What is considered a misappropriation of trust accounting funds?
Every state has their own rules regarding trust accounts, but they all prohibit the misappropriation of client funds. In order to avoid actions that can be interpreted as misappropriation and land you in an ethics violation, and even possibly result in being disbarred, you should be aware of what it constitutes. As an example of how serious the consequences can be for misappropriation, in Connecticut a lawyer that knowingly misappropriates client funds held in trust will be disbarred.
Misappropriation occurs when funds belonging to a client aren’t deposited into a trust account or are used for purposes other than those approved of by the client.
The following would likely be considered misappropriation of funds:
Failing to deposit client funds into a trust account.
No matter what the reason, client funds that belong in a trust account should always be placed in one. At no point should the funds be placed into the firm’s general account.
Issuing check from pooled trust account that results in overdraft
When you write a check for an amount that is larger than the balance of an individual client’s ledger, you are then using another client’s funds to cover the balance.
Not transferring credit card or debit card payments to the trust account
These funds also need to be kept specifically in the trust account, not in any other type of firm account.
Paying non-client expenses from the trust account
Client funds should only be used for their specific expenses. Other expenses should never, under any circumstances, be paid by the client. That includes overhead costs, other client charges or general fees.
Unreturned funds for work not performed
If you accept money from a client and don’t fulfill the work, then fail to refund the funds, then this is considered misappropriation.
There are a number of ways in which attorneys can find themselves in the midst of an ethics investigation when it comes to trust accounting, so it’s critical to be mindful of ways client funds, and trust accounts, should and shouldn’t be used.