February 27, 1981
Effective January 1, 1981, Michigan Financial Institutions are permitted, by law, to offer negotiable order of withdrawal (NOW) accounts which are, in effect, interest-bearing checking accounts.
When a client's funds are going to be held by a lawyer or law firm for any appreciable period beyond the time customarily required to clear checks through the Bank collection process, the client should be advised of such fact and notified with respect to the location and nature (interest or non-interest bearing) of the trust account in which the client funds are being held.
Until technological refinements are developed to minimize the administrative burden of calculating interest on common trust accounts, lawyer's have no ethical obligation to deposit client's funds into an interest-bearing account unless specifically requested to do so by the client.
A lawyer or law firm has an obligation to fully apprise the client of charges incident to maintaining an interest-bearing trust fund account. After disclosure and with consent of the client, the lawyer or law firm may charge the client reasonable costs and expenses incident to the administration of an interest-bearing account on a pro rata basis allocated among all trust fund account participants.
A lawyer or law firm may properly employ responsible outside auditors, chosen with reasonable care, to examine and audit the firm's records of receipts and disbursements of client trust funds, provided, the outside auditors undertake confidentiality in the handling of the information and do not under any circumstances reveal to any third party any information that identifies any particular client or would otherwise be a confidence or a secret.
It is not unethical for a lawyer or law firm to retain funds belonging in part to a client and in part presently or potentially to the lawyer or law firm in a trust account.
In the absence of a specific agreement with the client, a lawyer or law firm may not withdraw from a trust account fund belonging in part to the client and in part presently or potentially to the lawyer of law firm.
Interest earned on trust account funds belonging to a client belongs to the client. Interest earned on that portion of the funds in the client's trust account presently belonging to the lawyer or law firm belongs to the lawyer or law firm.
A lawyer or law firm should not commingle their own funds with those of the client and should properly withdraw from the client trust account funds to which the lawyer or law firm is clearly entitled by way of fees and/or reimbursement for costs advanced as they become due.
References: DR 9-102(A) and (B); DR 4-101(A), (B) and (D).
In response to your letter requesting an Informal Opinion of the State Bar of Michigan Professional and Judicial Ethics Committee on the subject of a lawyers responsibility to deposit trust funds in an interest-bearing account, you have asked the following questions;
- Do lawyers have an obligation to maintain a client's trust account, which bears interest?
- If not, do lawyers have the duty to notify clients that the account is non-interest bearing?
- If so, can the cost of administering such an account be passed on to the clients if the cost of administration does not exceed the interest?
- Will lawyers be permitted to retain the interest on that portion of the money in the account, which represents earned lawyer fees or expenses?
Effective January 1, 1981 practically all financial institutions will be able to offer negotiable order of withdrawal (NOW) accounts, which are, in effect, interest bearing checking accounts. The advent of NOWs presents some serious problems for lawyers and/or law firms holding client trust accounts.
The threshold question is whether or not lawyers are obligated to convert their trust accounts to the new interest-bearing checking account if available?
DR 9-102 states rules governing the lawyer's handling of monies and other properties on behalf of clients or third parties. DR 9-102(A) states that all client funds, "other than advances for costs and expenses" must be deposited in "one or more identifiable bank accounts" in the state in which the lawyers office is located. This rule requires a lawyer to segregate his or her funds from those of the client. The rule itself does not specify the type of account (interest-bearing or non-interest bearing) into which the funds must be deposited.
DR 9-102(B)(1) through (4) set forth specific procedures a lawyer must follow when he or she comes into the possession of client funds and/or property. DR 9-102(B)(1) requires a lawyer to notify the client promptly upon receipt of client funds. DR 9-102(B)(2) obligates the lawyer to promptly identify and label properties of a client upon receipt and to place them in a safety deposit box or other place of safe keeping as soon as practical. DR 9-102(B)(3) imposes upon a lawyer the obligation to maintain complete records of all client funds or other properties that come into his or her possession and to further "render appropriate" accounts to the client with regard to such properties. DR 9-102(B)(4) provides that the lawyer must promptly pay or deliver to the client upon request any properties to which the client is "entitled." Unfortunately, the Code does not provide guidelines for a lawyer to use in determining what property the client is "entitled" to receive in the sense that the regulation makes no reference to any ethical duty obligating the lawyer to place the client's funds in an interest-bearing account.
Having found no specific guidance in the Code of Professional Responsibility, it is appropriate to examine the professional relationship, which exists between the lawyer and his or her client. Traditionally, the lawyer-client relationship is characterized as a special fiduciary undertaking in which the lawyer acts as a trustee for the client in all undertakings on behalf of the client. In such a relationship, the lawyer accepts the client's funds, in trust, with all of the attendant responsibilities including the duty to disclose all facts incident to the relationship to the client. See Rippey v Wilson, 280 Mich 233, 273 NW 552 (1937) and Storm v Eldridge, 336 Mich 424, 58 NW 2d 129 (1953). It would therefore seem reasonable to conclude that when a client's funds are going to be held by the lawyer for an appreciable period beyond the time customarily required to clear checks through the bank collection process, the client should be advised of such fact and further notified of the location and nature (interest-bearing or non-interest bearing) of the trust accounts in which the funds are being held.
Until technological refinements are developed which would minimize the administrative burden of calculating interest on common trust accounts, it is the opinion of the Committee that lawyers do not have an ethical obligation to give the client the choice of having client funds deposited into an interest-bearing or non-interest-bearing form of account. However, having been advised of the type of deposit relationship, should the client then specifically request the monies be invested in some form of interest-bearing account, then follows the lawyer's duty of loyalty to follow the client's instructions with respect to the deposit in compliance with DR 9-102(A) and (B). In such a case, it would not be improper for the lawyer to advise the client of the additional charges which would be incurred in following the client's instructions and, upon the client's insistence that the funds be deposited in an interest-bearing account, charging for those expenses.
Your third question poses several interesting considerations, namely, can the cost of administering an interest-bearing account be passed on to the clients on some equitable pro-rata basis and the related problem concomitant with the possible use of outside auditors hired to perform this service.
In answer to the first part of this question, we believe, at the outset, the client should be fully apprised of all costs, including bank charges and accounting fees, incident to the deposit of client funds in an interest-bearing trust account and the manner in which those costs will be shared by the beneficiaries of the account. This disclosure is elementary to an informed decision on whether or not the client may want to choose some form or income producing deposit. Naturally, if the expense will exceed the benefit, the client may well elect to have the money placed in a regular checking account. Assuming the cost would not exceed the interest income, and that you have advised the client of his or her financial responsibility for the administrative expenses, we find no ethical prohibition in the clients sharing pro rata in the necessary and reasonable administrative charges.
In answer to the second portion of this question, clearly, the Code of Professional Responsibility and, particularly, DR 9-102(B)(3) obligates the lawyer to maintain complete records of all receipts and disbursements of client's funds in a manner that provides a generally acceptable audit trail for all transactions. When this function is performed by outside auditors, who in all likelihood will necessarily have access to client records identifying the clients and the nature of the financial transactions and possibly some information of the events giving rise to the lawyers employment, is there a violation of the lawyers professional responsibilities to clients?
Canon 4 of the Code obligates a lawyer to preserve the confidences and secrets of a client. Disciplinary Rule 4-101(A) defines "confidence" as information protected by the lawyer-client privilege under applicable law and defines "secret" as other information gained in the professional relationship that the client has requested be held in violate or the disclosure of which would be embarrassing to the client or would be likely to be detrimental to the client. In the writer's opinion, information reflected in a lawyer's records of client trust funds could, in some circumstances, be either a confidence or a secret. In American Bar Association Formal Opinion 1287 (June 7, 1947), the Committee ruled that the disclosure of the names, addresses and phone numbers of clients of a Legal Service Office, absent consent, would be a violation of DR 4-101(B) because that information is considered a "secret" within the meaning of DR 4-101(A) since it might be an embarrassment to the client for any number of reasons to have it revealed that the particular person or entity was a client of the office. Again in ABA Formal Opinion 334 (1974), the American Bar Association Committee Professional and Judicial Ethics, stated that "lawyers should follow procedures to preserve the client's anonymity." DR 4-101(A) and (B) would not, however, prevent the employment of responsible outside specialists to examine and audit the law firm's financial records. Disciplinary Rule 4-101(D) recognizes that a lawyer has a need to use "others" in order to properly render legal services to clients. This section further obligates the lawyer to use reasonable care to prevent those persons from disclosing or using confidences or secrets of a client. Ethical consideration 4-3 states that "unless the client otherwise directs, it is not improper for a lawyer to give limited information from his or her files to an outside agency necessary for . . ." accounting and other legitimate purposes, if ". . . he exercises due care in the selection of the agency and warns the agency that the information must be kept confidential." In ABA Informal Opinion 1364 (1976), the Committee ruled that a law firm's use of a computerized data processing bureau for efficient record keeping is included within DR 4-101(D) which refers to "others who services are utilized by him." This subject was further dealt with in ABA Informal Opinion 1443 (December 10, 1979), in which the ABA Committee admonished the lawyer to notify a client in advance that an efficient legal practice requires modern business technology in the form of outside agencies and persons. In ABA Informal Opinion 1443 the Committee said:
"We conclude that a legal services program may properly employ an independent accountant, chosen with reasonable care, to examine and audit the programs records of receipts and disbursements of client trust funds, if the independent accountant undertakes confidentiality in the handling of the information."
This Committee hereby expressly adopts the conclusions reached by the American Bar Association in Informal Opinion 1443 and concludes that a lawyer or law firm may properly employ responsible outside auditors, chosen with reasonable care, to examine and audit the firms records of receipts and disbursements of client trust funds provided the outside auditors undertake confidentiality in the handling of the information and do not under any circumstances reveal to any third party any information that identifies any particular client or would otherwise be a confidence or a secret.
Finally, in response to your last inquiry on the subject of whether lawyers may ethically retain interest earned on that portion of the money in the client trust account, which represents earned lawyer fees or expenses? We believe the answer to this question is suggested by the proscription of DR 9-102(A), which states the procedures, which a lawyer must follow in order to handle his or her client's funds in a responsible manner. DR 9-102(A) states that all client's funds, with two exceptions, must be deposited in "one or more identifiable bank accounts, in the State in which the lawyer's office is located." This Rule prohibits the commingling of the lawyer's or firm's funds with the funds in the trust account. The two exceptions relate to (1) funds "reasonably sufficient to pay bank charges," and (2) funds "belonging in part to the client and in part presently or potentially to the lawyer or law firm." Emphasis added. This Rule against commingling was adopted to provide against the probability in some cases, the possibility in many cases, and the danger in all cases that commingling may result in a loss of the client's money. Black v State Bar, 57 Cal. 2d 219, 368 P2d 118 (1962). We are of the opinion that prudence is suggested by DR 9-102(A)(2) and that the lawyer should properly withdraw from the client trust account funds in amounts to which the lawyer is clearly entitled by way of fees and/or reimbursement for costs advanced, but only under circumstances where the client has been advised of and has agreed to an arrangement for the lawyer's periodic withdrawal. In the absence of these requirements, the lawyer should not assume that he may withdraw funds pursuant to DR 9-102(A)(2) and, consequently, it is not unethical for the lawyer to retain funds belonging in part to the client and in part presently or potentially to the lawyer or law firm in the trust account. From this it would follow that interest earned on that portion of the funds, in a trust account, presently belonging to the lawyer or law firm may be retained by the lawyer(s) as his or her share of earnings subject to the pro rata expense allocation among all participants. Obviously, interest earned on the client's funds belongs to the client and the lawyer has an obligation to account to the client with respect thereto.
Although this opinion has been written by the undersigned, it has been circulated to the other Committee members for their concurrence prior to its release to you.