1. Requirements for keeping clients’ money
Massachusetts
Rule of Prof. Conduct 1.15
Mass School of Law 2018
This program is ONLY about Rule This program does not address a lawyer’s operating or personal account. A lawyer is running a business and should keep good records in those accounts but they are not covered by Mass. R. Prof. C
Terrence Pricher, Esq.
LinkedIn: Terrence Pricher

2. Compliance is a non-delegable duty
Compliance with Mass. R. Prof. C is a non-delegable duty
Hiring a bookkeeper or office manager to maintain billing and/or financial records does not absolve the lawyer of the responsibility to comply with Mass. R. Prof. C
Many title insurance companies audit their agents accounts for compliance with their requirements. This does not mean the records are compliant with Mass. R. Prof. C. 1.15
We have seen cases of employee theft – even from longtime friends. (e.g. Writing checks to themselves and using a lawyer’s signature stamp)
If an employee is embezzling funds from an IOLTA account, a lawyer can be disciplined even if they do not misuse client funds of personally benefit from the misuse.
Every title insurance company has different audit procedures & they are only looking for their own transactions. Some lawyers write for more than one title insurance company and can be confused by getting multiple sets of instructions. We have had many cases where the lawyer has passed all title insurance audits but been a few hundred thousand dollars short in their IOLTA account.

3. IOLTA Accounts
An IOLTA account is a pooled trust account where an attorney holds funds for multiple client matters for a short period of time.
Separate records of funds for each client matter must be kept within the IOLTA account.
Each real estate transaction is a separate client matter.
Example: lawyer holding a $50,000 holdback from transaction 1 handles transaction 2 (totally unrelated buyer & seller). Buyer in transaction 2 gives lawyer a $10,000 personal check. The lawyer cannot disburse the $10,000 for transaction 2 until the deposit for transaction 2 clears.
Note: giving a client a check and asking them to hold the check for a few days NEVER works out.

4. IOLTA Accounts (cont’d)
Trust funds held for a longer time period must be deposited into an individual trust account.
Client funds are NOT fungible. Client funds can ONLY be used for the client matter for which the attorney is holding the funds.
Rule of thumb test: If the expenses associated with opening and maintaining an account are greater than the interest generated, the funds should remain in an IOLTA account. If the interest is greater, the funds should be held in an individual trust account.
Scenario: An estate is selling a house and the proceeds will be held for a year while the estate is settled. The funds should be put into an individual trust account.
Scenario: Lawyer is holding $50,000 is escrow for transaction A that she knows she won’t need for 6 months. In transaction B, Buyer’s check last minute and it has not cleared – lawyer cannot issue a $10,000 check (covered by transaction A escrow funds) for transaction B until deposit clears.

5. Client Funds v. Non-Client Funds
Any funds that a client or a third party have a claim to are client funds.
Client funds
Funding received from a lender for a real estate transaction
Retainers
Settlement checks

6. Rule 1.15 / Central Requirements
Segregation of trust funds from lawyer’s funds
No commingling*
Commingling = depositing personal / firm funds into the IOLTA account
Commingling = leaving earned fees in an IOLTA account
Documentation of amounts currently held for each client matter and of amounts received and disbursed
Regular reconciliation
Documentation means records adequate to show exactly how much you are holding for each client matter: how much you received, how much you have disbursed, how much you have left.
Reconciliation: everyone makes a mistake at some point – the lawyer, paralegal, bookkeeper, or bank employee – regular reconciliation will identify the mistakes quickly.
Example: A wire for $174,000 went to an incorrect account. The lawyer verified it was sent, not received in his account.
The lawyer did a R.E. closing and disbursed funds based (in part) on the $174,000 deposit. When he bounced a check 3+ years later he was quoted $100,000 from a forensic accountant to reconstruct his account AND he could not recover the $174,000 he never received.

7. Operational requirements
Must use an IOLTA account with interest to the IOLTA committee or an individual trust account that has interest paid to client or third party
IOLTA accounts are for small amounts of money OR funds the lawyer will have for a short period of time
All IOLTA accounts must be in Massachusetts; all trust accounts must be in an approved bank
Most major banks are approved. A list of all approved banks is available on the IOLTA committee’s website
Account title must identify it as a trust / IOLTA account
A lawyer should also have the trust account title printed on the checks
Very dumb mistake: I grabbed the wrong check book.
Have the account title printed on the checks – get IOLTA checks in a different color & size from the operating account checks (also keep them in a separate place).

8. Operational Requirements (cont’d)
**For each trust account opened:
Lawyer must submit written notice to the bank confirming that the account will hold trust funds.
The lawyer shall retain a copy of the notice
Notice shall identify the bank, account, and type of account (IOLTA or individual trust account)
**New July 1, 2015
See also Mass. R. Prof. C Comment #7
Comment 7: Paragraph (e)(3) requires attorneys to provide a written notice to the bank or other depository when opening any account that is a trust account within the meaning of this Rule, regardless of whether the account is an IOLTA account or an individual trust account.

9. Operational requirements (cont’d)
No withdrawals from trust accounts via ATM and no checks payable to “Cash”
All withdrawals must identify the recipient of the funds*
Use pre-numbered checks only
starter checks are just for starters
Fee withdrawals must be by check payable to lawyer or the lawyer’s firm*
A lawyer cannot pay personal / business expenses directly from an IOLTA account
A lawyer CANNOT pay personal expenses out of an IOLTA account – even if it is an earned fee.
This means a lawyer cannot pay her cell phone bill, office, rent, car payment, or ANNUAL REGISTRATION DUES from the IOLTA account.

10. *Fee withdrawals made via online transfer
A fee withdrawal made by online transfer to the firm operating account is permissible
An online transfer DOES identify the recipient of the funds (the monthly bank statement will show the account number the funds are transferred into)
Some banks do not allow online transfers from an IOLTA account to an operating account. Know your bank policies.

11. Operational Requirements (cont’d)
**Dissolution of a Law Firm.
The partners shall make reasonable efforts to ensure the maintenance of client trust account records specified in this Rule.
** New rule - July 1, 2015
See also Mass. R. Prof. C Comment #13

12. All Funds Must be held in a trust account
Client Funds
Advances for costs and expenses
**Addition to Rule 1.15 Effective July 1, 2015
Prior to July 1, 2015 advances for costs and expenses could be kept in a business account
“A lawyer shall deposit into a trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or as expenses incurred.”
See also Mass. R. Prof. C comment #2A

13. Accounting to the Client
Lawyer must render full written account to the client upon:
Demand
Final distribution
Withdrawing fees
These are your client’s funds in the account
You should always be able to tell clients exactly how much of their money you are holding at any time
In a standard real estate transaction, all funds will be disbursed in a short period of time and this is often only done once. In cases of a holdback or other reason to hold funds for an extended period of time, additional accountings will be necessary.

14. Withdrawing fees - notification to the client
On or before the date of withdrawing funds to pay fees from a trust account, the lawyer must mail or deliver to the client:
Written itemized bill accounting for services rendered
Written notice of the date of withdrawal
Statement of the amount withdrawn and the balance in the client’s account after the withdrawal
If a lawyer is keeping her individual client ledgers correctly this is easy to produce.

15. Withdrawing fees - notification to the client
The definition of “trust property” in paragraph (a)(1) includes funds held in a fiduciary capacity, lawyers who represent themselves as fiduciaries (e.g. personal representatives, executors, conservators, guardians or trustees) must comply with all notification requirements of 1.15(d)(2)
See also Mass. R. Prof. C comment #6A
Note: A lawyer is a fiduciary even if the lawyer is handling a transaction for a family member, or the estate of a family member.

16. Account documentation
All documents recording transactions that the bank returns to the lawyer must be kept by the lawyer
Examples:
Statements
Cancelled checks
Records of electronic transactions
Deposit receipts
Requirement of the lawyer to record:
name and address of the bank
account number
account title
opening and closing dates, and
type of account
Check your statement when you open the account and verify the information is correct – most of this information is printed on the statement
Just keep everything the bank gives you. This means in any data format – hard copy, , internet access to your account.

17. Account documentation
Verify the account has been set up correctly
Make sure the IOLTA committee tax id number is on the account.
If the account has the lawyer’s or the client’s tax id number, it was not set up correctly as an IOLTA account
Make sure the interest gets transferred to the IOLTA committee.
Interest is transferred monthly or quarterly to the IOLTA committee
Interest is usually credited the last business day of a month (or quarter) and transferred the first business day of the following month. Check the second month’s statement to make sure it is being transferred.

18. Records created by the lawyer
Four types of accounting records must be created and kept by the lawyer:
Account/Check register
Ledger for each client matter
Ledger for all bank fees
Reconciliation Reports
**All records that are required to be created by
the lawyer must be created contemporaneously
with each transaction
Do not save everything until the end of the month. When you write out the check – update the records. When you deposit the funds – update the records!

19. Account/check register
All transactions must be recorded in chronological order
Date and amount of every deposit and withdrawal
Includes all types of transactions (check, wire, EFT)
Specific client identifier
running balance after each transaction
The rule refers to this as the check register but specifically requires that EVERY transaction be listed.
Chronological order is the date the transactions are done by the lawyer – NOT the day they clear the bank. (When you write the check / deposit slip – update the records!)
Problems / mistakes happen when people write multiple checks for one client matter but don’t update the balance after every check. Often someone gets over paid or double paid when the balance isn’t updated after each transaction.
Should also list the source of the deposit and purpose of the disbursement in the register & ledger.

20. check register: example
*The client identifier can be any system the lawyer wants to use as long as it is used consistently throughout the register. Client name, file number, case number, docket number, claim number, and street address are examples of frequently used client identifiers.
DATE
TRANS TYPE / CHECK NUMBER
PAYEE
DEPOSIT
WITHDRAWAL
BALANCE
CLIENT MATTER
 7/1/12
check
Attorney & John Smith
$10,000
Smith, John
7/2/12
cash
Attorney
$5,000
$15,000
Warner, Bob
7/3/12
Attorney; client; Mass DOR
$25,000
$40,000
Brady, Tom
7/5/12
Wire
Client X c/o Attorney
$400,000
$440,000
Johnson, Chris
 7/6/12
1001
$3,333.33
$436,666.67 
 1002
$750
$435,916.67 
 1003
John Smith
$5,916.67
 $430,000
7/10/12
$100
$430,100
Gilmore, Sherri
This is the order the transactions occur – when deposits are made and checks are written – NOT the order the transactions clear the bank.
Note that you do not have to identify each client matter by name. Any way you want to identify a client matter: by name, file #, case #, address, docket #, claim# is ok as long as it is the same throughout your records.
If you use a software program you must be careful to use the same client identifiers consistently because this is most likely how the program will sort the main register into individual client ledgers.

21. Ledgers for each client matter
A lawyer is required to keep individual client records for each separate client matter in which the lawyer holds funds for the client
Each individual client ledger must:
Name the client matter
Detail all the funds received or disbursed
(date and source/payee)
Maintain a running balance following every receipt or payment of funds for the client matter
The requirements are the exact same as the main register with the client matter listed at the top.

22. Ledgers for each client matter (cont’d)
No individual client ledger should ever have a negative balance
This program is specifically about 1.15 / Trust account record keeping.
If you are advancing expenses you must do that from your operating account. You will have a negative balance in your operating account for that client matter. In your IOLTA account your first transaction is ALWAYS a deposit. Once the deposit clears then the lawyer disburses funds – in a case where the lawyer has advanced money (from the operating account) the lawyer reimburses her operating account from client funds that are deposited into the IOLTA account.
Example: PI case / contingent fee case. Lawyer advances $6,000 for filing fees, an investigator, and deposition transcripts. Balance in operating account is negative -$6,000. Balance in IOLTA account is $0. The lawyer deposits a $60,000 settlement check into the IOLTA account. After the deposit clear the first check the lawyer write – to herself for $6,000 / expenses reimbursement. The IOLTA account NEVER has a negative balance.

23. Funds must clear before they are disbursed
A lawyer must verify that funds have cleared before disbursing funds.
It is not sufficient to verify funds have been sent – funds must have been received and cleared.
Available and cleared are different. The lawyer must verify the funds have CLEARED before authorizing any disbursement.

24. Individual client ledger
CLIENT MATTER: ________John Smith_______________________
DATE
TRANS TYPE / CHECK NUMBER
PAYEE
DEPOSIT
WITHDRAWAL
BALANCE
NOTES
7/1/12 
Check
Attorney & John Smith
$10,000
Settlement check
 7/6/12
 1001
Attorney 
$3,333.33 
 $6,666.67
 attorney fee
1002 
$750 
$5,916.67 
 expenses reimbursement
1003 
John Smith 
 $0
 client payout
This is the same as the main register with the client matter listed at the top.

25. Ledger for bank fees and charges
A lawyer is required to keep a separate ledger for bank fees and expenses. Must detail:
Every deposit of the lawyer’s funds for bank fees
Every disbursement of funds for bank fees
Maintain a running balance after each transaction
The funds for bank fees are the only personal funds a
lawyer is allowed to have in an IOLTA account
This is the lawyers personal funds. We do not question $200 or less. Above $200 we ask a lawyer to justify why they have so much personal money in the account.
Most banks do not charge wire fees from an IOLTA account. Some do. Others charge a fee is they have been given incorrect instructions. All banks charge for ordering new checks.

26. Bank fees ledger CLIENT LEDGER
CLIENT MATTER: ______Bank fees / attorney funds____________
DATE
TRANS TYPE / CHECK NUMBER
PAYEE
DEPOSIT
WITHDRAWAL
BALANCE
NOTES
7/10/12 
Check
Attorney
$100
Personal funds deposit
7/25/12 
Bank withdrawal
Bank
$85
$15
New check order
 8/5/12

27. Account Reconciliation
Lawyers must perform a “three way” reconciliation of the account at least every sixty days
High volume accounts should be reconciled more frequently
The purpose of regular reconciliation is to identify any errors or inconsistencies quickly when they can be corrected easily

28. “Three-Way” reconciliation (cont’d)
Three-way reconciliation requires that the following three numbers must be identical:
The total of all individual client ledgers plus the bank fees ledger
The account register balance
The adjusted bank statement balance
The adjusted bank statement balance is: the bank statement balance plus (+) any outstanding deposits, minus (-) any outstanding disbursements
If you use a computer program the first 2 numbers ALWAYS match because it is using only the numbers you input.
The bank statement must be adjusted because the lawyer (following the rules) updates the records contemporaneously with each transaction so the register balance reflects all transactions as though they have already cleared. The bank statement has to be adjusted to reflect the un-cleared transactions.

29. Reconciliation report
RECONCILIATION WORKSHEET
As of Date: ________________________
Individual Client Ledger Balances
Name or Client ID: Amount
1.___Bank Fees (Attorney’s Funds)_______ $__________________________________
2.__________________________________ $__________________________________
3.__________________________________ $__________________________________
4.__________________________________ $__________________________________
5.__________________________________ $__________________________________
6.__________________________________ $__________________________________
7.__________________________________ $__________________________________
8.__________________________________ $__________________________________
Additional Client Ledgers Attached ( Y ) / ( N )
Total Client Ledger Balances $__________________________________*
Check Register Balance $__________________________________*
Bank Statement Balance: $________________
Add: Outstanding Deposits $________________
Subtract: Outstanding Disbursements $________________
Adjusted Bank Statement Balance $__________________________________*
* These three numbers must be identical
_______________________________ _______ _____________________________
Completed By Date Approved By
Most software programs don’t produce fully compliant reports. Call the companies tech support and have them help you modify the program. If you can’t do that – or don’t want to – then I recommend using this worksheet. You can use the software program to do 90% of the work and fill in the numbers then do the remaining 10%, which is usually filling in the register balance and total of all client ledgers balance.

30. Reconciliation Report
An attorney must REVIEW the reconciliation report.
Reconciliation should identify inconsistencies between what the bank records show and what the lawyer’s records show
Errors and inconsistencies identified in the reconciliation report must be corrected immediately.
Everyone makes mistakes – this is the time to catch them.
When we see an un-cleared check for over a year it is obvious that the account wasn’t reconciled or the lawyer never reviewed the reports.
If you have mistakenly entered an incorrect client identifier you will see an equally abnormally large and small client balances. (E.g. client A’s balance will be $10,000 to high and client AA’s balance will be $10,000 too low.)

31. “Three-Way” reconciliation (cont’d)
Reports should identify outstanding checks and aged funds yet to be distributed
Title insurance, recording fees, discharge fees, and other checks associated with real estate transactions need to be cashed in a reasonable amount of time
Keep lawyers updated on the amounts of funds they are holding and what client matter the funds are for
Personal injury settlements / client checks need to be cashed in a reasonable amount of time.

32. Record retention
Rule 1.15 (f) requires keeping trust account records for six years after termination of the representation and the funds are paid out.
What records?
All bank records
All records created by the lawyer
Individual client ledger
Bank fees ledger
Account/Check register
Reconciliation Reports
Records do not have to be saved in hard copy but must be saved in a secure way.
External hard drive, flash drive, CD, or other methods are ways lawyers keep backup copies of records.
Geek squad is approximately $4,000 to attempt to rebuild an average hard drive if necessary – back up your files!

33. Keeping records by computer (cont’d)
A lawyer is responsible for creating and maintaining all records required by Mass. R. Prof. C regardless of what computer program is used
A lawyer is required to be able to produce a copy of all required records in hard copy.
BACK UP YOUR FILES!
It will cost approximately $4,000 for Geek squad to attempt to rebuild a crashed hard drive. It costs much less for a flash drive, external hard drive, to burn a copy to a CD, or print a hard copy.

34. Resources
Office of the Bar Counsel Ethics Hot Line Mon, Wed, Fri 2 -4 pm
BBO Website: Massbbo.org
IOLTA Committee Website: Maiolta.org
Terrence D. Pricher, Esq.
LinkedIn: Terrence Pricher

35. Requirements for keeping clients’ money
Massachusetts
Rule of Prof. Conduct
1.15
QUESTIONS