Higgins: New rules reflect renewed focus on attorney trust accounts

By John P. Higgins

Higgins

For most, the new year means personal resolutions to keep for a week and then abandon. For Indiana attorneys, the new year marks the effective date of the new Admission and Discipline Rule 23. The Indiana Supreme Court Disciplinary Commission and its staff have undertaken a wholesale revision of Admission and Discipline Rule 23, which is the rule governing the attorney disciplinary process. The importance of Rule 23 is generally limited only to those unlucky few who find themselves being investigated or prosecuted by the Disciplinary Commission.

However, Rule 23 also contains substantive provisions on how each lawyer must manage his or her trust account. Included in the new Rule 23 is a complete rewrite of the specific attorney trust accounting rules located outside the conceptual fiduciary provisions of Professional Conduct Rule 1.15. These new trust account rules are contained in Sections 29 and 30 and will apply to almost every attorney in private practice. Among the most notable changes:

Supporting documents required. Professional Conduct Rule 1.15(a) currently mandates that lawyers keep “[c]omplete records of such account funds and other property” for a period of five years after termination of a representation. The existing Rule 23 vainly attempted to explain this so-called “complete records” requirement, but the explanation was ambiguous at best. The ambiguity exists no more. As of Jan. 1, all lawyers holding funds of others will be required to keep:

• A deposit and disbursement journal, which is defined as a document reflecting each deposit into and disbursement from an attorney trust account. This deposit and disbursement journal is a record tracking the trust account balance as a pooled whole and should reconcile with the trust account bank statement (as adjusted for deposits and disbursements in transit).

• A client ledger, which is a document created for each client reflecting the amount of funds disbursed or deposited, the date of disbursement or deposit, the source of funds deposited, the payee of funds disbursed, and most importantly, a running total of the amounts held in trust for that client or beneficiary. These ledgers must be “sufficient to determine, at any time, the amount held for each client or other beneficiary in relation to the total amount held in the trust account as a pooled whole.”

• A ledger tracking the nominal amount of attorney-owned funds held in the trust account, if applicable.

• Records of all electronic disbursements, including the name of the person authorizing the disbursement, the date of the disbursement, the name of the recipient, the purpose of the disbursement, and the client or beneficiary for whom the disbursement was made.

Safe harbor for records. Worry not if your eyes just glazed over; there are now exhibits in the new Rule 23 with examples of each type of required trust account record. Although the new rule does not refer to these exhibits as a “safe harbor,” it seems reasonable that an attorney who keeps accurate and contemporaneous records similar to the examples set forth in Section 29 will satisfy the “complete records” requirement of Professional Conduct Rule 1.15.

Periodic reconciliation required. The new Rule 23 explicitly requires attorneys to reconcile their trust account records, specifically by ensuring that the sum of their ledgers reconciles with the deposit and disbursement journal, which reconciles with the bank statement. Furthermore, attorneys must keep records of these periodic reconciliations for a period of five years after the conclusion of the representation. Presumably, these reconciliation reports will be one of the first documents requested by the Disciplinary Commission when investigating allegations of trust account mismanagement.

Fee agreement retention. Lawyers will now be required to keep “relevant fee agreements” for a period of five years from the conclusion of a representation. This revision does not mandate that attorneys execute written fee agreements unless currently required to do so under existing law, but rather requires a lawyer to retain any fee agreement that is executed.

Electronic disbursements permitted. The existing trust account rules allow attorneys to make electronic deposits into their trust accounts, but for reasons foreign to the modern lawyer, electronic disbursements are currently prohibited. With the Rule 23 amendments, lawyers may now disburse funds electronically from their trust accounts, provided that the lawyer keeps records of the name of the person authorizing the disbursement, the date of the disbursement, the name of the recipient, the purpose of the disbursement, and the client or beneficiary for whom the disbursement was made. These records are also required to be kept for five years after the conclusion of the representation. Cash withdrawals, ATM withdrawals, and checks made payable to “cash” are still prohibited.

Expedited resolution of trust account investigations. Investigations of trust account misconduct under the current Rule 23 require an overdraft investigation, followed by a grievance, followed by docketing of that grievance, followed by the presentation of that grievance to the Disciplinary Commission for consideration of formal charges. This procedurally time-consuming process exists no more. Once a lawyer overdraws his or her trust account, that lawyer will be required to provide the Disciplinary Commission with a “comprehensive explanation” of the overdraft. Given that lawyers must now keep certain specific trust account records, the Disciplinary Commission will almost certainly require lawyers to submit current deposit and disbursement journals, ledgers, periodic reconciliations, and fee agreements at the outset of the investigation. If trust account misconduct is detected or the financial records are insufficient (or nonexistent), then the Disciplinary Commission may proceed directly to considering formal disciplinary charges without first having to file or docket a grievance.

These rule amendments are consistent with the Supreme Court and the Disciplinary Commission’s refocused efforts at enforcement of the trust account rules. Given the tools now at the Disciplinary Commission’s disposal to prosecute trust account misconduct, combined with the fact that sanctions for failing to keep adequate records are sufficiently serious, see, e.g., Matter of D.B, 53 N.E.3d 407 (Ind. 2015) (two-year suspension for commingling funds and failing to keep adequate trust account records) (David, J., dissenting in favor of disbarment), lawyers in private practice would be well advised to familiarize themselves with the new Admission and Discipline Rule 23, Sections 29 and 30.•

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John P. Higgins practices law at Katz & Korin P.C. in Indianapolis. He was formerly an attorney at the Disciplinary Commission. Higgins may be reached at [email protected]. The opinions expressed are those of the author.