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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Maryland Legal Ethics

1.15   Rule 1.15 Safekeeping Property

1.15:100   Comparative Analysis of Maryland Rule

Primary Maryland References: MD Rule 1.15
Background References: ABA Model Rule 1.15, Other Jurisdictions
Commentary:

1.15:101      Model Rule Comparison

Maryland Rule 1.15 is substantively identical to MR 1.15, except Maryland Rule 1.15(a) requires that "[f]unds shall be kept in a separate account maintained pursuant to Title 16 of Chapter 600 of the Maryland Rules." (Chapter 600 concerns attorney trust accounts.) There are no material differences in the comment, MR 1.15, cmt. sections.

1.15:102      Model Code Comparison

With regard to Maryland Rule 1.15(a), DR 9-102(A) provides that "funds of clients" are to be kept in an identifiable bank account in the state in which the lawyer's office is situated. DR 9-102(B)(2) provides that a lawyer shall "identify and label securities and properties of a client . . . and place them in . . . safekeeping . . . ." DR 9-102(B)(3) requires that a lawyer "maintain complete records of all funds, securities and other properties of a client . . . ." Maryland Rule 1.15(a) expands these requirements to include the property of a third person that is in the lawyer's possession in connection with the representation. Maryland Rule 1.15(b) is substantially similar to DR 9-102(B)(1) and (4). Maryland Rule 1.15(c) is substantially similar to DR 9-102(A)(2), except that the requirement regarding disputes also applies to property in which an interest is claimed by a third party as well as by the client.

1.15:110      Maryland IOLTA Plan

Maryland's IOLTA plan derives from the series of interlocking statutes and rules that define a lawyer's obligations in handling client funds. Statutes direct lawyers who accept any money from any source for the benefit of clients or others to maintain trust accounts. Md. Code Ann., Bus. Occ. & Prof. 10- 302 to 10-307 (1995). Maryland Rules 16-601 to 16-618 reiterate the general duty and provide details of maintaining these trust accounts. These Rules apply where the lawyer is holding funds as an escrow agent or as the lawyer for a fiduciary, but do not apply to fiduciary accounts where the attorney is the fiduciary. See MD Rule 16-601. With respect to the interest generated by the trust accounts, the basic rule is clear: "[t]he attorney or law firm shall have no right or claim to the interest." MD Rule 16-608. Interest on trust account funds is payable to the Maryland Legal Services Corporation. Md. Code Ann., Bus. Occ. & Prof. 10-303(d)(ii); MD Rule 16-608. Maryland Rule 1.15 establishes the applicable ethics standard for safekeeping the property of others. [See 1.15:200-1.15:400 for discussion of Maryland Rule 1.15.]

The successful challenge to the Texas IOLTA system in Phillips v. Washington Legal Foundation, Inc., _____ U.S. ____, 118 S. Ct. 1925 (1998), has not affected the Maryland IOLTA plan. At least until issues on remand in Phillips have been decided, Maryland IOLTA funds, about $4 million annually, will continue to go to the Maryland Legal Services Corporation to defray the cost of providing legal services to those of limited means in the state. See Barbara Grzincic, Supreme Court Says IOLTA Funds Are Private Property Of Clients, Daily Record, June 16, 1998 at 1C.

1.15:120      Maryland Client Security Fund

The Court of Appeals of Maryland adopted the Clients' Security Fund ("Trust Fund") "pursuant to Chapter 779, Laws of Maryland (1965)." MD Rule 16-811(a). See Md. Code Ann., Bus. Occ. & Prof. 10-310 to 10-313. This Trust Fund is expressly intended "to maintain the integrity and protect the good name of the legal profession by reimbursing . . . losses caused by defalcations by attorneys practicing in Maryland." MD Rule 16-811(b). As a condition precedent to practicing in Maryland, lawyers are required to make an annual payment to the Trust Fund. MD Rule 16-811(f). The Court of Appeals will decertify a lawyer who defaults in the payment of the annual assessment. MD Rule 16-811(g)(4). After receipt of a decertification order, a lawyer may not practice law in Maryland until the default is cured. Id. [See 0.2:250 regarding penalty for practicing law while decertified.] The Trust Fund is administered by nine trustees appointed by the Court of Appeals. MD Rule 16-811(c).

Trustees of the Clients' Security Trust Fund of the Bar of Maryland:

Chairman, Victor H. Laws
P.O. Box 75
209 East Main Street
Salisbury, MD 21803-0075

Vice-Chair, Barbara Ann Spicer
100 Light Street, Sixth Floor
Baltimore, MD 21202-1084

Secretary, Vincent L. Gingerich
Colewood Centre
10801 Lockwood Drive, Suite 330
Silver Spring, MD 20901-1555

Treasurer, Isaac Hecht
210 N. Charles Street, Suite 1317
Baltimore, MD 21201-4002

Theodore W. Beaulieu
12 Forest Drive
LaVale, MD 21502

Charles O. Fisher, Esq.
179 East Main Street
Westminster, MD 21157-5014

William V. Meyers, Esq.
6801 Kenilworth Avenue, Suite 400
Riverdale, MD 20737-1385

Richard A. Reid, Esq.
West Pennsylvania Avenues, Suite 600
Towson, MD 21204-4575

Carolyn C. Woodside, Esq.
11705 Berry Road
P.O. Box 696
Waldorf, MD 20603

Administrators of Fund

Membership Manager: Mrs. Sandra D. Jacobs, 251 Rowe Boulevard, 3rd Floor, Annapolis, Maryland 21401, 410-260-1950. Administrator: Mrs. Janet C. Moss, 251 Rowe Boulevard, 3rd Floor, Annapolis, Maryland 21401, 410-260-1950. Claims: Mrs. Margaret M. Magill, 208 Calvert Street, Salisbury, MD 21801-2804, (410) 543-8410.

The Trustees are responsible for determining which claims made to the Trust Fund should be paid and in what amount. MD Rule 16-811(i). Claimants may file exceptions to the Trustees' denial of a claim. MD Rule 16-811(j). Consistent with the discretion that rests with the Trustees, the Court of Appeals will treat the Trustees' decision as prima facie correct. MD Rule 16-811(j). For a helpful recital of factors in addition to those appearing in Maryland Rule 16-811(i) for the trustees to consider in setting reimbursement, see Folley Farms I, Inc. v. Trustees of Clients' Security Trust Fund, 282 Md. 659 (1978).

The Trustees decided 128 claims and paid out a total of $351,986.43 during the 1997 fiscal year, with the largest single payment being $106,628.09. Thirty-First Annual Report to the Court of Appeals of Maryland Clients' Security Trust Fund of the Bar of Maryland (1997). However, the Trust Fund, by its own admission, is a "last resort" mechanism. See Kate Shatzkin, Lawyers on Trial: Victims are Caught in a Long Nightmare, Baltimore Sun, Feb. 23, 1998 at 1A. It is unlikely that a victim of an attorney's defalcation will be reimbursed in full for the amount of the loss, either from the attorney or from the Trust Fund. Id. The $20 annual fee paid by the approximately 27,000 lawyers admitted to practice in Maryland does not begin to meet the value of meritorious claims; as of July 1, 1997, there were 121 pending claims with an estimated $8 million in exposure. Id.

The Trust Fund may be contacted as follows:

Clients' Security Trust Fund of the Bar of Maryland
Robert F. Sweeney District Court Building
251 Rowe Boulevard, 3rd Floor
Annapolis, Maryland 21401
410-260-1950

1.15:200   Safeguarding and Safekeeping Property

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

A Maryland attorney violates Maryland Rule 1.15 by placement of trust account money in an unapproved financial institution in violation of the Maryland Rules regarding attorney trust accounts. See MD Rules 16-601 to 16-608. According to the Court of Appeals, "[t]he law pertaining to attorney trust accounts is both simple and clear, as is the list of approved institutions." Attorney Grievance Comm'n v. Boyd, 333 Md. 298, 318 (1994). In Boyd, the court determined that with respect to the approved list, the lawyer "either failed to read it or chose to violate it." Id.

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

The purpose of the retainer, as set forth in the fee agreement, will determine whether it can be placed in the firm's general account or whether it must be placed in an escrow account pursuant to Maryland Rule 1.15. MSBA Eth. Op. 92-41 (1992). [See also 1.5:420 for discussion of the treatment of engagement fees and advance fee retainers.]

1.15:220      Surrendering Possession of Property

An attorney violates Maryland Rule 1.15 upon failure to return a fee that is unearned for a protracted period of time and failure to timely remit funds received on behalf of a client. Attorney Grievance Comm'n v. David, 331 Md. 317 (1993) (attorney failed to return unearned fee for nine months).

1.15:230      Documents Relating to Representation

Failure to properly maintain an attorney escrow account and to keep the appropriate records and documentation for the required five year period has been found to constitute a violation of Maryland Rule 1.15. Attorney Grievance Comm'n v. Drew, 341 Md. 139 (1996). Maryland Rule 1.15 requires attorneys to keep complete records of all escrow accounts. Attorney Grievance Comm'n v. Milliken, 348 Md. 486 (1998).

Absent any legal obligation to maintain files beyond the five year period established by Maryland Rule 1.15, and absent any reasonably known detriment to the client, the decision to destroy files is within the discretion of the attorney, once the attorney has offered to return the records to the client and the offer has been refused. MSBA Eth. Op. 93-39 (1993).

In determining whether a law firm is allowed to authorize a non-attorney to sign checks drawn on the firm's escrow account, the MSBA Committee on Ethics stated that Maryland Rules 16-601 to 16-618 seem to indicate that only attorneys are charged with the various responsibilities and obligations concerning trust accounts. The Committee concluded that the attorney's ethical obligation under Maryland Rule 1.15 is to comply with Maryland Rule 16-601, et. seq. (IOLTA Rules). MSBA Eth. Op. 97-31 (1997).

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

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

Maryland case law and ethics opinions have made it clear that under Maryland Rule 1.15 extend to third parties. MSBA Eth. Op. 87-48 (1987). A good example of this extension is Advance Finance Co. v. Trustees of the Clients' Security Trust Fund of the Bar of Maryland, 337 Md. 195 (1995), where a lender brought a claim against the Clients' Security Trust Fund ("Trust Fund") seeking reimbursement of funds loaned to an attorney's personal injury clients after the attorney failed to remit the loan indebtedness to the lender upon receiving the tort recoveries. When the Trustees of the Trust Fund denied the claim, the lender appealed. The Court of Appeals vacated the Trust Fund's decision and remanded the case for further proceedings in accordance with its opinion. Citing Maryland Rule 1.15, the court stated that the Rules of Professional Conduct require a lawyer to promptly deliver to a client or third person any funds that such person is entitled to receive. Advance Finance, 537 Md. at 207. In this particular case, the court held that the attorney acted as a fiduciary for the non-client lender within the meaning of the applicable statute governing the Trust Fund. Accordingly, the Trust Fund might be liable to the non-client lender, because the attorney was obligated to disburse the funds from the client's personal injury recovery to the lender pursuant to the client's instructions. Id.

When a client explicitly authorizes a lawyer to withhold certain funds from a settlement for payment to a third party, disbursement of the funds, in derogation of the client's instructions, is improper. MSBA Eth. Op. 96-16 (1996); MSBA Eth. Op. 90-16 (1990). In other words, unless and until an attorney makes a determination that no one other than the client is entitled to escrowed funds, release of the funds to a client in derogation of the express terms of an escrow agreement would be improper and would violate Maryland Rule 1.15. MSBA Eth. Op. 95-41 (1995).

Disbursement to a client of funds that are also claimed by a creditor does not necessarily violate Maryland Rule 1.15 in circumstances where, for example, (1) the service on which the creditor's claim is based was not requested by the lawyer, (2) the client has not signed an agreement with the creditor agreeing to the payment of the creditor out of funds recovered by the client's lawyer, or (3) there is no lien on such funds for the creditor's benefit. MSBA Eth. Op. 97-20 (1997). See also MSBA Eth. Op. 97-9 (1997) (a lawyer does not violate Maryland Rule 1.15 by disbursing escrow funds to a client, as opposed to a third party creditor where (1) the lawyer had no prior knowledge of the claim of the creditor, and there was no agreement to assign the proceeds; (2) the written fee agreement between the lawyer and the client did not mention that funds were to be disbursed to the creditor; and (3) use of the funds for payment of the client's general debts was not contemplated).

When an attorney is in possession of escrow funds and cannot locate the client or third party to whom the funds belong, Maryland Rule 1.15 requires that reasonable efforts be undertaken to deliver the property to the client or third party. MSBA Eth. Op. 92-2 (1992). What steps will be deemed to be reasonable will vary with the circumstances of each case. MSBA Eth. Op. 89-26 (1989). In situations where the attorney cannot locate the client or third party after reasonable efforts to do so have failed, the attorney should consult the Maryland Uniform Disposition of Abandoned Property Act, Md. Code Ann., Com. Law II 17-101 to 17-326 (1990), for a resolution of the dilemma. MSBA Eth. Op. 92- 2 (1992). See also MSBA Eth. Op. 98-14 (1998) (when a lawyer is in possession of property in which a third party has an interest, and the lawyer cannot locate the third party, Maryland Rule 1.15 requires that the lawyer continue to safekeep the property and make continuing efforts to locate the third party, or institute an interpleader action to dispose of the funds in a manner consistent with the Rules of Professional Conduct).

The Court of Appeals appears to have spoken inconsistently on whether a violation of Maryland Rule 1.15 requires a showing of improper intent. In Attorney Grievance Comm'n v. Awuah, 346 Md. 420 (1997), the Court of Appeals held that the Attorney Grievance Commission failed to prove by clear and convincing evidence that an attorney violated Maryland Rule 1.15, where the attorney's use of funds from a trust account for operating expenses was found to be motivated by ignorance of his obligations and not by fraud, dishonesty or deceit. However, in Attorney Grievance Comm'n v. Glenn, 341 Md. 448 (1996), the court held that the mere fact that the balance in an attorney trust account falls below the total amount held in trust supports a prima facie finding of a violation of Maryland Rule 1.15. Because improper intent does not need to be established, an unintentional violation of this Rule, with certain limited exceptions, is still a violation of Rule 1.5. Id. See also Attorney Grievance Comm'n v. Webster, 348 Md. 662 (1998) (an attorney may not avoid responsibility for misuse of a trust account, even if such misuse was inadvertent).

When a check from a client's insurer, payable to the client and attorney, is deposited into the attorney's personal checking account, there is a disciplinary offense if a prohibited commingling of funds occurs. Attorney Grievance Comm'n v. Kemp, 303 Md. 664 (1985) (commingling was found to be a violation even though the attorney disbursed the funds to the client less than three weeks later).

An attorney's deposit of his own personal funds, as well as his client's funds, into a trust account did not establish a violation of Maryland Rule 1.15, absent evidence that the client's funds were received "in connection with a representation." Webster, 348 Md. 662 (1998).

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

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

Disputed funds must remain in escrow pending resolution of the dispute. MSBA Eth. Op. 88-64 (1988).

Former Rule BU8 (now renumbered as Maryland Rule 16-608) requires that any interest paid on funds deposited into an attorney trust account, to the extent not paid to the Maryland Legal Services Corporation, be credited to the client. The attorney or law firm has no right or claim to that interest. Maryland Rule 16-608; MSBA Eth. Op. 93-35 (1993). Pursuant to Maryland Rule 1.15, it is impermissible for an attorney to contract with a client to retain the interest earned on the bank account containing the client's money. Id.

In MSBA Eth. Op. 98-1 (1998), a law firm purchased debt that the firm then collected upon. The firm maintained an "in-house" attorney trust account for the monies obtained from these collections. The firm also maintained a client trust account. Because both trust accounts were maintained under IOLTA, the interest accrued was paid to the Maryland Legal Services Corporation. The issue presented was whether the firm could keep the interest earned on the "in-house" attorney trust account. Citing Maryland Rule 1.15, the MSBA Committee on Ethics stated that lawyers must hold property of clients in a lawyer's possession in connection with a representation separate from the lawyer's own property. However, pursuant to the definition of "client" found in Maryland Rule 16-602(e), the entity from which the firm purchased the debt is not considered a client. Because the firm is not holding money in the "in-house" account for a client as defined by the Maryland Rules, there is no requirement that this money be held in an attorney trust account. Therefore, the firm may place this money into an account other than an attorney trust account and the interest earned would be firm property.

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