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ETHICS TIPS - SUMMER 2008:

•   FDIC Coverage for trust accounts:

Is your law firm trust account covered by FDIC protection up to only $100,000? What happens if the bank fails and you have more than $100,000 in trust? These are issues facing all law firms and unfortunately there’s no easy or definitive answer.

At least one Bar association, the Louisiana Bar, has advised lawyers that the $100,000 FDIC coverage is for each identifiable client deposit, not just the one trust account. For instance, if Law Firm A deposits $120,000 for Client Jones and $90,000 for Client Baker into the Firm’s trust account, and each deposit clearly identifies the respective client, Client Jones would receive $100,000 of coverage and Client Baker would receive full protection for his $90,000 deposit. This analysis is based upon the FDIC’s special procedures for certain fiduciary accounts that are established for the benefit of identifiable third parties (such as clients). In order to be considered one of these fiduciary accounts, each deposit must be able to be tracked to a specific client and then the $100,000 coverage will apply to the total deposits for each client, not just $100,000 for the trust account.

For more information, go to:
http://www.fdic.gov/deposit/deposits/financial/fiduciary.html .

One caution: Every time you deposit money for a specific client, you will need to check with the client regarding whether they already have an account at that bank because if they do, the $100,000 FDIC coverage is per depositor, so you will need to take into consideration the TOTAL amount that the client has in all accounts at that bank.

Suggestion: There is no easy fix for this headache. A firm may establish trust accounts at more than one bank, to obtain additional FDIC coverage. The firm could, for instance, place all of one client’s trust deposits at one bank and all of another client’s at another bank, or you could divide up the accounts based upon practice area or responsible partner. Just make sure that you remember where you deposit each client’s money, perform the mandatory three-way reconciliation each month for each account, and double-check with clients about whether they already have an account at the bank.
 

•   Don’t take credit cards for any payments that go into trust:

While there is no Ethical Rule or Supreme Court Rule that specifically prohibits taking credit cards for advance fees, the reality is that taking credit cards presents a significant risk to lawyers. If a credit card company has the authorization to reach into your law firm trust account and pull back a payment, that technically would violate ER 1.15 and will cause a nightmare for you. The following scenario has occurred multiple times to lawyers: lawyer takes advance fee deposit from new client on a credit card. The amount is credited into the law firm trust account (because it is an advance fee that will be billed against). The lawyer does the work and sends an invoice to the client. Client doesn’t say anything to lawyer. Lawyer therefore withdraws the earned portion of the advance fee from trust and transfers it to the firm operating account. Unbeknownst to lawyer, client has called their credit card company to complain, so the credit card company charges back the payment, in essence pulling money out of your firm trust account that belongs to another client or causes an overdraft.

Suggestion: While clients may not like this option, either have the clients get a cash advance on their credit card and pay you the advance fee in cash (which will still be held in trust until you do the work), or charge non-refundable earned upon receipt fees that do not go into trust – they are deposited into the firm operating account. Whatever you do, do NOT take an advance fee and deposit it into operating just to get around the issue – that will be considered commingling. Only earned fees and “non-refundable” fees, as defined by Ethical Rule 1.5(d)(3), can go into operating.