Nothing personal: Avoid the baggage of unclaimed funds

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Published on 4/23/07

A story in the April 2 issue (“Attorney: unclaimed money piling up in IOLTA accounts”) raises an interesting dilemma: some lawyers’ inability to track the owners of IOLTA money.

This can easily happen with very active personal-injury or debt-collection law practices, or in large-firm real estate practices.

How? Here are four examples:

  • Money is received in settlement of a claim and deposited into the clients’ trust account. Checks are then written to lien holders and mailed. Some of the lien holders fail to cash the check, but they (not the lawyer or the client) are still entitled to the funds.

  • A conflict arises over disbursement of trust account funds. The dispute lingers, is never resolved, and is forgotten — but the disputed funds remain in the account.

  • Funds for a real estate deal are held back for a triggering event, such as landscaping, which never happens. But, no one tells the lawyer who is waiting for disbursement instructions.

  • An employee in the law office makes an erroneous or incomplete bookkeeping entry in trust account records, which is not found until long after the employee takes a new job. Now the lawyer, who did not make the entry, has funds where the owner’s identity is no longer clear.

The Massachusetts Bar Association proposed an IOLTA amnesty to cover such instances, but bar counsel rejected the idea. And subsequent changes to the Massachusetts Rules of Professional Conduct clearly require accurate accounting records.

In California, the rules are very explicit. Failure to provide accurate accounting records on a state bar inquiry means very bad news for the lawyer.

Every state imposes a fiduciary duty to properly account for clients’ funds to prevent misappropriation (theft) or negligence. Banks are required to notify the bar of any such defalcations, and a bounced check from an IOLTA account brings bar counsel into the lawyer’s office almost instantly.

But if “bad things” inadvertently happen and the bar doesn’t know about the surplus, many lawyers — I suspect more than we care to know about — do nothing.

Without an amnesty, what is the lawyer to do? If the lien holder doesn’t claim the money, doesn’t cash a check previously drawn and issued, isn’t that property of the client who made the original deal or whose claim was previously resolved? Why should this money go to the state under the abandoned-property statute?

One expensive resolution is to hire an outside accountant to go through every document, check and ledger and reconcile the account.

Another suggestion is to open and operate through a new IOLTA account with scrupulously “clean” records, while allowing the old account to wind down until only the few questionable items remain. At least then, so the theory goes, you will have only a small problem.

This may be a practical solution, but such alternatives miss the point. The lawyer is a fiduciary who must keep accurate accounting records under every state’s rules of professional conduct.

This may require having an outside accountant reconcile trust and bank account records each month.

To do less is to invite stress for the lawyer, inquiry by the bar ... and trouble.

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