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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.

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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Delaware Legal Ethics

1.15 Rule 1.15 Safekeeping Property

1.15:100 Comparative Analysis of Delaware Rule

1.15:101 Model Rule Comparison

The text and the comments of DLRPC Rule 1.15 are significantly different from Model Rule 1.15 and contain very detailed rules governing the handling of funds, recordkeeping, and reporting. Delaware also has an additional rule, DLRPC Rule 1.15A, for trust account overdraft notification.

DLRPC Rule 1.15(a) adds a sentence after the second sentence that reads: “Funds of the lawyer that are reasonably sufficient to pay bank charges may be deposited therein; however, such amount may not exceed $500 and must be separately stated and accounted for in the same manner as clients' funds deposited therein.” This sentence is not found in Model Rule 1.15(a). The remainder of DLRPC Rule 1.15(a) corresponds with Model Rule 1.15(a).

Model Rule 1.15(d) is identical to DLRPC Rule 1.15(b).

DLRPC Rule 1.15(c) is similar to Model Rule 1.15(e). The first sentence of DLRPC Rule 1.15(e) states “both the lawyer and another person,” while the first sentence of Model Rule 1.15(e) states “two or more persons (one of whom may be the lawyer).” DLRPC Rule 1.15(c) omits the last sentence of Model Rule 1.15(e) that discusses prompt distribution of undisputed property.

There is no corresponding text to Model Rule 1.15(b) & (c) in DLRPC Rule 1.15.

The text of DLRPC Rule 1.15(d)-(n) is not found in the Model Rule 1.15, and states as follows:

“(d) A lawyer engaged in the private practice of law must maintain financial books and records on a current basis, and shall preserve the books and records for at least five years following the completion of the year to which they relate, or, as to fiduciary books and records, five years following the completion of that fiduciary obligation. The maintenance of books and records must conform with the following provisions:

(1) All bank statements, cancelled checks, and duplicate deposit slips relating to fiduciary and non- fiduciary accounts must be preserved.

(2) Bank accounts and related statements, checks, deposit slips, and other documents maintained for fiduciary funds must be specifically designated as "Trust Account" or "Escrow Account," and must be used only for funds held in a fiduciary capacity.

(3) Bank accounts and related statements, checks, deposit slips, and other documents maintained for non- fiduciary funds must be specifically designated as "Attorney Business Account" or "Attorney Operating Account," and must be used only for funds held in a non-fiduciary capacity. A lawyer in the private practice of law shall maintain a non-fiduciary account for general operating purposes, and the account shall be separate from any of the lawyer's personal or other accounts.

(4) All records relating to property other than cash received by a lawyer in a fiduciary capacity shall be maintained and preserved. The records must describe with specificity the identity and location of such property.

(5) All billing records reflecting fees charged and other billings to clients or other parties must be maintained and preserved.

(6) Cash receipts and cash disbursement journals must be maintained and preserved for each bank account for the purpose of recording fiduciary and nonfiduciary transactions. A lawyer using a manual system for such purposes must total and balance the transaction columns on a monthly basis.

(7) A monthly reconciliation for each bank account, matching totals from the cash receipts and cash disbursement journals with the ending check register balance, must be performed. The reconciliation procedures, however, shall not be required for lawyers using a computer accounting system or a general ledger.

(8) The check register balance for each bank account must be reconciled monthly to the bank statement balance.

(9) With respect to all fiduciary accounts:

(A) A subsidiary ledger must be maintained and preserved with a separate account for each client or third party in which cash receipts and cash disbursement transactions and monthly balances are recorded.

(B) Monthly listings of client or third party balances must be prepared showing the name and balance of each client or third party, and the total of all balances.

(C) No funds disbursed for a client or third party must be in excess of funds received from that client or third party. If, however, through error funds disbursed for a client or third party exceed funds received from that client or third party, the lawyer shall transfer funds from the nonfiduciary account in a timely manner to cover the excess disbursement.

(D) The reconciled total cash balance must agree with the total of the client or third party balance listing. There shall be no unidentified client or third party funds. The bank reconciliation for a fiduciary account is not complete unless there is agreement with the total of client or third party accounts.

(E) No funds which should have been disbursed shall remain in the account, including, but not limited to, earned legal fees, which must be transferred to the lawyer's non- fiduciary account on a prompt and timely basis when earned.

(F) No funds of the lawyer shall be placed in or left in the account except as provided in Rule 1.15(a).

(G) When a separate real estate bank account is maintained for settlement transactions, and when client or third party funds are received but not yet disbursed, a listing must be prepared on a monthly basis showing the name of the client or third party, the balance due to each client or third party, and the total of all such balances. The total must agree with the reconciled cash balance.

(10) If a lawyer maintains financial books and records using a computer system, the lawyer must cause to be printed each month a hard copy of all monthly journals, ledgers, reports, and reconciliations, and must review and preserve the documents in the same manner as other financial records described in this Rule.

(e) A lawyer's financial books and records must be subject to examination by the auditor for the Lawyers' Fund for Client Protection, for the purpose of verifying the accuracy of a certificate of compliance filed each year by the lawyer pursuant to Supreme Court Rule 69. The examination must be conducted so as to preserve, insofar as is consistent with these Rules, the confidential nature of the lawyer's books and records. If the lawyer's books and records are not located in Delaware, the lawyer may have the option either to produce the books and records at the lawyer's office in Delaware or to produce the books and records at the location outside of Delaware where they are ordinarily located. If the production occurs outside of Delaware, the lawyer shall pay any additional expenses incurred by the auditor for the purposes of an examination.

(f) A lawyer holding client funds must initially and reasonably determine whether the funds should or should not be placed in an interest-bearing depository account for the benefit of the client. In making such a determination, the lawyer must consider the financial interests of the client, the costs of establishing and maintaining the account, any tax reporting procedures or requirements, the nature of the transaction involved, the likelihood of delay in the relevant proceedings, whether the funds are of a nominal amount, and whether the funds are expected to be held by the lawyer for a short period of time. A lawyer must at reasonable intervals consider whether changed circumstances would warrant a different determination with respect to the deposit of client funds. Except as provided in these Rules, interest earned on client funds placed into an interest-bearing depository account for the benefit of the client (less any deductions for service charges or other fees of the depository institution) shall belong to the client whose-funds are deposited, and the lawyer shall have no right or claim to such interest.

(g) A lawyer holding client funds who has reasonably determined, pursuant to subsection (f) of this Rule, that such funds need not be deposited into an interest-bearing depository account for the benefit of the client must maintain a pooled interest-bearing depository account for the deposit of the funds; provided, however, that this requirement shall not apply to a lawyer who either has obtained inactive status pursuant to Supreme Court Rule 69(d), or has obtained a Certificate of Retirement pursuant to Supreme Court Rule 69(f), or has formally elected to opt out of this requirement in accordance with the procedure set forth below in subparagraph (k).

(h) A lawyer who maintains such a pooled account shall comply with the following:

(1) The account shall include only client’s funds which are nominal amount or are expected to be held for a short period of time.

(2) No interest from such an account shall be made available to a lawyer or law firm.

(3) Lawyers or law firms depositing client funds in a pooled interest-bearing account under this paragraph (h) [(g)] shall direct the depository institution:

(a) To remit interest, net any service charges or fees, as computed in accordance with the institution's standard accounting practice, at least quarterly, to the Delaware Bar Foundation; and

(b) To transmit with each remittance to the Delaware Bar Foundation a statement showing the name of the lawyer or law firm on whose accounting remittance is sent and the rate of interest applied; with a copy of statement to be transmitted to the lawyer or law firm by the Delaware Bar Foundation.

(i) The funds transmitted to the Delaware Bar Foundation shall be available for distribution for the following purposes:

(1) To improve the administration of justice;

(2) To provide and to enhance the delivery of legal services to the poor;

(3) To support law related education;

(4) For such other purposes that serve the public interest.

The Delaware Bar Foundation shall recommend for the approval of the Supreme Court of the State of Delaware, such distributions as it may deem appropriate. Distributions shall be made only upon the Court's approval.

(j) Lawyers or law firms, depositing client funds in a pooled interest-bearing depository account under this paragraph shall not be required to advise the client of such deposit or of the purposes to which the interest accumulated by reason of such deposits is to be directed.

(k) The procedure available for opting out of the requirement to maintain pooled interest-bearing accounts are as follows:

(1) Prior to December 15, 1983, a lawyer wishing to decline to maintain a pooled interest-bearing account[s] described in this paragraph for any calendar year may do so by submitting a Notice of Declination in writing to the Clerk of the Supreme Court ab initio or before December 15 of the preceding calendar year. Any such submission shall remain effective, unless revoked and need not be renewed for any ensuing year.

(2) Any lawyer who has not filed a Notice of Declination on or before December 15, 1983, may elect not to maintain a pooled interest-bearing depository account for client funds as required and instead to maintain a pooled depository account for such funds that does not bear interest or that bears interest solely for the benefit of the clients who deposited the funds by certifying that the lawyer or law firm opts out of the obligation to comply with the requirements by timely submission of the Annual Registration Statement required by Supreme Court Rule 69(b)(i). Any such certification shall release the lawyer or law firm submitting it from participation effective as of the date that the certification is submitted and it shall remain effective until revoked as set forth below without need for renewal for any ensuing year.

(3) Notwithstanding the foregoing provisions of this subparagraph, any lawyer or law firm may petition the Court at any time and, for good cause shown, may be granted leave to opt out of the obligation to comply with the mandatory requirements of this paragraph.

(l) An election to opt out of the obligation to comply with paragraph (h) hereof may be revoked at any time upon the opening by a non-participating lawyer or law firm of a pooled interest-bearing account as previously described and due notification thereof to the Court Administrator of the Supreme Court pursuant to Supreme Court Rule 69(g).

(m) A lawyer should exercise good faith judgment in determining initially, whether funds of a client are of such nominal amount or are expected to be held by the lawyer for such a short period of time that the funds should not be placed in an interestbearing depository account for the benefit of the client. The lawyer should also consider such other facts as:

(1) The cost of establishing and maintaining the account, service charges, accounting fees, and tax reporting procedures;

(2) The nature of the transaction(s) involved; and

(3) The likelihood of delay in the relevant proceedings.

A lawyer should review at reasonable intervals whether changed circumstances require further action respecting the deposit of client funds.

(n) A lawyer shall not disburse Fiduciary Funds from his or her attorney trust account(s) unless the funds deposited in the account to be disbursed are good funds as hereinafter defined. "Good funds" shall mean:

(1) cash;

(2) electronic fund ("wire") transfer;

(3) certified check;

(4) bank cashier's check or treasurer's check;

(5) U.S. Treasury or State of Delaware Treasury check;

(6) Check drawn on a separate trust or escrow account of an attorney engaged in the private practice of law in the State of Delaware held in a fiduciary capacity, including his or her client's funds;

(7) Check of an insurance company that is authorized by the Insurance Commissioner of Delaware to transact insurance business in Delaware;

(8) Check in an amount no greater than $10,000.00;

(9) Check greater than $10,000.00, which has been actually and finally collected and may be drawn against under federal or state banking regulations then in effect;

(10) Check drawn on an escrow account of a real estate broker licensed by the State of Delaware up to the limit of guarantee provided per transaction by statute.”

DLRPC Rule 1.15 comment 1 lacks the last sentence of Model Rule 1.15 comment 1, which reads: “A lawyer should maintain . . . recordkeeping rules established by law or court order. See, e.g., ABA Model Financial Recordkeeping Rule.”

DLRPC Rule 1.15 lacks the text of Model Rule 1.15 comment 2. DLRPC Rule 1.15 comment 2 corresponds with Model Rule 1.15 comment 3.

DLRPC Rule 1.15 comment 3 is similar to Model Rule 1.15 comment 4, but has some textual differences. DLRPC Rule 1.15 comment 3 reads: “Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.” DLRPC Rule 1.15 cmt. 3.

DLRPC Rule 1.15 comment 4 is substantially similar to Model Rule 1.15 comment 5, but lacks “and is not governed by this Rule” at the end of the last sentence.

DLRPC Rule 1.15 lacks Model Rule 1.15 comment 6, but adds its own comments 5-11, which read as follows:

“[5] The extensive provisions contained in Rule 1.15(d) represent the financial recordkeeping requirements that Delaware lawyers must follow when engaged in the private practice of law. These provisions are also reflected in a certificate of compliance that is included in each lawyer's registration statement, filed annually pursuant to Delaware Supreme Court Rule 69.

[6] Compliance with these provisions provides the necessary level of control to safeguard client and third party funds, as well as the lawyer's operating funds. When these recordkeeping procedures are not performed on a prompt and timely basis, there will be a loss of control by the lawyer, resulting in insufficient safeguards over client and other property.

[7] Some of the essential financial recordkeeping issues for Delaware lawyers under this Rule include the following:

(a) Segregation of funds. Improper commingling occurs when the lawyer's funds are deposited in an account intended for the holding of client and third party funds, or when client funds are deposited in an account intended for the holding of the lawyer's funds. The only exception is found in Rule 1.15(a), which allows a lawyer to maintain $500 of the lawyer's funds in the fiduciary account in order to cover possible bank service charges. Keeping an accurate account of each client's funds is more difficult if client funds are combined with the lawyer's own funds. The requirement of separate bank accounts for lawyer funds and non-lawyer funds, with separate bookkeeping procedures for each, is intended to avoid commingling.

(b) Deposits of legal fees. Unearned legal fees are the property of the client until earned, and therefore must be deposited into the lawyer's fiduciary account. Legal fees must be withdrawn from the fiduciary account and transferred to the operating or business account promptly upon being earned, to avoid improper commingling. The monthly listing of client and third party funds in the fiduciary account should therefore be carefully reviewed in order to determine whether any earned legal fees remain in the account.

(c) Identity of property. The identity and location of client funds and other property must be maintained at all times. Accordingly, every cash receipt and disbursement transaction in the fiduciary account must be specifically identified by the name of the client or third party. If financial books and records are maintained in this manner, the resultant control should ensure that there are no unidentified funds in the lawyer's possession.

(d) Disbursement of funds. Funds due to clients or third parties must be disbursed without unnecessary delay. The monthly listing of client funds in the fiduciary account should therefore be reviewed carefully in order to determine whether any balances due to clients or third parties remain in the account.

(e) Negative balances. The disbursement of client or third party funds in an amount greater than the amount being held for such client or third party results in a negative balance in the fiduciary account. This should never occur when the proper controls are in place. However, if a negative balance occurs by mistake or oversight, the lawyer must make a timely transfer of funds from the operating account to the fiduciary account in order to cover the excess disbursement and cure the negative balance. Such mistakes can be avoided by making certain that the client balance sufficiently covers a potential disbursement prior to making the actual disbursement.

(f) Reconciliations. Reconciled cash balances in the fiduciary accounts must agree with the totals of client balances held. Only by performing a reconciliation procedure will the lawyer be assured that the cash balance in the fiduciary account exactly covers the balance of client and third party funds that the lawyer is holding.

(g) Real estate accounts. Bank accounts used exclusively for real estate settlement transactions are fiduciary accounts, and are therefore subject to the same recordkeeping requirements as other such accounts, except that cash receipts and cash disbursements journals are not required.

[8] Illustrations of some of the accounting terms that Delaware lawyers need to be aware of, as used in this Rule, include the following:

(a) Financial books and records include all paper documents or computer files in which fiduciary and non-fiduciary transactions are individually recorded, balanced, reconciled, and totaled. Such records include cash receipts and cash disbursements journals, general and subsidiary journals, periodic reports, monthly reconciliations, listings, and so on.

(b) The cash receipts journal is a monthly listing of all deposits made during the month and identified by date, source name, and amount, and in distribution columns, the nature of the funds received, such as "fee income" or "advance from client," and so on. Such a journal is maintained for each bank account.

(c) The cash disbursements journal is a listing of all check payments made during the month and identified by date, payee name, check number, and amount, and in distribution columns, the nature of funds disbursed, such as "rent" or "payroll," and so on. Such a journal is maintained for each bank account. Cash receipts and cash disbursement records may be maintained in one consolidated journal.

(d) Totals and balances refer to the procedures that the lawyer needs to perform when using a manual system for accounting purposes, in order to ensure that the totals in the monthly cash receipts and cash disbursements journals are correct. The cash and distribution columns must be added up for each month, then the total cash received or disbursed must be compared with the total of all of the distribution columns.

(e) The ending check register balance is the accumulated net cash balance of all deposits, check payments, and adjustments for each bank account. This balance will not normally agree with the bank balance appearing on the end-of-month bank statement because deposits and checks may not clear with the bank until the next statement period. This is why a reconciliation is necessary.

(f) The reconciled monthly cash balance is the bank balance conformed to the check register balance by taking into account the items recorded in the check register which have not cleared the bank. For example:

Account balance, per bank statement

$2,000.00

Add -- deposits in transit (deposits in check register ($1,500.00) that do not appear on bank statement)

Less -- outstanding checks (checks entered in check register (1,800.00) that do not appear on bank statement)

----------

Reconciled cash balance

$1,700.00

----------

(g) The general ledger is a yearly record in which all of a lawyer's transactions are recorded and grouped by type, such as cash received, cash disbursed, fee income, funds due to clients, and so on. Each type of transaction recorded in the general ledger is also summarized as an aggregate balance. For example, the ledger shows cash balances for each bank account which represent the accumulation of the beginning balance, all of the deposits in the period, and all of the checks issued in the period.

(h) The subsidiary ledger is the list of transactions shown by each individual client or third party, with the individual balances of each (as contrasted to the general ledger, which lists the total balances in an aggregate amount "due to clients"). The total of all of the individual client and third party balances in the subsidiary ledger should agree with the total account balance in the general ledger.

(i) A variance occurs in a reconciliation procedure when two figures which should agree do not in fact agree. For example, a variance occurs when the reconciled cash balance in a fiduciary account does not agree with the total of client and third party funds that the lawyer is actually holding.

[9] Accrued interest on client and other funds in a lawyer's possession is not the property of the lawyer, but is generally considered to be the property of the owner of the principal. An exception to this legal principle relates to nominal amounts of interest on principal. A lawyer must reasonably determine if the transactional or other costs of tracking and transferring such interest to the owners of the principal are greater than the amount of the interest itself. The lawyer's proper determination along these lines will result in the lawyer's depositing of fiduciary funds into an interest-bearing account for the benefit of the owners of the principal, or into a pooled interest-bearing account. If funds are deposited into a pooled account, the interest is to be transferred (with some exceptions) to the Delaware Bar Foundation pursuant to the Delaware Supreme Court's Interest On Lawyer Trust Accounts Program ("IOLTA").

[10] Implicit in the principles underlying Rule 1.15 is the strict prohibition against the misappropriation of client or third party funds. Misappropriation of fiduciary funds is clearly a violation of the lawyer's obligation to safeguard client and other funds. Moreover, intentional or knowing misappropriation may also be a violation of Rule 8.4(b) (criminal conduct in the form of theft) and Rule 8.4(c) (general dishonest or deceptive conduct). Intentional or knowing misappropriation is considered to be one of the most serious acts of professional misconduct in which a lawyer can engage, and typically results in severe disciplinary sanctions.

[11] Misappropriation includes any unauthorized taking by a lawyer of client or other property, even for benign reasons or where there is an intent to replenish such funds. Although misappropriation by mistake, neglect, or recklessness is not as serious as intentional or knowing misappropriation, it can nevertheless result in severe disciplinary sanctions. See, e.g., Matter of Figliola, Del. Supr., 652 A.2d 1071, 1076-78 (1995).”

The Delaware Lawyer’s Rule of Professional Conduct also has a separate Rule 1.15A for trust account overdraft notification. Delaware Rule 1.15A reads:

(a) Attorney accounts designated as “Trust Account” or “Escrow Account” pursuant to Rule 1.15(d)(2) shall be maintained only in financial institutions approved by the Lawyers’ Fund for Client Protection (the “Fund”). A financial institution may not be approved as a depository for attorney trust and escrow accounts unless it shall have filed with the Fund an agreement, in a form provided by the Fund, to report to the Office of Disciplinary Counsel (“ODC”) in the event any instrument in properly payable form is presented against an attorney trust or escrow account containing insufficient funds, irrespective of whether or not the instrument is honored.

(b) The Supreme Court may establish rules governing approval and termination of approved status for financial institutions and the Fund shall annually publish a list of approved financial institutions. No trust or escrow account shall be maintained in any financial institution that does not agree to make such reports. Any such agreement shall apply to all branches of the financial institution and shall not be canceled except upon thirty (30) days notice in writing to the Fund.

(c) The overdraft notification agreement shall provide that all reports made by the financial institution shall be in the following format:

(1) In the case of a dishonored instrument, the report shall be identical to the overdraft notice customarily forwarded to the depositor, and the financial institution shall provide a copy of the dishonored instrument to the ODC no later than seven (7) calendar days following a request for the copy by the ODC.

(2) In the case of instruments that are presented against insufficient funds, but which instruments are honored, the report shall identify the financial institution, the attorney or law firm, the account number, the date of presentation for payment, and the date paid, as well as the amount of the overdraft created thereby.

(d) Reports shall be made simultaneously with, and within the time provided by law for, notice of dishonor. If an instrument presented against insufficient funds is honored, then the report shall be made within seven (7) calendar days of the date of presentation for payment against insufficient funds.

(e) Every attorney practicing or admitted to practice in this jurisdiction shall, as a condition thereof, be conclusively deemed to have consented to the reporting and production requirements mandated by this rule.

(f) Nothing herein shall preclude a financial institution from charging a particular attorney or law firm for the reasonable costs of producing the reports and records required by this rule.

(g) The terms used in this section are defined as follows:

(1) “Financial institution” includes banks, savings and loan associations, credit unions, savings banks, and any other business or persons who accept for deposit funds held in trust by attorneys.

(2) “Properly payable” refers to an instrument that, if presented in the normal course of business, is in a form requiring payment under the laws of Delaware.

(3) “Notice of dishonor” refers to the notice that a financial institution is required to give, under the laws of Delaware, upon presentation of an instrument that the institution dishonors.

(h) Every attorney practicing or admitted to practice in this jurisdiction shall designate every account into which attorney trust or escrow funds are deposited either as a “Rule 1.15A Attorney Trust Account” or a “Rule 1.15A Attorney Escrow Account.”

1.15:102 Model Code Comparison

DR 9-102, DR 9-102(B)(2), and DR 9-102(B)(3) contained similar safeguarding and recordkeeping obligations, but did not extend to cover property of third persons that a lawyer may be in possession of in connection to the lawyer’s representation of a client.

DR 9-102(B)(1) and DR 9-102(A)(2) corresponded with Model Rule 1.15(b) and (c), the text of which are not found in DLRPC Rule 1.15.

1.15:110 Delaware IOLTA Plan

DLRPC Rule 1.15 comment [9] states: “Accrued interest on client and other funds in a lawyer's possession is not the property of the lawyer, but is generally considered to be the property of the owner of the principal. An exception to this legal principle relates to nominal amounts of interest on principal. A lawyer must reasonably determine if the transactional or other costs of tracking and transferring such interest to the owners of the principal are greater than the amount of the interest itself. The lawyer's proper determination along these lines will result in the lawyer's depositing of fiduciary funds into an interest-bearing account for the benefit of the owners of the principal, or into a pooled interest-bearing account. If funds are deposited into a pooled account, the interest is to be transferred (with some exceptions) to the Delaware Bar Foundation pursuant to the Delaware Supreme Court's Interest On Lawyer Trust Accounts Program ("IOLTA").” DLRPC Rule 1.15 cmt. 9.

IOLTA funds have been used to provide representation for indigent parties in dependency and neglect proceedings. Brown v. Div. of Family Servs., 803 A.2d 948, 955 (Del. 2002). They have also been used to give grants to the Community Legal Aid Society, Inc. In re Interest on Lawyer Trust Account, 2000 Del. LEXIS 541, at *1 (Del. Nov. 9, 2000).

Regulations of the Regulations of the Trustees of the Lawyers' Fund for Client Protection of the Bar of Delaware [Effective January 1, 2004] can be found at http://courts.delaware.gov/Arms/lfcp/rules/regs.pdf.

1.15:120 Delaware Client Security Fund

“The responsibility of members of the Bar of [The Delaware Supreme Court] to safeguard, and properly account for, the funds of clients has long been the subject of regulation by [the Delaware Supreme Court] incident to [its] authority to regulate the practice of law.” In re Guy, Misc. No. 276, 1993 Del. LEXIS 192, at *8 (Del. Apr. 26, 1993).

DLRPC Rule 1.15(e) states: “A lawyer's financial books and records must be subject to examination by the auditor for the Lawyers' Fund for Client Protection, for the purpose of verifying the accuracy of a certificate of compliance filed each year by the lawyer pursuant to Supreme Court Rule 69. The examination must be conducted so as to preserve, insofar as is consistent with these Rules, the confidential nature of the lawyer's books and records. If the lawyer's books and records are not located in Delaware, the lawyer may have the option either to produce the books and records at the lawyer's office in Delaware or to produce the books and records at the location outside of Delaware where they are ordinarily located. If the production occurs outside of Delaware, the lawyer shall pay any additional expenses incurred by the auditor for the purposes of an examination.” DLRPC Rule 1.15(e).

DLRPC Rule 1.15A contains provisions that pertain to the Lawyers’ Fund for Client Protection. DLRPC Rule 1.15A(a) states: “Attorney accounts designated as “Trust Account” or “Escrow Account” pursuant to Rule 1.15(d)(2) shall be maintained only in financial institutions approved by the Lawyers’ Fund for Client Protection (the “Fund”). A financial institution may not be approved as a depository for attorney trust and escrow accounts unless it shall have filed with the Fund an agreement, in a form provided by the Fund, to report to the Office of Disciplinary Counsel (“ODC”) in the event any instrument in properly payable form is presented against an attorney trust or escrow account containing insufficient funds, irrespective of whether or not the instrument is honored.” DLRPC Rule 1.15A.

Lawyers' Fund for Client Protection of the Bar of Delaware “is a fund created by the Delaware Supreme Court to provide monetary relief to clients who have suffered financial losses as a result of the dishonest conduct of lawyers...While acts of attorney dishonesty are the exceptions and not the rule, the Fund was established to show the good faith of all members of the Delaware Bar.” http://courts.delaware.gov/lfcp/ (as of Apr. 25, 2006).

Regulations of the Regulations of the Trustees of the Lawyers' Fund for Client Protection of the Bar of Delaware [Effective January 1, 2004] can be found at http://courts.delaware.gov/Arms/lfcp/rules/regs.pdf.

Compliance check. “Regulation V of the Regulations of the Trustees of the Lawyers' Fund for Client Protection mandates that selected attorneys will be subject to audit by an independent certified public accountant in order to determine that the attorneys' books and records are in compliance with the recordkeeping requirements of Rule 1.15 of the Delaware Lawyers' Rules of Professional Conduct.” http://courts.delaware.gov/lfcp/audits.htm (as of May 2, 2006). It should be noted that just because a compliance check does not find an error or bring an error to the lawyer’s attention, it does not mean the lawyer cannot be held responsible when those errors are later brought to light. In re Figliola, 652 A.2d 1071, 1074 (Del. 1995). The lawyer cannot claim to have been “lulled . . . into a false sense of security.” Id. The efforts “to assist lawyers should not be considered as absolving lawyers of the duty to read and follow [the appropriate guidance lines].” Id. at 1075. “Compliance checks . . . are not audits and are not intended to verify the correctness of entries in an attorney’s books and records.” Id.

“The selection of attorneys for annual compliance audits is left to the discretion of the Trustees [of the client security fund].” In re Guy, Misc. No. 276, 1993 Del. LEXIS 192, at *8 (Del. Apr. 26, 1993). In In re Guy, a lawyer challenged his selection for a compliance check claiming it had a racial basis, Id. at *3, and the selection was to “harass” the lawyer. Id. at *12. The Delaware Supreme Court found “no suggestion in the entire testimony of those witnesses that they, or the selection procedure, [were] influenced by individuals outside the usual selection process. Nor was there any evidence that the [lawyer’s] selection was other than routine.” Id.

Mandatory annual payment. A challenge by a lawyer to mandatory payments to the Clients’ Security Trust Fund was denied. In re Member of the Bar of the Supreme Court of Delaware, 257 A.2d 382, 385 (Del. 1969). The lawyer disputed “whether or not the purpose of the Clients’ Security Trust Fund [fell] within the scope of the inherent power of the Court.” Id. at 383. The Court denied claims that it is “limited to the powers of the common law court in the control of the bar” and that the mandatory fee improperly “establishes an integrated Bar.” Id. at 384. The Court found that “[i]t must be borne in mind that lawyers, constituting the Board of Bar Examiners by appointment of this Court, control admission to the Bar. In a sense, therefore, the profession holds out to the public all its members in good standing as being competent, honest and devoted to their clients’ interests. This, it seems [to the Court], is in the nature of a collective representation by the Bar to the public, and justifies a collective acceptance of responsibility when one of its members is false to his oath and the common precepts of honesty.” Id. at 383.

1.15:200 Safeguarding and Safekeeping Property

“The responsibility of members of the Bar of [The Delaware Supreme Court] to safeguard, and properly account for, the funds of clients has long been the subject of regulation by [the Delaware Supreme Court] incident to [its] authority to regulate the practice of law.” In re Guy, Misc. No. 276, 1993 Del. LEXIS 192, at *8 (Del. Apr. 26, 1993).

Compliance checks. In Delaware, many disciplinary decisions, involving DLRPC Rule 1.15, start with a compliance check done by the Lawyers’ Fund for Client Protection (or previously, the Clients’ Security Trust Fund, “CSTF”). (see 1.15:120). “The selection of attorneys for annual compliance audits is left to the discretion of the Trustees [of the client security fund].” In re Guy, Misc. No. 276, 1993 Del. LEXIS 192, at *8 (Del. Apr. 26, 1993).

Just because a compliance check does not find an error or bring an error to the lawyer’s attention, does not mean the lawyer cannot be held responsible when those errors are later brought to light. In re Figliola, 652 A.2d 1071, 1074 (Del. 1995). The lawyer cannot claim to have been “lulled . . . into a false sense of security.” The efforts “to assist lawyers should not be considered as absolving lawyers of the duty to read and follow [the appropriate guidance lines].” Id. at 1075. “Compliance checks . . . are not audits and are not intended to verify the correctness of entries in an attorney’s books and records.” Id.

In In re Bailey, disciplinary action was found appropriate after one such audit, “directed specifically at the Firm’s books and tax filing and payment obligations,” found “numerous deficiencies in the Firm’s bookkeeping obligations.” In re Bailey, 821 A.2d 851, 854 (Del. 2003).

Another audit, in In re Benson, found violations of DLRPC Rule 1.15(d) for “(1) no client trust account reconciliation [being] performed [over a three year period], and trust account deposit and check transactions [not being] entered in [the lawyer’s] accounting software program [until after that period]; (2) no monthly listings of client balances [being] prepared (showing client name, balance, and the total of all client balances) [for a period of three years]; and no reconciliation of end-of-month cash balances to the total of client balances [being] performed [over that same three year period].” In re Benson, 774 A.2d 258, 260 (Del. 2001).

A lawyer’s violations of DLRPC Rule 1.15(d) were discovered during a compliance audit and included failure, “for over three years, to reconcile the escrow account cash balance to the total of client balances, by failing to identify client funds, and by allowing escrow checks to remain outstanding since as far back as [six years before the audit].” In re Doughty, 832 A.2d 724, 727-8 (Del. 2003).

For some other lawyers’ violations of DLRPC Rule 1.15 found through compliance check see In re Fountain, 878 A.2d 1167 (Del. 2005); In re Garrett, 835 A.2d 514, 521 (Del. 2003); In re Greene, 701 A.2d 1061, 1062-3 (Del. 1997); In re Landis, 850 A.2d 291, 292-3 (Del. 2004); In re O’Brien, No. 530, 2005, 2005 Del. LEXIS 471, at *9-10 (Del. Nov. 22, 2005); In re Spiller, 788 A.2d 114, 115 (Del. 2001); In re Williams, 804 A.2d 1067, at *11-12 (Del. 2002).

Misappropriation. A lawyer was found in violation of DLRPC Rule 1.15(a) for misappropriating client funds “in excess of $100,000, for his personal use.” In re Carey, 809 A.2d 563, 563 (Del. 2002). Another lawyer took a settlement check made payable to the lawyer and the client and without authorization from the client “signed [the client’s] name on the back of the check,” “deposited the full amount of the settlement into [the lawyer’s] personal checking account,” and “spent nearly [two-thirds] that constituted [the client’s] portion of the settlement” in violation of DLRPC Rule 1.15. In re Maguire, 725 A.2d 417, 418 (Del. 1999).

Professional Conduct Rule 1.15A account designation. A lawyer was found to be in violation of the rules of professional conduct when the lawyer had not properly designating his escrow account as a Professional Conduct Rule 1.15A account. In re Fountain, 878 A.2d 1167, 1169 (Del. 2005).

Sloppy practice/ bouncing checks. A lawyer was found in violation of several facets of DLRPC Rule 1.15 after various settlement checks that the lawyer wrote were dishonored. In re Spiller, 788 A.2d 114, 115 (Del. 2001). The cause of the problem was found to be “(1) [the lawyer’s] failure to reconcile his bank accounts on a regular basis; (2) [the lawyer’s] deposit of funds in an inactive account . . .; and (3) [the lawyer’s] failure to determine whether monies had been wired into the proper account, or at all, before issuing checks dependent upon wired monies.” Id.

Disciplinary sanction. The Delaware Supreme Court, in sanctioning a lawyer for violations of the rules of professional conduct, may require oversight of the lawyer regarding responsibilities “for the financial recordkeeping requirements imposed by Rule 1.15 . . .” In re Solomon, 886 A.2d 1266, 1269 (Del. 2005).

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

An attorney will be disciplined for depositing unearned retainer fees in the attorney’s personal bank account in violation of DLRPC Rule 1.15(a). In re Garrett, 835 A.2d 514, 515 (Del. 2003).

A lawyer was found in violation of DLRPC Rule 1.15 for failing to “hold unearned fees in a trust account” and failing “to keep the client’s property separate [from the lawyer’s] property.” In re Ayres, 802 A.2d 266, 267 (Del. 2002).

“Despite the fact that [a lawyer’s] disbursements were four times as great as advancements, [the lawyer] maintained what he believed that he was entitled to the Firm fees that he withdrew, claiming that these fees offset client costs previously advanced by him.” In re Figliola, 652 A.2d 1071, 1073 (Del. 1995). Such action was found to violate DLRPC Rule 1.15. Id. at 1074.

A lawyer was found in violation of DLRPC Rule 1.15(b) on various occasions for not adequately explaining the use of retainers when the clients wished the unused portions returned and disputed the amount returned. In re Fountain, 878 A.2d 1167, 1169-70 (Del. 2005).

1.15:220 Surrendering Possession of Property

A lawyer admitted violation of DLRPC Rule 1.15(b) for “failing to promptly disburse $322,812.79 consisting of 136 checks” from an account for over a year and a half period. In re Beauregard, No. 391, 2005, 2005 LEXIS 422, at *9 (Del. Oct. 24, 2005).

A lawyer was found to be in violation of DLRPC Rule 1.15(b) for “failing to take reasonably prompt steps to disburse over $31,000 in fiduciary funds” over a five year period. In re Doughty, 832 A.2d 724, 727-8 (Del. 2003).

1.15:230 Documents Relating to Representation

In violation of DLRPC Rule 1.15(a), a compliance audit found a lawyer failed “to maintain client lists and a client subsidiary ledger, for” an account over a period of three and a half years, necessary to “determine to whom and what amount were owed.” In re Beauregard, No. 391, 2005, 2005 LEXIS 422, at *8 (Del. Oct. 24, 2005).

A lawyer admitted to violating DLRPC Rule 1.15(a) when he lost a client’s files in connection with failure to preserve the client’s funds. In re Maguire, 725 A.2d 417, 418 (Del. 1999). Another lawyer was found in violation of DLRPC Rule 1.15 when the lawyer’s “accounts could not be reconciled due to 20 missing settlement files [even though] there was no evidence that [the lawyer] had stolen money or defrauded anyone.” In re Spiller, 788 A.2d 114, 115-6 (Del. 2001).

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

see Client Trust Accounting for Delaware Attorneys (Revised 11/23/98) at http://courts.delaware.gov/Arms/lfcp/pubs/cta.htm.

Reasonably prompt distribution. A lawyer admitted violation of DLRPC Rule 1.15(d) for “failing to maintain client listings and a client subsidiary ledger for [an] account for a three-year period . . .; and by failing to promptly disburse funds from the…account.” In re Beauregard, No. 391, 2005, 2005 LEXIS 422, at *9 (Del. Oct. 24, 2005). Another lawyer was found to be in violation of DLRPC Rule 1.15(b) for “failing to take reasonably prompt steps to disburse over $31,000 in fiduciary funds” over a five year period. In re Doughty, 832 A.2d 724, 727-8 (Del. 2003).

Executor, not attorney for an estate. In In re Benge, with respect to DLRPC Rule 1.15 mandates, the Court found that it did not matter whether the lawyer was an executor of an estate or the attorney for the estate since DLRPC Rule 1.15(d) creates no “such distinction.” In re Benge, 783 A.2d 1279, 1281 (Del. 2001).

Ability to adequately reimburse. In In re Figliola, the Delaware Supreme Court found that the lawyer’s ability to reimburse a client was not a factor in determining whether the lawyer violated rules of conduct, rather the issue was “whether [the lawyer] should have taken a client’s money without proper authorization.” In re Figliola, 652 A.2d 1071, 1076 (Del. 1995).

Inadequate funds. A lawyer was found in violation of several facets of DLRPC Rule 1.15 after various settlement checks that the lawyer wrote were dishonored. In re Spiller, 788 A.2d 114, 115 (Del. 2001). The cause of the problem was found to be “(1) [the lawyer’s] failure to reconcile his bank accounts on a regular basis; (2) [the lawyer’s] deposit of funds in an inactive account . . .; and (3) [the lawyer’s] failure to determine whether monies had been wired into the proper account, or at all, before issuing checks dependent upon wired monies.” Id. In In re Williams, a lawyer was found in violation of DLRPC Rule 1.15(a) and 1.15(n) for not having adequate funds, or “good funds,” in an account to cover withdrawals. In re Williams, 804 A.2d 1067 (Del. 2002).

Not paying taxes. A lawyer was found in violation of DLRPC Rule 1.15(b) for “failing to pay various federal and state employee payroll taxes owed for [the lawyer’s] practice in a timely manner during an extended period . . .” In re Williams, 804 A.2d 1067 (Del. 2002).

Following client instructions to deposit in interest bearing account. A lawyer violated DLRPC Rule 1.15 when the lawyer only partially followed the requests of a client, his in-laws, by moving their money from an escrow account into the lawyer’s “nonfiduciary drawing account” that was not interest bearing, when they had requested that the lawyer move the money, but into an interest bearing account. In re Figliola, 652 A.2d 1071, 1074-5 (Del. 1995).

Using funds of one client for the benefit of another. A lawyer was found in violation of DLRPC Rule 1.15 for using “funds belonging to [one client] to satisfy a judgment for the benefit of another client.” In re Figliola, 652 A.2d 1071, 1073-4 (Del. 1995).

Withholding client funds for past debt. In Lowicki v. Traux, the defendant had a long history of not paying employees on time. Lowicki v. Traux, C.A. No. 90C-FE-193, 1992 Del. Super. LEXIS 251, at *4-5 (Del. Super. Ct. June 15, 1992). Defendant’s employees insisted that they get paid directly from a third party for work that defendant had contracted to do for the third party. The third party wrote a check to both an employee and defendant. Once the employee endorsed the check, the lawyer would deposit the check, give the employee his share, and instead of giving defendant their share, the lawyer kept defendant’s share to cover what the lawyer claimed the defendant owed him. The judge found the practice in violation of DLRPC Rule 1.15 and ordered the money returned, with interest. Id.

Failing to satisfy debts. In In re Higgins, a lawyer was found in violation of DLRPC Rule 1.15(a) by failing “to satisfy a sewer bill, a county tax lien, an appraisal fee, several mortgages,” and a “property tax [bill]after having received funds at settlement to do so. Instead, [the lawyer] converted [the funds] to his own use.” In re Higgins, 582 A.2d 929, 930-1 (Del. 1990).

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

see Client Trust Accounting for Delaware Attorneys (Revised 11/23/98) at http://courts.delaware.gov/Arms/lfcp/pubs/cta.htm.

Besides the accounting guidelines referenced above and other relevant information in other sections under DLRPC Rule 1.15, there appear to be no other pertinent Delaware specific court decisions or ethics opinions on this subject.