Can a law firm collecting receivables for a corporate client on contingency set up a joint bank account the client can withdraw from directly, with a line of credit for overdraft protection?

Plain-English summary

A law firm retained on a contingent-fee basis to collect a large corporation's accounts receivable described a proposed arrangement: a separate bank account holding only recovered receivables, from which the firm would deduct its contingent fees and the corporate client would deduct the remaining receivables, with a line of credit attached for overdraft protection and bank statements sent to both the client and the firm for reconciliation. The firm asked whether this would violate the Rules of Professional Conduct.

The committee said RPC 1.14 may not allow the proposed course. RPC 1.14 requires client funds to be held in a trust account segregated from the lawyer's funds to safeguard the client's property, and imposes account-administration responsibilities on the lawyer. The committee viewed the proposed arrangement as inconsistent with the rule's purposes and requirements. A lawyer must care for client property as a fiduciary, and allowing the client independent access to the account is inherently incompatible with managing it with a fiduciary's care. The separation requirement also exists so that the lawyer's creditors cannot attach client property through commingling; the committee cited In re Anonymous, 698 N.E.2d 808 (Ind. 1998), describing the "unacceptable risks" of commingling. The account as described appeared to be a joint account of client and firm funds to which each had independent access, exposing client funds to the danger of attachment that RPC 1.14 was meant to prevent.

The committee added that the arrangement was inconsistent with the management duties of RPC 1.14(b). The firm could not render appropriate accounts under RPC 1.14(b)(3) because at any moment it could not be certain of the balance, the withdrawals, or their bases; and the arrangement conflicted with RPC 1.14(b)(4), which requires the lawyer to pay the client funds the client is entitled to, because here the client would pay itself without the firm determining entitlement. The line of credit anticipated overdrafts, which the rule does not envision and which trigger notice to the Disciplinary Board under ELC 15.4. Citing its Informal Published Opinion 86-3, the committee reiterated that the terms of RPC 1.14 are mandatory and may not be waived by the client, and concluded the proposed course may not be permissible.

Currency note

This opinion was issued in 2003, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct, which renumbered the trust-account rule (then RPC 1.14, now RPC 1.15) and revised its provisions. Subsequent rule amendments or later opinions may have changed the analysis, including the citations to specific subsections and to ELC 15.4. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee treated the proposed joint account as inconsistent with RPC 1.14. Per the opinion, the problems were the client's independent access (incompatible with the lawyer's fiduciary control), the loss of the segregation that protects client funds from the lawyer's creditors, the firm's inability to render proper accounts under RPC 1.14(b)(3), the client paying itself without a firm determination of entitlement contrary to RPC 1.14(b)(4), and a line of credit that anticipates overdrafts the rule does not envision. The committee restated that RPC 1.14's terms are mandatory and not waivable by the client.

Common questions

Q: Can a firm and its corporate client share a bank account the client can withdraw from directly?

A: The committee said RPC 1.14 may not allow it. Allowing the client independent access is inherently incompatible with the lawyer's duty to manage client funds with a fiduciary's care.

Q: Why is keeping client funds separate from the firm's funds so important here?

A: The committee said the separation requirement helps ensure that the lawyer's creditors cannot attach client property through commingling, citing In re Anonymous, 698 N.E.2d 808 (Ind. 1998); a joint account with shared independent access would expose client funds to that danger.

Q: What is wrong with the client paying itself out of the account?

A: The committee said it conflicts with RPC 1.14(b)(4), which requires the lawyer to pay the client funds the client is entitled to; under the proposal the client would pay itself without the firm determining entitlement, and the firm also could not render proper accounts under RPC 1.14(b)(3).

Q: Can the client just agree to waive the trust-account requirements?

A: No. Citing Informal Published Opinion 86-3, the committee reiterated that the terms of RPC 1.14 are mandatory and may not be waived by the client.

Background and rules framework

The opinion interprets RPC 1.14 (Washington's pre-2006 trust-account rule, corresponding to Model Rule 1.15 and renumbered RPC 1.15 in 2006), which requires all client funds to be held in a segregated trust account and imposes mandatory safekeeping and accounting duties on the lawyer, including the duties in subsections (b)(3) (rendering accounts) and (b)(4) (paying the client funds the client is entitled to). The committee read the rule's fiduciary and segregation requirements to bar a joint account with independent client access, and referred to ELC 15.4 (the rule requiring notice to the Disciplinary Board on a trust-account overdraft) and to its earlier Informal Published Opinion 86-3.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Washington RPC 1.14 (pre-2006 numbering) (safekeeping property; client trust accounts), including subsections (b)(3) and (b)(4)

Court rules:

• Washington Rules for Enforcement of Lawyer Conduct (ELC) 15.4 (trust-account overdraft notification to the Disciplinary Board)

Cases:

• In re Anonymous, 698 N.E.2d 808 (Ind. 1998), commingling of lawyer and client funds creates unacceptable risks such as attachment by creditors

Other opinions cited:

• WSBA Informal Published Opinion 86-3 (terms of RPC 1.14 are mandatory and may not be waived by the client)

See also

• WSBA Ethics Op. 1193: Bank Trust-Payment Arrangement
• WSBA Ethics Op. 1066: Qualified Trust Accounts, Not Waivable
• WSBA Ethics Op. 1084: Personal Funds in a Trust Account

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1260

Original opinion text

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

Advisory Opinion: 2014
Year Issued: 2003
RPC(s): RPC 1.14, ELC 15.4, Informal Published Opinion 86-3
Subject: bank account with corporate client; insurance settlement proceeds

You advise that a large corporation has retained your law firm on a contingent fee basis to collect accounts receivable owed to the corporation. The corporation has asked your firm to deposit the amounts recovered in an account from which the corporation may directly withdraw funds. Your firm proposes to establish a separate bank account containing only receivables recovered on behalf of the corporation. You advise that your firm would deduct its contingent fees from the account and the corporate client would deduct the remaining receivables. A line of credit would be attached to the account to provide overdraft protection, and bank statements would be provided both to the client and the firm so that appropriate reconciliation of the account would be possible. You ask whether this approach would violate any Rules of Professional Conduct.

The committee opines that RPC 1.14 may not allow the course that you propose. RPC 1.14 requires client funds to be held in a trust account segregated from funds belonging to the lawyer, as a means of safeguarding the client’s property. It also imposes on the lawyer certain responsibilities with respect to administering the account. In the committee’s view, the arrangement you propose is inconsistent with the purposes and requirements of the rule. For example, a lawyer is required to care for client property in the lawyer’s possession as would a fiduciary. Allowing independent access to the account by the client would seem inherently incompatible with managing the account with the care of a fiduciary. Similarly, the requirement that client funds be kept separate from funds belonging to the lawyer seeks to ensure, among other things, that creditors of the lawyer are not able to attach client property as a result of its being commingled with the lawyer’s property. See In re Anonymous, 698 N.E.2d 808 (Ind.1998) (commingling of lawyer and client funds would subject clients to “unacceptable risks”, such as attachment by creditors). Thus, some sort of account making it apparent that the lawyer’s access to the funds is in a fiduciary capacity, not an ownership capacity, would seem inherent in the rule. The description of the account provided in your inquiry does not appear to contemplate any such designation. Rather, it seems simply to describe a joint account containing funds belonging to the client and to the firm, to which each has independent access. Such an account seemingly would expose client funds to the danger of attachment by creditors of the lawyer, a danger that RPC 1.14 was intended to prevent.

Moreover, in the committee’s opinion, the proposed financial arrangement would be inconsistent with the management responsibilities placed on the lawyer by RPC 1.14(b). First, it does not appear that your firm would be in a position to render appropriate accounts to the client under RPC 1.14(b)(3). This is because at any given moment your firm could not be certain of the account balance, withdrawals from the account, or the bases for them. Second, the committee concludes that the arrangement is inconsistent with RPC 1.14(b)(4), which requires the lawyer to pay to the client funds to which the client is entitled. Under the proposed arrangement, the client would pay itself from the account, without any determination by your firm that the client is entitled to the funds.

Finally, the proposal to link the account with a line of credit (presumably the client’s) anticipates overdrafts of the account. In light of the fact that the proposal contemplates independent access to the account by the client and your firm, the danger of overdrafts would be significant. But RPC 1.14 plainly does not envision management of client trust funds in a fashion that entails significant risk of overdrafts. Rather, the responsibility for control over trust account funds that the rule entrusts to the lawyer presumably is designed to avoid them. Indeed, overdraft of a lawyer’s trust account triggers notice to the Disciplinary Board and requires the lawyer to explain the circumstances leading to the deficiency. See ELC 15.4. Again, because your firm may not know of client withdrawals or the bases for them, compliance with this requirement additionally would be made extremely difficult.

Nothing in RPC 1.14 suggests that its terms are optional or that alternate means are available for holding or administering client funds. The requirements of the rule are couched in mandatory language requiring “all” client funds to be placed in a trust account and providing that the lawyer “shall” have certain responsibilities with respect to those funds. The committee previously has concluded that the terms of RPC 1.14 are mandatory and may not be waived by the client. See Informal Published Opinion 86-3. The committee adheres to that position and, for the reasons expressed above, concludes that the course proposed in your inquiry may not be permissible under RPC 1.14.