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South Carolina Legal Ethics
1.15:100 Comparative Analysis of SC Rule
• Primary SC References: SC
Rule 1.15. See also S.C. App. Ct. R. 411 (Lawyers' Fund for Client Protection),
412 (Interest on Lawyer Trust Accounts, IOLTA), and 417 (Financial Record Keeping).
Lawyer liens are discussed at section 1.8:1130.
• Background References: ABA Model Rule 1.15, Other Jurisdictions
South Carolina Rule 1.15 and its comments are identical to Model Rule 1.15, except that South Carolina has deleted the last sentence of the comment to the Model Rules because South Carolina has adopted a client's security fund. See S.C. App. Ct. R. 411.
South Carolina Appellate Court Rule 412 governs interest on lawyer trust accounts. This rule is commonly referred to as IOLTA. This rule provides that "a member of the South Carolina Bar shall maintain one (1) or more interest-bearing accounts for client funds which are nominal in amount or to be held for a short period of time . . . established with a bank or saving and loan association." A lawyer may elect not to maintain such an account, and Rule 412 provides detailed procedures a lawyer must follow in order to notify the Bar of such an election. If a lawyer instead chooses to maintain an interest-bearing trust account for client funds, such funds are subject to withdrawal upon request and without delay, and the rate of interest payable on these accounts "shall not be less than the rate paid by the depositary institution on comparable accounts." Higher rates may be obtained and reasonable service charges and fees may be assessed under certain circumstances.
At the direction of the lawyer depositing the funds, the depositary institution is "to remit interest or dividends to the South Carolina Bar" and to transmit, at least quarterly, a report of the activity of the account to both the Bar and the depositing lawyer. The Bar is entitled to "receive, administer, invest, disburse, and separately account for all funds remitted to it through this program."
The depositing lawyer is not required to notify his client as to whether the client's funds will be placed in such an account, nor does the client have the power to elect "whether nominal or short-term funds shall be placed in the account."
If the client asserts a claim against his lawyer concerning such an account, upon written request of the lawyer the Bar shall review the claim and either "approve the claim . . . and remit directly to the claimant any sum of interest remitted to the Bar Foundation on account of the client's funds . . . or . . .reject the claim . . . and advise the claimant in writing of the grounds for rejection." If subsequent litigation develops between the client and the lawyer, the Bar will interplead the sum of money, "assume the defense of the action, and shall indemnify the lawyer or law firm if judgment is awarded on the client's claim."
Rule 411 of the South Carolina Appellate Court Rules establishes the Lawyers' Fund for Client Protection and the Lawyers' Fund for Client Protection Committee. The committee, established by the South Carolina Supreme Court, is comprised of 10 members of the South Carolina Bar and one member of the general public. This committee's functions shall be to "receive, hold, manage, and disburse such funds . . . for the purpose of maintaining the integrity and protecting the good name of the legal profession by reimbursing . . . losses caused by the dishonest conduct of members of the South Carolina Bar." The fund itself is financed by members of the South Carolina Bar.
Specifically, the committee considers applications for reimbursement of losses caused by dishonest conduct of a member of the bar "who was acting either as a lawyer or in a fiduciary capacity customary to the practice of law in the matter in which the loss arose, but only to the extent to which these losses are not bonded or to the extent these losses are not otherwise covered." Dishonest conduct of a member of the bar includes not only actions committed by a member of the bar but also dishonest conduct by a person "employed by a member or the firm of a member to assist the member or firm in providing legal services."
The committee only considers reimbursement applications received within three (3) years of the date the applicant reasonably should have discovered the dishonest conduct; the committee will not accept applications after six (6) years have passed from the date of the conduct in question. Once the committee receives an application for reimbursement, the committee investigates the assertions in the application and is then authorized to accept or reject in whole or in part the reimbursement application. Payment on those applications accepted can not exceed $20,000 per claim, and the aggregate total of claims paid per attorney shall not exceed $100,000. Applications are confidential until the committee authorizes reimbursement.
Furthermore, the committee may prescribe rules of procedure for the management of its affairs, to purchase insurance as deemed appropriate to cover losses, to invest portions of the fund as needed, and to deposit interest of the fund in banks or savings and loan institutions.
The committee reports its activities to the South Carolina Supreme Court, and the members of the committee are immune from liability and suit while acting within their scope of duties.
1.15:200 Safeguarding and Safekeeping Property
1.15:210 Status of Fee Advances [see also 1.5:420]
Whether a retainer fee paid by the client is client money that must be retained in the trust account or is the property of the law firm depends upon the type of retainer paid. A special retainer is compensation for services to be rendered in a particular matter. It should be deposited into an escrow account and transferred to the general account only as fees are earned. When fees have been paid in advance, they remain the property of the client until they are earned, and the lawyer is obligated to return any unearned portion. See S.C. Bar Ethics Adv. Op. # 81-15; Rule 1.5, cmt. See also In re Meeder, 320 S.C. 82, 463 S.E.2d 312 (1995) (lawyer withdrew trust account funds to pay attorney's fees without client authorization); In re Howard, 303 S.C. 278, 400 S.E.2d 138 (1991) (lawyer failed to account for hours worked or to return fee at request of client); In re Burr, 267 S.C. 419, 228 S.E.2d 678 (1976) (lawyer commingled with personal funds a retainer paid in advance for services never rendered).
A general retainer, on the other hand, is a fee paid to retain the lawyer's availability to handle matters for the client. A general retainer is earned when received and, therefore, may be deposited directly into the law firm's general account. When the lawyer and client have agreed that the retainer is nonrefundable, that nonrefundable retainer "may be retained if it is reasonable." Rule 1.5, cmt.
When a client is billed for several matters and overpays one invoice or mistakenly designates two payments for the same invoice, the excess payments could be construed as client funds. The overpayment should not be applied to other invoices unless those invoices are due and the client does not dispute the obligation. The better practice is to obtain the client's consent prior to applying the overpayment to other invoices. If a dispute arises, the overpayment should be retained in the client trust account until the dispute is resolved. S.C. Bar Ethics Adv. Op. # 88-08.
A lawyer may not claim unclaimed property of a client as the lawyer's own property. See S.C. Bar Ethics Adv. Ops. # 84-01; 83-18. Nor may the lawyer contribute any unclaimed funds to a charity selected by the lawyer. Unclaimed funds should be disposed of in accordance with statutory procedures. See S.C. Bar Ethics Adv. Op. # 95-03. Any interest generated on funds of a client, other than funds deposited in an IOLTA account, belongs to the client and not to the lawyer. See S.C. Bar Ethics Adv. Op. 81-04; see also S.C. App. Ct. R. 412 (Interest On Lawyer Trust Accounts).
Unless the lawyer is otherwise permitted by law or by agreement to retain possession of another person's property received in connection with a representation, the lawyer must promptly deliver any funds or property held by the lawyer to which the other person is entitled. Rule 1.15(b). See, e.g., In re Tootle, 319 S.C. 392, 461 S.E.2d 824 (1995) (failure to disburse amount due client until 10 months after closing); In re Charles, 319 S.C. 434, 462 S.E.2d 268 (1995) (lawyer for estate failed to distribute estate property promptly). This obligation is separate from any obligation of the lawyer arising independent of legal services, such as through an escrow agreement, although discipline may be appropriate for improper disbursement in those situations as well. See Rule 1.15, cmt.; see In re King, 279 S.C. 48, 301 S.E.2d 752 (1983) (lawyer disciplined for conduct including failure to disburse promptly money held in escrow after being directed to disburse by master's decree, the appeal from which had been dismissed); In re Smith, 306 S.C. 403, 412 S.E.2d 414 (1991) (lawyer failed to distribute or account for funds held in escrow); In re Charles, 319 S.C. 434, 462 S.E.2d 268 (1995) (lawyer disbursed closing proceeds even though lawyer had been authorized to issue a title policy only if sale proceeds from the land were held in escrow until an estate closed).
The lawyer must be careful to disburse only funds belonging to the recipient of the disbursement. If a lawyer has misappropriated funds from the trust account, disbursements made to one client after the misappropriation may actually draw improperly upon the funds of other clients. See In re Moore, 280 S.C. 178, 312 S.E.2d 1 (1984). The problem is not limited, however, to instances in which there has been any bad faith on the part of the lawyer. It is a disciplinary violation to disburse trust account funds prior to securing and depositing the funds to be disbursed. By disbursing prior to deposit of the funds, the lawyer is borrowing against the funds of other clients already on deposit. In re Iseman, 287 S.C. 194, 336 S.E.2d 474 (1985).
Three South Carolina Bar Ethics Advisory Opinions issued under the old Code of Professional Responsibility addressed the problem of disbursing against uncollected funds. In S.C. Bar Ethics Adv. Op. # 78-20, the bar committee concluded that a lawyer may not disburse funds at closing until the funds are deposited and available to the lawyer. Left unanswered was the definition of available funds. S.C. Bar Ethics Adv. Op. # 83-24 advised that a lawyer at a real estate closing may not immediately disburse funds when the lender has provided a sight draft drawn on an out of state bank, since the funds are not yet collected. The opinion also offered several possible ways to avoid a delay in disbursement. For example, a lawyer may immediately disburse proceeds at a real estate closing if the lawyer has an arrangement with the bank whereby the bank guarantees payment of the draft deposited by the lawyer. In S.C. Bar Ethics Adv. Op. # 84-23 the bar committee opined that once a check from an insurance company or from the United States government or a certified check is deposited in the client trust account, the funds may be disbursed immediately to the client. There is no requirement in those situations that the lawyer wait until the deposited check has been finally paid. The 1984 opinion drew a distinction between checks and sight drafts.
Although Rule 1.15 makes no specific mention of any lien held by the lawyer against the property of a client, it does suggest that a lawyer may hold property of the client, if permitted by law. The language of Rule 1.15, however, must be read in connection with Rules 1.8(j) and 1.16. [see 1.8:1130 Lawyer Liens].
1.15:230 Documents Relating to Representation
The Rules of Professional Conduct do not specify how long client files must be retained after a representation ends. Rule 1.16 requires that at the end of the representation the lawyer surrender papers and property to which the client is entitled. Thus, at least when a lawyer is fired for cause, the lawyer must promptly return the file to the client. See In re Ring, 320 S.C. 249, 464 S.E.2d 328 (1995); In re Meeder, 320 S.C. 82, 463 S.E.2d 312 (1995); In re Edwards, 323 S.C. 3, 448 S.E.2d 547 (1994); S.C. Bar Ethics Adv. Op. # 92-37. The lawyer should make available to the former client any file materials provided by the client to the lawyer and any other original materials obtained on behalf of the client. Also, the lawyer should return to the client any original correspondence and other materials prepared in final form. The lawyer is not required to turn over to the client personal notes in the file regarding the lawyer's personal impressions of the client. Id. See John Freeman, Turning Over "The File," S.C. LAW., July-Aug. 1998, at 11.
Rule 1.16 does not elaborate on the lawyer's duty when files are not claimed. The S.C. Bar Ethics Advisory Committee has concluded only that, in the absence of more specific guidance, a lawyer should not dispose of the files until "it is reasonable to believe" that the client will not be prejudiced by disposal. See S.C. Bar Ethics Adv. Op. # 92-19. One possible means to reduce the likelihood of indefinite storage obligations is an agreement between lawyer and client entered into at the outset of the representation. The agreement must provide the client with reasonable notice and a reasonable opportunity to obtain the file prior to its destruction. Id. Even a general agreement allowing the lawyer to dispose of files if not claimed after a certain passage of time, however, may not authorize the lawyer to dispose of file materials that have inherent value to the client, such as corporate records or deeds. See S.C. Bar Ethics Adv. Op. # 98-33 (absent agreement with client regarding destination of client files, attorney should retain files for at least six years and may place files on computer disks or similar media as long as attorney can access records and insure confidentiality). See also ABA Formal Op. # 92-369 (disposition of files after death of sole practitioner); S.C. Bar Ethics Adv. Op. # 95-18 (disposal of property other than files).
The lawyer may retain a copy of any file materials returned to the former client. The lawyer, however, must bear the cost of any copies retained, except for the cost of additional copies of materials previously provided to the client. Id. A lawyer dismissed for cause has no retaining lien and may not require payment prior to delivery of the file for any copies properly chargeable to the client. A lawyer fired without cause may have a retaining lien, but may retain the file only so long as retention does not prejudice the client's interests. Id.
In contrast to the lack of specific guidance provided by the Rules of Professional Conduct regarding the file retention duty owed to a client, South Carolina Appellate Court Rule 417 imposes specific retention requirements regarding financial information. In addition to retaining specified bank account records, the lawyer must keep for at least six years after the termination of the representation any "portions of clients' files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them." Also the lawyer must retain copies of all retainer and fee agreements and copies of all bills or statements rendered to clients. S.C. App. Ct. R. 417(a). These records may be retained by appropriate electronic means. S.C. App. Ct. R. 417(c).
1.15:300 Holding Money as a Fiduciary for the Benefit of Clients or Third Parties
Rule 1.15 imposes a number of duties on lawyers regarding money or property of clients or third persons that come into their possession. First, money or property must be held by the lawyer separately from the lawyer's own property. Rule 1.15(a). Rule 1.15 requires that funds held by a lawyer for other persons must be kept in a separate account in either the state in which the lawyer's office is situated or in another state if consented to by the owner of the property. When the lawyer is administering an estate or trust or acting in a similar special capacity, separate accounts for the funds of that client may be appropriate. Rule 1.15, cmt. See In re King, 279 S.C. 48, 301 S.E.2d 752 (1983) (lawyer disciplined for failing to place escrowed money in special account as required by escrow agreement). Generally, securities are to be kept in a safe deposit box, unless other care is appropriate. Id. Other property is to be marked and appropriately safeguarded. Rule 1.15(a).
Commingling of funds, often combined with misuse of client funds for the benefit of the lawyer, has been cited frequently as a ground for discipline against a lawyer. See, e.g., In re Smith, 310 S.C. 449, 427 S.E.2d 634 (1992) (commingling and conversion of client monies); In re Watkins, 301 S.C. 461, 392 S.E.2d 786 (1990) (fees deposited in personal account, not firm account, and client funds diverted to personal use). Discipline is not avoided simply because the clients suffer no pecuniary loss. See, e.g., In re Hall, 319 S.C. 358, 461 S.E.2d 396 (1995) (lawyer reprimanded for commingling although clients did not lose any funds). In In re Rushton, 286 S.C. 543, 335 S.E.2d 238 (1985), a lawyer received checks from a client payable to the lawyer as trustee to fund a purchase of corporate stock. The lawyer deposited the checks into a personal account, apparently intending to have the stock issued in the lawyer's name. The deposit into a personal account was an improper commingling of funds, even though the lawyer's partners discovered and corrected the transaction without loss to any clients. The checks should have been payable to the firm trust account or to the corporation.
Since only the funds actually received and held for another person should be available for disbursement, the trust account ought never to be overdrawn. An overdraft may be grounds for discipline. In re Craig, 317 S.C. 295, 454 S.E.2d 314 (1995) (multiple overdrafts); In re Abney, 316 S.C. 182, 447 S.E.2d 848 (1994) (overdrafts and negative trust account balance). When a check is written on a client's behalf in excess of funds deposited for that client, even if the withdrawal does not create an overdraft, the lawyer impermissibly borrows on the accounts of other clients in violation of the rules. See In re Iseman, 287 S.C. 194, 336 S.E.2d 474 (1985); see In re Mason, 271 S.C. 111, 245 S.E.2d 424 (1978) (lawyer acting as trustee, not as attorney, commingled personal and trust moneys and failed to maintain sufficient account balance to cover all trust funds).
The burden appears to be upon a lawyer to explain why overdrafts occur in a trust account. In In re Myers, 321 S.C. 93, 467 S.E.2d 446 (1996), a lawyer received a public reprimand although the hearing panel had found no evidence of conversion or commingling of funds. The panel had suggested that 45 overdrafts were caused only by a failure to make timely deposits and had recommended that the complaint be dismissed. The court, however, agreed with the Executive Committee that a reprimand was appropriate when the lawyer had "failed to sufficiently explain why the account was short, where the money went, or what the proper accounting should have been." That case was decided prior to the adoption of current South Carolina Appellate Court Rule 417. Now, the inability to produce an adequate accounting may itself be a violation of court rules.
Second, lawyers receiving property are held to the standard of care of a fiduciary, Rule 1.15, cmt., and complete records are to be made of all property received and disbursed, with the records retained for at least six years after the representation ends. Rule 1.15(a); S.C. App. Ct. R 417; see In re James, 289 S.C. 4, 344 S.E.2d 378 (1986) (lawyer failed to keep adequate records); In re Garris, 279 S.C. 559, 309 S.E.2d 755 (1983) (lawyer failed to maintain proper records); In re Drose, 275 S.C. 414, 272 S.E.2d 173 (1980) (misconduct included failure to maintain adequate records of incoming funds). See also S.C. Ethics Adv. Op. # 84-01 (It is unclear what, if any, sanction would be imposed for an unintentional failure to maintain proper trust account records.). The duty to maintain records survives the dissolution of a law firm. S.C. App. Ct. R. 417(d)-(e).
South Carolina Appellate Court Rule 417 imposes specific financial recordkeeping responsibilities on lawyers. A lawyer is required to maintain receipt and disbursement journals that record all deposits to and withdrawals from bank accounts related to the lawyer's practice, including the date, source, and description of each deposit and the date, payee and purpose of each disbursement. Ledgers for trust accounts must exist for each separate trust beneficiary showing the source and amount of all funds deposited, the person for whom the funds are held, the description and amount of any withdrawal, and the name of any person to whom a disbursement is made. S.C. App. Ct. R. 417(a). The rule further requires that "receipts shall be deposited intact" and withdrawals may be made only by bank transfer or by a check payable to a named payee, and not to "cash." S.C. App. Ct. R. 417(b). See In re Davis, 2000 WL 62103 (2000) (lawyer publicly reprimanded for failing to conduct monthly reconciliations of trust account as required by Appellate Court Rule 417).
A lawyer must provide an accounting upon a request from the owner of property held by the lawyer. Rule 1.15(b). See, e.g., In re Larkin, 320 S.C. 512, 466 S.E.2d 355 (1996) (lawyer failed to respond to client's request for accounting of funds handled); In re Smith, 306 S.C. 403, 412 S.E.2d 414 (1991) (lawyer failed to account for settlement proceeds); In re Gaines, 293 S.C. 314, 360 S.E.2d 313 (1987) (lawyer failed to account properly). Copies of all accountings must be retained for at least six years after a representation ends. S.C. App. Ct. R. 417(a)(4). Also a failure to account for client moneys may result in disciplinary sanction even if there is no evidence of misappropriation by the lawyer. See In re Screen, 318 S.C. 367, 458 S.E.2d 39 (1995); In re Nida, 297 S.C. 541, 377 S.E.2d 580 (1989).
Third, lawyers receiving property of another person must notify the owner promptly after receipt. Rule 1.15(b). See In re Edwards, 323 S.C. 3, 448 S.E.2d 547 (1994); In re Watkins, 301 S.C. 461, 392 S.E.2d 786 (1990). A lawyer should not exercise control over the property of an adverse party without proper authority. In In re Bell, 289 S.C. 290, 345 S.E.2d 475 (1986), for example, the court, in disbursing the proceeds of a foreclosure sale, issued separate checks to a husband and wife who were involved in domestic litigation. The husband's lawyer assumed control over both checks without authority from the wife who was not a client. After several transfers of the checks and finalization of the divorce, the husband's lawyer had the wife's check reissued to the husband. The lawyer was reprimanded for assuming control over the wife's property without authority.
A lawyer may be held responsible for ethical misconduct when the lawyer fails to supervise properly an office employee, resulting in the misuse of client funds, even without the knowledge of the lawyer. See, e.g., In re Craig, 317 S.C. 295, 454 S.E.2d 314 (1995) (negligent supervision of employees); In re Gibbes, 315 S.C. 186, 432 S.E.2d 482 (1993) (lawyer had too many financial accounts with several authorized signatories and failed to supervise employees adequately); In re Jones, 313 S.C. 9, 437 S.E.2d 10 (1993) (no willful misfeasance by lawyer who nevertheless "clearly abdicated" responsibility for trust account management). See also In re Campbell, 313 S.C. 374, 438 S.E.2d 230 (1993) (lawyer failed to assist client in recovering money after fraud by lawyer's employee).
1.15:400 Dispute Over Lawyer's Entitlement to Funds Held in Trust
Rules requiring prompt disbursement of funds to a client upon demand by the client may create a dilemma for the lawyer if a third-party asserts an interest in client property held by the lawyer. The comment to Rule 1.15 notes that the lawyer "may have a duty under applicable law to protect such third-party claims against wrongful interference by the client." Rule 1.15, cmt. The comment adds, however, that the lawyer is not to "unilaterally assume to arbitrate a dispute" between the client and another person such as a creditor of the client. Id.
When a client has assigned an interest in a potential recovery to a creditor, the lawyer may honor the assignment when disbursing funds, unless the client objects. S.C. Bar Ethics Adv. Ops. # 92-06. If the client directs the lawyer to ignore the assignment, the lawyer should notify the assignee and hold the funds in trust until the dispute between the client and the assignee is resolved. The lawyer has these obligations even if the lawyer is not a party to the assignment or has not agreed to protect the assignee's interests. In In re Jones, 313 S.C. 9, 437 S.E.2d 10 (1993), the client had assigned the proceeds of any tort claim to a creditor as a part of an earlier settlement in which the lawyer had acted as counsel. The lawyer was disciplined for later, at the client's request, disbursing proceeds of the tort claim to the client and not to the assignee. The lawyer was held to have "violated the rules by failing to keep the money separate" until a dispute over the validity of the assignment had been resolved. In In re Boensch, 277 S.C. 148, 283 S.E.2d 442 (1981), the lawyer represented both the insured recipient of funds and the insuror with a subrogated interest. The lawyer was found to have acted improperly in disbursing settlement proceeds to the insured without deducting the subrogated interest of the insuror or even notifying the insuror that the funds had been received. Accord S.C. Bar Ethics Adv. Op. # 93-14 (disagreeing with prior bar opinions that had held that the lawyer should follow the client's instructions unless the lawyer was a party to the assignment) and S.C. Bar Ethics Adv. Op. # 94-20 (obligation applies if lawyer has knowledge of doctor's lien even in absence of provision in engagement agreement). See also In re Edwards, 323 S.C. 3, 448 S.E.2d 547 (1994) (lawyer failed to protect interests of creditors and subrogee after agreeing to do so in various personal injury matters).