Conversion and Discipline

Two subsections of Rule 1.15 mark the boundary of the client trust account. Under Rule 1.15(c), a lawyer withdraws advance fees and expenses only as the fees are earned or the expenses incurred.¹ Under Rule 1.15(b), the lawyer's own funds may enter the account only to pay its bank service charges, and only in the amount that purpose requires.² Conversion, the lawyer's use of money belonging to a client or third person for the lawyer's own purposes, is what those limits exist to prevent. It is also where the trust-account rules meet the disciplinary system.

The earlier sections followed client money into the account, through it, and out again. This section asks what happens to the lawyer who leaves that path, and the answer is severe: improperly withdrawing client funds from a trust account is one of the shortest paths to disbarment.³ The rule texts do not make a violation depend on the lawyer's intent or on any client's loss, so the contested question in discipline is the sanction. Three subjects settle most of it: the claim that a taking is acceptable when the lawyer means to replace the money, the narrow room for leniency, and the handling of funds that someone else claims or that the lawyer will not account for.

The Loan Defense Fails

A lawyer who withdraws unearned money from the trust account has misappropriated it, and a plan to put the money back does not change the label. Disciplinary authorities answer such a taking with one of their most severe sanctions, presumptively disbarment, even when the lawyer asserts an intent to replenish the account, which is to say a 'loan' from client money.⁴

The defense fails because of what a loan requires. A borrower needs the lender's agreement, and the client who handed over money for a settlement, a closing, or an advance against fees agreed to nothing of the kind. The money was entrusted for a particular purpose, and the account exists to keep it available for that purpose. While the money is out, a refund demanded when a closing fails, or the lawyer's own insolvency, can leave the client short, however good the lawyer's intentions. Restoring the balance later does not undo that exposure. A defense that turned on repayment would also reward luck, because only the lawyer whose finances happened to recover in time could invoke it. The sanction therefore answers the taking itself, whatever followed.

In re Warhaftig, a lawyer routinely wrote trust-account checks to himself for fees in pending real-estate matters before the fees were earned. He replaced the money when the closings occurred or fell through, believing that no one could be hurt, and he was disbarred.⁵ His belief is the loan defense in its most familiar form, since the money always went back. During every interval when it was out, each client's funds depended on his ability to replace them the moment someone asked, and no client had agreed to bear that risk.

The two lawyers differ in when each dollar left the account. Fernandez withdrew after her entitlement ripened. Okonkwo withdrew before his did, so on Monday he was spending money that still belonged to the client. His plan to do the work and his repayment are exactly the facts the loan defense relies on, and neither changes the result. Rule 1.15(c) ties withdrawal to the moment a fee is earned or an expense incurred, and a plan to earn the fee later is a different thing.⁶ His replacement money also came from another client's advance, which exposes that second client to the same risk.

The conversion cases reach back through the earlier sections of this chapter. Commingling is often the first step, because mixed funds erase the line that would make a taking visible. Early withdrawal of an advance fee is conversion in its own right, since the client's money leaves before the lawyer's claim to it exists. Rule 8.4 adds a second line of attack. It makes it professional misconduct to violate or attempt to violate the Rules of Professional Conduct, to engage in conduct involving dishonesty, fraud, deceit, or misrepresentation, or to engage in conduct prejudicial to the administration of justice.⁷ A lawyer who knowingly uses trust money can therefore face more than one charge. A clean prior record, good faith, a short period of use, and the absence of any loss each describe the lawyer or the aftermath. None of them answers the question the rules ask, which is whether the money left the account while it was still someone else's.

Mitigation and Its Limits

Does every trust-account violation end in disbarment? It does not, and the dividing line runs between mishandling client money and using it. Where commingling resulted from a negligent mistake, where the client suffered no financial loss, or perhaps where the lawyer had a colorable future claim to the funds taken, some leniency may be appropriate. When the lawyer has improperly converted client funds to the lawyer's own use, revocation of the license is a likely consequence.⁹

The two categories are treated differently because a sanction responds to what the violation reveals. A bookkeeping slip shows inadequate systems, which endanger client money and call for correction and a penalty, but it shows no decision to use someone else's property. A knowing taking shows the willingness the safekeeping rules are written to screen out. A colorable claim falls between the two, because the lawyer who honestly if mistakenly believed some of the money was already due differs from the lawyer who knew it belonged to the client.

The list of mitigating facts includes the absence of client loss, which seems to clash with the rule that a repaid loan is still conversion. The clash disappears once the category is identified. Lack of loss softens the sanction for careless handling, and it does not answer a knowing taking.

Both lawyers violated the rules. The first put her own money into the account for a purpose other than paying bank service charges,¹⁰ while the second took a client's money. The first lawyer's mistake was negligent and cost no one anything, so leniency is available. The second lawyer's clean outcome came from luck, since the money left the account on her own decision, and the presumptive sanction of disbarment applies despite the intended repayment.¹¹ On an exam, words such as inadvertent, mistaken, or bookkeeping error point toward the lighter end, and words such as took, used, or borrowed point toward conversion whether or not the money came back.

Disputes and Refusals to Account

Money that more than one person claims raises a distinct enforcement problem. When a lawyer holds property in which two or more persons, one of whom may be the lawyer, claim interests, Rule 1.15(e) requires the lawyer to keep the property separate until the dispute is resolved and to distribute promptly every portion in which the interests are not in dispute.¹³ The rule has two halves, because the lawyer may neither take the disputed amount nor hold the entire payment hostage to gain leverage over the client. The first half exists because a lawyer who is also a claimant has the strongest motive to end a disagreement by taking the money first. If the lawyer's own belief in the fee were enough to justify a withdrawal, the party with the most to gain would decide every fee dispute before anyone else could object. The second half exists because the undisputed portion belongs to the client whatever the argument about the rest, and withholding it turns the client's own money into a bargaining chip.

Two disciplinary decisions show where lawyers go wrong. In In re Jones, the Louisiana Supreme Court held that placing funds in the lawyer's operating account despite knowledge of a fee dispute amounts to conversion of client funds, and it set disbarment as the baseline sanction.¹⁴ In Attorney Disciplinary Board v. Rhinehart, the Iowa Supreme Court found a violation where a lawyer disbursed settlement funds from the trust account to himself despite knowing that his fee was disputed, and it rejected his excuse that the clients had been unwilling to discuss the dispute with him.¹⁵ The two lawyers took different routes to the same end. The Jones lawyer moved the money into the firm's own account, and the Rhinehart lawyer paid himself out of the trust account. Each resolved the dispute in his own favor by taking the money before anyone else decided the question. Rhinehart adds that the duty to keep disputed money separate does not wait on the client's cooperation, because a client's silence is not consent to a taking.

A refusal to account is treated as a taking in its own right. Florida's trust-account rule provides that money entrusted to a lawyer for a specific purpose, including advances for fees, costs, and expenses, is held in trust and applied only to that purpose. It also provides that client money is not subject to counterclaim or setoff for attorney's fees, and that a refusal to account for and deliver such property on demand is deemed a conversion.¹⁶ The accounting duty is what lets a client verify that the money is intact. A lawyer who stonewalls the client's demand has either spent the money or is holding it for leverage, and either one is a use of the client's money for the lawyer's own purposes. The bar on setoff closes the last exit, because a lawyer who believed the client owed fees could otherwise settle the account by self-help.

The first lawyer separated the money in dispute from the money that was not in dispute and handled each as the rule requires. She also paid out every undisputed dollar promptly, which satisfies the other half of the rule, because she did not hold the whole settlement while the fee was argued. The second lawyer converted the disputed $5,000, and his excuse about unreturned calls is the one the Iowa court rejected in Rhinehart.