Money Issues That Can Bite You
By: Bruce A. Campbell 
Stephanie N. Davenport 
All lawyers practicing law in any of the fifty (50) states in the United States are under certain obligations when coming into possession of property of clients and third parties. The obligations imposed by an attorney’s respective state and/or district of practice, include: 1) the obligation not to commingle property; 2) the obligation to notify the client and third-parties of the lawyer’s possession of their property; 3) the obligation to safe-keep the property; 4) the obligation to account for the property; 4) and, where there is a dispute over the right to the property, the obligation to hold the property until the dispute is resolved or the lawyer’s obligations have been terminated. This rule is commonly referred to as the “Safekeeping Rule” or the “Anti-commingling Rule.” The various jurisdictions have adopted either Model Rule 1.15 in diverse forms, or Model Code DR 9-102. All jurisdictions recognize these obligations. For instance, the Texas version of the Safekeeping Rule, Rule 1.14 of the Texas Disciplinary Rules of Professional Conduct is written very broadly and can apply to virtually all lawyers at various times during their practice. Although personal injury lawyers are the lawyers who are most frequently disciplined for failure to properly handle property, they are by no means alone. No practice area is immune from sanctions under the Safekeeping Rule. The focus of this paper is to discuss the obligations that are owed under the Safekeeping Rule. Awareness of the breadth of the Rule is important in avoiding exposure for violating the Rule.
1. The Duty to Keep Property Separate and Not Commingle
Regrettably, the adage that an honest lawyer will instinctively make the ethically correct decision often falls short when it comes to the obligations imposed by the Safekeeping Rule. As has been observed, property entrusted to a lawyer is not an intuitive matter of morality, but rather the subject of extensive technical requirements. For example, Texas Rule 1.14 (a) provides:
A lawyer shall hold funds and other property belonging in whole or in part to clients or third persons that are in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Such funds shall be kept in a separate account, designated as a “trust” or “escrow” account, maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other client property shall be identified as such and appropriately safeguarded. 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.
Tex. Discip. R. Prof. Conduct 1.14 (emphasis added). The Texas rule is consistent with, but less detailed than the Model Code, which provides as follows:
- (A)All fund of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firms shall be deposited therein except as follows:
- (1)Funds reasonably sufficient to pay bank charges may be deposited therein.
- (2)Funds reasonably belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.
- (B)A lawyer shall:
- (1)Promptly notify a client of the receipt of his funds, securities, or other properties.
- (2)Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
- (3)Maintain complete records of funds, securities, and other properties of a client coming into possession of the lawyer and render appropriate accounts to his client regarding them.
- (4)Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.
Model Code DR 9-102, “Preserving Identity of Funds and Property of a Client.” The rationale for disallowing commingling of the lawyer’s property with the property of a client or third party is to protect the property from claims of creditors of the lawyer. The comments to Texas Rule 1.14 point out:
A lawyer should not use even that portion of trust account funds due to the lawyer to make direct payment to general creditors of the lawyer or the lawyer’s firm, because such a course of dealing increases the risk that all the assets of that account will be viewed as the lawyer’s property rather than that of clients, and thus as available to satisfy the claims of such creditors. When a lawyer receives from a client monies that constitute a prepayment of a fee and that belongs to the client until the services are rendered, the lawyer should handle the fund in accordance with paragraph (c). Tex. Discip. R. Prof. Conduct 1.14 cmt. 2.
The decisions under the Safekeeping Rule appear to recognize a spectrum of conduct ranging from sloppy record keeping to intentional theft. At the center of the prohibited conduct is the rule prohibiting lawyers from commingling their property with the property of their clients and third parties. Commingling in violation of the Safekeeping Rule may be found even though no funds are actually misused, no client is deprived of the use of their property, or the attorney is not even aware of the commingling. For example, in In re: Brown, 427 S.E.2d 645 (S.C. 1993) a lawyer was suspended who commingled mortgage payments collected on a client’s behalf with other funds of the lawyers, despite the lawyer’s assertion that he had remitted all collected funds. See also,The Florida Bar v. Louis L. Suprina, 468 So. 2d 988 (Fla. 1985) a lawyer received a public reprimand when he commingled personal funds with trust funds, despite the fact that no deficits or overdrafts resulted from such action; and In re: Complaint as to the Conduct of Richard S. Mannis, 295 Or. 594, 668 P.2d 1224 (Or. 1983) lawyer received a public reprimand when client funds were deposited in attorney’s general account by attorney’s employees, attorney was not personally aware of the commingling, and commingling is done with no intent of attorney to enrich himself, and no client is harmed by reason of commingling.
Similarly, all state disciplinary authorities take a dim view of lawyers who commingle property. For instance, an Oklahoma attorney was suspended for four (4) months when he withdrew from his trust account funds that were earmarked for payment of medical bills and placed them in his personal account. State ex rel. Oklahoma Bar Association v. Robert L. Johnston, 863 P.2d 1136 (Okla. 1993); See In re: DiPipppo, 765 A.2d 1219 (R.I. 2001) (personal injury lawyer disbarred for converting funds of medical providers); cf. In re: Steiner, 591 N.W. 2d 857 (Wis. 1999) (bankruptcy lawyer commingled funds in his trust account and fraudulently received legal fees for bankruptcy work out that was part of a bankruptcy crime received only a 60 day suspension).
The Safekeeping Rule also prohibits a lawyer from depositing his own funds into a trust account to shield them from attachment by a creditor. See Tex. Discip. R. Prof. Conduct 1.14, cmt. 2 (1989); See i.e. Charles A. Brown v. Commission for Lawyer Discipline 980 S.W.2d 675 (Tex. App.—San Antonio 1998) (lawyer, who received funds from insurance company as settlement of client’s claim, deposited them into a joint account shared with client, claiming he was not “in possession” of funds because his client had equal access to the settlement funds, was suspended for nine (9) months when it was determined that an important reason for prohibiting commingling is the danger that funds in a commingled account will be viewed as the lawyer’s property, rather than the client’s and will thus be subject to the claims of the lawyer’s creditors).
Noteably, there is some authority that a lawyer’s failure to withdraw earned funds within a reasonable period of time of their being earned is a violation of the Safekeeping Rule. See e.g. Arm v. California State Bar, 789 P.2d 922 (Cal. 1990); Maryland Attorney Grievance Comm’n v. Schlifin, 625 A.2d 314 (Md. Ct. App. 1993) (failing to timely transfer earned fees from the trust account while not ordinarily dishonest, may still involve commingling); contra Maine Ethics Opinion 98 (1989) (lawyer who left earned fees in her trust account rather than withdrawing them as they were earned was not guilty of commingling).
When money is the property that is received by the lawyer, the lawyer is required to place the money in a trust account. See, e.g. Tex. Discip. R. Prof. Conduct 1.14(a). Different forms of property may require other types of efforts to segregate by the lawyer. For instance, securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. Tex. Discip. R. Prof. Conduct 1.14. cmt. 1. All property, which is the property of clients or third persons, should be kept separate from the lawyer’s business and personal property. For instance, an Illinois lawyer was censured when he received and deposited $1,000.00 earnest money into a business account with himself and his son as the only authorized signatories on the account. He later withdrew the $1,000, placed it in an envelope and deposited the envelope in a safe in his house, thus holding the earnest money segregated from other monies. The Hearing Panel and Review Board found that although technical commingling and technical conversion of the funds had occurred, the record was devoid of evidence of any dishonest motive. Nonetheless, they reasoned that such a “covert method of handling a client’s funds is highly unprofessional and one which can only create suspicion and harmful inference. . . .clients, courts, and public alike have a vital interest in a lawyer’s integrity and are entitled to require he shun even the appearance of any fraudulent design or purpose.” In re Richard Leon Clayter, 399 N.E.2d 1318, (Ill. 1980).
A developing issue concerning trust accounts can arise when a client seeks to deposit funds into the lawyer’s trust account, yet the amount of funds have no connection with a representation for which the lawyer is retained. For instance, a Kansas lawyer who represented a developer was disciplined for allowing his developer client to cause investor moneys to be placed in the lawyer’s trust account. In finding that the lawyer violated the Safekeeping Rule, the court noted that the lawyer’s trust account was being used as a conduit to filter the investment money through to the developer. The Court stressed that a trust account could only be used in connection with a representation, which the Court interpreted to mean representing the investors. Since the lawyer did not represent the investors he violated the Safekeeping Rule. In re: Rausch, 32 P. 3rd 1181(Ka. 2001). See also, Attorney Grievance Comm’n of Maryland v. Webster, 705 A.2d 1135 (Md. App. 1998) (using an account designated as an attorney trust account, when it no longer actually serves as such, constitutes a holding out to the public that the monies contained therein are not subject to attachment and improperly suggests that the monies are beyond the reach of creditors of the attorney. “In this case, when Respondent put his personal funds into an account entitled ‘escrow account’ he improperly represented to his creditors that those funds were being held for a third party.” The attorney received a 30-day suspension).
2. Notice After Receipt of Property
After receiving property from a client or a third party and segregating it from the lawyer’s own property, the lawyer must give notice of the receipt of the property. More particularly:
Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
Tex. Discip. R. Prof. Conduct 1.14(b) (emphasis added). The problem of failure to timely give notice of receipt frequently comes up in the personal injury practice. For instance, lawyers have been sanctioned when they receive settlement proceeds and notice is either not given to the client or third party at all, or not until much later. For instance, a lawyer in Georgia filed a Petition for Voluntary Discipline for an 18-month suspension when he admitted that on four (4) separate occasions, following the settlement of personal injury cases, he withheld, with the clients’ permission, but without notifying the clients of the receipt of such funds, a portion of the funds to pay third-party medical care providers, but subsequently failed to deliver the funds to third parties, and failed to provide his clients with accountings regarding his use of these funds. In the Matter of John J. Sowa, 271 Ga. 88, 515 S.E.2d 396, (Ga. 1999). In another case, a Wisconsin lawyer received a six (6)-month suspension when, upon receipt of settlement check for client’s personal injury claim, he failed to give the insurer prompt written notification upon receiving the settlement check, and further sent the insurer a check for less than the amount of insurer’s subrogation claim without negotiating any reduction of claim. In the Matter of Disciplinary Proceedings Against Donald J. Harman, Attorney at Law, 244 Wis.2d 438, 638 N.W.2d 351 (Wis. 2001).
A common, but somewhat different twist on the obligation to notify arose in Hanners v. State Bar of Texas, 860 S.W.2d 903 (Tex. App.–Dallas 1993, writ dism’d). In Hanners, an attorney agreed to pay a client’s former attorneys their assigned attorney’s lien. The lawyer settled the personal injury case and received the settlement check which he negotiated without the client’s consent. The check was not tendered to the medical provider, but instead was deposited into the lawyer’s operating account. In the subsequent disciplinary action, the lawyer failed to appear for trial. The court found there was a violation of the Safekeeping Rule because the attorney failed to promptly notify third persons of his receipt of funds in which the third parties had an interest. The lawyer did not notify the third party for over 14 months. As a result, the lawyer was disbarred. The potential sanction for the lawyer was no doubt increased when he was caught lying to the grievance committee about the settlement checks.
3. Accounting for the Property Received
Lawyers who receive property of clients and third parties must properly account for it. A common problem that can arise occurs when the lawyer is required to account for property and his records are poorly kept, lost, destroyed or are unavailable. An example of the gravity with which failure to keep such accounting records can be seen in In Re DiPippo, 765 A.2d 1219 (R.I. 2001). In DiPippo, the subject lawyer had been retained to represent his client in her claim for damages arising from an automobile accident. The insurer forwarded to the lawyer six (6) checks serving as payments for the client’s medical bills. The lawyer, inter alia, failed to notify his client had had received these reimbursements, and furthermore, did not use them to pay the medical bills. The client subsequently obtained new counsel and only then, some three (3) years later, did she discover that her former lawyer had received the reimbursements checks. At this time, the client attempted, but failed to obtain an accounting from her former lawyer. DiPippo claimed he was unable to locate any of his records regarding the disposition of the funds. The Court pointed to the Rules of Professional Conduct which impose strict record-keeping requirement for transactions involving client funds. Specifically, in Rhode Island “(a) a lawyer shall maintain for seven (7) years after the events which they record: (1) the records of all deposits in and withdrawals from special accounts. . .and of any other bank account which records the operations of the lawyer’s practice of law. These records shall specifically identify the date, source and description of each item deposited, as well as the date, payee and purpose of each withdrawal or disbursement. . .(6) Copies of all records showing payments to lawyers, investigators, or other persons. . .for services rendered or performed.” The Court determined that the lawyer’s failure to maintain records concerning the disposition of the funds was a “clear circumvention of his obligation. . .” DiPippo was subsequently disbarred from the practice of law.
Similarly, in Meachum v. Commission for Lawyer Discipline, 36 S.W.3d 612 (Tex. App.—Dallas 2000), the attorney received $116,000.00, which the lawyer put in his trust account. The money was to be used to pay the client’s mortgage. The money was not used to pay the mortgage, yet the lawyer admitted drawing checks out of the account, some of which went to pay the lawyer’s son’s college expenses. In affirming the sanction disbarring Meachum, the court pointed out that the real problem was the lawyer’s failure to provide any documentation or records demonstrating the handling of the money.
Another accounting issue, although not well defined in Texas, or in any other jurisdiction, is the timeframe within which a lawyer must provide an accounting to his client or third party. The determination of when the notification of receipt must occur appears to be based on the facts and circumstances of the particular case. This is particularly troubling given the quasi-criminal nature of disciplinary actions. In re: Ruffalo, 390 U.S. 544, 551, 88 S.Ct. 1222, 1226, 20 L.Ed. 2d 117, modified other grounds, 392 U.W. 254, 269-69, 90 S.Ct. 1011, 1020-21, 25 L.Ed. 2d 287 (1968). That is, unless there is a bright line standard for how long a lawyer has to give notice or provide an accounting, there will be serious fair notice issues for the lawyer who tries to conform his conduct to the requirements of the disciplinary rules. Lack of a bright line standard also raises troubling questions for the State Bar in its choice of prosecuting alleged violators. Regrettably, there appear to be few instances in which factors have been set out in the Rule, the comments, or case law to guide the timeliness analysis. We do know that waiting two years after the lawyer knows he has received the property to account for the property violates the rule. See Wade v. Commission, 961 S.W.2d 366 (Tex.App.–Houston [1st Dist.] 1997, no writ) (failure to account for settlement funds and expenses for over two years was sufficient evidence that the accounting requirement was violated).
4. Property of Third Persons
On its face, the Safekeeping Rule places the property of third parties on an equal level with that of a client’s property. Therefore, regardless of whether the property belongs to a client, or to a third party, such as a medical provider, or even taxing authory, it is to be kept safe by the attorney. See Tex. B. J. Vol. 64, P. 198 (2001); Attorney Grievance Comm’n of Maryland v. Clark, 767 A.2d. 865 (Ct. App. My. 2001) (employee taxes withheld by the lawyer for his staff must be kept safe). Interestingly, the sanctioning standards do not appear to recognize that property of clients and third parties are to be treated the same. For instance, Texas Disciplinary Rule 3.10 recognizes harm to a client as a factor to be considered in evaluating the sanction, yet harm to a third party is not expressly recognized. See Tex. Discip. R. Proc. 3.10. Failure to safekeep property belonging to a third party may not be as serious an offense as failing to safekeep the property of the client. The decisional law has not explicitly addressed this issue. This lack of authority is created in part, because the decisions rarely state the factors, which are relied upon for establishing the sanction. Nevertheless, a somewhat disturbing trend that has emerged in the last few years is that lawyers who fail to safekeep the property of medical providers appear to receive some of the most harsh sanctions. This may well be because medical providers have become frequent complainants in the grievance process, and while rarely admitted, often use the disciplinary system as a bill collection system.
5. Safekeeping Property in Non-Disciplinary Cases
There have been several instances wherein safekeeping obligations have been attempted to be asserted in support of civil liability claims against lawyers. Typically, the theory of recovery asserted against the lawyer is conversion or negligence, although a number of other theories have been asserted. The results have been mixed. Section 44 of the Restatement (Third) of the Law Governing Lawyers follows the requirements of the Safekeeping Rule. Comment C to Section 44 of the Restatement points out that a lawyer who violates the safekeeping obligations can be subjected to civil liability as well as disciplinary sanctions. A lawyer who converts property or negligently fails to safeguard it against loss can be held liable. Under agency principles, a lawyer is subject to civil liability for failure to segregate client or third party property and keep proper records. Furthermore, a lawyer must account for any profits resulting from the lawyer’s misuse of the property. Restatement (Third) of the Law Governing Lawyers Section 44 cmt. 3 (2001).
An interesting attempt to use the safekeeping obligations in non-disciplinary litigation occurred in Hughes v. Alpert, 1997 WL 16185 (Tex.App.–Dallas 1997, writ history). In Alpert, a lawyer acted as a substitute trustee for a real estate foreclosure. After the foreclosure was completed, the debtor asserted the lawyer had a duty to send notice to the borrower of an insurance check that was related to a portion of the property that was foreclosed upon. The court pointed out that violation of a disciplinary rule, including the Safekeeping Rule, would not give rise to a private cause of action for fraudulent concealment. If there were no civil liability for violating a disciplinary rule, then the fact that the Safekeeping Rule was violated could not create a private cause of action, and that finding should have been sufficient to end the discussion in this civil liability case. However, the court nevertheless went on to find that the lawyer did not violate her safekeeping obligations. In reaching this conclusion, the court stressed that the lawyer never actually took possession of the check, but only gave instructions to the insurance carrier on how the check should be drafted. Alpert is thus suggestive that Texas may recognize civil liability for failure to fulfill one’s safekeeping obligations if the lawyer takes possession of the property.
Decisional law from around the country suggests the existence of civil liability for failing to safekeep property held. In Herzog v. Irace, 594 A.2d 1196 (Me. 1996) a second set of lawyers who became aware of client’s assignment of benefits to a medical provider were liable to the medical provider for funds they tendered to their client that otherwise would have paid the provider. In Herzog, the court rejected the theory that an attorney must follow the instructions of his client and tender the funds to his client. The Court determined that a client has the power to assign his benefits, and a valid assignment must be honored by the attorney. This same court also stressed that a lawyer is under no ethical obligation to honor a client’s instructions to disregard a valid assignment. When the second set of lawyers tendered the money to the client they violated the assignment and were liable to the medical providers for the funds tendered to the client.
The Safekeeping Rule obligations are expansive, yet there still remain a number of open issues. Nonetheless, various Courts, grievance committees, and Boards all over the country do not hesitate in issuing disciplinary sanctions. Suspensions and disbarments are not uncommon when it comes to violations of the Safekeeping Rule. Authorities from various jurisdictions point out that an attorney need not even be aware of an occurrence of commingling; just the appearance of mishandling of a client’s or third party’s funds by an attorney’s staff, may lead to disciplinary action being taken. Given the severity of the sanctions meted out for violating the Safekeeping Rule, lawyers are well served by exercising extreme care in handling the property of clients and third parties.
Mr. Campbell is a shareholder in Campbell & LeBoeuf, P.C. He regularly defends lawyers in tort and disciplinary proceedings.
 Ms. Davenport is an associate with Campbell & LeBoeuf, P.C. and regularly defends lawyers on tort claims.
 See e.g. Iolta requirements. Tex. Gov’t. Code Ann. tit. 2, subtit. G, app. A, art. 1185 (West Supp. 1995); See discussion below.
 This attorney filed this Petition for Voluntary Discipline in response to six (6) pending grievances, but prior to the State Bar’s filing of a Formal Complaint against him.
 In this proceeding, the attorney had eight (8) total counts of misconduct brought against him in two (2) unrelated matters.
 Rule 1.16, Rules of Professional Conduct by the Supreme Court of Rhode Island.