By Brooke Ottesen, The Brocker Law Firm, P.A.
Under Rule 5.3, a lawyer has an obligation to properly supervise nonlawyer assistants who have access to the trust account. Thus, if that nonlawyer assistant embezzles entrusted client funds, the lawyer has a professional responsibility to replace the funds. What about when the loss occurs through fraud by an unaffiliated third party?
Does a lawyer have a professional responsibility to replace funds stolen from his trust account by an unaffiliated third party where the bank honored counterfeit checks presented by the third party?
Formal Ethics Opinion, 2015 FEO 5, was adopted in October 2015 and provides:
…when funds are stolen from a lawyer’s trust account by a third party who is not employed or supervised by the lawyer, and the lawyer was managing the trust account in compliance with the Rules of Professional Conduct, the lawyer is not professionally responsible for replacing the funds stolen from the account.
The Opinion advises that lawyers must still investigate the matter, take steps to prevent further loss to entrusted funds, and make every effort to remedy the situation including: “…researching the law to determine if Bank is liable; communication with Bank to discuss Bank’s liability; asking Bank to determine if there is insurance to cover the loss; considering whether it is appropriate to close the trust account and transfer the funds to a new trust account; and working with law enforcement to recover the funds.”
Note that the Opinion requires that the lawyer “was managing the trust account in compliance with the Rules of Professional Conduct” before he is relieved of the duty to replace the stolen funds. While the trust accounting rules may not be burdensome, they are specific. One area where we see lawyers consistently missing the mark is by failing to reconcile the trust accounts quarterly and by failing to send a written accounting of funds to clients, annually and upon final disbursement. The opinion also clarifies that “substantial compliance” would be sufficient to relieve the lawyer of the duty to reimburse the account, so it is likely that a mere technical violation of the Rules, such as failure to keep proper-sized cancelled check images, would not trigger the reimbursement requirement.
Compare this Opinion with RPC 191 which requires a lawyer to reimburse his trust account for any losses caused by disbursing before funds are irrevocably credited where the lawyer disburses against provisionally credited funds. In that case, if third party fraud prevented the funds from being irrevocably credited and the attorney disburses prior to that point, the attorney must reimburse the client funds.
Does a lawyer have a duty to replace stolen funds from the lawyer’s trust account when the theft occurs as a result of an unaffiliated third party gaining illegal access to lawyer’s computer and transferring the trust account balance to the third party’s account?
It depends upon whether reasonable security measures were in place. 2015 FEO 6 provides that the lawyer is not professionally obligated to replace the stolen funds as long as he has “taken reasonable care to minimize the risks to client funds by implementing reasonable security measures in compliance with the requirements of Rule 1.15.” 2011 FEO 7 provides some of those affirmative duties including:
educating himself regularly on the risks of online banking;
actively maintaining end-user security;
using encryption and security software;
hiring an IT professional to advise the lawyer and firm employees; and
insuring all staff members receive training and follow the security measures adopted by the law firm.
Under the above two circumstances, may a lawyer deposit his own funds into the trust account while pursuing other remedies?
As a general rule, there is a prohibition on commingling funds: Lawyers should not deposit personal funds into the lawyer’s trust or fiduciary accounts. There are, however, various exceptions to the rule which permit a lawyer to deposit personal funds into a trust account including funds sufficient to open or maintain an account and others which allow the lawyer to fulfill his duty to safeguard entrusted funds.
Although it is not required for a lawyer to deposit his own funds into the trust account under the circumstances described in 2015 FEO 6, the opinion permits a lawyer to do so. A lawyer may replace the stolen funds with his own, until the funds may otherwise be recovered from the bank, insurance, or elsewhere. The opinion provides that if the lawyer decides to deposit his own funds, the lawyer must make sure the trust account reflects the:
source of the funds;
reason for the deposit;
date of the deposit; and
client name for which the funds were deposited.
In short, under these circumstances involving an unaffiliated third party, a lawyer may not have a professional responsibility to reimburse the stolen funds. However, the lawyer (1) may still have a legal responsibility to do so; and (2) must take certain steps which include reporting the theft to the NC State Bar’s Trust Accounting Compliance Counsel.
*Any opinion or views expressed in blogs posted on this site are those of the identified author and not the Committee as a whole.