerAssistanceFormat:fdic.gov/starmail

Mailquestionsto:

FederalDepositInsuranceCorporation

Attn:DepositInsuranceOutreach55017thStreet,NW

Washington,DC20429‐9990



SECTION XIII: THE RANDOM AUDIT PROGRAM



A.Introduction



InApril1985theNorthCarolinaStateBarinitiatedaprogramofrandomauditsofthetrustaccountsofactive

membersoftheNorthCarolinaStateBar.Thepurposeoftheprogramwastoreducetheincidenceof

misappropriationandmishandlingofclients'fundsbymonitoringcompliancewiththeprocedures

andrecord

keepingrequirementsestablishedbytheRulesofProfessionalConduct.Theprogramwasspecificallylimitedto

proceduralauditsasopposedtothemorefamiliarandextensivefinancialaudit.Thefocuswasrecordkeepingand,

whenneeded,educationoflawyersinthepropermanagementofclientfundsandtrustaccounts.Although

the

programhas,onoccasion,uncoveredgrossimproprietiessuchascommingling,inadequatebalances,an duseofa

trustaccountasapersonalcheckingaccount,afteroperatingforover25years,itisclearthattherandomaudit

programhasbeenmostsuccessfulinraisingtheoveralllevelofcompliancewith

andunderstandingoftherules

governinglawyertrustaccounts.



B.AuthorityforRandomAudits



Theauthorityfortheran domauditprogramisgrantedinRule.0128(b)oftheStateBar'sRulesforDisciplineand

DisabilityofAttorneys,27N.C.A.C.1B ,Section.0100,whereitstates:



ThechairpersonoftheGrievanceCommitteemayrand omlyissueinvestigativesubpoenastomembers

compellingtheproductionofanyrecords

requiredtobekeptrelativetothehandlingofclientfundsor

propertybytheRulesofProfessionalConductforinspectionbythecounseloranyauditorappointedby

thecoun seltodeterminecompliancewiththeRulesofProfessionalConduct.Anysuchsubpoenawill

discloseuponitsfaceitsrandom

characterandcontainaverificationofthesecretarythatitwasrandomly

issued.Nomemberwillbesubjecttorandomselectionunderthissectionmorethanonceinthreeyears.

TheauditormayreportanyviolationoftheRu lesofProfessionalConductdiscoveredduringtherandom

audittotheGrievanceCommittee

forinvestigation.Theauditormayallowthelawyerareasonable

amountoftimetocorrectanyproceduralviolationinlieuofreportingthemattertotheGrievance

Committee.Theauditorshallhaveauthorityundertheoriginalsubpoenaforrandomaudittocompelthe

productionofanydocumentsnecessarytodetermine

whetherthelawyerhascorrectedanyviolation

identifiedduringtheaudit.



C.SelectionProcess



Onoccasion,alawyerconcludesthatsheisbeingauditedbecauseshehasdonesomethingtodrawattentionto

herself.Moreoften,auditedlawyersareindignantbecausetheybelievethattheBarshouldbeinvestigating

another,unnamedlawyerintownwhoisthe"type"tomishandletrustfunds.But,despite

theru morstothe

contrary,lawyersarenotpickedforatrustaccountauditbecausetheyhavedrawnattentiontothemselvesorthey

"fittheprofile."Rather,everyeffortismadetoberandomintheselectionofthelawyerswhosetrustaccountswill

beauditedbytheStateBarduring

aparticularquarter.



Lawyersrandomlyselectedforauditaredrawn fromalistgeneratedfromtheStateBar’sdatabasebasedupon

judicialdistrictmembershipdesignationsinthedatabase. Eachquarterthestaffauditorauditsthetrustaccounts

of60lawyersfromourdatabaseoftworandomlyselectedjudicialdistricts.The

weekbeforethequarterlymeeting

ofthecounciloftheStateBar,acomputersoftwareprogramrandomlyselectssixjudicialdistrictsfromallthe

judicialdistrictsinthestate.Althoughonlytwojudicialdistrictsparticipateeachqua rter,thefieldofsixnamesis

necessarytoavoidredundancy.Atrulyrandom

softwareprogramthatpicksonlytwojudicialdistrictseachquarter

hasthedisadvantageofpotentiallyselectingthesamejudicialdistrictsquarterafterquarter.Underthecurrent

procedure,sixdistrictsareinitiallyselectedbycomputertogeneratethefieldfromwhichthefinalselectionsare

made.Thestaffauditorreviewsthelist

ofsixtodeterminehowmanytimesandthedatesonwhicheachdistrict

wasselectedsincetheinceptionoftherandoma uditprogram.Thestaffauditoridentifiesthetwojudi cialdistrict

barsthatwillbeusedtodrawnamesfromourdatabaseduringthequarterbyeliminatingfromthe

listthefour

judicialdistrictsthathavebeenauditedmostrecentlyandfrequently.



Afterthestaffauditorselectsthetwodistrictbars,thenamesofthe60individuallawyerswhoseaccountswillbe

auditedmustbedetermined.Todothis,asoftwareprogramisrunthatscrambles,orrandomizes,the

alphabetical



listingoflawyerslistedasmembersofthetwochosenjudicialdistrictbarsinourdatabase.Thenumberoflawyers

auditedineachdistrictisdeterminedbyproration.Forexample:ThetwodistrictsselectedareDistrict1andDistrict

18.District1has200lawyersandDistrict18has1,300.

Therefore,District18ha s87%ofthe1,500totallawyersto

bedrawnfrom.District18wouldthereforereceive87%ofthe60allocatedrandomaudits,or52outof60.Dis trict

1,withonly13%ofthetotallawyerstobedrawnfrom,wouldreceiveeightrandomaudits.Startingat

thetopof

thecomputer‐generatedlistofrandomnamesoflawyersdrawnfromeachjudicialdistrictbar,thestaffauditor

schedulesappointmentsforauditsuntiltherespectivenumberoflawyersfromeachjudicialdistrictlistisreached.

Thelawyerselectedforrandomauditdoesnothavetobea

signatoryonthetrustaccountorapartneror

shareholderinthelawfirm:allgeneral,dedicated,andfiduciaryaccountsforalawfirmarereviewedwhenany

lawyerpracticingwiththefirmisselectedforrandomaudit.Lawyerswhodonotmaintaintrustaccounts(e.g.,

judges,prosecutors,publicdefenders,corporate

lawyers,etc.)areeliminatedfromthelist.



D.ScopeofAudit



Randomauditsareusuallyproceduralauditsoflimitedscope.However,auditsconductedpursuanttotheState

Bar'srandomauditprogrammayincludeasu bstantiveinquiryintoalawyer’shandlingofclientfunds,andtheState

Barauditorhastheauthoritytotakeappropriatestepstoensurethattheauditedlawyer

correctsprocedural

problemsdiscoveredduringarandomaudit.



Membersselectedforrandomauditarerequiredtoproduceallrecordsnecessarytodemonstratecompliancewith

therecordkeepingrequirementsoftheRulesofProfessionalConductconcerningactivityduringtheprecedingyear.

Auditsarescheduledinadvancebyagreementwheneverpossible.There

arenosurpriseinspections.



Whenalawyerassociatedwithorbelongingtoalawfirmisselectedforrandomaudit,theauditorinspectsthe

recordsforanytrustaccountmaintainedbythelawyerorbythelawfirm.Ifsomeofthetrustaccountsmaintained

bythefirmweresubject

torandomauditwithintheprecedingthreeyears,theauditislimitedtorecordsforany

trustaccountwhichwasnotauditedduringthethree‐yearperiod.



Duringanaudit,therecordsforthepast12monthsofactivityareexamined.Th eauditincludestheexaminationof

canceledchecks,deposit

slips,bankstatements,ledgercards,andthebookkeeping/softwaresystem(i.e.,check

stubs,receipts,disbursementjournals,softwareregisters,etc.).



Duringanaudit,thelawyerdoesnothavetobeattheauditor'sbeckandcall.Usually,anappropriatememberof

thelawyer'sstaffcananswertheauditor'squestions.Attheconclusion

ofthereview,theauditormeetswiththe

lawyertocritiquetheproceduresthefirmisusingtomaintainitstrustaccount(s).Thelawyeriswelcometoinvite

theotherlawyersinthefirmormembersofthestafftobepresentduringthecritique.Acopyoftheauditor's

memo

outlininganyproceduraldeficiencyisprovidedtothelawyer.Insomesituations,thelawyermustprovide

writtenassurancetotheStateBarthatcertaindeficiencieswillbecorrected.Forexample,alawyerwhohasfailed

toreconcileatrustaccountonaquarterlybasis(seeRule1.15‐3(d))maybe

askedtostate,inwriting,thatmonthly

orquarterlyreconciliationswillbeimmediatelyundertaken.Thetrustaccountsarethenmonitoredtoensurethat

thelawyercomplies.Insomeinstanceswhendisciplinemaybeappropriate,agrievancefilemaybeopened.Ifthe

grievanceisnotbasedondishonesty,fraud,or

deceit,thelawyermaybeofferedentryintotheTrustAccount

Compliance(TAC)program,describedindetailbelow.



E.TrustAccountComplianceProgram(TAC)



TheStateBarhascreatedanewprogrampursuanttoDisciplineandDisabilityRulesoftheNorthCarolinaStateBar,

27N.C.A.C.Chapter1,SubchapterB,Section.0112(l),whichwasapprovedbytheNorthCarolinaSupremeCourtin

March2011. 



TheTrustAccountComplianceProgram(TAC)isavoluntaryprogram.

Participationisconfidential.Whenalawyeris

foundafteraproceduralaudittohavesignificanttrustaccountcomplianceissues,agrievancefilemaybeopened

bytheStateBar.TheGrievanceCommitteemayelecttostaythegriev an ceandofferthelawyerentranceintothe

program.Ifthelawyerconsents

toparticipateintheprogram,heorshewillberequiredtocommunicatewiththe

StateBar’strustaccountcompliancecounsel,whowillmonitorthelawyer’strustaccount,reviewthelawyer’strust

accountingrecords,andinspectthelawyer’shandlingofentrustedfundsforaslongastwoyears.Participationin

the

programisgenerallyconfidential,butthetrustaccountcompliancecounselwillcommunicatewiththe

GrievanceCommitteeaboutthelawyer’sparticipation.Ifthelawyertimelycomplieswithallrequ irementsofthe



programandsatisfactorilycompletestheprogram,theGrievanceCommitteemayconsidersuccessfulcompletion

oftheprogramasamitigatingcircumstanceindeterminingwhatdiscipline,ifany,iswarrantedinthelawyer’s

grievance.TheGrievanceCom mitteemay,butisnotrequiredto,dismissthegrievanceforgoodcauseshown.



Ifthe

lawyerdoesnotconsenttoparticipateintheprogram,orifheorsh econsentstoparticipatebutdoesnot

timelycomplywithallrequirementsoftheprogram,thetrustaccountcompliancecounselwilldismissthelawyer

fromtheprogramandreturnthegri evancetotheGrievanceCommittee’sagendaat

asubsequentquarterly

meetingforconsiderationofimpositionofdisciplineintheunderlyingmatter.



Thisprogramisnotintendedfor,andwillnotbeofferedto,lawyersincasesinvolvingpossiblemisappropriationof

entrustedfunds,criminalconduct,dishonesty,fraud,misrepresentation,deceit,oranyothercasethech airofthe

Grievance

Committeedeemsinappropriateforreferral.ThesecaseswillcontinuetobehandledbytheOfficeof

CounselandtheGrievanceCommittee.



F.ExemptionfromAudi t



Lawyerswhodonothandleclientfundsorpropertybecause,forexample,theyaregovernmentemployeesorin ‐

houselegalcounsel,areexemptfromtherandomauditprogram.Otherlawyersmayseekanexemptionfrom

randomauditbyhavingaCPAperformanexaminationofthelawyer’strustaccountspursuant

toAgreedUpon

ProceduresandsubmittingtheCPAreporttotheNorthCarolinaStateBar.Theexemptionisvalidfor15months.

Theexemptionappliestoanylawyerwhofilesaproperreportwithin15monthsoftheselectionofthelawyer's

judicialdistrictforrandomaudit.Thereportincludesrepresentations

signedbythelawyer,acopyoftheCPA

engag ementletter,alistofAgreedUponProcedures,andtheCPA’srep ortpursuanttoAgreedUponProcedures,all

ofwhichmustbesubmittedtotheStateBarwithin90daysoftheexamination.



Alawyerisprohibitedfromseekingexemptionfrom

therandomauditofhis/hertrustaccountsduringthequarter

inwhichthelawyer’sjudicialdistrictbarhasbeenselectedforreview.[ForacopyoftheExemptionfromRandom

Auditforms,seeAppendixB16].



G.Confidentiality



AsnotedinRule.0128(e)oftheDiscipli neandDisabilityRules,"Noassertionofattorney‐clientprivilegeor

confidentialitywillpreventaninspectionorauditofatrustaccount…."Informationobtainedasaresultoforin

connec tionwithanauditisheldinconfidenceandisdisclosedbythe

auditoronlyasnecessarytoinvestigate

misconductandtoconductthebusinessoftheStateBar.

Suchinformationmaybecomepublic,however,upontheinstitutionofformaldisciplinaryproceedingspursuantto

therulesoftheStateBar.



H.Discipline



Minortechnicalviolationsofthetrustaccountingrulesareaddressedbytheauditorand/ortrustaccount

compliancecounselanddonotgenerallyresultintheinstitutionofdisciplinaryproceedings.Shouldsimilarminor

technicalviolationsbediscoveredduringarepeatrandomauditofthesametrustaccount(s),themattermaybe

referredtotheGrievanceCommittee.Moreseriousviolationsofthetrustaccountingrulesarereportedbythe

auditortothecounseloftheStateBarwhodetermineswhetheragrievanceinvestigationshouldbeinstitutedorif

thedeficienciescanberemediedwithaninformalfollow‐upletter.



I.Workshops



Trustaccountmaintenanceworkshopsareconductedinjudicialdistrictsselectedforrandomaudituponrequestof

thelocaldistrictbarpresident.Theauditor,timepermitting,willalsoconductworkshopsuponrequestfromother

groupsaffiliatedwiththepracticeoflaw.



J.AuditCheckList



Wheninspectingalawyer’strustaccount,theStateBarauditorisguidedbythedetailedrequirementsoftheRules

ofProfessionalConduct.Toensurethateachinspectionissystematicanduniform,theauditorasksthefollowing

questions(whichtrackthelanguageofRules1.15‐1,1.15‐2,and1.15‐3).

Generallyspeaking,alawyershouldbe



abletoanswereachquestionintheaffirmative.



Rule1.15‐1Definitions

(1) Does the trust account contain only the funds of a client(s) for whom a lawyer is engaged to perform or is

performingalegalservice?PleasenotetheexceptionspermittedinRule1.15‐2( f).



(2)Isa"dedicatedtrustaccount"(aspecialinterestbearingtrustaccount)maintainedsolelyfor

thebenefitofa

singleclientoraspecifictransaction?



(3)Istheterm"generaltrustaccount"usedtodenotetrustaccountsotherthandedicatedtrustaccounts?



(4)Isa"fiduciaryaccount"designatedassuchandmaintainedsolelyforthedepositoffiduciaryfundsorother

entrustedpropertyofa

particularpersonorentity(i.e.,anestate,guardianship,powerofattorney,trust,or

escrow)?



(5)Isthefinancialinstitutionwherethetrustaccountsaremaintainedabankorsavingsandloanassociation

charteredunderNorthCarolinaorfederallaw?



Rule1.15‐2GeneralRules

Safekeeping

(1)Isentrustedproperty(i.e.,trustandfiduciaryfunds,andotherproperty)identified,held,andmaintained

separatefromthepropertyofthelawyer?



(2)Arealltrustfundspromptlydepositedinageneralordedicatedtrustaccount?



(3)AreallgeneraltrustaccountsestablishedasIOLTAaccounts,fromwhichinterestisremittedtoNCIOLTAatthe

StateBar?



(4)Areallfiduciaryfundspromptlydepositedinafiduciaryorgeneraltrustaccount?



(5)Isallentrustedpropertynototherwisedepositedinatrustorfi duciaryaccount(e.g.stockcertificates)promptly

identifiedandlabeledaspropertyoftheperson

orentityforwhomitisheld?



(6)Isentrustedproperty(otherthanmoney)inasafedepositboxorothersuitableplaceofsafekeeping?



(7)Isthelocationoftheentrustedpropertydisclosedtotheclientorotherpersonforwhomitisheld?



(8)Isthe

safedepositboxorotherplaceofsafekeepinglocatedinNorthCarolina?



(9)Ifnot,hastheclientorotherpersonforwhomtheentrustedpropertyisheldgivenwrittenauthorizationto

maintainthepropertyoutsideNorthCarolina?



(10)Ifadedicatedtrustaccountismaintainedatabankoutside

thestateorinafinancialinstitutionotherthana

bankinoroutsideNorthCarolina,hastheclientprovidedawrittenconsenttodoso?



DepositsandDisbursements

(1)Areonlyclientfundsdepositedinthetrustaccount,exceptlawyerfundssufficienttoopenorservicethe

accountor

fundsbelonginginparttoaclient,thirdparty,orlawyer?



(2)Whenfundsbelonginginparttothelawyerandin parttotheclient(e.g.,aclientcheckforlegalfeesandcourt

costs)arereceived,arethefundsdepositedintactintothetrustaccount?



(3)Are

checksforlegalfeesorexpensesthataredrawnonatrustorfiduciaryaccountandmadepayabl etothe

lawyerenteredasdisbursementsontheclient'sledg ercard?



(4)Areallitemsdrawnonatrustorfiduciaryaccountmadepayabletoaspecificpersonorentityandnot

cashor

bearer?



(5)Isentrustedpropertyusedtoobtaincreditorotherpersonalbenefitonlyforthelegalorbeneficialownerofthe

entrustedproperty?



Notifications

(1)Hasabankdirectivebeenfiledwiththebankwhereatrustorfiduciaryaccountismaintained(seeSectionVIII)?



(2)Istheclient

promptlynotifiedofthereceiptofanyentrustedpropertybelonginginwholeorinparttothe

client?



Miscellaneous

(1)Isentrustedpropertybelongingtotheclientandtowhichaclientisentitledpaidordeliveredpromptlytothe

clientortothirdpersonsasdirectedbytheclient?



(2)Doesthelawyerholdanyentrustedpropertyortitletopropertyassecurityforthepaymentofanyfeesorother

obligationstothelawyer(e.g.,deedsoftrustsorliens)?



(3)Ifso,isthepropertyclearlyidentifiedaspropertyheldassecurityandnotasa

completedtransferofownership

tothelawyer?



(4)HasthelawyerpromptlyreportedtotheNorthCarolinaStateBaranyknowledgeorreasonablebeliefthat

entrustedpropertyhasbeenmisappropriatedormisapplied?



(5)Hasallinteres tearnedonatrustorfiduciaryaccountbeenpaidtotheclientorother

personorentityentitledto

theprincipalortotheStateBarIOLTAprogramasrequiredbyRule1.15‐2andRu le.1316(seeSectionXII)?



(6)Hasthelawyerco mpliedwiththerequirementsofChapter116Bconcerningtheescheatingof

abandoned / unidentifiedproperty?



Rule1.15‐3Records&Accountings

(1)Arethechecksforallgeneraltrustaccounts,dedicatedtrustaccounts,andfiduciaryaccountsbusi ness‐sizedand

dotheycontainanAuxiliaryOn‐UsfieldintheMICRline?Rule1.15‐3(a).



(2)Dobankreceiptsordepositslipslistsourceanddateofdeposit?Fordepositstothegeneral

trustaccount,do

bankreceiptsordeposi tslipsalsolistthenameoftheclientorotherpersontowhomthefundsbelongandsource

offundsifotherthanpersonal?



(3)IfrecordsofcanceledchecksarefurnishedbythebankindigitalimageorCD‐Romformat,do

thedigitalimages

orCD‐RomssatisfytherequirementsofRule1.15‐3(b)(2)(A)?



 Dotheyshowamount,date,andpayee,and,forthegeneraltrustaccount,dotheyshowtheclient

balanceagainstwhichtheitemisdrawn?

 Isthelawyer/firmusingbusinesschecksthatcontainanAuxiliary

On‐Usfield?

 Isthedigitalimagealegiblereproductionoffrontandbackoftheoriginalitemandnotsmallerthan1

3/16×3inches?

 Doesthebankmaintain,foratleastsixyears,theabilitytoreproduceelectronicallyadditionalorenlarged

imageswithinareasonable

time?

 Isthelawyerretainingtheserecordsfortherequiredsixyearperiod?

(4)Areallinstructionsorauthorizationstotransfer,disburse,orwithdrawfundsfromthetrustaccountincluding

electronicorwrittentransferreco rdsretained?



(5)Areallbankstatementsandotherdocumentsreceivedfromthebankregarding

thetrustaccount,includingany

noticesofinsufficientfunds,retained?



(6)Forthegeneraltrustaccount,isaledgercontainingarecordofreceiptsanddisbursementsforeachpersonor

entityfromwhomorforwhomfundsarereceivedmaintained?Doesthisledgershowthecurrentandaccurate

balanceoffunds

heldinthetrustaccountforeachpersonorentity?



(7)Aredepositoryreceiptsordepositslipsforalldep ositedfundsretainedanddothereceiptslistthesourceand

dateofreceipt?



(8)Areallstatementsandothe rdocumentsreceivedfromthedepositorybankregardingtheaccount,including

noticesofinsufficientfunds,retained?



(9)Aregeneraltrustaccountsreconciledatleastquarterlyinthefollowingmanner:thei ndividualclientbalances

shownontheledgersaretotaledandreconciledwiththecurrent

bankstatementbalanceforthetrustaccountasa

whole?



(10)Aregeneraltrusta ccountsreconciledmonthlyinthefollowingmanner:thebalan ceofthetrustaccountas

shownonthelawyer'srecordisreconciledwiththecurrentban kstatementbalanceforthetrustaccount?



(11)Arewrittenaccountingsprovided

totheclientuponthefinaldisbursementoffunds(i.e,whenthebalance

reacheszero),whenreasonablyrequestedbyclient,andatleastannuallyiffundsareretainedmorethan12

months?



(12)Ifnotrequiredbylaw,isawrittenaccountingoffiduciaryfundsandotherentrustedpropertyrendered

tothe

beneficialownersorrepresentativesatleastannuallyanduponterminationoflawyers'professionalfiduciary

service?



(13)Arecompleteandaccuraterecordsofallentrustedpropertyreceivedbythelawyerretainedforsixyearsfrom

lasttransactiontowhichtherecordpertains?



HowcanIgetquestionsansweredabout

mytrustaccountwhenIcalltheNCStateBar?



AnumberofstaffpeopleindifferentdepartmentsattheNCStateBarmaybeabletoassistwithyourtru staccount

questiondependinguponthetypeofquestion.Ifyoucanletthereceptionistknowthetypeofquestion

youhave,

shecanbetterassistyouinreachingthecorrectstaffpersoninthefirstinstance.Pleasedirectquestionstothe

staffmemberslistedbelow:



 Questionsregardingtrustaccountpractices:PeterBolac,trustaccountcompliancecounsel.Petercanbe

reachedviaphon eat(919)828‐4620orvia

emailatPBolac@ncbar.gov

 EthicsQuestions:NicholeMcLaughlinandSuzanneLever

 Questions,explanations,orissuesregardingaNSF(non‐sufficientfunds)notification:SonjaPuryearand

DawnWhaley

 QuestionsregardingIOLTAcompliance,suchashowtoestablishanIOLTAaccountorcertifyasto

compliance:MaryIrvine,ClaireMills,

andAaliyahPierceat919‐828‐0477





 



APPENDIX A: ETHICS OPINIONS



ReferenceGuidetoTrustAccountEthicsOpinions



DepositsandFees



Guidelinesfo radvancedfees08FEO10(Surveyofdifferenttypesofadvancedfees)



AdvancepaymentsofcostsRPC51,13FEO3(Whenlawyerreceivesalumpsumpaymentwhichisinclusiveof

costs,theportionrepresentingcostsmustbeheldinthetrustaccount)



Depositofmixedfunds

RPC158(Lawyermaycollectapaymentfromclientthatrepresentsbothcriminalfinesand

legalfeeseveniflawyerisnotcompletelysurewhatfineswillbe,undercertainconditions)



NonrefundableretainerfeesRPC50,RPC106,97FEO4,00FEO5(Opinionstrackevolutionof“nonrefundable”

fees)



TrustAccountingforsmallsumsRPC47(Nodeminimisamountsintrustaccounting)



Paymentoflegalfeesbythirdparties05FEO12(Explainslawyer’sdutytorefundthirdpartiesundercertain

circumstances)



Disbursement



Disbursementinrelianceonbank'sfundingschedule06FEO8(Lawyersmayrelyuponabank’shistoricfunding

scheduleundercertainconditions)



ConditionaldeliveryoftrustaccountchecksbeforedepositingloanproceedsRPC78(Noconditionaldeliveryof

trustaccountchecksbeforedepositingproceedsintotrustaccount)



Conditionaldelivery

ofsettlementproceedsRPC127(Releasingsettlementproceedsbeforesatisfyingsettlement

conditionsisdishonestandunethical)



Settlementfunds,disbursementwithoutconsentofclientprohibitedRPC75(Lawyermaynotpayhisorherfees

fromexcessfundsunlesspreviouslyauthorizedbytheclient)



Disbursementoftortclaimsettlementupondeposit

ofprovisionallycreditedfunds01FEO3(AppliesRPC191to

alldisbursements,notjustrealestate;lawyermayendorsesettlementcheckdirectlytoclientwithoutdepositingin

trustaccount)



CreditCards/OnlineBanking



DisbursementagainstfundscreditedtotrustaccountbyACHtransferorelectronicfundstransfer13FEO13

(LawyermaydisburseuponACHdepositsimmediately,butmustimmediatelyacttoprotectclientfundsupon

learningofACHreversal)



Businessaccount,linkingforpurposeofdetermininginterestorservicechargesRPC150

(Can’tlinktrustand

businessaccountstogetherifthearrangementwillcausetrustaccountfundstopayservicechargesforbusiness

account)



Creditcard,acceptingfeespaidbyRPC247,97FEO9,09FEO4(Lawyersmaycollectentrustedfundsviacredit

cardprovidedthelawyeraddressesrisks

suchaschargebacksandcommingling)



Cashingcheckforclient/PurchasingmoneyorderforclientRPC4(Rulesdonotprohibitlawyerfromperforming

servicesforincarceratedclient)



Onlinebanking11FEO7(Lawfirmmayuseonlinebankingtomanageatrustaccountprovidedthelawyersare



regularlyeducatedonsecurityrisksassociatedwithaccountandcanfollowrecordkeepingrequirements)



Recordkeeping/AbandonedFunds



AbandonedfundsRPC89,RPC149,RPC226(Abandonedfundsmustbeheldforfiveyearsfromthedateoflast

activityofthefunds;mustbeescheatedtothestate,notdonatedtocharity;iffirmreceivesacheckthatarenot

identifiedasclientfunds,canconcludeafter

investigationthatfundsbelongtofirm)



RetainingCD‐ROMwithdigitalimagesoftrustaccountchecks01FEO14(RetainingcheckimagesonCDsatisfies

recordkeepingrequirement.SeealsoRule1.15‐3(j))



Dormancyfeeonunclaimedfunds06FEO15(Lawyermaychargeareasonabledormancyfeeonunclaimedfunds



ifstatutorilypermittedandclientagreesinadvance)



Disputes



Applicationoftrustfundstoclient’sfeeobligationRPC37(Lawyermaynotpayhisorherfeesfromentrusted

fundsunlesspreviouslyauthorizedbytheclient)



Retainingfundsintrustaccounttopaydisputedlegalfee11FEO13(Lawyermaynot,absentclientconsent,retain

fundsintrust

accountinordertoobtainlegalfeeiffundswerenotentrustedforthepaymentoflegalfees)



Divisionoffeewithformerfirm03FEO11,2008FEO8(Lawyermustacthonestlywithformerfirmand

employmentagreementsondivisionoffeesmustbereasonableandnotpenalize

withdrawinglawyer)



Disbursementtomedicalprovidersinabsenceoflien01FEO11(Lawyerowesdutytoclient,butmaynot

unilaterallydecideadisputebetweenclientandmedicalproviderintheabsenceofalien)



Transferofdisputedfeesfromtrustaccounttolawyeruponcertainconditions06

FEO16(Undercertain

circumstances,lawyermayconsideradisputewithclientresolvedandtransferfeesoutoftrustaccount)



RealEstate



Auditofrealestatetrustaccountbytitleinsurer08FEO13(Auditispermissiblewithcertainconditions)



DisbursementsincidenttorealpropertyclosingsRPC86(Discussesearnestmoneypaidoutsideofclosingand

representationofthesellerafterclosing)



E‐recording,interimaccountforcostsof05FEO

11(Note:N.C.G.S.45Ahassincebeenamendedtoallow

disbursementofrecordingcoststoe‐recordingcompanybeforerecording)



Realestateclosing,disbursementagainstprovisionalcreditRPC191(Maydisburseonprovisionalcreditifdeposit

instrumentislistedinGoodFundsSettlementAct,withcertainconditions)



Depositingclient's

fundsforrecordingcostsRPC47(Nodeminimisamountsintrustaccounting)



LawyerasEscrowAgent



Disputeoverdisbursement,representationofonepartypursuanttowaiveroffutureconflict99FEO8(Lawyer

mayrepresentbothpartiesinaresidentialrealestatetransactionandsubsequentlyonlyonepartyinanescrow

disputeundercertainconditions)



Dutiesasescrowagent98FEO11(Lawyerasescrow

agentowesfiduciarydutiestobothpartiesandcannot

advocateforeitherpartyuntilthefiduciarydutyends)



Disbursementofescrowedfunds,disputeoverRPC66(Lawyeractingasescrowagentmaynotdisbursefundsina

mannernotcontemplatedbyescrowagreementwithoutconsentofbothparties)



Miscellaneous



Financinglitigation00FEO04(Lawyermayacknowledgefinancecompany’sinterestinsettlementundercertain

circumstances)



Out‐of‐statetrustaccountsRPC96(mustobtainclientconsenttodepositclientfundsinoutofstatetrustaccount;

seealsorequirementthatfundsmustbeheldinNCIOLTAaccounts)



Nonprofitpublicinterestlawcorporation,legalfeescollectedby13FEO9(Publicinterestlaworganizationsmust

stillfollowtrustaccountingrules)



Stolentrustaccountfunds,dutywhenthirdpartyresponsible15FEO6(Lawyermayhaveadutytoreplenish

stolenfundsundercertaincircumstances)



(1)RPC47

TrustAccountingforSmallSums

October28,1988

Opinionrulesthatanattorneywhoreceivesfromhisorherclientasmallsumofmoneywhichistobeusedtopay

thecostofrecordingadeedmustdepositthatmoneyinatrustaccount.



Inquiry:

AttorneyAis

employedtodraftadeedforClientBwhowishestogiveaparcelofrealpropertytoarelative.Itis

contemplatedthatAttorneyAwill,inadditiontodrawingthedeed,presideoveritsexecutionandseethatitis

properlyrecorded.ClientBisexpectedtopaya

relativelysmalllegalfeealongwiththecostofrecordationatthe

timethedeedisexecuted.Forreasonsofcostandconvenience,AttorneyAwouldliketoaskhisclientforasingle

checkrepresentingthefeeandthecostofrecordationandwouldprefertodepositthatch eck

inhisgeneraloffice

account.FromthataccountasinglecheckwouldbewrittentotheRegisterofDeedsforthecostofrecordation.



WouldtheproceduredescribedaboveviolatetheRulesofProfessionalConduct?Ifso,isthereanyprofessionally

responsiblewayofhandlingsuchtransactionswhichwouldnot

involveanintermediatedepositinthetrustaccount

andthenecessityofwritingmultiplechecks?



Opinion:

Rules10.1(a)and(c)[NowRules1.15‐1(a)and(c)]quiteclearlyrequirealawyertodepositintohisorhertrust

accountallfundsreceivedasafidu ciary.Thisobligationisnotinany

waydiminishedwhenthesuminvolvedis

small.Strictsegregationofclientfundsfromthepersonalfundsofthelawyerisalwaysnecessarytopreclude

confusionastotheidentityofthefundsandtoensurethattrustfundsarenotsubjecttotheclaimsofthelawyer’s

creditorsor

tothoseofhisorherestate.



ItshouldbenotedthatRu le10.1(c)[1.15‐1(c)]furtherprovidesthatfundsreceivedfromtheclientbythelawyeras

reimbursementforexpensesproperlyadvance dbythelawyeronbehalfoftheclientneednotbedepositedinthe

lawyer’strustaccount.

Alawyerhandlingsuchtransactionscouldthereforeadvancefundsfromhisorhergeneral

accounttopaythecostofrecordationandcouldacceptfromtheclientasinglecheckforthelegalfeeandthe

advancedexpensesandthecheckcouldthenbedepositeddirectlyandfinallyintothelawyer’s

generaloffice

account.



(2)RPC51

TrustAccountingforLitigationCosts

January13,1989

Opinionrulesthatwherealawyerreceivesalumpsumpaymentinadvancewhichisinclusiveofthecostsof

litigation,theportionrepresentingthecostsmustbedepositedinthetrustaccount.



Inquiry:

Is

itproperforalawfirmtocontractforatotalamountofattorney’sfees,allcostsinclusive,deposittheentire



amountintoageneralaccountasfees,andpayallthecostsoftheaction,includingfilingandprocessfeesoutof

thegeneralaccount?Assumethattheclienthasagreedinwritingtotheaboveagreementbeforethereceiptofany

funds.



Opinion:

No.Underthecircumstancesdescribed,some

ofthemoneycollectedbythefirmas“fees”wouldactuallybean

entrustmentintendedtodefraythecostsoflitigation.Rules10.1(a)and(c)[Rules1.15‐1(a)and(c)]requirethat

fundsreceivedinthefiduciarycapacity,howevercharacterized,bedirectlydepositedintoatrustaccount.



(3)RPC66



DispositionofEscrowedFunds

July14,1989

Opinionrulesthatanattorneyservingasanescrowagentmaynotdisburseinamannernotcontemplatedbythe

escrowagreementunlessallpartiesagree.



Inquiry:

PurchaserenteredintoaresidentialconstructioncontractonMarch27,1985withbuilder.Whenthetransaction



wasclosedonJul y25,1986,$1000wasplacedinescrowwiththeclosingattorneytobehelduntilalistofitems

wascorrectedandthendisbursedtothebuilder.



Thebuilderhasfailedtocorrecttheitemsalthoughmanyrequestshavebeenmadebythepurchaser.Fromtime

to

timetheattorn eyhasurgedthebuildertoresolvetheproblemswiththepurchaserbutnoactionhasbeentaken.



Theattorneyhasmaintainedanescrowaccountearninginterestinthenameofthepurchaserandthepurchaser

hasnowrequestedthattheattorneydisbursetheescrowaccountand

interesttothepurchaserinexchangeforan

indemnificationfromthepurchasertotheattorney.



Afterthepassageofthreeyears’timeonJuly25,1989,andafterninety(90)days’noticetobothparties,the

attorneywouldliketotransfertheescrowaccounttothepurchaserandassumeany

civilliability,providedthe

transfercanbemadewithoutviolatinganyethicalstandard.



Cantheattorneyethicallydisbursetheescrowedfundstothepurchaserundersuchcircumstances?



Opinion:

No.Fundsreceivedbyalawyeractingasanescrowagentmustbemaintainedinaccordan cewiththetrust

accountingprovisionsof

Rules10.1and10.2[now1.15‐1and1.15‐2]oftheRulesofProfessionalConduct.A

lawyer/escrowagentstandsinafiduciaryrelationshipwithallpartiestotheescrowandisobligatedtotreateachas

aclientwithrespecttothefundsheldintrust.Disbursementofescrowed

fundsisgovernedinthefirstinstanceby

thetermsoftheescrowagreementwhichshouldinformthelawyerastowhich“client”isentitledtoreceive

paymentandwhenandinwhatamountssuchpaymentoughttobemade.Rule10.2(E)[1.15‐2(e)].Ifunforeseen

circumstancesariseforwhi ch

noprovisionwasmadeintheescrowagreement,suchasthosedescribedinthe

inquiry,thedispositionoftheescrowedfundsmustbeagreeduponbythepartiesormadethesubjectofalegally

bindingorderpriortothelawyer’sreleaseoftheescrowedfunds.Thelawyermaynot,

inconcertwithonlyoneof

thepartiestotheescrowagreement,determinethatthefundswillbedisbursedtothatpartywithouttheconsent

oftheotherinterestedparty.



(4)RPC75

DisbursementofClientFunds

October20,1989

Opinionrulesthatalawyermaynotpayhisorher

feeorthefeeofaphysicianfromfundsheldintrustforaclient

withouttheclient’sauthority.



Inquiry:

LastyearLawyerLbeganrepresentationofMs.Bforin juriesshereceivedinanautomobileaccident.Sincethat

timeMs.Bhasfailedtocooperateintheprocessingof

herclaim,hasnotgivenanyresponsetonumerousletters,

hasnotreturnedtelephonemessages,andhasnotacceptedacertifiedletter.LawyerLfeelsthatheisnolongerin

apositiontoproviderepresentationtoMs.Bbasedonherlackofcooperation.



Thequestionwhichhasarisendealswitha$353.00balancewhichismaintainedinthetrustaccou ntonbehalfof

Ms.B.ThisrepresentsaportionofthemedicalpaymentscoveragewhichwasreceivedonbehalfofMs.B.LawyerL

generallyobtainsmedicalpaymentscoverageforhisclientsas

acourtesywithnodeductionoflegalfees.However,

LawyerLhasspentagreatdealoftimeonthiscaseandfeelsthatheshouldbeentitledtosomefee.Additionally,

Ms.Bhassignedadoctor’slieninfavorofDr.K.



LawyerLha sonseveraloccasions

writtenMs.BaskinghertoauthorizehimtodisbursethisamounttoDr.Kforhis

outstandingexpensesandtohimselfinpaymentforlegalservicesperformed.Therehasbeennoresponse.May

LawyerLethicallytakeareasonablelegalfeefromthisbalanceandforwardtheremaindertoMs.

B’sphysicianfor

hisservices?



Opinion:

No.Rule10.2(E)[nowRule1.15‐2(e)]oftheRulesofProfessionalConductrequiresalawyerholdingclientfundsin

trusttopayordeliverthose fundsonlyasdirectedbytheclient.Inthiscasetheclienthasevidentlynotofferedany

direction

regardingthedisbursementofthefundsinquestionandLawyerLsh ouldthereforecontinuetoholdthis

moneyintrust.



Althoughtherewouldappeartobeavalidphysician’slienagainstsomeportionofthetrustfunds,LawyerLshould

refrainfromdisbursinganymoneytoDoctorKuntilheobtains

hisclient’sconsenttopaysomeoralloftheamount

billedorisrequiredtopaysomeliquidatedamountbyavalidcourtorder.Anyfundswhicharethesubjectofan

ongoingdi sputeshouldberetainedintrust.



(5)RPC78

ConditionalDeliveryofTrustAccountChecks

October

20,1989

Opinionrulesthataclosingattorneycannotmakeconditionaldeliveryoftrustaccountcheckstorealestateagent

beforedepositingloanproceedsagainstwhichchecksweretobedrawn.



Inquiry:

Attorneyclosesloansforanumberofrealestateclients.Afteralldocumentsaresigned,butbeforerecording,

AttorneygivestherealestateagentthecommissioncheckandthecheckfortheSellers’proceeds,withspecific

instructionsthatrealestateagentistoholdbothchecksintrustuntilnotifiedthattheclosingdocumentshave

beenrecordedandallclosingproceedshavebeendepositedinAttorney’strustaccount.Attorney

thenrecordsthe

necessarydocumentsanddepositsallclosingproceedsinhistrustaccount.



Attorneyhasbeengivenclosinginstructionsfromthelenderwhichrequirerecordingbeforedisbursement.

Attorneyhasactuallysignedastatementtothelenderthathewillfollowthelender’sinstructions.Attorneyison

theapprovedattorneys’

listforanumberoftitleinsurancecompanieswhohaveissuedinsuredclosinglettersto

lenderswhoseloansAttorneycloses.TheinsuredclosingletterensuresthatAttorneywillcomplywiththelender’s

closinginstructions.Attorneydoesnotdepositanyfunds,includinglender’sloanproceeds,untilaftertitleupdate

andrecording.

IfadefectintitleisdiscoveredbyAttorneyinhistitleupdateafter“disbursement,”hewillnot

recordandwillnotifytherealestateagenttoreturnthechecks.



1.MayAttorneyethicallytendertorealestateagent,intrust,thecommissionandseller’sproceedscheckswith

instructionsthat

therealtor,asagentforattorney,holdsuchchecksuntiltheattorneyhasrecordedtheclosing

documents,depositedtheclosingproceedsinhistrustaccount,andnotifiedtherealtorthathemaydisbursethe

checkswhichrealestateagentisholdingintrust?



2.HasAttorneyviolatedanyethicalrequirementsin

disregardingthepotentialliabilitythatwouldbeimposedupon

thetitleinsurancecompanyand/orhisprofessionalliabilitycarrierifadefectisdiscoveredafterdisbursement?



Opinion:

Thisisavariationoftheinquiryadd ressedinRPC44,concerningtheobligationoftheclosingattorneytofollowthe

instructionsofhis

client,thelender,torecorddocumentsbeforedisbursingloanproceeds.



1.No.Theattorneymaynotethicallydelivertrustaccountcheckstotherealestateagent,evenifsuchdeliveryis



made“intrust”or“conditionally,”untiltheattorneyhasrecordedtheclosingdocumentsanddepositedtheclosing

proceedsinhistrustaccount.



Arguably,theconditionaldeliveryofthetrustaccountcheckswouldnotviolatethelender’sinstructions,because

theAttorneyis,infact,recordingbeforedepositinganddisbursingthelender’s

funds.Thosefundshavenotbeen

“disbursed.”SeeRPC44.



However,bydeliveringtotherealestateagentchecksdrawnonthetrustaccountwhentheaccoun thaseither(i)

nofundsor(ii)trustfundsbelongingtoothers,theAttorneyviolatesRules10.1and10.2[nowRules1.15‐1

and

1.15‐2].Underthoserules,fundsdepositedinatrustaccou ntarefundsreceivedbytheAttorneyasafiduciary,

whichmustbeheldanddisbursedonlyforthebenefitofthoseentitledtothem,inaccordancewithappropriate

instructions.Accordingly,Attorneycannotviolateordelegatehisfiduciaryduty

byputtingintothehandsofan

unrelatedthird‐partyacheck,regularonitsface,drawnonatrustaccountcontainingonlythefundsofothers.

Similarly,Attorneycannotethicallydeliverchecksdrawnonanaccountwithinsufficientfunds,inviolationofthe

lawandtheimplicitrequirementimposedby

Rule10.2(F)[1.15‐2(f)].



2.Becauseoftheanswertoquestion1,itappearsunnecessarytoanswerquestion2.ReferenceismadetoRPC44.

Asageneralmatter,theultimateliabilitycreatedunderatitleinsurancepolicyorprofessionalliabilityinsurance

policywillbeirrelevanttoadeterminationof

theethicalissues,whichmustbejudgedindependentlyoflegal

liabilityandinsurability.



(6)RPC125

DisbursementofSettlementProceeds

January17,1992

Opinionrulesthatalawyermaynotpayamedicalcareproviderfromtheproceedsofasettlementnegotiatedprior

tothefilingofsuitoverhis

client’sobjectionunlessthefundsaresubjecttoavalidlien.



Inquiry:

LawyerArepresentsaplaintiffinapersonalinjuryaction.Duringthecourseofsettlingthecase,theattorney

receivesmedicalbillsfrommedicalcareproviderswhichtreatedtheclientforthepersonalinjuries.Settlementis

reachedwithout

thefilingofalawsuit.Thereisnodisputeoverthemedicalbills.TheclientinstructsLawyerAto

payallproceedsofthesettlementovertoherandtonotpaythemedicalbills.Themedicalcareprovidershavenot

takenthestepssetforthinG.S.§44‐49to

perfectthelienprovidedinthatstatute,butLawyerAhasactualnoticeof

thebills(seeG.S.§44‐50).DoesRPC69mandatethattheattorneypaythesettlementproceedstotheclientrather

thanfollowingthedistributionschemesetforthinG.S.§44‐50?



Opinion:

RPC69

ruledthatanattorneyhasanethicalobligationtodisbursefundsbelongingtothecli entasinstructedbythe

clientintheabsenceofavalidlieninfavorofahealthcareprovider.



Rule10.2(e).FromthestandpointoftheRulesofProfessionalConduct,thesituationisthesame

regardlessof

whetherthecaseissettledbeforeoraftertheinitiationoflitigation.TheinterpretationofG.S.§44‐50isbeyondthe

purviewoftheethicscommittee.Sufficeittosaythatifthatstatutehastheeffectofimposingalienupon

settlementproceedsinthehandsofan

attorneywhentheattorneyhasreceivedactualnoticeofthemedicalcare

provider’sclaimandsuithasnotbeenfiled,thentheattorneymaypaythemedicalcareprovider’sundisputed

claiminspiteofhisclient’sobjection.If,ontheotherhand,alienisnotperfectedbytheattorney’s

acquisitionof

actualnoticeundersuchcircumstances,theattorneywouldhavetoabidebytheinstructionsoftheclientinregard

tothedisbursementoftheproceedsofsettlement.



(7)RPC127

ConditionalDeliveryofSettlementProceeds

April17,1992

Opinionrulesthatdeliberatereleaseofsettlementproceedswithoutsatisfying

conditionsprecedentisdishonest

andunethical.



Inquiry#1:

AttorneyDisregularlyemployedbyanautomobileliabilityinsurancecompanytodefendclaimsorlitigationagainst



itsinsureds,oragainsttheinsurancecompanywhentheclaimisagain stothercoveragethatthecompanyhas

provided(suchasuninsuredandunderinsuredmotoristinsurancecoverage).Whenasettlementofanysuchclaim

orlitigationisnegotiated,AttorneyDtypicallypreparesthedocumentsthatheandhisclientor

clientswillrequire

toconcludethesettlement(thesettlementdocuments).Thesettlementdocumentsusuallyconsistofarelease,as

wellasaconsentjudgment,oranoticeorastipulationtoeffectadismissalofanypendinglitigation.



AttorneyDroutinelysendsthesettlementdocumentstoopposingcounsel,AttorneyP,

withaletterwhichdirects

themannerinwhichthesettlementistobeconcludedwiththeuseofthesettlementdocumentsbyAttorneyP.



AttorneyDalsosendsthecheckorchecksforthesettlementproceedstoAttorneyPwithaletterstatingthateach

checkisconditionallydelivered

toAttorneyPintrustanduponthecon ditionthat,whileinsomeinstancesacheck

maybedepositedinthetrustaccountofAttorneyP,nocheckmayotherwisebedelivered,andnoproceedsfrom

anycheckmaybedisbursedbyAttorneyPuntilthesettlementdocumentshavebeenexecuted

inthemanner

directedintheletterandreturnedtoAttorneyD.



Withrespecttothisconditionaldeliveryofasettlementcheckoritsproceeds,isAttorneyDa“client”ofAttorneyP

asdefinedbyRule10.1(b)(4)[now1.15‐1(b)(4)]?



Opinion#1:

No.



Inquiry#2:

IsAttorneyP

requiredtorenderappropriateaccountingstoAttorneyDwithrespecttothereceipt,deliveryor

disbursementofasettlementcheckoritsproceeds?



Opinion#2:

No.



Inquiry#3:

HasAttorneyPviolatedaruleifhedeliversasettlementcheckordisbursesanyoftheproceedsfromasettlement

checkin

violationofanyconditionunderwhichAttorneyPreceivedthesettlementcheck?



Opinion#3:

Yes.Wheneveranattorneyacceptsconditiona ldeliveryofsettlementproceedsfromopposingcounsel,the

attorneyimplicitlyagreestoabidebythepre scribedconditions.Anydeliberatefailuretoabidebythoseconditions,

suchasbydisbursingthe

proceedswithoutfirsthavingobtainedasignedrelease,wouldbedishonestandviolative

ofRule1.2(c),whichprohibits“conductinvolvingdishonesty,fraud,deceitormisrepresentation.”Itdoesnotappear

thatsuch conductwouldviolateanyoftheprovisionsofRules10.1or10.2[now1.15‐1or1.15‐2]sincethe



obligationsimposedbythoserul esareowedexclusivelytoclientsandadversecounselcannotproperlybe

consideredaclient.



Inquiry#4:

IsAttorneyDrequiredbyRule1.3(a)toinformtheNorthCarolinaStateBarifitcomestohisattentionthatthe

settlementcheckhasormayhavebeen

delivered,orthatproceedsfromthesettlementcheckhaveormayhave

beendisbursed,byAttorneyPwithoutmeetingacondition requiredforanysuchdeliveryordisbursement?



Opinion#4:

Notnecessarily.Rule1.3(a)requiresonlythereportingofviolationsoftheRulesofProfessionalConductthatraise

substantialquestions

astotheoffendinglawyer’s“honesty,trustworthinessorfitnessasalawyerinother

respects....”Awillfulfailureonthepartoftheattorneytowhomsuchfundswereentrustedtosatisfytheconditions

oftenderwouldraiseasubstantialquestionaboutthelawyer’strustworthinessandwouldnecessitateareportof



theapparentviolationtotheStateBar.If,however,itappearsthatthefailuretosatisfytheconditionsoftender

resultedfrommistake,asopposedtoknowingdisregard,areportofthemisconductwouldnotberequired.It

shouldbenotedthatRule1.3doesnot,inanycase,require

disclosureofconfid entia linformation.Rule1.3(c).



Inquiry#5:

WithrespecttoanyobligationAttorneyDmighthavetoinformtheNorthCarolinaStateBarofAttorneyP’s



misconduct,doesitmakean ydifferencewhethertheconditionsuponwhichasettlementcheckwasdeliveredto

AttorneyParesubsequentlysatisfied,orwhetherthesettlementisotherwisesubsequentlyconcludedtothe

satisfactionofAttorneyDandhisclientorclients?



Opinion#5:

Ifitappearstotheattorneyfor

theadversepartythatAttorneyPknowinglyviolatedtheconditionsoftender,there

wouldbeadutytoreporttheapparentmisconductregardlessofsubsequentactionsonthepartofAttorneyPto

rectifythesituationorotherwisesatisfyAttorneyDandhisclient.



Inquiry#6:

Withrespecttoinquiries

4and5,doesitmakeanydifferencewhetherAttorneyDisalsoawarethatAttorneyPis

orhasbeenunderinvestigationbytheNorthCarolinaStateBarforotherallegedviolationsofCanonXorarule

promulgatedthereunder?



Opinion#6:

ThemerefactthatAttorneyDis

awarethatAttorneyPisorhasbeenunderinvestigationbytheStateBarforother

allegedviolationsofthetrustaccountruleswouldnotnecessarilycompelareportofAttorneyP’sdisbursementin

violationoftheconditionsoftender.Theremayexistcircumstances,however,inwhichanattorneybecomesaware



ofapatternofmisconductsopronouncedastowarranttheconclusionthatasimilarviolationwasknowingand

intentional.Undersuchcircumstances,anattorneywouldhaveanobligationtoreportthemisconducttotheState

Bar.



(8)RPC150

LinkingTrustandBusinessAccounts

January15,1993

Opinionrules

thatanattorneycannotpermitthebanktolinkhertrustandbusinessaccountsforthepurposeof

determininginterestearnedorchargesassessedifsuchanarrangementcausestheattorneytouseclientfunds

fromthetrustaccounttooffsetservicechargesassessedonthebusinessaccount.



Inquiry:

Attorney

AmaintainsatrustaccountandabusinessaccountwithSunshineBank.AttorneyAhasbeenaparticipant

inIOLTA.Overthelastseveralmonths,however,AttorneyA’saccounthasbeenincurringsubstantialcharges(over

$400inthelastyear).



Afterrepeatedinquiries,AttorneyAdiscoveredthatherbusinessaccount

andtrustaccountwere“linked”forthe

purposesofdetermininginterestearnedorchargesassessed.Bothaccountsaresubjecttoachargeperdepositor

check,andinterestaccruesondailybalancessuchthatasubstantialbalanceintheaccountshouldoffsetthecheck

anddepositcharges.



SinceAttorneyA

hadrepeatedlyinstructed thebanknottodebitthetrustaccountforcharges,intendingtoavoid

chargesfornewchecks,etc.,thebankhadlinkedthetwoaccountssothatthechargesfromthetrustaccountwere

assessedagainstthebusinessaccount.Ofcourse,beingamemberofIOLTA,theinterest

onthetrustaccount

balance,whichwouldotherwisehaveoffsetthecha rges,wassenttoIOLTA.Ineffect,AttorneyAwaspayingfor

contribu tionstoIOLTA.Beingdeprivedoftheoffsettinginterestonthetrustaccount,thenumerouschecksshe

wroteforrealestateconveyancescreatedaconsiderabledebit.



thispoint,thebankhaschangedbothaccountstocommercialaccountswhichdonotdrawinterest,butthe

balancesintheaccountscreate“credits”whichoffsetthechargespercheckordeposit.Anynegativebalanceon

thetrustaccountisshiftedovertothebusinessaccount.



Doesthissituationcreate

anyethicalproblems?Neitheraccountwilleveryieldacreditintheformofinterest

income,andhopefullytheongoingbalanceswilloffsetthedebitchargessuchthattheywillusuallybe“free”

accounts.



Opinion:

UnderRules10.1and10.3[nowrules1.15‐1and1.15‐3],clientfundsin

atrustaccountmaynotbeusedtopay

bankservicecha rg e sorfeesofthebankbe causesuchfundsarethesolepropertyoftheclientandcannotbenefit



theattorney.Rules10.1and10.3[now1.15‐1and1.15‐3]dopermitthepaymentofbankservicecha rgesandfees

ofthebankfrominterestearnedonclientfundsdepositedinthelawyer’strustaccount.Thenewarrangement

establishedbyAttorneyA’sbankcouldcreateethicalproblemsif

thecreditsandservicechargestothetrustand

businessaccountswerenotaccountedforindependently.Sincethetrustandbusinessaccountsare“linked”forthe

purposesofdetermininginterestearnedorchargesassessed,itwouldbeimpossibleforonetoseparateoutthe

specificamountofinterestearnedorcharges

assessedforeitheraccount.Ifforaparticularstatementperiodthe

trustaccountearnedmore“credits”thanitwasassessedcharges,whilethebusinessaccountwasassessedmore

servicechargesthanitearned“credits”,thetrustaccount“credits”couldoffsettheservicechargesassessedonthe

businessaccount.Rule10.1

[1.15‐1]doesnotpermitthelawyertouseclientfundsfromthetrustaccou nt(“credits”

fromthetrustaccount)forthelawyer’spersonalbenefit(theoffsetofservicechargesassessedonthebusiness

account).



(9)RPC191

DisbursementsUponDepositofFundsProvisionallyCreditedtoTrustAccount 

October20,1995,

RevisedJanuary24,1997

Opinionrulesthatalawyermaymakedisbursementsfromhisorhertrustaccountinrelianceuponthedepositof

fundsprovisionallycreditedtotheaccountifthefundsaredepositedintheformofcash,wiredfunds,orby

specifiedinstrumentswhich,althoughtheyare

notirrevocablycreditedtotheaccountupondeposit,aregenerally

regardedasreliable.



Introduction

Inthewakeofthefinancialfailureofanout‐of‐statemortgagelender,theStateBarreceivednumerousrequeststo

reexaminepriorethicsopinionsCPR358andRPC86whichpermittedalawyertoissue

trustaccountchecksagainst

fundswhich,althoughuncollected,wereprovisionallycreditedtothelawyer’strustaccountbythefinancial

institutionwithwhichthetrustaccountwasmaintained.RPC86cautionedthattheclosinglawyershoulddisburse

againstprovisionallycreditedfundsonlywhenthelawyerreasonablybelievedthattheunderlyingdeposited

instrument

wasvirtuallycertaintobehonoredwhenpresentedforcollection.Nevertheless,lawyersdidaccept,

deposit,anddisbu rseagainsttheresi dentialloanproceed sch ecksoftheout‐of‐statemortgagelenderthatfailed.

Someofthesecheckswereultimatelydishonoredandchargedbackagainstthetrustaccountsoftheclosing

lawyers.

Inthemeantime,sometrustaccountchecksissuedfortheclosingswerepresentedforcoll ectionandpaid,

resultingintheuseoffundsdepositedbyotherclientstopaytheclosingcheckspresentedforpayment.



Inquiry:

Inthetypicalresidentialrealestateclosing,thelendinginstitutionthatfinancesthepurchaseof

theproperty

deliverstheloanproceedstotheclosinglawyerintheformofacheckdrawnuponafinancialinstitutionwhichmay

ormaynotbelocatedinNorthCarolina.Loanproceedsareseldomdeliveredtotheclosinglawyerintheformof

wiredfunds.Similarly,therealestate

agentsometimesdeliverstheearnestmoneytotheclosinglawyerintheform

ofacheckdrawnonhisorhertrustaccountandthebuyersometimesdeliversapersonalchecktotheclosing

lawyertocoverthedifferencebetweentheloana m ountandthebuyer’sobligations.Mayaclosinglawyer

deposit

suchchecksinhisorhertrustaccountand,ifthedepositorybankwillprovisionallycreditthelawyer’strust

account,immediatelydisburseagainsttheitemsbeforetheyhavebeencollected?



Opinion:

Yes,butonlyupontheconditionssetforthinthisopinion.Alawyer(1)maydisbursefundsfrom

atrustaccountonly

inrelianceuponthedepositofafinancialinstrumentspecifiedintheGoodF undsSettlementAct,G.S.Chap.45A

(theAct),whichbecameeffectiveonOctober1,1996,andthesecuringofprovisionalcreditforthedepositeditem,

and(2)asanaffirmativeduty,mustimmediately

acttoprotectthepropertyofthelawyer’ s otherclientsby

personallypayingtheamountofanyfaileddepositorsecuringorarrangingpaymentfromothersourcesupon

learningthatadepositedinstrumenthasbeendishonored.Itshallbeunethicalforalawyertodisbursefundsfrom

atrustaccountin

relianceuponthedepositofafinancialinstrumentthatisnotspecifiedintheAct,regardlessof

whethertheitemisultimatelyhonoredordishonored.



InrelianceonCPR358andRPC86,manyclosinglawyersdepositthechecksfromthelender,therealestateagent,

andthebuyerinto

theirtrustaccounts,receiveprovisionalcreditfortheitemsfromthedepositorybankand

immediatelydisbursefundsfromtheirtrustaccountsinaccordancewiththescheduleofreceiptsand

disbursementspreparedfortheclosing.Thereistypicallysomedelay,generallythreetofourdaysbutinsome

instancesasmuch

asfifteendays,betweenthetimeofthedepositofthech ecksofthelender,thebuyer,andthe



realestateagentintothelawyer’strustaccountandthetimewhenthefundsareirrevocablycreditedtothe

lawyer’strustaccountbythedepositoryinstitution.Becauseofthetimelagbetweenthedepositandthecollection

ofthechecks,theclosinglawyerrunstheriskthatacheckmay

beultimatelydishonoredandchargedbackagainst

thetrustaccountoftheclosinglawyer,resultingintheuseofthefundsofotherclientsondepositinthetrust

accounttosatisfythedisbursementchecks fromtheclosing.



Alawyerwhoreceivesfundsthatbelongtoaclientassumesthe

responsibilitiesofafiduciarytosafeguardthose

fundsandtopreservetheidentityofthefundsbydepositingthefundsintoadesignatedtrustaccount.Rule10.1

[now1.15‐1]oftheRulesofProfessionalConduct.Itisalawyer’sfiduciaryobligationtoensurethatthefundsofa

particularclient

areusedonlytosatisfytheobligation softhatclientandarenotusedtosatisfytheclaimsofthe

lawyer’screditors.Rule10.1[now1.15‐1]andcomment.Furthermore,Rule10.2[now1.15‐2]oftheRulesof

ProfessionalConductrequiresalawyertomaintaincompleterecordsofall

fundsorotherpropertyofaclient

receivedbythelawyerandtorendertotheclientappropriateaccountingsofthereceiptanddisbursementofany

oftheclient’sfundsorpropertyheldbythelawyer.Rule10.2(e)[now1.15‐2(e)]recognizesalawyer’sobligationto

paypromptlyordeliverto

theclient,ortoathirdpersonasdirectedbytheclient,thefundsinthepossessionofthe

lawyertowhichtheclientisentitled.Strictlyinterpreted,theserul eswouldappeartorequirealawyernotto

disburseuponitemsdepositedinhisorhertrustaccountuntilthe

depositorybankhasirrevocablycreditedthe

itemstotheaccount.



Requiringaclosinglawyertopostponedisbursementuntilallitemshavebeencreditedtothelawyer’strust

accountwouldresultininconvenience,delay,andcouldhaveanadverseeffectontheeconomy.Nevertheless,

thereissom eriskthatcertaininstruments,

suchasordinarycommercialchecks,maybeuncollectibleinanygiven

transaction.Conversely,therearefinancialinstrumentsthataregenerallyregardedasextremelyreliable.Infact,

otherstatebarsthathaveconsideredtheissuehaveheldthattherearecertainfinancialinstrumentsforwhichthe

riskofnoncollectibilityissoslight

astomakeitunnecessarytoprohibitaclosinglawyerfromdisbursing

immediatelyagainstsuchitemsbeforetheyarecollected.SeeVirginiaStateBarLegalEthicsOpinion183andRule

5‐1.1(g)oftheRulesRegulatingtheFloridaBar.Similarly,theNorthCarolinaGoodFundsSettlementActpermitsa

“settlement

agent,”orpersonresponsibleforconductingthesettlementanddisbursementoftheproceedsfora

residentialrealestateclosing,todisburseagainstuncollectedfundsbutonlyifthedepositedinstrumentisinoneof

theformsspecifiedintheAct.



Notwithstandingthefactthatsomeoftheformsoffunds

designatedintheActarenotirrevocablycreditedtothe

lawyer’strustaccountatthetimeofdeposit,theriskofnoncollectibilityissoslightthatalawyer’sdisbursementof

fundsfromatrustaccountinrelianceuponthedepositintotheaccountofprovisionallycreditedfundsinthese

formsshall

notbeconsideredunethical.However,aclosinglawyershouldneverdisburseagainstanyprovisionally

creditedfundsunlessheorshereasonablybelievesthattheunderlyingdepositedinstrumentisvirtuallycertainto

behonoredwhenpresentedforcollection.Alawyermayimmediatelydisburseagainstcollectedfunds,suchas

cashorwired

funds,andmayimmediatelymakedisbursementsfromhisorhertrustaccountinrelianceupon

provisionalcreditextendedbythedepositoryinstitutionforfundsdepositedintothetrustaccountinoneormore

oftheformssetforthinG.S.§45A‐4.



Thedisbursementoffundsfromatrustaccount

byalawyerinrelianceuponprovisionalcreditextendeduponthe

depositofanitemintothetrustaccountwhichdoesnottakeoneoftheformsprescribedintheActconstitutes

professionalmisconduct,regardlessofwhethertheitemisultimatelyhonoredordishonored.However,alawyer

whodisbursesinreliance

uponprovisionalcreditextendeduponthedepositofanitemprescribedintheActshall

notbeguiltyofprofessionalmisconductifthatlawyer,uponlearningthattheitemhasbeendishonored,

immediatelyactstoprotectthepropertyofthelawyer’sotherclientsbypersonallypayingtheamountofany

failed

depositorsecuringorarran gingpaymentfromsourcesavailabletothelawyerotherthantrustaccountfundsof

otherclients.Anattorneyshouldtakecarenottodisburseagainstuncollectedfundsinsituationswherethe

attorney’sassetsorcreditwouldbeinsufficienttofundthetrustaccountchecksinthe

eventthataprovisionally

crediteditemisdishonored.



TotheextentthatCPR358andRPC86areinconsistentwiththisopinion,theyareoverruled.However,therear e

provisionsinbothopinionsthatremainoperative.Specifically,theprovisionofCPR358thatprohibitsalawyerfrom

disbursingagainstthe“float”

inthetrustaccountduringthetimelagbetweenthed epositofthecheck softhe

lender,thebuyer,andtherealestateagentandthetimewhentheseitemsareirrevocablycreditedtotheaccount

unlessprovisionalcreditfortheitemsisextendedbythedepositoryinstitutionremainsin

effect.Ifprovisional



creditisnotextendedbythedepositoryinstitution,thedisbursinglawyerisusingthefundsofotherclientstocover

theclosin gdisbursementsuntilthedepositeditemsarecollectedinviolationofRule10.1[now1.15‐1].



Itshouldbeemphasizedthatthisopinionshallapplytoanydisbursementsfrom

thetrustaccountagainstitems

whicharenotirrevocablycreditedtotheaccountupondeposit,whethersuchdisbursementsareforthepurpose

ofclosingarealestatetransactionorforthepurposeofconcludingsomeothertransactionormatter.



(10)97FormalEthicsOpinion9

CreditCardChargebacksAgainsta

TrustAccount

January16,1998

Opinionrulesthat,providedstepsaretakentosafeguardtheclientfundsondepositinatrustaccount,alawyermay

acceptfeespaidbycreditcardalthoughthebank'sagreementtoprocesssuchchargesauthorizesthebanktodebit

thelawyer'strustaccountin

theeventacreditcardchargeisdisputedbyaclient.



Inquiry#1:

ToacceptchargespaidbyMasterCardandVisacreditcards,aswellasothernationalcreditcards,alawyermust

enterintoastandardform“MerchantAgreement”withabankinwhichthebankagreestodeposit

creditcard

paymentsfromcardholderselectronicallyintothemerchant'saccountwiththebanksubjecttocertainconditions.

Amongotherconditions,suchagreementsty picallypermitthebanktodebitamerchant'saccountforthediscou nt

fee,orthebank'schargetothemerchantforadvancingthecreditcardpayments.



Inaddition,

suchagreementstypicallypermitthebankto“chargeback”themerchant'sbankaccount,withoutprior

notice,intheamountofapriorpaymentbycreditcardwhichissubsequentlydisputedbythecardholder.

1

The

disputeprocessiscommencedwhenthecardholdernotifiesthecreditcardissuerthathedisputesa

chargeshown

onhisstatement.Themerchantisnotifiedofthedispute.Documentationofthechargeisrequestedfromthe

merchant.Ifthedocumentationisnotdeemedsatisfactoryorthemerchantfailstorespond,thebankmaydebitthe

disputedamountfromthemerchant'saccountwiththebankwithoutpriornotice

tothemerchant.



Lawyersmayacceptpaymentoflegalfeesbyelectronictransferandcreditcard.CPR129andRPC247.However,

RPC247requiresalawyertoarrangetohaveallcreditcardpaymentselectronicallydepositedintothetrust

accountifthelawyer'sbankcannotorwillnotdistinguish

betweentheoperatingaccount,intowhichearnedfees

shouldbedeposited,andthetrustaccount,intowhichunearnedfeesshouldbedeposited.Toavoidtheproblemof

comminglingthefundsofclientsandthelawyer'sfunds,theopinionprovides:



[i]fapaymentbyelectronictransferofanearnedfeecannot

bedistinguishedbythebankfromapaymentby

electronictransferofanunearnedfee,allpaymentsbyelectronictransfershouldbedepositedintoalawyer's

trustaccountandearnedfeesshouldbewithdrawnfromthetrustaccountpromptly.[CitingnowrepealedRule

10.1(c).]Thelawyermayalsodepositintothe

trustaccountfundssufficienttopaythebank'sservicecharges

forelectronictransfers.[CitingnowrepealedRule10.1(c)(1).]Aledgershouldbemaintainedfortheservice

chargespostedagainstsuchfunds.[CitingnowrepealedRule10.2(c)(3).]



AccordingtoRPC247,allpaymentsofunearnedfeesandexpensesmustbedeposited

intoalawyer'strustaccount

evenifthepaymentismadebycreditcard.Mayalawyerparticipateinamerchantagreementwithabanktohonor

creditcardchargesiftheagreementgivesthebanktheauthoritytodebitthelawyer'strustaccountfora

chargebackwithoutpriornotice

tothelawyer?



Opinion#1:

Yes,providedthelawyertakesappropriatestepstoprotectthefundsofotherclientsondepositinthetrust

account.



Alawyerwhoreceivesfundsthatbelongtoaclientassumestheresponsibilitiesofafiduciarytosafeguardthose

fundsandtopreservetheidentity

ofthefundsbydepositingthemintoadesignatedtrustaccount.Rule1.15‐1of

theRevisedRulesofProfessionalConductandRPC191.Theresponsibilitiesofafiduciaryincludethedutytoensure

thatthefundsofaparticularclientareusedonlytosatisfytheobligationsofthatclient

andarenotusedtosatisfy

theclaimsofthelawyer'screditorsorofotherclientsofthelawyer.RPC191.Therefore,alawyermayparticipatein

amerchantagreementwithabanktohonorthecreditcardpaymentsofclientsonlyifthefundsofotherclientson

depositin

thelawyer'strustaccountwillbeprotectedagainstachargeback.



To avoid the potential jeopardy to the funds of other clients on deposit in a trust account, the lawyer must first

attempttonegotiateanagreementwiththebankthatrequiresthebanktodebitanaccountotherthanthetrust

accountintheeventofachargeback.Somebanks

willroutechargebackdebits(andthediscountfeeforcreditcard

charges)against a firm's operating account.Some banksmayrequireamerchant tomaintainaseparate demand

depositaccountinanamountsufficienttocoverchargebacks.Ifabankcannotorisunwillingtodebitaseparate

account,(i.e.,

thebankrequiresallchargebackstobedebitedfromtheaccountintowhichcreditcardpaymentsare

deposited), the lawyer must request that the bank arrange an inter‐account transfer such that the lawyer's

operatingaccount,orothernon‐trustaccount,willbeimmediatelydebitedintheeventofachargeback

againstthe

trust account and the money promptly deposited intothe trustaccountto cover the chargeback. Ifthe bank will

notagreetodebitanotheraccountorarrangeforinter‐accounttransfers,thelawyermustestablishatrustaccount

forthesolepurposeofreceivingadvancepaymentsbycredit

card.Thelawyermustwithdrawallpaymentstothis

trust account immediately and deposit them in the lawyer's “primary” trust account. In this way, the risk that a

chargebackwillimpactthefundsofotherclientswillbeminimized.



Underallcircumstances,alawyerisethicallycompelledtoarrangefor

apayment(fromhisorherownfundsor

fromsomeothersource)tothetrustaccountsufficienttocoverthechargebackintheeventthatachargeback

jeopardizesthefundsofotherclientsondepositintheaccount.



Inquiry#2:

Mayalawyerparticipateinamerchantagreementthat

grantsthebankasecurityinterestintheaccountsthatthe

lawyermaintainswiththebank?



Opinion#2:

No,Rule1.15‐1(g)prohibitstheuseorpledgeoffundsinatrustaccounttoobtaincredit.Ifoneormoreofthe

accountsisatrustaccount,thelawyermay

notparticipateintheagr eeme n tunlessthetrustaccountoraccounts

arespecificallyexemptedfromthegrantofasecurityinterest.



Inquiry#3:

Ifthenatureofalawyer'spracticeissuchthatallfeesthatthelawyercollectsareearnedatthetimeofcollection,

maythelawyerarrange

forpaymentsbycreditcardtobemadedirectlytothelawyer'soperatingaccount?



Opinion#3:

Yes.Rule1.15‐1.



Endnote

1.TheTruthinLendingAct(§170,15USC§1666i)andRegulationZ(12CFR§226.12(c))containprovisionswhich

preserveacardholder'sclaimanddefensesagainstacardissuer

incertaincircumstances.Acardholderisgivena

righttoassertagainstthecardissuerallclaims(otherthantortclaims)anddefensesarisingoutofthecredit

transactionthatitwouldotherwisehaveagainstthemerchant.RegulationZdoesnotprovideanyguidanceasto

thenatureofthe

claimsanddefensesthatmaybeasserted.Sinceitdoesgivethecardholdertherighttoassert

againstthecardissueranyclaimsanddefensesavailablethatwouldbeavailableagainstthemerchant,however,

mostmerchantagreementsprovidedfora“passthrough”oftheproblem.



Thepowerofacardholder

toreverseacreditcardtran sactionisverybroad.Thefollowingisthemandatory

disclosurethatmustappearinthecreditcardagreementwithaprospectivecardholder:



Ifyouhaveaproblemwiththequalityofpropertyorservicesthatyoupurchasedwithacreditcard,andyouhave

tried

ingoodfaithtocorrecttheproblemwiththemerchant,youmayhavetherightnottopaytheremaining

amountdueonthepropertyorservices.Therearetwolimitationsonthisright:



(A)Youmusthavemadethepurchaseinyourhomestate,ifnotwithinyourhome

state,within100miles

ofyourcurrentmailingaddress;and



(B)Thepurchasepricemusthavebeenmorethan$50.00.



Theselimitationsdonotapplyifthecardissuerownsoroperatesthemerchantorifwemailedyouthe



advertisementforthepropertyorservices(RegulationZ,App.G‐3).



(11)2001FormalEthicsOpinion3

DisbursementforTortClaimSettlementUponDepositofFundsProvisionallyCreditedtoTrustAccount

April27,2001

Opinionrulesthatalawyermaysettleatortclaimbymakingdisbursementsfromatrust

accountinrelianceupon

thedepositoffundsprovisionallycreditedtotheaccountifthedepositedfundsareintheformofafinancial

instrumentthatisspecifiedintheGoodFundsSettlementAct,

G.S.Chap.45A.



Inquiry#1:

Attorneyregularlyrepresentsindividualswithpersonalinjuryclaims.Whenaninsurance

companycheckfor$5000

ormoreispaidinsettlementofaclient'sclaim,thecheckisdepositedintothetrustaccountofAttorney'sfirm.No

disbursementsaremadetotheclient,ortothirdpartiesonbehalfoftheclient,untilthefundsareactually

collectedbecauseRPC191

limitsthedisbursementsthatcanbemadeagainstprovisionalcredit.RPC191prohibits

alawyerfrommakingdisbursementsfromatrustaccountunlessthefundsareactuallyond epositintheaccount

or,ifthedepositoryinstitutiongrantsprovisionalcredit,unlessthefinancialinstrumentdepositedintotheaccount

isoneof

theonesspecified intheGoodFundsSettlementAct,G.S.Chap.45A(the"Act").



AttorneybelievesthatRPC191shouldnotapplytodisbursementsfromatrustaccountforapersonalinjury

settlementbecausetheActisspecificallylimitedtothesettlementofresidentialrealestatetransactions.SeeG.S.

§45A

‐2.AttorneybelievesthatthelimitationsofRPC191createaha rdshiponhisfirmandtheclientbecausethe

clienthastocometothefirm'sofficetoendorsethesettlementcheckand,afterthecheckclearsthebank,return

tothefirmtocollectthedisbursement.Thismay

haveanadverseeffectonaclient'screditanddelayrepairstoor

replacementofanautomobileifthereisalsoapropertydamagesettlement.ItalsocostsAttorneyadditionaltime

tomeetwiththeclienttwice.



IsRPC191applicabletopersonalinjurysettlements?Ifso,istherean

exemptionforpersonalinjurysettlementsor

checksfrominsurancecompanieslicensedtodobusinessinNorthCarolina?



Opinion#1:

RPC191isapplicabletoalldisbursementsfromatrustaccountagainstfinancialinstrumentsthatarenot

irrevocablycreditedtotheaccountupondepositalthoughtheGoodFundsSettlementActwas

adoptedbythe

GeneralAssemblyonlytoregulatethesettlementofresidentialrealestatetransactions.Therationaleforthe

opinionisfoundinthefollowingexcerptfromtheopinion:



NotwithstandingthefactthatsomeoftheformsoffundsdesignatedintheActarenot

irrevocablycreditedtothelawyer's

trustaccountatthetimeofdeposit,theriskofnoncollectibilityissoslightthata

lawyer'sdisbursementoffundsfromatrustaccountinrelianceuponthedepositintotheaccountofprovisionally

creditedfundsintheseformsshallnotbeconsideredunethical.However,aclosinglawyershouldneverdisburse



againstanyprovisionallycreditedfundsunlessheorshereasonablybelievesthattheunderlyingdeposited

instrumentisvirtuallycertaintobehonoredwhenpresentedforcollection.Alawyermayimmediatelydisburse

againstcollectedfunds,suchascashorwiredfunds,andmayimmediatelymakedisbursementsfromhisorher

trust

accountinrelianceuponprovisionalcreditextendedbythedepositoryinstitutionforfundsdepositedintothe

trustaccountinoneormoreoftheformssetforthinG.S.§45A‐4.



 Thedisbursementoffundsfromatrustaccountbyalawyerinrelianceuponprovisionalcreditextended

upon

thedepositofanitemintothetrustaccountwhichdoesnottakeoneoftheformsprescribedintheAct

constitutesprofessionalmisconduct,regardlessofwheth ertheitemisultimatelyhonoredordishonored.



The exception allowed in RPC 191 to the duty to disburse only against collected funds in

a trust account is

purposefullynarrowtolimitthepotentialfordisbursementsagainstinstrumentsthataresubsequentlydishonored.

If an instrument is subsequently dishonored, it puts at risk all client funds on deposit in the trust account. The

relativelyminorinconvenienceofwaitingforachecktoclearthebankis

offsetbytheprotectionthatdisbursement

againstcollectedfundsprovidestoallclientswithfundsdepositedinthetrustaccount.TheGeneralAssembly,asa

matterofpublicpolicy,hasdeterminedthattheitems setforthin the GoodFundsSettlementActaresufficiently

reliableto exempttheseitems from

thesafeguardawaitingtocollect thefunds,but theEthics Committeeof the



StateBardoesnothavetheauthoritytoexpandtheexemption.



Inquiry#2:

WhenAttorneysettlesapropertydamageclaimonaclient'svehicle,heaskstheinsurancecompanytoputonlythe

nameoftheclientonthesettlementcheck.Attorneybelievesthatthisistheonlywaythat

thecheckcanbegiven

directlytotheclient.Ifthecheckismadeouttoboththeclientandthelawfirm,Attorneydepositsthecheckinto

thetrustaccountandwaitsuntilthecheckiscollectedbeforedisbursingtheentireamountofthechec ktothe

client.The

delaybeforedisbursementcanbeaseriousinconveniencetoaclientwhoneedsanautomobilefor

transportation.



Ifaninsurancecheckismadeoutjointlytothelawfirm(orAttorney)andtheclient,mayAttorneyendorsethe

checkandgivethechecktotheclientwithoutdepositingitfirst

intothetrustaccount?



Opinion#2:

Whenfundsbelongingpresentlyorpotentiallytoalawyerarereceivedincombinationwithfundsbelongingtoa

client,orotherpersons,thefundsmus tbedepositedintactintothetrustaccount.SeeRule1.15‐2(g).However,if

allofthefundsrepresented

byacheckfromathirdpartybelongtotheclientorthelawyerispreparedtoforgo

beingpaidforhislegalservicesfromthecheckproceeds(andbilltheclientinstead),thecheckmaybeendorsed

directlytotheclientwithoutbeingdepositedintothetrustaccount.



(12)

2005FormalEthicsOpinion13

UnearnedPortionofaMinimumFeeMustBeReturnedtotheClient

January20,2006

Opinionrulesthataminimumfeethatwillbebilledagainstatanhourlyrateandiscollectedatthebeginningof

representationbelongstotheclientandmustbedeposited

intothetrustaccountuntilearnedand,upon

terminationofrepresentation,theunearnedportionofthefeemustbereturnedtotheclient.



Inquiry#1:

LawFirmismadeupoffivepartnersandoneassociate.Partnershipexpenses,debts,andprofitsaredividedequally

amongallpartnersirre spectiveofgross

receiptsandarepaidweekly.



PartnerC,whopracticedfamilylawlitigation,typicallyusedafeecontractreferredto

bythefirmasa"minimumfee"contract.Thecontractprovidesthattheinitialfeechargedtotheclientsisthe

greaterof(1)theflatfeeestablishedinthecontract,

or(2)anhourlyrateappliedtoactualtimethatwillbespentin

representationoftheclient.Aminimumfeepaidbytheclientwasdepositedintothefirm'sgeneralaccount.The

contract,however,didnotstatethatthefeewasdeemedearnedandpayabletotheattorneyupon

receipt.



PartnerCleftLawFirmandopenedhisownpractice.MostofhisclientschosetofollowCforcontinued

representation.Theseclientspaidtheminimumfee,accordingtothetermsofthefeecontract,toLawFirmpriorto

C'sdeparture.ShortlyafterC'sdeparture,Csenta

lettertoLawFirmrequestingatransferofhisclients'remaining

fundstoC.Theremainingfundsarethedifferencebetweenthefeescollectedatthebeginningofeach

representationandthevalueofthehourlyservicesperformedbyCforeachclientpriortoleavingLawFirm.



LawFirm

refusedtocomplywithC'srequestreasoningthatthefeesweredepositedintothefirm'soperating

accountandusedtopayongoingexpenses,includingpartnershipdraws,ofwhichCreceivedhisshare.AtC's

direction,theclientsthenbegantocontactLawFirmdemandingarefundoftheirremainingfundsso

thatthe

moneycouldbepaidtoCforcontinuedrepresentation.Iftheremainingfundsarenotreturned,C'sclientsmaybe

precludedfromhavingCcontinuetorepresentthem.



ArethelawyersremainingwithLawFirmrequiredtorefundanyfundstoC'sclients?



Opinion#1:

Yes.Law

Firmincorrectlydepositedthe"minimumfees"intothefirm'soperatingaccount.Inorderforapayment

madetoanattorneytobeearnedimmediately,theattorneymustclearlyinformtheclientthatitisearned

immediately,andtheclientmustagreetothisarrangement.SeeRPC158.Evenwiththeconsent

oftheclient,only

trueretainersandflatfeesar edeemedearnedbythelawyerimmediatelyandthereforecanbedepositedintothe

operatingaccountuponreceipt.Aminimumfeethatwillbebilledagainstatthelawyer'shourlyrateisclientmoney



andbelongsinthetrustaccountuntilearned.SeeRule1.15‐2(b).Inthepresentcase,atsomepointduringthe

representation,LawFirmwouldcalculatethenumberofhoursCspentonthecaseanddeterminewhetherthe

clientowedmoremoney.Thefeearrangementwasthereforeneither

atrueretainernoraflatfee.Furthermore,

LawFirm'sfeecontractdidnotmakeanallowanceforthefeetobedepositedintothefirm'soperatingaccount.

Therefore,thoseportionsoftheminimumfeesthatwerenotearnedbyC'slaborwhilewithLawFirmrem ainclient

fundsandmust

bereturnedtotheclients.SeeRule1.16(d).IfLawFirmdoesnotreturntheunearnedportionsof

thefundstoC'sclients,theywillhavecollectedanexcessivefeeinviolationofRule1.5(a).



Inquiry#2:

Willtheanswerbedifferentifbysubsequentagreementtheclientconsentsto

thedepositoftheminimumfeeinto

LawFirm'soperatingaccount?



Opinion#2:

No.Aclienthastherighttoterminatetherepresentationatanytimewithorwithoutcause.See97FormalEthics

Opinion4.Whentheclient‐lawyerrelationshipends,ifthefeeisclearly excessiveinlight

oftheservicesactually

rendered,theportionofthefeethatmakesthetotalpaymentclearlyexcessivemustbereturnedtotheclient.See

2000FormalEthicsOpinion5.Seealsoopinion#1.



Inquiry#3:

WhatdutiesareowedbyLawFirmand/orCtoformerclientsofLawFirm

forwhomlegalworkisongoing,with

respectto(a)anaccountingforfeespreviouslypaidtoLawFirmpursuanttothefeecontract,(b)arequestfor

refundoffees,and(c)providingfuturelegalservicesinaccordancewiththefeecontract?



Opinion#3:

(a)LawFirmandC

areresponsibleforprovidinganaccountingofthefeestotheclient,uponrequestorattheend

oftherepresentation.SeeRule1.15‐3(d).



(b)AllofthelawyersinLawFirm,whetherinitscurrentinca rnationoratthetimethefeeswerecollected,are

responsiblefor

refundinganyunearnedportionsofthefees.Seeopinion#1.



(c)Onceafeeagreementisreachedbetweenattorneyandclient,theattorneyhasanethicalobligationtofulfillthe

contractandrepresenttheclient'sbestinterest,subjecttotherightordutytowithdrawunderRule1.16.SeeRule

1.5,comment5.



Inquiry#4:

IsitethicalforCtoinstructformerclientsof LawFirm,whoarerepresentedbyC,toseekarefundoffeessothat

theycanpayfortheircontinuedrepresentationbyC?



Opinion#4:

Yes.Seeopinion#1.



(13)2006FormalEthics

Opinion8

DisbursementofTrustFunds

July21,2006

Opinionrulesthatalawyermaydisburseagainstdepositeditemsinrelianceuponabank'sfundingscheduleunder

certaincircumstances.



Inquiry:

Attorneyreceivesinsurancecompanychecksforpaymentofworkers'compensationandpersonalinjury

settlements.Uponreceipt,Attorneydepositsthesechecks

intohertrustaccount.



BecausetheinsurancechecksarenotamongtheidentifiedinstrumentsintheGoodFundsSettlementAct,G.S.

A745A‐4,shemustwaituntilthefundshavebeen"irrevocablycredited"orcollectedbeforedisbursingfromthe

trustaccounttotheclient.RPC191.Attorneyhasbeenunable

tolocateabankthatiswillingtoconfirmwhen

depositedfundshavebeencollected.



Attorneyhasconsultedwithotherla wyers inherlocalitywithsimilarpractices.Ratherthancallthebanktoconfirm



thatthefundshavebeencollected,thelawyersroutinelydisburseagainstitemsdepositedinthetrustaccount,

baseduponpriordealingswiththebanks,inaccordancewiththefollowingfundingschedule:3businessdaysforan

in‐statecheckand7businessdaysforanout‐of‐statechec k.Attorney

wouldliketofollowthisfundingor"float"

schedulefordisbursements,asitappearstobethestandardinhercommunity.



MayAttorneydisbursefundsfromhertrustaccountinrelianceuponthisschedule?



Opinion:

RPC191permitslawyerstodisburseimmediatelyfromthetrustaccountinrelianceuponthe

depositoffunds

provisionallycreditedtotheaccountifthefundsareintheformofcash,wiredfunds,oroneoftheenumerated

instrumentslistedintheGoodFundsSettlementAct.Forallotherinstruments,alawyerhasanobligationto

conductreasonableduediligencetodeterminewhetherfunds

depositedintothetrustaccounthavebeen

collectedpriortodisbursement.



Initially,alawyeralwaysshouldconsultwithherbanktodeterminewhenaparticularinstrumenthasbeen

collectedorfunded.Beforedisbursing,alawyershouldalsoconsiderthesourceofthefunds,i.e.,whetherthe

payorisreputableand

whethertheinstrumentislikelytobehonored.Ifalawyerreceivesconfirmationbythebank

thatthefundsdepositedarecollected,thenthelawyermayrelyuponthisinformationanddisburseagainstthe

funds.Alawyerreasonablymayrelyuponherbank'sfundingor"float"scheduleorpolicyonlywhen

thelawyeris

unabletoconfirmwhetherfundshavebeenirrevocablycreditedtohisaccountandhehasnoreasontobelievea

particularinstrumentwillnotbehonoredunderthecircumstances.Inanycase,ifthelawyersubsequentlylearns

thataninstrumenthasbeendishonored,thelawyermustact

immediatelytoprotectothertrustaccountproperty

bypersonallypayingtheamountofanyfaileddepositorarrangingforpaymentfromothersources."Anattorney

shouldtakecarenottodisburseagainstun collectedfundsinsituationswheretheattorney'sassetsorcreditwould

beinsufficienttofundthetrustaccountchecks

intheeventthatan...itemisdishonored."RPC191.



Therefore,ifAttorneyisunabletoconfirmthataparticularinsurancecheckhasbeencollected,shemayreasonably

relyuponanddisburseinaccordancewithherbank'sfundingscheduleaslongas1)shereasonablybelievesthe

trustaccountcheck

willbehonored,and2)sheisabletofundthecheckintheeventitisultimatelydishonored.



(14)2006FormalEthicsOpinion15

DormancyFeeonUnclaimedFunds

January19,2007

Opinionrulesthatalawyermaychargeareasonabledormancyfeeagainstunclaimedfundsiftheclient

agreesin

advanceandthefeemeetsotherstatutoryrequirements.



Inquiry:

Rule1.15‐2(q)requiresalawyertomakedueinquiryintotheidentityandlocationoftheownerofunclaimedfunds

inhistrustaccount.IfthiseffortisunsuccessfulandtheprovisionsofG.S.116B‐53aresatisfied,

thepropertyshall

bedeemedabandoned.Thelawyermustthenfollowthep rovision sofG.S.116Bfortheescheatofabandoned

property.PursuanttoG.S.116B‐57(a),theholderofabandonedorunclaimedfundsmaychargeareasonable

"dormancy"fee,therebyreducingtheamountoffundstransferredtotheState

Treasurer'sOffice,solongasthe

holderhasmadeagoodfaithefforttolocatetheownersofthefunds,thereisavalidandenforceablewritten

contractwhichimposesthecharge,andthechargeisappliedonaregularbasis.



AttorneyAwouldliketostartchargingadormancy

feeforabandonedfundstocoversomeofthecostsandtime

associatedwithreasonableeffortstolocatetheclient.AttorneyAproposesincludingthefollowinglanguageinall

hisfeecontracts:



Areasonabledormancyfeeshallbechargedagainstanyremainingfundsintheclient'strustaccountwhichare

not

claimedafternoticetotheclientand/orissuanceofarefundchecksixmonthsfromthedateofthefinalizationof

client's case.Thechargeshall be basedontimeand effortspent makingreasonable effortstocontact clientand

returnfunds.Saidchargesshallnotexceed$200.00peryear.



MayAttorneyAchargeadormancyfeeassetforthinhisfeecontract?



Opinion:

AttorneyAmaychargeadormancyfeeagainstunclaimedfundssolongas(1)theclientreceivespriornoticeofand

giveswrittenconsenttothedormancyfee,(2)theamountofthefeeisappropriateunderRule1.5(a)oftheRules

ofProfessionalConduct,and(3)thefee

complieswiththestatutoryrequirementsofG.S.116B‐57(a)andanyother

restrictionsimposedbytheUnclaimedPropertyProgramoftheStateTreasurer'sOffice.



(15)2006FormalEthicsOpinion16

DistributionofDisputedLegalFees

January19,2007

Opinionrulesthatundercertaincircumstancesalawyermayconsideradispute

withaclientoverlegalfeesresolved

andtransferfundsfromthetrustaccounttohisoperatingaccounttopaythosefees.



Inquiry#1:

AttorneyrepresentsClientinapersonalinjurymatter.Clientsignsawrittenfeeagreementandagreestopay

Attorney30%ofanyrecoverymadeinhis

case.Afternegotiationswiththeinsurancecarrier,Attorneysettles

Client'scase.Attorneyreceivesthesettlementcheckandreleaseandplacesthefundsinhistrustaccount.Client

signsthereleasebutdisputesthe30%contingentfee.PursuanttoRule1.15‐2(g),Attorneyholdsthedisputedfees

inhistrustaccountand

disbursestheremainderappropriately.AttorneythengivesClientnoticeoftheStateBar's

FeeDisputeResolutionProgramasrequiredunderRule1.5(f).Clientelectstoparticipateintheprocessbyfilinga

petition.AfterAttorneyprovidesaresponsetothepetitionandtheStateBarstaffreviewsthefile,

itisdetermined

thatClient'sdisputeisnotmerit oriousandthestaffissuesadismissalletter.



Notwithstandingthedismissal,Clientcontinuestoobjecttothepaymentofthefee.Becausefeedisputeresolution

isnonbinding,Attorneycontinuestoholdthefundsin histrustaccount.Attorneywouldliketotransfer

thefunds

fromthetrustaccounttohisoperatingaccount.



WhenmayAttorneyconsiderthedisputeresolvedandtransferthefundswithoutClient'sconsent?



Opinion#1:

Alawyerisrequiredtoholddisputedlegalfeesinhistrusta ccountuntilthedisputeisresolved.Rule1.15‐2(g)and

Rule1.15,

comment[13].Therefore,aclientwhocontinuestodisputealegalfeebuttakesnoactiontorecoverthe

funds,ineffect,forcesthelawyertoholdthedisputedfundsintrustindefinitely.Toavoidthisanomalousresult,

thelawyermaytransferthefundsfromthetrustaccounttohis

operatingaccountafterthedismissalofapetition

bytheStateBar'sFeeDisputeResolutionProgram,butonlyifhehasgiventheclien treasonablenoticethatthe

fundswillbetransferredtotheoperatingaccountifnolegalactionistakenbyacertaindate.Providing30days’

noticefor

theclienttotakelegalactiontorecoverthefundsshouldbeareasonableamountoftime.If,withinthat

timeframe,theclientfilesalawsuittorecoverthefunds,thelawyermustcontinuetoholdthemintrust.



Inquiry#2:

AssumethesamefactsasinInquiry#1,

exceptthatAttorneyindicates,inhisresponsetothefeepetition,a

willingn esstoreducehisfeetotrytoresolvethecontroversy.AttorneyandClientagreetohavetheirdispute

mediatedbytheStateBar'sFeeDisputeResolutionProgram,buttheyreachanimpasseduringthemediation

process.The

StateBarstaffsendsalettertoClientandAttorneynotifyingthemthatthefilehasbeencloseddueto

animpasse.



IfClientcontinuestodispu tethefeebuttakesnolegalaction,mayAttorneytransferthedisputedfundsfromthe

trustaccounttohisoperatingaccount?



Opinion#2:

Yes,solongasAttorneyhasgivenadequatenoticetoClientofhisintenttotransferthefundsassetforthinOpinion

#1,andClientdoesnotfilealawsuittorecoverthefundswithinthenoticeperiod.



Inquiry#3:

AssumeClientnotifiesAttorneythathedisputeshis30%

contingentfee,butfailstofileafeedisputepetitionorto

initiatelegalactiontorecoverthedisputedfunds.



WhenmayAttorneyconsiderthedisputeresolvedandtransfertrustfundstotheoperatingaccounttopayhisfee?



Opinion#3:

IntheabsenceofoversightfromtheFeeDisputeResolutionprogram,alawyermaytransferdisputedfundsinhis

trustaccountonlyif(1)hehasgiventheclient30‐dayswrittennoticeofthefeedisputeprogramrequired under

Rule1.5(f);(2)theclientfailstoelect

feedisputeresolution;(3)thefundsheldinthetrustaccountareforservices

renderedandarenotclearlyexcessive;and(4)afterthe30dayshasexpiredwithnofeepetitionfiledbytheclient,

thelawyergivestheclientasecondwrittennotice,asrequiredinOpinion#1,that

thefundswillbetransferredto

theoperatingaccountunlesstheclientinitiateslegalactionwithin30days.If,atanypointduringthe30days,the

clientelectstoparticipateinthefeedisputeprogramorinitiateslegalactiontorecoverthefunds,thelawyermust

holdthefunds

intrustpendingresolutionofthedispute.



(16)2008FormalEthicsOpinion10

GuidelinesforFeesPaidinAdvance

October24,2008



Background:

Althoughthereareseveralethicsopinionsontheethicalrequirementsrelativetothedifferenttypesoflegalfees

thatarechargedandcollectedatthebeginningof

therepresentationofaclient,theinformationintheseopinions

isnotgatheredinoneplaceandtheopinionsappeartoprovidecontradictoryorinconsistentadvice.Inaddition,

theconfusionamonglawyersastotheethicalrequirementsforlegalfeespaidpriortorepresentationhasleadto

poorlycraftedfee

agreements.Inresponsetotheseconcerns,thisopinionsetsforththekeyethicalobligations

whenchargingandcollectinglegalfees,surveystheopinionsonlegalfees,reconcilestheholdingsintheopinions,

andprovidesmodelprovisionsforfeeagreementsthatsatisfytherequirementsoftheRulesofProfessional

Conductandthe

ethicsopinions.



A.KeyEthicalObligations

Regardlessofthetypeoffee,alllegalfeesmustmeetthefollowingstandardsetforthinRule1.5(a)oftheRulesof

ProfessionalCon duct:



Alawyermaynotmakeanagreementfor,charge,orcollectanillegalorclearlyexcessivefee....Thefactors

tobeconsider edindeterminingwhetherafeeisclearlyexcessiveincludethefollowing:



(1)thetimeandlaborrequired,thenoveltyanddifficultyofthequestionsinvolved,andtheskill

requisitetoperformthelegalserviceproperly;

(2)thelikelihood,ifapparenttotheclient,thattheaccep tanceof

theparticularemploymentwill

precludeotheremploymentbythelawyer;

(3)thefeecustomarilychargedinthelocalityforsimilarlegalservices;

(4)theamountinvolvedandtheresultsobtained;

(5)thetimelimitationsimposedbytheclientorbythecircumstances;

(6)thenatureandlengthoftheprofessionalrelationship

withtheclient;

(7)theexperience,reputation,andabilityofthelawyerorlawyersperformingtheservices;and

(8)whetherthefeeisfixedorcontingent.



Itmaybedifficulttodeterminewhetheralegalfeeisclearlyexcessiv euntiltherepresentationisconcludedandall

oftherelevantfactors

aretakenintoconsideration.Atthatpoint,alawyermayberequiredtodisgorgesome

portionofafeethatheorshehasalreadycollectedtoinsurethatthetotalfeeisnotclearlyexcessive.2000FEO5.

Iftheclient'sfundsweredepositedinthelawyer'strustaccount,

themoneyisavailabletoreturntotheclient.If,

becauseofthenatureofthefee(seediscussionbelow)theclientfundswerepaidtothelawyer,thelawyermaybe

requiredtomakearefundtotheclientusinghisorherownfunds.



Inadditiontoavoiding

clearlyexcessivefees,alawyermustdepositanyfundsthatbelongtoaclientinthelawyer's

trustaccount.Rule1.15‐2(a).Thismeansthatanypaymentthatremainsthepropertyoftheclientuntilearned,

usuallybytheperformanceoflegalservices,mus tbedepositedintothelawyer'strustaccount

andmaynotbe

withdrawnwithouttheclient'sconsentuntilearned.Whenthelawyerisdischarged,anymoneythatremainson

depositinthetrustaccou n tmustbepaidbacktotheclient.



Finally,alawyermustdealhonestlyandfairlywithhisorherclientsandshouldgivea

clientsufficientinformation

tomakereasonabledecisionsabouttherepresentation,includingdecisionsaboutthefeearrangement.SeeRule



1.4andRule8.4(c).



A.SurveyoftheOpinions

RPC50holdsthatalawyermaychargeandcollectageneralretainerasconsiderationfortheexclusiveuseofthe

lawyer'sservicesinaparticularmatter.Suchretainersaresometimesreferredtoas"trueretainers"becausethe

moneyispaidfornothingmorethanthereservationofthelawyer'stime;

thelegalservicesprovidedbythelawyer

areseparatelycompensated.Theopiniondistinguishesthegeneralretainerfromanadvancepaymentasfollows:



Initstruestsense,aretainerismoneytowhichanattorneyisimmediatelyentitledandshouldnotbeplacedinthe

attorney'strustaccount.A"retainer"which

isactuallyadepositbytheclientofanadvancepaymentofafeetobe

billedonanhourlybasisisnotapaymenttowhichtheattorneyisimmediatelyentitled.Itisreallyasecuritydeposit

andshouldbeplacedinthetrustaccount.Astheattorneyearns

thefee,thefundsshouldbewithdrawnfromthe

account.



RPC158holdsthatanadvancepaymenttoalawyerforservicestoberenderedinthefuture,intheabsenceofan

agreementwiththeclientthatthepaymentisearnedimmediately,isadepositsecuringthepaymentof

afeewhich

isyettobeearned.Assuch,itremainsthepropertyoftheclientandmustbedepositedinthelawyer'strust

account.Seealso2005FEO13(minimumfeethatiscollectedatthebeginningof arepresentationandwillbebilled

againstatalawyer'sregular

hourlyrateisneitherageneralretainernoraflatfee;therefore,minimumfeeremains

theclient'smoneyuntilearnedbytheprovisionoflegalservicesandmustremainondepositinthetrustaccount

untilearned).



RPC 15 8also holds thata lawyermay chargeand collect a flat

fee forrepresentationon a specific,discrete legal

tasksuchasresolutionofatrafficinfraction.Iftheclientagreesthatthemoneyrepresentsaflatfeetowhichthe

lawyer is immediately entitled,the lawyer may pay themoney to himself or herself or deposit the money in the

firm'sgeneraloperatingaccountratherthanthefirmtrustaccount.Theagreementoftheclientthattheflatfeeis

earneduponpaymentiscritical.Theopinionwarns,however:



[w]hetherthefeeportionisdepositedinthetrustaccountorpaid overtotheoperatingaccount,any

portionofthe

feewhichisclearlyexcessivemayberefundabletotheclienteitherattheconclu sionofthe

representationorearlierif[thelawyer's]servicesareterminatedbeforetheendoftheengagement.



97FEO4amplifiesthedefinitionsforthegeneralretainerandtheflatfee.Bothtypesoffees

maybechargedand

collectedatthebeginningofarepresentationandareconsidered"presentlyowed"tothelawyer.Thegeneral

retaineris"apayment'forther eservationoftheexclusiveservicesofthelawyerwhichisnotusedtopayforthe

legalservicesprovidedbythelawyer.'"[Citing

andquotingRule1.15‐1,cmt.[4].]"Thetruegeneralretainerfinds

generalapplicationinthoseinstanceswherecorporateclients,merchantsorbusinessmenhaveaspecificneedto

consultthelawyeronaregularorrecurringbasis."Theopinionadmoni shesthatageneralretainer,likeallother

fees,mustnotbeclearly

excessiveand"[w]hatiscustomarilychargedinsimilarsituationsmaydeter minewh ether

aspecifictruegeneralretainerisclearlyexcessive."



Aflatfeemaybeearnedatthebeginningoftherepresentationandispayment"forspecifiedlegalservicestobe

completedwithinareasonableperiodoftime.""[T]histype

offeeprovideseconomicvaluetotheclientandthe

lawyeralikebecauseitenablestheclienttoknow,inadvance,theexpenseoftherepresentationanditrewardsthe

lawyerforefficientlyhandlingthematter."Aflatfeearrangementis"customarilyidentifiedwithisolated

transactionssuchasrepresentationsontraffic

citations,domesticactions,criminalcharges,andcommercial

transactions."Theflatfeeiscollectedatthebeginningoftherepresentation,treatedasmoneytowhichthelawyer

isimmediatelyentitled,andpaidtothelawyerordepositedinthelawyer'sgeneraloperatingaccount.



Theopinionrecognizesthatalawyermaycharge

aclienthybridfees.Suchhybridfeesinclud eapaymentthatis

partgeneralretainerorflatfeeandpartadvancetosecurethepaymentoffeesyettobeearned.Withhybridfees,

oneportionofthefeeisearnedimmediatelyandtheotherportionremainstheclient'sproperty

andmustbe

depositedinthetrustaccounttobewithdrawnasearned."Thereshouldbeaclearagreementbetweenthelawyer

andtheclientastowhichportionofthepaymentisatruegeneralretainer,oraflatfee,andwhichportionofthe

paymentisanadvance.

Absentsuchanagreement,theentirepaymentmustbedepositedintothetrustaccount

andwillbeconsideredclientfundsuntilearned."



Withregardtoanadvancepayment,theopinionreiterates:



[t]hefundsadvancedbytheclientanddepositedinthetrustaccountmaybewithdrawnbythelawyer

whenearnedbytheperformanceoflegalservicesonbehalfoftheclientpursuanttotherepresentation

agreementwiththeclient.RevisedRule

1.15‐1(d).Shouldtheclientterminatetherelationship,that

portionoftheadvancefeedep ositedinthelawyer'strustaccountwhichisunearnedmustberefundedto

theclient.



2000FEO5prohibitstheuseoftheterm"nonrefundablefee"infeeagreementswhilefurtherelucidatingthe

differencesbetweenfees

earnedatthebeginningofarepresentationandpaymentsthataresecurityforafee

whichisyettobeearned.Theopinionemphasizesthatalawyermaytreatanadvancepaymentasanearnedfee

(anddepositthemoneyinthefirm'soperatingaccount)"onlyiftheclientagrees

that[the]paymentmaybetreated

asearnedbythelawyerwhenitispaid."Theopinion'smostimportantparagraphsemphasizethatthereisadu ty

torefund"anyportionofafeethatisclearlyexcessiveregardlessofthetypeoffeethatwaspaid"and,therefore,

nofeeis

trulynonrefundable."Tocallsuchapaymenta'nonrefundablefee'isfalsean dmisleadinginviolationof

Rule7.1."However,alawyermayagreewithaclientthat"someorallofafeemaybeforfeitedundercertain

conditionsbutonlyiftheamountsoforfeitedisnotclearly

excessiveinlightofthecircumstancesandallsuch

conditionsarereasonableandfairtotheclient."



Ratherthancallingaflatfee"nonrefundable,"theopinioninstructsalawyertorefertosuchafeeasa"prepaidflat

fee."



B.TheTypesofFeesandTheirCharacteristics

Baseduponthesurveyoftheethicsopinions,thesearethetypesoffeesthatarepaidinadvanceandtheir

characteristics.



AdvancePayment:adepositbytheclientofmoneythatwillbebilledagainst,usuallyonanhourlybasis,aslegal

servicesareprovided;notearneduntillegal

servicesarerendered;depositedinthetrustaccount;unearned

portionrefundedupontheterminationoftheclient‐lawyerrelationship.



GeneralRetainer:considerationpaidatthebeginningofarepresentationtoreservetheexclusiveservicesofa

lawyerbutnotusedtopayforactualrepresentation;generallyusedwhencorporateor

businessclientshavea

specificneedtoconsultalawyeronaregularbasis;earneduponpayment;paidtolawyerordepositedinfirm

operatingaccount;someoralloftheretainerissubjecttorefundifclearlyexcessiveunderthecircumstancesas

determinedupontheterminationoftheclient‐lawyer

relationship.



FlatFeeorPrepaidFlatFee:feepaidatthebeginningofarepresentationforspecifiedlegalservicesonadiscrete

legaltaskorisolatedtransactiontobecompletedwithinareasonableamountoftime;feepaysforalllegalservices

regardlessoftheamountoftimethelawyer

expendsonthematter;ifclientconsents,treatedasearned

immediatelyandpaidtothelawyerordepositedinthefirmoperatingaccount;someoralloftheflatfeeissubject

torefundifclearlyexcessiveunderthecircumstancesasdeterminedupontheterminationoftheclient‐lawyer

relationship.



HybridFee:feepaidatthebeginningofarepresentationthatisinpartageneralretaineroraflatfeeandinpartan

advancepaymenttosecurethepaymentoffeesyettobeearned;oneportionofthefeeisearnedimmediatelyand

theotherremainsthe

client'spropertyondepositinthetrustaccount;clientmustconsentandagreetotheportion

thatisaflatfeeorageneralretainerandearnedimmediately;unearnedportionoftheadvancepaymentrefunded

uponterminationoftheclient‐lawyerrelationship;flatfee/generalretainerportionsubjecttorefundifclearly



excessiveunderthecircumstancesasdeterminedupontheterminationoftheclient‐lawyerrelationship.



C.ReconcilingtheOpinions

Ifthereisas eemingi nconsistencyintheethicsopinionsitarisesfromthestrictformulationofthegeneralretainer.

Alawyerisallowedtochargeageneralretainerasconsiderationforthereservationofthelawyer'sservicesandto

treatthemoneyasearnedimmediately.Buttheclientisnot

givenacreditforfuturelegalservicesuptothevalue

oftheretainer.Thisstrikesmanylawyersasdetrimentaltotheclient'sinterestsandithasleadtothecreationof

hybridfees.ThestrictformulationofthegeneralretainerhasbeenmaintainedbytheEthicsCommitteeforthree

importantreasons.Itavoidstheclientconfusionthatisengenderedifaclientistoldthatapaymentbothreserves



thelawyer'sservicesandpaysforfuturerepresentation.Inaddition,requiringgeneralretainerstobeseparateand

distinctfromadvancefeesmeansthat,ifanadvancefeeischargedforfuturelegalservices,thereisnopenaltyto

theclientfordecidingtochangelegalcounselbeforetheadvancefee

isexhaustedand,ifarefundisowedtothe

clientbecauseexpectedserviceshavenotbeenperformed,themoneyisreadilyavailableinthetrustaccount.



Uponfurtherreflection,theEthicsCommitteehas,n evertheless,determinedthatitisintheclient'sinterestto

receivelegalservicesuptothe

valueofageneralretainerprovidedtheclientfullyunderstandsandagreesthatthe

paymenttheclientmakesatthebeginningoftherepresentationisearnedbythelawyerwhenpaid,willnotbe

depositedinatrustaccount,andisonlysubjecttorefundifthechargeforreservingthe

lawyer'sservices(as

opposedtothechargeforthelegalservicesperformed)isclearlyexcessiveunderthecircumstances.Th isnewly

acknowledgedformoffeepaymentmadebyaclientatthebeginningofarepresentationwillbereferredtoasa

minimumfeeandhavethefollowingcharacteristics:



MinimumFee:

considerationpaidatthebeginningofarepresentationtoreservetheexclusiveservicesofalawyer;

lawyerprovideslegalservicesuptothevalueoftheminimumfee;earneduponpayment;paidtolawyeror

depositedinfirmoperatingaccount;someoralloftheminimumfeeissubjectto

refundifclearlyexcessiveunder

thecircumstancesasdeterminedupontheterminationoftheclient‐lawyerrelationship.



Totheextentanypreviousethicsopinionisinconsistentwiththisopinion,itisoverruled.



D.ModelFeeProvisions:Introduction

TheRulesofProfessionalConductdonotrequirefeeagreementstobeinwritingunlessthefeeiscontingenton

theoutcomeofthematter.Rule1.5(c).Thefeesdiscussedinthisopinionarenotcontingentandtechnicallya

lawyerisnotrequiredtoputaclient'sagreementtopaysuch

feesinwriting.Nevertheless,giventhepropensityof

clientstomisunderstandthepurposeofapaymentmadepriortothecommencementofarepresentation(and

whethersuchapaymentwillberefunded),alawyerwouldbeprudenttoputinwritinganyfeeagreementthat

requiresaclienttomake

apaymentinadvance.



Inadditiontoexplainingandobtainingtheclient'sconsenttochargethespecifiedpaymentspriorto

representation,alawyer'swrittenfeeagreementwithaclientshouldalsocontainprovisionsthatfullyandclearly

explainhowfeesandexpensesarechargedincluding,butnotlimitedto,thefollowing:

howbillablehoursare

calculatedandtherateschargedperhourfortheservicesofthelawyersorstaffmemberswhowillworkonthe

client'smatter;ifsomeothermethodofbillingisused,suchasvaluebillin g,howthefeewillbedetermined;and

theexpensesforwhich

thecl ientwillbeliableandhowthecostofthoseexpenseswillbedetermined.



ModelFeeProvisions

Notethatthefollowingparagraphscontainsuggestedorrecommendedlanguage.Lawyersarenotrequiredtouse

thesemodelfeeprovisions.



AdvancePayment

AsaconditionoftheemploymentofLawyer,Clientagrees

todeposit$ intheclienttrust

accountmaintainedbyLawyer'sfirm.ThismoneyisadepositsecuringpaymentforthelegalworkforClientthat

willbeperformedbyLawyerandhis/herstaff.Legalworkwillbebilledonanhourlybasis[orotherappropriate

basis]accordingtothescheduleattachedtothis

agreement.ClientspecificallyauthorizesLawyertowithdrawfunds

fromClient'sdepositinthetrusta ccountwhenpaymentisearnedbytheperformanceoflegalservicesforClient.

Whenthedepositisexhausted,Lawyerreservestherighttorequirefurtherreasonabledepositstosecure

payment.LawyerwillprovideClientwitha

[monthly,quarterly,etc.]accounting[uponrequest]forlegalservices

showingthelegalfeesearnedandpaymentofthefeesbywithdrawalagainstClient'sdepositinthetrustaccount.

ClientshouldnotifyLawyerimmediatelyifClientretractshis/herconsenttothewithdrawalofmoneyfromClient's

depositinthetrustaccountto

payforlegalservices.WhenLawyer'srepresentationends,LawyerwillprovideClient

withawrittenaccountingofthefeesearnedandcostsincurred,andarefundofanyunearnedportionofthe

depositthatremainsinthetrustaccount[lessexpensesassociatedwiththerepresentation].



GeneralRetainer

Asacondition

oftheemploymentofLawyer,Clientagreestopay$ toLawyer.Thismoneyisa

generalretainerpaidbyClienttoensurethatLawyerisavailabletoClientintheeventthatlegalservicesareneeded

noworinthefutureandtoinsurethatLawyerwillnotrepresentanyoneelserelativetoClient'slegalmatter



withoutClient'sconsent.



Clientunderstan dsandspeci ficallyagreesthat:



 thegeneralretainerisnotpaymentforthelegalworktobeperformedbyLawyer;

 ClientwillbebilledseparatelyforthelegalworkperformedbyLawyerandhis/herstaff.Legalworkwillbe

billedonanhourly

basis[orotherappropriatebasis]accordingtothescheduleattachedtothisagreement;

 thegeneralretainerwillbeearnedbyLawyerimmediatelyuponpaymentandwillbedepositedinLawyer's

businessaccountratherthanaclienttrustaccount;and

 whenLawyer'srepresentationends,Clientwillnotbeentitled

toarefundofanyportionofthegeneral

retainerunlessitcanbedemonstratedthatthegeneralretainerisclearlyexcessiveunderthecircumstances.



FlatFee(orPrepaidFlatFee)

AsaconditionoftheemploymentofLawyer,Clientagreestopay$

toLawyerasaflatfeeforthe

followingspecifiedlegalworktobeperformedbyLawyerforClient:[descriptionoflegalwork]



Clientunderstan dsandspeci ficallyagreesthat:



 theflatfeeistheentirepaymentforthespecifiedlegalworktobeperformedbyLawyerregardlessof

the

amountoftimethatittakesLawyertoperformthelegalwork;theflatfeewillbeearnedbyLawyer

immediatelyuponpaymentandwillbedepositedinLawyer'sbusinessaccountratherthanaclienttrust

account;and

 whenLawyer'srepresentationends,Clientwillnotbeentitledtoa

refundofanyportionoftheflatfeeunless

(1)thelegalworkisnotcompleted,inwhicheventaproportionaterefundmaybeowed,or(2)itcanbe

demonstratedthattheflatfeeisclearlyexcessiveunderthecircumstances.



MinimumFee

Asaconditionoftheemploymentof

Lawyer,Clientagreestopay$ toLawyer.Thismoneyisa

minimumfeeforthereservationofLawyer'sservices;toinsurethatLawyerwillnotrepresentanyoneelserelative

toClient'slegalmatterwithoutClient'sconsent;andforlegalworktobeperformedforClient.



Clientunderstan dsandspeci ficallyagreesthat:

 theminimumfee

willbeearnedbyLawyerimmediatelyuponpaymentandwillbedepositedinLawyer's

businessaccountratherthanaclienttrustaccount;

 LawyerwillprovidelegalservicestoClientonanhourlybasis[orotherappropriatebasis]accordingtothe

scheduleattachedtothisagreementuntilthevalueofthose

servicesisequivalenttotheminimumfee;

thereafter,ClientwillbebilledforthelegalworkperformedbyLawyerandhis/herstaffonanhourlybasis[or

otherappropriatebasis]accordingtothescheduleattachedtothisagreement;and

 whenLawyer'srepresentationends,Clientwillnotbeentitledto

arefundofanyportionoftheminimumfee,

eveniftherepresentationendsbeforeLawyerhasprovidedlegalservicesequivalentinvaluetotheminimum

fee,unlessitcanbedemonstratedthattheminimumfeeisclearlyexcessivefeeun derthecircumstances.



(17)2009FormalEthicsOpinion4

Credit

CardAccountthatAvoidsCommingling

April24,2009

Opinionrulesthatalawfirmmayestablishacreditcardaccountthatavoidscomminglingbydepositingunearned

feesintothelawfirm'strustaccountandearnedfeesintothelawfirm'soperatingaccountprovidedtheproblemof

chargebacksisaddressed.



Inquiry:

Toavoidthecomminglingofclientfundswithalawyer'sownfunds,Rule1.15‐2oftheRulesofProfessional

Conductrequirespaymentsofmixedfunds,unearnedfees,andmoneyadvancedforcoststobedepositedintoa

lawyer'strustaccount,andpaymentsforearnedfeesandreimbursementsforexpensesadvanced

byalawyerto

bedepositedintoalawyer'soperatingaccount.Althoughalawyermayacceptpaymentoflegalfeesbycreditcard,

ifthereisnowaytodistinguishacreditcardpaymentforearnedfeesorcostsadvancedfromapaymentfor

unearnedfeesoranticipatedexpenses,all

creditcardpaymentsmustbeinitiallydepositedintothelawyer'strust

account.Earnedfeesandexpensereimbursementsarethenwithdrawnpromptlyfromthetrustaccountfordeposit



intotheoperatingaccountorpaymenttothelawyer.CPR129andRPC247.

Abank



hasdevelopedacreditcardaccountspecificallyforlawfirmsthatseparatesanddepositspaymentsof

unearnedandearnedclientfundsintotrustandoperatingaccountsasappropriate.Paymentsforunearnedfees

(andforanticipatedexpenses)aredepositeddirectlyintotheparticipatinglawfirm'strustaccountandpayments

forearned

fees(andcostsadvanced)aredepositeddirectlyintothefirm'soperatingaccount.Mayalawyer

establishsuchanaccount?



Opinion:

Yes,theaccountsatisfiesalawyer'sprofessionalresponsibilitytoavoidthecomminglingoffunds.Utilizationofsuch

anaccountdoesnotviolateRule1.15‐2(g)whichrequiresmixedfunds(funds

belongingtothelawyerreceivedin

combinationwithfundsbelongingtoaclient)tobedepositedintothelawyer'strustaccountintactand,after

deposit,thefundsbelongingtothelawyertobewithdrawn.Thelawfirmcreditcardaccountdescribedinthe

inquiryseparatesthefundspriortotheirdeposit

and,therefore,thefundsarenotmixedwhenreceivedbythe

lawyer.



Alawyermaysetupsuchanaccountonlyifthelawyerisalsoabletocomplywith97FEO9whichaddressescredit

cardagreementsthatgivetheprocessingbanktheauthoritytodebitor"chargeback"

anaccountintheeventa

creditchargeisdisputed.Theopinionsetsforththefollowingalternativewaystosafeguardclientfundsinatrust

accountwhenthecreditcardagreementgivesthebanktheauthoritytodebitthelawyer'strustaccountfora

chargebackbyaclientwithoutpriornotice

tothelawyer:



 attempttonegotiateanagreementwiththebankthatrequiresthebanktodebitanaccountotherthan

thetrustaccountintheeventofachargeback;

 maintainaseparatedemanddepositaccountinanamountsufficienttocoveranychargeback;

 requestthatthe

bankarrangeaninter‐accounttransfersuchthatthelawyer'soperatingaccountwillbe

immediatelydebitedintheeventofachargebackagainstthetrustaccount;or

 establishatrustaccountforthesolepurposeofreceivingadvancepaymentsbycreditcardwhichwillbe

transferredimmediatelytothe

lawyer'sprimarytrustaccount.



Asnotedin97FEO9,"[u]nderallcircumstances,alawyerisethicallycompelledtoarrangeforapayment(fromhis

orherownfundsorfromsomeothersource)tothetrustaccountsufficienttocoverthechargebackintheevent

thatachargebackjeopardizes

thefundsofotherclientsondepositintheaccount."Therefore,providedthelawyer

cancomplywiththerequirementssetforthin97FEO9,thelawyermayestablishacreditcardaccountthat

depositsfundsintoseparateaccounts.



Endnote

1.OnesuchaccountistheLawFirmMerchantAccount99

whichisofferedbyAffiniscapeMerchantSolutionsin



associationwithBankofAmerica,NA.



(18)2011FormalEthicsOpinion7

UsingOnlineBankingtoManageaTrustAccount

January27,2012

Opinionrules thata lawfirm may useonline banking tomanageits trustaccounts providedthe firm’s managing

lawyersareregularlyeducatedonthesecurityrisks

andactivelymaintainend‐usersecurity.



Inquiry:

Mostbanksandsavingsandloansprovide“onlinebanking”whichallowscustomerstoaccessaccountsand

conductfinancialtransactionsovertheinternetonasecurewebsiteoperatedbythebankorsavingsandloan.

Transactionsthatmaybeconductedviaon‐linebanking

includeaccount‐to‐accounttransfers,paymentstothird

parties,wiretransfers,andapplicationsforloansandnewaccounts.Onlinebankingpermitsuserstoviewrecent

transactionsandviewand/ordownloadclearedcheckimagesandbankstatements.Additionalservicesmayinclude

accountmanagementsoftware.



Financialtransactionsconductedovertheinternetare

subjecttotheriskoftheftbyhackersandothercomputer

criminals.Giventhedutytosafeguardclientproperty,particularlythefundsthataclientdepositsinalawyer’strust

account,mayalawfirmuseonlinebankingtomanageatrustaccount?



Opinion:

Yes,providedthelawyersusereasonablecaretominimi zetheriskoflossortheftofclientpropertyspecifically

includingtheregulareducationofthefirm’smanaginglawyersontheever‐changingsecurityrisksofonline

bankingandtheactivemaintenanceofend‐usersecurity.



Asnotedin

[Proposed]2011FEO6,SubscribingtoSoftwareasaServiceWhileFulfillingtheDutiesofConfidentiality

andPreservationofClientProperty,theuseoftheinternettotransmitandstoreclientdata(or,inthisinstance,

dataaboutclientproperty)presentssignificantchallenges.Inthiscomplexandtechnicalenvironment,a

lawyer

mustbeabletofulfillthefiduciaryobligationstoprotectconfidentialclientinformationandpropertyfromriskof

disclosureandloss.Thelawyermustprotectagainstsecurityweaknessesuniquetotheinternet,particularly“end‐

user”vulnerabilitiesfoundinthelawyer’sownlawoffice.Thelawyermustalsoengageinfrequent

andregular

educationaboutthesecurityriskspresentedbytheinternet.



Rule1.15requiresalawyertopreserveclientproperty,todepositclientfundsentrustedtothelawyerinaseparate

trustaccount,andtomanagethattrustaccountaccordingtostrictrecordkeepingandproceduralrequirements.See

alsoRPC209

(notingthe“generalfiduciarydutytosafeguardthepropertyofaclient”)and98FEO15(requiringa

lawyertoexercise“duecare”whenselectingdepositorybankfortrustaccount).Theruleissilent,however,about

onlinebanking.



Nevertheless,onlinebankingmaybeusedtomanageaclienttrustaccount

iftherecordkeepingandfiduciary

obligationsinRule1.15canbefulfilled.TherecordkeepingrequirementsfortrustaccountsaresetforthinRule

1.15‐3.Rule1.15 ‐3(b)(3)specificallyrequiresalawyertomaintainthefollowingrecordsrelativetothetransferof

fundsfromthetrustaccount:



allinstructionsor

authorizati onstotransfer,disburse,orwithdrawfundsfromthetrustaccount(including

electronictransfersordebits),orawrittenorelectronicrecordofanysuchtransfer,disbursement,or

withdrawalshowingtheamount,date,andrecipientofthetransferordisbursement,and,inthecaseofa

generaltrustaccount,also

showingthenameoftheclientorotherpersontowhomthefundsbelong;



Iftheonlinebankingsoftwaredoesnotprovideamethodformakinganofficialbankrecordoftherequired

informationwhenmoneyistransferredfromthetrustaccounttoanotheraccount,suchtransfersmustbehandled

byamethodthatprovidestherequiredrecords.



TofulfillthefiduciaryobligationsinRule1.15,alawyermanagingatrustaccountmustusereasonablecareto

minimizetheriskstoclientfundsondepositinthetrustaccountbyremainingeducatedastothedynamicrisks

involvedinonline

bankingandinsuringthatthelawfirminvestsinproperprotectionandmultiplelayersofsecurity

toaddressthoserisks.See[Proposed]2011FEO6.



Alawyerwhoismanagingatrustaccounthasaffirmativedutiestoregularlyeducatehimselfastothesecurityrisks

ofonlinebanking;toactively

maintainend‐usersecurityatthelawfirmthroughsafetypracticessuchasstrong

passwordpoliciesandprocedures,theuseofencryption,andsecuritysoftware,andthehiringofaninformation

technologyconsultanttoadvisethelawyerorfirmemployees;andtoinsurethatallstaffmemberswhoassistwith

the

managementofthetrustaccountreceivetrainingonandabidebythesecuritymeasuresadoptedbythefirm.

Understandingthecontractwiththedepositorybankandtheuseoftheresourcesandexpertiseavailablefromthe

bankaregoodfirststepstowardfulfillingthelawyer’sfiduciaryobligations.



Thisopiniondoes

notsetforthspecificsecurityrequirementsbecausemandatorysecuritymeasureswouldcreatea

falsesenseofsecurityinanenvironmentwheretherisksarecontinuallychanging.Instead,duediligenceand

frequentandregulareducationarerequired.Alawyermustfulfillhisfiduciaryobligationtosafeguardclientfunds

byapplyingthe

samediligenceandcompetencytomanagetherisksofon‐linebankingthatalawyerisrequiredto

applywhenrepresentingclients.

 



(19)2013FormalEthicsOpinion13

DisbursementAgainstFundsCreditedtoTrustAccountbyACHandEFT

January24,2014



Opinionrulesthatalawyermaydisburseimmediatelyagainstfundsthatarecreditedtothelawyer’strustaccount

byautomatedclearinghouse(ACH)transferandelectronicfundstransfer(EFT)despitethe

riskthatanoriginator

mayinitiateareversal.



Inquiry:

Theoriginatorofanautomatedclearinghouse(ACH)transfer

1

oranelectronicfundstransfer(EFT)caninitiatea

reversalofthetransaction.Howev er,thereversalmustberequestedbytheoriginatingbankandapprovedbythe

receivingbank.Whenabank

receivesareversalrequest,ittypicallywillattempttoobtainauthorizationfromthe

individualwhoseaccountwascreditedbeforemakingareversal.



MayalawyerdisburseimmediatelyagainstfundsthatarecreditedtohertrustaccountbyACHorEFTifthereis

someriskthattheoriginatormayinitiate

areversal?



Opinion:

Yes.Electronicfundstransfers,whetherACHorEFT,aredesignedtomakefundsavailableimmediately,likewired

funds.Whilethereissomeriskthattheoriginatormayinitiateareversal,theriskofreversalisslight.Moreover,the

lawyershouldgetnoticefromthereceivingban kin

timetotakeactiontopreventthereversalorotherwiseto

protectotherclientfundsondepositinthetrustaccount.See,e.g.,97FEO9(lawyermayacceptpaymentstoa

trustaccountbycreditcardalthoughthebankisauthorizedtodebitthetrustaccountintheevent

acreditcard

chargeisdisputed).



Alawyerisnotguiltyofprofessionalmisconductifthatlawyer,uponlearningthatanACHorEFThasbeenreversed,

immediatelyactstoprotectthefundsofthelawyer'sotherclientsondepositinthetrustaccount.Thismaybe

donebypersonally

depositingthefundsnecessarytoaddressthedeficitcreatedbythereversalorbysecuringor

arrangingpaymentfromsourcesavailabletothelawyerotherthantrustaccountfundsofotherclients.SeeRPC

191.



Nevertheless,checksdrawnonatrustaccountshouldnotbeconvertedtoACHbecausethe

lawyerwillnotreceive

aphysicalcheckoracheckimagethatcanberetainedinsatisfactionoftherecord‐keepingrequirementsinRule

1.15‐3.Thetransactionwillappearonthelawyer'strustaccountstatementasanACHdebitwithlimited

informationaboutthepayment(e.g.,dollaramount,dateprocessed,

originatoroftheACHdebit).Forthisreason,

lawyersarerequiredtousebusiness‐sizechecksthatcontainanAuxiliary‐On‐UsfieldintheMICRlineofthecheck

becausethesecheckscannotbeconvertedtoACH.SeeRule1.15 ‐3(a).



SeegenerallyRule1.15,comments[17]and[18]





Endnote



1.Whenapapercheckisconvertedtoanautomatedclearinghouse(ACH)debit,thecheckistakeneitheratthe

point‐of‐saleorthroughthemailforpayment,theaccountinformationiscapturedfromthecheck,andan

electronictransactioniscreatedforpaymentthroughtheACH

system.Theoriginalphysicalcheckistypically

destroyedbytheconvertingentity(althoughanimageofthecheckmaybestoredforacertainperiodoftime).A

lawfirmmayconvertthepaperchecksthatitreceivesonbehalfofaclientoraclientmatterforpaymenttothe



trustaccountthroughtheACHsystem.



AuthorizedACHdebitsfromthetrustaccountthatareelectronictransfersoffunds(inwhichnochecksare

involved)areallowedprovidedthelawyermaintainsarecordofthetransactionasrequiredbyRule1.15‐3(b)(3)

and(c)(3).Therecord,whetherconsistingofthe

instructionsorauthorizationtodebittheaccount,arecordor

receiptfromtheregisterofdeedsorafinancialinstitution,orthelawyer'sindependentrecordofthetransaction,

mustshowtheamount,date,andrecipientofthetransferordisbursement,and,inthecaseofageneraltrust

account,also

showthenameoftheclientorotherpersontowhomthefundsbelong.



(20)2015Form alEthicsOpinion6

Lawyer’sProfessionalResponsibilityWhenThirdPartyStealsFundsfromTrustAccount

October23,2015



Opinionrulesthatwhenfundsarestolenfromalawyer’strustaccountbyathirdpartywhoisnotemployedor

supervisedbythelawyer,andthelawyerwasmanaging

thetrustaccountincompliancewiththeRulesof

ProfessionalConduct,thelawyerisnotprofessionallyresponsibleforreplacingthefundsstolenfromtheaccount.



NOTE:Thisopinionislimitedtoalawyer’sprofessionalresponsibilitiesandisnotintendedtoopineonalawyer’s

legalliability.



Inquiry#1:

JohnDoe,

athirdpartyunaffiliatedwithLawyer,createdcounterfeitchecksthatwereidenticaltoLawyer’strust

accountchecks.JohnDoemadethecounterfeitchecks,purportedlydrawnonLawyer’strustaccount,payableto

himselfandpresentedthecounterfeitchecksforpaymentatBank.Bankhonoredsomeofthecounterfeitchecks.

Asa

consequence,clientfundsheldbyLawyerinhistrustaccountwereutilizedforanunauthorizedpurpose.

Lawyerproperlysupervisedallnonlawyerstaffparticipatingintherecordkeepingforthetrustaccount.Lawyer

alsomaintainedthetrustaccountrecordsandreconciledthetrustaccountasrequiredbyRule1.15‐3.Lawyerhad



noknowledgeofthefraudandhadnoopportunitytopreventthetheft.



DoesLawyerhaveaprofessionalresponsibilitytoreplacethestolenfunds?



Opinion#1:

No.



Alawyerwhoreceivesfundsthatbelongtoaclientassumestheresponsibilitiesofafiduciarytosafeguardthose

fundsandto

preservetheidentityofthefundsbydepositingthemintoadesignatedtrustaccount.Rule1.15‐2,

RPC191,and97FEO9.Theresponsibilitiesofafiduciaryincludethedutytoensurethatthefundsofaparticular

clientareusedonlytosatisfytheobligationsofthatclient.RPC

191and97FEO9.Rule1.15‐3requiresalawyerto

keepaccuraterecordsofthetrustaccountandtoreconcilethetrustaccount.Alawyerhasanobligationtoensure

thatanynonlawyerassistantwithaccesstothetrustaccountisawareofthelawyer’sprofessionalobligations

regarding

entrustedfundsandisproperlysupervised.Rule5.3.



IfLawyerhasmanagedthetrustaccountinsubstantialcompliancewiththerequirementsoftheRulesof

ProfessionalConduct(seeRules1.15‐2,1.15‐3,and5.3)but,nevertheless,isvictimizedbyathirdpartytheft,

Lawyerisnotrequiredtoreplace

thestolenfunds.If,however,LawyerfailedtofollowtheRulesofProfessional

Conductontrustaccountingandsupervisionofstaff,andthefailureisaproximatecauseoftheftfromthetrust

account,Lawyermaybeprofessionallyobligatedtoreplacethestolenfunds.CompareRPC191(ifalawyer

disburses

againstprovisionallycreditedfunds,thelawyerisresponsibleforreimbursingthetrustaccountforany

lossescausedbydisbursingbeforethefundsareirrevocablycredited).



Underallcircumstances,Lawyermustpromptlyinvestigatethematterandtakestepstopreventfurthertheftsof

entrustedfunds.Lawyermustseekouteveryavailable

optiontoremedythesituationincludingresearchingthe

lawtodetermineifBankisliable;

communicatingwithBanktodiscussBank’sliability;askingBanktodetermineif

thereisinsurancetocovertheloss;consideringwhetheritisappropriatetoclosethetrustaccountandtransfer

thefundstoanewtrustaccount;andworkingwithlawenforcementtorecoverthefunds.



Inquiry#2:

Prior

tolearningofthefraudandtheftfromthetrustaccount,Lawyerissuedseveraltrustaccountchecksto

clientsand/orthirdpartiesforthebenefitofaclient.Despitethetheft,therearesufficienttotalfundsinthetrust

accounttosatisfytheoutstandingchecks.However,becauseofthetheft,

fundsbelongingtootherclientswillbe

usediftheoutstandingchecksarecashed.



WhatisLawyer’sdutytosafeguardtheremainingfundsinthetrustaccount?







Opinion#2:

Lawyermusttakereasonablemeasurestoensurethatfundsbelongingtooneclientarenotusedtosatisfy

obligationstoanotherclient.Suchreasonablemeasuresinclude,butarenotlimitedto,requestingthatBankissue

stoppaymentsonoutstandingtrustaccountchecks;providingBankwithalistof

outstandingchecksand

requestingthatBankcontactLawyerbeforehonoringanyoutstandingchecks;anddeterminingifBankisliable

and,ifso,demandingtheoutstandingchecksbecoveredbyBank.IfLawyerdeterminesBankisnotliableor

liabilityisunclear,Lawyermustmaintainthestatusquoandpreventfurtherloss

bynotissuingnewtrustaccount

checks.Ifpaymentwillbestoppedontheoutstandingchecks,Lawyermustcontactthepayeesandalertthemto

theproblem.



Inquiry#3:

AssumethesamefactsinInquiry#2exceptthereareinsufficientfundsinthetrustaccounttosatisfythe

outstandingchecks.

MustLawyerdepositfundsintothetrustaccounttoensurethattheoutstandingchecksare

notpresentedagainstanaccountwithinsufficientfunds?



Opinion#3

No.InadditiontotheremedialmeasureslistedinOpinion#2,LawyershouldnotifythepayeesifLawyerknows

thatthecheckswillnotclear.



Inquiry#4:

HackergainsillegalaccesstoLawyer’scomputernetworkandelectronicallytransfersthebalanceofthefundsin

Lawyer’strustaccounttoaseparateaccountthatiscontrolledbyHacker.Lawyer’strustaccountnowhasazero

balance.Lawyerhaswrittenseveraltrustaccountcheckstoclientsand/orthird

partiesforthebenefitofclients.

Becauseofthetheft,thereareinsufficientfundsinthetrustaccounttosatisfytheoutstandingchecks.



DoesLawyerhaveaprofessionalresponsibilitytoreplacethestolenfunds?



Opinion#4:

No,Lawyerisnotobligatedtoreplacethestolenfundsprovidedhehastaken

reasonablecaretominimizetherisks

toclientfundsbyimplementingreasonablesecuritymeasuresincompliancewiththerequirementsofRule1.15.



Rule1.15requiresalawyertopreserveclientproperty,todepositclientfundsentrustedtothelawyerina

separatetrustaccount,andtomanagethattrustaccount

accordingtostrictrecordkeepingandprocedural

requirements.TofulfillthefiduciaryobligationsinRule1.15,alawyermanagingatrustaccountmustuse

reasonablecaretominimizetheriskstoclientfundsondepositinthetrustaccount.2011FEO7.



In2011FEO7theEthicsCommitteeopinedthat

alawyerhasaffirmativedutiestoeducatehimselfregularlyasto

thesecurityrisksofonlinebanking;toactivelymaintainend‐usersecurityatthelawfirmthroughsafetypractices

suchasstrongpasswordpoliciesandprocedures,theuseofencryptionandsecuritysoftware,andthehiringofan

information

technologyconsultanttoadvisethelawyerorfirmemployees;andtoinsurethatallstaffmembers

whoassistwiththemanagementofthetrustaccountreceivetrainingonandabidebythesecuritymeasures

adoptedbythefirm.



IfLawyerhastakenreasonablecaretominimizetheriskstoclient

funds,Lawyerisnotethicallyobligatedto

replacethestolenfunds.If,however,LawyerfailedtousereasonablecareinfollowingtheRulesofProfessional

Conductontrustaccountingandsupervisionofstaff,andthefailureisaproximatecauseoftheftfromthetrust

account,Lawyermaybeprofessionallyobligated

toreplacethestolenfunds.



Inquiry#5:

Lawyerisretainedtoclosearealestatetransaction.Priortotheclosing,Lawyerobtainsinformationrelevantto

theclosing,includingtheseller’snameandmailingaddress.Lawyeralsoreceivesintohistrustaccountthefunds

necessaryfortheclosing.Lawyer’snormalpractice

aftertheclosingistorecordthedeedanddisbursethefunds.

Lawyerthenmailsatrustaccountchecktothesellerintheamountofthesellerproceeds.



Hackergainsaccesstoinformationrelatingtotherealestatetransactionbyhackingtheemailofoneoftheparties

(lawyer,

realtor,orseller).Hackerthencreatesa“spoof”emailaddressthatissimilartorealtor’sorseller’semail

address(onlyoneletterisdifferent).HackeremailsLawyerwithdisbursementinstructionsdirectingLawyerto



wirefundstotheaccountidentifiedintheemailinsteadofmailingachecktosellerattheaddressincludedin

Lawyer’sfileaspreviouslyinstructed.

Lawyerfollowstheinstructionsintheemailwithoutfirstimplementing

securitymeasuressuchascontactingthesellerbyphoneatthephonenumberincludedinLawye r’sfiletoconfirm

thewiringinstructions.Aftertheclosinganddisbursement,thetruesellercallsLawyeranddemandshisfunds.

LawyergoestoBank

torequestreversalofthewire.Bankrefusestoreversethewireandwillnotcooperateor

communicatewithLawyerwithoutasubpoena.



Whilepursuingotherlegalremedies,doesLawyerhaveaprofessionalresponsibilitytoreplacethestolenfunds?



Opinion#5:

Yes.Lawyersmustusereasonablecaretopreventthirdparties

fromgainingaccesstoclientfundsheldinthetrust

account.AsstatedinOpinion#4,Lawyerhasadutytoimplementreasonablesecuritymeasures.Lawyerdidnot

verifythedisbursementchangebycallingselleratthephonenumberlistedinLawyer’sfileorconfirmingseller’s

emailaddress.Thesewere

reasonablesecuritymeasuresthat,ifimplemented,couldhavepreventedthetheft.

Lawyeris,therefore,professionallyresponsibleandmustreplacethefundsstolenbyHacker.Ifitislater

determinedthatBankislegallyresponsible,orinsurancecoversthestolenfunds,Lawyermaybereimbursed.



Inquiry#6:

Whilepursuingtheremedies

describedinOpinion#2,mayLawyerdeposithisownfundsintothetrustaccount?



Opinion#6:

Yes.



Generally,nofundsbelongingtoalawyershallbedepositedinatrustaccountorfiduciaryaccountofthelawyer.

Rule1.15‐2(f).Theexceptionstotherulepermitthelawyertodeposit

fundssufficienttoopenormaintainan

account,payanybankservicecharges,orpayanytaxleviedontheaccount.Id.Theexceptionswereexpandedin

1997FEO9toincludethedepositoflawyerfundswhenabankwouldnotroutecreditcardchargebackdebitsto

thelawyer’soperating

account.Theseexceptionstotheprohibitiononcomminglingenablelawyerstofulfillthe

fiduciarydutytosafeguardentrustedfunds.



Therefore,notwithstandingtheprohibitiononcommingling,Lawyermaydeposithisownfundsintothetrust

accounttoreplacethestolenfundsuntilitisdeterminedwhethertheBankisliablefor

theloss,insuranceis

availabletocovertheloss,orthefundsareotherwiserecovered.IfLawyerdecidestodeposithisownfunds,he

mustensurethatthetrustaccountingrecordsaccuratelyreflectthesourceofthefunds,thereasonforthe

deposit,thedateofthedeposit,andthe

clientname(s)andmatter(s)forwhichthefundsweredeposited.



Inquiry#7:

Withregardtoallofthesituationsdescribedinthisopinion,whatdutiesdoesLawyerowetotheclientswh ose

fundswerestolen?



Opinion#7:

Lawyermustnotifytheclientsofthetheftandadvisetheclientsof

theconsequencesforrepresentation;helpthe

clientstoidentifyanysourceoffunds,suchasbankliabilityandinsurance,tocovertheirlosses;deferaclient’s

matter(byseekingacontinuance,forexample)ifnecessarytoprotecttheclient’sinterest;andexplaintothird

partiesoropposingpartiesasnecessaryto

protecttheclient’sinterests.Ifstoppaymentsareissuedagainst

outstandingchecks,LawyermusttaketheremedialmeasuresoutlinedinOpinions#1and#2toprotecttheclient’s

interest.Finally,LawyermustreportthethefttotheNorthCarolinaStateBar’sTrustAccountingCompliance

Counsel.



Endnotes

1.Seee.g.N.C.

Gen.Stat.§25‐4‐406.



2.TheinquiryassumesthatLawyerbelievedthat,bywiringthefundstotheaccountdesignatedintheemail,he

wasdisbursingthefundstothesellerasrequiredbythesettlementstatement.Thisopiniondoesnotaddressthe

issuesofprofessionalresponsibilityraisedwhen

alawyerknowinglymakesdisbursementscontrarytoasettlement

statement.



(21)EthicsAdvisory2217

RefundingSmallSumsinTrustAccount

October23,1998

Opinionrulesthatattorneymayaskborrowersandsellerstoagreeinwritingtowaivethereturnofverysmall

sums,esp eciallywhereattorneybearssimilarriskofloss.



Inquiry:

Attorneyclosesnumerousresidentialloansinwhich

Attorneyreceivesloanproceedsanddisbursesthesame

accordingtoasettlementstatementthroughthetrustaccountofAttorney.Onafewoccasions,somefeessuchas

taxesandrecordingfeesareunintentionallymiscalculatedusuallyforrelativelysmallamounts.Attorneywouldlike

toaskborrowersandsellerstoagreein

writingtowaivethereturnof$10.00orlesstoeliminateAttorneyfrom

havingtoforwardchecksinsmallamountswhichhavebeenlostordiscardedonprioroccasions.Attorneywould

alsoagreetoforegoanyrequestsforcompensationforshortfallsof$10.00orless(exceptforloanpayoffamounts,

etc.).



IfAttorneydisclose stheabovedescribedwaivertoallapplicablepartiesandsuchpartiesagree,mayAttorney

implementthispolicy?



Opinion:

Rule1.15‐2(h)oftheRevisedRulesofProfessionalConductprovidesthatanattorneymustdisbursepropertyor

trustfundsheldonbehalfoftheclientasthe

clientdirects.



Therulesdonotappeartoprohibitanattorneyfromrequestingthatclientsonoccasionagreetowaivethereturn

ofcertaininsubstantialordeminimisamounts.Especially,ashere,whereAttorneyalsobearssomeminimalriskof

loss,Attorneyshouldbeabletoproposethiswaiver.If

thepartyorpartiesinvolvedrefusetoagreetothewaiver,

thenAttorneymustabidebytheirwishes.Rule1.15‐2(h);seealsoEA955.



Notwithstandingtheabove,Attorneystillhasanobligationtomakeaproperaccountingofallfundsheldinhisor

hertrustaccount.



(22)Ethics

Advisory2295

TrustFundsHeldforDeceasedClient

November23,1999

OpinionrulesthatAttorneymustcomplywiththeoriginalfeeagreementfortherepresentationofthedeceased

clientasitrelatestoexcessfunds.



Inquiry:

AttorneywashiredtorepresentClientinClient'sdomesticdissolution.Client'sfatherpaidan

advancefeeforclient

of$1,600,andtheAttorneybilledagainstitasserviceswererenderedtoClient.Thismoneywasplacedin

Attorney'strustaccount.Recently,Clientwaskilledinanautomobileaccident.AfterClient'sdeath,Client'sfather

contactedAttorneyaboutresolvinganissuerelatingtoanoutstandingmedical

billforClientthatwasrelatedtothe

domesticaction.OfthefundsoriginallydepositedinAttorney'strustaccountonbehalfofClient,$198still

remained.MayfundsstillondepositinAttorney'strustaccountbeusedtopayforthelegalworkdonebyAttorney

attherequestofClient's

father?



Opinion:

AttorneymustcomplywiththeoriginalfeeagreementfortherepresentationofClient.Hemustalsobetruthfulin

hisdealingswithallindividual sinterestedintheestateofClient.Iftheorigin alfeeagreementwithClient,and

Client'sfather,providedthatanyexcessfundswouldbereturned

tothefather,Attorneyshouldaskthefather

whetherthoseexcessfundscanbeusedto covertheoutstandingbillwiththefirm.If,however,itwasunderstood

thatthefundsprovidedbythefatherwereprovidedasagifttoClient,Attorneymusttreatthefundsstillon

deposit

inthetrustaccountasfundsbelongingtotheestateofClientandactaccordingly.



APPENDIX B: EXAMPLE FORMS



B1. Key Concepts Infographic



B2. Sample Client Ledger



Client: __________________________________

Matter: _________________________________

Rec (√) Number Date

Description of Transaction

(Payor/Payee) Debit (-) Credit (+) Balance



B3. Bank Directive on NSF Trust Checks__

Rule 1.15-2(l) of the Rules of Professional Conduct requires a lawyer to direct each bank

where he or she maintains a trust account to notify the State Bar when any item

drawn on the

trust account is presented for payment against insufficient funds. To comply with the rule,

every lawyer or law firm that maintains a trust account must file a directive with the bank

where the account is maintained instructing the bank to notify the Executive Director of the

State Bar when any item drawn on the trust account is presented for payment against

insufficient funds. The notice form below should be used for this purpose.



Rule1.15‐1(j):“Item”denotesanymeansormethodbywhichfundsarecreditedtoordebitedfromanaccount;for

example:acheck,substitutecheck,remotelycreatedcheck,draft,withdrawalorder,automatedclearinghouse(ACH)or

electronictransfer,electronicorwirefundstransfer,electronicimageofanitemand/orinformationin

electronicform

describinganitem,orinstructionsgiveninpersonorbytelephone,mail,orcomputer.



Notice and Authorization:

Concerning Attorney Trust Account Checks

Presented Against Insufficient Funds

To: __________________________________________________________________________________

Financial Institution

Pursuant to Rule 1.15-2(l), of the North Carolina State Bar Rules of Professional Conduct, you are hereby authorized and directed

to transmit immediate notice to the executive director of the North Carolina State Bar of any item drawn on the trust account(s) or fiduciary

account(s) listed below which is presented for payment against insufficient funds.

Acct. No.________________________________________ Acct. Name. ________________________________________

This the___________ day of___________________________________, 20_____.

_______________________________________________

Signature

North Carolina State Bar

PO Box 25908 __________________________________________________

Raleigh, NC 27611 (print full name)



B4. Opening an Account Checklist

When opening a trust account, the lawyer must ensure that the following requirements are completed (check each box

whencomplete):



Requirements:

 ThelawyermustuseabankfromtheNCIOLTAapprovedbanklist.Visit

www.nciolta.com/iolta_banklist.asp

formoredetails.

 AccountmustusetheNCIOLTATaxIDNumber(ifbankdoesnothaveitonfile,please

call(919)828‐0477).

 LawyermustfileanNSFDirectivewithbank,andretainacopyforlawyer’srecords.

 Accountmustbelabeledasa“TrustAccount”ondocuments,depositslips,andchecks.

 Lawyermustusebusiness‐sizechecks.(seeattachedsample)

 Legiblecheckimages,front/back,aretobeprovidedwiththebankstatement.

 Overdraftprotectionmustbedisabledonthetrustaccount.

 NoDebitCardsaretobeissuedforthetrustaccount.

 LawyermustfileaStatusUpdateFormwithIOLTAoffice.

 Signatureauthoritymayonlybegrantedto(1)lawyersand(2)nonlawyeremployeeswho

arenotresponsibleforreconcilingthetrustaccount.Anypersonwithsignatureauthoritymust

completea1‐hourtrustaccountmanagementCLEbeforeexercisingsuchauthority.

 Checksmaynotbesignedusingasignaturestamporpre‐printedsignatureline.



Recommendations:

 Thelawyershouldrequestthatallbankfeesandchargesbedrawnfromlawyer’s

operatingaccount,thuslimitingtheriskthatclientfundsareusedforthispurpose.

 Iflawyermaintainsotheraccountsatbank,heorsheshouldrequestdifferentcolored

trustaccountchecks.

 SafeguardstoprotectinadvertentwiresandACHsshouldbediscussedwithbanker.

 Iflawyerwantstouseonlinebankingtotransferfundsfromthetrustaccounttodifferent

account,thebankmusthaveatext/memoboxonthetransferpagethatallowslawyerto

properlyattributealltransactionsto particularclients.

 Lawyershouldlearnthebank’sdepositdeadlinesandwhenprovisionalcreditismade

available,andinquireabouttypicallengthoftimeforcheckstoclear.

 Lawyershoulddevelopanofficepolicyregardingtrustaccountprocedures(reconciliations,

deposits,disbursements,etc).



Note:Itisthelawyer’sresponsibilitytoensurecompliancewithRule1.15,notthebank’s.





B5. Trust Account Check

(Actual Size)



B6. Trust Account Check Detail



INFORMATION AND

FIELDS REQUIRED BY THE RULES



Pre-Numbered Check

Trust Account Designation

Payee Name

Dee Fender, Esq. 101

Trust Account Date:May23,2009

Raleigh, NC 27808

PAY

TO THE

ORDER OF



Fifteenhundredandno/100‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐

MEMOOmega (12345)–fullandfinalpayment  Dee Fender 

00000101 8 031202084 000-123-12345678



Auxiliary On-Us Client Matter & Purpose Account Number

LONGER THAN 6’’

ABCXYZChiropracticCenter

1,500.00

DOLLARS

Wegottayourmoney

BANK



! ! ! ! ! ! ! ! !

Deposit slips should

always be printed with

the name of the lawyer

or law firm, IOLTA or

Trust Account

Designation, account

number, and routing

number.

! ! ! ! ! ! ! ! !



B7. Deposit Slip for One Client



PLEASE ENDORSE ALL CHECKS

DATE 05/01/2008

CHECKS AND OTHER ITEMS ARE RECEIVED FOR DEPOSIT

SUBJECT TO THE RULES AND REGULATIONS OF THIS

INSTITUTION.

DEPOSITS MAY NOT BE AVAILABLE

FOR IMMEDIATE WITHDRAWAL.

PLEASE LIST EACH CHECK SEPARATELY.

DOLLARS CENTS

CURRENCY

COIN

1 Alpha $5,000 00

FRONT SIDE TOTAL

$5,000 00

REVERSE SIDE TOTAL

000

TOTAL DEPOSIT

$5,000 00



ABC LAW FIRM

Acct. #: 123456789



! ! ! ! ! ! ! ! !

Deposit slips

should always be

printed with the

name of the

lawyer or law

firm, IOLTA or

Trust Account

Designation,

account number,

and routing

number.

! ! ! ! ! ! ! ! !



B8. Deposit Slip for Multiple Clients

PLEASE ENDORSE ALL CHECKS

DATE 05/15/2008

CHECKS AND OTHER ITEMS ARE RECEIVED FOR DEPOSIT

SUBJECT TO THE RULES AND REGULATIONS OF THIS

INSTITUTION.

DEPOSITS MAY NOT BE AVAILABLE

FOR IMMEDIATE WITHDRAWAL.

PLEASE LIST EACH CHECK SEPARATELY.

DOLLARS CENTS

CURRENCY

COIN

1 Beta (Source: BB&T) $1,500 00

2 Gamma $1,450 00

3 Delta $5,100 00

4 Epsilon $2,000 00

FRONT SIDE TOTAL

$10,500 00

REVERSE SIDE TOTAL

000

TOTAL DEPOSIT

$10,500 00



Listclientnames

insteadofcheck

routingnumbers.

ABCLawFirm

cct. #:

23456789



B9. General Ledger

Rec Number Date

Description of

Transaction

(Payor/Payee) Payment Deposit Balance

Reconciliation

ConfirmationBox

(√)

Check#

Example:SuperiorCourt

FilingFees‐ClientName

RunningBalanceof

GeneralTrust

Account



B10. Administrative Funds Ledger

Rec Number Date

Description of

Transaction

Payment Deposit Balance

Dep. 3/1 Funds to open Acct. 100.00 100.00

Wire #123 4/15 Wire fee – Jones 15.00 85.00

112 9/10 TA Checks Order 50.00 35.00

Dep. 10/1 Firm funds back to $100 65.00 100.00

Client:AdministrativeFunds



B11. Zero Balance Written Accounting

Attorney/FirmsName

Address

AccountingforFundsinTrust

1/10/2001



Client:JoeAccidentVictim



Receipts



Date   SourceAmount



1/3/2005  AllStateIns.   $21,712.00

TotalReceipts:$21,712.00



Disbursements:



Date   Recipient   Purpose  Amount



1/6/2005  HealMeHospital  MedicalExpenses $13,252.00

1/6/2005  HiMotors   CarRepair  $1,200.00

1/6/2005  What’sHisName,MD  MedicalExpenses $4,803.26

1/6/2005  JoeAccidentVictim Payment  $2,456.74





TotalDisbursements:$21,712.00

Balance:$0.00



Thisaccountingofthereceiptanddisbursementofyourfundsinthetrustaccountisprovidedas

requiredbythe

rulesoftheNorthCarolinaStateBar.



______(Lawyer_)____________



Note:Acopyoftheclient'sledgermaybeincludedwithaletterormemostating:Acopyofyourtrustaccount

ledgerisbeingprovidedindicatingthereceiptanddisbursementofyourfundsinthetrustaccount.



B12. Annual Written Accounting

(When There Has Been No Activity in the Account)

Lawyer/FirmLetterhead



Mr./Mrs./Ms.

Address

City,StateZip



Re:AnnualAccountingofFundsHeldinTrustAccount



Dear



Iamwritingtoadviseyouthatthisofficeholdsintrustthesumof____________________onyourbehalf.This

informationisbeingfurnishedto youasrequiredbytheRulesofthe

NorthCarolinaStateBar.



Thisisaperiodicaccountingandnoactionisrequiredonyourpart.However,ifthisreportisincorrect,please

contactthisofficeimmediately.



Anaccountingofyourtrustaccountrecordisavailableatanytime.



Verytrulyyours,



Note:Thisaccountingisfor

clientfundsonwhichtherehasbeennoactivitysincethelastaccounting.Ifthereare

receiptsordisbursementsonaclientledgerduringa12‐monthperiod,theremustbeanaccountingforthe

receiptsanddisbursementsoracopyoftheclient'sledgermustbeincludedwiththe

letter.Rule1.15‐3(e).



Ifalawyerisholdingsubstantialfundsforaclientforaperiodoftime,thosefundsshouldbeplacedinadedicated

trustaccountinorderthattheymayearninterestfortheclient.





B13. Reconciliation Report

100



B14. Quarterly Review Report

101



B15. NC IOLTA Status Update Form

102



B16. Random Audit Exemption Documents

Lawyer’sRepresentationsPursuanttoCPAExaminationofLawyer’sTrustAccount(s)

(Lawyer’sRepresentationForm)



Pursuanttothepolicyof theNorthCarolinaStateBarCouncil,alawyerorlawfirmmayseekexemptionfromthe

randomauditoftrustaccountsauthorizedby27NCAC1B,Rule.0128(b)byhavingaCPAorCPAfirmperforman

examination pursuant to the Agreed Upon Procedures for

 CPA Examination of Lawyers’ Trust Accounts (“Agreed

Upon Procedures”) to provide information to the lawyer and the North Carolina State Bar regarding the

management of the lawyer’s trust account(s). As a condition of the exemption, the lawyer must make certain

representationsregardingthemanagementofclientand/orfiduciaryfundsheld

intrust.Thisrepresentationform

and any attachmentsmust be provided to the CPA/CPA firm prior to commencement of the examination and

mustbeattachedtotheCPAreportsenttotheNorthCarolinaStateBar.



____________________,hereafter“Lawyer”,mustattachalistofallbankaccountsintowhich

Lawyerhas

depositedclientorotherfiduciaryfunds,includingallgeneral,dedicated,andfiduciarytrustaccounts(Attachment

1),andlistalllawyersaffiliatedwithLawyer’sfirmtowhichtheexemptionwouldapply(Attachment2).



Lawyer’sRepresentations



I hereby certify personally and on behalf of any lawyers affiliated with this firm,

whose names are listed in

Attachment 2,thattheaccount(s) listedin Attachment 1 is/aretheonlytrustaccount(s)to whichsuchlawyer(s)

has had access during the past year, that the records and documents provided to ______________________,

hereafter CPA, are thefull and accurate records of the trust accounts and,

 further, with respect to transactions

occurringduringthepastyear,thatthefollowingstatementsaretrue:



 1)Thelawyer/firmdoesnotmaintainanytrustaccountsoutsidethestateofNorthCarolina.



2)Thelawyer/firmisawareofhis/herdutytoreporttrust/fiduciaryaccountmisappropriation.



3)Thelawyer/firmretains

requiredtrustaccountrecordsforatleastthesix(6)yearperiodimmediately

precedingthelawyer’smostrecentfiscalyearend.



4)Thelawyer/firmhasnotusedorpledgedanyentrustedpropertytoobtaincreditorotherpersonal

financialbenefitforthelawyeroranyotherpersonotherthanthe

legalorbeneficialownerofthat

property.



5)Entrustedpropertiesbelongingtoaclientreceivedbythelawyerarepromptlyidentifiedandlabeledas

thepropertyoftheclient.



6)Entrustedpropertynotdepositedinatrustaccountorfiduciaryaccountwhenreceivedbylawyer/firm

isplacedinaplace

ofsafekeepingassoonaspractical.Specifically,itisplacedin:



N/A SafeDepositBoxOfficeSafeOther_______________



7)Thelawyer/firmpromptlynotifiesclientofthereceiptofanyfunds,securitiesorpropertybelongingin

wholeorinparttoclient.



8)Wherethefundsreceivedarea

mixoftrustfundsandnon‐trustfunds,thedepositismadetothetrust

accountintactandthenon‐trustportioniswithdrawnwhenthebankcreditstheaccountuponfinal

settlementorpaymentoftheinstrument.

103



9)Writtenaccountingsareprovidedtoclientatcompletionofdisbursementoratleastannuallyiffunds

areheldmorethantwelve(12)months.



10)Ifthelawyer/firmholdsanypropertyortitlestopropertyassecurityforthepaymentofanyfeesor

otherobligationsowedto

thelawyerotherthanforfeespresentlyowed,thelawyerhasindicatedthat

thepropertyortitlestopropertyareheldintrustassecurityfortheobligationandnotasacompleted

transferofownershiptothelawyer.



11)Thelawyer/firmhasnotearnedinterestonthetrustaccount

orfiduciaryaccountwhichwasnot

distributedtoclientortoIOLTA.



Thisthe________dayof__________________20___.



________________________________

Lawyer/Firm[print]



By_____________________________

[Signature]



Sworntoandsubscribedtobeforemethisthe______dayof__________________,20_____



_____________________________________

NotaryPublic

104



CPAEngagementLettertoPerformAgreedUponProceduresforLawyer



{Date}



{Address}



Dear{LawyerName}:



Thisletteristoexplainourunderstandingofthearrangementsfor,andthenatureandlimitationsof,theservices

we are to perform pursuant to the Agreed Upon Procedures for CPA Examination of Lawyers’ Trust Accounts

(“Agreed Upon Procedures”) relative to your

exemption from the random audit of lawyer trust accounts

authorized by 27 NCAC 1B, Rule .0128(b). Unless specifically indicated in the Agreed Upon Procedures, a

reference to a lawyer’s trust account(s) includes all general trusts, dedicated trusts, and fiduciary accounts in

which the lawyer holds funds for others. You are solely responsible for compliance with the State Bar’s rules

regardinglawyers’trustaccounts.TheAgreedUponProceduresareincludedasAttachmentAtothisletter.Acopy

of this letter and Attachment A will be sent to the North Carolina State Bar along with our report and your

representationform.



EngagementServices



OurengagementwillbeconductedinaccordancewithattestationstandardsestablishedbytheAmericanInstitute

ofCertifiedPublicAccountants.BecausetheAgreedUponProceduresincludedinAttachmentAdonotconstitute

anauditmadeinaccordancewithgenerallyacceptedauditingstandards,wewillnotexpressanopinion

onanyof

thespecificelements,accounts,oritemsreferredtoinourreport.



Attheconclusion ofourengagement, wewill submit areport inletterform outlining the proceduresperformed

and our findings resulting from the procedures performed. It is our understanding that any and all exceptions

noted

willbereportedasafindingandthatmaterialitywillnotbeconsideredby__________________(hereafter

{CPA/CPAfirm}).



Ourreportwillcontainastatementthatitisintendedsolelyfortheuseof________________________(hereafter

{lawyer/lawfirm})andtheNorthCarolinaStateBarandshouldnotbeusedforanyotherpurpose.





Theproceduresthatwe willperformare notdesigned and cannotbe reliedupon to disclosefraud or illegalacts

shouldanyexist.However,wewillinformthe{lawyer/lawfirm}andtheStateBarofanyfraudorillegalactsthat

cometoourattention.



Furthermore,theservicesarenot

designedtoprovideassuranceoninternalcontrolortoidentifysignificant

deficienciesormaterialweaknesses.However,wewillcommunicateto {lawyer/lawfirm}andtheStateBarany

significantdeficienciesormaterialweaknessesthatbecomeknowntousduringthecourseoftheengagement.

105



Conditionsand{Lawyer/LawFirm}Responsibilities



Thesufficiencyoftheseproceduresissolelytheresponsibilityof {lawyer/lawfirm}andtheStateBar.Wemakeno

representationregardingthesufficiencyoftheproceduresdescribedaboveeitherforthepurposeforwhichthese

serviceshavebeenrequestedorforanyotherpurpose.



If circumstances arise relating to the

 condition of {lawyer/law firm} records, the availability of appropriate

evidence, indications of a significant risk of fraudulent transactions, or misappropriation of assets, which in our

professional judgment prevent us from completing the engagement, we retain the unilateral right to take any

courseofactionpermittedbyprofessionalstandardsincludingdeclining

toissueareport,orwithdrawalfromthe

engagement.



Theassistancetobesuppliedbyyourpersonnel(ifany)willbediscussedandcoordinatedwith{lawyer/lawfirm}.

The timeliness and accuracy of this assistance is an essential condition to  the completion of our services and

issuance of our report.We

understand thatthefinalagreed upon procedures report is requiredto be issued no

laterthan______________.



Fees,Costs,andAccesstoDocumentation



Ourfeesarebasedonthetimerequiredbytheindividualsassignedtotheengagement,plusdirectexpenses.We

anticipatethatthetotalfeeswillnotexceed

$_______.Billingsaredueuponsubmission.



In the event we are requested or authorized by {lawyer/law firm} or are required by government regulation,

subpoena, or other legal process to produce our documents or our personnel as witnesses with respect to our

engagement,{lawyer/law firm}will, so long aswe are

not a partyto the proceeding in whichthe information is

sought, reimburse us for our professional time and expenses as well as the fees and expenses of our counsel

incurredinrespondingtosuchrequests.



This letter constitutes the complete and exclusive statement of agreement between {CPA/CPA firm} and

{lawyer/law firm} superseding all proposals, oral or written, and all other communications with respect to the

termsoftheengagementbetweentheparties.



Ifthisletter definestheengagement as {lawyer/lawfirm}understandsit, pleasesignanddatetheenclosedcopy

andreturnittous.



Sincerely,



{CPA/CPAfirm}



Enclosures



CC:TrustAccountComplianceCounsel,NCStateBar



Thisletterdefinestheengagementas_____________________(Lawyer/lawfirm)understandsit.



_________________________________ _______________________

(Signature)(Date)

106



AgreedUponProceduresforCPAExaminationofLawyers’TrustAccounts

(“AgreedUponProcedures”)

TheCPA/CPAfirmagreestoperformthefollowingtasks:



 ObtainanexecutedLawyer’sRepresentationFormrequiredforexemptionfromrandomauditandbealertfor

anyinconsistenciesbetweentherepresentationsintheformandtheresultsoftheengagement(seenext‐to‐

lastproceduretoreportsuchinconsistencies).



 Reviewasampleofbankstatements,depositslips,andchecksforalltrustaccount(s)todeterminethatthey

arelabeledasatrustaccount(s)orfiduciaryaccount(s).



 Review bank statements for the trust account(s) to determine whether the lawyer is using business‐sized

checkscontaininganAuxiliary‐On

‐UsfieldintheMICRlinewhichcorrelatestothechecknumber.



 Test a sample of original trust account(s) deposit slips to determine if the client name is identified and the

sourceoffundsisindicatedifsourceisotherthantheclient(e.g.,3

partypayee).



 Test a sample of amounts received (deposits) to determine if client ledgers are being maintained for each

personorentityfromwhomorforwhomtrustmoneyisreceived.



 Test a sample of wire/electronic transfers into or out of the trust account(s) to determine if

the

client/beneficiaryisidentified.



 Testasampleoftrustaccountdisbursementstodeterminethattheclients(fromwhoseledgersthefundsare

drawn)areidentifiedonthechecks.



 Review a sampleof disbursementsto determine thatpayees arespecificpersonsor entities andthat checks

arenotto

“cash”or“bearer.”



 Inthecourseofourwork,bealertforandreportanytransactionsthatdonotappearrelevanttotypicaltrust

receiptsanddisbursements.



 Review trustaccount bankstatements todetermineif check imagesare legible copiesof thefrontand back

andno

smallerthan3x13/16inchesindimension.



 Review trust account records to confirm that the lawyer has maintainedcancelled checks,bank statements,

andanyotherdocuments,includingNSFnotices,receivedfromthebankregardingtheaccountforaperiodof

atleastsixyearsimmediatelyprecedinglawyer’s

mostrecentfiscalyearend.



 Reviewthetrustaccount(s)todeterminethatbankchargesarepaidfromthelawyer’soperatingaccountor,if

not, thatthe lawyer hasdeposited a reasonable amountof funds tothetrust account specifically topay for

futurebankservicechargesandthata

trustaccountledgerismaintainedtoaccountforthesefunds.



 Examineindividualclientledgers(oracomputerizedreportshowingallclientledgerbalances)todetermineif

anyhavebeenoverdrawn(i.e.havenegativebalances).



 Reviewmonthlytrustaccountbankstatementreconciliationstoconfirmthattheyarebeingperformed.



 Reviewquarterlyreconciliationsofthegeneraltrustaccount(s)withtheclientledgerspursuanttoRule1.15‐

3(d)oftheRulesofProfessionalConduct.

107



 ReviewmonthlyandquarterlyreviewstoconfirmthattheyarebeingperformedpursuanttoRule1.15‐3(i).



 DeterminewhetherthelawyersentthebankawrittendirectiverequiringthebanktoreporttotheBarwhen

anitemdrawnonthelawyer’strustaccount(s)ispresentedfor

paymentagainstinsufficientfundspursuantto

Rule1.15‐2(k)oftheRulesofProfessionalConduct.



 Testasampleoflawyer’saccountingsrequiredtobesentannuallytoclientsforwhomfundshavebeenheld

formorethanoneyearandforallclientswhosefundshavebeenfullydisbursed

(zerobalanceledgers).



 Report on any inconsistencies noted between the Lawyer’s Representation Form and the results of the

foregoingprocedures.



 Utilize the report formatprovided bythe NC State Boardof CPAExaminers to describe thework performed

andtonoteanyfindings.

108



ReportPursuanttoAgreedUponProceduresforCPAExaminationofLawyers’TrustAccounts

ToLawyer/LawFirmandNorthCarolinaStateBar:



WehaveperformedtheattachedAgreedUponProceduresforCPAExaminationofLawyers’TrustAccounts

(“AgreedUponProcedures”)whichwereagreed‐uponbyLawyer/LawfirmandtheNorthCarolinaStateBarsolely

toassisttheNorthCarolinaStateBarindeterminingifLawyer/Law

firmhascompliedwiththeNorthCarolinaState

Bar’srulesregardinglawyers’trustaccountsforthe12monthperiodended(month,day,year)

.Lawyer/Lawfirmis

responsibleforcompliancewiththeNorthCarolinaStateBar‘srulesregardinglawyers’trustaccounts.This

engagementwasperformedinaccordancewithattestationstandardsestablishedbytheAmericanInstituteof

CertifiedPublicAccountants.Thesufficiencyoftheseproceduresissolelytheresponsibilityofthoseparties

specifiedinthis

report.Consequently,wemakenorepresentationregardingthesufficiencyoftheprocedures

describedaboveeitherforthepurposeforwhichthisreporthasbeenrequestedorforanyotherpurpose.



[Duringtheperformanceoftheagreed‐uponprocedureswefoundnoinstancesinwhichLawyer/Lawfirmfailed

tocomply

withtheNorthCarolinaStateBar’srulesregardingtrustaccounts.]

OR



[WewishtoreportthefollowingtoyouregardingLawyer’s/LawFirm’scompliancewiththeNorthCarolinaState

Bar’srulesregardingtrustaccounts:]



ApartfromtheperformanceoftheAgreedUponProcedures,wewerenotengagedtoanddidnot

conductan

examination,theobjectiveofwhichwouldbetheexpressionofanopiniononwhetherLawyer/Lawfirmcomplied

withtheNorthCarolinaStateBar’srulesregardinglawyers’trustaccounts.Accordingly,wedonotexpresssuchan

opinion.Hadweperformedadditionalprocedures,othermattersmighthavecometoour

attentionthatwould

havebeenreportedtoyou.



ThisreportisintendedsolelyfortheinformationanduseofLawyer/LawfirmandtheNorthCarolinaStateBar

relativetoLawyer/Lawfirm’sexemptionfromtherandomauditoflawyertrustaccountsauthorizedby27NCAC

1B,Rule.0128(b).



[CPA/CPAfirmName]



[Signature]

[Date]

109



APPENDIX C: JOURNAL ARTICLES

(Articleshavenotbeeneditedtoreflectrulechangesenactedafterthearticle’soriginalpublication)



EscheatHappens

BySuzanneLever



Ethicscounselperiodicallyreceivescallsfromlawyersseekingguidanceastotheproperdispositionof“dormant”

fundsintheirtrustaccount.Asithappens,thisisnotsimplyamatterof“finderskeepers,losersweepers.”



At the April Ethics Committee meeting, the State Bar’s field auditor reported

that for the past quarter, 28% of

lawyers audited failed to properly designate and “escheat” unidentified and/or abandoned funds as required by

N.C. Gen. Stat. §116B‐53. Given that the most recent formal ethics opinion discussing escheat is from1991, a

refresher course seems in order. First of all, what exactly is

 “escheat” and how the heck do you pronounce it?

Apparently,thewordispronounced“escheet.”(Honestly,Ihavebeenpronouncingit“es‐sheet”alloftheseyears.

Howembarrassing!)Escheatisoneofthoseoverachievingwordsthatcanbeeitheranounoraverb.Accordingto

Black’sLawDictionary

(8thed.2004),escheatisthereversionofpropertytothestatewhenthepropertyhasno

knownowner.Itisalsousedtoreferto theactualpropertythathasbeenreverted.Intheolddays,therewasalso

an “escheater” who was appointed to value the propertye scheating

to the state. Hence, it would be perfectly

propertostate:“Theescheaterescheatedtheescheat.”Andiftheescheaterhappenedtobelessthanhonest(as

was,reportedly,sometimesthecase),youwouldhavetoproclaimthat,“Theescheatercheatedwhenescheating

theescheat.”(Threetimesfast—Idareyou.)



Inanyevent,escheatingreferstothepowerofthestatetoacquireabandonedorunclaimedproperty.Escheating

becomesrelevantinthelegalprofessionwhenalawyerholdsfundsinageneraltrustaccountanddoesnotknow

the identity or the location of the owner. During the required quarterly reconciliation

 of trust account records,

lawyersshouldperformaclassificationofallfundsheld.



Propertyispresumed“abandoned”iftheownerhasnotcommunicatedwiththelawyerorindicatedaninterestin

thepropertywithinits“dormancyholdingperiod.”TheholdingperiodsaredefinedinN.C.Gen.Stat.§116B‐53(c).



Inmostcases,thedormancyperiodforfundsinalawyer’strustaccountisfiveyears.PursuanttoRPC89(1991),a

lawyer should consider four factors when determining whether the applicable dormancy period has run. The

lawyer needs to establish whether during the dormancy period (1) the fund’s principal

has increased; (2) the

ownerhasacceptedpaymentofprincipalorincome;(3)theownerhascorrespondedinwriting;or(4)theowner

hasotherwiseindicatedaninterestintheaccountasevidencedbyamemorandumorotherrecordonfilewiththe

lawyer. If any of the four events enumerated

 above have occurred, no abandonment will be deemed to have

occurred and the client’s funds must remain in the lawyer’s trust. In addition, whenever any of the four events

occurs,a newdormancy period begins to run.The propertymayonlybe deemed abandoned ifnoneof thefour

enumerated

eventshasoccurred.



Once the lawyer has determined that the dormancy period has run, Rule 1.15(q) provides thatthe lawyer must

make “due inquiry” of his personnel, records, and other sources of information in an effort to determine the

identity and location of the owner of the property. The legal

investigative requirements are more specific. N.C.

Gen.Stat.§116B‐59statesthataholder(thelawyerinthisscenario)mustmakeagoodfaithefforttolocatethe

owner.Forpropertiesover$50invalue,aholdermustsendawrittennotice byfirst‐classmailtothe lastknown



addressoftheapparentownerasreflectedintheholder’srecords.Holderswhofailtoperformduediligencemay

be subject to penalties and interest as outlined in N.C. Gen. Stat. § 116B‐77. If the lawyer is unsuccessful in

ascertaining theidentityorthe locationoftheownerof

thefunds,thelawyer shouldcontacttheNorthCarolina

State Treasury Department. (nctreasurer.com/upp/Pages/default.aspx). The Unclaimed Property and Escheats

Divisionoverseesandmaintainsthestate’sdatabaseofunclaimedpropertyandisresponsibleforrecoveringand

returning such property to all rightful owners. A helpful FAQ section can be accessed online:

nctreasurer.com/upp/Resources/HolderReportingFAQs.pdf.



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

Trustaccountfundsforwhichthedormancyperiodhasrunmustbeescheatedtothestateevenifitisbelieved,

but cannot be conclusively documented, thatthe funds belong to the lawyer. But cf. RPC 226 (when a law firm

receivesfundsthatarenotidentifiedasclientfunds,

thefirmmustinvestigatetheownershipofthefundsand,ifit

isreasonabletoconcludethefundsdonotbelongtoaclientorathirdparty,thefirmmayconcludethatthefunds

belong to the firm). Pending escheatment, the funds should be held and accounted for in the

 lawyer’s trust

account.N.C.Gen. Stat.§ 116B‐57(a) permits aholder ofabandoned or unclaimedfunds tochargea reasonable

“dormancy”fee,therebyreducing the amountoffunds transferredto theStateTreasurer’s Office,so longas (1)

the holder has made a good faith effort to locate the

owners of the funds; (2) there is a valid and enforceable

writtencontract whichimposesthecharge; and(3) thecharge isapplied on aregular basis.In 2006FEO15, the

Ethics Committee concluded that lawyer/holders mayalso charge a reasonable dormancy fee against unclaimed

fundswiththeadditionalrequirements

that(1)theclientreceivespriornoticeofandgiveswrittenconsenttothe

dormancyfee;and(2)theamountofthefeeisappropriateunderRule1.5(a)oftheRulesofProfessionalConduct.



Accordingtoourfieldauditor,theabandonedfundsareoftentheresultofunclearedchecksor

leftoverfundsfrom

real estate closings due to miscalculations of taxes or recording fees. Sometimes the amount of these dormant

funds is annoyingly small. One way to avoid escheat issues on small amounts is to obtain consent for the

dispositionofthese“leftover”fundsintheoriginalretaineragreement.An

unpublishedethicsadvisoryopinion,EA

2217 (1998), provides that a lawyer may obtain consent from a client at the beginning of the representation to

waivethelawyer’sobligationtoreturna diminimisamount(anaggregateamountoflessthan$10)owedto the

clientattheconclusionoftherepresentation.



Sodon’t“es‐cheet”yourselfoutofastellartrustaccountauditbyfailingtoproperlyhandledormanttrustfunds.

Much of the information above is contained in theLawyer’s Trust Account Handbook, which canbe quickly and

easily accessed online: ncbar.gov/media/283992/lawyer‐trustaccount‐handbook.pdf. The handbook is always a

good

place to start when trust account issues arise. You may also contact our field auditor Anne Parkin

([email protected]) or our trust account compliance counsel Peter Bolac (pbo[email protected]). You may also

contactme,andIwilldomybesttoassistyouwiththees‐sheetprocess.



TOPTIPSONTRUSTACCOUNTING:GetActivewithYourInactiveBalances!



Rule1.15‐2(q)AbandonedProperty

Ifentrustedpropertyisunclaimed,thelawyershallmakedueinquiryofhisorherpersonnel,recordsandother

sourcesofinformationinanefforttodeterminetheidentityandlocationoftheowneroftheproperty.Ifthateffort

issuccessful,theentrustedproperty

shallbepromptlytransferredtothepersonorentitytowhomitbelongs.Ifthe

effortisunsuccessfulandtheprovisionsofG.S.116B‐53aresatisfied,thepropertyshallbedeemedabandoned,

andthelawyershallcomplywiththerequirementsofChapter116BoftheGeneralStatutesconcerningthe

escheat

ofabandonedproperty.



AccordingtothereportssubmittedbyournewStateBarRandomAuditor,AnneParkin,lawyersarenotproperly

dealingwithinactivebalancesintheirtrustaccounts.Theseinactivebalancesareusuallytheresultof1)

outstandingchecksthathavenevercleared,2)earnedfeesthatwere

neverremoved,or3)fundsthatcannotbe

identifiedduetopoorrecordkeeping.Herearesometipstodealwiththesethreesituations:



1.OutstandingChecks

Areviewofthepastquarter’sauditreportsshowsthatlawyersareretainingfundsintheirtrustaccountsfrom

outstandingchecksdating

asfarbackas2003.Theseoutstandingchecksweremostlikelylost,thrownaway,or

perhapsneverevenmailed.Thereareseveralwaystoaddresstheproblemoftrustaccountchecksthatarenot

cashedforasignificantperiodoftime.Somelawyersprint"Voidafter90Days,"ontrustaccount

checksto

persuadepayeesnottoholdthechecks,butthatnotationdoesnotguaranteethatthebankwillnothonorthe

checkafter90days.Thisissueshouldbeaddressedwiththebankinadvance.Otherlawyerscontactallrecalcitrant

payeeswhofailtonegotiateatrustaccountcheck

afteracertainperiodoftime(usuallysixtoninemonths).

111



Certifiedmailshouldbeusedifwarrantedbytheamountofthecheck.Ifthepayeecannotbelocatedorareplyis

notreceivedwithinareasonabletime,thecheckisvoidedorastoppaymentisplacedonthecheck.Thestop

paymentchargehastobepaid

andastoppaymentisusuallygoodforonlysixmonths.Ifthecheckisvoided,it

maystillbenegotiable.Therefore,astoppaymentordermaybemoreappropriatedependingontheamountof

thecheck.Ifastoppaymentorderisplacedonacheck,itispossiblethat

thecheckmaystillbecashed,sothe

bank'sproceduresforstoppaymentordersshouldbeunderstoodinadvance.Afterpaymentisstoppedona

check,thefundsarenotedasreturnedontheclient'sledgercard.Thereisnotarestrictiononissuingasecond

trustaccountcheck.



While

thereisreallyno100%safewaytodealwiththeissueofwritingtwochecks,alawyershouldusehis

judgmentbasedontheamountofthecheck,thes ophisticationofthepayee,andhisabilitytocommunicatewith

thepayee.If,inthelawyer’sjudgment,itwouldbe

impracticaltoissuestoppaymentordersorcancelthecheck

becauseoftheamount,alawyermaydecidethatitisappropriatetosimplyre‐issueanewchecktohisclient.

However,ifthelawyerissuesasecondcheck,thelawyerwillberequiredtoreimbursethetrustaccountif

for

somereasontheclientfindsandcashesthefirstcheck.Remember,alawyerisnotpermittedtomailtheclient

cash,moneyorders,orcashier’schecksinanefforttoabsolvethemselvesoftheirfiduciaryresponsibilities.One

potentialsolutiontotheissueofoutstandingchecksisforthelawyerto

chargeareasonabledormancyfeeagainst

theunclaimedfunds.Thisispermitted,solongas1)theclientreceivespriornoticeofandgiveswrittenconsentto

thedormancyfee,(2)theamountofthefeeisappropriateunderRule1.5(a)oftheRulesofProfessionalConduct,

and(3)thefee

complieswiththestatutoryrequirementsofG.S.116B‐57(a)andanyotherrestrictionsimposedby

theUnclaimedPropertyProgramoftheStateTreasurer'sOffice.Formoreinformation,andsamplefeelanguage,

see2006FormalEthicsOpinion15.



2.EarnedFeesinTrustAccount

Rule1.15‐2(f)describesthetwo

typesofpersonalfundsthatalawyermaykeepinthetrustaccount.Theyare:1)

fundssufficienttoopenormaintaintheaccount,and2)fundsbelonginginparttoaclientorotherthirdpartyand

inpartcurrentlyorconditionallytothelawyer.Apartfromthesekinds

ofdeposits,andadeposittocorrectan

errorornegativebalance,alawyer’sfundsshouldnotbeinthetrustaccount.Compliancewiththisprohibition

requiresthepromptremovalofearnedfees.2Apracticalreasoninsupportofpromptremovalofearnedfeesis

that,overtime,alawyermay

losetrackofwhatmoneyheisentitledtoandwhatisowedtoaformerclient.

2)Toavoidcommingling,lawyersshouldremoveearnedfeesfromtheirtrustaccountsonaconsistentcycle.

Whetherbi‐weeklyormonthly,aconsistentbillingcycleisgoodevidencethatthelawyeris

complyingwiththe

rulesagainstcommingling.



Ifalawyerbelievesthattrustaccountfundsareearnedfeeswhichthelawyerfailedtoremove,thelawyermay

withdrawthosefundsonlyifhecanverifyandretaindocumentationshowingthatthelawyerisentitledtothe

funds.Meresuspicionandbelief,

evenaverystrongbelief,isnotenoughtojustifythewithdrawalofthefunds.If

thelawyercannotprovethatheisentitledtothefundsandcannotattributethefundstoaparticularclient,then

thelawyermustfollowtheprovisionsofG.S.116Bfortheescheatofabandoned

propertyandescheatthosefunds

totheStateTreasurer’sOffice.



3.UnidentifiedFunds

Rule1.15‐2(q)isveryclearonthissubject.Thelawyermustmakeadiligentattempttodeterminetheidentity

and/orlocationoftheownerofthefunds.Thisattemptentailsexaminingclientfiles,searchingfor

address

information,andreviewingoldtrustaccountrecordsinanefforttodetermineandlocatetheownerofthefunds.

If,afteradiligentattempt,thelawyercannotlocateordeterminetheownerofthefunds,thefundsmustbe

deemedabandonedandpaidtothestatetreasurerincompliancewith

therequirementsofG.S.116B.



EscheatingProperty

Fundsaretobedeemedabandonedif,overthepastfiveyears,thefund’sprincipalhasnotincreased,theowner

hasnotacceptedpaymentofprincipalorincome,theownerhasnotcorrespondedinwritingandtheownerhas

nototherwiseindicatedan

interestintheaccount.Ifanyoftheeventslistedabovehaveoccurredduringthefive‐

yearperiod,anewfive‐yearperiodbeginstorunduringwhichthelawyerisobligatedtomaintainthepropertyin

112



thetrustaccount.Lawyersshouldperformanannualreviewoftheirtrustaccounttodetermineifanyfunds

qualifyforescheatment.Fordetailsontheescheatprocess,includingformsandaFour‐StepReportingguide,visit

www.nctreasurer.com/Claim‐Your‐

Cash/For‐Holders‐Of‐Unclaimed‐Property/Pages/default.aspx or email the Unclaimed Property Division at

unclaimed.property@nctreasurer.com.



Bruno'sTopTipsforTipTopTrustAccounting

ByBrunoDeMolli

(ThisarticleappearedinJournal15,3,September2010)

ReconcileYourselftoReconciliations

Iperformedrandomauditsoftrustaccountsinthe9AJudicialDistrict(CaswellandPersoncounties)andthe11th

JudicialDistrict(Harnett,Johnston,andLeecounties)lastquarter.Ofthe60lawfirmsIaudited,60%

werenotin

compliancewiththereconciliationrequirementsfortrustaccounts.Sadly,thisisnotanaberration.

Whydolawyersfailtoreconcile?

Mostlawyersfailtoreconciletheirtrustaccountsbecausetheydonotunderstandhowtoreconcile.Verytypically

oflate,thislackofunderstandingiscompoundedby

anoverrelianceontrustaccountingsoftwarethatreadily

producesareportcalleda“ReconciliationSummary”orareportwithanamethatincludestheword

“reconciliation.”Thereportwiththeseeminglyappropriatenamecreatesafalsesenseofsecuritybecause,

althoughthereportmayconfirmthatthetrustaccounttotaland

thebalanceshownonthebankstatementare

consistent,thereportdoesnotsatisfythequarterlyreconciliationrequirements.Thisarticlesetsforththe

requirementsoftheRulesofProfessionalConductandexplainshowtoreconcileyourtrustaccounttothebank

statement.

Howdoyouperformamonthlyanda

quarterlyreconciliation?

TheRule1.15‐3(d)requiresbothquarterlyandmonthlyreconciliationsofthetrustaccountbalancetothecurrent

bankstatementforatrustaccount.However,thereisanimportantdistinctionbetweenthebasicreconciliation

thatmustbedonemonthlyandthemorethoroughreconciliationsthatmustbedone

eachquarter.

MonthlyReconciliations

Rule1.15‐3(d)(2)statesthateachmonth,“thebalanceofthetrustaccountasshownonthelawyer’srecordsshall

bereconciledwiththecurrentbankstatementbalanceofthetrustaccount.”Thestepsrequiredforthistypeof

reconciliationarenotunlikethosenecessarytobalance

apersonalcheckingaccount.

 Fromtheendingbalanceshownonthebankstatementforthemonthlyreportingperiod,subtractall

outstandingchecks.Tothisamount,addalldepositsthathavenotclearedthebank.Theresultingbalance

isthecurrentbankbalance.



 Confirmthatthecurrentbankbalanceequalsthebalanceforthetrustaccountasshownonthelawyer’s

recordsforthesamedatethatthebankstatementisbalanced(ifusingmanualaccounting,thisbalance

appearsoncheckstubsortheaccountregister).

Notethatthe“ReconciliationSummary”produced

byaccountingsoftwarethatIreferenceabovewill

typicallysatisfythemonthlyrequirementtoreconcilethecurrentbankbalancetothetotaltrustaccount

balance.

QuarterlyReconciliations

Rule1.15‐3(d)(1)statesthateachquarter,“theindividualclientbalancesshownontheledgerofageneraltrust

accountmustbetotaled

andreconciledwiththecurrentbankstatementbalanceforthetrustaccount.”Ihave

addedtheemphasistodemonstratethedifferencebetweenmonthlyandquarterlyreconciliations.Thequarterly

reconciliationsrequiretheextrastepofaddingupindividualbalancesforeachclientasshownonthetrustaccount

ledgerandmakingsure

thatthistotalreconcilestothebankcurrentbalanceforthemonthattheendofthe

113



quarter.Quarterlyreconciliationspromoteaccurateaccountingforclientfundsby(1)ensuringthattherunning

balancesforeachclient,whentotaled,equalthetotalfundsondepositinthetrustaccountand(2)identifyingany

negativebalances.

Thereisonlyoneadditionalsteprequiredforquarterlyreconciliations.

 Determinethe

currentbankbalance(asexplainedabove).

 Totalthecurrentindividualbalancesforeveryclientasshownontheclientledgersforthetrustaccount.

Accountingsoftwarecanusuallyproduceareportthatsatisfiesthisstep.Typicalnamesforsuchareport

include“clienttrustlisting,”“multiplebalancesreport(balancesonly),”

or“customsummaryreport.”

 Confirmthatthecurrentbankbalanceequalsthetotalofcurrentclientbalances.

Thedateforbalancingthebankstatementandthedateclientbalancesaretotaledmustbethesameorthe

accountmaynotreconcile.Ifreportsaregeneratedbycomputer,thismeans

thatthereportsmustbegenerated

onthesamedate.Itisrecommendedthatthereportsbeprintedsimultaneouslytoavoidasubsequentpostingto

onereportandnottheother,therebyaffectingreconciliation.

Ifyourtrustaccountrecordsarekeptmanually,youmayusethisalternativemethodofreconciliation:



Addallclientbalancesandoutstandingchecks.Subtractanyoutstandingdeposits.

 Theresultingbalanceshouldreconcilewiththeendingbalanceonthebankstatement.

Notethattrustaccountquarterlyreconciliationrecords(whethermanualorcomputer‐generated)mustlisteach

client’snameandcurrentbalance,thetotalofallclient

balances,andthecurrentbankbalance(withdetails)for

theperiod.Allreconciliationrecordsmustberetainedforsixyearstosatisfytherecordkeepingrequirementin

Rule1.15‐3(d).Ifyoursoftwaredoesnotallowyoutoretrieveahardcopyofthereconciliationreportatalater

date,ahard

copyshouldbeprintedatthetimeofreconciliation.

NegativeBalances

Negativebalances,whethertheyarediscoveredinaclientbalanceorinthecurrentbankbalance,mustbe

promptlyreimbursedorawrittenexplanation(e.g.,foranaccountingerror)mustbeincludedintherecordsfor

thetrustaccount.

Ifyouhavequestionsaboutthereconciliationrequirementsfortrustaccounts,youcanfindmoreinformationin

theAttorney’sTrustAccountHandbook,whichispostedontheStateBarwebsite(www.ncbar.gov)underthetab

for"Programs—TrustAccounting."YoumayalsocalltheethicslawyersormeattheStateBar

(919‐828‐4620).

Endnote

1. InterestearnedonatrustaccountispayabletotheStateBar’sInterestonLawyers’TrustAccounts

(IOLTA)programand,ifremittedbythebankeachmonth,doesnotneedtobetakenintoconsideration

whendeterminingthecurrentbankbalance.However,somebanksremitthe

interesttoIOLTAduringthe

monthafteritisearned.Whenthisoccurs,theinterestremittedfromthepriormonth(asshownonthe

bankstatement)issubtractedfromthebalanceandtheinterestearnedduringthecurrentmonthis

addedtothebalance.Somebanksremittheinterestto

IOLTAonaquarterlybasis.Thisrequiresthe

interestearnedduringthethirdmonthofthequartertobeaddedtothestatementbalanceandthe

interestremittedtobesubtractedfromthestatementbalance.ItisrecommendedthatanIOLTAledger

bemaintainedforbothmanualandsoftwareaccountingwhen

interestisnotremittedinthesamemonth

thatitisearned.



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

TopTipsonTrustAccounting:SafeguardingFundsfromEmbezzlement

ByPeterBolac,TrustAccountComplianceCounsel

Winter2014



TheStateBarisseeinganalarmingincreaseinthenumberofreportedcasesofemployeeembezzlementfromlaw

firms.Justthismonth,Ireceivedthreecallsfromlawyerswhohadtrustaccountfundsembezzledbyemployees.

AccordingtotheStateBar

investigators,thereweretenreportedtheftsthroughOctoberofthisyear(anaverage

ofoneamonth).Thisisbothhorrifyingandunacceptable.Ifearthattheselfreportedcasesaremerelythetipof

theicebergincomparisontothenumberoftheftsthathavegoneeitherunnoticedor

unreported.Theamounts

reportedstolenfromtrustaccountsrangefrompettycashtohundredsofthousandsofdollars,allofwhichthe

lawyerisprofessionallyresponsibleforreplacinginordertoprotectclientsfromharm.Perhapsthemost

disconcertingfactisthatthetheftsareperpetratedbybothnewandlong

‐termemployeeswithaboutthesame

frequency.Theculpritisoftenthelastpersonyouwouldsuspect,andtheproblemwilloftenpresentitselfwhen

youleastexpectit.



Beforeyoudismissthesetheftsassomethingthatonlyhappenstobadlawyersoroverstretchedsolopractitioners,

notethatmanyfine

lawyersandlargereputablefirmshavefallenpreytothesecrimes.Typesofemployeetheft

rangeinsophisticationfromtheobvioustothecomplex.



Ononeend,thereareemployeeswhosimplywritethemselveschecksfromthetrustaccount,andontheother

end,thereareemployeeswhodevelopshell

companiesandmanipulatebankdocumentstocoverupsystematic

fraud.TheStateBarseesmoreoftheformerthanthelatter.Thisisconcerningbecausesimplegoodmanagement

ofthetrustaccountwoulddeterandpreventthistypeofblatant,unsophisticatedtheft.Themoredifficult‐to‐

catchtheftsinclude:employeesstealing

cashbroughtintotheofficebyclientsbeforethecashisrecordedona

ledgerordepositedintoanaccount;employeesmakingpaymentstoshellcompaniesorbankaccountsinreal

estateclosingsorsettlements;andemployeesscanningbankstatementsintoPhotoshopanddoctoringnumbers

tohideillicitactivities.If

yoususpectthatanemployeeisembezzlingfromyourtrustaccount,1thefirstthingyou

shoulddoisobtainphysicalcontrolofthetrustaccountrecords.



Toooftenwehearthatanemployee,upongettingwordthatthelawyermaybeontohim,madeupanexcuseto

take

thetrustaccountrecordshomewithhimwheretheywereultimately“lost”ordestroyed.



Aftersecuringyourrecords,contactanindependentCPAorforensicaccountanttoaudityourtrustaccountand

lookfordiscrepancies.HavetheCPAperformaproperthree‐wayreconciliationoftheaccount,examinecheck

images,and

lookatcheckbookreceiptsanddepositslips.Onceyouhaveretainedanoutsideconsultantto

examineyourrecordsandconfirmedadiscrepancy,confronttheemployee.Often,theemployeeisweigheddown

byhiscrimeandisreadytoconfess.Whileconfrontationmaybeuncomfortableandtheemployeemaybecome

combative,defiant,

orinsultedbyyouraccusations,itisyourresponsibilitytoensurethatclientfundsareproperly

safeguardedbyaskingdifficultquestions.Ifyoucannotbesurethatan

employeehasstolenfunds,butremainsuspicious,youmayelecttosuspendtheemployeewithpayandhavehim

temporarilyremovedfrom

theoffice.



Whenembezzlementisdiscovered,thelawyermustimmediatelydothefollowing:



‐Replenishanyknowndeficitinthetrustaccountbydepositingfirmfundsorpersonalfundsintothetrust

accountanddocumentingthedepositontheappropriateclientledgers.Ifthelawyersuspectsthatmorefunds

mayhave

beenembezzled,thelawyermaydepositfundsintotheaccounttocoverestimateddeficiencies.The

lawyershouldcreatealedgerforthisadditionaldepositandtitleit“firmfundstocoverestimateddeficiencies.”



‐ReporttheembezzlementtotheNorthCarolinaStateBar.Whileareportinwritingwillatsome

pointbe

required,callingourofficerightawaywillallowusto helpyouwithanyquestionsandconcernsyoumayhave—

(919)828‐4620.Thelawyerisstronglyencouragedtoalsoimmediatelytakethefollowingactions:

115



‐Terminatetheemployee.Donotallowtheemployeetotakeanydocumentsfromaworkstation,ortoaccess

emailorothercomputerfiles.



‐Callthepolice.Pressingchargesonalong‐trustedemployeemaybedifficult,butitisimportanttoshowthatyou

aretakingyourresponsibilitiesseriously.

Itisalsoimportantthattheemployeeendsupwitharecordthatis

informativetootherlawyersiftheemployeeattemptstogainemploymentinthelegalfieldagain.



‐Questionotheremployeesastotheirknowledgeofand/orcomplicityinthescheme.Itmaybethattherewas

thanoneemployeeinvolvedintheembezzlement,orthatanemployeeviolatedyourtrustbynotrevealing

potentiallyincriminatinginformationwhenitbecameknown.



‐Consideropeninganewtrustaccount.Ifyouarenot100%certainoftheamountthathasbeenstolenfromyour

trustaccount,consideropening

anewaccountforallentrustedfundsgoingforward.Thisway,youcanoperate

yourpracticethroughthenewtrustaccountwithfreshrecordsandprocesseswhilesimultaneouslyinvestigating

theoldaccountfordeficiencies.



TheNCStateBarLawyer’sTrustAccountHandbook,availableontheStateBarwebsite

(ncbar.gov/menu/publications.asp),

hasachapterdedicatedtosafeguardingfundsfromembezzlement(Section

IX).Someofthetipslistedinthatsectioninclude:



‐Donotactinhastewhensigningchecks(makesureyouknowwhatyou’resigning).



‐Examinetrustaccountcheckimagesforforgedsignatures.



‐Reconcileyourtrustaccountpromptly

afterreceivingabankstatement.Alawyershouldbereviewingand

signingoffonallreconciliationsmonthlyandquarterly.



‐Reviewalltrustaccountactivityregularly.Randomspotchecksonalltrustaccountrecordsand

correspondencehelpsdetertheft.



‐Legalfeespaidincasharedifficulttocontrol.Office

policyshouldrequirethatareceiptmustbegiventoany

clientwhopaysincash,andthelawyershouldregularlyaskclientswhopayincashiftheyreceivedareceipt.The

numbersforreceiptsinthereceiptbookshouldalsobeexaminedperiodicallytodetermineifanyreceipts

were

removedorvoided.



‐Checkwiththepostofficetodetermineifanyoneotherthandesignatedpersonnelhasattemptedtopickupyour

mail.Agoodthiefmayinterceptmailthatwouldrevealincriminatinginformation.



‐Considerhavingyourbankstatementssenttoyourhomeaddress.



‐Questionlifestylechanges

(newcars,jewelry,travel,etc.)ofindividualswithaccesstoyouraccount.Also,

personalandfamilyproblems,healthissues,ordepressionmaybeacauseofembezzlement.



‐Bewareofanemployeewhoisoverlypossessiveofthetrustaccount.Implementinternalcontrolstodivide

certaintrustaccountresponsibilitiesbetween

multipleemployees.



Often,trustaccountembezzlementisacrimeofopportunity.Ifanemployeeknowsthatnobodyislookingatthe

records,reviewingreconciliations,orperformingrandomspotchecks,thentheemployeewillbemuchmorelikely

toattempttosteal.Afirmthathasstrongtrustaccountingpracticeswill

rarelyhavetodealwithsimpleand

obvioustheft.Evenwithadequatesupervision,however,thereisoftenlittlealawyercandotostopanextremely

motivatedanddiabolicalemployee.Whileacknowledgingthisdepressingtruth,alawyershouldbeableto 

discoverthetheftquicklyandmitigatepotentialharmto

hisorherclientswithsufficientsafeguards,internal

116



controls,andpersonaloversightofthetrustaccount.Ifyouhaveanyquestionsaboutemployeeembezzlementor

anyothertrustaccountingissue,pleasecontactPeterBolacat(919)828‐4620orPbolac@ncbar.gov.



Itwouldbeusefultofollowthisprocedureforanyaccount,buttheStateBarismostlyconcerned

withtheftof

entrustedfunds.LawyersrandomlyselectedforauditaredrawnfromalistgeneratedfromtheStateBar’s

databasebaseduponjudicialdistrictmembershipdesignationsinthedatabase.



TopTipsonTrustAccounting:Do’sandDon’tsofAcceptingCreditCards

ByPeterBolac,TrustAccountComplianceCounsel



DO readthe relevant ethics opinions on credit cardsbefore you decide toaccept credit cards for advancedfees

and costs. RPC 247 Payment of Fees by Electronic Transfer (1997); 97 FEO 9 Credit Card Chargebacks Against a

TrustAccount(1998);2009FEO

4CreditCardAccountthatAvoidsCommingling(2009).



DON’Tjustaskyourfriendswhattheyuseanddothesame.Thereisachancetheyaredoingitwrongandarein

violationoftherules.



DO know the rules on passing the costs associated with credit cards on to

 your clients (allowed by our ethics

opinions with full advance disclosure, but may be in violation of merchant agreements or consumer protection

laws).Further,lawyersmustensurethatswipefeesordiscountchargesassessedagainstthetrustaccountare1)

properly accounted for, and 2) not paid with client funds

unless the funds were specifically collected for that

purpose.



DON’T deposit unearned fees and advanced costs into your operating account. Entrusted funds should NEVER,

underanycircumstances,touchalawyer’soperatingaccountuntiltheyareearnedbythelawyer.Whenindoubt

orwhenlimitedbycircumstancessuchasa

bank’sinabilitytodistinguishbetweenearnedandunearnedcharges,

funds should be deposited into the trust account and earned fees should be promptly removed to the lawyer’s

operatingaccount.



DOknowtherulesrelatingtoprotectingyourtrustaccountfromchargebacks.Alawyermustattempttonegotiate

anagreementwith

hisorherbankthatrequiresthebanktodebitchargebacksagainstanaccountotherthanthe

trustaccount.Ifthebankwillnotagreetodebitanotheraccount,thelawyermustestablishatrustaccountforthe

solepurposeofreceivingadvancepaymentsbycreditcardandtransferall

paymentstothisaccountimmediately

tothegeneraltrustaccount.Thiswillprotectthefundsofotherclientsfromchargebackdebits(see97FEO9).



DON’Tsharecreditcardequipmentwithanotherfirmif sharingwillresultinthetemporarycomminglingofboth

firms’funds.



DOconsider usinga

paymentprocessor thatistailoredforthelegalcommunity.Therearemanyprocessorsthat

catertolawyersbyagreeingtoseparateunearnedfees(depositedintotrustaccount)andearnedfees(deposited

into operating account), and protect trust funds from anydebits by chargingswipe fees and chargebacks to the

operating

account. The costs of these accounts are competitive with other providers and these companies are

knowledgeable aboutthespecificrequirements inRule 1.15.WhiletheStateBarcannotvouchforany particular

company, the North Carolina Bar Association recommends LawPay as their preferred credit card processor for

lawyers(www.lawpay.com

).



DON’T use PayPalto collect entrusted funds. RPC247 says that advancedfees andexpenses mustbe deposited

“directly” into a trust account. When a lawyer accepts credit card payments through PayPal, the money is

depositedinto aPayPal account andthelawyer must transfer themoneyfromthe

PayPal accountintothetrust

account. Since the PayPal account is not a trust account, this process is not permitted. Lawyers are permitted,

however,tousePayPaltoacceptearnedfeesthatwillbedepositedintoyouroperatingaccount.



117



DOknowthattheproperwaytorefundunearnedfeespaidbyelectronictransferisbyatrustaccountcheck(RPC

247).



DON’Tparticipateinamerchantagreementthatgrantsthebankasecurityinterestinthetrustaccount.Rule1.15‐

1(g)prohibitstheuseorpledgeoffundsin

atrustaccounttoobtaincredit.Alawyermaynotparticipateinsuchan

agreementunlessthetrustaccountisspecificallyexempted

fromthegrantofasecurityinterest.Forexample,this

would prohibit a lawyer from using the service Square unless the company is willing to alter its merchant

agreementthatrequiresthelawyertogrant“ a securityinterestin,aswellasarightofsetoffagainst,andhereby

assign, convey, deliver, pledge and transfer to us, as security for repayment of any obligations due under this

Agreement, all of your right, title, and interest in and to all of your accounts with us.” 

(https://squareup.com/legal/ua)



DO your homework. Having the ability toaccept creditcard payments from clientscan be a greattool for alaw

practice,butmakesurethatyouareawareoftherulesandrisksassociatedwiththisprocess.



IfyouhaveanyquestionsrelatingtocreditcardsoranyotherTrustAccountingissue,pleasecontactPeterBolacat

(919)828‐4620orPBolac@ncbar.gov.FollowPeteronTwitter@TrustAccountNCforalertsontrustaccountscams.



TrustAccountPlanningfortheSolePractitioner’sWithdrawalfromPractice

ThefollowingisanexcerptofanarticlethatappearedintheSpring2001editionoftheJournal.Theoriginal

article,"LawPracticeTrustees:WhatHappenswhenaSolePractitionerisMissing,Incapacitated,Dece ased,or

Disciplined?,"waswrittenbyLarissaErkman,StateBarDeputyCounsel.



Fromtimetotime,the

StateBarisaskedtoseektheappointmentofatrusteetowinddownlawpracticesfor

solepractitionerswhodie,becomedisabled,abandontheirlawpracticeoraredisciplinedbythesuspensionof

theirlawlicenseordisbarment.NorthCarolinaGeneralStatuteSection84‐28(j)governstheprocessfor

appointment

oflawpracticetrustees.Section84‐28(j)providesthat,uponapplicationoftheNorthCarolina

StateBar,thecourtsmayappointatrusteetoprotecttheclientsofanyNorthCarolinaattorneywhois

"missing,suspended,disbarred,disabled,ordeceased."N.C.Gen.Stat.§84‐28(j).



Inkeepingwiththe

GeneralStatutes,Section.0122oftheDiscipline&DisabilityRulesoftheNorthCarolinaState

Barspecificallystates:



Wheneverthereisnopartnerorothermember oftheNorthCarolinaStateBarcapableofprotectingthe

interests oftheattorney'sclientsis knowntoexist,theseniorresidentjudgeof

thesuperiorcourt inthe

districtofthemember'smostrecentaddressonfilewiththeNorthCarolinaStateBar,ifitisinthisstate,

willberequestedbythesecretary[oftheStateBar]toappointanattorneyorattorneystoinventoryfiles

of themember and to

takeaction toprotect theinterests ofthemember and his orher clients.27 N.C.

Admin.Code,1B§.0122(1994).



Appointmentofatrusteeisusuallynotnecessaryifamissing,inca p acitated,deceased,ordisciplinedattorney

(hereafter,"MIDDa ttorney")hasapartnerorassociatewhoiswillingand

abletoprotecttheinterestsofthe

attorney'sclients.Insuchcase,thepartnerorassociateordinarilyisabletohandlethesituationwithoutformal

courtorderappointingatrusteeoftheattorney'slawpractice.



Thespecificdutiesofthetrusteearesetoutinthecourt'sorderappointingthe

trustee.Inaddition,theorder

appointingthetrusteeconfersgeneralauthoritytothetrusteetotakesuchactionsasarenecessaryto

accomplishthespecificduties.Thespecificdutiesofalawpracticetrusteeare(1 )toimmediatelysecurethe

MIDDattorney'strustaccount;(2)topromptlynotifyclientsoftheir

needtoretainnewcounsel;and(3)to

inventoryfiles,toarrangeforclientstopickuptheirfiles,toseekanorderfromthecourtallowingforthe

disposalofclosedfiles.



118



ThetrusteemustpromptlysecuretheMIDDattorney'strustan d/orfiduciaryaccountsbynotifyingthefinancial

institutionswheresuchaccountsaremaintainedoftheattorney'sunavailabilityandsecuringallcheckbooksand

trustaccountrecords.Thecourtorderappointingthetrusteegiveshimorherbroadauthoritytotakeany

steps

necessarytosecurethetrustaccount,includingauthoritytoexecutenewdirectivesconcerningsignatoryauthority

fortheaccount.Thetrusteemustobtaintheaccountrecordsinordertoidentifytheown ershipofanyfundsin

suchaccounts,sothattheclients/beneficiariesmaybereimbursed,ortheirfundsforwardedasthey

maydirect.

Thetrusteemayneedtoobtainrecordsfromthefinancialinstitutionwheretheaccountismaintainedifthetrust

accountrecordsarenotonfileintheMIDDattorney'soffice.Theorderappointingatrusteegenerallygivesthe

trusteeauthoritytodisbursefundsfromthetrustand/orfiduciary

accounts.Nevertheless,theStateBar

recommendsthatthetrusteeobtainanothercou r torderspecificallyauthorizingdisbursementonceheorshehas

determinedwhatfundsaretobedisbursedandtowhom.Thetrusteeisrequiredtoaccounttothecourtforall

fundsanddisbursements.



AlongwithsecuringtheMIDD

attorney'strustaccount,themostimportanttaskofthetrusteeistodetermine

whatactiveclientmattersneedimmediateattentionandtocontactthoseclientstoinformthemoftheneedto

retainnewcounsel.TheStateBarrecommendsthatallsolepractitionersgivecarefulconsiderationtothefact

thatan

unexpectedandtragiceventmayoccurrequiringtheappointmentofalawpracticetrusteetowinddown

thelawpractice.Totheextentpracticable,itisthereforeprudentforsolepractitionerstoplanforthese

contingenciesby:(1)maintainingcurrenttrustaccountrecordsand reconciliationsinaccordancewiththeRules

ofProfessionalConduct;(2)leavinginstructionsastowherealltrustrecordsandreconciliationscanbefound;(3)

adoptingafileorganizationandretentionpolicythatincludesaninvento ryofcurrentfileswithclients'addresses,

aswellasaninventoryofclosedfileslessthansixyears;and(4 )adoptingand

implementingaclosedfile

destructionpolicyinaccordancewithRPC209andtheRul esofProfessionalConduct,sothatthetrusteedoesnot

havetoincurtimeandexpensesinventoryingclosedfilesthathaveamassedovertheyears.Thesestepswillnot

onlyprotectclientsandsavetimeandexpense

forthecourtandthelegalprofession,butwillalsosavecoststo

thesolepractitionerorhisestate.



ProposedRuleAmendmentstoPreventandDetectInternalTheft

ByPeterBolac,TrustAccountComplianceCounsel



ThefollowingisanexcerptofanarticlethatappearedintheMay2015editionoftheJournal.

AttheAprilmeetingoftheStateBar,thecouncilvotedtoreviseandrepublishforcommentproposedamendments

toRule1.15oftheRules

ofProfessionalConduct.Theamendmentswereproposedtofacilitatethepreventionand

early detection of employee theft from a trust account. Minor revisions were made in response to the public

comment received after the January quarterly meeting, and relate to how Rule 1.15 distinguishes between trust

accountsandfiduciaryaccounts.



TheBaronlyreceivedthreewrittencommentsfollowingthepublicationoftheproposedruleamendmentsinthe

lasteditionoftheJournal,buttherehasbeenafairamountof“chatter”aboutwhethertheproposedchangesare

overlyburdensomeonalawyer’spractice.Whilethereareothersubstantiveproposedchanges

toRule1.15(e.g.,

allowing the use of credit unions, explaining the self‐reporting requirement, requiring lawyers to sign

reconciliations), this article focuses on three proposed rule changes: 1) monthly and quarterly reviews, 2)

restrictionofsignatureauthority,and3)trustaccountoversightofficers(TAOO).



JohnSmithisasmall‐town

lawyerwithageneralpractice.Hefocusesmainlyonlitigationandtaxmatters,butalso

maintainsanactiverealestatepractice.Heiswellregardedinhiscommunityandhasnopriordisciplinaryissues.

Mr. Smith, a solo practitioner, has always relied on the help of his staff, under his

supervision, to complete real

estateclosingsandmaintainthetrustaccount.Hetrustshisstaffcompletely.Mr.Smithknowshehastosupervise

hisstaff’shandlingofthetrustaccountbecauseBrunomadeitveryclearduringaharrowingvisitinthelate‘90s.

During the early ‘00s, the real estate

 market begins to boom and Mr. Smith’s real estate practice increases

exponentially.Henolongerhastimetooverseeeveryaspectoftheclosingprocess,andreliessolelyonhisstaffto

handlethedaytoday deposits,disbursements,andreconciliations.Hestillsignsmosttrustaccountchecks,buthas

119



given signatory authorityto oneof his employeesfor situationswhen heis not inthe office.The bankstatement

appears to balance with the trust account balance whenever Mr. Smith asks to see a reconciliation. Everything

seemstobegoingwelluntilthetitleinsurancecompaniesbeginaskingwhy

premiumshavenotbeenpaid,andMr.

SmithisselectedforrandomauditbytheStateBar.Uponlookingathistrustaccount,Mr.Smithnoticesthattrust

accountcheckshavebeenpaidouttoemployeesandrelativesofemployees,titleinsurancecheckshaveneverbeen

mailed,andthetrust account

is thousands ofdollarsshort.Mr.Smith isforcedtoborrowmoney toreplenishthe

deficitandhislawpracticeandbarlicenseareinjeopardy.



Thisisatruestory.



HadJohnSmithregularly reviewedtheimagesofclearedchecksandarandom sampleoftransactions, hewould

have

 noticed that checks were made out to his employees and that title insurance checks were never mailed.

Further, ifhe was theonlypersonin thefirmwith signatureauthority,he wouldhaveseenthatthecheckswere

made payable to improper payees. What is even more likely, however, is

that if John Smith regularly reviewed

imagesofclearedchecksandarandomsampleoftransactions,hisemployeeswould neverhavestolenfromthe

trustaccount.A lawyer’sregular reviewof thetrustaccount servesas thesingle greatestdeterrenttoemployee

embezzlement.Theembezzlingemployeeintheabovestorysaid,

wheninterviewedbythedistrictattorney,that

sheknewhewasn’tlookingand“hewon’tknowifItakeitorifIputitback.”



MonthlyandQuarterlyReviews

TheproposedamendmentstoRule1.15includetheadditionofmonthlyandquarterlytrustaccountreviews.The

monthly review requires

 lawyersto “reviewthebank statement and cancelled checks forthe month covered by

thebankstatement.”Mostlawyersalreadyperformthistaskduringtheirmonthlybalanceofthebankstatement

withthetrustaccountrecords.Themonthlyreviewwilldisclosea)forgedsignatures,b)improperpayeesorchecks

to

cash,andc)unexplainedgapsinchecknumbersindicatingchecksmayhavegonemissing.Thelawyercanalso

verify that checks from the general trust account properly identify the client from whose balance the check is

drawnonthefaceofthecheckandcanexaminethebackofclearedchecks

toensureproperendorsementswere

made.



The quarterly review requires the lawyer to “review the statement of costs and receipts, client ledger, and

cancelled checksof a random sample of representative transactionscompleted during thequarter to verify that

thedisbursements were properly made.” The revisions made this quarter add

 that “[T]he transactions reviewed

mustinvolvemultipledisbursementsunlessnosuchtransactionsareprocessedthroughtheaccount,inwhichcase

a single disbursement is considered a transaction for the purpose of this paragraph.” A sample of three

transactions satisfies the requirement, but a larger sample may be advisable. Random review

of ledgers and

settlement statements helps to ensure that the ledgers and statements accurately reflect the transaction. This

typeof review canuncover improperdisbursements,incorrectdeposits, andsubstituted or unissuedchecks.The

review canbe performed asan additional stepin the quarterly reconciliation, and thebar will providea

 sample

formto use whenreviewing transactions. Whiletherandom review requirement maynot uncover anyimproper

activity,itwillmostdefinitelyactasadeterrenttoemployeemalfeasance.



RestrictionofSignatureAuthority

Theproposedamendmentswilllimitsignatureauthoritytoa)alawyerorb)anon‐lawyeremployee

supervisedby

thelawyerwhoisnotresponsibleforperformingreconciliations.Everysignatory,lawyerornon‐lawyer,musttake

a one‐hour trust account continuing education course (CLE) prior to exercising the signatory authority. The rule

amendments will ensure that 1) the non‐lawyer employee is educated about trust account

rules and 2) the

employee cannot issue checks without any oversight because, at a minimum, someone else is reconciling the

account. The State Bar has found that limiting signature authority to lawyers is a significant barrier against

employeeembezzlement.TheSubcommitteeonAccountabilityforTrustAccountManagementinitiallyconsidered

whether only

 lawyers should be permitted to sign trust account checks, but understood that such a rule would

createdifficultiesformanylawyersanddecidedtogivelawyerstheoptionofhavinganon‐lawyersignatory.The

proposedamendment should not overlyburden smallfirmorsolo attorneysbecause alawyer can

opttobethe

only signatory and allow a non‐lawyer employee to conduct the required reconciliations for the review and

120



signatureofthelawyer.



Jane Doe is a lawyer at a highly reputable and distinguished big‐city firm. Jane, a new partner, has signature

authority on the trust  account but doesn’t handle any of the day to day trust account maintenance. Ms. Doe

assumesthattheotherpartnersarereviewing

thetrustaccount.Theonlytimetrustaccountsarementionedatthe

monthlypartnershipmeetingiswhena trustedemployeetellsthepartnersthattheaccountsreconcile.Thentrust

accountchecksstartedtobounce.Itquicklybecomesapparentthatanemployeehasbeenstealingfromthetrust

account. The State

Bar investigates and requests the firm’s trust account records. Each partner at the firm had

assumed that another partner was actively supervising the account. In fact, no one was. The State Bar opens

disciplinaryfilesagainsteverypartner.

Thisisatruestory.



TrustAccountOversightOfficer(TAOO)

Theproposed

amendmentstoRule1.15includetheadditionofanewsubsection,Rule1.15‐4,titledTrustAccount

OversightOfficer.Thisruleallows,butdoesnotrequire,amulti‐memberfirmtodesignate,annuallyandinwriting,

one or more partners as oversight officers for any general trust account. The rule

helps a firm ensure that it is

properlymaintainingitstrustandfiduciaryaccountsandavoidrelianceonanassumptionthattrustaccountsare

beingmaintainedbysomeoneelse.DesignationastheTAOOrequiresthelawyertocompleteacertainamountof

trainingtogainproficiencyinthetrustaccountingrules

andthefirm’saccountingsystem,andrequiresthefirmto

adopt a writtenpolicy detailing thefirm’strust account management procedures. Again, thisrule is optionalfor

multi‐memberfirmsthatwanttoaddanextra

levelofoversighttotheirfirm’strustaccountmanagement.



Conclusion

Itisunderstandabletofeeloverburdenedbytheimpositionofadditionaloversightresponsibilities.However,the

additional reviewsand requirementsin the proposedruleamendmentsare notoverwhelmingandwill goa long

way to deter and detect theft from lawyer

 trust accounts. Safeguarding client property is your professional

responsibilityasalawyer.Surely,someadditionaltimeperquarteroverseeingyourtrustaccountsisworthwhileif

ithelpsyoutoavoidbecominganothercautionarytale.



You are encouraged to read the full‐text of the proposed rule amendments on page ____

 and submit your

commentstotheNorthCarolina StateBar. TheCouncilconsidersallcomments, negativeandpositive,beforeany

actionistaken.



RandomAudits

LawyersrandomlyselectedforauditaredrawnfromalistgeneratedfromtheStateBar’sdatabasebasedupon

judicialdistrictmembershipdesignationsinthedatabase.

Therandomlyselectedjudicialdistrictsusedtogenerate

thelistforthe2

quarterof2015wereDistrict3B(Carteret,Craven,andPamlicoCounties)andDistrict27A

(GastonCounty).