Concept
Separating and Safeguarding Property
Safekeeping funds and other property of third persons
Separating and Safeguarding Property
Rule 1.15 turns on a single demand: property that belongs to clients or third persons must stay separate from the lawyer's own property.1 Every requirement in this section is a way of making that separation something a bank statement, an inventory, or a set of records can verify, so that an owner's protection never rests on the lawyer's good intentions.
Separation carries so much weight because an owner cannot watch what happens to money once a lawyer holds it. If the money sits in the account that pays the lawyer's rent, a single balance invites the lawyer to treat all of it as available, and a withdrawal for a personal purpose draws down someone else's funds without any signal that something has gone wrong. Mixing also destroys proof. No one can say which dollars belong to whom, so the lawyer cannot readily show that an owner's share is intact, and a regulator who finds a shortfall cannot tell when it began. Keep entrusted money apart, and any gap between what the account holds and what the lawyer owes others shows up as a gap.
The rule carries this instinct to its limit when the lawyer is one of the claimants. If two or more persons, the lawyer among them, claim interests in property the lawyer holds, the property must be kept separate until the dispute is resolved, and the lawyer must promptly distribute every portion that is not in dispute.2 A lawyer's own claim to part of the money therefore gives the lawyer no authority to take it. The subsections below follow separation through its working parts: where entrusted funds must be kept, why the lawyer's own money must stay out of that account, how to handle property that is not cash, and where to put deposits too small or too short-lived to earn interest for their owners.
Trust Account Requirements
Rule 1.15(a) turns the demand for separation into three working requirements for funds: a separate account, a permitted location, and preserved records. Funds “shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person,” and the lawyer must keep complete records of the account funds and other property for [five years] after the representation ends.3 The separate account is what lawyers call a trust account: a bank account that holds money belonging to clients or third persons apart from the lawyer's own accounts. Client funds go into it, never into the lawyer's personal account.4
Lawyers once kept clients' funds in an office safe. Today Rule 1.15(a) obliges the lawyer to place the funds in a separate trust account at a financial institution, usually under detailed court rules on which institutions qualify, interest-bearing accounts, records, and audits.5 The account matters because ordinary accounts get spent. Rent, payroll, and other costs of practice draw on them, and a hurried withdrawal can take an owner's money without anyone noticing. A trust account keeps entrusted money where only entrusted money sits.
The location requirement sets a default and an exception. The default is the state where the lawyer's office is situated. The exception rests on ownership: because the money belongs to the client or third person, that person's consent is what permits the account to sit elsewhere. The lawyer's own convenience cannot waive a protection that exists for the owner.
The consent that counts belongs to the owner. Approval from a law partner, an accountant, or the bank does not substitute for it. The Model Rule asks for consent without saying it must be written, but a lawyer who may later have to prove consent will want it in writing, and some jurisdictions add formalities of their own. One such rule permits trust funds to be held other than in a bank or savings and loan account only if the lawyer first obtains the client's written permission. It also requires a lawyer who stores trust funds or property in a safe deposit box to tell the institution that the box may hold property of clients or third persons.6
Complete records are the third requirement, and they supply the proof. A bank statement shows a running total, which cannot tell anyone whose money was in the account on a given day, but a full set of records can. Records kept for the whole retention period let an owner, a regulator, or the lawyer reconstruct what was held and when, which is how misuse is detected and how a lawyer who handled the funds properly demonstrates it. The Model Rule brackets the five-year period, which signals that the number may vary by jurisdiction, and the period runs from the end of the representation, so the records of a long matter must outlast the matter itself.7
Commingling Prohibited
Rule 1.15(a) requires a lawyer to hold entrusted property “separate from the lawyer's own property” and to keep funds in a separate account, so putting the lawyer's own money into the account that holds entrusted money, commingling, violates the rule.9 Two working consequences follow. Only entrusted money belongs in the trust account, so the lawyer needs a second account, usually called the operating account, for the lawyer's own money: rent, payroll, and fees once they are earned. And the violation does not wait for proof of harm or bad intent, as the Rousso discussion below shows.
The reason for a bright line lies in what can and cannot be verified. A lawyer's explanation of why money was deposited is a statement of intent that nobody can check, while the account balance and the deposit records can be checked. If the rule asked whether the lawyer meant well, every commingling charge would become a contest over the lawyer's state of mind while the owners' money stayed exposed. The structural danger is the same whatever the motive. Once the lawyer's money sits in the account, a single balance no longer shows whose dollars are whose, and later misuse is easier to disguise.
The operating account matters as much as the trust account, because earned fees are the lawyer's money and need somewhere to go. Rule 1.15(c) requires advance payments toward fees and expenses to be placed in the trust account and withdrawn only when fees are earned and expenses incurred.10 Each withdrawal needs a destination other than the trust account, and that destination is the operating account. A lawyer who has none will end up paying bills from trust or leaving earned fees there.
The rule makes one narrow exception. A lawyer “may deposit the lawyer's own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.”11 Banks deduct service charges from the account itself, so with no lawyer money in it those charges would come out of entrusted funds and slowly shrink the owners' money. A small buffer of the lawyer's own money prevents that, and the words “only in an amount necessary” keep the exception from becoming a place to park other money. Florida's rule draws the same line in different words: the lawyer's funds may not exceed what is “reasonably sufficient to pay bank charges relating to the trust account.”12
The hardest test of the bright-line rule is a lawyer whose motive is admirable. In Florida Bar v. Rousso, the firm's trust account developed shortages through the bookkeeper's misconduct, and the two partners covered the deficits from several sources: the firm's malpractice insurer, credit lines, their own funds, money borrowed from family, and a loan from a client.13 By April 2008 they had deposited $245,600 of personal funds, and in June 2008 each deposited a $100,000 check.14 The court stressed that these funds were personal to the partners and that trust accounts are reserved for client funds and should not be used as a repository for a lawyer's own property. Despite that evidence, the referee had recommended finding them not guilty of violating the trust-account rule.15 The court's comparison cases show where it was heading. In Florida Bar v. Cox, a lawyer had wired a $200,000 business loan into his trust account. In Florida Bar v. Brownstein, a lawyer who bounced checks on thirty occasions moved operating-account money into trust to cover them, “like Respondents,” and was found guilty of commingling.16
The partners' motive was admirable, yet their deposits put personal funds and borrowed money into an account reserved for entrusted funds, and the rule asks where the money sits. Motive still matters at the sanction stage: the referee treated the partners' efforts to cover the account's liabilities as a mitigating factor.17 A good motive therefore bears on how severe the punishment is and has no bearing on whether the deposit was a violation. Taking money out of trust for the lawyer's own use is a different order of wrong. Even when the lawyer means to replenish the account, discipline is severe, presumptively disbarment, a subject the misappropriation section takes up.18
Other Property of Others
Rule 1.15(a) does not stop at money. After directing that funds go into a separate account, it adds a sentence for everything else a lawyer may hold: “Other property shall be identified as such and appropriately safeguarded,” and the lawyer must keep complete records of that property for the retention period, just as for account funds.20 Documents and securities that a client hands over are the standard examples.21 A stock certificate or a signed original cannot be deposited in a bank account, so the rule substitutes two duties suited to objects, identification and safekeeping. Each can fail without the other.
To identify property is to mark and record it so that anyone looking at it can tell what it is and whose it is. The lawyer should catalog the property and hold it in a secure location that is physically separate from the lawyer's own property.22 An object carries no ledger. A certificate loose in a desk drawer looks like part of the lawyer's own papers, and the people who may need to sort it out, such as the owner asking for it back, a successor lawyer, or an auditor, have no way to tell otherwise. A catalog and a record of receipt let them reconstruct what the lawyer held and for whom, which is the work the records requirement does for funds.
Safekeeping answers a different danger: loss, theft, and misuse. The word “appropriately” sets the standard, and the more valuable, negotiable, or hard to replace an item is, the more protection it needs. The office safe may still serve for temporary holding of certain valuables and for safeguarding sensitive documents, but a lawyer ordinarily should place client securities and other valuable or negotiable documents in a bank safe deposit box maintained separately for client property.23 The rule quoted earlier for written permission adds one refinement. A lawyer who uses a safe deposit box for trust funds or property must tell the institution that the box may include property of clients or third persons, so that the bank is on notice that the contents are not the lawyer's.24
The duty governs how the lawyer handles the property while holding it, so compliance does not depend on whether anything goes missing. The two lawyers below show where the line falls.
The duty also reaches beyond what clients hand over. Rule 1.15(a) covers property of “clients or third persons” that is in the lawyer's possession in connection with a representation,25 so materials that belong to a stranger fall inside it even when the client supplies them. A lawyer with reason to suspect that a client has delivered someone else's property should therefore find out what it is and whose it is before shelving it as ordinary case material, and the notice and delivery duties covered in the next section are the tools for returning it. Rule 1.15 is one of several rules that limit what a lawyer may do with material belonging to or protected for others.26 The discovery rules, for example, are crossed by requests that plainly seek privileged or otherwise protected information.27
IOLTA Accounts
Separation raises a question about interest: when entrusted money sits in a trust account, who gets what it earns? The Supreme Court's decision in Brown v. Legal Foundation of Washington describes one answer, Washington's program of interest on lawyers' trust accounts, known as IOLTA. Washington's rule recognized two types of account. The first pays interest, net of transaction costs, to the client, and it may be a separate account for each client or a single pooled account with subaccounting that tracks each client's interest. The second is a pooled interest-bearing account whose interest the financial institution pays directly to the Legal Foundation of Washington, a nonprofit entity.29 Every state and the District of Columbia has adopted a program of this kind, through its legislature or its highest court,30 and most states, like Washington, established theirs by rule of the state supreme court.31
The program fills a gap in the safekeeping duty. Before 1980, client funds were typically held in non-interest-bearing federally insured checking accounts, and the banks kept the value of using that money. In 1980 Congress authorized federally insured banks to pay interest on a limited category of demand deposits called NOW accounts. Florida responded in 1981 with the first IOLTA program, and every other state followed, so that the value of the money now goes to charitable entities that provide legal services to the poor.32
A lawyer cannot close that gap by opening an interest-bearing account for every deposit. Washington's factors show why: the interest a deposit would earn during the expected holding period has to cover the cost of establishing and administering the account, and financial institutions must be able to calculate and pay interest to individual clients.33 A deposit that fails that arithmetic would earn its owner nothing in a separate account. For funds in that position, states typically require a pooled interest-bearing trust account whose interest the financial institution pays to a state commission, which typically spends it on law-related programs: the administration of justice, education about the law, student scholarships, and grants to organizations providing legal services to the poor.34 Pooling several owners' money in one trust account does not offend the ban on commingling, which concerns mixing clients' money with the lawyer's own, and it is not unethical to pool several clients' funds.35 The lawyer's records must still show whose money is whose.
The lawyer's one decision is which track a deposit belongs on, and the test is whether the funds could earn a positive net return for the owner. Washington's rule directed the lawyer to decide solely on that question, weighing the amount of interest expected, the cost of the account, and the banks' ability to pay interest to individual clients.36 Amount and time work together, so a modest sum held for a year may call for an account that pays the owner where a larger sum held for a day does not. The word solely matters because the interest belongs to the owner. The lawyer's convenience, a wish to avoid subaccounting, and the worth of the foundation's grants cannot enter the decision.
The lawyer may not keep the interest either. In an IOLTA account the lawyer must direct the bank to pay the interest, net of service charges, to the designated foundation, so it never passes through the lawyer's hands.37 In an owner-benefiting account the interest follows the principal to the owner, and a lawyer who pockets it takes property that belongs to someone else, a wrong the misappropriation section returns to. An exam stem that gives a dollar figure and a holding period is really asking whether that sum, held that long, could earn net interest for its owner after costs, and the answer decides where the money goes.
Because the interest has an owner, IOLTA raises a constitutional question. In Phillips v. Washington Legal Foundation, a challenge to the Texas program, the Supreme Court held that interest income generated by funds held in IOLTA accounts is the private property of the owner of the principal, though it expressed no opinion on whether the State had taken that income or on what just compensation might be due.38 The holding rests on a settled principle: courts have long treated interest as following the principal, so that it “necessarily belongs to that person as an increment to the principal fund.”39 Brown then confronted the questions Phillips left open.40 The Fifth Amendment condemns a taking only when it occurs without just compensation, and the compensation it requires is measured by the owner's loss rather than the government's gain.41
That measure decides the compensation question for IOLTA. The owner of funds that could never have earned net interest has lost nothing, because without the program the money would have sat in an account that produced nothing for anyone, and a measure keyed to loss leaves nothing to compensate even though the foundation receives real money. The Washington Supreme Court reasoned in the same direction when it said the program creates income where there had been none before, income that would never benefit the client under any set of circumstances.42 The defense of the program therefore depends on the lawyer's sorting rule. For funds that could have earned net interest, the owner's loss is real, and a lawyer who sends them to IOLTA gives away income the owner could have received.