By Thomas P. McGarry and Thomas P. Sukowicz
Hinshaw & Culbertson
On July 1, the Illinois Supreme Courtamended Rule 1.15 of the Illinois Rules of Professional Conduct to include a provision that requires overdrafts in client trust accounts to be reported to the Attorney Registration and Disciplinary Commission (ARDC) by the financial institution maintaining the account. The amended rule becomes effective Sept. 1 of this year.
Rule 1.15(h) was amended to require that lawyers only maintain client trust accounts (or trust accounts holding funds of third parties in connection with the representation of a client) in financial institutions that have agreed to report overdrafts to the ARDC. The financial institution is required to report to the ARDC any instance where a "properly payable instrument is presented against a client trust account containing insufficient funds." The report must be made even if the instrument is honored by the financial institution. The ARDC is to annually publish a list of financial institutions that agreed to enter into such reporting agreements.
The rule also provides that every Illinois lawyer is conclusively deemed to have consented to the reporting and production requirements imposed on financial institutions by the rule. Other states have had mandatory trust account overdraft reporting for many years, but this is new in Illinois. The comments to the rule explain that this requirement is "intended to provide early detection of problems in lawyers' trust accounts, so that errors by lawyers and/or banks may be corrected and serious lawyer transgressions pursued."
The 2010 ARDC annual report reported that it conducted 335 investigations into "improper management of client or third-party funds, including commingling, conversion, failing to promptly pay litigation costs or client creditors or issuing NSF checks." The administrator filed 27 complaints before the Hearing Board in which "improper handling of trust funds" was alleged. The Illinois Supreme Court entered 31 orders disciplining attorneys for "improper management of client or third party funds, including commingling and conversion."
Amended Rule 1.15(a) adds a new requirement for client trust accounts. The amended rule, effective this year, requires that lawyers who hold funds of clients or third persons in connection with a representation deposit those funds in a client trust account that bears interest or dividends. Client trust accounts that do not bear interest or dividends are no longer permitted.
Amended Rule 1.15(a), like the current version, requires that lawyers with client trust accounts maintain and preserve "complete records of such account funds and other property" for seven years after termination of the representation. The amended rule, unlike the current rule, sets forth the kinds of records that are required. These records include:
1) receipt and disbursement journals containing a record of deposits and withdrawals and identifying the date, source and description of each item deposited and the date, payee and purpose of each disbursement;
2) contemporaneous ledger records for all client trust accounts showing the source of all funds deposited, the date of each deposit, the names of all persons for whom the funds are or were held, the amount of such funds, the dates, descriptions and amounts of charges or withdrawals and the names of all persons to whom such funds were disbursed;
3) copies of all accountings to clients or third persons showing the disbursement of funds to them or on their behalf, along with copies of those portions of clients' files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them;
4) checkbook registers, check stubs, bank statements, records of deposit and checks or other records of debits;
5) copies of all retainer and compensation agreements with clients;
6) copies of all bills rendered to clients for legal fees and expenses;
7) reconciliation reports of all client trust accounts, on at least a quarterly basis, including reconciliations of ledger balances with client trust account balances.
In addition to maintaining and preserving such records themselves, lawyers are also required to make appropriate arrangements for the maintenance of these records in the event of the closing, sale, dissolution or merger of a law practice.
The seven-year period during which these records must be preserved is consistent with Supreme Court Rule 769, which requires "all financial records related to the attorney's practice, for a period of not less than seven years, including but not limited to bank statements, time and billing records, checks, check stubs, journals, ledgers, audits, financial statements, tax returns and tax reports."
Rule 769 also requires that attorneys maintain originals, copies or computer-generated images of "records which identify the name and last known address of each of the attorney's clients and which reflect whether the representation of the client is ongoing or concluded," but this requirement is not limited by any time period, such as the seven-year period applicable to financial records.