Commingling in IOLTA?

From a disciplinary petition filed today by the Commission for Lawyer Discipline against a criminal-defense lawyer (no, not me):

1. In or around November 2009, [Client] hired Respondent for representation in a federal criminal matter. [Client] paid Respondent $250,000.00 for the representation. In or around February 2010, [Client] terminated the representation and requested an accounting of the funds and a refund of any unused portion of the funds.

2. Respondent failed to provide an accounting or refund the portion of the fee that had not yet been earned by him. Respondent claims that the $250,000.00 fee was a nonrefundable retainer not subject to refund. To support this contention, Respondent provides a “Agreement for Employment,” ostensibly signed by both [Client] and Respondent, which states that the $250,000.00 paid was not a prepayment for services, but rather a nonrefundable retainer. [Client], however, denies that the contract provided by Respondent is the contract he actually signed. [Client] denies that he agreed that the $250,000.00 paid would be a nonrefundable retainer.

3. It is undisputed, however, that Respondent deposited the funds into his IOLTA attorney trust account. This action contradicts Respondent’s claim that the money was a nonrefundable retainer, as nonrefundable retainers are earned by the attorney upon receipt. However, if it can be shown that the $250,000.00 paid was in fact a nonrefundable retainer, he impermissibly comingled his own funds with those belonging in whole or in part to his clients or to other third persons when he deposited the funds into his IOLTA account.

4. Respondent further contradicts his position that the fee was a true nonrefundable retainer when he attempts to show, in his response to the instant grievance, that he earned the money that was paid to him by [Client]. Petitioner denies that Respondent has shown that he performed enough work in the approximately three months he was employed by [Client] to earn all $250,000.00 paid to him.

The State Bar is not (explicitly) arguing that the fee could not have been earned on receipt. In a federal criminal case, it is easy to conceive of such a large fee being earned upon receipt. The State Bar is arguing that the fee is unconscionable and that it was not earned upon receipt.

The State Bar is also arguing that by putting a nonrefundable fee (if that is what it was) in his IOLTA (Interest on Lawyers Trust Account) account the lawyer commingled (“comingled”) his funds with the client’s.

That is interesting.

An IOLTA account is for clients’ property—personal-injury settlements, for example, or unearned fees, or deposits made to cover expenses. It may contain the property of multiple clients, so the lawyer must keep careful records of how much of whose money is in the IOLTA account. This accounting requirement should prevent one of the evils addressed by the rule against commingling: that the lawyer might, without bad intent, spend the client’s money as his own.

The other evil addressed by the rule against commingling is that the lawyer’s creditors might seize or attach clients’ property if it is commingled with the lawyer’s property. Putting the lawyer’s money in the IOLTA account puts that money beyond creditors’ easy reach (and probably doesn’t make the IRS particularly happy), but it doesn’t bring clients’ money, held in trust, within their reach.

Putting an earned fee in an IOLTA account may be a violation of the letter of the rule against commingling, and I can’t think of a good reason to do it, but it doesn’t implicate the reason behind the rule.

(Interestingly, while in Paragraph 3 the State Bar argues in the alternative—that the fee was not nonrefundable, and if it was it was intermingled—in Paragraph 4 it holds up the lawyer’s alternative arguments—that the fee was nonrefundable, and if it was not it was earned—as evidence that the fee was not nonrefundable.)

5 responses to “Commingling in IOLTA?”

  1. I used an IOLTA account in flat-fee cases, but only if the payment and contract execution didn’t happen at the same time. For example, if the client’s family paid the fee and the incarcerated client had not signed a contract, I would put the money in trust until the contract was signed (and fee earned) then would transfer it over to the operating account.

    But seriously, the commingling argument is odd. A lawyer’s fee temporarily lives in trust all the time. That’s what the account is (in part) for!

  2. Interesting and not at all confusing…I place all funds when received from clients and/or settling insurers into IOLTA. I then pay myself. This analysis seems to say that is improper. Almost impossible to be right in the eyes of the rules.

  3. Interesting arguments from the Bar. The Bar seems to be arguing that whether or not a fee is refundable depends, basically, on whether the attorney deposits it in his firm’s account or in the IOLTA account.

    There actually is a rational argument for placing a fee earned upon receipt in an IOLTA account: given the Bar’s history regarding “earned upon receipt” fees, the Bar might come in and decide after the fact that the fee was unearned, and if you placed it in your firm’s account, you’re in big trouble.

    But, perhaps the result of this case will give lawyers who use flat fees (i.e. most criminal defense lawyers) some clear guidelines.

  4. ‘Nother thing I thought of here. The term “nonrefundable retainer” seems to imply that the $250,000 was to retain the lawyer’s services. If the lawyer intended to bill the client on top of that, that makes it seem a little more likely that the fee would be considered unconscionable.

    If it was simply a fee for services, why not call it that? “Retainer” seems to have a different implication.

  5. I’ve left funds in IOLTA after they have been earned—does that put me in violation for leaving my money in the account after it is earned? Do I have to make instant, minute by minute withdrawals to guard against such ‘commingling’? The Bar can sure be dense sometimes.

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