How Can Lawyers Avoid Unintentionally Misappropriating Client Funds?

CosmoLex Team

Misappropriating client funds
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Misappropriating client funds can have severe repercussions, no matter which jurisdiction you practice in. Although every jurisdiction has its own rules around trust funds, the bottom line is always the same—money in a client’s trust account doesn’t belong to the lawyer until they’ve done the work and billed for it.

But what, exactly, counts as misappropriating client funds? Bad apples aside, there are times when lawyers misappropriate client funds without realizing they are doing something they shouldn’t be.

Here’s the breakdown of examples of misappropriation—and how to avoid accidents that could lead to sanctions or disbarment.

What is misappropriating client funds?

When a lawyer fails to directly and immediately deposit client funds into a trust account or when the funds are used for a purpose the client hasn’t approved of, then the lawyer has misappropriated the funds.[1]

Intentional or not, the consequences for such behavior can be considerable. From sanctions to disbarment, state bars take the misappropriation of client funds seriously.

Below, we break down a few real-world examples of misappropriating client funds.

Not depositing filing fees into a client trust account[2]

Client funds must always be deposited directly and immediately into the client account. They should never be placed in a law firm’s operating account—even if you have already begun working on the matter.

The funds must stay in your client trust account until you have billed for work completed and the client has had a reasonable amount of time to receive and review the bill.

Not depositing credit or debit card payments directly into the client account[2]

When a failure to deposit client funds into a trust account occurs unintentionally, it is sometimes because of issues with the electronic payments merchant the law firm is using.

Credit card merchants that aren’t legal-specific deposit the charged amount into an account from which they also withdraw a charge fee. Because the charge fee is the lawyer’s responsibility to pay—and not the client’s—some lawyers attempt to deal with this issue by having credit card payments land in the operating account. They then move the funds to the client trust account.

However, well-intentioned as it may be, this approach isn’t a legal solution. Instead, it is a misappropriation of client funds. For a proper solution, we recommend using a legal-specific merchant. (More on that below.)

Overdrafting a client account[2]

It’s the attorney’s responsibility to know the balance of a client account—and avoid overdrafting. If you write a check for more than the balance of a client’s account, and as a result, you draw from another client’s funds to cover the overdraft, you are misappropriating client funds.

By billing for work completed and then writing a check from the client account to the firm’s operating account, you may deplete the contents of a client account. But you may not overdraw.

Using a client account to pay non-client expenses[2]

While it’s common practice to use client funds to reimburse the law firm for expenses covered on the client’s behalf, lawyers should be careful about how they approach this process.

Even when it comes to hard costs advanced on a client’s behalf, such as court reporter fees, the fact that they are the client’s financial obligation should be addressed in the client agreement. Soft costs, such as overhead costs, may be covered by the client, too, but the client needs to agree with this approach ahead of time and it must be documented in the client agreement, too.

Failing to refund clients for work the lawyer hasn’t done[2]

If a lawyer accepts funds from a client as part of an agreement to do legal work for the client—and then doesn’t do any of the agreed-upon work—they must return the funds to the client. Failing to return the funds is another form of misappropriation.

Safeguards to avoid accidental misappropriation

Some of these examples of misappropriating client funds occur when lawyers don’t realize that what they’re doing is a failure to comply with state bar regulations. Even so, they can face stiff penalties if the error is discovered.

Fortunately, lawyers can take a few steps to reduce the likelihood of committing unintentional misappropriation.

Implement trust accounting safeguards

Your practice management system’s billing and accounting features should include trust accounting safeguards. These help prevent mistakes with significant consequences, such as making a withdrawal that results in a negative trust account balance.

It’s beneficial to have a single-platform billing and accounting program, as this reduces double data entry—and thus the likelihood of making time-consuming entry errors—and it allows the system to notify you when balances get low.

Use a legal-specific merchant

Clients want the option of online payments. After all, in other areas of their lives, they’ve come to expect the ease and convenience of paying for services in this manner.

Yet as noted above, accepting credit cards can land lawyers in a pickle—if they don’t use a legal-specific merchant. Legal-specific payment merchants design their programs with the understanding that law firms need to deposit charged funds in one account but have fees withdrawn from another.

They are also equipped to handle voids, refunds, and chargebacks to keep lawyers compliant in all areas of electronic payments.

Leverage legal tech

Misappropriating client funds can result in significant consequences for lawyers—even if the misappropriation occurs without the lawyer realizing they are breaking regulations.

It’s always recommended that lawyers familiarize themselves with their state bar regulations. Understanding the ins and outs of local rules can help lawyers avoid common pitfalls.

However, we also recommend leveraging technology for added safeguards. Using a legal-specific credit card merchant can help prevent lawyers from needing to find a work-around for how standard credit card merchants do things—and accidentally misappropriating client funds in the process.

Finally, make full use of your practice management system. A single-platform billing and accounting program can prevent overdrafts of a client’s trust account and thus protect you from misappropriation.

Ultimately, legal tech is explicitly designed to help lawyers stay compliant and run their law offices with a little more peace of mind.


References

1. ABA Model Rule 1.15: Safekeeping Property
2. Everything You Need to Know about Trust Accounts

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