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End-of-life notice: American Legal Ethics Library

As of March 1, 2013, the Legal Information Institute is no longer maintaining the information in the American Legal Ethics Library. It is no longer possible for us to maintain it at a level of completeness and accuracy given its staffing needs. It is very possible that we will revive it at a future time. At this point, it is in need of a complete technological renovation and reworking of the "correspondent firm" model which successfully sustained it for many years.

Many people have contributed time and effort to the project over the years, and we would like to thank them. In particular, Roger Cramton and Peter Martin not only conceived ALEL but gave much of their own labor to it. We are also grateful to Brad Wendel for his editorial contributions, to Brian Toohey and all at Jones Day for their efforts, and to all of our correspondents and contributors. Thank you.

We regret any inconvenience.

Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


California Legal Ethics

1.15   Rule 1.15 Safekeeping Property

1.15:100   Comparative Analysis of CA Rule

Primary California References: CRPC 4-100
Background References: ABA Model Rule 1.15, Other Jurisdictions
Commentary:

1.15:101      Model Rule Comparison

CRPC 4-100 addresses a lawyer's responsibilities in preserving the identity of a client's funds and property. CRPC 4-100(A) requires a California lawyer to segregate a client's money and property from the lawyer's money and property. In particular, any funds received or held on the client's behalf must be deposited into a trust account, a bank account specifically labeled as an account for the client's funds. This trust account must be maintained in the State of California or, with the client's written consent, in any other jurisdiction in which there is a substantial relationship between the client or client's business and the jurisdiction.

There are two narrow exceptions to the rule against commingling a lawyer's funds with the client's funds. Pursuant to CRPC 4-100(A)(1) and CRPC 4-100(A)(2), funds reasonably sufficient to pay bank charges and funds belonging in part to a client and in part presently or potentially to the lawyer may be placed in the client trust account. CRPC 4-100(A)(2) also provides that any disputed portion of the trust funds shall not be withdrawn until that dispute is resolved.

Similar to CRPC 4-100(A), MR 1.15(a) requires that the lawyer segregate a client's or third person's money and property. These funds must be deposited in a separate account maintained in the state where the lawyer's office is located or, with the client's or third person's consent, elsewhere.

CRPC 4-100(B) requires a California lawyer to notify clients promptly when money or property is received on their behalf, as well as to adequately identify and label a client's properties. Additionally, CRPC 4-100(B) provides that the lawyer must promptly place the property in a safe deposit box or other place of safekeeping, maintain complete records of account funds and other property held by the lawyer for five years after termination of representation, and deliver promptly any money or property that belongs to a client entitled to receive such property or funds.

Similarly, MR 1.15(a) requires a lawyer to identify and appropriately safeguard a client's or third person's property. The lawyer must also maintain complete records of any account funds or other property held by the lawyer for five years after terminating representation of a client. MR 1.15(b) requires the lawyer to promptly notify clients and third parties when money or property is received on their behalf, to deliver such funds or property to the client or third person entitled to receive it, and, upon request by the client or third person to promptly render a full accounting of such property.

MR 1.15(c) sets forth a lawyer's obligations when a dispute arises with regard to the ownership of property held by the lawyer. When another party and lawyer claim the same interests in the property held by the lawyer, the lawyer must segregate the property until there is an accounting and severance of the interests, or until the dispute is resolved.

Pursuant to CRPC 4-100(C), the Board of Governors of the State Bar has the authority to formulate and adopt standards regarding what records must be maintained by members of the State Bar. The Board of Governors adopted the Trust Account Record Keeping Standards on July 11, 1992, which became effective on January 1, 1993. These standards describe how a lawyer must maintain a client's funds. They require a lawyer to maintain individual ledgers for each client which are updated monthly against an activity ledger for the overall trust account. Detailed records regarding all client funds and client property held by the lawyer must be maintained and reviewed monthly so that a lawyer can account for the exact amount of money in the client trust account and to whom the money belongs at any given moment. Additionally, regular examination of the accounts permit the lawyer to detect any discrepancies or bookkeeping errors immediately. Karpman & Margolis pg. 74.

CRPC 4-100 differs from MR 1.15 in several minor respects. First, CRPC 4-100(A)(1) provides for two exceptions to the rule against commingling funds in a client trust account. MR 1.15(a) does not have comparable exceptions. Additionally, CRPC 4-100(B)(2) explicitly states that the lawyer must place the client's property in a "safe deposit box or other place of safekeeping" as soon as practicable. MR 1.15 does not mention a safe deposit box; rather it requires only that the property be "appropriately safeguarded." Unlike CRPC 4-100(B), MR 1.15 does not require that property be placed in safekeeping "as soon as practicable."

CRPC 4-100 also varies from MR 1.15 in that CRPC 4-100 explicitly requires a lawyer to keep a client's funds in an identifiable bank account entitled "Trust Account," "Client's Fund Account" or words of similar import. Additionally, pursuant to CRPC 4-100, a client trust fund can be maintained in a jurisdiction outside of California if the client consents and there is a substantial relationship between the client or client's business and the jurisdiction.

Unlike MR 1.15, CRPC 4-100 grants the Board of Governors of the State Bar the authority to formulate and adopt standards regarding what records must be maintained by members of that State Bar.

Also unlike MR 1.15, CRPC 4-100 does not explicitly address the obligations of a lawyer that can arise when a third party claims an interest in property or funds which the lawyer is holding. Additionally, CRPC 4-100 does not require a lawyer to provide upon request a full accounting of property or funds held on a client's or third party's behalf.

1.15:102      Model Code Comparison

Similar to MR 1.15, EC 9-5 and DR 9-102(A) require a lawyer to segregate a client's funds from those of the lawyer.

DR 9-102(A) requires that all funds paid to a lawyer or firm, other than advances for costs and expenses, be deposited in a separate account. DR 9-102 is similar to CRPC 4-100(A) because it provides the same two narrow exceptions to the rule against commingling.

A lawyer can place into a client trust account funds to pay bank charges or funds which belong in part to the client and the lawyer. In either instance, the lawyer may only withdraw the portion belonging to the lawyer or law firm only when it becomes due. If a dispute arises between the lawyer and client regarding interests in the funds, then the disputed portion cannot be withdrawn until the dispute is resolved.

DR 9-102(B) requires a lawyer to promptly notify a client upon receipt of the client's funds or other property, as well as to identify and label the property. Additionally, the lawyer must promptly place the property in a safe deposit box or other place of safekeeping as soon as practicable, maintain complete records of such property and funds, render an accounting to the client, and promptly deliver to the client as the client requests, the funds or other properties in the possession of the lawyer which the client is entitled to receive.

DR 9-102 is substantially similar to MR 1.15. However, unlike MR 1.15, DR 9-102 does not address a lawyer's obligations which can arise when a third party claims an interest in property or funds that the lawyer is holding.

EC 5-5 through EC 5-7 are related sections. In particular, EC 5-5 addresses various issues surrounding the receipt of gifts from a client to a lawyer. A lawyer is prohibited from suggesting that a gift be made to the lawyer or for his benefit. If a client offers to make a gift to his or her lawyer voluntarily, then the lawyer, before accepting, should urge the client to secure disinterested advice from an independent third party. Also, a lawyer should insist that an instrument which benefits the lawyer be prepared by another lawyer selected by the client. [See 1.8:400 Client Gifts to Lawyer, supra]. EC 5-6 mandates that a lawyer "should not consciously influence a client" to name the lawyer as executor, trustee or lawyer of the estate. Finally, EC 5-7 is directed at the prohibitions of a lawyer acquiring a proprietary interest in the client's cause or becoming financially interested in the litigation's outcome. EC 5-7 permits a lawyer to collect his or her fee for services by means of a lien, even if the lawyer acquires an interest in the litigation's outcome. EC 5-7 also permits a reasonable contingent fee in civil cases. [See 1.5:600 Contingent Fees, supra].

Another related section is DR 5-103. In particular, DR 5-103(A) prohibits a lawyer from acquiring a proprietary interest in the cause of an action or subject matter of the litigation. However, in a civil matter, the lawyer may obtain a lien or enter into a reasonable contingent fee with the client. DR 5-103(A) is similar to EC 5-7. [See 1.8:1100 Lawyer's Proprietary Interest in Subject Matter of Representation, supra].

DR 5-103(B) prohibits a lawyer from advancing or guaranteeing any financial assistance to his or her client except for costs relating to the expenses of litigation.

1.15:110      CA IOLTA Plan

A lawyer's client trust account must contain, at all times, the precise amount entrusted to the lawyer by all clients whose funds are deposited in the account. No funds of the lawyer may be put into the account, except to pay bank charges. B&PC 6210-6212 require a California lawyer to use special interest-bearing accounts known as IOLTA accounts ("Interest on Lawyers' Trust Accounts") for small sums held for relatively brief periods. The interest earned from these IOLTA accounts are used to fund legal service programs for the poor.

Nominal trust funds or funds held for a short period of time must be placed in an interest-bearing trust account when it is not practical to segregate the funds such that it can earn income. B&PC 6211(a) and State Bar Rules Regulating Interest-Bearing Trust Fund Accounts for the Provision of Legal Services to Indigent Persons, 1 and 1.4. Based on Rule 1.4, it is "not practical" to segregate nominal trust funds when the income that the funds could earn is negligible or when the costs involved for maintaining the account is equal to any income earned.

According to State Bar Rules Regulating Interest-Bearing Trust Fund Accounts for the Provision of Legal Services to Indigent Persons 1.4, if a lawyer determines that the segregated trust funds could earn income, then the trust funds are to be deposited in an account pursuant to B&PC 6211(b) and CRPC 4-100 or as the client directs in writing. Funds that must be placed in an IOLTA account may be deposited in a single unsegregated account. B&PC 6211(a). Any interest earned on such accounts is paid to the State Bar of California. B&PC 6211(a).

Pursuant to B&PC 6211(a), a lawyer is required to place a client's nominal trust funds or funds that are on deposit for a short period of time into a single unsegregated account. Carroll v. State Bar (4th Dist. 1985) 166 Cal.App.3d 1193, 213 Cal.Rptr. 305. B&PC 6211(a) excludes deposits which can individually earn an income equal to the transactional costs of keeping the account. Therefore, only the funds that, once deposited in an interest-bearing account will not under present banking regulations earn some income for the client's individual profit after offsetting any transactional costs, such as accounting fees, are to be placed in an IOLTA account. Carroll v. State Bar (4th Dist. 1985) 166 Cal.App.3d 1193, 213 Cal.Rptr. 305.

1.15:120      CA Client Security Fund

B&PC 6140.5 establishes a "client security fund." This fund is used to reimburse or mitigate pecuniary losses of a claimant caused by the dishonest conduct of active State Bar members arising from or connected with the practice of law. Pursuant to B&PC 6140.55, a portion of Bar membership fees, currently in the amount of $40, goes into this fund.

However, the fund is not large enough to provide a full reimbursement to all claimants. Consequently, any funds paid from the fund are discretionary and subject to regulations and conditions set by the Board of Governors of the State Bar. B&PC 6140.5(a). Therefore, pursuant to State Bar Rule of Proc. Client Security Fund Matters 2, the Board or any Body designated by the Board to act upon applications for reimbursement from the client security fund may limit or deny an application for reimbursement.

Pursuant to B&PC 6140.5(b), to recover from the client security fund, an applicant must establish that an active State Bar member in his or her capacity as a lawyer, trustee or fiduciary caused the applicant a loss of money or property. See Johnson v. State Bar (2nd Dist. 1993) 12 Cal.App.4th 1561, 16 Cal.Rptr.2d 6. There can only be one maximum payment despite the number of losses suffered caused by a lawyer's dishonest conduct. For losses occurring between March 4, 1972 and January 1, 1982, the maximum allowable payment from the client security fund is $25,000. For losses occurring after January 1, 1982, the maximum allowable payment is $50,000. See State Bar Rules of Proc. Client Security Fund Matters 4.

No payment from the client security fund will include interest on or consequential damages resulting from any reimbursable loss. However, an applicant may be reimbursed upon clear and convincing proof that he or she expended reasonable costs, including a reasonable attorney fee, to recover or reduce the amount of the loss caused by the dishonest activity of a lawyer. State Bar Rules of Proc. Client Security Fund Matters 5(a).

If an applicant receives payment from the fund, that applicant's rights against the State Bar member subrogate to the State Bar. Therefore, within three years from the date of payment to the applicant, the State Bar can bring an action against the active State Bar member for the amount paid to the applicant from the fund. B&PC 6140.5(b).

Pursuant to B&PC 6140.5(c), as a condition of continued practice, the lawyer whose dishonest actions resulted in a payment from the client security fund must reimburse the fund for money paid out as a result of his or her conduct, including interest and the costs accrued in processing the claim. The amount reimbursed to the client security fund becomes part of the membership fee for the next calendar year of a publicly reproved or suspended member. The amount reimbursed to the client security fund is also a condition of reinstating State Bar membership if a member resigns while disciplinary charges are pending or the member is suspended or disbarred. See also B&PC 6140.7.    

1.15:200   Safeguarding and Safekeeping Property

Primary California References: CRPC 4-100
Background References: ABA Model Rule 1.15(a), Other Jurisdictions
Commentary: ABA/BNA 45:101, ALI-LGL 56-58, Wolfram 4.8

MR 1.15(a) requires that funds of a client or third party are segregated from a lawyer's funds. For a discussion of the related issues of commingling and misappropriation of funds [see 1.15:300 Holding Money as a Fiduciary for the Benefit of Clients or Third Parties, infra].

Maintenance of Records and Rendering Accounts

A lawyer has the duty to maintain a proper accounting to the client for funds and property received on the client's behalf. The lawyer must be able to provide an accounting of the client's property upon the client's request. A failure to provide such an accounting constitutes an abuse of the client's trust. Murray v. State Bar (1985) 40 Cal.3d 575, 220 Cal.Rptr. 677, 709 P.2d 480 (refusal to account for client funds after the client's repeated demands). Even if there is no financial loss to the client, the lawyer is still subject to discipline. McCray v. State Bar (1985) 38 Cal.3d 257, 211 Cal.Rptr. 691, 696 P.2d 83.

The purpose of keeping proper books of account, vouchers, receipts, and checks is to demonstrate the honesty and fair dealing of lawyers when their actions are called into question. Clark v. State Bar (1952) 39 Cal.2d 161, 246 P.2d 1; In the Matter of Hultman, II (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 297. The failure to keep proper books is in itself a suspicious circumstance. Clark v. State Bar (1952) 39 Cal.2d 161, 246 P.2d 1; Rodgers v. State Bar (1989) 48 Cal.3d 300, 256 Cal.Rptr. 381, 768 P.2d 1058.

The duty to account can extend to third parties. A lawyer has a fiduciary duty to the client's spouse to render an accounting in a divorce proceeding when the lawyer is entrusted with community property funds. Guzzetta v. State Bar (1987) 43 Cal.3d 962, 239 Cal.Rptr. 675, 741 P.2d 172; Sternlieb v. State Bar (1990) 52 Cal.3d 317, 276 Cal.Rptr. 346, 801 P.2d 1097.

The duty to account arises only after a client requests an accounting. Guzzetta v. State Bar (1987) 43 Cal.3d 962, 239 Cal.Rptr. 675, 741 P.2d 172; Lawhorn v. State Bar (1987) 43 Cal.3d 1357, 240 Cal.Rptr 848, 743 P.2d 908; Kelly v. State Bar (1988) 45 Cal.3d 649, 247 Cal.Rptr. 608, 754 P.2d 1104; Chang v. State Bar (1989) 49 Cal.3d 114, 260 Cal.Rptr. 280, 775 P.2d 1049; Rhodes v. State Bar (1989) 49 Cal.3d 50, 260 Cal.Rptr. 266, 775 P.2d 1035; In the Matter of Respondent E (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716; In the Matter of Whitehead (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 354. Pursuant to B&PC 6091, upon a client's written request, the lawyer is required to provide the client with a complete statement of the funds received and disbursed and any charges upon the trust account, within ten calendar days after receiving the request.

A false accounting of the client's funds and property can result in disbarment. Richardson v. State Bar (1942) 19 Cal.2d 707, 122 P.2d 889.

A failure to provide the client with an accounting of funds and property held by the lawyer after the client has made repeated demands for such an accounting constitutes willful misappropriation. Chefsky v. State Bar (1984) 36 Cal.3d 116, 202 Cal.Rptr. 349, 680 P.2d 82; Jackson v. State Bar (1979) 25 Cal.3d 398, 158 Cal.Rptr. 869, 600 P.2d 1326; Brody v. State Bar (1974) 11 Cal.3d 347, 113 Cal.Rptr. 371, 521 P.2d 107.

The following comments are taken from Karpman & Margolis pages 74-76 with certain conforming changes:

CRPC 4-100 is the only Rule that addresses the practitioner's strict responsibilities regarding the handling and disbursement of client trust funds. The rule encompasses all aspects of the lawyer's fiduciary duty with respect to trust funds: the duty to fully account for funds received and held, the duty to promptly notify a client of funds received, the duty to promptly disburse funds to the client or to a third party at the client's direction, and the duty to segregate and maintain trust funds inviolate and safe. These duties are non-delegable. A breach of any part of this rule subjects the lawyer to disciplinary liability, even though the lawyer may have delegated the task of handling client funds to office staff, accountants, or others.

Proper maintenance of the trust account is a personal obligation of the lawyer. This duty cannot be waived or delegated.

Since the 1975 amendments to this rule, a client cannot authorize any deviation from trust account requirements. In the Matter of Lilly (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 185, 191; Himmel v. State Bar (1971) 4 Cal.3d 786, 94 Cal.Rptr. 825, 484 P.2d 993.

The rule requiring client funds to be retained in a trust account is binding upon lawyers, not lay personnel, and necessitates reasonable supervision by a lawyer of his staff in handling matters relating to the trust account. Even though the lawyer cannot be held responsible for every detail of office procedure, he must accept responsibility to supervise the work of his staff. Palomo v. State Bar (1984) 36 Cal.3d 785, 795, 205 Cal.Rptr. 834, 685 P.2d 1185; Black v. State Bar (1962) 57 Cal.2d 219, 18 Cal.Rptr. 518, 368 P.2d 118; Vaughn v. State Bar (1972) 6 Cal.3d 847, 857, 100 Cal.Rptr. 713, 494 P.2d 1257.

A lawyer's duty of proper supervision and maintenance of a trust account may not be delegated to the client, see Coppock v. State Bar (1988) 44 Cal.3d 665, 244 Cal.Rptr. 462, 749 P.2d 1317, to a lay employee, see Gassman v. State Bar (1976) 18 Cal.3d 125, 132 Cal.Rptr. 675, 553 P.2d 1147, to a spouse-bookkeeper, see Burns v. State Bar (1955) 45 Cal.2d 296, 300, 288 P.2d 514, or to others.

Funds That May Not Be Held in Trust

Earned fees must be withdrawn at the earliest reasonable time, after the lawyer's fee is fixed and approved by the client. Leaving earned fees in a trust account constitutes improper commingling. Jackson v. State Bar (1979) 25 Cal.3d 398, 404, 158 Cal.Rptr. 869, 600 P.2d 1326.

Non-refundable "true" retainer. Money paid to a lawyer solely to ensure his or her availability to handle the case is earned the moment it is paid; it should never be put in a trust account. Baranowski v. State Bar (1979) 24 Cal.3d 153, 164, n.4., 154 Cal.Rptr. 752, 593 P.2d 613; Dixon v. State Bar (1985) 39 Cal.3d 335, 216 Cal.Rptr. 432, 702 P.2d 590 (lawyer who seeks to claim payment of funds was for a true retainer has burden to prove client clearly understood funds to be non-refundable).

The following comments are taken from Karpman & Margolis pages 79-80 with certain conforming changes:

CRPC 4-100(B)(2)

Duty to label and safeguard property. Garlow v. State Bar (1988) 44 Cal.3d 689, 707-710, 244 Cal.Rptr. 452, 749 P.2d 1307 (client gave lawyer five rings worth $43,500 as security for future payment of fees; despite client's later payment of bill, lawyer refused to return rings, and sold them.); Hartford v. State Bar (1990) 50 Cal.3d 1139, 270 Cal.Rptr. 12, 791 P.2d 598 (pledged stock certificate deposited with lawyer as security for fees; lawyer later sold stock; violation of CRPC 4-100).

A lawyer who lost a client's check from an insurance company violated CRPC 4-100(B). Although the record did not specify how and when he lost the check, it clearly established that he had not kept the check in a safe place. In the Matter of Broderick (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 138.

CRPC 4-100(B)(3)

Proper books and records; duty to account. Willful failure to account demonstrates a lawyer's abuse of the trust placed in him, see Murray v. State Bar (1985) 40 Cal.3d 575, 583, 220 Cal.Rptr. 677, 709 P.2d 480, and warrants discipline regardless of whether there is any financial loss to the client. McCray v. State Bar (1985) 38 Cal.3d 257, 270, 211 Cal.Rptr. 691, 696 P.2d 83. Worse than a failure to account is the giving of a false account, see Richardson v. State Bar (1942) 19 Cal.2d 707, 122 P.2d 889; Clark v. State Bar (1952) 39 Cal.2d 161, 246 P.2d 1 (lawyer acting as guardian of incompetent person, lost track of a large amount of his ward's money through gross negligence; thereafter, submitted accounts to the court hiding his loss of funds by listing the debt under a general entry of "accounts receivable," attempting to mislead court to believe the sum was due to the estate from third persons rather than himself).

Duty to account may extend to third parties as well as to client. Guzzetta v. State Bar (1987) 43 Cal.3d 962, 975, 979, 239 Cal.Rptr. 675, 741 P.2d 172 (duty to account to opposing counsel and his client in divorce proceeding when lawyer was entrusted with community property funds).

The purpose of keeping proper books of account, vouchers, receipts and checks is to be prepared to make proof of the honesty and fair dealing of a lawyer when his acts are called into question, whether in litigation with client or during a disciplinary proceeding. Clark v. State Bar (1952) 39 Cal.2d 161, 174, 246 P.2d 1. Failing to keep proper books and records is itself a suspicious circumstance. Clark v. State Bar (1952), 39 Cal.2d 161, 174, 246 P.2d 1, Black v. State Bar (1962) 57 Cal.2d 219, 18 Cal.Rptr. 518, 368 P.2d 118; together with other circumstances involving failure to keep trust funds in trust, supports inference of misappropriation. Walter v. State Bar (1970) 2 Cal.3d 880, 87 Cal.Rptr. 833, 471 P.2d 481.

Persistent refusal to account to a client in the face of repeated demands to do so, supports a finding of willful misappropriation. Brody v. State Bar (1974) 11 Cal.3d 347, 349, 13 Cal.Rptr. 371, 521 P.2d 107; Jackson v. State Bar (1979) 25 Cal.3d 398, 403, 158 Cal.Rptr. 869, 600 P.2d 1326.

The duty to account arises only after a request for an accounting is made by a client. In the Matter of Respondent E (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716, 728; In the Matter of Whitehead (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 354, 367.

Prompt Notification of Receipt of Funds or Property on Client's Behalf

A lawyer has a duty to promptly notify the client upon receipt of funds and property on the client's behalf. Sevin v. State Bar (1973) 8 Cal.3d 641, 105 Cal.Rptr. 513, 504 P.2d 449 (lawyer failed to notify client about payment of judgment received on client's behalf); Browne v. State Bar (1955) 45 Cal.2d 165, 287 P.2d 745; McKnight v. State Bar (1991) 53 Cal.3d 1025, 281 Cal.Rptr. 766, 810 P.2d 998 (lawyer failed to notify client of receipt of distribution check received on the client's behalf); Phillips v. State Bar (1975) 14 Cal.3d 492, 121 Cal.Rptr. 605, 535 P.2d 733 (willful failure to promptly inform client of receipt of payment in settlement of a lawsuit); In the Matter of Bouyer (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 404 (failure to distribute settlement funds).

The following comments are taken from Karpman & Margolis page 79 with certain conforming changes:

CRPC 4-100(B)(1)

Duty of Prompt Notification of Funds Received. Sevin v. State Bar (1973) 8 Cal.3d 641, 643, 105 Cal.Rptr. 513, 504 P.2d 449 (lawyer did not advise clients he had received close to $17,000.00 in funds on their behalf; placed money in trust account and proceeded to misappropriate it; clients discovered 8 months later lawyer's receipt of funds and subsequent conversion); Browne v. State Bar (1955) 45 Cal.2d 165, 287 P.2d 745 (two and one half year delay in advising client of receipt of funds and subsequent loss thereof); McKnight v. State Bar (1991) 53 Cal.3d 1025, 281 Cal.Rptr. 766, 810 P.2d 998 (failure to notify client three weeks after receipt of funds, and failure to notify client of exact amount received). See also Phillips v. State Bar (1975) 14 Cal.3d 492, 121 Cal.Rptr. 605, 535 P.2d 733.

Prompt Placement in Safekeeping

Pursuant to CRPC 4-100(B)(2), a lawyer is required to promptly put a client's property in a safe place. In the Matter of Broderick (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 138 (lawyer lost client's check, and therefore failed to keep client's property in a safe place); Lister v. State Bar (1990) 51 Cal.3d 1117, 275 Cal.Rptr. 802, 800 P.2d 1232 (lawyer willfully failed to place the property of the client in a place of safekeeping).

A lawyer who receives an estate planning document as defined by Prob. Code 704 on or after July 1, 1994, is required to place the document in a safe, vault, safe deposit box, or other secure place where it will be reasonably protected against loss or destruction. See Prob. Code 710.

1.15:210      Status of Fee Advances [see also 1.5:420]

The California Supreme Court has not yet decided whether advance fee payments must be deposited into an identifiable trust account until such time as earned. Baranowski v. State Bar (1979) 24 Cal.3d 153, 154 Cal.Rptr. 752, 593 P.2d 613; Katz v. Workers' Compensation Appeals Board (1981) 30 Cal.3d 353, 356, n. 2 , 178 Cal.Rptr. 815, 636 P.2d 1153. However, a recent appellate decision indicates that until fees paid in advance are earned by the lawyer, they should remain the client's property and must be segregated in a client trust account. T&R Foods, Inc. v. Rose (Super. 1996) 47 Cal.App.4th Supp.1, 56 Cal.Rptr.2d 41 (failure to segregate advance payment constituted a breach of fiduciary duty and professional negligence). Generally, advanced fees may be deposited either in a general or trust account. See Karpman & Margolis pg. 74.

Advances for costs of the litigation must be deposited in the client trust account. In the Matter of Nunez (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 196; Aronin v. State Bar (1990) 52 Cal.3d 276, 276 Cal.Rptr. 160, 801 P.2d 403. Additionally, community property funds must be held in a client trust account. Sternlieb v. State Bar (1990) 52 Cal.3d 317, 276 Cal.Rptr. 346, 801 P.2d 1097. The California Supreme Court has held that other client funds must be placed in a trust account. Rodgers v. State Bar (1989) 48 Cal.3d 300, 256 Cal.Rptr. 381, 768 P.2d 1058 (conservatorship funds); Waysman v. State Bar (1986) 41 Cal.3d 452, 224 Cal.Rptr. 101, 714 P.2d 1239; Edwards v. State Bar (1990) 52 Cal.3d 28, 276 Cal.Rptr. 153, 801 P.2d 396 (settlement funds); Crooks v. State Bar (1970) 3 Cal.3d 346, 90 Cal.Rptr. 600, 475 P.2d 872; Kelly v. State Bar (1988) 45 Cal.3d 649, 247 Cal.Rptr. 608, 754 P.2d 1104 (escrow funds).

1.15:220      Surrendering Possession of Property

CRPC 4-100(B)(4) requires that funds to which a client is entitled must be paid to the client promptly upon demand by the client. In the Matter of Bouyer (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 404; In the Matter of Kritzer (Review Dept. 1997) 1997 WL 93306 *1 (lawyer violated rule by failing to pay his client for three years); In the Matter of Elliot (Review Dept. 1996) 3 Cal. State Bar Ct. Rptr. 541 (failure to promptly pay client upon demand and failure to maintain client's funds in the trust account justified the charge of willful misappropriation); In the Matter of Hagen (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 153 (for over two months, lawyer delayed paying client after client demanded the funds).

Liens

A lawyer may have an obligation to pay third parties out of a client's funds in trust, including the obligation to pay holders of medical liens. In the Matter of Sampson (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 119 (lawyer willfully violated CRPC 4-100(B)(4) by failing to pay medical liens); Guzzetta v. State Bar (1987) 43 Cal.3d 962, 239 Cal.Rptr. 675, 741 P.2d 172; In the Matter of Respondent P (Review Dept. 1993) 2 Cal. State Bar Ct. Rptr. 622. If the client does not consent to payment of the lien, the lawyer must either satisfy the lien or take steps to resolve the dispute, otherwise the lawyer may be disciplined for intentional or reckless failure to perform legal services competently. In the Matter of Riley (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 91; see also, In the Matter of Bouyer (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 404 (prompt payment of medical liens is an aspect of competent performance). A lawyer's failure to keep settlement funds necessary to pay medical liens in a client trust account can amount to moral turpitude in willful violation of B&PC 6106. In the Matter of Sampson (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 119.

Upon notice of a third party's interest in funds received on behalf of his client, a lawyer can be liable for conversion if he or she disburses all of the funds to the client, ignoring the third party's rights in the funds. Miller v. Rau (2nd Dist. 1963) 216 Cal.App.2d 68, 30 Cal.Rptr. 612. Moreover, a lawyer may be liable for settlement proceeds disbursed to a client in knowing disregard of a lien. Kaiser Foundation Health Plan v. Aguiluz (1st Dist. 1996) 47 Cal.App.4th 302, 54 Cal.Rptr.2d 665. However, CRPC 4-100(B)(4) does not require a lawyer to endorse a settlement check if it will jeopardize the lawyer's lien for legal services in the settlement funds. In the Matter of Feldsott (Review Dept. 1997) 3 Cal. State Bar Ct. Rptr. 754.

1.15:230      Documents Relating to Representation

B&PC 6068(n) requires lawyers to provide copies of certain client documents within a prescribed time limit.

Upon termination of representation, CRPC 3-700 requires the prompt release of client papers and property when requested by the client. Whether or not the client has paid for the lawyer's services, the work product belongs to the client. CRPC 3-700; Academy of California Optometrists, Inc. v. Superior Court (3rd Dist. 1975) 51 Cal.App.3d 999, 124 Cal.Rptr. 668; Weiss v. Marcus (2nd Dist. 1975) 51 Cal.App.3d 590, 124 Cal.Rptr. 297. A failure to forward files to substitute counsel warrants disciplinary action. See Finch v. State Bar (1981) 28 Cal.3d 659, 170 Cal.Rptr. 629, 621 P.2d 253; In the Matter of Sullivan (Review Dept. 1997 3 Cal. State Bar Ct. Rptr. 608 (delay of six months failed to meet duty). Moreover, a lawyer's duty to safeguard property does not terminate simply by leaving the state. In the Matter of Frazier (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 676 (it is the duty of the lawyer, not the State Bar, to contact clients and safeguard client files when lawyer suddenly abandons California clients). [See also, 1.8:1140 Retention of Files to Collect Fees, supra].

Failure to keep proper books of account, vouchers, receipts and checks is a breach of a lawyer's duty to his clients. Weir v. State Bar (1979) 23 Cal.3d 564, 152 Cal.Rptr. 921, 591 P.2d 19.

1.15:300   Holding Money as a Fiduciary for the Benefit of Clients or Third Parties

Primary California References: CRPC 4-100
Background References: ABA Model Rule 1.15(b), Other Jurisdictions
Commentary: ABA/BNA 45:101, ALI-LGL 56, Wolfram 4.8

B&PC 6091.1 limits trust accounts to financial institutions which agree to report to the California State Bar any overdrafts to the trust account. Furthermore, B&PC 6091.2 requires that the financial institution accepting trust accounts be regulated by a federal or state agency, pay interest, insure deposits with a federal agency, and have a withdrawal notification of less than 30 days. CRPC 4-100(A) mandates that the accounts be labelled "Trust Account," "Client's Funds Account," or words of similar import. These provisions help provide prompt detection of misappropriation and reduce the possibility of unintentional loss of funds.

CRPC 4-100 requires identity preservation of client funds. Commingling a lawyer's money with a client's funds, or a lawyer's failure to deposit and manage these funds in a manner mandated by the rule necessarily violates CRPC 4-100. Jackson v. State Bar (1979) 25 Cal.3d 398, 158 Cal.Rptr. 869, 600 P.2d 1326. However, stock certificates, notes, and deeds of trust are not funds within the meaning of CRPC 4-100. See Hartford v. State Bar (1990) 50 Cal.3d 1139, 270 Cal.Rptr. 12, 791 P.2d 598 (stock certificate); Read v. State Bar (1991) 53 Cal.3d 394, 53 Cal.3d 1009A, 279 Cal.Rptr. 818, 807 P.2d 1047 (note and deed of trust taken by lawyer for security).

Misappropriation

Generally, misappropriation occurs when a lawyer spends client funds for personal use and benefit. Jackson v. State Bar (1975) 15 Cal.3d 372, 124 Cal.Rptr. 185, 540 P.2d 25. The misappropriation of a client's funds, in the absence of clearly extenuating circumstances, warrants disbarment. Himmel v. State Bar (1971) 4 Cal.3d 786, 94 Cal.Rptr. 825, 484 P.2d 993. Evidence that a lawyer's trust account balance falls below the amount credited to a client is sufficient to support a finding of willful misappropriation. The violation is deemed willful even in the absence of deliberate wrongdoing. In the Matter of Ward (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 47; Edwards v. State Bar (1990) 52 Cal.3d 28, 276 Cal.Rptr. 153, 801 P.2d 396. In Edwards, the lawyer's failure to keep adequate records and oversee client funds constituted willful misappropriation. Moreover, persistent refusal to provide an accounting to a client justifies a finding of willful misappropriation. Brody v. State Bar (1974) 11 Cal.3d 347, 113 Cal.Rptr. 371, 521 P.2d 107. A lawyer also has a duty to notify his or her client of any funds collected on the client's behalf. Phillips v. State Bar (1975) 14 Cal.3d 492, 121 Cal.Rptr. 605, 535 P.2d 733. When a lawyer receives money on behalf of a third party who is not a client, the lawyer nevertheless owes a fiduciary obligation to the third party. Thus, any funds that the lawyer holds on the third party's behalf must be treated as trust funds. Johnstone v. State Bar (1966) 64 Cal.2d 153, 49 Cal.Rptr. 97, 410 P.2d 617 (breach of fiduciary duty to third party who had an interest in settlement proceeds); Haley v. State Bar (1963) 60 Cal.2d 404, 33 Cal.Rptr. 609, 385 P.2d 1 (lawyer misappropriated funds from a personal injury settlement which the lawyer knew the State Compensation Insurance Fund had an interest in pursuant to its lien claim).

B&PC 6106 states that the commission of an act of moral turpitude or dishonesty by a lawyer is grounds for disbarment or suspension regardless of whether the act was committed while acting as a lawyer or not and whether the act constituted a felony or misdemeanor. A finding that a lawyer has willfully misappropriated a client's funds is sufficient to warrant the conclusion that the lawyer has committed an act of moral turpitude, despite the lack of any evil intent. Lipson v. State Bar (1991) 53 Cal.3d 1010, 281 Cal.Rptr. 775, 810 P.2d 1007. Willfully violating a trust involving money of a third party who is not a client constitutes an act of moral turpitude and dishonesty in violation of B&PC 6106. Johnstone v. State Bar (1966) 64 Cal.2d 153, 49 Cal.Rptr. 97, 410 P.2d 617.

As related to attorneys' fees, clients retain ownership of funds until earned by the lawyer. Read v State Bar (1991) 53 Cal.3d 394, 279 Cal.Rptr. 818, 807 P.2d 1047. A lawyer may not unilaterally determine his own fees and withhold funds to satisfy it. McKnight v. State Bar (1991) 53 Cal.3d 1025, 281 Cal.Rptr. 766, 810 P.2d 998; Kelly v. State Bar (1991) 53 Cal.3d 509, 280 Cal.Rptr. 298, 808 P.2d 808.

Without compelling mitigating circumstances, the appropriate sanction for willful misappropriation is disbarment. Hartford v. State Bar (1990) 52 Cal.3d 93, 276 Cal.Rptr. 74, 801 P.2d 317; Sugarman v. State Bar (1990) 51 Cal.3d 609, 274 Cal.Rptr. 246, 798 P.2d 843. If the amount of misappropriated funds or property misappropriated is insignificantly small, then at least one year's actual suspension is imposed. Silva-Vidor v. State Bar (1989) 49 Cal.3d 1071, 264 Cal.Rptr. 439, 782 P.2d 680; In re Brown (1995) 12 Cal.4th 205, 48 Cal.Rptr.2d 29, 906 P.2d 1184 (if offenses do not result in willful misappropriation of entrusted funds, then appropriate sanction is at least three month actual suspension, regardless of mitigating circumstances). These disciplinary standards should be regarded as guidelines, not inflexible mandates. Edwards v. State Bar (1990) 52 Cal.3d 28, 276 Cal.Rptr. 153, 801 P.2d 396. Disbarment would rarely be appropriate for a single act of negligent misappropriation, unaccompanied by deceit or other aggravating factors. Id.

However, evidence that the trust account's balance fell below the amount credited to the client is sufficient to support a finding of willful misappropriation. Edwards v. State Bar (1990) 52 Cal.3d 28, 276 Cal.Rptr. 153, 801 P.2d 396. Even if the client does not suffer any loss, the lawyer can still be disciplined for misappropriation. Himmel v. State Bar (1971) 4 Cal.3d 786, 94 Cal.Rptr. 825, 484 P.2d 993 (lawyer's one year suspension was warranted even though the client suffered no loss where he misappropriated funds, made misrepresentations, and signed or caused to be signed a client's name on a check knowing he lacked the authority to do so).

Necessity and misfortune are not defenses available to a lawyer who appropriates a client's money. Cane v. State Bar (1939) 14 Cal.2d 597, 95 P.2d 934.

Commingling

Commingling is defined as the failure to segregate client funds from the lawyer's money. T&R Foods, Inc. v. Rose (Super. 1996) 47 Cal.App.4th Supp. 1, 56 Cal.Rptr.2d 41 (failure to segregate advance payment retainer constituted a breach of fiduciary duty and professional negligence); Greenbaum v. State Bar (1976) 15 Cal.3d 893, 126 Cal.Rptr. 785, 544 P.2d 921. Even the honest belief of entitlement of funds is not a defense. Dudugjian v. State Bar (1991) 52 Cal.3d 1092, 278 Cal.Rptr. 90, 804 P.2d 715. But, a lawyer's deposit to cover an improper withdrawal does not constitute commingling of funds. Guzzetta v. State Bar (1987) 43 Cal.3d 962, 239 Cal.Rptr. 675, 741 P.2d 172.

"Borrowing" client funds or commingling them with the lawyer's funds is one of the surest ways for a California lawyer to be disbarred.

The mere commingling of funds can justify three years of actual suspension. Fitzpatrick v. State Bar (1977) 20 Cal.3d 73, 141 Cal.Rptr 169, 569 P.2d 763. However, an isolated, honest mistake that funds belong to a firm, warrants only public reproval. Dudugjian v. State Bar (1991) 52 Cal.3d 1092, 278 Cal.Rptr. 90, 804 P.2d 715.

The following comments are taken from Karpman & Margolis pages 76-79 with certain conforming changes:

Improper Commingling [CRPC 4-100(A)]

As far as the client is concerned, the result is the same whether his or her money is deliberately misappropriated by a lawyer or is unintentionally lost by circumstances beyond the control of the lawyer. Murray v. State Bar (1985) 40 Cal.3d 575, 582, 220 Cal.Rptr. 677, 709 P.2d 480.

The purpose of the rule against commingling is to provide against the probability in some cases, the possibility in many cases, and the danger in all cases that commingling will result in a loss of clients' money. However, actual harm to the client or the loss of funds is not necessary to establish a commingling violation. Hamilton v. State Bar (1979) 23 Cal.3d 868, 153 Cal.Rptr. 602, 591 P.2d 1254.

Neither good faith nor restitution is a defense to a charge of commingling. Heavey v. State Bar (1976) 17 Cal.3d 553, 558, 131 Cal.Rptr. 406, 551 P.2d 1238.

Ignorance of the rule against commingling does not preclude discipline. Silver v. State Bar (1974) 13 Cal.3d 134, 117 Cal.Rptr. 821, 528 P.2d 1157.

Moral turpitude is not necessarily involved in a commingling violation, if the client's money is not endangered by such procedure and is always available to the client. Spindell v. State Bar (1975) 13 Cal.3d 253, 256, n.1, 118 Cal.Rptr. 480, 530 P.2d 168; Heavey v. State Bar (1976) 17 Cal.3d 553, 558, 131 Cal.Rptr. 406, 551 P.2d 1238; Silver v. State Bar (1974) 13 Cal.3d 134, 144-145, 117 Cal.Rptr. 821, 528 P.2d 1157.

Placing a lawyer's own funds in the trust account to serve as a "buffer" is prohibited commingling. Silver v. State Bar (1974) 13 Cal.3d 134, 117 Cal.Rptr. 821, 528 P.2d 1157.

Commingling occurs when the client's money is intermingled with that of his or her lawyer and its separate identity is lost, so that it may be used for the lawyer's personal expenses or subjected to the claims of the lawyer's creditors, including attachment and levy. Vaughn v. State Bar (1972) 6 Cal.3d 847, 100 Cal.Rptr. 713, 494 P.2d 1257.

Leaving earned fees in the trust account is prohibited commingling. Black v. State Bar (1962) 57 Cal.2d 219, 18 Cal.Rptr. 518, 368 P.2d 118.

A lawyer who kept personal funds in a client trust fund account and wrote personal checks on the account over a three month period willfully violated CRPC 4-100(A). In the Matter of Broderick (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 138.

Failure to Place Client Funds into Trust Account

A lawyer deposited his clients' insurance company drafts into his personal account; commingling was found. It was not a defense that he "intended" to immediately pay both clients and doctors in full, that he had a "bookkeeping entry" that allowed him mentally to "segregate" his client's funds from his own, or that he had personal credit with his bank as security for his clients' funds. Bernstein v. State Bar (1972) 6 Cal.3d 909, 913, 917, 101 Cal.Rptr. 369, 495 P.2d 1289.

Where a lawyer's staff mistakenly placed a client's cost money in the lawyer's general account, the court held that the lawyer was not liable for commingling based on a single bookkeeping error. Proper office trust account monitoring procedures were in place, and the error nevertheless remained undetected for several years. However, once the lawyer became aware of the error and failed to rectify it, he became culpable of a commingling violation. In the Matter of Respondent E (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716, 727.

Holding Client Funds Outside Trust Account in Cash or Cashier's Check

Merely holding client funds outside of the trust account in the form of a cashier's check does not constitute misappropriation, without more, but is commingling. In the Matter of Whitehead (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 354, 362; Vaughn v. State Bar (1972) 6 Cal.3d 847, 855, 100 Cal.Rptr. 713, 494 P.2d 1257; Black v. State Bar (1962) 57 Cal.2d 219, 18 Cal.Rptr. 518, 368 P.2d 118; Lawhorn v. State Bar (1987) 43 Cal.3d 1357, 1366, 240 Cal.Rptr. 848, 743 P.2d 908 (putting client's money into refrigerator to avoid attachment by ex-wife and other creditors); Alberton v. State Bar (1984) 37 Cal.3d 1, 206 Cal.Rptr. 373, 686 P.2d 1177 (placing funds in office safe).

Placing Client Funds in Lawyer's Personal or Business Account

Where a lawyer instructed a secretary to deposit a client settlement draft in office account, rather than the trust account, so that the draft would clear the bank faster, commingling was found. Waysman v. State Bar (1986) 41 Cal.3d 452, 224 Cal.Rptr. 101, 714 P.2d 1239.

A lawyer put a client's settlement into a personal account to avoid levy on a trust account obtained by his wife in divorce proceedings. This action did not involve misappropriation, but did involve commingling. In the Matter of Whitehead (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 354, 362, 366-367.

Placing Lawyer's Personal Funds into Client Trust Account and Other Improper Uses

Evidence showed that a lawyer opened a "trust account" with personal funds and used it as a personal account, although client funds were sometimes placed in it. Further, the lawyer attached a personal credit card and ready reserve account to the purported trust account authorizing the bank to make automatic withdrawals for the required monthly payments. This was a clear case of commingling and endangerment of client funds. Brody v. State Bar (1974) 11 Cal.3d 347, 349, 113 Cal.Rptr. 371, 521 P.2d 107.

A violation of the rule occurred where a lawyer set up spurious trust account into which he placed personal funds, in order to avoid attachments. Bradpiece v. State Bar (1974) 10 Cal.3d 742, 111 Cal.Rptr. 905, 518 P.2d 337.

The rule absolutely bars use of the trust account for personal purposes, even if client funds are not on deposit. Doyle v. State Bar (1976) 15 Cal.3d 973, 126 Cal.Rptr. 801, 544 P.2d 937.

By using the trust account to pay personal debts, the lawyer "cloaks the transaction with the care and soundness represented by the [trust] account . . ." In the Matter of Heiser (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 47, 54.

It is a violation of the rule to use the trust account as a general account to avoid the IRS. In the Matter of Bleecker (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 113.

Exceptions to Commingling

Keeping "reasonably sufficient" personal funds in an account to cover bank charges is specifically authorized. CRPC 4-100(A)(1).

A lawyer's restoration of funds wrongfully withdrawn from a trust account, by placing personal funds into trust account to cover shortfall, is not a prohibited commingling. Guzzetta v. State Bar (1987) 43 Cal.3d 962, 978-979, 239 Cal.Rptr. 675, 741 P.2d 172.

Absent specific guidelines from the State Bar, holding $121.83 of personal funds in the client trust account to cover bank charges was not unreasonable. In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17, 24. See also Bernstein v. State Bar (1972) 6 Cal.3d 909, 916-917, 101 Cal.Rptr. 369, 495 P.2d 1289 and Silver v. State Bar (1974) 13 Cal.3d 134, 145, n.7, 117 Cal.Rptr. 821, 528 P.2d 1157.

Misappropriation

Misappropriation is any unauthorized use or withholding by a lawyer of client's funds or other entrusted funds. Greenbaum v. State Bar (1976) 15 Cal.3d 893, 126 Cal.Rptr. 785, 544 P.2d 921.

Misappropriation is generally found to also involve moral turpitude. Glickman v. State Bar (1973) 9 Cal.3d 179, 107 Cal.Rptr. 65, 507 P.2d 953. However, when trust funds taken in honest, good faith, but mistaken belief that a lawyer had a client's authority to apply the funds to outstanding fees, the court found neither moral turpitude nor misappropriation. Dudugjian v. State Bar (1991) 52 Cal.3d 1092, 278 Cal.Rptr. 90, 804 P.2d 715; Sternlieb v. State Bar (1990) 52 Cal.3d 317, 276 Cal.Rptr. 346, 801 P.2d 1097.

"Willful" misappropriation is found not only when a lawyer deliberately takes money with intent to deprive, see Chang v. State Bar (1989) 49 Cal.3d 114, 260 Cal.Rptr. 280, 775 P.2d 1049, but also when trust account deficiencies occur because of the lawyer's extended failure to properly manage and reconcile the account, or properly supervise others in carrying out that responsibility. Palomo v. State Bar (1984) 36 Cal.3d 785, 795, 205 Cal.Rptr. 834, 685 P.2d 1185; In the Matter of Respondent E (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716, 726-727.

The mere fact that the balance in a client trust account has fallen below the total of amounts deposited in, and purportedly held in trust supports a finding of misappropriation. Giovanazzi v. State Bar (1980) 28 Cal.3d 465, 474, 169 Cal.Rptr. 581, 619 P.2d 1005.

Not all trust account violations rise to the level of a willful misappropriation. Only when a lawyer's handling of a trust account rises to at least gross negligence, will a "misappropriation" be found. In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17, 26 (when shortfall in account due to single bookkeeping error, which remained undetected for several months due to lawyer's inadequate monitoring of account, State Bar Court declined to call such conduct "misappropriation," but did find violation of CRPC 4-100).

When misappropriation results from inexactness and insolvency, not greed and venality, it is deserving of less severe discipline. Hipolito v. State Bar (1989) 48 Cal.3d 621, 257 Cal.Rptr. 331, 770 P.2d 743.

Where a lawyer withdrew trust account funds for his own use and the balance in his trust account was less than the amount needed to cover his clients' outstanding medical liens, he willfully violated CRPC 4-100(A). In the Matter of Sampson (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 119.

Misappropriation of Client Property Rather Than Funds

Garlow v. State Bar (1988) 44 Cal.3d 689, 707-710, 244 Cal.Rptr. 452, 749 P.2d 1307 (client gave lawyer five rings worth $43,500 as security for future payment of fees; despite client's later payment of bill, lawyer refused to return rings, and sold them.); Hartford v. State Bar (1990) 50 Cal.3d 1139, 270 Cal.Rptr. 12, 791 P.2d 598 (pledged stock certificate deposited with lawyer as security for fees; lawyer later sold stock; violation of CRPC 4-100).

Misappropriation of Funds from Other Than Clients

Morales v. State Bar (1988) 44 Cal.3d 1037, 245 Cal.Rptr. 398, 751 P.2d 457 (misappropriation of over $23,000.00 from former partnership's pension fund account; Kaplan v. State Bar (1991) 52 Cal.3d 1067, 278 Cal.Rptr. 95, 804 P.2d 720; In re Basinger (1988) 45 Cal.3d 1348, 249 Cal.Rptr. 110, 756 P.2d 833 (misappropriation of funds from law partnership); Lefner v. State Bar (1966) 64 Cal.2d 189, 49 Cal.Rptr. 296, 410 P.2d 832 (misappropriation of bail bond money).

Non-Defenses

Restitution of funds not a defense to misappropriation. Sevin v. State Bar (1973) 8 Cal.3d 641, 646, 105 Cal.Rptr. 513, 504 P.2d 449.

The following comments are taken from Karpman & Margolis page 75 with certain conforming changes:

Monies held for the benefit of third parties. Funds of certain third parties that come into a lawyer's hands are required to be treated as trust funds. Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-156, 49 Cal.Rptr. 97, 410 P.2d 617. When a lawyer assumes the responsibility to disburse funds as agreed by the parties in an action, the lawyer owes an obligation to the party who is not his client to ensure compliance with the terms of the agreement. If a dispute arises over entitlement to the funds, the lawyer must keep the funds in trust pending resolution of the dispute. In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17, 27-28 (competing claims to funds between client and the insurance company); In the Matter of Mapps (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 1 (money owed for medical liens); Johnstone v. State Bar (1966) 64 Cal.2d 153, 49 Cal.Rptr. 97, 410 P.2d 617 (money owed to worker's compensation carrier); Galardi v. State Bar (1987) 43 Cal.3d 683, 238 Cal.Rptr. 774, 739 P.2d 134 (breach of fiduciary duty to non-client, real estate co-venturers).

The following comments are taken from Karpman & Margolis pages 80-82 with certain conforming changes:

CRPC 4-100(B)(4)

Failure to pay out funds constitutes misappropriation and a violation of this section.

Willful failure to return illegal fees in excess of MICRA limitations upon demand, despite Respondent's good faith belief of entitlement to fees, is a violation. In the Matter of Harney (Review Dept. 1995) 3 Cal. State Bar Ct. Rptr. 266.

Duty to promptly pay out funds to client. Failure to promptly honor medical liens violates this section. In the Matter of Sampson (Review Dept. 1994) 3 Cal. State Bar Rptr. 119; In the Matter of Mapps (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 1, 10; In the Matter of Dyson (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 280, 286 (lawyer's fiduciary duty to client does not end with payment to client of his share of settlement proceeds; lawyer has ongoing fiduciary duty to hold in trust remaining settlement funds subject to client's authorization for disbursement, and to honor client's agreement to pay medical providers).

A violation of this section also contemplates that the client "be entitled to receive" the funds prior to pay-out. In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17 (delay of eight months in paying client, when client had not yet signed release and therefore was not yet entitled to receive funds, not a violation).

Delay of two months in paying funds to client after demand violates this rule. In the Matter of Hagen (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 153.

A violation of this section contemplates that a request must first be received from the client for payment of funds. In the Matter of Bouyer (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 404; In the Matter of Nelson (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 178.

Other Misconduct with Respect to Trust Funds

Issuance of Bad Checks

Conduct in issuing even a single bad check from a trust account, and failing to perform a subsequent promise to make good the check, is the equivalent of issuing numerous bad checks, and supports a finding of moral turpitude. Bowles v. State Bar (1989) 48 Cal.3d 100, 255 Cal.Rptr. 846, 768 P.2d 65.

Issuance of insufficiently funded checks from trust account manifests dishonesty and moral turpitude, and warrants discipline. Tomlinson v. State Bar (1975) 13 Cal.3d 567, 577, 119 Cal.Rptr. 335, 531 P.2d 1119; Mack v. State Bar (1970) 2 Cal.3d 440, 443, 85 Cal.Rptr. 625, 467 P.2d 225; In the Matter of Heiser (Review Dept. 1990) 1 Cal. State Bar Ct. Rptr. 47, 53-54.

Improper Endorsement of Settlement Drafts

Endorsement of a client's name on a settlement check, without authorization, constitutes serious misconduct. Palomo v. State Bar (1984) 36 Cal.3d 785, 205 Cal.Rptr. 834, 685 P.2d 1185; Silver v. State Bar (1974) 13 Cal.3d 134, 144, 117 Cal.Rptr. 821, 528 P.2d 1157.

A lawyer may obtain express authority from a client to sign the client's name on checks and releases; the inclusion of such a special power in the retainer agreement does not violate ethical rules, absent unconscionable circumstances in its creation. In the Matter of Lazarus (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 387, 396-397; In the Matter of Respondent H (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 234. However, a lawyer may not lead a third party to believe that the client has personally signed a document, where the signature is needed under penalty of perjury (such as a verification) or the third party expects, anticipates, or needs the client's original signature. See Aronin v. State Bar (1990) 52 Cal.3d 276, 286-287, 276 Cal.Rptr. 160, 801 P.2d 403; Levin v. State Bar (1989) 47 Cal.3d 1140, 1146, 255 Cal.Rptr. 422, 767 P.2d 689; Hallinan v. State Bar (1948) 33 Cal.2d 246, 249, 200 P.2d 787.

Although a prior lawyer did not expressly authorize the successor lawyer to endorse his name to a settlement draft, he did not object after notice of intended endorsement and deposit of drafts; under the circumstances, the successor lawyer reasonably believed he had the authority to endorse the first lawyer's name on the draft, and was not guilty of any act of moral turpitude or other impropriety. In the Matter of Respondent H (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 234, 240.

References

B&PC 6106 (Acts of moral turpitude, dishonesty or corruption); B&PC 6069 (Irrevocable authorization for disclosure of trust account records given to State Bar and Supreme Court); B&PC 6091 (State Bar investigation and audit of suspected trust fund mishandling); B&PC 6091.1, B&PC 6091.2 (Duty of financial institutions to report overdrafts, NSF checks, and misappropriation in client trust account maintained by lawyer to State Bar, irrespective of whether instruments are honored); B&PC 6102 (Conviction of grand theft of client funds-summary disbarment); B&PC 6211, B&PC 6212 (Nominal, short-term funds to be deposited into interest-bearing trust account, with interest payable to State Bar to fund legal services programs; requirements for establishing client trust account, see Carroll v. State Bar (4th Dist. 1985) 166 Cal.App.3d 1193, 213 Cal.Rptr. 305 (upholding constitutionality of B&PC 6211)).

Civ. Proc. Code 1518 (funds and other property held in fiduciary capacity escheat to state if unclaimed after 3 years).

Fin. Code 17410 (escrow or trust funds not subject to enforcement of money judgment arising out of any claim against escrow agent).

94 ALR3d 846 (attorney's commingling of client's funds with his own as ground for disciplinary action-modern status).

91 ALR3d 975 (attorney's failure to report promptly receipt of money or property belonging to client as ground for disciplinary action).

Ethics Opinions

L.A. Op. 478 (medical liens fiduciary duties owed to third party lien holders when client disputes lien and requests receipt of disputed funds).

O.C. Op. 93-002 (use of a fee financing plan whereby the client obtains financing for legal fees through an independent financial institution and what procedural safeguards should be satisfied).

C.O.P.R.A.C. Op. 1988-97 (lawyer may have lay person as signatory on client trust account. Lawyer's ultimate responsibility for the integrity of the account is a fiduciary responsibility that cannot be delegated).

C.O.P.R.A.C. Op. 1975-36 (unclaimed client funds must be left in trust account and not taken by lawyer; provisions of Civ. Proc. Code 1518 (unclaimed property escheats to state) should be complied with).

L.A. Op. 454 (ethical obligations to third parties in handling trust accounts; right to delegate control of trust account to lay persons).

L.A. Op. 1985-438 (no right to withdraw disputed fee from trust account, even when client fails to elect fee arbitration after 3 years; final resolution of dispute must be reached first).

Under L.A. Op. 1995-484, a lawyer may retain funds in a client trust account as a "security deposit" against future fees. In so doing, there are two key guidelines that must be followed: (1) if a fee dispute arises, then the money must be frozen in the account until the dispute is resolved and (2) once the lawyer's interest becomes fixed and is not in dispute, the lawyer must withdraw the money from the account at the earliest reasonable time.

1.15:400   Dispute Over Lawyer's Entitlement to Funds Held in Trust

Primary California References: CRPC 4-100
Background References: ABA Model Rule 1.15(c), Other Jurisdictions
Commentary: ABA/BNA 45:101, ALI-LGL 56-57, Wolfram 4.8

CRPC 4-100(A)(2) requires that the disputed portion of trust funds not be withdrawn until the dispute is finally resolved. Walker v. State Bar (1990) 49 Cal.3d 1107 n.5, 264 Cal.Rptr. 825, 783 P.2d 184 (commenting on former CRPC 8-101(A)(2) (1983)); T&R Foods, Inc. v. Rose (Super. 1996) 47 Cal.App.4th supp. 1, 56 Cal.Rptr.2d 41. Furthermore, a lawyer may not unilaterally determine his own fees and withhold trust funds to satisfy it. McKnight v. State Bar (1991) 53 Cal.3d 1025, 281 Cal.Rptr. 766, 810 P.2d 998; Kelly v. State Bar (1991) 53 Cal.3d 509, 280 Cal.Rptr. 298, 808 P.2d 808.