The Impact of Amendments to IRPC 1.15: A Lawyer's Obligation to Manage and Protect Client Funds

EFFECTIVE SEPTEMBER 1, 2011

On July 1, 2011, the Supreme Court of Illinois announced amendments to Rule 1.15 of the Illinois Rules of Professional Conduct (IRPC) regarding a lawyer's obligation to manage and protect client funds through client trust accounts. Between now and the effective date of September 1, 2011, lawyers should take action to ensure that the trust accounts in which they have placed their clients' funds meet the requirements of Rule 1.15. The new rule contains three key changes regarding the types of client trust accounts permitted, specific recordkeeping requirements, and automatic overdraft notification. Each change is discussed in detail below.

Types of Client Trust Accounts

In Illinois, lawyers are always required to keep clients' money or property separate from the lawyer's own money or property. This is due to the professional fiduciary duty a lawyer owes to a client to safeguard the client's funds. Rule 1.15(a). "Funds" is defined as any form of money including cash, payment instruments such as checks, money orders or sales drafts, and electronic fund transfers. Rule 1.15(i)(1).

Under the new rule, lawyers must continue to keep client funds separate but there are only two types of client trust accounts in which lawyers are permitted to place clients' funds: An Interest on Lawyers Trust Account (IOLTA) account or a separate interest- or dividend-bearing non-IOLTA account. Additionally, Rule 1.15(a) and (f) expressly prohibits non-interest or non-dividend-bearing trust accounts.

An IOLTA account is a pooled interest or dividend-bearing client trust account, established with an eligible financial institution to hold nominal or short-term client funds. See Rule 1.15(a), (f), (i)(2). The Lawyers Trust Fund of Illinois (LTF) is designated as the income beneficiary. LTF is a tax-exempt, non-profit organization that uses the interest to make charitable contributions to non-profit agencies that provide legal aid to the poor. Paragraph (f) lists five provisions that govern IOLTA accounts, which are generally similar to the provisions in the former Rule 1.15.

Non-IOLTA accounts are separate, interest-bearing client trust accounts, established with an eligible financial institution to hold non-nominal or non-short-term funds of a specific client. The client is designated as the income beneficiary. See Rule 1.15(a), (f). Non-IOLTA accounts cannot be pooled accounts. Illinois State Bar Association, Illinois Supreme Court Amends Lawyer Trust Account Guidelines. Therefore, if a lawyer wants to establish an account for a client with the interest from the account paid to the client instead of the LTF, the funds from that account must be kept separate from the funds of the lawyer's other clients in an interest- or dividend-bearing non-IOLTA account.

The name of the client trust account should clearly distinguish that the account is for the clients' funds. Names that would indicate the fiduciary nature of the account such as "client trust account" or "client funds account" are valid. Rule 1.15 Comment [1]. The Attorney Registration and Disciplinary Commission (ARDC) advises avoiding ambiguous words such as "special account." ARDC FAQS on Amended Rule 1.15.

Choosing Which Type of Account
When determining whether to place a client's funds into an IOLTA or non-IOLTA account, lawyers must exercise "reasonable judgment." Rule 1.15(g). Trust funds that are nominal in amount or expected to be held for a short period of time must be deposited into an IOLTA account. Rule 1.15(f). Trust funds that are not nominal or not expected to be held for a short period of time must be deposited into an interest- or dividend-bearing non-IOLTA account. Id. Factors to consider include the following:

  1. The amount of interest the funds would earn during the period they are expected to be held and the likelihood of delay in the relevant transaction or proceeding;
  2. The cost of establishing and administering the account, including the cost of the lawyer's services; and
  3. The capability of the financial institution to calculate and pay interest earned by each client's funds, net of any transaction costs, to the individual client.

Rule 1.15(g). Lawyers will not face charges of ethical impropriety or other breach of professional conduct for exercising reasonable judgment in choosing which client trust account to use.

Eligible Financial Institutions
Revised rule 1.15(a) requires that each client trust account be maintained in an "eligible financial institution." The rule defines an eligible financial institution as follows, "a bank or a savings bank insured by the Federal Deposit Insurance Corporation or an open-ended investment company registered with the Securities and Exchange Commission that agrees to provide dishonored instrument notification regarding any type of client trust account." Rule 1.15(i)(3). Additionally, the financial institution must meet the requirements of an IOLTA account listed in Rule 1.15(f)(1)–(5).

Recordkeeping Requirements

Revised rule 1.15(a)(1)–(8) establishes specific recordkeeping requirements for client trust account funds. These requirements serve to benefit both lawyers and clients because they ensure that documents are available to fulfill the lawyer's fiduciary obligation to provide an accounting to clients and can also be used to refute any charge that the funds were handled improperly. Rule 1.15 Comment [1]. Recordkeeping requirements are common nationally; the rule change now requires Illinois lawyers to carry ou the following with regard to their client trust account records:

  1. Prepare and maintain receipt and disbursement journals for all client trust accounts containing a record of deposits and withdrawals specifically indentifying the date, source, and description of each item deposited and the date, payee and purpose of each disbursement; 
  2. Prepare and maintain contemporaneous ledger records for all client trust accounts showing, for each separate trust client or beneficiary, the source of all funds deposited, the date of each deposit, the names of all persons whom the funds are or were held, the amount of such funds, the dates, descriptions and amounts of charges or withdrawals, and the names of all persons to whom such funds were disbursed; 
  3. Maintain copies of all accountings made to clients or third persons showing the disbursement of funds to them or on their behalf, along with copies of those portions of clients' files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them; 
  4. Maintain all client trust account checkbook registers, check stubs, bank statements, records of deposit, and checks or other records of debits;
  5. Maintain copies of all retainer and compensation agreements with clients; 
  6. Maintain copies of all bills rendered to clients for legal fees and expenses; 
  7. Prepare and maintain reconciliation reports of all client trust accounts, on at least a quarterly basis, including reconciliations of ledger balances with client trust account balances; and
  8. Make appropriate arrangements for the maintenance of the records in the event of the closing, sale, dissolution, or merger of a law practice.

Lawyers are required to maintain these records for at least seven years after termination of the representation. Records may be maintained by electronic, photographic, or other media provided that printed copies can be produced and the records are readily accessible to the lawyer.

Automatic Overdraft Notification

Revised Rule 1.15(h) creates an overdraft notification requirement, which is a new requirement that financial institutions must meet to be eligible to hold client funds for lawyers. An eligible financial institution must agree to notify the ARDC when a client trust account is overdrawn. The financial institution must notify the ARDC of an overdraft even if the account has overdraft protection. Rule 1.15(h)(2) dictates how to report the overdraft depending on whether the instrument was honored or dishonored. Every lawyer admitted to practice in Illinois is "deemed to have consented to the reporting and production requirements mandated by this Rule." Rule 1.15(h)(3). The financial institution may charge fees for the reasonable cost of producing the reports and records, which are the sole responsibility of the lawyer. Rule 1.15(h)(4).

The ARDC is a Supreme Court agency that investigates alleged wrongdoing by Illinois attorneys, holds hearings on specific charges, and recommends professional discipline to the Supreme Court when warranted. An overdraft notification law has already been adopted in 42 jurisdictions. The rule serves as an early warning to the ARDC that a lawyer is engaging in conduct that could injure clients. See Rule 1.15 Comment [7]. Generally, an overdraft on a client's account will not lead to disciplinary charges against the lawyer. Instead, the purpose of this rule is to provide early detection of those lawyers who need education on managing their client trust accounts, so that errors may be corrected. Id. However, the ARDC may still pursue "serious lawyer transgressions." Id.

The ARDC and LTF are in the process of updating the list of eligible institutions who have agreed to comply with this rule. The list should be available on the ARDC and LTF websites before the September 1 effective date and will be updated annually.

What Illinois Lawyers Should Do Before the Effective Date

Lawyers should review the new Rule 1.15 to determine if the accounts they have placed their clients' funds meet the new requirements for client trust accounts. Under the new rule, all client trust accounts must be either an IOLTA or non-IOLTA account, interest- or dividend-bearing, and held in an eligible financial institution. If the client trust account is pooled, it must be an interest- or dividend-bearing IOLTA account. The LTF website has step-by-step instructions on how to change an account to an IOLTA account.

Next, lawyers should review recordkeeping practices to ensure they are sufficient to comply with Rule 1.15(a)(1)–(8). Basic accounting journals and forms are available on the ARDC and LTF websites to help lawyers meet these recordkeeping requirements.

Finally, to minimize overdraft of client trust accounts, lawyers should regularly reconcile accounting records with bank statements. Regular reconciliation will help spot any accounting or banking errors. The ARDC suggests monthly reconciliation if monthly statements are issued, or at least quarterly reconciliation. ARDC FAQS, https://www.iardc.org/Rule1.15FAQs.html. A reconciliation report form is available at the ARDC website as a guide.

Note on Real Estate Funds Account

The rule regarding the closing of real estate transactions and establishment of a segregated Real Estate Funds Account (REFA) remains unchanged. It has merely been renamed to Rule 1.15(j) instead of Rule 1.15(i). However, REFA accounts must comport with the other Rule 1.15 requirements, which means they now must all be IOLTA accounts at eligible financial institutions and attorneys must observe the accounting rules for tracking their REFA accounts.

Comment on RetainersRule 1.15(c) does not change the rule regarding retainers in Illinois. The rule continues to follow Dowling v Chicago Options Associates, Inc., where the Supreme Court recognized three different types of retainers. 226 Ill 2d 277 (2007); Rule 1.15 Comment [3], [3A], [3B], [3C], [3D]. First, a general retainer is paid by a client to ensure a lawyer's availability during a specific time or for a specific matter. This retainer is earned when paid and immediately becomes the property of the lawyer, regardless of whether the lawyer actually performs any service for the client. Second, a security retainer secures payment for future services and must be deposited in a client trust account. Funds in this retainer remain the property of the client until the lawyer performs service for the client. Unapplied funds must be returned to the client. Finally, the court formally recognized the advance payment retainer, which is a present payment to the lawyer in exchange for the commitment to provide legal services in the future. Ownership of the retainer passes to the lawyer immediately upon payment and may not be deposited into a client trust account because of the rule that a lawyer may not commingle client's funds with the lawyer's own funds. However, any portion of the retainer that is not earned must be refunded to the client. The court encourages limited use of the advance retainer. The court also distinguishes the advance payment retainer from fixed fees. Fixed fees are not refundable, but like all fees, must be reasonable. See Rule 1.5(a).

Deciding which retainer is appropriate depends on the circumstances of each case. Rule 1.15 Comment [3D]. The lawyer and client may define the terms of the retainer in a written agreement. If the parties' intent is not evident by the agreement, courts will construe the agreement as a security retainer. Rule 1.15 Comment [3B].

 

Helpful Resources: Attorney Registration and Disciplinary Commission (ARDC): www.iardc.org

Lawyers Trust Fund of Illinois (LTF): www.ltf.org

Amended Rule 1.15: www.state.il.us/court/SupremeCourt/Rules/Amend/2011/070111_Rule_Amendments.pdf

Conclusion

The Supreme Court of Illinois announced amendments to Rule 1.15 of the IRPC that will go into effect on September 1, 2011. There are three key changes regarding the types of client trust accounts permitted, specific recordkeeping requirements, and automatic overdraft notification. Lawyers should ensure that the trust accounts they have placed their clients' funds meet the requirements of the new rule.

 

Posted on: Fri, 07/22/2011 - 11:44am