You are pleased about the substantial fee your firm earned from the recent client settlement. The fee is one of largest your firm ever earned. The firm is off to a great year. All is well until you receive a notice from the bank. One of the client expense checks related to the settlement written from the trust account bounced!
You were so busy doing legal work that you did not reconcile the IOLTA account for several months. Your contentment turns to grave concern, as you try to determine the severity of the problem. You phone the bank. The bank's customer service representative initially allays your concerns. The bank paid the check, so you transfer funds sufficient to cure the deficit and cover any bank fees. Easy enough.
A week later, just as you breathe a sigh of relief, you receive a letter in the mail containing the initials "ODC" listed on the return address. The Office of Disciplinary Counsel of the Supreme Court of Ohio commenced an investigation of your trust account because of your IOLTA account overdraft, requiring your explanation within 14 days.
Rule 1.15 Requirements
Trust accounts require lawyers to adhere to specific financial record-keeping for the proper practice of law. Unfortunately, many lawyers do not know these requirements. Yet, given the dire consequences a lawyer may suffer for failing to follow IOLTA account ethics rules, and given the financial institution reporting mandated by R.C. 4705.10, all lawyers who maintain client funds must strive to enhance their knowledge of IOLTA account requirements.
The lawyer discipline system enforces the standard of safekeeping of client property as a fundamental, fiduciary obligation of lawyers. Rule 1.15(a) requires that client and third-person funds are maintained (1) in an insured, interest-bearing account; (2) in a financial institution permitted under Ohio law and in the state where the lawyer's office is situated; and (3) in an account designated as "client trust account," "IOLTA account," or with another identifiable fiduciary title1. Rule 1.15 requires the lawyer to maintain the following financial records for a period of seven years:
- Any fee agreements
- A record for each client's funds, setting forth:
- the client's name
- the date, amount, and source of received funds
- the date, amount, payee, and disbursement's purpose
- the current balance
- A record of each bank account that sets forth:
- the name of the account
- the date, amount, and client for each credit and debit
- the balance in the account
- Any bank statements, deposit slips, and canceled checks provided by the bank, for each account
- A monthly reconciliation of the client ledgers bank account records2
IOLTA account rules authorize lawyers to deposit their own funds into the trust account for the sole purpose of paying or obtaining a waiver of bank service charges3, to place advances on expenses into the trust account 4, and to comply R.C. 120.52, 3953.231, 4705.09, and 4705.10 and Gov. Bar R. VI, (1) (F)5.
A dishonored check drawn from an IOLTA client trust account can signal (a) that the lawyer or the bank made an honest administrative, or accounting error, or (b) that the account is "out of trust," and the lawyer is intentionally or unintentionally using the client funds. Overdraft Notification
The ABA Standing Committee on Client Protection has promulgated rules as guidelines for implementing client protection and discipline programs. An ABA Model Rule for Trust Account Overdraft Notification was approved by the ABA House of Delegates in 1988. Ohio adopted its overdraft notification provision in 2005.
R.C. 4705.10 requires that any bank which holds attorney trust accounts notify Disciplinary Counsel of any dishonored checks written on an IOLTA account:
The depository institution shall notify the office of disciplinary counsel or other entity designated by the Supreme Court on each occasion when a properly payable instrument is presented for payment from the account, and the account contains insufficient funds. The depository institution shall provide this notice without regard to whether the instrument is honored by the depository institution. The depository institution shall provide the notice described in division (A)(4) of this section by electronic or other means within five banking days of the date that the instrument was honored or returned as dishonored. The notice shall contain all of the following: (a) The name and address of the depository institution; (b) The name and address of the lawyer, law firm, or legal professional association that maintains the account; (c) The account number and either the amount of the overdraft and the date issued or the amount of the dishonored instrument and the date returned6.
While bank error or poor record-keeping by the lawyer may be explanations for an overdraft on the IOLTA account, the far more serious concern is commingling of lawyer and client funds. If the overdraft was caused by a banking error, in responding to the Disciplinary Counsel's investigation, the lawyer should immediately provide evidence of the bank's mistake. If the overdraft is caused by the lawyer's accounting mistakes, the lawyer must assure the Disciplinary Counsel that the lawyer understands the mistakes, that they are isolated and will not be repeated. If the problem is more serious, involving commingling and misuse of the trust account by the lawyer, the investigation may involve the lawyer and the lawyer's bank providing additional bank records to determine if client funds were impacted and if formal disciplinary action is warranted.
Regardless of the severity of the problem, the lawyer should determine whether he or she can benefit from the assistance of counsel so that formal disciplinary action can be avoided if possible.