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1.15:100 Comparative Analysis of New Mexico Rule
- Primary New Mexico References: NM Rule 16-115
- Secondary New Mexico Reference: Comment to NMR 16-102 (see Appendix attached)
- Background References: ABA Model Rule 1.15, Other Jurisdictions
- New Mexico Commentary:
“A. Holding another's property separately. A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five (5) years after termination of the representation.
B. Client trust account deposits; discretionary. A lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.
C. Client trust account deposits; mandatory. A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.
D. Notification of receipt of funds or property. Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
E. Severance of interest. When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.”
NMR 16-115 establishes requirements for safekeeping “property of clients or third persons,” while DR 9-102 only pertains to “funds” or “other properties” of “clients.” Unlike the Code provision, NMR 16-115 permits the separately-maintained client funds or properties to be kept in another state, upon client consent. See also EC 5-7, EC 9-5, EC 9-7, and DR 5-103(A)">DR 9-102 covers preserving the identity of funds and property of a client. NMR 16-115 establishes requirements for safekeeping “property of clients or third persons,” while DR 9-102 only pertains to “funds” or “other properties” of “clients.” Unlike the Code provision, NMR 16-115 permits the separately-maintained client funds or properties to be kept in another state, upon client consent. See also EC 5-7, EC 9-5, EC 9-7, and DR 5-103(A)(1).
Under the 2008 amendments, express provisions in NMR 16-115 concerning IOLTA accounts (trust accounts for client funds which are nominal in amount or to be held for a short time) were eliminated.
In one case decided under former NMR 16-115, a lawyer’s pooled trust account generated dividends, even though he was not a participant in the IOLTA program. Matter of Cannain, 122 N.M. 710, 930 P.2d 1162 (1997) (attorney disciplined).
The Comment to NMR 16-115 states that a “lawyers’ fund for client protection” provides a means through the efforts of the bar to reimburse persons who have lost money or property as a result of dishonest conduct of a lawyer. In New Mexico there exists a client security fund, and a lawyer who is disciplined may be required to make restitution and to reimburse the client security fund for any expenditure the fund has made as a result of the lawyer’s misconduct. See NMRA 17-206(C).
1.15:200 Safeguarding and Safekeeping Property
- Primary New Mexico References: NM Rule 16-115(a)
- Background References: ABA Model Rule 1.15(a), Other Jurisdictions
- Commentary: ABA/BNA § 45:101, ALI-LGL §§ 44-46, Wolfram § 4.8
- New Mexico Commentary:
A lawyer is expected to hold the property of others with the care required of a professional fiduciary. Therefore, property of clients or third persons must be kept separate from the lawyer’s business and personal property. In addition, under former NMR 16-115 the funds of different clients had to be kept separate and accounted for in one or more trust accounts, unless they are permitted to be “pooled” under NMR 16-115(D). Thus, a payment to one client from another client’s fund is considered a violation of the rule. See, e.g., Matter of Hamar, 123 N.M. 795, 945 P.2d 1013 (1997) (decided under former rule).
The New Mexico courts generally distinguish between conversion of client funds, and the lesser offense of misuse of client funds. In Matter of Kelly, 119 N.M. 807, 896 P.2d 487 (1995), the court stated that “[s]tealing client funds is perhaps the most egregious violation of a lawyer’s ethical responsibilities; it is a violation of the trust placed in lawyers by their clients. A lawyer’s trust account should be held sacred; willfully taking funds from a trust account cannot and will not be tolerated by this Court. In such cases, disbarment is the appropriate sanction;” see also NMR 16-115 Comments  to .
In contrast, “misuse” of trust funds occurs “when a lawyer withdraws client funds for an improper purpose, but does so in error, without an intent to deprive the client of the funds. While this is a serious breach of the attorney’s fiduciary duties, it is not as egregious as misappropriation of client funds. The latter necessarily involves a dishonest motive and an intent to deprive the client of his or her funds and will almost inevitably result in disbarment.” Matter of Cannain, 122 N.M. 710, 930 P.2d 1162 (1997) (also stating that “even misuse is a serious offense” and that “a significant sanction is warranted” in misuse cases; and finding attorney commingled personal funds with client funds, made personal disbursements and cash withdrawals from trust, failed to maintain separate ledgers for clients whose funds he held in trust, failed to maintain proper records of deposits and withdrawals, and failed to perform account reconciliations).
The following additional cases, generally involving lawyer conversion of client funds, demonstrate the seriousness with which the New Mexico authorities treat the lawyer’s duty to safeguard property of others. See, e.g., Matter of O’Brien, 130 N.M. 643, 29 P.3d 1044 (2002) (stating mismanagement of client funds is one of the most serious violations of an attorney’s ethical obligations; and finding disbarment was warranted as disciplinary sanction for attorney’s misconduct in misappropriating funds belonging to clients or to law firm, and in employing elaborate scheme of deception to conceal that misappropriation, which included establishing a secret trust account and intercepting law firm’s bills to a client and reissuing the bills on attorney’s own letterhead); Matter of Gallegos, 104 N.M. 496, 723 P.2d 967 (1986) (attorney’s conversion to his own use of money received from a client to have a liquor license transferred to her name, violated numerous rules, including NMR 16-115); Matter of Greenfield, 121 N.M. 633, 916 P.2d 833 (1986) (conversion of client funds is one of the most serious offenses that an attorney can commit and one generally resulting in loss of right to practice law); Matter of Schmidt, 121 N.M. 640, 916 P.2d 840 (1996) (disbarment warranted for attorney who failed to hold client funds separate from his own, failed to remit to client funds she was entitled to receive, failed to provide an accounting to client of funds in his possession that belonged to her, improperly maintained an interest bearing trust account, made cash disbursements from his trust account, and failed to cooperate with disciplinary counsel); and Matter of Chávez, 129 N.M. 35, 1 P.3d 417 (2000) (disbarment was appropriate sanction for attorney who participated in misappropriation of client funds from law firm trust account while attorney was under indefinite suspension for making misrepresentations regarding status of funds and failing to property maintain trust account records).
See also Matter of Wilson, 108 N.M. 378, 772 P.2d 1301 (1989) (attorney disbarred for stealing client funds by forging clients’ names on settlement checks and withdrawal slips on accounts maintained by clients); Matter of Arrieta, 105 N.M. 418, 733 P.2d 866 (1987) (removal of escrowed funds to own use constituted conversion of clients’ funds in violation of NMR 16-115); Matter of Rawson, 113 N.M. 758, 833 P.2d 235 (1992) (mishandling of client trust funds, commingling of personal funds with client trust funds, converting client funds for personal use, refusing to honor letters of protection issued on behalf of client to client’s treating doctors, failing to honor assignment of settlement proceeds to client’s creditors, and asserting interpleader action seeking award of monies deposited for distribution to former clients pursuant to condition of earlier disciplinary probation warranted disbarment and order to make restitution; a review of the records showed that in order for client to have been paid in full lawyer would have had to use other client’s funds; in addition, when defending against claims of mishandling of client funds, lawyers may not rely on the attorney-client privilege to prevent scrutiny of their records); Matter of Krob, 123 N.M. 652, 944 P.2d 881 (1997) (lawyer disbarred for accepting “Retainer” payments from clients on behalf of law firm, and subsequently converting to own use); Matter of Duffy, 102 N.M. 524, 697 P.2d 943 (1985) (disbarment is appropriate sanction for attorney’s conversion of his clients’ funds to his own use); Matter of Wilson, 108 N.M. 378, 772 P.2d 1301 (1989) (theft from carious clients by forging clients’ names on settlement checks and withdrawal slips on accounts maintained by clients warrants disbarment); and Matter of Gallegos, 104 N.M. 496, 723 P.2d 967 (1986) (disbarment ordered where attorney accepted money from client for purpose of investing it, informed client that money had been invested in real estate contract assigned to client, falsely informed client that his money was lost, and failed to repay client).
Other cases, generally involving misuse of client funds, also illustrate the importance of lawyers following NMR 16-115. See, e.g., Matter of Sheehan, 130 N.M. 485, 27 P.2d 972 (2001) (sanctioning attorney who improperly paid own legal fees from client’s trust account; finding that though attorney’s commingling of funds was in accordance with client’s wishes, attorney nonetheless violated NMR 16-115; and stating that scope of NMR 16-115 is not limited to attorney trust account issues, and is broad enough to cover any circumstances in which a lawyer is in possession of client or third party funds in a fiduciary capacity); Matter of Martínez, 107 N.M. 171, 754 P.2d 842 (1988) (to allow one’s assistant to simply cash a check made payable to a client with no documentation of the transaction is a violation of NMR 16-115); Matter of Archuleta, 122 N.M. 52, 920 P.2d 517 (1996) (attorney deposited client monies in his operating account instead of his trust account, failed to produce required records for his trust account, and made false statements of material fact to a bankruptcy court, resulting in a one-year suspension); Matter of Turpen, 119 N.M. 227, 889 P.2d 835 (1995) (commingling earned fees with client funds, issuing trust account checks for personal disbursements, and failing to maintain required records for trust account, warranted two year deferred suspension with probation throughout deferral period); Matter of Moore, 129 N.M. 217, 4 P.3d 664 (2000) (deferred suspension for 18 months was appropriate sanction for attorney who failed to abide by promise to treating physician to pay for physician’s services from proceeds of client’s personal injury settlement and who violated record keeping and substantive requirements for maintaining client trust fund); and Matter of Privette, 92 N.M. 32, 582 P.2d 804 (1978) (suspension from practice was proper remedy for gross mishandling of trust funds).
See also Matter of Thompson, 105 N.M. 257, 731 P.2d 953 (1987) (attorney indefinitely suspended since he used a client’s funds as collateral for a personal loan and had invested client’s funds in a corporation in which he had an ownership interest, even though he made full restitution and fully acknowledge his misconduct); Matter of Ruybalid, 118 N.M. 587, 884 P.2d 478 (1994) (case involved virtually every conceivable type of misuse of trust account, except conversion B attorney commingled client funds with his personal funds and funds from an unrelated business he operated, wrote checks for personal expenses such as groceries on trust account, maintained trust account as interest-bearing account even though he was not an IOLTA participant, had an automatic cash withdrawal card available on his trust account, and failed to maintain and preserve trust account records); Matter of Reid, 122 N.M. 517, 927 P.2d 1055 (1996) (attorney failed to properly segregate his own funds from client funds, repeatedly wrote checks on his trust account for personal purposes, failed to maintain records reflecting the identity of the client whose funds were being deposited in or withdrawn from trust, failed to maintain a separate ledger for each client whose funds he held in trust, failed to prepare statements to clients reflecting trust account transactions, and failed to perform reconciliations of his trust account records); and Matter of Dawson, 129 N.M. 369 8 P.3d (2000) (lawyer’s claim that a flat fee or retainer was charged that is non-refundable, will not suffice to justify a failure to deposit unearned client funds in a trust account, a withdrawal of client funds from a trust account to pay fees that have not yet been earned, or a failure to promptly return unearned funds to a client upon termination of the representation).
See also Matter of Gabriel, 110 N.M. 691, 799 P.2d 127 (1990) (attorney suspended where she delayed remitting settlement proceeds to client, and where attorney’s trust account check to client was dishonored for lack of sufficient funds); Matter of Martin, 127 N.M. 321, 323, 980 P.2d 646, 648 (1999) (lawyer suspended for misuse of client trust account; stating that health issues generally are not considered in mitigation in disciplinary proceedings, and are only considered if the attorney can show a meaningful and sustained period of rehabilitation); Matter of Hartley, 107 N.M. 376, 758 P.2d 790 (1988) (suspension ordered by attorney’s appropriating a portion of funds collected for Western States Treasurers Conference to his own use, after attorney had solicited and received funds in his capacity as host-state treasurer); Matter of Darnell, 123 N.M. 323, 940 P.2d 171 (1997) (finding misuse of trust funds and attempt to mislead Disciplinary Board regarding lawyer’s actions); Matter of Harrison, 103 N.M. 537, 710 P.2d 731 (1985) (attorney suspended indefinitely for failing to preserve identity of client funds); and Matter of Silverberg, 108 N.M. 768, 779 P.2d 546 (1989) (suspension ordered for failing to keep client funds in separate accounts, failing to deliver clients’ funds, and failing to render a full accounting).
Lawyers may not retain any interest generated by the trust accounts that lawyers maintain for funds from clients. Interest must be provided to the client or to a non-profit fund to be used for certain public purposes. N.M. Attorney General Opinion 1987-30.
NMR 16-115(A) requires lawyers to deposit client funds, including fee advances, into a separate account. Lawyers are not permitted to charge non-refundable advanced fees or retainers. Matter of Dawson, 129 N.M. 369, 8 P.3d 856 (2000). Because retainer fees must be kept in a separate trust account until the fees have been earned, stating to a client that the retainer fee is non-refundable does not absolve an attorney of his procedural duties to maintain separate accounts for client funds and to refund unearned portions of fees paid. Id. See also section 1.15:200 supra. However, there does not appear to be New Mexico authority which expressly prohibits attorneys and clients from contracting for a lump sum fee which qualifies as “reasonable” under NMR 16-105(A).
Though attorneys may hold client funds for expenses, they cannot transfer those funds to their personal accounts until fees and expenditures have been incurred. Matter of Archuleta, 122 N.M. 52, 54, 920 P.2d 517, 519 (1996) (stating that “when the attorney receives funds from a client for future attorneys’ fees, those funds are still considered property of the client until actually earned by the attorney and should be placed in the attorney’s trust account”). See also Matter of Cannain, 122 N.M. 710, 930 P.2d 1162 (1997) (lawyer found to have misused client trust funds when he deposited a check from a client and withdrew a portion of it for fees, where lawyer had not yet earned the fee, even though the day after withdrawal he performed services sufficient to earn the sum he had withdrawn).
A lawyer generally should not accept credit card payments for retainer deposits to be held in trust, because the processing fee raises concerns regarding inadequate separation of lawyer funds from client funds. State Bar Advisory Opinion 2000-1.
In In re Yalkut, 2008-NMSC-009, 143 N.M. 387, 176 P.3d 1119, the Supreme Court reviewed a disciplinary proceedings held against attorney accused of commingling funds. The Court held there was sufficient evidence to support a finding of commingling since the attorney deposited the funds into a personal account containing his own funds. The Court did not, however, make a finding of wrongful intent and could therefore not conclude that the misused funds were converted. Accordingly, the Court found the appropriate sanction for the attorney was not disbarment, but suspension. Finally, the Court determined that definite suspension was consistent with conditions for reinstatement, explaining that when circumstances warrant a definite suspension, the attorney remains suspended for that period regardless of whether conditions for reinstatement have been satisfied. If the attorney has not satisfied the conditions when the period of definite suspension expires, disciplinary counsel is permitted to file objections to the attorney’s reinstatement.
NMR 16-115(D) states that a lawyer has a duty to promptly notify clients and interested third parties upon the lawyer’s receipt of property belonging to a client or third party. Likewise, such property is to be promptly delivered to the client or third person. A lawyer’s failure to promptly remit funds to a client can constitute violation of NMR 16-115. Matter of Cannain, 122 N.M. 710, 930 P.2d 1162 (1997). See also Matter of C’De Baca, 109 N.M. 151, 782 P.2d 1348 (1989) (finding failure to surrender possession of property).
Among the documents relating to representation are records indicating, in a full accounting, how funds maintained in client trust accounts have been spent. Matter of Silverberg, 108 N.M. 768, 779 P.2d 546 (1989) (suspension ordered; and stating attorney violated NMR 16-115 “in that he failed to deliver to his client, or his client’s father, funds to which they were entitled and failed upon a request properly to render a full accounting regarding such funds”).
Detailed guidelines setting forth lawyer responsibilities regarding retention and return of client files and other documents relating to representation, are found in State Bar Advisory Opinion 1988-1. According to the opinion, court pleadings and recorded documents can be reconstructed from other records and so generally need not be kept by the lawyer. Original documents should be returned to clients, and clients should be sent a conformed set of formal documents, such as contracts and settlements. Documents that are the client’s property and are of intrinsic value, such as will and deeds, should be retained indefinitely or deposited with the court. Documents that are the client’s property and are of the type the client would not expect to be returned to them, should be retained for a reasonable period. All other documents in a “closed file” may be destroyed. In doing so, a lawyer should prepare an index of destroyed files, and of course, should retain an accurate and complete record of receipts and disbursements of trust funds. Lastly, a lawyer may wish to retain certain kinds of client file records in the event an inquiry is raised regarding what the lawyer did, and why.
1.15:300 Holding Money as a Fiduciary for the Benefit of Clients or Third Parties
- Primary New Mexico References: NM Rule 16-115(b)
- Background References: ABA Model Rule 1.15(b), Other Jurisdictions
- Commentary: ABA/BNA § 45:101, ALI-LGL § 44, Wolfram § 4.8
- New Mexico Commentary:
See section 1.15:200 supra.
1.15:400 Dispute Over Lawyer's Entitlement to Funds Held in Trust
- Primary New Mexico References: NM Rule 16-115(c)
- Background References: ABA Model Rule 1.15(c), Other Jurisdictions
- Commentary: ABA/BNA § 45:101, ALI-LGL §§ 44-45, Wolfram § 4.8
- New Mexico Commentary:
NMR 16-115(E) states that when a lawyer and a client have funds that are held together, the money should remain in the name of the client until a severance report can be made stipulating ownership of the shares. When disputes arise regarding funds, the undisputed amount should be immediately dispersed while those funds under dispute must be held in trust until the lawyer can resolve the dispute. Comments  to  to NMR 16-115 also discuss disputes concerning funds held in trust.
In Matter of C’De Baca, 109 N.M. 151, 782 P.2d 1348 (1989), the attorney failed to pay his clients’ treating physician, and later informed the physician that he had spent the clients’ funds but would pay the physician as soon as he received money in another settlement; the attorney then never paid the physician. The attorney thus violated NMR 16-115, because he failed to hold client funds separately from his own and failed to appropriately safeguard client funds; he failed to promptly notify a third person, the physician, of his receipt of the funds in which physician had an interest; he failed to promptly deliver the funds the physician was entitled to receive; and he failed to keep the funds belonging to another separately, when both he and another person claimed an interest in those funds, until there was a proper resolution or severance of those interests.
Similarly, in Lozano v. GTE Lenkurt, Inc., 122 N.M. 103, 920 P.2d 1057 (Ct. App. 1996), the court required the attorney to provide a full accounting to his client regarding a medical trust fund and a settlement fund obtained from third party defendants, before it would award additional fees to the lawyer in connection with a settlement with a different third party defendant.