Client trust accounts are intended to safeguard clients’ property – whether it takes the form of a million-dollar settlement award that needs to allocated before distribution to the client, or a $5000 advance retainer fee that hasn’t yet been earned. But as a result of a recent North Carolina ethics opinion, 2015 FEO 6, clients can no longer depend upon a trust account to keep their money safe – which is another reason why the legal profession should ditch lawyer trust accounts altogether.
In 2015 FEO 6, the North Carolina regulators considered whether a lawyer has a professional obligation to replace funds held in an attorney trust account that are stolen by a third party. The Opinion concluded that:
If Lawyer has managed the trust account in substantial compliance with the requirements of the Rules of Professional Conduct (see Rules 1.15-2, 1.15-3, and 5.3) but, nevertheless, is victimized by a third party theft, Lawyer is not required to replace the stolen funds. If, however, Lawyer failed to follow the Rules of Professional Conduct on trust accounting and supervision of staff, and the failure is a proximate cause of theft from the trust account, Lawyer may be professionally obligated to replace the stolen funds. Compare RPC 191 (if a lawyer disburses against provisionally credited funds, the lawyer is responsible for reimbursing the trust account for any losses caused by disbursing before the funds are irrevocably credited).
Plain and simple, the North Carolina opinion puts clients’ money at risk. It’s now well-known that lawyer trust accounts are a common target of sophisticated hackers with rapidly increased ability to penetrate even the most secure systems. Yet even though clients are asked to place their money in trust accounts – far riskier locations than clients’ own bank account — if the money is stolen, clients can’t get it back.
So how can regulators ensure full protection of client funds?
Though arguably, regulators could make lawyers strictly liable for all third party theft, the solution is simpler than that: don’t put clients’ money at risk to begin with.
In other words, instead of forcing lawyers to put client advance payments in trust accounts that bear a big red “HACK ME” sign, let’s get rid of trust accounts once and for all. Instead, as I’ve described before, clients would pay by credit card, money would go directly into the law firm’s operating fund – and if clients later had a complaint about the lawyer’s performance, they could simply initiate a chargeback through their credit card company. Meanwhile, if the lawyer’s operating account was hacked, it would be the lawyer’s money that was stolen, not the client’s.
And beyond credit cards, there are even more exciting prospects around the corner in the form of block chain technology – which is essentially a distributed database (i.e., spread across multiple machines) of transactions secured against tampering. While block chain technology grew out of bit coin (which admittedly,raises some ethics questions for lawyers), the two are not the same – and at least one lawyer, Pamela Morgan has described how block chain technology might be used to replace lawyer trust accounts.
Whereas once, a trust account secured by complex accounting and onerous paper ledgers may have protected client funds, today, trust accounts do exactly the opposite: they expose client money to a known risk of hacking. The North Carolina opinion acknowledges the dangers of putting money in trust accounts – yet exacerbates the problem by making clients’ bear the loss resulting from known risks that clients are forced to accept by their own lawyers. The bottom line: if we lawyers are really serious about protecting client property in a digital age, we must ask our regulators to eliminate the trust account requirement once and for all.