We all know that we need a trust account to practice law. But did you know that not all trust accounts are created equal? And that you need at least two of them? Did you also know that even the smallest accounting error can land you in hot water with the State Bar? This article examines these and other important issues related to trust accounts.
A lawyer must deposit money belonging to a client in a trust account. See Nevada RPC 1.15(a). Although simple in the abstract, the rule is a bit more nuanced in its application. Specifically, if the money is either nominal in amount or if you intend to hold it for only a short period of time, then you must deposit the money in an “Interest On Lawyer Trust Account” a/k/a IOLTA account; otherwise, the money must be deposited in a regular, non-IOLTA account.[i] Why? Because the Nevada Supreme Court says so. See SCR 78.5(1)(a), (9); SCR 217. That, and because interest earned in your IOLTA account is pooled with interest earned in other lawyers’ IOLTA accounts and then earmarked to benefit the poor, victims of domestic violence, and children in need of assistance in juvenile court. See SCR 216(1)(a). This is unlike interest earned in a non-IOLTA account, which belongs to the client. See SCR 219. You do not need client approval to deposit money in an IOLTA account, nor does it constitute a “regulatory taking” for the Nevada Supreme Court to require you to deposit your client’s money in an IOLTA account. See Brown v. Legal Found. of Wash., 538 U.S. 216, 240-41 (2003).
Now, be mindful of two steps when opening not one, but two trust accounts: an IOLTA account and a non-IOLTA account.[ii] First, not all financial institutions are approved by the State Bar to manage either or both types of accounts. And that matters because the State Bar has to know where you keep money belonging to your clients.[iii] In other words, you will not be able to keep secret from the State Bar where you hold money in trust for clients—those annual renewal forms that you prepare and submit to the State Bar require you to disclose where you maintain your trust accounts. See SCR 78.5(5)(a); SCR 217(4)(b).
Second, each trust account needs to be specifically designated as such when it is opened. You cannot get away with having checking and savings accounts and, in your mind, treat the checking account as your operating account and the savings account as your trust account.[iv] Why? Consider the following hypothetical: You get sued for non-payment of rent for your office lease. A judgment is entered against you. While you are trying to satisfy the judgment, your landlord proceeds with execution, including freezing all of your bank accounts. If that happens, and the money in your self-described trust account, which the financial institution understands to be a normal savings account, is drained, you now owe money to numerous others (i.e., your clients, and possibly third parties) and will be defending an action brought against you by the State Bar for violating the Rules of Professional Conduct.[v] Do not let that happen.
Once you have opened the accounts, be meticulous about your recordkeeping. Use a good accounting software to track not only credits and debits for particular client matters,[vi] but all money going in and out of the accounts. At any point in time, you should be able to render a full accounting of the accounts, down to the last penny. If not, there is a problem.
Next, be vigilant when it comes to handling money in your trust accounts. Even a minor overdraft that is promptly remedied, thereby resulting in no harm to a client, can still earn you a letter of reprimand.[vii] The State Bar treats trust account violations as strict liability offenses—the issue at formal hearings concerns the severity of the discipline to be imposed, not the fact of discipline.[viii] Now, do not take this to mean that you should hire a bookkeeper and then delegate authority over your trust accounts to the bookkeeper. As the lawyer, the buck stops with you. See Nevada RPC 5.1(a); Nevada RPC 5.3(a). And there is no “head in the sand” defense when dealing with the State Bar.
Money, once earned, must be promptly withdrawn from your trust account. The money cannot stay in there until it is convenient for you to withdraw it. Additionally, you may not pay business expenses, such as payroll, taxes, and utilities, using funds in your trust account, even if those funds have been earned by you but not yet withdrawn. There is a limited exception to this rule: You may keep in your trust account funds sufficient to cover monthly service charges imposed by your financial institution.[ix] See Nevada RPC 1.15(b). No more; no less.
The same is true about disbursing money to your client and, if applicable, third parties who have a valid interest in the money.[x] In fact, if you know that your client has assigned to a third party an interest in money that you obtained for the client, you must promptly notify the third party once the money is received and, upon request, render a full accounting. See Nevada RPC 1.15(d). If a dispute arises over how to disburse the money that you are unable to informally resolve, you must take steps to try to resolve it, such as by recommending arbitration or initiating an interpleader. See Nevada RPC 1.15(e). Recent unpublished Orders issued by the Nevada Supreme Court demonstrate that the State Bar will pursue lawyers who unreasonably delay disbursing money held in trust to third parties, even if it appears that the clients did not suffer any harm.
Keep copies of all records related to your trust accounts. Do not rely on your financial institution to be able to reproduce copies of deposit slips, checks, and bank statements upon request in the future. Such accounting records, together with ledgers, must be preserved for a period of seven years following the conclusion of a matter. See Nevada RPC 1.15(a).
Trust accounts are an important aspect of the practice of law. By being proactive and conscientious about your duties and responsibilities related to trust accounts, you can avoid the pain and suffering associated with client disputes and disciplinary proceedings.
If you have any questions about this article, please call or email Joshua P. Gilmore at 702-562-8820 or JGilmore@BaileyKennedy.com. Additional resources can be found at www.baileykennedy.com/category/articles/
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[i] How do you know when money qualifies as being “nominal in amount;” and what constitutes a “short period of time”? There are no easy answers to those questions. But, as long as you think about where the money should go when it is initially deposited, you are immune from disciplinary action if it later turns out that the money should have been deposited in an IOLTA account as opposed to a non-IOLTA account (or vice versa). See SCR 221.
[ii] Unless you are dealing with large amounts of money, it ends there because you may hold money belonging to multiple clients in the same trust account.
[iii] As an aside, not only can the State Bar ask you to make your trust account records available for inspection upon request, see SCR 78.5(1)(b), the State Bar can subpoena those records during a disciplinary investigation. See Agwara v. State Bar of Nev., 133 Nev., Adv. Op. 96 (2017). With that in mind, when responding to a grievance received from the State Bar, although you may fight about disclosing certain portions of your file, do not fight about disclosing your accounting records.
[iv] Be sure to decline an ATM card for your trust account, if one is offered.
[v] The charge will not be limited to Nevada RPC 1.15—the State Bar will invariably add a Nevada RPC 1.1 charge, for failing to know that you needed to have a specifically identifiable trust account; a Nevada RPC 1.4 charge, for failing to communicate with your clients regarding how money was being held for their benefit; and a Nevada RPC 8.4(a) charge, for violating Nevada RPC 1.1, 1.4, and 1.15. Needless to say, the more rules that you violate, the greater the discipline that is likely to be imposed.
[vi] Along those same lines, avoid writing checks made payable to “cash.” All else being equal, you want to be able to determine, from the check itself, to whom it was issued and in connection with what matter it was issued.
[vii] The State Bar will hear about the overdraft, even if the check is honored despite insufficient funds in the account. See SCR 78.5(2). And once the State Bar opens an investigation (and it will), you will be producing far more than just the accounting records related to the matter in which the overdraft occurred.
[viii] Leniency is in short supply when it comes to mistakes handling a client’s money.
[ix] Do not shift the monthly charges for maintaining a trust account on to your clients. Such costs constitute general office overhead that is subsumed within your fee.
[x] Of course, you must wait to disburse the money until after it has cleared your trust account.
“Lawyers are expensive”—a phrase commonly uttered whenever someone is told to hire a lawyer to assist with a matter. As lawyers, we have an obligation to try to quash that common misconception by making sure that we bill each of our clients a fee that is “reasonable under the circumstances.” Model Rules of Prof’l Conduct, R. 1.5 cmt. [1]; see also Bird, Marella, Boxer & Wolpert v. Sup. Ct., 130 Cal. Rptr. 2d 782, 791-92 (Cal. Ct. App. 2003) (noting that a lawyer owes a duty “to charge only fair, reasonable and conscionable fees” to his or her client); Lawyer Disciplinary Bd. v. Ball, 633 S.E.2d 241, 250 (W. Va. 2006) (noting that a lawyer owes a duty “not to charge excessive fees” in representing a client). The following is an attempt to elaborate on how to do just that in order to comply with Nevada Rule of Professional Conduct (RPC) 1.5(a).
To begin, a lawyer should exercise “billing judgment” in representing a client and should not bill for work that is “excessive, redundant, or otherwise unnecessary.” Hensley v. Eckerhart, 461 U.S. 424, 434 (1983). This means that a lawyer should not:
See ABA Center for Prof’l Responsibility, Annotated Model Rules of Prof’l Conduct, at 77-82 (8th ed. 2015). A lawyer who engages in such improper billing practices may find himself or herself on the wrong side of the proverbial “v” in an action for breach of contract or breach of fiduciary duty. See, e.g., O’Connor v. Blodnick, Abramowitz & Blodnick, 744 N.Y.S.2d 205, 206 (N.Y. App. 2002); U.S. Ice Cream Corp. v. Bizar, 659 N.Y.S.2d 492, 493-94 (N.Y. App. 1997).
It is equally true that a lawyer does not avoid judicial (or State Bar) scrutiny merely by finding a wealthy client who agrees in writing to pay an unreasonable fee. See, e.g., In re Sinnott, 845 A.2d 373, 379 (Vt. 2004) (“[L]awyers . . . cannot charge unreasonable fees even if they are able to find clients who will pay whatever a lawyer’s contract demands.”); Attorney Grievance Comm’n v. Braskey, 836 A.2d 605, 625-26 (Md. 2003) (finding that a client’s willingness to pay an unreasonable fee is irrelevant and amounts to “fee gouging”); see also Microsoft Corp. v. United Computer Resources of New Jersey, Inc., 216 F. Supp. 2d 383, 386 (D. N.J. 2002) (“[H]aving a wealthy client does not justify a legal feeding frenzy resulting in the escalation of attorneys’ fees and costs.”). Rather, a fee agreement remains subject to review in any subsequent action between the lawyer and the client, see, e.g., McDonald Carano Wilson v. Bourassa Law Grp., 131 Nev., Adv. Op. 90, 362 P.3d 89, 91 (2015) (“[T]he district court must ensure that [a law firm’s fee] agreements are not unreasonable.”), and “will be set aside when its provisions are unreasonable as to the client.” Restatement (Third) Law Governing Lawyers § 34 cmt. b.
Even a flat fee agreement or an agreement indicating that a fee is deemed to be earned upon receipt remains subject to review for reasonableness; and a lawyer who is discharged or withdraws before completing the matter for which the lawyer was retained may be required to refund a portion of his or her fee. See, e.g., State Bar of Nev., Standing Comm. on Ethics & Prof’l Resp., Formal Op. No. 15 (1993); Supreme Court of Ohio, Bd. of Prof’l Conduct, Op. No. 2016-1.
A lawyer must also be cautious when trying to modify a fee agreement mid-stream. Except for “changes in the basis or rate of the fee” agreed to by the client at the outset of the representation, see Nevada RPC 1.5(b), a lawyer does not have free reign to unilaterally modify his or her fee agreement with a client during the course of the representation simply because the modification is communicated to the client. ABA Standing Comm. on Ethics & Prof’l Responsibility, Formal Op. No. 11-458. In fact, a presumption of undue influence attaches to a modified fee agreement. See, e.g., Drake v. Becker, 303 N.E.2d 212, 216 (Ill. App. 1973); Griffin v. Rainer, 186 S.E.2d 10, 12 (Va. 1972); cf. In re Jane Tiffany Living Trust 2001, 124 Nev. 74, 78, 177 P.3d 1060, 1062 (2008).
A lawyer must treat any proposal to modify a fee agreement as doing business with a client, thereby requiring the lawyer to also comply with Nevada RPC 1.8(a), which includes making sure that the client reasonably understands the need for the modification and is given a reasonable opportunity to consult with separate counsel about the modification. See, e.g., Valley/50th Ave., LLC v. Stewart, 153 P.3d 186, 189 (Wash. 2007); In re Hefron, 771 N.E.2d 1157, 1162 (Ind. 2002). A lawyer who fails to strictly comply with Nevada RPC 1.8(a) upon entering into a modified fee agreement with a client risks having the agreement set aside by the client even if the modification is economically fair to the client. See, e.g., McMahon v. Eke-Nweke, 503 F. Supp. 2d 598, 606-07 (E.D.N.Y. 2007); BGJ Assocs., LLC v. Wilson, 7 Cal. Rptr. 3d 140, 146-47 (Cal. Ct. App. 2004). And agreeing to continue representing the client—without more—is insufficient to justify a proposed modification to the fee agreement given that the lawyer is already duty-bound to handle the matter through its completion. In re Kaufman, 93 Nev. 452, 456, 567 P.2d 957, 959-60 (1977) (stating that a lawyer may only withdraw for “good cause” from representing a client); see also Restatement (Third) Law Governing Lawyers § 32 cmt. c (noting the general rule “that a lawyer must persist despite unforeseen difficulties and carry through the representation to its intended conclusion”).
Gone are the days when a lawyer could bill a client at the conclusion of a matter for “services rendered.” Gisbrecht v. Barnhart, 535 U.S. 789, 801 (2002) (“By the early 1970s, the practice of hourly billing had become widespread.”). While a lawyer may still block bill for multiple tasks performed in a day, a lawyer should avoid combining too many tasks and refrain from using vague or undescriptive time entries (“attention to file,” “trial preparation,” etc.). See, e.g., In re Margaret Mary Adams 2006 Tr., No. 61710, 2015 WL 1423378, at *2 (Nev. Mar. 26, 2015). Similarly, a lawyer who anticipates billing long hours each day over an extended period of time should discuss the matter with the client in order to avoid the potential appearance of padding the bill. See, e.g., Lawyer Disciplinary Bd. v. Cooke, 799 S.E.2d 117, 121-25 (W. Va. 2017) (disciplining a lawyer for, among other wrongful acts, “extraordinary overbilling”); Toledo Bar Assn. v. Stahlbush, 933 N.E.2d 1091, 1093-95 (Ohio 2010) (disciplining a lawyer who falsely claimed to have worked “an average of almost ten hours a day, 365 days a year”).
Nevada RPC 1.5(a) contains a non-exhaustive list of factors “to be considered in determining the reasonableness of a fee.” The Nevada State Bar’s Ethics and Professional Responsibility Committee has identified additional factors to be considered, including a client’s level of sophistication; whether the client or the lawyer proposed the fee arrangement; and, in the context of a contingency fee, the amount of risk borne by the lawyer. See State Bar of Nev., Standing Comm. on Ethics & Prof’l Responsibility, Formal Op. No. 4 (1987). A lawyer should be mindful of these factors when proposing a fee for representing a client in a matter. No two matters are alike, and therefore, what may be reasonable to charge for representing a client in one matter may be unreasonable in another matter. For what it is worth, though, a lawyer’s profit margin is not among the factors to be considered, and at least one appellate court has said that it would unfairly penalize lawyers by making them reveal their profit margin when establishing the reasonableness of their fees. See Shaffer v. Sup. Ct., 39 Cal. Rptr. 2d 506, 511-13 (Cal. Ct. App. 1995).
Nevada RPC 1.5(a) is not limited to the reasonableness of a lawyer’s fee—the rule also states that a lawyer shall not “make an agreement for, charge, or collect . . . an unreasonable amount for expenses.” For example, absent client consent, a lawyer should not bill a client for staying in a five-star hotel or dining at a 3-star Michelin-rated restaurant. Cf. Entertainment Software Ass’n. v. Blagojevich, No. 05 C 4265, 2006 WL 3694851, at *10 (N.D. Ill. Aug. 9, 2006) (noting that a court will exclude an “unnecessarily luxurious” expense from a cost and fee award). In addition, a lawyer should not bill a client for “general office overhead,” such as the cost of obtaining malpractice insurance. Annotated Model Rules, at 75-76. Before incurring a large expense on a client’s behalf, a lawyer should discuss the matter with the client and, if possible, propose one or more alternatives.
As a final note, a lawyer who prefers to avoid a public airing of a dispute with a client regarding the reasonableness of his or her fee and expenses should consider including an arbitration provision in his or her fee agreement with the client. See ABA Standing Comm. on Ethics & Prof’l Responsibility, Formal Op. No. 02-425 (indicating that lawyers may ask their clients to agree to privately arbitrate disputes concerning fees and expenses). Nevada lawyers should be mindful of NRS 597.995 when including binding arbitration provisions in their fee agreements.
If you have any questions about this article, please call or email Joshua P. Gilmore at 702-562-8820 or JGilmore@BaileyKennedy.com. Additional resources can be found at www.baileykennedy.com/category/articles/
This article was originally published in COMMUNIQUÉ, the official publication of the Clark County Bar Association.
It’s Tuesday. After lunch, you grab the mail and sort through it. You see an envelope from the State Bar of Nevada. You ask yourself, “Why is the Bar sending me a letter?” You open the envelope and find a letter from an investigator for the Bar. [Gulp…] The opening paragraph indicates that the Bar has received correspondence from your former client and, as such, “A grievance file has been opened.” Great; there goes the rest of your week….
What happens next? This article offers a glimpse into the attorney discipline process as viewed through the eyes of someone who has defended attorneys through the process for more than a decade.
First, if the grievance involves client funds, the Bar will likely subpoena your bank for records involving your client trust account. The Bar may also subpoena records involving your operating account. The Bar will do so under the authority of SCR 110(1). No big deal; right? Perhaps, but keep in mind that the Bar will not tell you that it is issuing a subpoena for those records. You will learn of the subpoena only after the fact, particularly if the Bar finds accounting discrepancies in those records and starts asking questions.
Second, after the Bar completes its investigation, which will include reviewing your written response and supporting documents—being forthright, responsive, and cooperative in this context is well taken, see SCR 102.5(2)(e)—it will make recommendations for handling the grievance to a screening panel. The screening panel has several options available to it, one of which includes issuing a letter of reprimand. SCR 105(1)(a). If that happens, you will get another letter in the mail, this time notifying you of the outcome and of your right to accept or reject the reprimand pursuant to SCR 105(1)(b). Instinctively, you may want to object, if for no other reason than to avoid seeing your name appear in next month’s Bar Counsel Report for the Nevada Lawyer. That’s fine, but the decision to do so is not without risk; indeed, the Bar will likely advocate for greater discipline at the formal hearing.
Third, if the Bar files a Complaint against you, there is limited discovery that will occur before the formal hearing. You may feel confident about defending your position, intending to describe how you skillfully handled your client’s case with appropriate vigor while thoroughly responding to each and every question in a timely manner. Although your testimony may be enough, you may also choose to retain an expert witness to buttress your defense. See In re Assad, 124 Nev. 391, 185 P.3d 1044 (2008).
Fourth, prior to the formal hearing, you must disclose what evidence you intend to use and which witnesses you intend to call. The Bar will do the same. Do not let the deadline to object to the Bar’s final disclosures lapse without taking any action. Unless you timely object to the Bar’s evidence based on foundation and authenticity, those objections will be deemed waived; meaning, the Bar will be able to admit into evidence any document contained within its files without the need for a live witness—irrespective of how the Bar came into possession of the document. DRP 28-29.
Finally, the formal hearing consists of two basic parts: (i) Determining whether you violated the RPCs; and (ii) Determining what form of discipline, if any, you should receive for the violations. Although the default is to handle those two parts simultaneously, you may want to bifurcate the hearing. In re Discipline of Seegmiller, No. 45537 (Nev. Dec. 8, 2005); see also ABA Standards for Imposing Lawyer Sanctions § 9.1. Doing so avoids putting you in the precarious position of having to simultaneously defend yourself on the merits and ask for forgiveness. Bifurcation has the added bonus of eliminating the risk of any prior discipline that you may have serving as impermissible character evidence. NRS 48.045(2).
A disciplinary proceeding is neither civil nor criminal in nature; it is sui generis. Because the process is unique in many respects, consider the old adage about a lawyer who represents himself having a fool for a client before responding to that initial inquiry letter from the Bar.
Joshua P. Gilmore is a partner at Bailey Kennedy. Alongside defending attorneys subject to possible disciplinary action, he advises attorneys on ethics and compliance-related issues that arise in the course of their practices, including permissive advertising and marketing, conflicts, lawyer departures, and charging liens.
If you have any questions about this article please call or email Joshua P. Gilmore at 702-562-8820 or JGilmore@BaileyKennedy.com. Additional resources can be found at www.baileykennedy.com/category/articles/
This article was originally published in COMMUNIQUÉ, the official publication of the Clark County Bar Association (June/July 2021).” It is also available at https://clarkcountybar.org/about/member-benefits/communique-2021/communique-june-july-2021/
Recently, in Walker v. Second Judicial District Court ex rel. County of Washoe, Nev. Adv. Op. 80, 476 P.3d 1194 (Dec. 10, 2020), the Nevada Supreme Court provided clarification regarding the requirements which must be met to seek extraordinary writ relief regarding an issue for which the district court has been entrusted to exercise its discretion. Specifically, writ relief is not appropriate to correct every error or abuse of discretion alleged to have been committed by the district court. At a minimum, a party must be able to demonstrate a manifest abuse of discretion by the lower court, as well as an impending, irreparable harm that will occur if the party must await entry of a final judgment before seeking appellate review.
While most issues are appropriate for review on appeal at the end of a case, after entry of a final judgment, there are some issues, like the invocation of a privilege, which may warrant immediate review by the Nevada Supreme Court. In such circumstances, a party can file a petition for extraordinary writ relief to request that the Supreme Court exercise its discretion to review the issue prior to entry of a final judgment in the case.
The most common writ relief sought in civil cases is a writ of mandamus by which the Supreme Court can order any government official or office to perform one or more of its legal duties. In most instances, this means that the Supreme Court can order a district court judge to perform an act which it is legally obligated to do—i.e., issue an order protecting a party’s attorney-client privileged documents from disclosure during discovery, dismiss an action where a claim cannot be stated by the plaintiff as a matter of law, or sanction a party for a failure to comply with a court order.
To obtain issuance of a writ of mandamus or any other extraordinary writ, like a writ of prohibition (which can be used to prohibit a district court judge from taking some action), a party must be able to demonstrate the following:
First, the petitioner must show that the district court manifestly abused its discretion or acted arbitrarily or capriciously. Merely contending that the district court committed an error is not sufficient. An appeal is more than an adequate remedy for most errors that may have been committed in the case. Rather, writ relief is only appropriate when the lower court: (1) acts contrary to the law; (2) misapplies the law; (3) takes an action that is manifestly unreasonable; or (4) exercises partiality, prejudice, bias, or ill will. In sum, a petitioner must show that the district court manifestly abused its discretion by taking an action or making a decision “in the absence of a clearly established factual and legal basis to do so.” Id. at 1197.
Second, the petitioner must show that no other plain, speedy, or adequate legal remedy is available to correct the alleged error. Essentially, a party must be able to demonstrate that some impending, irreparable harm will occur if the Supreme Court does not remedy the district court’s error before entry of final judgment. It is not sufficient merely to claim that extraordinary writ relief would be easier or more expeditious than awaiting the right to appeal. Id. at 1198.
About Sarah Harmon:
Sarah E. Harmon is Of Counsel at Bailey Kennedy and has over 18 years of experience in the areas of appellate advocacy and civil/business litigation, including breach of contract, fraud, legal malpractice, products liability, complex civil litigation, and many other types of business disputes. Her experience with appellate advocacy includes appeals from adverse judgments and orders as well as petitions for extraordinary writ relief. Ms. Harmon can assist clients with obtaining settlements and judgments before going to trial, avoiding errors at trial, and properly preserving issues for an appeal.
If you have any questions about appeals or civil/business litigation, please call or email Sarah Harmon at 702-562-8820 or SHarmon@BaileyKennedy.com. Additional resources can also be found at www.baileykennedy.com/category/articles/ or www.linkedin.com/in/sarahharmonbk.
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