Rule 1.15—Trust Accounts
I. OLPR WROTE THE BOOK
A. OLPR Website Resources
The scope of this chapter is limited, because of the abundant resources on trust accounts already available on the website of the Office of Lawyers Professional Responsibility (OLPR). The OLPR website makes available all the practical guidance Minnesota lawyers need to properly maintain trust accounts. These resources are available under "Lawyer Resources/Trust Accounts." Trust Accounts, MINN. LAW. PROF'L RESP. BOARD & OFF. LAW. PROF'L RESP., http://lprb.mncourts.gov/LawyerResources/Pages/TrustAccounts.aspx (last visited Jan. 29, 2014). OLPR is to be commended for recognizing that, to comply with Minnesota's elaborate trust account requirements, Minnesota lawyers need considerable practical education.
B. Start Here
An OLPR article provides an excellent introduction to trust account regulation. Patrick R. Burns, The Basics of Trust Accounts, MINN. LAW., Nov. 1, 2010. A more recent OLPR article also provides useful guidance, especially as to trust account books and records. Joshua Brand, When to Bring Ink and Paper Into a Transaction, MINN. LAW., May 29, 2014. Another OLPR article identifies basic requirements and frequent violations of trust account regulations. Susan Humiston, Is Your Trust Account in Order?, BENCH & B. OF MINN., Sept. 2015.
C. Overdraft Notice Forms
The OLPR website resources include Trust Account Overdraft Notification form agreements. Also included is a memo from Cassie Hanson, a Senior Assistant Director, regarding these agreements. A list of financial institutions that may be used for trust accounts is also provided.
D. Operating Lawyer Trust Accounts
OLPR's website posts an excellent manual, which addresses the following topics. MINN. LAW. PROF'L RESP. BOARD & OFF. LAW. PROF'L RESP., Other People's Money: Operating Lawyer Trust Accounts, 2010, available at http://lprb.mncourts.gov/LawyerResources/Pages/TrustAccounts.aspx (follow "Operating Lawyer Trust Accounts (Sept. 2010)" hyperlink).
1. Introduction
2. Types of Trust Accounts
3. Defining Books and Records
4. Handling Trust Account Transactions
5. Reconciling the Trust Account
6. Using the Reconciliation to Find Mistakes
7. Frequently Asked Questions
E. Quicken How-To
The OLPR and Minnesota State Bar Association websites offer several practical, lengthy manuals on how to set up and maintain trust accounts with various accounting software. MINN. LAW. PROF'L RESP. BD. & OFF. LAW. PROF'L RESP., http://lprb.mncourts.gov/ (Under "Lawyer Resources" go to "Trust Accounts." The current guide is Maintaining Trust Accounts Using Quicken (2006).) (last visited March 27, 2014); MINN. STATE BAR ASS'N, Practice Management Forms and Materials, https://www.amazon.com/s?i=stripbooks&rh=p_27%3AMichael+Trittipo&s=relevancerank&text=Michael+Trittipo&ref=dp_byline_sr_book_1.
F. Scope of This Chapter / OLPR Resources
This chapter will inevitably overlap to some degree with OLPR resources. This chapter does not address trust account ethics issues comprehensively, because OLPR has provided an excellent, comprehensive guide. Instead, this chapter will primarily aim at additional commentary, with attention to case law and an independent perspective.
II. OVERVIEW
A. Importance of Trust Accounts
Lawyers are fiduciaries. Among lawyers' fiduciary duties are careful handling and accounting of client properties entrusted to them. Lawyers sometimes also have duties to third parties under the Rules.
B. Frequent and Often Severe Discipline
Intentional misappropriation of trust funds is a cardinal sin for a lawyer. On average, several Minnesota lawyers are disbarred annually for trust account misappropriation and approximately a dozen Minnesota lawyers are publicly disciplined for intentional or substantial trust account offenses. OLPR's annual "Summary of Public Discipline" articles give more specific information. Unintentional misappropriation is far less serious, but is still the subject of numerous disciplines, many of them public. Failure to keep required trust account books and records is a common failing. Failing to properly deposit unearned retainers is such a common failing that approximately a dozen admonitions were issued in one eighteen-month period. Patrick R. Burns, You Should Really Already Know This . . ., MINN. LAW., Aug. 7, 2000, at 2. Taken together, these trust account improprieties account for a large share of all disciplines.
C. Mismatch—Trust Account Books and Records, Education and Requirements
Who learned in law school the nature of a subsidiary ledger or a trust account reconciliation? If not in law school, where and when? There is a mismatch between ethics education and ethics requirements for trust accounts. When lawyers hold funds in trust for clients and others, they are required to apply skills that are associated more with bookkeepers and bankers than with lawyers. Lawyers should be able to determine from their books, with only minimal updating, the amount of money that should be on hand for each client, and for all clients, as well as the funds that are actually on hand. Making adjustments for transactions that have not yet cleared or have not yet been entered in the books, and for minimum funds of the law office for bank service charges, lawyers should be able to tell whether funds held in trust are in the right amount.
D. Elaborate Minnesota Requirements, Appendix 1
Minnesota's Rule 1.15 is approximately ten times the length of its ABA Model Rule counterpart. In addition, Minnesota prescribes, again at length, certain books and records that must be created and maintained. Rule 1.15(h)-(i); Minn. R. Prof'l Conduct Appendix 1. LPRB amended Appendix 1 effective June 26, 2015, the first amendment since adoption in 2005. The amendments are technical but also important, e.g. specifying when, after a deposit into trust, a corresponding check may be issued. Cassie Hanson, Recent Changes to Trust Account Books and Records Requirements, MINN. LAW., Aug. 3, 2015. Another amendment makes express a long-standing prohibition on paying a lawyer's personal and business expenses directly from the trust account, as opposed to from the lawyer's business account. Martin A. Cole, Top Ten List, BENCH & B. OF MINN., Aug. 2015.
E. Brief Model Rule
In contrast, the ABA records requirements are entirely stated in one sentence, "Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation." Model Rule 1.15(a). (For the definitions of "records" and "books," see below.) Remarkably, the Model Rule does not require maintaining any trust account "books"! A comment attempts to add to this requirement, "A lawyer should maintain on a current basis books and records in accordance with generally accepted accounting practice and comply with any recordkeeping rules established by law or court order. See, e.g., Model Rules for Client Trust Account Records." Model Rule 1.15 cmt. 1.
F. Lawyers Board Opinions—Codified and Repealed
In 2006, the Lawyers Board repealed several of its opinions, including Minnesota Lawyers Board Opinion 9 (1976) (repealed 2006) and Minnesota Lawyers Board Opinion 15 (1991) (repealed 2006). Opinion 9 addressed trust account books and records. Opinion 15 addressed retainers and nonrefundable fees. For many years, these opinions had been regarded as governing law on the subjects they covered. The occasion for repeal was the supreme court's amendment of numerous rules, including Rule 1.15. Several amendments essentially codified, as Rules, what previously had been stated in Board opinions. Kenneth L. Jorgensen & William J. Wernz, New Directions in Professional Conduct: The Devil is in the Details, BENCH & B. OF MINN., Sept. 2005, at 14; William J. Wernz, Opinion 15: Retainer Fees, BENCH & B. OF MINN., Nov. 1991, at 11. Opinion 9 lives on in the form of an express delegation by the court to the Board of authority to prescribe what books and records are required. Rule 1.15(h).
G. Related Rules
Rules closely related to Rule 1.15 include Rules 1.16(d)-(g), 5.1, 5.3, and 8.4(c). Especially close to Rule 1.15 are Rule 1.5(b), dealing with fees paid in advance of services, and Rule 1.16(d), requiring upon termination of a representation that unearned retainer fees be returned.
III. TERMINOLOGY AND DEFINITIONS
A. Definitions
Minnesota's elaborate trust account regulatory plan includes several detailed definitions. Rule 1.15(o). The following terms are defined in this Rule:
1. "Trust account"
2. "IOLTA account"
3. "Allowable reasonable fees"
4. "Eligible financial institution"
5. "Properly payable"
6. "Notice of dishonor"
B. "IOLTA"
"IOLTA" is an acronym for "Interest on Lawyer Trust Accounts." An IOLTA account is "a pooled trust account . . . for deposit of funds that are nominal in amount or expected to be held for a short period of time." Rule 1.15(e). An "IOLTA account" is further defined in Rule 1.15(o).
C. IOLTA Background
IOLTA programs were instituted in most states in the 1980s, when interest rates were exceptionally high. Before IOLTA programs were established, banks were paying no interest on lawyer trust checking accounts, because until 1980 federal law did not allow interest to be paid on checking accounts generally. The lawyer-account holders had no right to any such interest. If interest-bearing accounts were required, the interest could be paid to a state IOLTA board, which would remit the interest to legal aid and other worthy projects. Adopted in substantially all states, such programs generally survived constitutional challenge and provided funding for worthy programs. A leading commentary provides further background on these matters. 1 GEOFFREY C. HAZARD JR., W. WILLIAM HODES & PETER R. JARVIS, THE LAW OF LAWYERING § 19.3 (3d ed. Supp. 2005-2). However, as interest rates declined to the vanishing point, the basic rationale for IOLTA programs became far...
