The Attorney Escrow Accounts and the Prohibition of Commingling Client Funds April 19, 2010Posted by Herb Chestnut in Uncategorized.
Recently, an Illinois attorney who represents a number of DBA clients was arrested on charges of “ … unlawful financial exploitation of an elderly person for allegedly obtaining a check written payable to the 81-year-old victim.” The case alleges that the attorney deposited a check made out to a client into his own account. Bear in mind that this attorney has not been convicted of the allegations at this point and, under our laws is innocent until proven guilty. However, the story here is a good opportunity to explain the reason attorney’s have escrow accounts and the prohibition against commingling funds.
Most states and the American Bar Association have rules which read something like the one here in Georgia: “A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation seperate from the lawyer’s own property. Funds shall be kept in a separate account maintained in an approved institution as defined in Rule 1.15(III)(c)(1).” Georgia Rules of Professional Conduct. The account referred to is called an “escrow” or “trust” account. Its basic purpose is to create a separate depository for funds of a client or funds which contain both client and attorney funds.
An example of the escrow account’s use would be in a situation where and insurance company issues one check which included a client’s proceeds of a settlement and attorney fees and costs. In that situation, since the check includes client property in addition to moneys payable to the attorney, it would have to be deposited in a separate account, an escrow account, before distributed. After the check clears the bank and the funds are verified, the attorney will disburse the funds in separate checks, one to the client and one to himself. When handled in this manner, it is easily determined where the fund were dispersed.
Often, a client is confused when they have to wait an additional period of time to receive settlement proceeds. However, even though this procedure take a few extra days, it protects the client and the attorney and creates a record of each transaction which can be easily audited or checked at a later time.
It is fair to say that the case referenced above involved more than simply the deposit of funds into the wrong account. According to the article, the attorney received a check in excess of $137,000 in 2006, deposited it and, at the time of the article, had not disbursed any funds to the client.
Generally, any check representing funds belonging jointly to a client and an attorney will have the client’s name on it. This requires the client to endorse the check before it is deposited into the escrow account. It is our firm’s practice to give a copy of the check which the client endorses to the client so that there is no doubt as to the amount of the check and so that the client can have a record of the funds for their file. At disbursement, any fees, costs or other deduction from the client’s proceeds should be disclosed and the client should be given a accounting of the individual costs being assessed. There should be a writing in the file acknowledging the distribution of the funds with a copy of this accounting being provided to the client. When handled in this manner, all transactions are documented and easily verified if a question arises at a later date.
Before you agree to a settlement, it is necessary to ask several questions so that there will be no unpleasant surprises when the final distribution takes place. First, ask your attorney if there will be separate checks representing your proceeds and the fees and costs. If so, will it be necessary to deposit your check into an escrow account. If that will be necessary, what additional costs/fees come out of your proceeds and how long will it take for the funds to clear.
If all proceeds are paid in one check, ask your lawyer what the net proceeds will be; that is, what will you receive after all fees, cost, medical and other expenses are paid. Finally, request a copy of the check deposited, front and back, and ask in what account the check will be deposited. If the answer is not an escrow of trust account, there may be problems.
In DBA cases, the checks are generally separate so these problems may not arise. Also in DBA cases, the client’s check is rarely sent to the attorney and there is no need for an escrow deposit. However, if the situation arises, there should be documentation for every deduction taken. If you have questions of your attorney, ask them. The great majority of lawyers follow the ethical rules and will not risk losing their licence to practice by commingling funds. Therefore, an attorney will want you to be satisfied that you are aware of the reason for every deduction from your funds so that there will be no questions in the future.