When a North Carolina lawyer collects money from a client to pay a third-party expense like a court reporter, must the money go into the trust account?

Plain-English summary

The inquiry addresses how a lawyer must handle money a client provides to pay a third-party expense of the representation, using a court reporter's invoice and, in later questions, foreign patent agents as examples. The opinion concludes that when a client gives the lawyer funds to pay a third party in connection with legal services, those funds are entrusted property under Rule 1.15-1(d) and must be deposited in the trust account under Rule 1.15-2(b). The lawyer may instead direct the client to write a check payable directly to the third party, which the lawyer may forward without depositing it in trust.

The opinion holds the result does not change based on who is obligated to pay or how the lawyer characterizes the obligation. It does not matter whether the lawyer considers payment of the court reporter to be the lawyer's own obligation (Inquiry 2) or whether the lawyer is contractually obligated to pay the reporter regardless of client payment (Inquiry 3): money received from a client to pay a third party is entrusted and must be kept separate in trust. The same answers apply to funds collected to pay foreign patent agents (Inquiries 5, 6, 9, 10).

The opinion identifies one exception and several limits. If the lawyer already advanced the expense from operating or personal funds before receiving the client's money, the client's payment is a reimbursement owed to the lawyer, not entrusted funds, and to avoid commingling it must be deposited in the operating or personal account (Inquiry 4; Rule 1.8 cmt. [10]; Rule 1.15-2(f)). A lawyer who collects money for a specific purpose must either use it for that purpose, return it, or obtain the client's consent to hold it in trust; the lawyer may not collect the expense money and then settle the obligation through offsets or personal payment (Inquiry 7). A lawyer may offset a client expense against a fee due in an unrelated matter only with a full accounting to the client, and offsets may never be used to earn a profit on expenses (Inquiry 8; Rule 1.5(a)). If the client terminates the lawyer before the third party is paid, the lawyer must keep the entrusted funds in trust until returned to the client or paid or transferred on the client's or new lawyer's instructions (Inquiry 11).

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which a lawyer deposits client funds collected to pay a third-party expense into the operating account is prohibited; those funds are entrusted and belong in the trust account under Rule 1.15-2(b). Per the opinion, the trigger is the purpose of the payment, not the contract or the label: if the client gives money to pay a third party for the representation, it is entrusted regardless of who is obligated to pay.

Per the opinion, the one exception is reimbursement: when the lawyer already advanced the expense from his own or operating funds, the client's later payment is owed to the lawyer and must go in the operating or personal account to avoid commingling. The opinion also limits offsets: a lawyer who invoices a client for a specific expense must use the money for that expense, return it, or get consent to hold it, and offsets may never be used to profit on the expenses of representation.

Common questions

Q: If a client gives me money to pay a court reporter, can I run it through my operating account?

A: No. Opinion #1 concludes that funds a client gives the lawyer to pay a third party in connection with legal services are entrusted (Rule 1.15-1(d)) and must be deposited in the trust account; alternatively, the lawyer may have the client write a check payable directly to the court reporter.

Q: Does it matter who is obligated to pay the third party, or what my contract says?

A: No. Opinions #2 and #3 conclude it does not matter whether the lawyer considers the payment his own obligation or is contractually obligated to pay; money received from a client to pay a third party is entrusted and must go in the trust account.

Q: What if I already paid the expense myself before the client reimbursed me?

A: Then it is not entrusted. Opinion #4 concludes that money the client pays to reimburse an expense the lawyer already advanced is owed to the lawyer, not entrusted, and must be deposited in the operating or personal account to avoid commingling (Rule 1.15-2(f)).

Q: Can a lawyer keep the client's expense money and settle the expense later through offsets?

A: No. Opinion #7 concludes a lawyer who collects money for a specific purpose must use it for that purpose, return it, or obtain the client's consent to hold it in trust; the lawyer may not collect for the expense and then settle the obligation by offset or personal payment.

Q: Can a lawyer profit on expenses through offset arrangements?

A: No. Opinion #8 concludes offsets may never be used to earn a profit on the expenses of representation, citing Rule 1.5(a)'s bar on collecting an excessive amount for expenses; an offset against an unrelated fee is permitted only with a full accounting to the client.

Background and rules framework

The opinion applies North Carolina Rule 1.15 trust accounting (the analogue of Model Rule 1.15), in particular the definition of entrusted funds in Rule 1.15-1(d) and the deposit and anti-commingling requirements of Rule 1.15-2. It reads Rule 1.8 (cmt. [10], advancing the expenses of representation, the analogue of Model Rule 1.8) to explain why reimbursement of an advanced expense belongs to the lawyer rather than the client, and Rule 1.5(a) to bar collecting or profiting on an excessive amount for expenses.

The dispositive principle is that funds a client provides to pay a third party for the representation are entrusted from the moment the lawyer receives them, and remain so until used for that purpose, returned, or held in trust with the client's consent.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rule 1.15 (trust accounting; entrusted funds, Rule 1.15-1(d); deposit and anti-commingling, Rule 1.15-2)
• MR 1.8 / NC Rule 1.8 (advancing expenses of representation, cmt. [10])
• MR 1.5 / NC Rule 1.5(a) (no charging or collecting an excessive amount for expenses)

See also

• NC State Bar 2013 FEO 13: Disbursing ACH/EFT Trust Funds
• NC State Bar 2009 FEO 4: Credit Card Trust Account
• NC State Bar 2017 FEO 4: Settlement Funds Subject to a Lien

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2013-formal-ethics-opinion-3/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry #1:

Attorney hires a court reporter to take a deposition in Client’s case. The court reporter transcribes the deposition and delivers the transcript and an invoice to Attorney. Attorney bills Client for the court reporter’s services in the amount shown on the invoice. Client gives Attorney the funds to pay the court reporter’s invoice. Attorney has not previously paid the court reporter.

May Attorney deposit the funds from Client into Attorney’s operating account and write a check on the operating account to pay the court reporter?

Opinion #1:

No. The funds collected from Client were collected for the purpose of paying a third party in connection with the performance of legal services and are, therefore, “entrusted funds.” Entrusted funds are funds belonging to someone other than the lawyer which are in the lawyer’s possession or control in connection with the performance of legal services or professional fiduciary services. Rule 1.15-1(d). Entrusted funds must be maintained separately from the property of Attorney and deposited in Attorney’s trust account in accordance with Rule 1.15-2(b).

Attorney may direct Client to write a check for the court reporter’s fee payable directly to the court reporter. Attorney would then forward the check to the court reporter without depositing the check in Attorney’s trust account. Rule 1.15 does not prohibit a lawyer who receives a check belonging wholly to a third party from delivering the check to the appropriate recipient without first depositing the check in the lawyer’s trust account. Rule 1.15, cmt. [5].

Inquiry #2:

Would the answer to Inquiry #1 change if Attorney considers payment of a court reporter to be the lawyer’s obligation?

Opinion #2:

No. It does not matter who has the obligation to pay the court reporter. If a lawyer receives funds from a client for the purpose of paying a third party, the funds are entrusted funds and must be maintained separately from the property of the lawyer in a trust account.

Inquiry #3:

Would the answer to Inquiry #1 change if Attorney is contractually obligated to pay the court reporter’s fee regardless of whether Client pays Attorney for this expense?

Opinion #3:

No. Attorney’s contractual obligations do not change the fact that Attorney is receiving entrusted funds from a client for the specific purpose of paying a third party.

Inquiry #4:

Would the answer to Inquiry #1 change if Attorney has already paid the court reporter from either his operating account or personal funds prior to receipt of Client’s funds?

Opinion #4:

Yes. Attorney has advanced the funds to pay the expenses of representation and Attorney is entitled to reimbursement from the client. Rule 1.8, cmt. [10]. The money paid by Client is not entrusted to Attorney but is owed to him. To avoid commingling client funds with the lawyer’s funds as required by Rule 1.15-2(f), Attorney must deposit Client’s payment into his operating or personal account.

Inquiry #5:

In the field of patent law, the services of patent lawyers or agents in foreign countries (“foreign agents”) are sometimes required in the course of applying for international patents for US clients. On behalf of Client, Patent Attorney arranges for foreign agent services. The foreign agent performs the required services and sends an invoice to Patent Attorney. Patent Attorney bills Client for the foreign agent’s services in the amount shown on the invoice. Client sends Patent Attorney the funds to pay the foreign agent’s invoice. Patent Attorney has not previously paid the foreign agent.

Do the answers to Inquiries #1-4 change if the funds at issue are funds received from the client to pay for the services of a foreign agent?

Opinion #5:

No.

Inquiry #6

Patent Attorney and a foreign agent routinely provide services to clients of the other lawyer upon request. The foreign agent and Patent Attorney invoice each other per client matter. The foreign agent and Patent Attorney also have a practice of arranging offsets, such that the total amount due to the foreign agent is reduced by the amount due to Patent Attorney.

When Patent Attorney receives an invoice from the foreign agent for services performed by the foreign agent for one of Patent Attorney’s clients, Patent Attorney invoices the client for the amount due for the foreign agent’s fee and collects the funds from the client.

Do these additional facts change the answer to Inquiry #5?

Opinion #6:

No.

Inquiry #7:

Under the facts in Inquiry #6, Patent Attorney collects the funds from the client for the foreign agent’s fee but does not use that money to pay the foreign agent’s fee. Instead Attorney settles the obligation to the foreign agent through offsets or, if no offset agreement can be reached, by payment from Patent Attorney.
Is this permissible?

Opinion #7:

No. If a lawyer collects money from a client for a specific purpose, the lawyer must either (1) use the money received from the client to make the payment for which the money was collected, (2) return the funds to the client, or (3) obtain the client’s consent to hold the funds in trust until earned by provision of legal services or used to pay other expenses. Rule 1.15-2.

Inquiry #8:

Under the facts in Inquiry #6, is it permissible for Patent Attorney to offset a client expense with a fee due to Patent Attorney in an unrelated matter?

Opinion #8:

Yes, provided Attorney provides Client with a full accounting and explanation of the cost of the foreign agent’s services, the offsets applied to the foreign agent’s invoice, and the amount still owed to the foreign agent or owed to Attorney by Client. If a lawyer invoices a client for a specific amount to pay a designated expense, the lawyer must use the money received from the client to pay that expense, return the funds to the client, or obtain the client’s consent to deposit the funds in the trust account. See Opinion #7. If an expense was already paid by the lawyer through offsets or the advancing of the lawyer’s funds, the lawyer may use the money received from the client to reimburse the lawyer. See Opinion #4. However, offset agreements may never be used by a lawyer to earn a profit on the expenses of representation. See Rule 1.5(a)(prohibiting the charging or collecting of an excess amount for expenses).

Inquiry #9

Would the answers to Inquiries #6-8 change if Patent Attorney considers the obligation to pay a foreign agent to be the lawyer’s obligation?

Opinion #9:

No.

Inquiry #10:

Would the answers to Inquiries #6-8 change if Patent Attorney is contractually obligated to pay for the services of the foreign agent regardless of whether Client pays Patent Attorney for those services?

Opinion #10:

No.

Inquiry #11:

Client pays Patent Attorney for the foreign agent’s fee after the foreign agent has performed services and invoiced Patent Attorney. Client terminates Patent Attorney’s representation and retains Patent Attorney #2. At the time of termination, Patent Attorney has not paid the foreign agent or used offsets to satisfy the obligation to the foreign agent. The foreign agent invoices Patent Attorney #2 for the services provided in Client’s matter. Do these additional facts or the potential for this to occur change the answers to Inquiries #5-10?

Opinion #11:

No. Patent Attorney must maintain Client’s entrusted funds in Patent Attorney’s trust account until returned to Client or until receipt of instructions for disposition from Client or Client’s new lawyer. If Client or Patent Attorney #2 instructs Patent Attorney to pay the foreign agent, Patent Attorney must do so promptly. See Rule 1.5-2(m). Similarly, if instructed to do so, Patent Attorney must transfer Client’s funds to Patent Attorney #2 for deposit in Patent Attorney #2’s trust account where they will be available to pay the foreign agent.