Trust busted: Complicated account rules a pitfall for well-intentioned attorneys

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With the Wisconsin Supreme Court poised to pass several changes to the state’s rules governing trust accounts, lawyers are hoping for a simplification of a series of procedures that some contend go beyond their stated purpose of preventing fraud and sometimes do little more than trip up the unwary.

Those rules — contained in Chapter 20.15 of the Supreme Court Rules — require lawyers who choose to hold money in trust for clients to follow a very specific set of requirements. They must, for example, give clients five days’ notice before making any disbursements from a trust account and must maintain records going back the last six years. They must also keep records of all transactions related to an account and copies of all receipts, deposit slips and checks.

According to a Wisconsin Law Journal review of all in-state disciplinary actions from January 2014 to December 2014, including consensual private reprimands, about 40 percent of the lawyers who got in trouble during that time did so in part for violating at least one trust account rule. For the same period a year later, the comparable figure was up to about 50 percent.

One thing to keep in mind, said Office of Lawyer Regulation Director Keith Sellen, is that most of the lawyers who run afoul of the rules have done so by mistake and not out of a deliberate attempt to steal money.

The OLR has a number of ways to receive notice that a particular lawyer may not be doing everything he should to protect a client’s money held in trust. Account overdrafts, which must be reported by banks to the OLR, instantly send up a red flag. The OLR also gets notified when grievances are filed by clients and adverse parties.

The usual response when such warning signs arise is to open an investigation. Over the past four fiscal years, the OLR has investigated an average of about 98 reports a year of trust-account overdrafts from banks. The same time period saw four lawyers a year on average be publicly disciplined for trust-account violations.

But an overdraft doesn’t always mean a lawyer is stealing.

“If someone is acting with malice, the numbers can’t always tell you that,” Sellen said.

As for grievances, reports of trust-account violations and failures to return property — another sign of possible trust-account violations — are usually far exceeded by complaints about a lawyer’s lack of diligence or improper advocacy. In the state’s fiscal year 2016, for instance, about 6 percent of the grievances filed involved trust-account violations or failure to return property. That same year, 16 percent of the complaints filed concerned a lack of diligence and 18 percent alleged improper advocacy.

The biggest source of trouble with trust accounts is the large number of lawyers who simply don’t understand the rules governing their proper use, said Nate Cade, a Milwaukee attorney who often represents lawyers in discipline cases.

“You are the defender of that trust account at every stage. That’s something lawyers have to understand,” Cade said. “You’re protecting someone’s money.”

Aviva Kaiser, one of the lawyers who mans the lines at the Wisconsin State Bar’s ethics hotline, said trust accounts are a frequent topic of inquiry. Many of the callers she hears from are people who are just starting out in the profession, she said.

“The rules are very complex, and the ethical questions that arise are not only a matter of the ethics, they’re whether the rules of professional conduct intersect with particular areas,” she said.

Despite the many pitfalls, students don’t learn about the state’s trust account rules in law school.

Kaiser, who taught for 25 years at the University of Wisconsin Law School, said she thinks there would most likely be some benefit to teaching students about the state’s trust account rules.

“There is so much to know, it’d be nice if our students had a way to learn about the big issues they need to avoid,” Kaiser said.

However, Kaiser said, one stumbling block is students’ lack of professional experience. People who have never practiced law often have a hard time understanding matters related to the proper management of an office and other everyday matters.

“I do think ethics can be taught, but they’re not easily taught, they’re not cheaply taught,” Kaiser said. “They’re not taught in two credits.”

Cade said a semester-long class on trust account rules would be overkill. Better, he said, would be for students to learn the basics in an ethics class and then for the OLR and the Bar or the Board of Bar Examiners to add courses on ethics to lawyers’ continuing education requirements.

In December, the Wisconsin Supreme Court approved a petition that Kaiser had submitted, asking for an electronic banking system to be set up for trust accounts. The justices are now working on a final order and plan to have it take effect July 1.

The petition includes changes that could make the trust account rules easier to follow.

First, the new rules would allow electronic transfers of almost every type, including deposits through PayPal accounts. The current rules, in contrast, allow such transfers only for a few types of payments, such as by credit card. Secondly, the proposed changes would greatly condense the record-keeping portion of the trust account rules and make the requirements much more general.

The detailed requirements would move to the OLR’s guidelines. Taking their place in the rules would be two presumptions: 1) That the lawyer overseeing an account has an obligation to keep records concerning it and understands that obligation and that, 2) if that lawyer doesn’t produce those records, there would be a rebuttable presumption that he had failed to hold funds in trust.

Sellen said he predicts that those changes to trust account rules would cause the OLR to spend less time investigating trust account cases arising from mistakes. State officials could instead direct their attention to cases with a greater risk of public harm.

Cade warned, though, that the changes would also make it harder for both the OLR and lawyers to track down what happened to money held in trust. The temptation to misuse the funds would increase.

Cade said he will be advising his clients to stick with paper until enough time has elapsed for everyone to have gained a sense of how the new rules work.

“While 98 to 99 percent of lawyers are good, trustworthy and all that, why would you create temptation?” he said. Follow @erikastrebel