Board of Professional Responsibility of the Supreme Court of Tennessee

tn-attorneys-trust-account-handbook-2023.pdf (2023)

Note: This document was published in 2023. Information in older documents may not reflect current board procedures or policies.

Need help? Please use the Assistance Request Form below.

Original PDF Document

Download Official Record (tn-attorneys-trust-account-handbook-2023.pdf)

Go to Top

Alternative Accessible HTML

Accessible Alternative: This HTML version is an automatically processed accessible alternative. While it provides a searchable format, the text extraction may contain formatting or character errors. The original PDF remains the authoritative official record.

Need a different format? Use the Request Assistance Form.

TENNESSEE ATTORNEY’S
TRUST ACCOUNT
HANDBOOK

ISSUED BY:
Board of Professional Responsibility
of the Supreme Court of Tennessee
10 Cadillac Drive, Suite 220
Brentwood, Tennessee 37027
(615) 361-7500
(615) 367-2480 fax
www.tbpr.org

DISCLAIMER
This handbook contains legal information, not legal advice. While the Board of Professional
Responsibility will make every effort to update the manual as necessary, it is the responsibility of
each attorney to ensure that they are following the most current version of the Rules of Professional
Conduct. 1 Nothing contained in this handbook is intended to address any specific inquiry, nor is
it a substitute for independent legal research to original sources or for obtaining the advice of legal
counsel with respect to legal problems.

ACKNOWLEDGEMENTS
Selected portions of this handbook were adopted, adapted, and/or reprinted from the materials
originally authored by the following jurisdictions with their permission:
The State Bar of Arizona, Client Trust Accounting for Arizona Attorneys, 2014. The workbook
may not be reproduced or copied in any manner without the express, written permission of the
State Bar of Arizona. (For the current online version of the Arizona Handbook, please go to:
https://azbar.org/media/cldktlty/trust-account-manual-rev-8-2017.pdf) at Tennessee Attorney’s
Trust Account Handbook Introduction and Sections 1, 5, 8, 9, 10 and 12.
The State Bar of California Handbook on Client Trust Accounting for California Attorneys ©
2021 The State Bar of California. All rights reserved. Reprinted with permission. No part of this
work may be reproduced, stored in a retrieval system, or transmitted in any medium without
prior written permission of The State Bar of California. (For the current online version of the
California Handbook, please go to: https://www.calbar.ca.gov/Attorneys/Conduct-Discipline/ClientTrust-Accounting-IOLTA/Client-Trust-Accounting-Handbook) at Tennessee Attorney Trust Account
Handbook, Sections 3 and 7.
The State Bar of North Carolina, Lawyer’s Trust Account Handbook, 2017. (Available online at:
https://www.ncbar.gov/media/283992/trust-account-handbook.pdf) Tennessee Attorney Trust
Account Handbook, Sections 3, 4, 6, 7 and 11.
Compiled and written by:
Sandy Garrett
Chief Disciplinary Counsel
Board of Professional Responsibility
of the Supreme Court of Tennessee
1

Approved by the Board on September 19, 2014; revised by the Board on October 12, 2021.

TABLE OF CONTENTS

Section 1: Trust Account Rules…………………………………………………………

1

A. Tenn. Sup. Ct. R. 8, RPC 1.5 – Fees………………………………………………
B. Tenn. Sup. Ct. R. 8, RPC 1.15 – Safekeeping Property and Funds……………….
C. Tenn. Sup. Ct. R. 9, § 35 – Detection and Prevention of Trust Account
Violations………………………………………………………………………….
D. Tenn. Sup. Ct. R. 43 – Interest on Lawyers’ Trust Accounts (IOLTA)…………..

1
2

Section 2: The Importance of Client Trust Accounting………………………………

15

Section 3: Key Concepts in Client Trust Accounting………………………………….

19

1.
2.
3.
4.
5.
6.
7.

4
7

Separate Clients are Separate Accounts…………………………………………..
You Can’t Spend What You Don’t Have…………………………………………
There’s No Such Thing as a “Negative Balance”…………………………………
Timing is Everything……………………………………………………………...
You Can’t Play the Game Unless You Know the Score………………………….
The Final Score is Always Zero…………………………………………………..
Always Maintain an Audit Trail………………………………………………….

19
19
20
20
21
22
22

Section 4: Trust Account Basics………………………………………………………...

24

A. Trust Accounts: What are they and how many do you need……………………..
B. Opening a Trust Account………………………………………………………….
C. Trust Account Management………………………………………………………
D. Abandoned or Unclaimed Funds/Property……………………………………….
E. Closing a Trust Account………………………………………………………….

24
25
27
27
28

Section 5: Fees……………………………………………………………………………

29

A. Advanced Fee/Retainer…………………………………………………………....
B. Flat Fee………………...………………………………………………………….
C. Nonrefundable Fee.………………………………………………………..............
D. Contingent Fees .……………………………………………………….................
E. Advanced Costs…………………………………………………………………..
F. Refunds……………………………………………………………………………

29
29
29
30
30
30

i

Section 6: Funds Go In…………………………………………………………………..

32

A. What Goes into a Trust Account………………………………………………….
B. What Does Not Go into a Trust Account…………………………………………
C. Depositing Funds into a Trust Account…………………………………………...

32
32
33

Section 7: Funds Go Out………………………………………………………………...

34

A. What Disbursements are Inappropriate…………………………………………...
B. Overdrafts and Checks Presented against Insufficient Funds…………………….

34
35

Section 8: Recordkeeping……………………………………………………………….

37

A. How long must you keep records…………………………………………………
B. What if you have a computerized system…………………………………………
C. Which bank-created records do you have to keep………………………………...
D. How should you file bank-created records………………………………………..
E. What records do you have to create……………………………………………….
F. Automated Alternatives to Managing Your Trust Account………………………
G. What records do you have to keep of other properties……………………………
H. Other Resources…………………………………………………………………...
I. Reminders…………………………………………………………………………

38
38
39
39
40
43
47
47
47

Section 9: Reconciliation………………………………………………………………...

48

A. Monthly Reconciliation…………………………………………………………...
B. Quarterly Reconciliation………………………………………………………….
C. Example of Three-way Reconciliation……………………………………………

48
49
50

Section 10: Internal Controls…………………………………………………………… 57
A. The Need for Control……………………………………………………………...
B. Diversification of Financial Functions……………………………………………
C. Exercising Control of Records……………………………………………………
D. Exercising Control over Employees………………………………………………
E. Process…………………………………………………………………………….
F. Billing Clients Regularly………………………………………………………….
G. Separate Trust Accounts for Lawyers in the Same Firm………………………….
H. Insurance – the Ultimate Control………………………………………………….

ii

57
57
58
59
59
60
60
60

Section 11: Interest on Lawyers Trust Accounts – IOLTA…………………………...

61

A. What is IOLTA……………………………………………………………………
B. How it Works……………………………………………………………………..
Frequently Asked Questions……………………………………………………...

61
61
61

Section 12: Other Relevant Trust Account Topics…………………………………….

64

A. Abandoned Property/Funds……………………………………………………….
B. Unidentified Trust Funds …………………………………………………………
C. Trust Account Overdraft Notification…………………………………………….
D. Closing a Client Trust Bank Account…………………………………………….
E. Death or Disability and the Client Trust Bank Account………………………….
F. Fraud………………………………………………………………………………
G. Credit Cards and IRS Section 6050W…………………………………………….

64
64
65
66
67
68
71

Appendix A – Summary Descriptions of Formal Ethics Opinions…………………...

72

1. Formal Ethics Opinion 85-F-96………………………………………………………..
2. Formal Ethics Opinion 85-F-96(a)……………………………………………………..
3. Formal Ethics Opinion 86-F-106………………………………………………………
4. Formal Ethics Opinion 87-F-109………………………………………………………
5. Formal Ethics Opinion 89-F-121………………………………………………………
6. Formal Ethics Opinion 92-F-128………………………………………………………
7. Formal Ethics Opinion 92-F-128(a)……………………………………………………
8. Formal Ethics Opinion 92-F-128(b)……………………………………………………
9. Formal Ethics Opinion 2010-F-154……………………………………………………

74
76
78
81
82
90
93
98
100

iii

INTRODUCTION
Trust account.
These two words can send chills up and down the spines of new and experienced lawyers alike.
Fear of making a mistake. Fear that you haven’t trained your staff well enough. Fear that you don’t
understand the rules. And besides that, you didn’t go to law school to become an accountant, did
you?
We put together this handbook to help dispel those fears. We’ve heard your questions and concerns
at seminars and on the Board of Professional Responsibility’s ethics hotline. We know the errors
that often result in discipline for trust account violations.
Not only does this handbook explain the how-tos of trust accounts but we also explain the whys
of trust accounts. We also address a variety of trust-account-related issues.
A couple of general tips as you read this handbook and use it as a resource. First, always remember
that it’s not your money. That’s why it’s in a trust account and not your operating account.
Second, your trust account must never have a negative balance. A negative balance means a serious
problem.
Third, you should always know to whom the money in your trust account belongs. You can have
mystery money in your operating account – hey, an extra $100 I didn’t realize I had until I
balanced the account! – but not in your trust account. Finally, you must have a detailed paper trail
for everything concerning your trust account.
We hope this handbook answers all of your questions – including questions you didn’t realize you
had until you read it – and provides a guide for accurate and ethical client trust accounting. And
you don’t even have to be an accountant to get it right.

Section 1 – Trust Account Rules
A. Tenn. Sup. Ct. R. 8, RPC 1.5 – Fees (adopted September 29, 2010; effective January 1, 2011)
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an
unreasonable amount for expenses. The factors to be considered in determining the
reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and
the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment
will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services;
(8) whether the fee is fixed or contingent;
(9) prior advertisements or statements by the lawyer with respect to the fees the lawyer
charges; and
(10) whether the fee agreement is in writing.
(b) The scope of the representation and the basis or rate of the fee and expenses for which
the client will be responsible shall be communicated to the client, preferably in writing,
before or within a reasonable time after commencing the representation, except when the
lawyer will charge a regularly represented client on the same basis or rate. Any changes in
the basis or rate of the fee or expenses shall also be communicated to the client.
(c) A fee may be contingent on the outcome of the matter for which the service is rendered,
except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A
contingent fee agreement shall be in a writing signed by the client and shall state the method
1

by which the fee is to be determined, including the percentage or percentages that shall
accrue to the lawyer in the event of settlement, trial, or appeal; litigation and other expenses
to be deducted from the recovery; and whether such expenses are to be deducted before or
after the contingent fee is calculated. The agreement must clearly notify the client of any
expenses for which the client will be liable whether or not the client is the prevailing party.
Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a
written statement stating the outcome of the matter and, if there is a recovery, showing the
remittance to the client and the method of its determination.
(d) A lawyer shall not enter into an arrangement for, charge, or collect:
(1) any fee in a domestic relations matter, the payment or amount of which is contingent
upon the securing of a divorce or the award of custodial rights, or upon the amount of
alimony or support, or the value of a property division or settlement, unless the matter
relates solely to the collection of arrearages in alimony or child support or the enforcement
of an order dividing the marital estate and the fee arrangement is disclosed to the court; or
(2) a contingent fee for representing a defendant in a criminal case.
(e) A division of a fee between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer, or each lawyer
assumes joint responsibility for the representation;
(2) the client agrees to the arrangement, and the agreement is confirmed in writing; and
(3) the total fee is reasonable.
(f) A fee that is nonrefundable in whole or in part shall be agreed to in a writing, signed by
the client, that explains the intent of the parties as to the nature and amount of the
nonrefundable fee.
B. Tenn. Sup. Ct. R. 8, RPC 1.15 – Safekeeping Property and Funds (adopted September 29,
2010; effective January 1, 2011)
(a) A lawyer shall hold property and funds of clients or third persons that are in a lawyer's
possession in connection with a representation separate from the lawyer's own property
and funds.

2

(b) Funds belonging to clients or third persons shall be deposited in a separate account
maintained in an FDIC member depository institution having a deposit-accepting office
located in the state where the lawyer's office is situated (or elsewhere with the consent of
the client or third person) and which participates in the required overdraft notification
program as required by Supreme Court Rule 9, Section 29.1. A lawyer may deposit the
lawyer's own funds in such an account for the sole purpose of paying financial institution
service charges or fees on that account, but only in an amount reasonably necessary for that
purpose. Other property shall be identified as such and appropriately safeguarded.
Complete records of such funds and other property shall be kept by the lawyer and shall be
preserved for a period of five years after termination of the representation.
(1) Except as provided by subparagraph (b)(2), interest earned on accounts in which the
funds of clients or third persons are deposited, less any deduction for financial institution
service charges or fees (other than overdraft charges) and intangible taxes collected with
respect to the deposited funds, shall belong to the clients or third persons whose funds are
deposited, and the lawyer shall have no right or claim to such interest. Overdraft charges
shall not be deducted from accrued interest and shall be the responsibility of the lawyer.
(2) A lawyer shall deposit all funds of clients and third persons that are nominal in amount
or expected to be held for a short period of time such that the funds cannot earn income for
the benefit of the client or third persons in excess of the costs incurred to secure such
income in one or more pooled accounts known as an "Interest on Lawyers' Trust Account"
("IOLTA"), in accordance with the requirements of Supreme Court Rule 43. A lawyer shall
not deposit funds in any account for the purpose of complying with this sub-section unless
the account participates in the IOLTA program under Rule 43.
(3) The determination of whether funds are required to be deposited in an IOLTA account
pursuant to subparagraph (b)(2) rests in the sound discretion of the lawyer. No charge of
ethical impropriety or other breach of professional conduct shall attend a lawyer's exercise
of good faith judgment in making such a determination.
(c) A lawyer shall deposit into a client trust account legal fees and expenses that have been
paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses
incurred.
(d) Upon receiving funds or other property in which a client or third person has an interest,
a lawyer shall promptly notify the client or third person. Except as stated in this Rule or
otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver
to the client or third person any funds or other property that the client or third person is

3

entitled to receive and, upon request by the client or third person, shall promptly render a
full accounting regarding such funds or other property.
(e) When in the course of representation, a lawyer is in possession of property or funds in
which two or more persons (one of whom may be the lawyer) claim interests, the property
shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly
distribute all portions of the property or funds as to which the interests are not in dispute.
C. Tenn. Sup. Ct. R. 9, § 35 Detection and Prevention of Trust Account Violations (adopted
August 30, 2013; effective January 1, 2014)
35.1. Maintenance of Trust Funds in Approved Financial Institutions; Overdraft Notification.
(a) Clearly Identified Trust Accounts in Approved Financial Institutions Required.
(1) Attorneys who practice law in Tennessee shall deposit all funds held in trust in
this jurisdiction in accounts clearly identified as “trust” or “escrow” accounts,
referred to herein as “trust accounts,” and shall take all steps necessary to inform
the depository institution of the purpose and identity of the accounts. Funds held in
trust include funds held in any fiduciary capacity in connection with a
representation, whether as trustee, agent, guardian, executor or otherwise. Attorney
trust accounts shall be maintained only in financial institutions approved by the
Board, provided however nothing herein shall be construed as limiting any statutory
provisions dealing with the investment of trust and/or estate assets, or the
investment authority granted in any instrument creating a fiduciary relationship.
(2) Every attorney engaged in the practice of law in Tennessee shall maintain and
preserve for a period of at least five years, after final disposition of the underlying
matter, the records of the accounts, including checkbooks, canceled checks, check
stubs, vouchers, ledgers, journals, closing statements, accounting or other
statements of disbursements rendered to clients or other parties with regard to trust
funds or similar equivalent records clearly and expressly reflecting the date,
amount, source and explanation for all receipts, withdrawals, deliveries and
disbursements of the funds or other property of a client. The five year period for
preserving records created herein is only intended for the application of this rule
and does not alter, change or amend any other requirements for record-keeping as
may be required by other laws, statutes or regulations.
(b) Overdraft Notification Agreement and Acknowledgment of Authorization Required.

4

A financial institution shall be approved as a depository for attorney trust accounts if it files
with the Board an acknowledgment of the attorney’s constructive consent of disclosure of
their trust account financial records as a condition of their admission to practice law, and
the financial institution’s agreement, in a form provided by the Board to report to the Board
whenever any properly payable instrument is presented against an attorney trust account
containing insufficient funds, irrespective of whether or not the instrument is honored. The
Board shall establish rules governing approval and termination of approved status for
financial institutions and shall annually publish a list of approved financial institutions. No
trust account shall be maintained in any financial institution that does not acknowledge
constructive authorization by the attorney and agree to so report. Any such
acknowledgment and agreement shall apply to all branches of the financial institution and
shall not be canceled except upon thirty days notice in writing to the Board.
(c) Overdraft Reports. The overdraft notification agreement shall provide that all reports
made by the financial institution shall be in the following format:
(1) In the case of a dishonored instrument, the report shall be identical to the
overdraft notice customarily forwarded to the depositor, and should include a copy
of the dishonored instrument, if such a copy is normally provided to depositors;
(2) In the case of instruments that are presented against insufficient funds but which
instruments are honored, the report shall identify the financial institution, the
attorney or law firm, the account number, the date of presentation for payment, and
the date paid, as well as the amount of overdraft created thereby.
(d) Timing of Reports. Reports under Subpart (c) shall be made simultaneously with, and
within the time provided by law for notice of dishonor, if any. If an instrument presented
against insufficient funds is honored, then the report shall be made within five banking
days of the date of presentation for payment against insufficient funds.
(e) Consent by Attorneys. Every attorney practicing or admitted to practice in this
jurisdiction shall, as a condition thereof, be conclusively deemed, under the financial
records privacy laws, other similar laws, or otherwise, to have designated the Board as their
agent for the purpose of disclosure of financial records by financial institutions relating to
their trust accounts; conclusively deemed to have authorized disclosure of financial records
relating to their trust accounts to the Board; and, conclusively deemed to have consented
to the reporting and production of financial records requirements contemplated or
mandated by Sections 35.1 or 35.2 of this Rule.

5

(f) No Liability Created. Nothing herein shall create or operate as a liability of any kind or
nature against any financial institution for any of its actions or omissions in reporting
overdrafts or insufficient funds to the Board.
(g) Costs. Nothing herein shall preclude a financial institution from charging a particular
attorney or law firm for the reasonable cost of producing the reports and records required
by this rule.
(h) Definitions. For the purpose of this Rule:
(1) “Financial institution” includes a bank, savings and loan association, credit
union, savings bank, and any other business or person that accepts for deposit funds
held in trust by attorneys.
(2) “Properly payable” refers to an instrument which, if presented in the normal
course of business, is in a form requiring payment under the laws of this
jurisdiction.
(3) “Notice of dishonor” refers to the notice that a financial institution is required
to give, under the laws of this jurisdiction, upon presentation of an instrument that
the institution dishonors.
35.2. Verification of Bank Accounts.
(a) Generally. Whenever Disciplinary Counsel has probable cause to believe that bank
accounts of an attorney that contain, should contain or have contained funds belonging to
clients have not been properly maintained or that the funds have not been properly handled,
Disciplinary Counsel shall request the approval of the Chair or Vice-Chair of the Board to
initiate an investigation for the purpose of verifying the accuracy and integrity of all bank
accounts maintained by the attorney. If the Chair or Vice-Chair approves, Disciplinary
Counsel shall proceed to verify the accuracy of the bank accounts.
(b) Confidentiality. Investigations, examinations, and verifications shall be conducted so
as to preserve the private and confidential nature of the attorney’s records insofar as is
consistent with these rules and the attorney-client privilege; however, no assertion of
attorney-client privilege or confidentiality will prevent an inspection or audit of a trust
account as provided in this Rule.

6

D. Tenn. Sup. Ct. R. 43 – Interest on Lawyers’ Trust Accounts (amended February 20, 2013,
effective nunc pro tunc January 1, 2012)
Section 1. The determination of whether or not a financial institution is an eligible
institution which meets the requirements of this Rule shall be made by the Tennessee Bar
Foundation, the organizational administrator of the IOLTA program. The Foundation shall
maintain a list of eligible financial institutions and shall make that list available to
Tennessee lawyers. The selection of an institution from the list of those eligible rests with
the lawyer or law firm.
Section 2. Eligible institutions are those financial institutions which voluntarily offer
IOLTA accounts and comply with the requirements of this Rule, including maintaining
IOLTA accounts which pay the highest interest rate or dividend generally available from
the institution to its non-IOLTA account customers in a local market area when IOLTA
accounts meet or exceed the same minimum balance or other eligibility qualifications, if
any. To determine the highest interest rate or dividend generally available from the
institution to its non-IOLTA accounts, eligible institutions may consider factors, in
addition to the IOLTA account balance, customarily considered when setting interest rates
or dividends for customers, provided that such factors do not discriminate between IOLTA
accounts and accounts of non-IOLTA customers and that these factors do not include that
the account is an IOLTA account. The determination of the highest interest rate or dividend
generally available shall not include consideration of promotional rates that are offered by
the financial institution for a limited time. Nothing in this Rule shall prohibit an eligible
institution from paying an interest rate or dividend higher than required herein.
Section 3. If a financial institution offers one or more of the following product types to its
non-IOLTA customers and an IOLTA account qualifies for one or more of the products
pursuant to Section 2 of this Rule, then, in order to be an eligible financial institution, the
financial institution must pay an interest rate on the IOLTA account equal to the highest
yield available at that financial institution among those product types. The financial
institution may, at its discretion, either use the identified product or products as the IOLTA
account or pay the equivalent yield on the IOLTA account in lieu of using the highest yield
bank product(s) identified:
(a) A business checking account with an automated investment feature, such as an
overnight investment in repurchase agreements or money market funds fully collateralized
by or invested solely in United States government securities which are direct debt
obligations of the government of the United States or of agencies or instruments thereof
guaranteed by the full faith and credit of the government of the United States as to the
payment of principal and interest at maturity; or
7

(b) A checking account paying preferred interest rates, such as market based or indexed
rates; or
(c) A public funds interest-bearing checking account, such as accounts used for
governmental agencies and other non-profit organizations; or
(d) An interest-bearing checking account such as a negotiable order of withdrawal (NOW)
account, or business checking account with interest; or
(e) A business demand deposit checking interest-bearing transaction account (when
permitted by federal law); or
(f) Any other suitable interest-bearing deposit account with or tied to unlimited check
writing ability offered by the institution to its non-IOLTA customers.
Section 4. As an alternative to compliance under Section 3, a financial institution may also
comply with this rule if it agrees to pay a rate voluntarily negotiated with the Foundation
to be in effect for and remain unchanged during a period of up to twelve months as provided
pursuant to a voluntary agreement between the financial institution and the Foundation.
Section 5. A daily financial institution repurchase agreement shall be fully collateralized
by United States Government Securities, and may be established only with an eligible
institution that is "well capitalized" or "adequately capitalized" as those terms are defined
by applicable federal statutes and regulations.
Section 6. An open-end money-market fund shall be invested solely in United States
Government Securities or repurchase agreements fully collateralized by United States
Government Securities and shall hold itself out as a "money market fund" as that term is
defined by federal statutes and regulations under the Investment Company Act of 1940
and, at the time of the investment, shall have total assets of at least two hundred fifty million
dollars ($250,000,000).
Section 7. An eligible financial institution participating in the IOLTA program must also:
(a) Remit interest or dividends net of any allowable service charges or fees, preferably
monthly, but at least quarterly, to the Tennessee Bar Foundation;
(b) Transmit to the Tennessee Bar Foundation, in a format specified by the Tennessee Bar
Foundation, a report which contains:

8

(i) the name of the lawyer or law firm on whose account the remittance is sent;
(ii) the account number;
(iii) the balance on which the interest rate is applied;
(iv) the rate of interest or dividends applied;
(v) the gross interest or dividends earned;
(vi) the type and amount of any allowable service charges or fees deducted; and
(vii) the net amount remitted.
A financial institution which maintains more than thirty IOLTA accounts may, at the
request of the Tennessee Bar Foundation, be required to transmit the report in an electronic
format.
(c) Transmit information to the lawyer or law firm maintaining that account in accordance
with the institution's normal procedures for reporting to depositors.
Section 8. No financial institution service charges or fees may be deducted from the
principal of any IOLTA account.
Section 9. Deductions by the financial institution from interest earned may only be for
allowable reasonable service charges or fees calculated in accordance with the institution's
standard practice for non-IOLTA customers. For purposes of this Rule, "allowable
reasonable service charges or fees" are defined as:
(a) per check or electronic debit charges;
(b) per deposit or electronic credit charges;
(c) a fee in lieu of minimum balance;
(d) FDIC insurance fees or FDIC account guarantee fees;
(e) a sweep fee; and
(f) a reasonable IOLTA account administrative fee.
9

Other financial institution service charges or fees shall not be deducted from IOLTA
account interest and shall be the responsibility of, and may be charged to, the lawyer or
law firm maintaining the IOLTA account. Nothing in this Rule shall be construed to require
that a financial institution charge fees on an IOLTA account, nor does anything in this Rule
prohibit a financial institution from waiving or discounting fees associated with an IOLTA
account.
Section 10. Allowable reasonable service charges or fees in excess of the interest earned
on any one IOLTA account may not be deducted from interest earned on any other IOLTA
account.
Section 11. If the Tennessee Bar Foundation, for any reason, determines a financial
institution does not meet the requirements of this rule, the Tennessee Bar Foundation will
notify the financial institution. The financial institution will be provided not less than thirty
days to take corrective action that results in compliance with this rule.
Section 12. A lawyer, law firm or financial institution that objects to a determination of the
Tennessee Bar Foundation that a financial institution is not an eligible institution under
Section 1 through 10 of this Rule or a lawyer who objects to a determination of the
Tennessee Bar Foundation that the lawyer is not eligible for an exemption under Section
14(e), may appeal such determination to the Board of Professional Responsibility in
accordance with regulations adopted by the Board of Professional Responsibility.
Section 13. Interest transmitted shall, after deductions for the necessary and reasonable
administrative expenses of the Tennessee Bar Foundation for operation of the IOLTA
program, be distributed by that entity, in proportions it deems appropriate, for the following
purposes:
(a) To provide legal assistance to the poor;
(b) To provide student loans, grants, and/or scholarships to deserving law students;
(c) To improve the administration of justice; and
(d) For such other programs for the benefit of the public as are specifically approved by
the Tennessee Supreme Court.
Section 14. Unless exempt under this Section 14, every lawyer admitted to practice in
Tennessee shall certify in the lawyer's annual registration statement required by Tennessee
Supreme Court Rule 9, as a condition of licensure, that all funds in the lawyer's possession
10

that are required pursuant to RPC 1.1 5(b) to be held in an IOLTA account are, in fact, so
held and shall list the name(s) of the financial institution(s) and account number(s) where
such funds are deposited. This certification shall be made on a form provided by the Board
of Professional Responsibility and shall be submitted by the lawyer within the time period
set forth in Rule 9 for the annual registration statement. A lawyer licensed in Tennessee is
exempt, and shall so certify on the lawyer's annual registration statement, if:
(a) the lawyer is not engaged in the private practice of law in the State of Tennessee;
(b) the lawyer serves as a Judge, Attorney General, Public Defender, U.S. Attorney, District
Attorney, in-house counsel, teacher of law, on active duty in the armed forces or employed
by state, local or federal government and not otherwise engaged in the private practice of
law;
(c) the lawyer does not have an office in Tennessee; however, for purposes of this Rule, a
lawyer who practices, as a principal, employee, of counsel, or in any other capacity, with
a firm that has an office in Tennessee shall be deemed for purposes of this Rule to have an
office in Tennessee if the lawyer utilizes one or more offices of the firm located in
Tennessee more than the lawyer utilizes one or more offices of the firm located in any other
single state;
(d) under regulations adopted by the Board of Professional Responsibility under criteria
established upon recommendation of the Tennessee Bar Foundation, the lawyer or law firm
is exempted from maintaining an IOLTA account because such an IOLTA account has not
and cannot reasonably be expected to produce interest or dividends in excess of allowable
reasonable fees; or
(e) the lawyer is exempted by the Tennessee Bar Foundation from the application of this
Rule following a written request for exemption by the lawyer and determination by the
Tennessee Bar Foundation that no eligible financial institution (as defined and determined
in accordance with this Rule 43) is located within reasonable proximity of that lawyer.
Section 15. As a part of the annual birth month registration process, as provided in Supreme
Court Rule 9, the Board of Professional Responsibility shall receive and review a lawyer’s
certification required by Section 14. In the event a lawyer fails to submit the required
certification or should the certification be facially defective, such noncompliance with this
Rule will result in the following action:
(a) On or before the 15th day following the date on which the certification required by
Section 14 is due, the Board of Professional Responsibility shall serve such lawyer a Notice
11

of Noncompliance requiring the lawyer to remedy any deficiencies identified in the Notice
within 30 days following the mailing of the Notice. Each lawyer to whom a Notice of
Noncompliance is issued shall pay to the Board of Professional Responsibility a
Noncompliance Fee of One Hundred Dollars ($100.00). Such Noncompliance Fee shall
be paid on or before the 30th day following the mailing of the Notice, unless the lawyer
shows to the satisfaction of the Chief Disciplinary Counsel that the Notice of
Noncompliance was erroneously issued, in which case no such fee shall be due.
(b) On or before the 30th day following the mailing of the Notice, each lawyer on whom a
Notice of Noncompliance is served also shall submit to the Board of Professional
Responsibility the lawyer’s completed certification. In the event a lawyer fails to timely
submit the lawyer certification required by this Rule and payment of the $100.00
Noncompliance Fee by the 30th day following the mailing of the Notice, the lawyer shall
pay to the Board of Professional Responsibility, in addition to the Noncompliance Fee, a
Delinquent Compliance Fee of Two Hundred Dollars ($200.00).
(c) On or before the 45th day following the mailing of each month’s Notices of
Noncompliance, the Board of Professional Responsibility shall:
(i) prepare a proposed Suspension Order listing all lawyers who were issued Notices of
Noncompliance for that month’s birth month registration cycle and who failed to remedy
timely their deficiencies;
(ii) submit the proposed Suspension Order to the Supreme Court; and
(iii) serve a copy of the proposed Suspension Order on each lawyer named in the Order.
The Supreme Court will review the proposed Suspension Order and enter such order as the
Court may deem appropriate suspending the law license of each lawyer deemed by the
Court to be not in compliance with the requirements of this Rule.
(d) Each lawyer named in the Suspension Order entered by the Court shall submit to the
Board of Professional Responsibility the lawyer certification required by the Rule and shall
pay to the Board of Professional Responsibility, in addition to the Noncompliance Fee and
the Delinquent Compliance Fee, a Five Hundred Dollar ($500.00) Suspension Fee as a
condition of reinstatement from suspension under subsection (c). Submission of the lawyer
certification and payment of all fees imposed by this section shall be a requirement for
compliance with this Rule and for reinstatement. Upon satisfaction of this condition of
reinstatement, and if the lawyer is otherwise eligible for reinstatement, Chief Disciplinary
Counsel will recommend to the Supreme Court that the Court reinstate the lawyer's law
12

license. No lawyer suspended under this Rule 43 may resume practice until reinstated by
Order of the Supreme Court.
(e) Upon receipt of the lawyer’s certification required by this Rule and payment of all fees
imposed, the Board of Professional Responsibility shall forward the lawyer’s completed
certification to the Tennessee Bar Foundation.
(f) All notices required or permitted to be served on a lawyer under the provisions of this
Rule shall be served by United States Postal Service Certified Mail, return receipt
requested, at the preferred address shown in the most recent registration statement filed by
the lawyer pursuant to Supreme Court Rule 9 and shall be deemed to have been served as
of the postmark date shown on the Certified Mail Receipt.
Section 16. Upon its receipt of a lawyer's certification under Section 14 of this Rule, the
Tennessee Bar Foundation shall report monthly to the Board of Professional Responsibility
any evidence of the lawyer's noncompliance known by the Tennessee Bar Foundation.
Noncompliance with this Rule will result in the following action:
(a) On or before the 15th day following the date the Tennessee Bar Foundation provides
its report to the Board of Professional Responsibility, the Board of Professional
Responsibility shall serve each such lawyer a Notice of Noncompliance requiring the
lawyer to remedy any deficiencies identified in the Notice within 30 days. Each lawyer to
whom a Notice of Noncompliance is issued shall pay to the Board of Professional
Responsibility a Noncompliance Fee of One Hundred Dollars ($100.00). Such
Noncompliance Fee shall be paid on or before the 30th day following the mailing of the
Notice, unless the lawyer shows to the satisfaction of the Chief Disciplinary Counsel that
the Notice of Noncompliance was erroneously issued, in which case no such fee shall be
due.
(b) On or before the 30th day following the mailing of the Notice, each lawyer on whom a
Notice of Noncompliance is served also shall file with the Board of Professional
Responsibility an affidavit, in the form specified by the Board of Professional
Responsibility, attesting that any identified deficiencies have been remedied. In the event
a lawyer fails to timely remedy any such deficiency or fails to timely file such affidavit,
the lawyer shall pay to the Board of Professional Responsibility, in addition to the
Noncompliance Fee, a Delinquent Compliance Fee of Two Hundred Dollars ($200.00).
(c) On or before the 45th day following the mailing of each month’s Notices of
Noncompliance, the Board of Professional Responsibility shall:

13

(i) prepare a proposed Suspension Order listing all lawyers who were issued Notices of
Noncompliance for that month’s birth month registration cycle and who failed to remedy
timely their deficiencies;
(ii) submit the proposed Suspension Order to the Supreme Court; and
(iii) serve a copy of the proposed Suspension Order on each lawyer named in the Order.
(d) The Supreme Court will review the proposed Suspension Order and enter such order as
the Court may deem appropriate suspending the law license of each lawyer deemed by the
Court to be not in compliance with the requirements of this Rule.
(e) Each lawyer named in the Suspension Order entered by the Court shall file with the
Board of Professional Responsibility an affidavit in the form specified by the Board of
Professional Responsibility, attesting that any identified deficiencies have been remedied
and shall pay to the Board of Professional Responsibility, in addition to the Noncompliance
Fee and the Delinquent Compliance Fee, a Five Hundred Dollar ($500.00) Suspension Fee
as a condition of reinstatement from suspension under subsection (d). Payment of all fees
imposed by this section shall be a requirement for compliance with this Rule and for
reinstatement. Upon satisfaction of this condition of reinstatement, and if the lawyer is
otherwise eligible for reinstatement, Chief Disciplinary Counsel will recommend to the
Supreme Court that the Court reinstate the lawyer's law license. No lawyer suspended
under this Rule 43 may resume practice until reinstated by Order of the Supreme Court.
(f) All notices required or permitted to be served on a lawyer under the provisions of this
Rule shall be served by United States Postal Service Certified Mail, return receipt
requested, at the preferred address shown in the most recent registration statement filed by
the lawyer pursuant to Supreme Court Rule 9 and shall be deemed to have been served as
of the postmark date shown on the Certified Mail Receipt.
Section 17. The information contained in the statements forwarded to the Tennessee Bar
Foundation under Section 14 and/or Section 15 of this Rule shall remain confidential other
than as to Tennessee Supreme Court or the Board of Professional Responsibility. The
Tennessee Bar Foundation shall not release any information contained in such statements
other than as a compilation of data from such statements, except as directed in writing by
the Tennessee Supreme Court or the Board of Professional Responsibility or in response
to a subpoena.

14

Section 2 – The Importance of Client Trust Accounting
If you became disabled or died suddenly, would your clients — or the personal representatives of
your estate — be able to tell how much of the money in your client trust account belonged to each
client? If a Disciplinary Counsel for the Board asked you to account for a particular client’s money,
would you be able to do so? Would the Disciplinary Counsel find complete, systematic, up-to-date
records showing what’s been received and paid out for each client, or would the Disciplinary
Counsel find a random assortment of canceled checks, unopened bank statements, and general
ledgers/checkbook registers full of cryptic notations and rounded-off figures? In these situations,
the fact that you “have it all in your head” isn’t going to help your clients find their money or
satisfy the Board of Professional Responsibility.
There are two completely mistaken preconceptions about client trust accounting. One is that client
trust accounting is a mysterious, complicated process that requires years of training and innate
mathematical ability. The other is that “maintaining a client trust account” simply means opening
a bank account and depositing clients’ funds into it.
The truth is that client trust accounting consists of a simple set of easy-to-learn and easy-to-use
procedures that require consistent, careful application. But as simple as it is, client trust accounting
still means more than keeping money in the bank. A bank account is something you have; client
trust accounting is something you do in order to know—and to show your clients that you know—
how much of the money in your account belongs to each client.
Whether you find it easy or difficult, the fact is that if you agree to hold money in trust, you take
on a non-delegable, personal fiduciary responsibility to account for every penny as long as the
funds remain in your possession. This responsibility can’t be transferred, and isn’t excused by your
or your employees’ ignorance, inattention, incompetence or dishonesty. The legal and ethical
obligation to account for those monies is yours and yours alone, regardless of how busy your
practice is or how hopeless you are with numbers. You may employ others to help you fulfill this
duty, but if you do, you must provide adequate training and supervision as required by RPC 5.3.
Failure to live up to this responsibility can result in personal monetary liability, fee disputes, loss
of clients and public discipline.
The essence of client trust accounting is contained in those three words:
Client (These duties arise in the context of an lawyer-client relationship, regardless of
whether you are paid for your services, and are as inviolable as your duty to maintain client
confidences. These duties may also be owed to third parties.)

15

Trust (The willingness of people to trust a complete stranger with money just because the
stranger is a lawyer is a fundamental aspect of the lawyer-client relationship, and
maintaining that trust is the duty of every individual lawyer and a matter of supreme public
interest.)
Accounting (The way to fulfill your clients’ trust is to be able, at any time, to make a full
and accurate accounting of all money you’ve received, held and paid out on their behalf.)
That’s all “client trust accounting” means. If you follow the simple procedures explained below,
you will never have to worry about failing to live up to your duties as a fiduciary no matter how
complex or busy your practice is.
Imagine how you’d feel if you asked your bank how much money was in your personal account,
and the bank officer explained that the bank couldn’t tell you because business was booming and
keeping exact records of so much money for so many people would just take too much time. You’d
probably feel that if knowing how much of your money it held was too much trouble, the bank
shouldn’t be holding your money. That’s exactly how your clients feel about you. You keep
records so you can give your clients an accounting of their money; failing to do so is a violation
of your professional responsibilities.
The minute you don’t keep track of a client’s money, you violate the client trust accounting rules.
The longer you don’t know, the more violations you’re likely to stumble into, and if you keep
stumbling, sooner or later you’re going to stumble into a Board of Professional Responsibility
investigation.
And don’t think if you keep enough of your own money in the client trust account that everything’s
all right. Not only does that not satisfy your professional responsibility to your clients, it may also
constitute an additional violation known as “commingling.” In short, the only adequate way to
fulfill your fiduciary responsibility to your clients is to keep track of how much of their money
you have in your client trust account, at all times.
You must maintain a ledger, or the equivalent, for each client that reflects all transactions related
to that client’s funds, even if you hold money only long enough for the check to clear then disburse
and close the matter. If you hold administrative funds to cover the costs of maintaining the account,
you also must create a ledger or equivalent for those administrative funds.
Maintaining a common client trust bank account in which the funds of more than one client are
held is fine, as long as you keep an accurate record of what belongs to each client. That’s what
client trust accounting is all about.

16

Pointers for everyday trust account management
•

Do not sign blank trust account checks. If you do, you risk someone using them for
improper purposes.

•

Do not allow your staff to use a signature stamp. If you do, you risk someone endorsing
checks for improper purposes.

•

Receive trust account bank statements unopened or sent directly to you by electronic
transmission. You can then review the statement before someone could tamper with it.

•

Checks on the trust account should never be made payable to “cash.” Checks from the trust
account should never be used for the lawyer’s personal expenses.

•

If you delegate duties, do not allow the same person to handle everything to do with the
trust account. The person who takes in the deposits should not be the same person who
writes the checks on the account.

•

Use different colored checkbook covers for your trust account and your operating account
so as not to confuse the two when you are in a hurry.

•

DO NOT carry your trust account checkbook with you when you leave your office. Many
lawyers have written checks for inappropriate disbursements from the trust account
“because it was the only checkbook I had with me.” The only exception may be when you
are making a trip specifically to disburse funds (such as a filing fee) on behalf of the client,
but you do not know the exact amount. Before leaving the office, make sure you know
exactly how much money is available for that particular client (the checkbook alone will
not give you that information if you have money in the account for more than one client)
and do not exceed that amount.

•

Include in your fee agreement information about how fees will be handled, including
money paid in advance for fees or costs and expenses. It’s also a good idea to provide your
client with an itemized statement of work performed prior to transferring fees that you
consider earned. If the client disputes the amount, you will need to hold it in the trust
account pending resolution.

•

Develop and memorialize a standard procedure for notifying clients or third parties when
you receive funds in which they have an interest and take steps to assure that you
consistently follow the procedure. Be sure part of the procedure is documenting notice to

17

the client. If it’s done by telephone call rather than in writing, be sure to include details of
when the call was made and with whom the caller spoke.
•

If support staff helps you maintain your trust account, you MUST properly train and
supervise them; no matter how long they’ve been in your employment and no matter how
well you believe they understand trust account requirements. Be sure you understand the
process well enough and periodically audit whether it’s being handled properly.

•

Do not set up overdraft protection or a credit line on your trust account. This will be
considered commingling of your personal funds if either takes effect.

18

Section 3: Key Concepts in Client Trust Accounting
The following seven key concepts provide the background you need to understand your client trust
accounting responsibilities.
Key Concept 1: Separate Clients Are Separate Accounts
Client A's money has nothing to do with Client B's money. Even when you keep them in a general
trust account (also known as an IOLTA account), each client's funds are completely separate from
those of all your other clients. In other words, you are NEVER allowed to use one client's money
to pay another client's or your own obligations.
In a general trust account, the way to distinguish one client's money from another's is to keep a
client ledger of each individual client's funds. A client ledger tells you how much money you've
received on behalf of a client, how much money you've paid out on behalf of that client, and how
much money that client has left in your general trust account. If you are holding money in your
general trust account for 10 clients, you have to maintain 10 separate client ledgers. If you keep
each client's ledger properly, you will always know exactly how much of the money in your general
trust account belongs to each client. If you don't, you will lose track of how much money each
client has, and when you make payments out of your general trust account, you won't know which
client's money you are using.
Also note, if your client's money can earn income because the funds are large enough in amount
or are held for a long period of time, then you should consider whether to place the funds in your
general trust account or a separate trust account for that client or transaction. RPC 1.15(b)(c).
Key Concept 2: You Can't Spend What You Don't Have
Each client has only his or her own funds available to cover their expenses, no matter how much
money belonging to other clients is in your general trust account. Your general trust account might
have a balance of $100,000, but if you are only holding $10.00 for a certain client, you can't write
a check for $10.50 on behalf of that client without using some other client's money. The following
example graphically illustrates this concept. Assume you are holding a total of $5,000 for four
clients in your general trust account as follows:
Client A
Client B
Client C
Client D
Total

$1,000
$2,000
$1,500
$ 500
$5,000
19

If you write a check for $1,500 from the general trust account for Client D, $1,000 of that check
is going to be paid for by Clients A, B and C. The funds you are holding in trust for them are
being used for Client D's expenses. You should have a total of $4,500 for Clients A, B and C, but
you only have $3,500 left in the trust account. In disciplinary matters, the failure to maintain a
sufficient client trust account balance will support a finding of misappropriation.
Key Concept 3: There's No Such Thing as a “Negative Balance”
It's not uncommon in personal checkbooks for people to write checks against money they haven't
deposited yet or a check that has not cleared yet, and show this as a “negative balance.” In client
trust accounting, there's no such thing as a negative balance. A “negative balance” is at best a sign
of negligence and, at worst, a sign of theft.
In client trust accounting, there are only three possibilities:
- You have a positive balance (while you are holding money for a client);
- You have a zero balance (when all the client's money has been paid out); or
- YOU HAVE A PROBLEM because the balance is less than zero (a so-called “negative
balance”).
Key Concept 4: Timing Is Everything
It takes anywhere from a day to several weeks after you make a deposit before the money becomes
“available for use.” A client's funds aren't “available” for you to use on the client's behalf until
they have cleared the banking process and been credited by the bank to your general trust account.
(This is especially true when you receive an insurance company's settlement draft — which cannot
clear until the company actually receives the draft at its home office during the bank collection
process and honors the draft. Thus, insurance company settlement drafts will take longer to clear
your account.) If you write a check for a client at any time before that client's funds clear the
banking process and are credited to your general trust account, ordinarily either the check will
bounce or you will be using other clients' money to cover the check.
The time it takes for trust account funds to become available after deposit depends on the form in
which you deposit them. Every bank has different procedures, so when you open your trust
account, get the bank's schedule of when funds are available for withdrawal. Depending on the
instrument, you may have to wait as many as 15 working days before you can be reasonably
confident that the funds are available. For example, even if you make a cash deposit, the money
may not be available for use until the following day. If you deposit a personal check from an outof-state bank, the money will take longer to be available. Either way, until the bank has credited a
deposit to your general trust account, you can't pay out any portion of that money for that client.

20

You also need to know what time your bank has set as the deadline for posting deposits to that
day's business and for paying checks presented to it. Otherwise, even when you have deposited
cash, you may end up drawing on uncollected funds. For example, let's say your bank credits any
deposit made after 3 p.m. on the following day, but stays open for business until 5 p.m. Your client
arrives at 3:30 and gives you $5,000 in cash which you immediately deposit. At 4 p.m., you write
a general trust account check against that money to pay an investigator. If the investigator presents
the check for payment at the bank before it closes at 5 p.m., the check will either bounce or be
covered by other clients' money.
You may be tempted to do your client a favor by writing a check from your trust account to the
client for settlement proceeds before the settlement check has cleared because you know there's
money belonging to other clients in your general trust account to cover this client's check.
Depending on the circumstances, your client may insist that you do this. Don't. If you do, you'll
end up writing a check to one client using another clients' money. You should never help one client
at the expense of your obligations to your other clients. In other words, no matter how expedient
or kind or convenient it seems, don't make payments on your clients' behalf before their deposited
funds have cleared. Otherwise, sooner or later, you'll end up spending money your clients don't
have.
Key Concept 5: You Can't Play the Game Unless You Know the Score
In client trust accounting, there are two kinds of balances: the “running balance” of the money you
are holding for each client, and the “running balance” of the general trust account.
A “running balance” is the amount you have in an account after you add in all the deposits
(including interest earned, etc.) and subtract all the money paid out (including bank charges for
items like wire transfers, etc.). In other words, the running balance is what's in the account at any
given time. The running balance for each client is kept on the client ledger, and the running balance
for each trust account is kept on the account journal.
Maintaining a running balance for a client is simple. Every time you make a deposit on behalf of
a client, you write the amount of the deposit in the client ledger and add it to the previous balance.
Every time you make a payment on behalf of the client, you write the amount in the client ledger
and subtract it from the previous balance. The result is the running balance. That's how much
money the client has left to spend.
You figure out the running balance for the general trust account the same way. Every time you
make a deposit to the general trust account, you write the amount of the deposit in the account
journal and add it to the previous balance. Every time you make a payment from the general trust

21

account, you write the amount in the account journal and subtract it from the previous balance.
The result is the running balance. That's how much money is in the account.
Since “you can't spend what you don't have,” you should check the running balance in each client's
ledger before you write any general trust account checks for that client. That way, if your records
are accurate and up to date, it's almost impossible to pay out more money than the client has in the
account.
Key Concept 6: The Final Score Is Always Zero
The goal in client trust accounting is to make sure that every dollar you receive on behalf of a
client is ultimately paid out to the client at the conclusion of the representation or to third parties
on the client’s behalf. What comes in for each client must equal what goes out for that client; no
more, no less.
Many lawyers have small, inactive balances in their general trust accounts. Sometimes these
balances are the result of a mathematical error, sometimes they are part of a fee you forgot to take,
and sometimes a check you wrote never cleared or wasn't cashed.
Whatever the reason, as long as the money is in your general trust account, you are responsible for
it. The longer these funds stay in the bank, the harder it is to account for them. Therefore, you
should take care of those small, inactive balances as soon as possible, including, if necessary,
following up with payees to find out why a check hasn't cleared.
If you take steps to take care of these small balances and are still unable to pay out the funds, you
should consider whether the unclaimed monies must be escheated to the state. For more
information on abandoned or unclaimed funds, see Section 4, Part D, “Abandoned or Unclaimed
Funds/Property.”
Key Concept 7: Always Maintain an Audit Trail
An “audit trail” is the series of bank-created records, like cancelled checks, bank statements, etc.,
that make it possible to trace what happened to the money you handled. An audit trail should start
whenever you receive funds on behalf of a client and should continue through the final check you
issue against them. Without an audit trail, you have no way to show that you have taken proper
care of your clients' money, or to explain what you did with the money if any questions come up.
The audit trail is also an important tool for tracking down accounting errors. If you don't maintain
an audit trail, you will find it hard to correct the small mistakes, like errors in addition or
subtraction, and the big mistakes, like miscredited deposits, that are inevitable when you handle
money.
22

The key to making a good audit trail is being descriptive. Let's say you are filling out a deposit slip
for five checks relating to three separate clients. All the bank requires you to do is write down the
bank identification code for each check and the check amounts. This doesn't identify which client
the money belongs to. If you include the name of the client and keep a copy or make a duplicate,
you will know which client the check was for, which is the purpose of an audit trail. That will take
it easy to answer any questions that come up, even years later.
By the same token, every check you write from your general trust account should include the name
of the client on whose behalf it is written, so that it is easy to match up the money with the client.
That means you should NEVER make out a general trust account check to cash, because there is
no way to know later who actually cashed the check. If you are handling more than one case for
the client, indicate which matter the payments and receipts relate to on your checks and deposit
slips.

23

Section 4: Trust Account Basics
A. Trust Accounts: What are they and how many do you need?
What is a trust account?
A trust account is a bank account maintained incident to a lawyer's law practice in which the lawyer
holds funds received in a fiduciary capacity on behalf of or belonging to a client or third person.
Who must have a trust account?
Any lawyer who receives funds in a fiduciary capacity in the context of his or her law practice
must have access to or maintain a trust account. The lawyer must have access to or establish a trust
account before receiving such funds. See RPC 1.15(a), (b), and (c). Lawyers who do not receive
funds belonging to or on behalf of clients do not have to have a trust account.
How many trust accounts does a lawyer need?
Generally speaking, a lawyer needs only one trust account to handle monies received in trust which
are either nominal in amount or held for a short period of time. Within this common account—
called a "general trust account"—the funds of many clients may be commingled so long as
adequate records are kept to identify the funds of each client. See RPC 1.15(b)(2). If desired, a
lawyer may have multiple trust accounts for administrative purposes. For example, lawyers often
have trust accounts for real estate transactions which are distinct from the trust accounts used for
other client matters.
Does each lawyer in a firm need a separate trust account?
No. Each lawyer in a firm may ethically use the firm's general trust account so long as adequate
records of the funds of each client are maintained. However, multiple accounts are permissible. A
lawyer may personally maintain several trust accounts if he or she desires.
Is a lawyer ever permitted to establish a trust account for one client, one transaction, or a series
of integrated transactions?
Yes. The size of the deposit or the length of time the deposited funds are to be held could be such
that a prudent person acting in a fiduciary capacity would be expected to invest the funds on behalf
of the beneficiary, and a lawyer receiving funds under such circumstances would have a
corresponding right to deposit the funds in a separate interest-bearing or dedicated trust account.
24

RPC 1.15(b)(1)(3). Comment [5] following RPC 1.15 contains a list of factors to be considered
when determining whether there is a duty to deposit funds into a separate interest-bearing
dedicated trust account. Any interest generated is the property of the client.
What sort of bank account must be maintained?
A lawyer has an ethical obligation to pay or deliver client funds promptly as instructed by the
client, unless there is a dispute about the funds in which case the funds should be kept separate
until the dispute is resolved. See RPC 1.15(d)(e) and Formal Ethics Opinion 2010-F-154. The
determination of whether funds are required to be deposited in an IOLTA account rests in the
sound discretion of the lawyer. See RPC 1.15(b)(3).

B. Opening a Trust Account
1. Choosing a Trust Account Bank
RPC 1.15 of the Tennessee Rules of Professional Conduct, contains many provisions about the
duty to deposit client funds in a trust account to protect and secure the funds. For example, RPC
1.15(b) admonishes:
Funds belonging to clients or third persons shall be deposited in a separate account
maintained in an FDIC member depository institution having a deposit-accepting
office located in the state where the lawyer’s office is situated (or elsewhere with
the consent of the client or third person) and which participates in the required
overdraft notification program as required by Supreme Court Rule 9 § 35.
The rule says a lawyer shall deposit funds in a separate account located in the state where the
lawyer’s office is situated or elsewhere with the consent of the client or third person.
The depository bank for a lawyer’s trust account must agree to the following:
• Report to the Board of Professional Responsibility when an item drawn on the trust
account is presented for payment against insufficient funds. See Rule 9 § 35. A lawyer may
not maintain a trust or fiduciary account at a bank that does not agree to make the reports.
• Agree to pay IOLTA accounts the highest interest rate available to that bank’s other
customers when the IOLTA accounts meet the same minimum balance or other account
qualifications (also known as the “comparability requirement”). See Rule 43 § 2. Banks
will be certified as “eligible” by the Tennessee Bar Foundation upon a finding that they are
in compliance with this comparability requirement, and the Board of Professional
Responsibility will maintain a list of eligible banks. Banks not found on the eligible list
25

must submit an Overdraft Notification Agreement and receive approval before IOLTA
accounts may be opened with them.
If your bank is not doing these things, you are professionally responsible—not the bank.
Compliance with the requirements varies substantially from bank to bank and from branch office
to branch office. Some banks regularly fail to notify the Board of Professional Responsibility when
a trust account check is presented against insufficient funds. This occurs despite the bank’s
agreement to notify the Board of Professional Responsibility of an overdraft.
How Do You Fulfill Your Professional Responsibility to Choose the Right Bank?
Since you are responsible, the only way for you to act in a professionally responsible manner is to
investigate the banks in your community to find out which banks understand the requirements and
are willing to comply. If a local branch manager does not understand the notice and recordkeeping
rules, or the IOLTA comparability requirement, encourage the manager to contact the home office
for instructions or call the Board of Professional Responsibility and/or the Tennessee Bar
Foundation. Disciplinary Counsel and/or staff for these agencies would be glad to explain the rules
and requirements.
Are there restrictions concerning the kinds of institutions where trust accounts may be maintained?
Yes. Trust accounts may only be maintained at FDIC member depository institutions having a
deposit-accepting office located in the state where the lawyer’s office is situated. See RPC 1.15(b).
Dedicated trust accounts may be maintained at an institution outside the state upon consent of the
client or third person.

2. Opening a Client Trust Account
Labeling a Trust Account
A trust account must be clearly labeled and designated as a "trust account," and all checks drawn
on the account must be so identified. For instance, an appropriate title for a general trust account
might be "The Trust Account of John Smith, Lawyer" or "Smith, Jones & Williams Trust
Account.”
Each account in which funds are held by a lawyer pursuant to the lawyer's service as a trustee,
guardian, personal representative, attorney-in-fact, or escrow agent must be appropriately labeled
as a fiduciary account unless such funds are held in a general trust account. For example, an
appropriate title for a fiduciary account might be "Trust Account for the Estate of John Doe."

26

Similarly, a dedicated trust account that holds the funds of one client must be properly labeled as
a trust account (e.g., "Trust Account for the Benefit of Jane Smith").
Trust Account Checks
Any check written from the trust account should have client reference data on the check. The
client’s name or identification number may appear on the check stub, check register, journal, etc.;
however, this information should also appear on the check. If a trust account software program or
a check-writing program cannot record this reference data on the check, it should be manually
recorded.
If a check drawn on the trust account includes payment of fees or cost reimbursement for more
than one client, the check should indicate the respective individual payments. The purpose for the
disbursement may be indicated after the client’s name (i.e., fees, cost reimbursement, etc.).

C. Trust Account Management
May the responsibility for managing a firm’s trust accounts be delegated to one lawyer in a firm?
Yes, however, all managing lawyers in the firm may be professionally responsible for violations
of the trust accounting rules that result from failure to have in effect procedures that the rules will
be followed. RPC 5.1.
May a lawyer delegate the management of a trust account, including check signing authority, to a
staff member who is not a lawyer?
Yes, however, the lawyer is professionally responsible for the supervision of the non-lawyer. RPC
5.3 and RPC 8.4(a). A lawyer may be subject to professional discipline for violations of the trust
accounting rules that result from the inadequate supervision of a staff member.

D. Abandoned or Unidentified Funds/Property
If a lawyer holds funds in a general trust account and does not know either the identity or the
location of the owner of those funds, what should be done with the money?
The lawyer must first make a diligent attempt to determine the identity and/or the location of the
owner of the funds in order that an appropriate disbursement might be made. This means
questioning personnel and investigating records and other sources of information in an effort to
determine the identity and location of the owner of the funds. If that effort is successful, the
entrusted property shall be promptly transferred to the person or entity to whom it belongs. If the
27

lawyer is unsuccessful in ascertaining the identity or the location of the owner of the funds, the
lawyer after 12 months of the discovery of the unidentified funds, must remit the funds to the
Tennessee Lawyers’ Fund for Client Protection. See RPC 1.15(f). Funds that qualify for
escheatment to the State of Tennessee pursuant to T.C.A. 66-29-101 to 66-29-204 (Uniform
Disposition of Unclaimed Property Act) should be remitted pursuant to that statute. Pending
escheatment, the funds should be held and accounted for in the lawyer's trust account.

E. Closing a Trust Account
1. Closing account with remaining funds
I have a trust account I no longer use, but some funds remain in the account. How do I close the
account?
Either transfer the funds from the old account into a new account or disburse the funds to the
owners as shown on the client ledgers for the account. See RPC 1.15. Any funds on deposit for a
client who is no longer represented by the lawyer or the law firm should be disbursed to the owners
thereof. If transfer to a new account is appropriate, you must document the transfer of the funds
from the old account to the new account and accurately note the deposit of funds on the appropriate
clients' ledgers. See Rule 1.15. If any interest was credited to the dormant account, this money
should be sent to the IOLTA program. If there are unclaimed or unidentified funds in the account,
see the discussion of abandoned funds in the preceding pages.

28

Section 5: Fees
Why is it important in a manual on client trust accounting to discuss what kind of fees you accept?
Because the characterization of the fee – and, in reality, how you apply it to the client’s work –
determines whether you put the fee in your IOLTA account or your operating account.
Any funds received by a lawyer can be analyzed by the basic test of “To whom does this money
belong right now?” If the answer is “the lawyer,” the funds should be deposited to an operating
account. If the answer is “the client” (or a third party related to the representation), the funds should
be deposited to the trust account. If it belongs in part to the lawyer and in part to the client or third
party, it must first be deposited into the trust account. The part belonging to the lawyer should be
removed once the funds have been earned. The best management procedure is to clearly define in
a written fee agreement to whom the money belongs, where it will be deposited and when and how
it will be used.
A. Advanced Fee/Retainer
Except for a nonrefundable fee as discussed below, an advanced fee is an amount paid to a lawyer
in contemplation of future services that will be earned at an agreed-upon basis, whether hourly or
flat. Any amount paid to a lawyer in contemplation of future services is an advanced fee regardless
of what the fee is called. An advanced fee must be deposited into the client trust account. Formal
Ethics Opinions 92-F-128; 92-F-128(a) and 92-F-128(b) and RPC 1.5(f).
B. Flat Fee
A flat fee is a fixed amount paid to a lawyer for specific, agreed-upon services, or for a fixed,
agreed-upon stage in a representation, regardless of the time required of the lawyer to perform the
service or reach the agreed-upon stage in the representation. A flat fee is not an advance against
the lawyer’s hourly rate and may not be billed against at an hourly rate. A flat fee may or may not
be paid in advance but is not deemed earned until the work is performed.
C. Nonrefundable Fee
A nonrefundable fee or earned-upon-receipt fee is a flat fee paid in advance that is deemed earned
upon payment regardless of the amount of future work performed. The agreement as to when a fee
is earned determines whether it must be deposited to the client trust account and may have
significance under other laws such as tax and bankruptcy. If a flat fee is not designated earnedupon-receipt, then it is presumed to belong to the client and it must be deposited in the trust
account. Formal Ethics Opinions 92-F-128; 92-F-128(a) and 92-F-128(b). A fee that is
nonrefundable in whole or in part shall be agreed to in a writing, signed by the client, that explains
29

the intent of the parties as to the nature and amount of the nonrefundable fee. RPC 1.5(f).
Nonrefundable fees are subject to the reasonableness standard in RPC 1.5(a). RPC 1.5 Comment
[4a]. Nonrefundable fees are earned fees so long as the lawyer remains available to provide the
services called for by the retainer or for which the fixed fee was charged. RPC 1.5 Comment [4a].
If the initial payment is defined as a nonrefundable fee that will be paid for the lawyer’s availability
(including the potential necessity for the lawyer to decline representation of other clients), whether
or not his or her services are actually used, the fee generally belongs to the lawyer upon receipt
and should be deposited into an operating account.
D. Contingent Fees
RPC 1.5(c) requires that contingent fee agreement be in writing and signed by the client. The
agreement must state the method by which fee is to be determined, including the percentage that
lawyer receives if settlement, trial or appeal, and whether the expenses will be deducted from the
recovery before or after fee is calculated. Upon conclusion of matter the lawyer must provide the
client with a written statement stating the outcome, the remittance to client (if any), and the method
of determining any remittance. This written statement is not a substitute for a client ledger. A
lawyer may require advance payment of a fee, but may be obliged to return any unearned portion.
RPC 1.5 Comment [4] and Comment [4a] referencing RPC 1.16(d).
E. Advanced Costs
All advanced payments of costs must be held in trust until the costs are incurred. If a lawyer
receives an advanced payment that includes both fees and costs, the lawyer must deposit that
payment into the trust account.
F. Refunds
The reasonableness requirement and application of the factors to be considered may mean that a
client is entitled to a refund of an advance fee payment even though it has been denominated
“nonrefundable” “earned upon receipt” or in similar terms that imply the client would never
become entitled to a refund. So that a client is not misled by the use of such terms, RPC 1.5 requires
that a lawyer make certain minimum disclosures to the client in writing. See RPC 1.5(f). This does
not mean the client will always be entitled to a refund upon early termination of the representation
nor does it determine how any refund should be calculated but merely requires and agrees to the
non-refundable fee and the amount of this fee. Nonrefundable fees are earned fees so long as the
lawyer remains available to provide the services called for by the retainer or for which the fixed
fee was charged. RPC 1.5 comment [4a]. Lawyers should keep time records for all representations,

30

even flat-fee arrangements and contingency cases, so they can use this information if they need to
demonstrate the reasonableness of the fee in case the client terminates representation early.
A lawyer who is discharged by a client, or withdraws from representation of a client, shall, to the
extent reasonable practicable, take steps to protect the client’s interests. Depending on the
circumstances, protecting the client’s interests may include…promptly refunding any advance
payment of fees that have not been earned or expenses that have not been incurred. RPC 1.16(d)(6).

31

Section 6: Funds Go In
A. What Goes Into a Trust Account?
The general rule is that every receipt of money from a client or for a client which will be used or
delivered on the client's behalf should be placed in the trust account or a fiduciary account if the
funds are received by a lawyer while serving as a lawyer or other professional fiduciary. This
includes funds received by the lawyer as an escrow agent. See RPC 1.15(b) and (c), and Comment
[10].
Must a lawyer deposit very small sums of money received from a client into a trust account?
Yes. A lawyer who receives from his or her client a small sum of money (for example, money
which is to be used to pay the cost of recording a deed) must deposit that money in a trust account.
May a lawyer who receives a lump sum payment in advance, which is inclusive of the costs of
litigation, deposit the payment in his operating account as fees?
No. Where a lawyer receives a lump sum payment in advance which is inclusive of the costs of
litigation, the portion representing the costs must be deposited in the trust account. Some of the
money collected by the firm as “fees” is actually entrusted funds intended to defray the costs of
litigation. The rules require that funds received in the fiduciary capacity, however characterized,
be directly deposited into a trust account.

B. What Does Not Go in the Trust Account?
May a lawyer deposit his or her own funds in a trust account?
No funds belonging to the lawyer may be deposited in the trust account except such funds as are
necessary to open or maintain the account, or pay service charges, or are funds belonging in part
to a client and in part presently or potentially to the lawyer, such as where a deposited item
represents both the client's recovery and the lawyer's fee. In such a case, the portion of the funds
belonging to the lawyer must be withdrawn from the trust account as soon as the lawyer becomes
entitled to the funds unless the right of the lawyer to receive that portion is disputed by the client
in which event the disputed portion must remain in the trust account until the dispute is resolved.
See RPC 1.15(b).
Should nonrefundable retainers pursuant to RPC 1.5(f) be deposited in the trust account?
Strictly speaking, no. Since a nonrefundable retainer is deemed earned when paid, it immediately
becomes the property of the lawyer and as such must not be deposited in the trust account.
Nonrefundable retainers must be distinguished from fees paid in advance which are intended to be
held by the lawyer as security deposits against work which is yet to be performed. A lawyer has
an ethical obligation to refund the unearned portion of any fee paid in advance upon discharge or
withdrawal, therefore, such funds are not considered property of the lawyer and must be held in
32

the trust account until they are earned. RPC 1.15, RPC 1.16(d), and Formal Ethics Opinion 92-F128; 92-F-128(a); and 92-F-128(b).

C. Depositing Funds into a Trust Account
1. Example: Depositing a Mix of Trust and Non-trust Funds
A lawyer advises a client that a domestic matter will involve a legal fee of $150.00, earned upon
receipt, as agreed up front, a recording fee of $30.00, and a sheriff fee of $4.00, totaling $184.00.
Alternative (a): The client presents the lawyer with a check for $184.00. The check is deposited
into the general trust account. A check for $150.00 is then disbursed to the lawyer and the
remaining fees are paid when required (RPC 1.15).
Alternative (b): The client pays with two checks, one for $150.00 and another for $34.00. The
$34.00 check is deposited into the general trust account. The $150.00 is deposited in the firm
operation account or otherwise paid to the lawyer.
Alternative (c): The client pays in cash. Thirty-four dollars ($34.00) is deposited into the general
trust account. The remaining cash is deposited in the firm operating account or otherwise paid to
the lawyer.
If the lawyer previously advanced the recording and sheriff fees, all funds received from the client
would in each instance be deposited into the operating account.
If, however, a check submitted by a client contains any funds that are to be used to pay client
expenses in the future, the check must be deposited into the trust account intact.
2. Credit Card Payments from Clients
Lawyers may accept payment of legal fees by electronic transfer and credit card. Client funds
cannot be deposited by credit card to the office operating account and then transferred to the trust
account. A lawyer must arrange to have all credit card payments deposited into the trust account
if the lawyer's bank cannot or will not distinguish between the operating account, into which earned
fees are deposited, and the trust account, into which unearned fees and entrusted funds are
deposited.
3. Cash Reimbursements
RPC 1.15 requires client funds to be promptly deposited in a lawyer trust account and RPC 1.15
requires a lawyer to maintain a complete record of all client funds received by the lawyer.
Therefore, cash refunds must be recorded on the client's ledger card and deposited in the trust
account.

33

Section 7: Funds Go Out
A. What Disbursements are Inappropriate?
1. Immediate Disbursement
Disbursement against a client check should not be made until the check is collected unless the
lawyer's depository bank grants provisional credit for deposited items. The risk that a check will
not clear may not be borne by other client funds in the trust account.
Trust account checks are returned for insufficient funds on occasion because of the failure to make
a deposit before the close of the banking day (usually 2:00 P.M.). Such deposits are not posted
until the following business day. Timely deposits ensure availability of funds for disbursement.
2. Bank Charges
Some lawyers inadvertently pay the bank service charges for check printing, wires, returned
checks, etc., from client funds. This occurs when a bank debits the trust account for a service
charge. RPC 1.15(b) permits a lawyer to deposit in advance sufficient personal funds in the trust
account to pay for service charges, thereby avoiding the use of client funds. When this is done, a
record (i.e., ledger card) should be maintained concerning the deposit and disbursement of these
funds. Some lawyers direct their bank to bill the office operating account for service charges on
the trust account if both accounts are maintained at the same bank. On occasion, the bank will
incorrectly debit the trust account. If the trust account is incorrectly charged, the error may result
in client funds being used to pay the charge and the trust account must be reimbursed promptly.
3. Outstanding Checks
There are several ways to address the problem of trust account checks that are not cashed for a
significant period of time. Some lawyers print "Void After 90 Days," on trust account checks to
persuade payees not to hold the checks. The notation does not guarantee that the bank will not
honor the check after 90 days. This issue should be addressed with the bank in advance. Other
lawyers contact all recalcitrant payees who fail to negotiate a trust account check after a certain
period of time (usually six to nine months). Certified mail should be used if warranted by the
amount of the check. If the payee cannot be located or a reply is not received within a reasonable
time, the check is voided or a stop payment is placed on the check. The stop payment charge has
to be paid and a stop payment is usually good for only six months. If the check is voided, it may
still be negotiable. Therefore, a stop payment order may be more appropriate depending on the
amount of the check. If a stop payment order is placed on a check, the check may still be cashed.
The bank's procedures for stop payment orders should be understood in advance. After payment is
stopped on a check, the funds are noted as returned on the client's ledger card. There is not a
restriction on issuing a second trust account check. If the lawyer believes that funds have been
abandoned, the lawyer must follow the escheat requirements set forth in T.C.A. 66-29-101 to
T.C.A. 66-29-204.

34

May a lawyer unilaterally decide to use funds held in trust to pay his or her legal fees or the claims
of other creditors?
As the client's agent and fiduciary, the lawyer has an obligation to pay or deliver the funds in
accordance with the client's most recent instructions. Unless the lawyer is authorized by the client
to pay a particular charge or claim, the lawyer may not disburse trust funds for those purposes. See
RPC 1.15.
What if the lawyer has an interest in funds received in settlement of a claim or in satisfaction of a
judgment?
All receipts of trust funds must be deposited into the trust account intact. If an item represents
funds belonging in part to the client and in part to the lawyer, the portion belonging to the lawyer
must be withdrawn when the lawyer becomes entitled to the funds unless the right of the lawyer
to receive the portion of the funds is disputed by the client. In that case the disputed portion must
remain in the trust account until the dispute is resolved. See RPCs 1.15(e).
Is it proper for a lawyer to disburse settlement funds conditionally delivered by opposing counsel
before satisfying the settlement conditions under which the lawyer received the settlement check?
No. When a lawyer accepts conditional delivery of settlement proceeds from opposing counsel,
the lawyer implicitly agrees to abide by the prescribed conditions. While it may not be a violation
of RPC 1.15, any deliberate failure to abide by those conditions, such as by disbursing the proceeds
without first having obtained a signed release, would be dishonest and violative of RPC 8.4(c),
which prohibits “conduct involving dishonesty, fraud, deceit or misrepresentation.”

B. Overdrafts and Checks Presented Against Insufficient Funds
What should a lawyer do if his or her trust account check bounces?
Theoretically, of course, this should never happen. As a practical matter, however, mistakes do
happen and bank errors or administrative snafus within the lawyer's own office can result in an
item's being returned for insufficient funds. If a trust account check is dishonored, the lawyer
should immediately ascertain the nature of the problem and promptly correct it, even if this requires
a deposit of the lawyer's own funds into the trust account. Under no circumstances should the
lawyer allow the trust funds of another client to be used impermissibly. Reimbursement of the trust
account should NOT be held in abeyance pending resolution of the error (e.g., by locating the party
responsible for a bad check). Any delay in reimbursing the account may result in the use of other
client funds to cover the shortage which is not permitted.
Finally, the lawyer should immediately document the problem and any corrective action taken in
a memorandum for his or her own files.

35

Must a report be made to the Board of Professional Responsibility?
Every lawyer must open a trust or escrow account at an approved financial institution which agrees
to notify the Board of Professional Responsibility when any check drawn on a trust account or a
fiduciary account is presented for payment against insufficient funds. Rule 9 § 35. Note that the
reporting requirement applies to the presentation of an instrument against insufficient funds, not
just to the return of an instrument for insufficient funds.
The rule requires a lawyer to maintain trust accounts and fiduciary accounts only at a bank that
agrees to notify the Board of Professional Responsibility pursuant to the agreement. The lawyer
must ensure that the bank understands that the directive applies to all trust and fiduciary accounts
of the lawyer, not just to general trust accounts (sometimes called "IOLTA accounts" by banks).
Lawyers with signatory authority on fiduciary accounts, such as estate accounts, should also
comply with this requirement.
The purpose of the directive is to prevent defalcations by giving the Board notice when a trust
account may be overdrawn. The requirement greatly diminishes the possibility that a lawyer
engaged in misappropriation of trust funds can hide such activity by directing the depository bank
to notify him or her prior to the return of a check for insufficient funds in order that the lawyer
might deposit funds into the account before the item is returned and thereby avoid the reporting
requirement.
A lawyer who overdraws a trust account or a fiduciary account may soon expect to be contacted
by a representative of the Board who will informally request an explanation of the problem. Once
it is verified that an innocent mistake caused the shortage or apparent shortage in the account, the
inquiry will be concluded and no further action will be taken. If, however, no adequate explanation
is immediately forthcoming, a complaint will be opened and an investigation conducted.

36

Section 8: Recordkeeping
Some lawyers have the misconception that they cannot fulfill their ethical responsibility to keep
track of their clients’ money without spending a great deal of money on computer hardware and
software that they will then have to spend a great deal of time learning how to use. While this is
not true, technology can certainly make the process easier, particularly for lawyers and firms that
have a high volume of trust account transactions.
Rule 8, RPC 1.15, and Rule 43 do not mandate any particular client trust-accounting system.
(However, keep in mind that Formal Ethics Opinion 89-F-121 does spell out the particular records
you must maintain.) You can hire consultants to set up a system, buy computer accounting
software—whatever works for you—as long as you get the results and keep the records that the
Rules require. The system described below will give you everything you need to do in order to
account for your clients’ funds.
The following client trust accounting system is designed for sole practitioners and lawyers in small
law firms. It assumes that you will be directly involved in every aspect of handling your clients’
money. However, whatever size firm you work in and whatever client trust-accounting system you
use, you still have full personal fiduciary responsibility for accounting for your clients’ money.
Keeping records is the way you do the “accounting” part of client trust-accounting. Recordkeeping must be done consistently and keeping incomplete records is just as great a breach of your
ethical responsibility as keeping no records at all.
There are a few things that must be kept in mind in formulating procedures for handling the trust
account, whether the lawyer uses a manual or a computerized system. These are:
•

The lawyer may delegate duties, but cannot delegate responsibility or accountability for
the trust account. Therefore, the lawyer must:
o understand the types of records that must be maintained and how a trust account
operates to properly train and supervise employees who maintain the account;
o train all employees who will handle trust account functions;
o supervise all employees who will handle trust account functions on an ongoing basis,
not just when they are new; and
o review trust account records regularly, including bank statements, the general
ledger/checkbook register, deposit slips, individual client ledgers, etc.

•

The lawyer or firm must establish and rigorously follow good internal control procedures.
This includes:
o don’t make the same person responsible for receiving funds, recording funds and
disbursing funds;
o special precautions for handling cash;
o the lawyer must be part of the internal controls system;
o taking specific steps to reduce the risk of misappropriation;
o not assuming that any individual will be impervious to temptation;
o monitoring and enforcing use of the established internal control procedures; and
37

o analyzing the potential effect on internal control procedures of downsizing,
redistribution of duties or replacement of staff members and modifying procedures as
necessary to compensate.
In establishing the system for maintaining the trust account, there are also some procedures that
must be included, whether the system is manual or automated.
•
•
•
•
•
•
•

Every transaction must be recorded in full detail, including date, payee of funds
disbursed/payor of funds deposited, applicable client, check number, amount, reason for
disbursement or deposit, etc.
A current balance must be available at all times, both for the trust account as a whole and
for each individual client on whose behalf money is being held.
A ledger (or its equivalent) must be kept for each individual client whose money is being
held that indicates the full history of that client’s funds, including receipts and
disbursements until the last penny has been paid from the account.
A reconciliation of the account must be performed no less frequently than quarterly. Formal
Ethics Opinion 89-F-121.
Compare client ledgers to the general ledger/checkbook register. The total balance of all
client ledgers should match the total on the general ledger/checkbook register.
Reconcile to the bank statement, adjusting for outstanding checks, deposits in transit, bank
charges, etc.
Resolve any discrepancies immediately – they are usually easy to find if they are isolated
to the period since the last bank statement and much more difficult to find as time passes.

As we’ve discussed, Rule 9 § 35.1(a)(2) requires you to keep two kinds of records: records created
by the bank that show what went into and out of your client trust accounts; and records created by
you to explain the transactions reflected in the bank documents.

A. How long must you keep records?
Rule 9 § 35.1(a)(2) requires you to keep trust account records for a period of at least five years
after disposition of the underlying matter.

B. What if you have a computerized system?
Even if you have a computerized accounting system, you may want to keep hard copies of all the
records required by the Rule (including bank-created records). You can use computer printouts
instead of hand-written ledgers for the records you are responsible for creating, but just having the
data stored electronically in the cloud, on a drive (local or external), or saved to storage media is
risky. (It’s a good idea to have these printouts dated and signed by the preparer to show when and
by whom they were generated.) Remember that there are numerous computerized systems and no
one knows how everyone works. Your records must be accessible and understandable to the Board.
If you’re using a computerized accounting system, applications or other technology tools, you
should remember that computer data can be lost through natural disaster (like earthquake or fire),
power or equipment failure, cyberattack, and human error. For your own protection, make hard
38

copies regularly and have all of your computer records regularly backed up to the cloud, on a drive
(local or external), or on storage media.
Beyond preservation of the computer data, you also should be very careful when changing or
upgrading your specific accounting software application, your overall computer operating system,
and the computer hardware itself. Different software applications and newer versions of the same
software application may not be fully compatible with the data generated by your current software
application. Similarly, changing computers or operating systems can cause difficult compatibility
problems. These days, it is not unusual for computer technology to advance dramatically in a fiveyear time period, rendering some application data obsolete and problematic to use. In addition, a
special note for web-based applications is that browsers change over time, and it is not unusual for
a common component or functionality of a browser to be discontinued or no longer be supported
at some point in the future. An example is the 2020 end of life for Adobe Flash support that
impacted many browser-based applications in 2021.
To avoid problems, a person’s ordinary use of a smartphone requires responsible steps, such as
regularly backing up data, and this is true of accounting technology. Accounting technology should
not be avoided simply because there are potential problems as it offers the advantages of efficiency
and reliability and can avoid the errors that arise from manual entries on hard copy accounting
forms.

C. Which bank-created records do you have to keep?
You are required to keep these bank-created records: client trust account statements, canceled
checks and check stubs. Some lawyers don’t take their duty to keep bank-created records seriously
because they can always get copies from their bank. If your bank fails, merges with or is taken
over by another bank, you may find that copies of your four-year-old canceled client trust account
checks just aren’t available. As previously noted, finding a bank that still offers “canceled checks”
may take some searching and if you’re unable to find such a bank, be sure to access and maintain
“canceled check” information by requesting check imaging or other documentation from your
bank.

D. How should you file bank-created records?
To ensure that you have a complete set of bank-created records, and to save you time when you
need to find a particular record, you should have a simple, consistent filing system. One good
system is to keep separate binders for each of your client trust accounts. Each binder should have
one section for bank statements, one section for canceled checks, one section for deposit slips and
one section for checkbook stubs. File each record in date order in the appropriate section of the
binder for the account they refer to. Just label each binder with the name of the client trust account
and the period it covers, and you should be able to find any record in one or two minutes.
An even simpler recommendation is to keep deposit slips and canceled checks in the same
envelope as the bank statement to which they are associated, or print these documents using online
account access and attach them to a copy of the bank account statement.

39

E. What records do you have to create?
You need to create three kinds of records to show that you know at all times what you’re doing
with your clients’ money. We’ll discuss each of these records in detail below, but a few general
points apply to all of them:
Tenn. Sup. Ct. R. 9 § 35 requires you to retain these records for a minimum of five years after the
representation ends.
NEVER round off figures in these records. You must keep “complete records of such account
funds.” That means all receipts and payments must be recorded to the penny.
These records can be handwritten, typed or printed out from a computer file. However, they should
be complete, neat and legible, and stored in such a way that you can find them—and read them—
as many as five years later. Handwritten records should be kept in ink—not pencil or magic
marker—in bound accounting books, and typed records or computer printouts should be filed in
binders. As with bank-created records, you can save yourself time and trouble by labeling the
covers of the books and binders with complete account or client names and the dates the records
cover.
All deposits and payments should be recorded in the general ledger/checkbook register and client
ledger as soon as possible. Waiting longer increases the chance that you will forget to record a
transaction or will record it incorrectly. It also means that your records aren’t up-to-date and that
you might be spending money your clients don’t have.
You must also keep your client trust account deposit slips, checkbook stubs and/or records so you
will have a complete audit trail. These records will make it much easier to balance your books and
to show what you did with your clients’ money.
The Client Ledger. You must keep, create and maintain a client ledger or its equivalent for each
client (for example, a break-out by client created by your computerized program) whose money
you hold. This client ledger must give the name of the client, detail all money you receive and pay
out on behalf of the client, the name of the payor of funds deposited or payee of funds disbursed,
and show the client’s balance following every receipt or payment.
Maintaining a client ledger is like keeping a separate checkbook for each client, regardless of
whether or not the client’s money is being held in your common client trust account. The only
difference between properly maintaining a client ledger and properly maintaining your personal
checkbook is that you can be disciplined if you fail to properly maintain your client ledger.
Every receipt and payment of money for a client must be recorded in that client’s client ledger.
For every receipt, you must list the date, the amount, purpose and payor (the source) of the money.
For every payment, you must list the date, the amount, the payee (to whom the payment went) and
purpose of the payment. After you record each receipt, you must add the amount to the client’s old
balance and write in the new total. After you record each payment, you must subtract the amount
from the client’s old balance and write in the new total.
40

Client: Alpha, A
R
Number Date
Deposit
1001

12/14/2012
01/17/2013

Matter: 111111
Payment Deposit

Description of
Transaction
(Payor/Payee)
Deposit Alpha - fees
Dee Fender, Esq. – $250.00
earned fees

$250.00

Balance
$250.00
$0.00

When you deposit more than one check at a time for a client (i.e., using one deposit slip for all the
checks), you should record the name of each client in your general ledger/checkbook register, as
well as on the deposit slip. If you don’t, it will be harder to reconcile your books and to answer
any questions that may come up later.
You will find it much easier to keep your records straight if you don’t put more than one client’s
records on a given page. You also shouldn’t use the front of a page for one client and the back of
the page for another. This means wasting some paper, but it will enable you to file all the client
ledger pages that refer to a given client in chronological order and find those pages faster if you
need them. If you’re handling more than one case for the same client, you should maintain a
separate client ledger for each matter. NOTE: Use special caution when dealing with multiple
matters for the same client. Each matter should be uniquely identified and always use the same
identification for the particular matter on all documents referencing it so there will be no confusion.
Trust Receipts and Disbursement: RPC 1.15 says that you are allowed to deposit your own
money to pay bank service charges or fees on that account, but only in an amount necessary for
that purpose. The rule allows you to keep your own money in the account to cover bank charges;
it doesn’t require you to. Some lawyers arrange with the bank to have those charges assessed
against their operating or personal accounts.
If you deposit your own money into your client trust account to cover the charges, you may be
concerned about how much is reasonably sufficient. That depends on the kind of bank charges you
expect and how often you expect to incur them. For IOLTA accounts, there are other kinds of bank
charges you may incur, including charges for printing checks, for checks that are deposited in the
account and returned for insufficient funds, and for transferring money by wire, etc. You need to
know what these charges are so you can make sure that you always have enough money in the
account to cover them.
When the bank charges for a service (e.g. for wiring money) for a specific client, you can treat the
charge as you would any other cost and pay for it out of money you are holding for that client in
the account. But some charges, like printing checks, aren’t specific to a certain client. Like your
other general operating expenses, you — not your clients — have to pay these charges. That’s why
the rules allow you to keep a little of your own money— an amount “for the sole purpose of paying
bank service charges on that account, but only in an amount necessary for that purpose” — in your
client trust account.

41

Remember that a deposit of your own money to cover bank charges, like every deposit you make
to your client trust account, must be properly recorded in the general ledger/checkbook register for
your client trust account, and an Administrative Funds ledger. You should keep the
“Administrative Funds” ledger the same way you keep your individual client ledgers, recording
every deposit, every charge the bank makes against the account, and the running balance of money
you have left to cover the charges.

Client: Administrative Funds, Dee Fender, Esq.
Matter: 999999
R
Number Date
Description of
Payment Deposit
Balance
Transaction
(Payor/Payee)
Deposit
12/01/2012
Deposit to open
$50.00
$50.00
account - Fender
Bank Fee 07/18/2013
Client Epsilon
$5.00
$45.00
Returned Deposit Fee
Deposit
07/31/2013
Client Epsilon
$5.00
$50.00
Returned Deposit Fee
The general ledger/checkbook register: This is a written journal for each client trust account.
You must keep track of the money going in and out of a client trust account on a general
ledger/checkbook register, and give the account balance after each receipt or payment. When you
have a trust account that’s designated solely for one client’s money, the general ledger/checkbook
register will be identical to the client ledger.
Maintaining a general ledger/checkbook register is the only way you can know how much you
have in the account at any given time. If you maintain the general ledger/checkbook register
properly, you will not overdraft the client trust account unless there is a bank error.
In the general ledger/checkbook register, you must record every deposit into and payment out of
the client trust account. For every deposit, you must record the date you deposited the money, the
payor (source) of the funds deposited, and the amount of money you deposited. After you record
each deposit, you have to add the amount to the account’s old balance and write in the new total.
For every payment, you must list the date, the payee of the funds disbursed, and the amount of the
payment. After you record each payment, you have to subtract the amount from the account’s old
balance and write in the new total. Although it’s not required by the rule, you will find it a lot
easier to balance your books if you also record the client name and number of the check.

42

R

Number
Deposit
Deposit
1001
Bank Fee
Deposit

General Ledger/Checkbook Register
Date
Description of
Payment Deposit
Balance
Transaction
(Payor/Payee)
12/01/2012 Deposit to open
$50.00
$50.00
account - Fender
12/15/2012 Deposit – advanced
$250.00
$300.00
fees – client Alpha
07/17/2013 Dee Fender, Esq. –
$250.00
$50.00
earned fees
07/18/2013 Client Epsilon
$5.00
$45.00
Returned Deposit Fee
07/31/2013 Client Epsilon
$5.00
$50.00
reimbursement for $5
returned deposit bank
charge

After taking into consideration the above requirements, a lawyer has numerous choices for
software programs to computerize trust account procedures. The lawyer should consider the
volume of transactions, the amount of money he or she can or is willing to spend on software and
the hardware that will run it, the computer skills of the lawyer and of all staff members who will
be assisting, and the availability and cost of training in his or her community.
Most of the complicated timekeeping/billing software being used by medium and large firms
includes modules for handling the trust account. Because staff members are already trained on the
basics of the timekeeping/billing product and the module is designed to work in an integrated
fashion with the main program, firms will typically utilize a module for trust accounting.

F. Automated Alternatives to Managing Your Trust Account
Automating your trust account recordkeeping process can reduce the amount of data entry and
calculation errors. You can search and find trust account information quickly, and perhaps from
remote locations. Automating can organize the routine process of maintaining your trust account.
It can save you space, but ALWAYS print copies of your client ledgers, general ledger, and
reconciliation.
Choices for software packages range from the basic to the sophisticated: 1

This is not an exhaustive list. The Board of Professional Responsibility does not guarantee or
endorse any particular software package.
1

43

Fully integrated, legal-specific, trust
accounting, time & billing, general
ledger accounting software.
(PCLaw, Abacus Accounting,
Amicus Accounting, Juris, and more)
Legal-specific trust accounting software with
or without time & billing
(Amicus Premium Billing, EasyTrust, Tabs3
Trust Accounting, Billing Matters,
Credenza, Clio, Rocket Matter, and more)
Non-legal-specific time & billing software with
integrated trust accounting (TimeSlips)
Non-legal specific, small business, accounting software
(QuickBooks Pro/Premier, QuickBooks Online)
“Make the most of what you already paid for.” (Excel or Quattro Pro)
Non-automated trust account recordkeeping
Excel and Quattro-Pro are not legal-specific. These programs are free if you own the Microsoft
Office Suite or Corel Suite. These are relatively easy to learn for basic trust account management
purposes. They are good for lawyers not needing to integrate the trust accounting function with
time and billing or other practice management software. These are good for firms with 10 clients
or fewer with limited activity.
A sole practitioner or small firm with few transactions may find a simple, inexpensive program
that functions basically, like a checkbook to be satisfactory for maintaining the trust account.
Quicken, for example, will not only do the math to provide a running balance for the entire account,
but can be set up to provide the equivalent of an individual client ledger by using the client name
in the “category,” field. The lawyer can then sort by “category” and get a display on the screen or
a print-out of all deposits and disbursements related to that client, including a running balance.
Quicken is one example of a single entry bookkeeping program. In a single entry system, only one
entry is made for any given transaction. For example, when a check is written in Quicken, the
lawyer simply enters the amount of the check and the computer deducts it from the balance.
Although the lawyer must designate the client in “category” if he or she wants to use the computer
to create client ledger equivalents, there is no need to enter both debits and credits.
Quicken is inexpensive. It is integrated with tax preparation software, such as TurboTax. It is userfriendly and easy to learn. Quicken has limited automated functions for the trust account, but can
be customized to accommodate a law firm trust account. The system must be set up to show
running balances on all ledger reports, which can be difficult to do. The program is networkable;
however, the software company will not provide technical support if it is on a network. Quicken
can print checks and the Home and Business version is capable of limited invoicing.
44

In a double-entry system, however, there must be at least one debit and at least one credit for each
transaction, with the total dollar amount recorded as debits always equal to the total amount
recorded as credits. Examples of double-entry bookkeeping systems are QuickBooks and
Peachtree.
QuickBooks Pro/Premier have more features for law firms, yet it is not legal-specific. It now has
Legal Wizard to guide you through the installation, and will set up reimbursable cost accounts,
(i.e. copies, postage). The software links to Amicus Attorney, Time Matters, Practice Master, and
more. With the Case Management program link, it provides a fully integrated accounting function.
QuickBooks Online is considered a software-as-a-service (SaaS) system. You pay a monthly
subscription for its use, and it’s accessible from anywhere you have an internet connection. It has
features for law firms, but is not legal-specific.
TimeSlips (by Sage) has a trust account capability integrated with time and billing functions. It is
not legal-specific, but many solo practitioners and small law firms use it. TimeSlips links with
Amicus Attorney, Time Matters, Abacus Law, and other case management programs. You can
purchase an extra module for handling a general account. Remember, however, that TimeSlips
must be set up so that a running balance after each transaction is included on all ledgers.
Tabs3 is a specific program for managing a trust account. Tabs3 can track up to nine trust accounts.
It can print IRS Form 1099 as well as checks. Tabs3 provides fully integrated time and billing
functions, firm accounting and case management (Tabs3, General Ledger, and Practice Master).
Easy-Trust is a legal-specific software program used for managing a trust account only. It is userfriendly and easy to learn. Easy-Trust can even print checks. It prepares three-way reconciliations
reports. Easy-Trust is a stand-alone program or it can be networked, and may be combined with
Easy-TimeBill for billing; however, it does not link with any case management software.
PCLaw is a legal-specific program that provides fully integrated trust accounting, time and billing
features, and general ledger accounting. The Pro Version includes calendaring, document
management, and case management functions. Modules are also available for remote computing.
The program can also print checks and e-mail invoices.
Billing Matters has a legal-specific version available. The program has fully integrated trust
accounting, time, and billing features. It offers a seamless integration with front office and case
management functions (Time Matters.) It can also be purchased as an optional “add-on” to
TimeMatters.
Abacus Accounting is legal-specific. The program has fully integrated trust accounting, time and
billing features, general ledger accounting and payroll functionality. It offers a seamless
integration with front office and case management functions (Abacus Law). The program is not
available as a stand-alone. It can print checks and e-mail invoices.
Amicus Accounting is legal-specific. The program has fully integrated trust accounting, time and
billing features and general ledger accounting functionality. It offers a seamless integration with
45

front office and case management functions (Amicus Attorney Small Firm). It can be purchased
as a stand-alone program, and it prints checks as well.
Amicus Premium Billing is legal-specific. The program has fully integrated trust accounting, time
and billing features, but not general ledger. An optional module with full front office and case
management functions (Amicus Premium) is available. The program is not available as a standalone. It can also print checks.
Credenza Pro is legal-specific. The program has fully integrated trust accounting, time and billing
features, but not general ledger capabilities. It can integrate with QuickBooks. Credenza Pro
includes front office and case management functions. It is an Outlook “add-in,” but cannot print
checks.
In addition to the single and double entry software programs designed for general business use,
there are also a number of programs specifically designed for law offices. Several, including PC
Law Jr. and TABS III, are available at prices affordable for solo or small firms practitioners. Other
choices include more sophisticated and therefore more costly programs, and add-on modules to
programs that perform a wide range of timekeeping, billing and accounting functions.
One of the practical differences between general business and law-specific accounting software is
that law-specific programs are built around the concept that each client’s money in a trust account
has to be accounted for separately from every other client’s money. Therefore, when an entry is
made in the trust account for a disbursement, the software prompts the user to enter the name of
the clients and automatically performs a check to assure that that particular client has adequate
funds to cover the disbursement.
Once the transaction is made, the software automatically updates that client’s ledger as well as the
overall account records. By contrast, in a program not designed specifically for legal use, there is
no automatic check of the total for the individual client, and the computer user must take steps
(such as sorting the general ledger/checkbook register by category) to determine whether the
particular client has sufficient funds.
Some lawyers don’t want to change the product they currently use for timekeeping and billing, but
want to link to a program that supplements their system with the ability to maintain records on
both the trust and operating accounts. An example of this combination is TimeSlips, which,
although it was not specifically designed for lawyers, is widely used in the legal environment for
timekeeping and billing. Another example is Quicken.
Using a computerized program for maintaining the trust account reduces the risk of mathematical
error and provides the capability to sort data to instantaneously acquire information about a client’s
funds on the screen. However, all computer programs still require human input of data, and, while
the risk of human error can be reduced by decreasing the need for multiple entries of the same
data, the risk of human error cannot be totally eliminated through technology. Therefore, the
lawyer, who is the person most familiar with the client’s matter and the one most likely to
recognize if an error has occurred, must still be vigilant in assuring that the client’s money is
properly protected and accounted for until its final disbursement.
46

G. What records do you have to keep of other properties?
You have a responsibility to protect and keep track of any client property, even if it is not money.
It is important that at any point in time you know what property you are holding, when it was
received and where it is located. For example, if you are holding securities for a client they should
be kept in a secured place such as a safe deposit box and you should have a log showing when you
received the securities, which bank they are located at, and if returned to the client, the date you
returned them.

H. Other Resources
•

Go to the vendor website.

•

Read features, versions, and hardware requirements.

•

Read compatibility with other software (Palm software, time & billing, accounting)

•

Training and/or manuals provided.

I. Reminders
•

After each transaction, calculate and record a new running balance of the total in the
account on the general ledger/checkbook register, as well as a running balance on the
respective individual ledger for the client on whose behalf the transaction was made.

•

Each month, perform a three-way reconciliation: Calculate the total for all individual client
ledgers, compare that to the total in the general ledger/checkbook register (if it doesn’t
match, find the discrepancy before proceeding), then reconcile your general
ledger/checkbook register to the bank statement, adjusting for outstanding checks, deposits
in transit (made after your bank’s cut-off for that month’s bank statement), and any bank
charges.

•

Remember that trust account records, including bank statements, canceled checks,
duplicate deposit slips, client ledgers and reports to clients accounting for their funds, must
be maintained for a minimum of five years following termination of representation of that
specific client.

•

ALL transactions must be recorded to a ledger.

•

Total of the ledgers should always match the balance in the general ledger/checkbook
register.

47

Section 9: Reconciliation
“Reconciliation” means checking the three basic records you are required to keep - the bank
statements, the client ledgers, and the general ledger/checkbook register - against each other so
you can find and correct any mistakes.
Formal Ethics Opinion 89-F-121 requires you to reconcile your client trust account records. Even
banks make mistakes when it comes to recording money transactions. That is because when you
are working with numbers, mistakes are easy to make and difficult to notice. No amount of training
can completely eliminate these mistakes.
To make sure that you find and correct these mistakes, you must record every client trust account
transaction twice (in your client ledger and your general ledger/checkbook register), and check
these records against each other and against the bank’s records. For example, let’s say you deposit
a check for $1,000 into your client trust account but mistakenly record it as “$10,000” in your
client ledger and add $10,000 to your client’s running balance. In your general ledger/checkbook
register, you recorded the check correctly and added $1,000 to your client trust account’s running
balance. How will you find the mistake? The general ledger/checkbook register balance is right,
so you won’t find the mistake by bouncing a check. The numbers in the client ledger all add up so
there is no way to tell you made a mistake. Unless you compare your client ledger balance to your
general ledger/checkbook register balance, you won’t be able to find the recording error. And
unless you compare your client ledger and general ledger/checkbook register against the bank
statement, you won’t know which entry was right - $10,000 or $1,000.
We have just described the quarterly reconciliation process. The theory is that it is unlikely that
the same mistakes will be made in three different records - the client ledgers, the general
ledger/checkbook register, and the bank statement - so if those records are all checked against each
other, any mistakes will show up.
Formal Ethics Opinion 89-F-121 requires quarterly reconciliations of the trust account balance to
the current bank statement for a trust account, while noting that monthly reconciliations is a better
practice. However, there is an important distinction between the basic reconciliation that must be
done monthly and the more thorough reconciliations that must be done each quarter.

A. Monthly Reconciliation
You cannot do a reconciliation for a month until you are sure you have correct balances in all your
client ledgers and general ledger/checkbook register for the previous month. If you have not
recently reconciled your books, or if you are worried that they are wrong, you may want to bring
in a bookkeeper to straighten them out before you take on the monthly and quarterly reconciliations
yourself.
Once you have correct balances for the previous month, you are ready to reconcile. The steps
required for this type of reconciliation are not unlike those necessary to balance a personal
checking account.
48

There are two main steps in reconciling monthly:
1. From the balance shown on the bank statement for the monthly reporting period, subtract all
outstanding checks. To this amount, add all deposits that have not cleared the bank. This is the
current bank balance.
2. Confirm that the current bank balance equals the total balance for the trust account as shown on
the lawyer’s records (if using manual accounting, this would include check stubs or the account
register).
The cut-off date for the bank statement and the trust account balance must be the same or the two
balances may not reconcile. Note that the “Reconciliation Summary” produced by accounting
software will typically satisfy the monthly requirement to reconcile the current bank balance to the
total trust account balance (a different software report may be necessary for the quarterly
reconciliation).

B. Quarterly Reconciliation
Formal Ethics Opinion 89-F-121 requires a quarterly reconciliation of the trust account. The
quarterly reconciliations require the extra step of adding up individual balances for each client as
shown on the trust account ledger and making sure that this total reconciles to the bank current
balance for the month at the end of the quarter. Quarterly reconciliations promote accurate
accounting for client funds by ensuring that the running balances for each client, when totaled,
equal the total funds on deposit in the trust account.
Remember that a three-way reconciliation should be conducted every quarter for every client
trust account.
When completing the three-way reconciliation, it is a good idea to use a calculator that will produce
a printed record of the calculation you performed. That way, if your records do not match, you can
easily check to see if the reason is a mathematical mistake made while performing the
reconciliation.
You are required to retain these three different records and the reconciliation reports for five years
to satisfy the recordkeeping requirement in Tenn. Sup. Ct. R. 9 § 35. If your software does not
allow you to retrieve a hard copy of the reconciliation report at a later date, a hard copy should be
printed at the time of reconciliation.
It is fine to hire a bookkeeper or the equivalent, but you are still personally responsible for
accounting to your clients and to the Board of Professional Responsibility for the money in your
client trust accounts. Therefore, even if you never intend to do the reconciling, you should
understand the process. Even if it is your bookkeeper’s mistake, if you bounce a client trust account
check, you are the one your client or the Board is going to come to for an explanation.

49

C. Example of Three-way Reconciliation
The detailed example below illustrates a manual method that can be used to perform the three-way
reconciliation on a general trust account required each quarter. This is not the only method that
can be used, as any method that satisfies the rules will be sufficient.
These are the client ledgers that will be used for the three-way reconciliation example
(Note: the “R” box is a check-box for use during the reconciliation):
Client: Alpha, A.
R
Number
Deposit
1001

Date
01/15/2011
01/17/2011

Client: Beta, B.
R
Number

-FEES
Date

Deposit
1004
1005
Client: Beta, B.
R
Number

01/20/2011
02/01/2011
02/05/2011
-COSTS
Date

Deposit
01/20/2011
1002 02/01/2011
1003 02/05/2011
Client: Gamma, G.
R
Number

-FEES
Date

Deposit

02/08/2011
1007 02/11/2011
Client: Gamma, G. -COSTS
R
Number
Date
Deposit

02/08/2011
1006 02/11/2011

Client: Delta, D.
R
Number
Deposit

-FEES
Date
02/15/2011

1008 02/17/2011
1009 02/17/2011

Matter: 111111
Description of Transaction
Payment Deposit
Balance
(Payor/Payee)
Deposit - fees
250
250
Dee Fender, Esq. – earned fees
250
0
Matter: 222222
Description of Transaction
Payment Deposit
Balance
(Payor/Payee)
Deposit - $1,000 fees
$1,000
$1,000
Dee Fender, Esq. – earned fees
$600
$400
Dee Fender, Esq. – earned fees
$400
$0
Matter: 222222
Description of Transaction
Payment Deposit
Balance
(Payor/Payee)
Deposit - $500 costs
$500
$500
Superior Court – Nowhere
$125
$375
County Filing Fee – Cost
Nowhere Vital Records – Birth
$75
$300
Cert. - cost
Matter: 333333
Description of Transaction
Payment Deposit Balance
(Payor/Payee)
Deposit - $1,200 fees
$1,200
$1,200
Dee Fender, Esq. – earned fees
$1,200
$0
Matter: 333333
Description of Transaction
Payment Deposit Balance
(Payor/Payee)
Deposit - $250 costs
$250
$250
Record Round Up - costs
$150
$100
Matter: 444444
Description of Transaction
Payment Deposit Balance
(Payor/Payee)
Deposit - $15,000 fees
$15,000
$15,000
(unearned)
Dee Fender, Esq. – earned fees
$2,000
$13,000
8 hours @ $250/hr
D. Delta - refund
$13,000
$0
50

Client: Epsilon, E.
R
Number

Date

Deposit

03/15/2011

Returned
Deposit
Deposit

03/20/2011
03/31/2011

Matter: 555555
Description of Transaction
Payment Deposit Balance
(Payor/Payee)
Deposit - $2,000 fees
$2,000
$2,000
(unearned)
Returned deposited check for
$2,000
$0
insufficient funds
Deposit - $2,000 fees
$2,000
$0
(unearned)

Client: Administrative Funds, Dee Fender, Esq.
Description of Transaction
R Number
Date
(Payor/Payee)
Deposit
01/01/2011 Deposit to open account
Client Epsilon Returned Deposit
Bank Fee
03/20/2011 Fee
Client Epsilon reimbursement for
Deposit
03/31/2011 $5 returned deposit bank charge

Matter:

999999

Payment

Deposit
Balance
$50
$50

$5

$45
$5

$50

This is the general ledger/checkbook register that will be used for the three-way
reconciliation example:
General Ledger/Checkbook Register
R Number
Deposit
Deposit
1001
Deposit

Date

01/01/2011
01/15/2011
01/17/2011
01/20/2011

1002

01/25/2011

1003
1004
1005

01/25/2011
02/01/2011
02/05/2011

Deposit
1006
1007
Deposit

02/08/2011
02/11/2011
02/11/2011
02/15/2011

1008
1009

02/17/2011
02/17/2011

Deposit

03/1/2011

Returned
Deposit
Bank Fee

03/20/2011
03/20/2011

Deposit

03/31/2011

Description of Transaction
(Payor/Payee)

Deposit to open account
Deposit – Alpha fees
Dee Fender, Esq. – Alpha earned fees
Deposit – Beta $1,000 fees/$500 costs
Superior Court – Nowhere County
Filing Fee – Beta cost
Nowhere Vital Records – Birth Cert. –
Beta cost
Dee Fender, Esq. – Beta earned fees
Dee Fender, Esq. – Beta earned fees
Deposit – Gamma $1,200 fees, $250
costs
Record Round Up – Gamma costs
Dee Fender, Esq. – Gamma earned fees
Deposit – Delta $15,000 fees (unearned)
Dee Fender, Esq. – Delta earned fees 8
hrs @ $250/hr
D.Delta – refund of unused advanced fee
Deposit – Epsilon $2,000 fees
(unearned)

Epsilon – returned deposited check for
insufficient funds
Epsilon returned Deposit Fee
Deposit – Epsilon $2,000 fees
(unearned with reimbursement for $5
returned deposit bank charge

51

Payment
$250

Deposit

$50
$250

$1,500

Balance

$50
$300
$50
$1,550

$125

$1,425

$75
$600
$400

$1,350
$750
$350

$150
$1,200

$1,450
$15,000

$2,000
$13,000

$1,800
$1,650
$450
$15,450
$13,450
$450

$2,000

$2,000
$5

$2,450

$450
$445
$2,005

$2,450

This is the trust account bank statement that will be used for the three-way reconciliation example:

Bank of Wegottayourmoney
Dee Fender, Esq.
Dee Fender’s IOLTA Trust Account
1201 E. Easy Street, Suite #100
Sunnyvale, NC 20010
Account Number: 000200800888
Activity Through: 1/01/2011 – 03/31/2011
Beginning Balance 1/01/2011 $50.00
Ending Balance 03/31/2011 $520.00
Deposits/Credits
Date
1/01/11
1/15/11
1/20/11
2/08/11
2/15/11
3/15/11

Dollar Amount
$50.00
$250.00
$1,500.00
$1,450.00
$15,000.00
$2,000.00

Total Deposits/Credits:

$20,250.00

Withdrawals/Debits
Check #
1001
1002
1004*
1005
1006
1007
1008
1009

Dollar Amount
$250.00
$125.00
$600.00
$400.00
$150.00
$1,200.00
$2,000.00
$13,000.00

Type
Deposit
Deposit
Deposit
Deposit
Deposit
Deposit

Date
1/17/11
1/25/11
2/1/11
2/5/11
2/11/11
2/11/11
2/17/11
2/17/11

*Indicates preceding check (or checks) is outstanding
Other Withdrawals/Debits
Type
Returned Deposit 3/15/11
Returned Deposit Fee
Total Withdrawals/Debits:

Dollar Amount
$2,000.00
$5.00

Date
3/20/11
3/20/11

$19,730.00

Daily Balance
1.1.11
1/15/11
1/17/11
1/20/11
1/25/11

$50.00
$300.00
$50.00
$1,550.00
$1,425.00

2/1/11
2/5/11
2/8/11
2/11/11
2/15/11

$825.00
$425.00
$1,875.00
$525.00
$15,525.00

52

2/17/11
3/15/11
3/20/11
3/31/11

$525.00
$2,525.00
$520.00
$520.00

THREE-WAY RECONCILIATION SHEET
Client Ledger Balances:
1)

Administrative Funds

2)

Alpha

3)

Beta

4)

Gamma

5)

Delta

6)

Epsilon

7)

$50

Client Name

Ledger Balance

Client Name

Ledger Balance

Client Name

Ledger Balance

$0

$300
$100

Client Name

Ledger Balance

Client Name

Ledger Balance

$0

$2,000

Client Name

Ledger Balance

8)
9)
10)
Step 1: Enter total client ledger balances as of 03/31/2011……………………………………………………… $2,450
Step 2: Enter general ledger/checkbook register balance……………………………………………………….. $2,450
Step 3: Enter ending balance per bank statement, 03/31/2011………………………………………………….. $520
Step 4: Enter total outstanding deposits…………………………………………………….…………………… $2,005
(Deposits made to the account yet not captured on bank statement. These will be ADDED to the bank statement amount.)

Step 5: Enter total outstanding checks……………………………………………...…………………………… $75
(Checks that have been drawn from the account yet not captured on bank statement. These will be SUBTRACTED from the
bank statement amount.)

Step 6: Subtract any bank service charges…………………………………………………………….………… $0
Step 7: Calculate adjusted balance………………………………………………………………………………. $2,450
(Ending bank statement balance plus outstanding deposits minus outstanding checks)

Reconciliation: All three should match…
Total of all client ledgers………………………………………………………………………………………… $2,450
(Total from Step 1.)

Adjusted Bank Balance…………………………………………………………….……………………………. $2,450
(Total from Step 7.)

General ledger/checkbook register Balance……………………………………………………….……………. $2,450
(Total from Step 2.)

Reconcile the General Ledger/Checkbook Register with the Client Ledgers
53

For illustrative purposes only, the bank statement provided for this reconciliation covers the entire
quarterly period of 1/01/2011 through 03/31/2011. In every day practice, your trust account bank
statement would only cover one month, e.g., 01/01/2011 through 01/31/2011.
The first part of reconciliation is to reconcile the general ledger/checkbook register with the client
ledgers. The purpose of this step is to make sure that the entries in your client ledgers agree with
the entries in your general ledger/checkbook register.
Step 1: On the lines above “Client Name” write the name of each client whose money you are
holding in the general trust account. On the lines above “Ledger Balance,” write the running
balance as of the last day covered by the bank statement (in this case, March 31, 2011) from each
client ledger next to the name of that client. Add up the client ledger balances in the “Ledger
Balance” column and write in the total after “Total of Client Ledger Balances as of 03/31/2011.”
Even if only one client’s money is in the general trust account, you have to write that client’s
balance on this line.
Step 2: Notice that the “Total of Client Ledger Balances as of 03/31/2011” exactly matches the
“General ledger/checkbook register Balance.” That means that your individual client ledger
balance entries agrees with your general ledger/checkbook register entries, and you are ready to
move on to the next step of the reconciliation process.
When the “Total of Client Ledger Balances” does not exactly match the “General
Ledger/Checkbook Register Balance,” do not panic; you have found a mistake, and that is what
reconciliation is for. You can call in a bookkeeper to help you, or make the correction yourself.
Since you record every deposit and withdrawal twice, if you systematically compare each entry in
the general ledger/checkbook register with the corresponding entry in the client ledger, and check
the new balance you entered after each entry, you will always find the mistake. When you have
found and corrected any mistakes, move on to Step 3.
Reconcile the General Ledger/Checkbook Register with the Bank Statement
Step 3: In the space after “Ending Balance per bank statement, 03/31/2011,” write in the running
balance for the general trust account as of the last day covered by the bank statement.
Steps 4 and 5: The purpose of these steps is to make sure that the bank’s records of the deposits
and withdrawals you’ve made to your general trust account during the past month match your
records. Since you’ve already reconciled the client ledgers with the general ledger/checkbook
register, you know that the entries in the client ledgers agree with the ones in the general
ledger/checkbook register. Therefore, unless you find a mistake during this stage of the
reconciliation process you only have to compare the bank statement with the general
ledger/checkbook register.
Deposits and withdrawals not posted on bank statement. Generally, the bank sends out
statements one to three weeks after the end of the month. As a result, by the time you reconcile the
account, you will usually have made deposits or withdrawals that are not shown on the bank
statement. In addition, checks you wrote or deposits you made may not have cleared by the time
54

the bank produced the statement, and therefore the amounts of those checks or deposits won’t be
reflected in the account balance shown on the bank statement. Thus, to compare the balance of the
bank statement for the end of the month with the balance your general ledger/checkbook register
shows for the end of the month, you have to adjust the general ledger/checkbook register balance
by adding all un-credited deposits and subtracting all undebited withdrawals.
To find out which transactions have not been posted, you have to compare the entries on the bank
statement with the entries in your general ledger/checkbook register.
Go through each entry on the bank statement and compare it to the corresponding entry in your
general ledger/checkbook register. If the entry in the general ledger/checkbook register exactly
matches the entry on the bank statement, mark off the entry in the general ledger/checkbook
register to show that the money has cleared the banking process, and mark off the entry on the
bank statement to show that you have verified it against the general ledger/checkbook register. The
marks in the general ledger/checkbook register will help you keep track of items like checks that
are never cashed, which otherwise can become those small, inactive balances that make your
account harder to reconcile. The marks should be permanent (i.e. in ink) and clearly visible, but
should not make it hard to read the entries. You should use the same mark consistently, to avoid
confusion later.
When you are finished, all the entries on the bank statement should be checked off to show that
you have verified them against the corresponding entries in the general ledger/checkbook register.
Now go back through the general ledger/checkbook register to find any entries that are unmarked;
these transactions haven’t yet been debited or credited by the bank. As you go through the bank
statement, there are two kinds of mistakes you may find:
1. A deposit or withdrawal listed on the bank statement that is not in your general
ledger/checkbook register. To correct this mistake, go through your canceled checks (if
it is a withdrawal) or deposit slips (if it is a deposit) until you find the one that reflects the
transaction on the bank statement. If you cannot find a canceled check or deposit slip that
matches the entry on the bank statement, contact your banker and ask him or her to help
you track down the transaction. DO NOT record the bank statement entry in your records
until you verify that the transaction occurred; banks make mistakes, too.
2. An entry in the bank statement is different from the corresponding entry in the
general ledger/checkbook register. You correct this mistake the same way you correct a
transaction you forgot to record. First, find the canceled check or deposit slip that shows
the transaction to figure out which record is correct—the general ledger/checkbook register
or the bank statement. If you cannot find a canceled check or deposit slip for this
transaction, contact your banker and ask him or her to help you track it down before you
make any changes in your records.
If the canceled check or deposit slip shows that the bank statement is wrong, write a note on the
bank statement that clearly describes the mistake, then contact your banker and tell him or her to
correct their records. If it shows that your general ledger/checkbook register is wrong, record the
correction in the general ledger/checkbook register and the appropriate client ledgers. These must
55

be entered twice in both the general ledger/checkbook register and the client ledger for the client
on whose behalf you deposited or paid out the money.
When you have found and corrected any mistakes, move on to Step 6.
Step 6: Make sure that bank charges reflected on the bank statement are also reflected in your
records. Since you may not know what these bank charges are until you receive the bank statement,
you need to enter them into your records after you receive the bank statement.
All bank charges must be recorded in the general ledger/checkbook register. If a bank charge was
incurred on behalf of a specific client (as for example, a charge for wiring money to a client), the
charge must also be entered in that client’s ledger. (This ensures that the general ledger/checkbook
register balance will continue to match the total of the individual client ledger balances.) If the
charge was not for a specific client (for example, a charge for printing general trust account
checks), the charge must also be entered in the Administrative Funds/Bank Charges ledger.
Calculate the Adjusted Balance
Step 7: In the space after “Calculate Adjusted Balance,” write the balance after you calculate the
following:
1. Ending Bank Statement Balance
2. Plus All Outstanding Deposit Amounts
3. Minus All Outstanding Check Amounts
4. Minus Bank Fees and Charges
Trust Reconciliation Sheet
The totals from Step 1 (all client ledgers), Step 2 (general ledger/checkbook register), and Step 7
(adjusted bank balance), should all match. If they do, you have successfully reconciled the account.
If they do not, call in a bookkeeper or go back and recheck your ledgers and bank statement to find
and correct the mistake(s). Now clip all the pages that relate to the reconciliation process together
(and any calculator tapes) and file them.

56

Section 10: Internal Controls
A. The Need for Control
Having a good working set of accounting records is an essential step toward the sensible
management of client trust funds. It is also the first essential step to avoiding theft. However, it is
only a first step. Without required records, the lawyer has not met the obligation to clients or to
the Court. Moreover, the lawyer without proper records can be responsible for knowingly, or
negligently invading clients’ trust funds. Equally important is the fact that the lawyer who has poor
records is ripe for theft by partners, associates, bookkeepers, and secretarial employees.
Even when records are properly established, however, records alone do not satisfy the lawyer’s
ethical obligations and do not serve as a defense against theft by others. In order to meet these
challenges, one must: (a) maintain records in proper working order; and (b) exercise control over
these records by actively reviewing them in accordance with a regular oversight program. This
chapter outlines some of the steps by which lawyers can control their client trust account and meet
ethical obligations and minimize the possibilities of theft.

B. Diversification of Financial Functions
The cardinal rule in avoiding theft is to divide the monetary functions in a law office. This is
particularly difficult for a small firm or sole practitioner. However, if one secretary, for example,
is given authority and responsibility to handle the trust and business accounts, reconcile these
accounts, handle bank statements and, occasionally, even sign checks, that one person can easily
doctor the records to cover up a theft and avoid detection for a long period of time. The same is
true where one lawyer in a firm has sole responsibility for accounts with no oversight. Either one
could unilaterally steal from the law firm.
Ideally, functions can be divided this way:
•

Only a lawyer may sign trust account checks.

•

Only one secretary or bookkeeper should have access to trust and business accounts
records. Access by many secretaries makes it more difficult to pinpoint responsibility and
increases opportunities for theft.

•

A separate staffer should open all mail and record all incoming checks, which should then
be given to the secretary/bookkeeper responsible for maintaining the accounts.

•

All accounting records should be reconciled by the lawyer or by an independent accountant
or bookkeeper on a monthly basis.

•

The lawyer responsible should receive directly all monthly bank statement unopened or
directly by electronic transmission.

57

•

An annual (or quarterly) audit should be done by an outside accountant.

This layered diversification of responsibility minimizes the opportunities for fraud, since
successful theft in this system requires collusion between two or more persons.

C. Exercising Control of Records
Control is not a self-executing concept. It must be exercised. The following are positive steps that
can be taken to exercise control over trust and business accounts funds:
(a) When the lawyer signs trust account checks, a review of the client’s ledger should be made
to determine the validity of the checks drawn.
(b) A periodic review should be made of the reconciliation book prepared by the
secretary/bookkeeper to determine its correctness.
(c) A perusal and inquiry of checks outstanding for an extended period of time should also be
made periodically.
(d) Randomly, a review of the current balance on the general ledger/checkbook register and
the balance of funds reflected on the client’s ledger should be undertaken when a
disbursement is made to ensure that there are sufficient collected funds to accommodate
the disbursement.
(e) The bank statement (with canceled checks) should be delivered unopened to or directly by
electronic transmission. The lawyer should then peruse the canceled checks for the
following:
(1) Are the payees familiar?
(2) Are the clients who are named on the checks firm clients?
(3) Are endorsements made by the payee or by an employee in the law office?
(4) Are checks being cashed instead of being deposited? If so, communicate with
one or two payees to make sure they received the money?
(5) Are duplicate payments being made? If so, is one legitimate and the other being
taken by an employee?
(6) Is your signature on all checks authentic? DO NOT use signature stamps.
(f) Randomly review bank statements that are delivered to you unopened to make sure that
none are missing. Personally obtain and review any missing bank statements and also any
checks that have been outstanding for a long time or which are missing.

58

D. Exercising Control Over Employees
1. Hiring
Just as an eviction action is no substitute for finding a good tenant, so too a lawsuit or criminal
action is not much solace for hiring a dishonest employee. There is no substitute for hiring good,
honest employees. While there are no guarantees on new employees, there are basic steps that
should be taken. It is most important to do a thorough background review and to check references.
One law firm hired a bright, attractive secretary who had excellent skills. They later fired her for
stealing $26,000 and only then inquired of her former employer to find out she had previously
been fired from that firm and criminally prosecuted for theft.
2. Instruction
Lawyers are ethically obligated under RPC 5.3 to properly instruct and oversee employees to
ensure that their actions are compatible with the lawyer’s professional obligations. This is
particularly true of those employees who will be involved with the handling of clients’ and firm
funds. Give them a copy of the Rules and this manual and make sure they understand the basics.
Then follow up periodically and check their compliance.
3. Supervision
A partner in a law firm, and a lawyer who individually or together with other lawyers possesses
comparable managerial authority in a law firm, shall make reasonable efforts to ensure that the
firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the
Rules of Professional Conduct. A lawyer having direct supervisory authority over another lawyer
shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional
Conduct. RPC 5.1(a)(b).
With respect to a nonlawyer employed or retained by or associated with a lawyer, a partner, and a
lawyer who individually or together with other lawyers possesses comparable managerial authority
in a law firm, shall make reasonable efforts to ensure that the firm has in effect measures giving
reasonable assurance that the nonlawyer's conduct is compatible with the professional obligations
of the lawyer. RPC 5.3(a).

E. Process
It is essential that all law firms develop a sound, routine process for handling checks that any
deviations will serve to highlight questionable practices. Key among these processes are:
•

Use restrictive endorsements on all checks received, marked “for deposit only” into a
specific account or accounts.

•

Require two signatures for large checks.

•

Never use a facsimile signature stamp.
59

•

Never write trust account checks to cash.

•

Never use an ATM card to withdraw trust funds.

F. Billing Clients Regularly
One of the quickest ways to determine whether or not fees paid by clients for legal services (as
well as other monies paid to the law firm on the client’s behalf) have been handled improperly, is
to bill clients promptly. If money is diverted to other purposes by law firm staff and is not correctly
reflected on the bill, the client will be the first to complain. For this reason, many lawyers also
account to clients more frequently than they are otherwise obligated to do.

G. Separate Trust Accounts For Lawyers in Same Firm
There is no limit to the number of client trust accounts that may be maintained by a lawyer or law
firm. There is also nothing that prohibits each lawyer in a firm from maintaining trust accounts in
the lawyer’s own name separate from the firm. However, for good control, oversight and
accountability, firm accounts are preferable to individual accounts. When individual partners or
shareholders have separate trust accounts, they unnecessarily expose other principals to liability,
usually without the other principals having any ability to exercise oversight or control over the
handling of clients’ funds in the separate accounts.

H. Insurance—The Ultimate Control
The ultimate risk control mechanism is insurance. Despite all prudent audit control steps one may
take, it is still possible that a theft may occur. If reasonable audit control steps have been followed,
however, such a theft will be detected at an early time and, hopefully, while the amount of money
taken is small. Nevertheless, in a time where typical mortgage amounts run from $100,000 to
$400,000, just one theft can expose the lawyer to tremendous financial risk.
Insurance may be the key to avoiding liability for theft by another lawyer or employee in the firm.
Malpractice insurance policies usually have a standard exclusion relating to criminal, fraudulent
and dishonest conduct of an insured. However, many also contain an “Innocent Insured Exception”
to this inclusion. Some companies writing lawyer malpractice policies have a standard provision
in its “claims made” policy that, in effect, covers each and every insured who did not personally
commit, participate or acquiesce in the criminal, dishonest, fraudulent or malicious act, or remain
passive after having personal knowledge of such act.
Under this policy an “innocent” lawyer partner, shareholder or sole practitioner would not be faced
with declaring personal bankruptcy if another lawyer in the firm stole $800,000 as the result of a
gambling, drug or alcohol problem. Every lawyer should inquire into the feasibility of having the
firm’s malpractice policy contain this “innocent” lawyer exception. Lawyers should also inquire
about the cost of “Dishonest Employee” coverage for non-lawyer staff members who handle trust
and business funds.

60

Section 11: Interest On Lawyers Trust Accounts - IOLTA
A. What is IOLTA?
“IOLTA” (Interest On Lawyers’ Trust Accounts) is a method of raising funds through interest
earned on the aggregate balance in a lawyer or law firm trust (or escrow) account. A trust account’s
participation in IOLTA does not alter a lawyer’s determination of which funds should be held in
trust, or the important rules regarding handling and accounting for them.
The IOLTA program was established by the Tennessee Supreme Court in 1984, and the
responsibility for its administration was assigned to the Tennessee Bar Foundation. The purpose
of the program is to raise funds to distribute to Tennessee organizations which provide direct legal
services to the indigent, to organizations that seek to improve the administration of justice and to
students, in the form of scholarships, at the state-supported law schools.
All lawyers practicing in Tennessee, who hold client or third party funds in a pooled trust (or
escrow) checking account, must enroll those accounts in the Tennessee IOLTA program. The full
obligations of lawyers (and the banks that choose to offer IOLTA accounts) are found in Rule of
Professional Conduct 1.15 and Tenn. Sup. Ct. R. 43. As such, the IOLTA program functions as a
partnership between the legal and financial communities.

B. How it Works
Lawyers routinely receive funds from clients to be held for future use. Funds too small in amount
or held for too short a period of time to earn interest for the client, net of bank charges and
administrative fees, are combined, or pooled, into trust accounts. Before the establishment of
IOLTA programs (which now exist in all 50 states and the District of Columbia), funds held in
this manner earned no interest. The advent of the IOLTA concept allowed interest to be paid on
the aggregate balance in those accounts.
The lawyer’s responsibility is to enroll the account in the program at an Eligible financial
institution. Once this step is properly accomplished, no further lawyer action is required. The
financial institution calculates the interest earned, each month or quarter, and transmits that interest
directly to the Foundation.

Frequently Asked Questions
1. IS PARTICIPATION IN IOLTA MANDATORY FOR LAWYERS AND LAW FIRMS THAT
HOLD TRUST FUNDS?
Yes. Since January 1, 2010, a lawyer or law firm holding IOLTA-eligible funds must place those
funds in an IOLTA account at an Eligible financial institution. The lawyer also must complete the
IOLTA page of the Board of Professional Responsibility annual registration statement certifying
that an IOLTA-participating trust account is maintained and provide the bank name, account name
and number.
61

2. DO THE IOLTA RULES AFFECT LAWYERS WHO DO NOT HOLD TRUST FUNDS?
Yes. All lawyers are required to complete the IOLTA page of the Board of Professional
Responsibility annual registration statement. Lawyers not in private practice or those who do not
hold trust funds are “exempt” from participation in IOLTA, BUT they must certify that status
annually on the IOLTA page. For example, lawyers who work as a Judge, Attorney General, Public
Defender, U.S. Attorney, District Attorney, in-house counsel, teacher of law, are on active duty in
the armed forces or employed by state, local or federal government and not otherwise engaged in
the private practice of law, are exempt. Lawyers who maintain a Tennessee license but practice
law in another state are also exempt. The IOLTA page of the registration statement, which EVERY
lawyer must complete, provides check boxes for all exempt statuses.
3. WHAT ARE “IOLTA-ELIGIBLE” FUNDS?
Funds belonging to a client or third person are “IOLTA-eligible” if they cannot earn income for
the benefit of the client or third person in excess of the costs incurred to secure and distribute such
income to the client or third person. If so, the funds should be deposited in a lawyer or law firm
IOLTA-participating trust account.
4. WHAT IS AN “ELIGIBLE” FINANCIAL INSTITUTION?
Eligible financial institutions are those that voluntarily offer IOLTA accounts and comply with the
requirements of the Rules. The Foundation certifies financial institutions as “Eligible,” and the list
is available on the Foundation website (www.tnbarfoundation.org). Among the requirements to
be Eligible, a financial institution must pay interest on an IOLTA account at the highest rate it pays
to its non-IOLTA customers -- when IOLTA accounts meet or exceed the same minimum balance
or other account eligibility qualifications, if any.
5. HOW IS IOLTA HANDLED AT A LAW FIRM?
While each lawyer is required to comply with the IOLTA provisions of the Rules, members or
associates of law firms may meet those requirements using accounts shared by some or all lawyers
at the firm. Lawyers are not required to maintain individual IOLTA accounts.
6. HOW IS A TRUST ACCOUNT THAT PARTICIPATES IN THE IOLTA PROGRAM
OPENED?
Lawyers/law firms should complete the form titled “Notice to Financial Institution” available on
the Foundation website (www.tnbarfoundation.org) and visit an Eligible financial institution to
establish the new account. A copy of the completed form should be forwarded to the Foundation
once the account is established.

62

7. MAY LAWYERS DEPOSIT INDIVIDUAL CLIENT OR THIRD PARTY FUNDS IN
ACCOUNTS WHICH PAY INTEREST TO BE PASSED ON TO THE CLIENT?
Yes. Lawyers are expected to establish separate, interest-bearing accounts for individual client or
third party funds when the sum is large enough and/or the duration is long enough to justify the
cost of opening, administering and closing the account. Any interest accrued becomes the property
of the client or third party. Again, if the client or third party funds are not large enough or the
duration is not long enough to earn income net of the costs associated with the account, then the
funds must be placed in an IOLTA account at an Eligible financial institution.
8. WHO PAYS SERVICE CHARGES AND FEES ON ACCOUNTS PARTICIPATING IN
IOLTA?
Rule 43 of the Rules of the Supreme Court defines allowable reasonable service charges that may
be netted against the interest earned on IOLTA accounts. They are “(a) per check or electronic
debit charges; (b) per deposit or electronic credit charges; (c) a fee in lieu of minimum balance;
(d) FDIC insurance fees or FDIC account guarantee fees; (e) a sweep fee; and (f) a reasonable
IOLTA account administrative fee.” Check printing charges, wire transfer fees, bank or certified
checks, cash management fees and overdraft costs, etc., are the responsibility of and may be
charged to the lawyer or law firm maintaining the account. Lawyers with questions regarding
applicable account fees should contact the financial institution to request a service charge
disclosure.
9. ARE THERE OTHER REASONS A LAWYER WOULD NOT NEED AN IOLTA
ACCOUNT?
If the nature of a lawyer’s practice is such that no IOLTA-eligible funds would be held, a trust
account need not be established. Lawyers who do not hold IOLTA funds are required to certify
that status, using the check box, on the IOLTA page of the Board of Professional Responsibility
annual registration statement.
10. HOW IS THE INTEREST USED BY THE FOUNDATION?
The interest earned on IOLTA accounts is granted annually to law-related service providers in
Tennessee. These organizations apply and are selected through a competitive, multi-layered,
review process.
More information is available on the Foundation website
(www.tnbarfoundation.org).

63

Section 12: Other Relevant Trust Account Topics
A. Abandoned Property/Funds
Three situations provide unsolvable problems for lawyers:
•

Missing Owners—cases in which lawyers know to whom trust funds belong, but owners
cannot be found;

•

Unclaimed Trust Funds—cases in which lawyers know to whom trust funds belong, but
the owners fail or refuse to claim them; and

•

Unidentifiable Trust Funds—cases in which the ownership of trust funds has become
impossible to determine due to the passage of time (e.g. the merging of firms).

Maintenance of these funds, like all small inactive balances, hinders the process, since these odd
amounts of funds must be carried from month to month. RPC 1.15, Comment [14] provides a
procedure for disposing of these funds. If the funds remain unidentified or unclaimed, or if the
missing client cannot be found or will not accept the funds, the lawyer should forward the funds
according to Tennessee Code Annotated §§ 6-29-101 to 66-29-204 (Uniform Disposition of
Unclaimed Property Act).
There are several ways to address the problem of trust account checks that are not cashed for a
significant period of time. Some lawyers print “Void After 90 Days,” on trust account checks to
persuade payees not to hold the checks. The notation does not guarantee that the bank will not
honor the check after 90 days. This issue should be addressed with the bank in advance. Other
lawyers contact all recalcitrant payees who fail to negotiate a trust account check after a certain
period of time (usually six to nine months). Certified mail should be used if warranted by the
amount of the check. If the payee cannot be located or a reply is not received within a reasonable
amount of time, a stop payment should be placed on the check. If a stop payment order is placed
on a check, the check may still be cashed. The bank’s procedures for stop payment orders should
be understood in advance. After payment is stopped on a check, the funds are noted as returned on
the individual client ledger. If the lawyer believes the funds have been abandoned, the lawyer must
follow the Tennessee Unclaimed Property Act.

B. Unidentified Trust Funds
A lawyer who learns of unidentified funds in an IOLTA account must make periodic efforts to
identify and return the funds to the rightful owner. If after 12 months of the discovery of the
unidentified funds the lawyer determines that ascertaining the ownership or securing the return of
the funds will not succeed, the lawyer must remit the funds to the Tennessee Lawyers’ Fund for
Client Protection (TLFCP). No charge of ethical impropriety or other breach of professional
conduct shall attend to a lawyer’s exercise of reasonable judgement pursuant to RPC 1.15(f).

64

A lawyer who either remits funds in error or later ascertains the ownership of remitted funds may
make a claim to TLFCP, which after verification of the claim will return the funds to the lawyer.

C. Trust Account Overdraft Notification
All financial institutions, approved as depositories for client trust accounts, are required as a
condition of such approval, to report to the Board of Professional Responsibility in the event any
properly payable client trust account instrument is presented against insufficient funds, regardless
whether the instrument was honored. Tenn. Sup. Ct. R. 9 § 35.
The primary purpose of overdraft notification is to detect serious trust account violations. It should
be recognized that the creation of an overdraft, if adequately explained, does not per se indicate a
misappropriation of clients’ trust funds. Overdrafts can arise from a number of causes, such as a
bank encoding error or the failure to timely credit a deposit to the trust account. The purpose of
the overdraft notification procedure is, through documentation, to differentiate these situations
from a situation where a lawyer is misappropriating client’s trust funds.
Normal banking practice requires the financial institution to give notice to the lawyer
simultaneously with the notice of overdraft to the Board of Professional Responsibility. Where
there is no impropriety, the lawyer will be as interested as anyone in finding the cause for the
overdraft as quickly as possible.
On receipt of the overdraft notice, the Board will communicate in writing with the lawyer or law
firm, requesting a written, documented response that explains the overdraft within 10 business
days of the lawyer’s receipt of that letter. In many instances, the lawyer will already have
communicated with the financial institution and will have determined and corrected the error
resulting in the overdraft.
A written response by the lawyer is required to the Board’s request. A failure to respond is serious
and will result in the Board opening a disciplinary complaint and requesting the attorney’s written
response. The attorney’s failure to respond to a disciplinary complaint will result in the Board
petition the Supreme Court for the lawyer’s temporary suspension. Most overdraft notices are
handled by responses from the lawyer properly documenting the cause of the overdraft. If further
information is necessary to supplement the lawyer’s initial response, it will be requested.
One of the most frequent causes of overdrafts relates to a failure to timely deposit trust monies.
Checks drawn against uncollected funds will cause an overdraft to be reported. However, if a
deposit is not made so that the seller or realtor for example, presents a closing check, in a real
estate matter, on a banking day prior to the deposit (assuming there are no other trust funds in the
account), an overdraft has to occur. Several things can (and should) be done to prevent these
overdrafts:
•

deposit funds promptly so they are credited promptly, and

•

do not issue a trust account check or make an electronic disbursement until you are sure
the funds are collected, and
65

•

if it is a limited risk deposit, make sure you have other funds available in case the check
that is the deposit fails.

Some lawyers do not immediately reimburse the trust account when they discover the account was
overdrawn due to an accounting error or when a deposited check is returned for insufficient funds.
When such an inadvertent debit to the account is discovered, the lawyer is responsible for
reimbursing the account. Reimbursement of the trust account should NOT be held in abeyance
pending resolution of the error (e.g., by locating the party responsible for a bad check). Any delay
in reimbursing the account may result in the use of other client funds to cover the shortage, which
is not permitted (conversion).

D. Closing a Client Trust Bank Account
When you need to close your trust account for any reason, here are some tips to remember:
•

Be sure that the account is reconciled such that all funds remaining correspond to specific
clients and/or administrative funds.

•

Check with you bank to determine whether there are any charges associated with closing
the account. If there will be a fee, make sure that you have enough administrative funds on
deposit in the account to cover the fee.

•

Do not close the account until all outstanding checks have cleared.

•

Shred the checkbook and deposit slips for the account once it is closed so that these
documents will not be accidentally used in the future.

•

Refer to RPC 1.15, Comment [14] if there is an amount of funds left in the trust account
that you are unable to identify or if you are unable to locate a client.

•

Refer to IRS Publication 651 regarding abandoned property.

•

If you are closing the trust account to move it to a new banking institution, check to be sure
that your new banking institution is qualified to offer IOLTA accounts, by going to
www.tbpr.org or www.tnbarfoundation.org.

•

If you are closing the trust account to move it to a new banking institution, be sure that
your audit trail is not lost, i.e. all funds moved from the old trust account are clearly
identified by client and transferred fully to the new trust account.

•

Notify the Tennessee Bar Foundation with the new trust account banking information.

66

E. Death or Disability and the Client Trust Bank Account
Pursuant to Tenn. Sup. Ct. R. 9 § 29, the Board, the Tennessee Bar Association, or other local bar,
any attorney or other interested person may commence a proceeding in chancery, circuit or probate
court to appoint a receiver-attorney if…no partner, associate, executor or other responsible
successor to the practice of the lawyer is known to exist, and…the lawyer has resigned, been
suspended, disbarred or become incapacitated or disabled, or disappears or dies, or where other
reasons requiring protection of the public are shown.
Pursuant to Tenn. Sup. Ct. R. 9 § 29.3(b), the order of appointment of the receiver-attorney shall
make the receiver-attorney a necessary signatory and take custody of any account maintained by
the respondent with such bank or financial institution.
Pursuant to Tenn. Sup. Ct. R. 9 § 29, the receiver-attorney shall deliver all client funds in the
custody of the affected lawyer to the clients subject to retaining or charging liens if appropriate.
The necessary expenses and any compensation of a receiver-attorney shall, if possible, be paid by
the affected lawyer or the affected lawyer’s estate.
It is prudent for a lawyer to arrange for the administration of his or her client trust account in the
event of the lawyer’s death or disability. A prudent lawyer is well-advised to identify someone in
advance of such a contingency who can assume such a responsibility, to develop a plan that covers
both the contingencies of disability and death, and to incorporate plans for the administration of
the client trust account into a broader plan for winding down the lawyer’s affairs if either
contingency occurs. See Tenn. Sup. Ct. R. 9 § 29.9.
Strictly from the perspective of complying with a lawyer's ethical responsibilities, a prudent lawyer
should consider the following:
First, a lawyer should choose a means that is not only legally effective, but also fair to, and
expeditious for the clients who are entitled to the funds in the account. That favors identifying and
reaching agreement with an identified person who is willing to assume the responsibilities of
administering the trust account, and not leaving it to a court later to find a suitable candidate. The
lawyer also is ethically obligated to select someone whom the lawyer reasonably believes is
competent to discharge those responsibilities. Consistent with this requirement, the designee
should be a lawyer because the distribution of funds in a client trust account necessarily requires
an understanding of, and accountability under RPC 1.15.
Second, a lawyer should plan for both death and disability. Making a provision in a will for the
handling of a trust account may satisfy a lawyer's ethical obligations if he or she dies, but such
provisions are useless in planning for possible disability. Similarly, granting a power of attorney
to another lawyer might be an effective way to anticipate the possibility of disability, but it is an
ineffective tool in planning for a lawyer's death because such a power automatically terminates
upon the grantor's death.
Third, a lawyer's plans for the disposition of his or her client trust account should be made in
concert with a broader plan for the disposition of the lawyer's practice in the event of his or her
67

death or disability. Prudence dictates that arrangements should be made with another lawyer to
notify clients of the lawyer's disability or death, and to review the lawyer's files for the limited
purpose of determining whether any immediate action needs to be taken to protect those clients'
legal interests. See, e.g., ABA Formal Op. 92-369.
Consistent with a lawyer's obligations under RPC 1.15, a prudent lawyer is well advised to develop
such a plan to ensure that his or her clients' interests in the account are adequately safeguarded.

F. Fraud
Out of the blue, you receive an email from the representative of a potential foreign client, maybe
from China. He flatteringly tells you – in pretty decent English -- that he is looking for a
trustworthy lawyer in Tennessee to help his company with a collections issue. You – you! -- are
the trustworthy lawyer he has found. Your charge: you would receive money from a debtor and
then transfer it to the potential foreign client. You might even be paid with a percentage of the
money.
Sounds promising, right? Some easy money? And tempting, because who knows where this one
job for an international client might lead.
You send a fee agreement to the representative. He maybe sends the agreement back, signed, and
tells you that it’s imperative that you wire the money as soon as possible after receiving it from
the debtor. You promptly receive a check from the debtor and deposit it into your trust account.
Being a diligent lawyer, you confirm with your bank that the money has been credited to your
account, and you wire it as directed. And then a few days later, your bank tells you that the check
wasn’t legitimate. The bank has debited your trust account thousands of dollars.
You already know about the email scams in which a Nigerian government official allegedly needs
your help to move money out of the country. You’ve probably received those emails and
immediately - and rightly - disregarded them because they look so bogus. This new wave of check
scams just looks less bogus, more legitimate, and targets lawyers. It has hit close to home, too. The
Board of Professional Responsibility is aware of several Tennessee lawyers who have been
approached by the scammers, and a few who have taken the bait.
The checks that scammers send you, whether they are personal checks, cashier’s checks, look and
feel real, and may even fool bank tellers. The checks may be counterfeit or cloned from a legitimate
business or corporation, but may have been written fraudulently.
In another variant of the scam, no checks are involved. Instead, money is transferred directly from
another account into your trust account. The other account is often the account of someone who
fell for another scam. Once again, when the scam is discovered your bank will cancel the deposit.
You will lose your other client’s money and you could be charged with the crime of moneylaundering.
The following is a compilation of resources and ethics opinions regarding fraud and scams:

68

Resources:
The Office of the Comptroller of the Currency: www.occ.treas.gov
Fraud Resources: www.fraud.org
Internet Crime Complaint Center: www.ic3.gov
Federal Bureau of Investigation: www.fbi.gov
Nevada State Bar & ALPS - How to Minimize the Risk of Becoming a Victim of Wire
Fraud
New Hampshire State Bar - Wire Transfer Fraud Best Practices
State Bar of Texas - Law Firm Cybersecurity & Wire Transfer Fraud
Vermont Bar Counsel - Law offices should learn to identify trust account scams and should
discuss those scams with clients
Wisconsin State Bar - Wire Transfers & Trust Accounts: What’s permissible?
Ethics Opinions:
Missouri Bar - Missouri Informal Advisory Opinion 2022-09
North Carolina State Bar A Lawyer’s Responsibility in Avoiding Fraudulent Attempts to Obtain Entrusted Client
Funds
A Lawyer’s Professional Responsibility in Identifying and Avoiding Counterfeit
Checks
Florida Bar - Scam Wars – Attack of the Cloned Checks
How these scams work
These scams work well for three reasons:
The scammer appears to send you “real” money - usually a cashier’s check or certified check
drawn on a U.S. bank (sometimes even a postal money order) - before asking you to wire or
express-mail part or all of that money to the scammer or a third party. The scam relies on your
belief that real cashier’s and certified checks and postal money orders are more trustworthy than
personal checks. However, the counterfeit checks or money orders that the scammers send are very
well made and tough to identify as fake.
The scam is initiated in response to a legitimate activity, such as offering legal services and legal
representation. In the original versions of the Nigerian scam, the “offer” arrives unsolicited, in a
letter, an email or a fax.
Once the scammer is in touch with you, he often will chat via email or phone, talking about the
legal services he needs. He appears friendly, sincere and aboveboard. He works hard to win your
trust, but appearing trustworthy is the con artist’s primary tool in getting you to act.
Specific red flags to keep in mind

69

You are asked to pay money out of your account. This is a five-star red flag. If you are asked
to do this, run, don’t walk, away from the “deal.” The basic pattern of all the fake check scams is
that the con artists will send you a “cashier’s” or “certified” check (or postal money order) to
deposit into your account. Then they will give you a reason to quickly wire or express part or all
of the money out of your account to them or to some third party they identify. Often the wired
money is to go to a foreign country.
You are asked to act very quickly. The scammers don’t want you to have time to verify whether
the cashier’s check or certified check is authentic or counterfeit or to wait for the check to clear.
The scammers typically ask you to wire cash as quickly as possible. They know that their fakes
are very professional and usually will pass an initial visual inspection at the financial institution
taking the deposit. Some counterfeits are so good that it may take weeks to identify the check as
counterfeit. At that point, you are left holding the bag: the scam artists have your money and you
may even be suspected of fraud.
Fake check scammers often claim to be in another country. That makes it difficult, they say,
for them to do business in the U.S. so they need your help to receive payments by checks on U.S.
banks. Often you are asked to wire the funds out of the country.
The deal is too good to be true. This old, smart consumer advice holds true in these cases. If a
“client” is eager, sight unseen, to enlist your legal services, smell a rat. If after a few emails or
phone conversations, a “client” wants to hire you, slow down.
Avoiding the scam
Wait for a cashier’s or certified check to clear before using the money. Although your financial
institution may quickly make funds available that you’ve deposited, or may tell you that the deposit
has been credited to your account, that does not mean that the check is good or has cleared through
the original issuing institution. That can take many days. Sometimes it can take weeks to discover
a very good forgery, and the check won’t bounce until then. Therefore, verify the check with the
issuing bank and then wait for final clearance. All it will take is one insufficient-funds check for
your trust account to be in the red. And you know, of course, that banks have to report to the Board
of Professional Responsibility when your trust account becomes overdrawn.
Don't be fooled into thinking that the company is real or legitimate just because its website
looks good. Know your client or do independent due diligence to confirm name, address, company
name and other identifying information. Don’t just rely on information provided to you. Some of
the sites run by scammers look extremely professional.
Know with whom you are dealing. The law generally assumes that you, not your financial
institution, have the best knowledge of the person who gave you the check because you are dealing
directly with them. Therefore, if you are dealing with a stranger, make sure you have that person’s
name address and phone number, then verify those independently using online directories. If the
number or address in the directory is different, call the person using those numbers. You may have
stumbled into an identity-theft situation and can help another consumer.

70

Wire scams may victimize lawyers and clients. Changes to wire instructions should be confirmed
to a phone number independently obtained/verified by the attorneys. Similarly, clients should be
told if they receive an email asking them to wire money to the attorney, the client should call the
attorney’s known phone number and not a phone number in the email requesting the wire. There
is no legitimate reason for someone who is giving you money to ask you to wire money back.
Always insist that the check be in the exact amount or deal in cash. Emphasize that you
prefer a check from a local bank or a national bank with a branch in your area.
Your deposits are your responsibility. If you have deposited a check that then bounces, the bank
will withdraw the original dollar amount credited to your trust account. If your trust account
doesn’t have enough money to cover the deduction, the bank may freeze your trust account or,
worse, the bank may sue you to recover the funds. The problem for lawyers is that if you hold
funds for clients or third parties, you have to hold it in your client trust account. As a result, in this
scam, if you’re complying with the ethical rules, you would have put the money into your trust
account and then you’re disbursing out of your trust account. If the check you deposit turns out to
be fake, then you may have converted the other clients’ funds in your account.
So what do you do if you’ve been ensnared in a scam?
If you’ve been scammed, call the Board of Professional Responsibility’s Ethics Hotline (1-800486-5714) and your bank for advice. If you find that you’ve taken a fake check, don't deposit it. If
you want to report it, go to the website of the National Fraud Information Center,
http://www.fraud.org/.

G. Credit Cards and IRS Section 6050W
If you accept debit or credit cards from clients, a new IRS rule could cause problems if you're not
ready.
Starting January 1, 2013, attorneys who accept credit cards need to make sure that the names on
their merchant accounts match the ones the IRS has on file. Some attorneys may have used
abbreviations or acronyms when they opened their accounts. If there is not an EXACT match
between the information provided to the credit card processing company and the information on
file with the IRS, there may be serious consequences:
Beginning January 2013, the IRS will impose a 28% withholding penalty on all credit card
transactions. That could include your IOLTA client trust account if the account isn't labeled
properly.
Lawyers could also commit ethical violations if they are unable to gain access to client funds in
IOLTA accounts by failing to take the proper precautions.
Most credit card companies notified merchant accounts about the change. Ultimately, however,
it's your responsibility to make sure that the IRS has your correct information. Please take the
following steps:

71

1. If you accept credit cards, contact your credit card processor to check the name on the
account;
2. Make whatever changes are necessary to stay in compliance.
For more information on Section 6050W visit www.IRS.gov, call the Board’s Ethics hotline (1800-486-5714).

72

APPENDIX A: ETHICS OPINIONS
Editor’s Note: Only those ethics opinions that provide the most pertinent, substantive and
comprehensive advice are included below.
1. Formal Ethics Opinion 85-F-96
Inquiry is made concerning the ethical consequences of settlement negotiations
which include provisions relating to attorney's fees.
2. Formal Ethics Opinion 85-F-96(a)
Inquiry is made concerning the ethical consequences of settlement negotiations
which include provisions relating to attorney's fees.
3. Formal Ethics Opinion 86-F-106
Inquiry is made concerning the ethical consequences of settlement negotiations
which include provisions relating to attorney's fees.
4. Formal Ethics Opinion 87-F-109
Inquiry is made concerning the ethical obligations of a lawyer in the handling of
settlement proceeds on behalf of a personal injury client when the client objects to
the payment of medical expenses.
5. Formal Ethics Opinion 89-F-121
The Mechanics of Trust Accounting.
6. Formal Ethics Opinion 92-F-128
Inquiry is made concerning the ethical/fiduciary responsibilities relating to retainer
fees, advanced fees, advanced costs and expenses, flat fees, pre-paid fees, and
nonrefundable retainer fees.

73

7. Formal Ethics Opinion 92-F-128(a)
Inquiry is made concerning the ethical/fiduciary responsibilities relating to retainer
fees, advanced fees, advanced costs and expenses, flat fees, pre-paid fees, and
nonrefundable retainer fees.
8. Formal Ethics Opinion 92-F-128(b)
Reconsideration of 92-F-128(a) relating to refundable and nonrefundable fees has
been requested.
9. Formal Ethics Opinion 2010-F-154
Inquiry is made regarding the propriety of requesting or requiring plaintiff’s
attorney to enter into agreements or releases which require the attorney to ensure
payment of medical bills or liens to indemnify and hold harmless any party being
released.

74

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 85-F-96

Inquiry is made concerning the ethical consequences of settlement negotiations
which include provisions relating to attorney's fees.

The subject of this inquiry arises with increased frequency following the advent of structured
settlements, class actions and the Civil Rights Attorney's Fee Award Act of 1976, 72 U.S.C.
Section 1988.
Formal Ethics Opinions 80-F-1, 80-F-1(a), 84-F-61 and 84-F-77 have addressed the matter relating
to structured settlement. Formal Ethics Opinion 84-F-77 states:
There is a potential, if not an actual, conflict of interest between the
attorney and client in every instance where structured settlements
are discussed or considered as a settlement option. It is recognized
that, in some instances, an immediate cash settlement would be more
beneficial to the client, whereas the attorney may prefer to receive
the payment of his attorney fee periodically; or, vice versa. The
preferences of the attorney or client are often dependent or based
upon their respective ages, economic station or tax consequences.
These factors will seldom, if ever, be viewed from the same
perspective by the attorney and the client.
Formal Ethics Opinion 80-F-1 states:
... any arrangement by which the opposing party participates in the
setting of the fee charged by the attorney to his client conflicts with
the language and intent of DR 5-107 and EC 5-22 of the Code.
(emphasis added)
The matter of civil rights attorney's fee awards has not been addressed in a Formal Ethics Opinion.
It appears the conflict in such instances may be more severe than in cases involving structured
settlements. For example, in the case of Jeff D. et al v. Evans, 743 F.2d 648 (9th Cir. 1984), during
the settlement negotiations, the defendants offered virtually all of the relief sought by plaintiff's
conditioned upon waiver of attorney's fees by plaintiff's counsel.

75

Formal Ethics Opinion 85-F-96
-------------------------------------

Page 2

The Ninth Circuit Court of Appeals in considering the matter states:
The crux of the problem is the possibility of diverging interests of
the lawyer and the class. The attorney may be tempted with a
generous fee offer as a quid pro quo for less than optimal settlement.
Alternatively, the defendant may condition settlement on the
attorney's waiver of fees, creating a particularly severe conflict when
important interests of class members are at stake....
To avoid this conflict, this circuit has ... disapproved simultaneous
negotiation of settlements and attorney's fees.
In such instances, settlement negotiations which include provisions for attorney's fees are not
inherently improper and may be appropriate, provided plaintiff's counsel:
(i)
Fully advises the plaintiff or plaintiffs concerning each and
every step and aspect of the negotiations;
(ii)
Advises that independent legal advice may be obtained
regarding the matter; and
(iii) The client should be allowed to approve or disapprove of the
entire settlement, including provisions relating to attorney's fees.
When consent, approval or permission of a court is required, the
court should be fully advised of all matters relative thereto,
including the provisions of attorney fees.
This 31st day of May, 1985.
ETHICS COMMITTEE:
W. J. Flippin, Chairman
Edwin C. Townsend
Henry H. Hancock
APPROVED AND ADOPTED BY THE BOARD

76

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 85-F-96(a)

Inquiry is made concerning the ethical consequences of settlement
negotiations which include provisions relating to attorney's fees.

The subject of this inquiry arises with increased frequency following the advent of structured
settlements, class actions and the Civil Rights Attorney's Fee Award Act of 1976, 72 U.S.C.
Section 1988.
Formal Ethics Opinions 80-F-1, 80-F-1(a), 84-F-61 and 84-F-77 have addressed the matter relating
to structured settlement. Formal Ethics Opinion 84-F-77 states:
There is a potential, if not an actual, conflict of interest between the
attorney and client in every instance where structured settlements
are discussed or considered as a settlement option. It is recognized
that, in some instances, an immediate cash settlement would be more
beneficial to the client, whereas the attorney may prefer to receive
the payment of his attorney fee periodically; or, vice versa. The
preferences of the attorney or client are often dependent or based
upon their respective ages, economic station or tax consequences.
These factors will seldom, if ever, be viewed from the same
perspective by the attorney and the client.
Formal Ethics Opinion 80-F-1 states:
... any arrangement by which the opposing party participates in the
setting of the fee charged by the attorney to his client conflicts with
the language and intent of DR 5-107 and EC 5-22 of the Code.
(emphasis added)
The matter of civil rights attorney's fee awards has not been addressed in a Formal Ethics Opinion.
It appears the conflict in such instances may be more severe than in cases involving structured
settlements. For example, in the case of Jeff D. et al v. Evans, 743 F.2d 648 (9th Cir. 1984), during
the settlement negotiations, the defendants offered virtually all of the relief sought by plaintiff's
conditioned upon waiver of attorney's fees by plaintiff's counsel.

77

Formal Ethics Opinion 85-F-96A
-------------------------------------------The Ninth Circuit Court of Appeals in considering the matter states:1 : 1

Page 2

The crux of the problem is the possibility of diverging interests of
the lawyer and the class. The attorney may be tempted with a
generous fee offer as a quid pro quo for less than optimal settlement.
Alternatively, the defendant may condition settlement on the
attorney's waiver of fees, creating a particularly severe conflict when
important interests of class members are at stake....
To avoid this conflict, this circuit has ... disapproved simultaneous
negotiation of settlements and attorney's fees.
In such instances, settlement negotiations which include provisions for attorney's fees are not
inherently improper and may be appropriate, provided plaintiff's counsel:
(i)
Fully advises the plaintiff or plaintiffs concerning each and
every step and aspect of the negotiations;
(ii)
Advises that independent legal advice may be obtained
regarding the matter; and
(iii) The client should be allowed to approve or disapprove of the
entire settlement, including provisions relating to attorney's fees.
When consent, approval or permission of a court is required, the
court should be fully advised of all matters relative thereto,
including the provisions for attorney fees.
This 26th day of September, 1986.

ETHICS COMMITTEE:
W. J. Flippin, Chairman
Edwin C. Townsend
Henry H. Hancock

APPROVED AND ADOPTED BY THE BOARD
11

The District Court denied attorney's application for fees following a settlement agreement providing for a waiver of
attorney's fees. The Ninth Circuit held that a stipulated waiver of attorney's fees obtained solely as a condition for
obtaining relief for the class should not be accepted and the Court should make its own determination of reasonable
fees, remanding the case for such a determination. The United States Supreme Court granted certiorari and, on April
21, 1986, held that the District Court had discretion to refuse to award fees, and considering the extent of relief in the
settlement, there was no abuse of discretion by the District Court in upholding the waiver of fee and denying attorney's
application for fees. See Evans v. Jeff D., 106
S.Ct. 1531 (1986).

78

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 86-F-106
Inquiry is made concerning the attorney's retention of clients' documents in an effort to
enforce resolution of a fee dispute between the attorney and client.

The Common law recognizes an attorney's lien on client's documents to secure payment of legal fees. See
McDonald, Shea & Co. v. Railroad, 93 Tenn. 281 (1893) and Brown & Reid v. Bagley, 3 Tenn. Ch., 621
(1878).
American Bar Association Formal Ethics Opinion 209 states,
Any question as to the amount of an attorney's fee or method of its
payment is a matter of contract, expressed or implied to be construed. Any
controversy concerning such a matter is a matter of law to be determined
by the Courts. Ordinarily no ethical question is involved in such a
controversy.
This opinion will attempt to address some of the ethical obligations and concerns which may occasionally
arise from such matters.
Disciplinary Rules 2-106(A) and (B) of the Code of Professional Responsibility prohibit illegal or clearly
excessive fees for legal services.
Disciplinary Rule 2-110(A)(2) of the Code requires a lawyer, upon withdrawal from representation, to
take reasonable steps to avoid foreseeable prejudice to the rights of his client and to deliver all papers
and property.
Disciplinary Rule 7-101(A)(3) states that a lawyer shall not prejudice or damage his client.
Disciplinary Rule 9-102(B)(4) requires the lawyer to promptly deliver to the client the property in the
lawyer's possession which the client is entitled to receive.
Pursuant to the Preliminary Statement of the Code of Professional Responsibility the above cited
Disciplinary Rules are mandatory and,
state the minimum level of conduct below which no lawyer can fall without
being subject to disciplinary action.
Some of the applicable Ethical Considerations of the Code of Professional Responsibility which provide
aspirational objectives and constitute a body of principles for guidance in this matter are as follows:

79

86-F-106

Page 2
EC 2-16 The legal profession cannot remain a viable force in fulfilling its
role in our society unless its members receive adequate compensation for
services rendered, and reasonable fees should be charged in appropriate cases
to clients able to pay them.
Nevertheless, persons unable to pay all or a portion of a reasonable fee should
be able to obtain necessary legal services, and lawyers should support and
participate in ethical activities to achieve that objective.
EC 2-23 A lawyer should be zealous in his efforts to avoid
controversies over fees with clients and should attempt to resolve
amicably any differences on the subject. He should not sue a client for
a fee unless necessary to prevent fraud or gross imposition by the client.
EC 2-25 The basic responsibility for providing legal services for those
unable to pay ultimately rests upon the individual lawyer, and personal
involvement in the problems of the disadvantaged can be one of the most
rewarding experiences in the life of a lawyer. Every lawyer, regardless of
professional prominence or professional workload, should find time to
participate in serving the disadvantaged. The rendition of free legal
services to those unable to pay reasonable fees continues to be an
obligation of each lawyer, --EC 2-32 ---Even when he justifiably withdraws, a lawyer should protect
the welfare of this client by
---delivering to the client all papers and property to which the client is
entitled. ---and otherwise endeavoring to minimize the possibility of
harm.
EC 5-1 The professional judgment of a lawyer should be exercised, within
the bounds of the law, solely for the benefit of his client and free of
compromising influences and loyalties. Neither his personal interests, the
interests of other clients, nor the desires of third persons should be
permitted to dilute his loyalty to his client.
EC 5-2 A lawyer should not accept proffered employment if his personal
interests or desires will, or there is a reasonable probability that they will,
affect adversely the advice to be given or services to be rendered the
prospective client. After accepting employment, a lawyer carefully should
refrain from acquiring a property right or assuming a position that would
tend to make his judgment less protective of the interests of his client.

It therefore appears that there may be instances where there are mixed questions of legal and ethical
concern. In such instances the ethical obligations of the attorney should prevail. For example, it is

80

86-F-106

Page 3

unethical for an attorney to assert a lien for legal services which is illegal or clearly excessive.
Prior to asserting a lien on the client's property for payment of legal services the attorney should seek all
other reasonable means of collection, including suggesting that the client place funds for disputed claims
in escrow with a third party, pending the proper adjudication of the matter. The attorney's lien should only
be asserted as a last resort when necessary to prevent fraud or gross imposition by the client.
The case of Crawford v. Logan, 656 S.W.2d 360 (Tenn. 1983), wherein the attorney did not assert a lien
but instead withheld a portion of the file which the client did not know existed has been fully considered
and this opinion does not conflict with the holding of the Supreme Court therein.
This 26th day of September, 1986.
ETHICS COMMITTEE:
Jerry C. Colley
William R. Willis
Cecil D. Branstetter

APPROVED AND ADOPTED BY THE BOARD

81

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 87-F-109
Inquiry is made concerning the ethical obligations of a lawyer in the handling of
settlement proceeds on behalf of a personal injury client when the client objects to
the payment of medical expenses.
A lawyer should hold property of others with the care required of a professional fiduciary. Disciplinary
Rule 9-102 of the Code of Professional Responsibility requires the lawyer to keep funds of the client
in an identifiable bank account, maintain complete records thereon, render appropriate accounts to the
client, and promptly pay and deliver to the client the funds which the client is entitled to receive.
Disciplinary Rule 7-102 of the Code prohibits the lawyer from assisting the client in fraudulent
conduct. DR 7-102(B)(1) specifically requires the attorney to counsel the client against perpetration of
a fraud upon another and, if the client insists on fraudulent conduct, to reveal the potential fraud to the
affected person. The client has no privilege of confidentiality with respect to proposed fraudulent
activity. See DR 4-101.
There is no clear ascertainable ethical authority concerning the lawyers ethical duties when there is a
dispute between the client and third-party concerning the right to funds held by the lawyer on behalf
of the client. The Idaho Supreme Court in the case of Bonanza Motors Inc. v. Webb, 104 Idaho 234,
657 P2d 1102 (1983) in a legal issue held that a lawyer must not deliver funds to a client when the
lawyer has notice that a third-party has a superior right to the funds. The lawyer was found liable in an
action by the creditor when the lawyer paid the entire judgment to the client after having received a
copy of an instrument by which the client had assigned part of his judgment award to a third-party
creditor, and provided that the lawyer should pay the creditor directly when the funds were received.
This ethics opinion holds that a lawyer who has notice that a creditor of the client has a lien or
assignment to the funds held on behalf of the client is ethically obligated to segregate and retain the
disputed funds until the dispute is resolved. Payment of the disputed amount into court for a resolution
of the matter is permissible after the parties have had a reasonable opportunity to resolve the dispute.

This 16th day of September, 1987.
ETHICS COMMITTEE:
W. J. Flippin
Henry H. Hancock
Edwin C. Townsend
APPROVED AND ADOPTED BY THE BOARD
82

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 89-F-121
THE MECHANICS
OF
TRUST ACCOUNTING

The Board issues this Formal Ethics Opinion on the Mechanics of Trust Accounting for the
consideration of members of the Tennessee Bar by adopting the following portions of a treatise on Trust
and Business Accounting for Attorneys, Second Edition, 1988, by David E. Johnson, Jr., Esquire, Director,
Office of Attorney Ethics of the Supreme Court of New Jersey, as follows:
...In most states, whether by rule, statute or case law, attorneys are simply admonished to
account in accordance with generally accepted accounting practices. Most attorneys, however, are not
accountants and so this general direction, without more, leaves much to be desired.
items:

...(C)omplete compliance with trust accounting duties requires familiarity with only four

A.
B.
C.
D.

Trust Checkbook...
Trust Receipts Book...
Trust Disbursements...
Client Trust Ledger Book...
A. Trust Checkbook

This is the most familiar of the trust accounting documents. It is, as it says, simply a form of
checkbook. It may be identical in form to a personal checkbook, and anyone who can properly keep a
personal checkbook can easily maintain a trust checkbook....
There are two parts to the checkbook itself: the checks and the stub. The check itself is selfexplanatory. All checks must be pre-numbered. The stub is a miniature accounting sheet which, given
a correct beginning balance, allows you to add-in the amount of all deposits and to subtract-out the
amount of all the checks (and bank fees), giving you a new correct running balance. For those who
like to look at these things horizontally, instead of vertically as the stubs are produced, the information
would look like this:

83

Date
5/2/1987
5/13/1987
5/20/1987
5/20/1987
5/21/1987

Description of Client or Matter Deposits (ADD) Check (Subtract)
John Smith
Rebecca Sands
John Smith
John Smith
Burtol Corp

$5,000

$2,000

$3,200
$1,300
$3,700

Running
Balance
$17,500
$14,300
$13,000
$ 9,300
$11,300

Monies come into the trust account via deposits, either by the lawyer or by the financial institution.
If the attorney deposits the money, a deposit slip... will be completed by filling out the date, amount, client's
last name or file number (to protect client confidentiality) and the source of the deposit by recording the
bank identification code number of the check that is being deposited. These codes are found at the upper
right-hand corner of a check. They are an identification code developed by the American Banker's
Association and enable anyone with the code tables to locate the bank on which the check is drawn very
accurately.
Some deposit slips are carbonized and the carbon portion, called the duplicate deposit slip, is
returned to the attorney by the teller at the time the deposit is made. If carbonized deposit slips are not used,
the teller will give the attorney a receipt showing the day, time and amount of the deposit. In this case it is
important to record right on the receipt, the client's name or file number and the source bank code of the
check that was deposited.
Deposits may also be made by the bank issuing a memorandum (a/k/a credit memo) showing the
date, amount and source of the monies so deposited... This is the case where a client wires money directly
from her account to the attorney's account.
Monies may be disbursed (a/k/a withdrawn), either by the attorney or the financial institution.
Checks written on a trust account are identical to other checks... Checks, like deposits, must list the date
and client or legal matter (i.e., purpose). As a corollary to the source, which is required to be noted on the
deposit ticket, every check must show the payee.
As with deposits, withdrawals can be made by the financial institution issuing a memorandum (a/k/a
debit memo)... Thus, for example, where funds are wired from your account to that of your client in
California, your financial institution will issue a memorandum advising the date, amount and source of the
monies so transmitted. Debit memos are also issued for service items such as (a) cost of wire transfers, (b)
monthly service charges, (c) overdraft notices, (d) check printing charges, (e) returned item notices, and
other services rendered to you for which a fee is charged....
That is all there is to handling a trust account checkbook! It is really no different from handling a
personal checking account. Three rules, however, make it work. First, all entries (deposits and
disbursements) should be recorded contemporaneously (within 24 hours of the event). Second, all entries
must be exact, to the penny. There is no room for rounding-off figures. This may be tolerable for personal
accounts, but is definitely not acceptable for a trust account. Third, you must always keep a running balance
preferably after each deposit or disbursement. ...

84

B. and C. Trust Receipts and Disbursements Books
While these items sound foreboding to some, they are in fact much less complicated than the trust
checkbook. In fact the Trust Receipts Book is nothing more than a chronological listing of every deposit
made to the trust account. Conceptually, a yellow legal pad would serve the purpose! From the point of
view of generally accepted accounting practice, however, a bound book (or journal) which gives these
records some permanency is the required form. ...Note that it contains the exact same information required
to be maintained in the trust checkbook stub and on the deposit slip or receipt itself, namely:

(a) date;
(b) source;
(c) client name or matter; and (d) amount.
Similarly, the Trust Disbursements Book is a chronological listing of every disbursement made
from the trust account. ...It contains the identical information required to be recorded on the trust checkbook
stub and on the check (or a debit memorandum) itself, namely:

(a)
(b)
(c)
(d)

date;
payee;
purpose; and
amount.

In defining a Trust Receipts Book I stated that it must contain a chronological list of each and every
deposit. This includes all credit memos from the financial institutions. ...Similarly, the Trust Disbursements
Book must reflect each and every disbursement including any debit memos received....
At the end of each month, the total of all monies received should be added up as reflected in the
Trust Receipts Book. Likewise, the total of all disbursements must be added as shown in the Trust
Disbursements Book. These monthly totals should then be placed on the Control Sheet. ...(T)he Control
Sheet is one of the first steps in the reconciliation process and filling out the Control Sheet monthly puts
you a step ahead in the reconciliation process.
But why record the same information twice, you might ask? Why record all the same information
you included in writing out a check in a Trust Disbursements Book? Good question! There are several
reasons.
The first relates back to...maintaining an audit trail. The deposit slips, receipts, checks and
memoranda are all referred to as source documents. They are the documents which actually "move" money
around. Therefore, they must reflect the descriptive information above so they provide a complete audit
trail, a direct link, to the trust receipts and disbursements books and to the clients' ledger book which will
be covered next. But they are not permanent records. Recording their information in receipts and
disbursements books, however, gives them permanency and accords with generally accepted accounting
practice. ...
The other reasons relate to the purposes for the trust receipts and disbursements books, which are
three-fold. First and foremost these two records, under the commonly used double-entry bookkeeping
method, permit you to double check the running balance in the trust account to make sure it is correct...
85

The second purpose which these two books serve is an easily accessible means of locating items by
arranging all deposits together chronologically in one book, and all disbursements together chronologically
in another book. This is particularly handy at reconciliation time when a transposition error has occurred.
In short, it makes it easy to find mathematical errors chronologically. Finally, and this is very important to
realize, trust receipts and disbursements books allow you to look at your trust account activity on a macrolevel. Add up all of the deposits listed in your trust receipts book for a particular month (or year) and see
how much trust money you took in during that period. Similarly, add up all the disbursements in your trust
disbursements book for a year (or a month) and see how much trust money went out during that period.
Add the amount of deposits to the amount of disbursements for a given period, say one year, and you can
tell the total amount of client funds for which you were responsible.
All of the three records that have been discussed so far--the Trust Checkbook, Trust Receipts Book
and Trust Disbursements Book--give the "big picture," the overview. However, while this is very important,
it is at least equally important to know, at any given time, exactly how each client's funds stand. This can
be ascertained by the fourth and final item -- the Clients' Trust Ledger.

D. Clients' Trust Ledger Book
...(S)eparate clients are separate accounts. Indeed, this is the foundation of trust accounting,
maintaining the individual separation and control that each client has the right to expect.
In order to maintain this full control and separate accountability of each individual client's trust
funds, we maintain an individual accounting record of every deposit to and disbursement from that
particular client's account. We do so by maintaining a separate book, called a Clients' Trust Ledger, with a
separate page for each trust client.
The concept of an appropriate ledger book ... contemplates an integrated record which will show
the current status of all funds collected or received for the credit of a particular client or beneficiary, all
payments out and the amount, if any, remaining due the client. ...The Client Trust Ledger Book itself may
be either bound or loose leaf, with removable ledger sheets which may be taken out when the client matter
is closed. Original closed ledger sheets should not, however, be placed in the closed case file where they
will be lost forever unless the name of the client is recalled. While a photocopy of the closed ledger sheet
may properly be placed in the individual client case file, the original should be placed in a closed three ring
binder and arranged alphabetically for future reference.
A separate client ledger sheet must... be maintained for each separate trust client. Thus, an entirely
separate page must be set up for each client, regardless of the fact that all funds coming into the attorney's
hands are disbursed simultaneously. This situation commonly occurs, for example, in real estate
transactions. Good record keeping practices indicate that the reverse side of a ledger sheet should also be
reserved for the sole use of that single client. Do not use the reverse side of one client's ledger for another
client's case. Likewise, where a single client has multiple matters being handled by the same attorney, each
separate financial matter should be reflected on a separate client ledger sheet.
...Like the trust account checkbook, a running balance on each individual client ledger sheet is
maintained. This is so because we must NEVER disburse more money than we have on hand (collected)
86

to the credit of that individual client. Keeping a running balance permits the attorney to know this at a
glance.
Also, note the descriptiveness of the client ledger sheet. ...It must reflect:

(1)

the source of funds deposited;

(2)

the names of all persons (i.e., clients) for whom funds are or were held;

(3)

the amount of such funds;

(4)

the description and amounts of all charges or withdrawals (i.e., disbursements)
from such accounts;

(5)

the names of all persons to whom funds were disbursed.
Putting It All Together

We have separately looked at each of the four items that comprise the basics of correct attorney
trust accounting. They are:

A.

Trust Checkbook;

B.

Trust Receipts Book;

C.

Trust Disbursements Book; and

D.

Clients' Trust Ledger Book.

Now we shall see how they fit together to form an integrated accounting system.
...(A)s a deposit comes in, say a settlement in a negligence matter, the check is received by the
attorney (Step 1). The attorney then prepares a source document, which is a deposit slip (Step 2), and
physically makes the deposit and has the duplicate deposit slip returned, stamped received with the date.
This information is then entered in the trust checkbook (Step 2). Next, the deposit information is entered
chronologically in the Trust Receipts Book (Step 3) and is also recorded on the individual client's trust
ledger (Step 4).
Set forth below is a simple key to show the trust documents on which deposit and disbursement
information must be recorded.

87

TRUST ENTRY KEY
DISBURSEMENTS
A.
B.
C.
D.

TRUST RECORDS
Trust Checkbook
Trust Receipts Book
Trust Disbursements Book
Clients’ Trust Ledger

ENTER DEPOSITS
X
X
X

ENTER
X
X
X

Reconciliation -- The 3-Way Check
Everybody makes mistakes when it comes to figures. Even banks and accountants make mistakes
on occasion. This should not be surprising because there are a lot of ways that mistakes can be made.
Simple arithmetic mistakes in addition or subtraction are common. Transposition errors occur when our
eye rearranges the sequence of numbers and we record $122.92 when the correct figure is $129.22. In a
similar vein, banks, which process checks and deposits electronically overnight by the millions, will
sometimes have an encoding error when one of its coders reads a $1,000 check but encodes the amount at
the bottom right-hand corner as $10,000. Other errors which may occur run the gamut from simply skipping
one of many lines while transferring figures from one list to another, to perhaps the simplest mistake of all
-- forgetting to record a check or deposit at all.
A reconciliation allows the attorney to detect when an error has occurred by showing that items,
which should balance, do not balance. Our record keeping rule (and generally accepted accounting practice)
requires that a reconciliation be performed at least quarterly.
...Naturally, the more frequently an account is reconciled, the sooner one will be able to detect, and thus
correct, an error. The best rule is to reconcile monthly. Copies of all records reflecting quarterly
reconciliations must be retained.
Reconciliation is the process by which all required trust records are brought into agreement. More
simply, perhaps, it represents a balancing process by which the trust account records are all brought into a
state of equilibrium. Based upon our model double-entry bookkeeping system, a full reconciliation requires
a three-step review and analysis of the four documents.... By this process:

(1)

the balance of all trust receipts and disbursements is
reconciled to the total of individual client ledger balances
on hand;

(2)

the total of individual client ledger balances on hand is
then reconciled to the trust checkbook balance; and
finally,

(3)

the trust checkbook balance (as adjusted) is then
reconciled with the balance on the trust bank account
statement.

88

STEP NO. 1
The very first step in the reconciliation process is to obtain a correct beginning balance. You can
never reconcile an account unless you know the correct balance which you should have on hand to start
with. When a new trust account is opened, the first time the account is reconciled the beginning balance
will be zero. The beginning balance for each succeeding period for which a reconciliation is prepared will
necessarily depend upon the prior reconciled balance being correct. This requires any discovered errors to
be resolved. If you are not sure that the beginning trust balance is correct, you should consult a bookkeeper
or an accountant. Carrying an incorrect balance only compounds the problem, as time makes finding and
correcting the errors more and more difficult.
STEP NO. 2
The second step in the reconciliation process is to add up all items for the reconciliation period (i.e.,
month or quarter) that have been recorded in the Trust Receipts Book.... The same total is then compiled
for the Trust Disbursement Book.... Both of these figures are placed on the Receipts/Disbursements Control
Sheet..., together with the beginning balance. The total of trust funds received is then added to the beginning
balance. From the resulting figure, the total of trust funds disbursed is subtracted. This results in a new
balance figure. It is this figure which will form the bedrock of the reconciliation process. That figure is
also placed in the appropriate place on the Trust Reconciliation Sheet.
STEP NO. 3
Next, prepare a list of the names and balances on hand (as of the bank statement date) for all trust
clients and place them in the appropriate location on the Trust Reconciliation Sheet. These client figures
are obtained by taking the last running balance from each individual Client's Trust Ledger Sheet and
inserting the total of all individual ledger balances in the appropriate place on the Trust Reconciliation
Sheet. (If there are many clients, a separate schedule of clients' ledger balances should be made.)
STEP NO. 4
equal...

Compare the Control Sheet Balance to the total Clients' Trust Ledger Balance. They must be
STEP NO. 5

Place the amount of the checkbook balance in the Trust Checkbook in the appropriate
place on the Trust Reconciliation Sheet. Compare the amount of the Total Clients' Ledger Balance to the
balance in the Trust Checkbook. They must be equal.
STEP NO. 6
List all outstanding checks and outstanding deposits (also called deposits in transit) on the Trust
Reconciliation Sheet that are not reflected on the latest monthly bank statement for the reconciliation period.
Add the outstanding checks to the Trust Checkbook Balance and place that amount in the place indicated
on the Trust Reconciliation Sheet. Subtract from that figure all outstanding deposits and place that amount
opposite the entry titled "Reconciliation Balance." Insert the Bank Statement Balance on the Trust
Reconciliation Sheet.
89

STEP NO. 7
Compare the Reconciliation Balance to the Bank Statement Balance - they must be equal.
Congratulations, if both figures are equal! If they are you have successfully, and correctly,
reconciled your trust account. If there is a difference between the two figures roll up your sleeves, call in
your bookkeeper or check with an accountant. Whatever you do, do not do nothing. Figures which do not
reconcile only get harder to reconcile with time.
This 9th day of December, 1989.
ETHICS COMMITTEE:
/s/ Kitty G. Grubb
/s/ Michael E. Callaway
/s/ Charles T. Herndon, III
APPROVED AND ADOPTED BY THE BOARD

90

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 92-F-128
Inquiry is made concerning the ethical/fiduciary responsibilities relating to
retainer fees, advanced fees, advanced costs and expenses, flat fees, prepaid fees, and nonrefundable retainer fees.

Ethical Consideration 2-19 of the Code of Professional Responsibility states:
EC 2-19
As soon as feasible after a lawyer has been employed, it is desirable that
he reach a clear agreement with his client as to the basis of the fee charges
to be made. Such a course will not only prevent later misunderstanding
but will also work for good relations between the lawyer and the client. It
is usually beneficial to reduce to writing the understanding of the parties
regarding the fee, particularly when it is contingent. A lawyer should be
mindful that many persons who desire to employ him may have had little
or no experience with fee charges of lawyers, and for this reason he should
explain fully to such persons the reasons for the particular fee arrangement
he proposes.
Disciplinary Rule 9-102(A) of the Code states, in part;
DR 9-102. Preserving Identity of Funds and Property of a Client.
(A) All funds of clients paid to a lawyer or law firm, including advances
for costs and expenses, shall be deposited in one or more identifiable
insured depository institutions maintained in the state in which the law
office is situated.
...No funds belonging to the lawyer or law firm shall be deposited therein
except as follows:
(1)
Funds reasonably sufficient to pay service
charges may be deposited therein;

91

Formal Ethics Opinion 92-F-128

(2)

(B)

Page 2

Funds belonging in part to a client and in part
presently or potentially to the lawyer or law firm
must be deposited therein, but the portion
belonging to the lawyer or law firm may be
withdrawn when due unless the right of the
lawyer or law firm to receive it is disputed by the
client, in which event the disputed portion shall
not be withdrawn until the dispute is finally
resolved.

A lawyer shall:
(1)
Promptly notify a client of the receipt of ...funds,
securities, or other properties.
(2)
Identify and label securities and properties of a
client promptly upon receipt and place them in a
safe deposit box or other place of safekeeping as
soon as practicable.
(3)
Maintain complete records of all funds, securities
and other properties of a client coming into the
possession of the lawyer and render appropriate
accounts to (the) client regarding them.
(4)
Promptly pay or deliver to the client as requested
by a client the funds, securities or other properties
in the possession of the lawyer which the client is
entitled to receive.

All unearned attorney fees of any kind or nature paid by or on behalf of a client to an
attorney, including retainer fees, advanced fees, general retainers, special retainers, flat fees, pre-paid fees,
etc.; including advanced costs and expenses; are funds which belong in part to the client and must be
deposited in a trust account to be withdrawn only when due, unless the right of the attorney or other payee
to receive funds is disputed by the client, in which event the disputed portion shall not be withdrawn until
the dispute is finally resolved.
The same fiduciary duties described above are applicable to non-monetary property
delivered to an attorney as security for unearned fees. Such security deposits are required to be placed in
trust and safekeeping.
In limited instances an attorney may receive an advanced earned fee in the nature of an
unrefundable retainer fee designed to compensate the attorney for being available to represent a client, or
to compensate the attorney for committing time for representation precluding acceptance of other
employment, or to compensate the attorney for being precluded from taking an adversary interest or
position because of conflicting interests or for having received privileged information. Earned fees of this
kind and nature do not have to be placed in trust accounts and are subject to the strict limitations of
Disciplinary Rules 2-106(A) and (B) of the Code; and, pursuant to DR 2-110(A)(3), 2-110(B)(4) and other
applicable legal authorities

92

Formal Ethics Opinion 92-F-128

Page 3

may be subject to accountability and refunding in certain circumstances.1 1
All pre-paid, advanced or retainer fees are ethically deemed to be refundable in the absence of a clear
understanding by the client to the contrary, preferably in writing.
This 11th day of June, 1992.
ETHICS COMMITTEE:
Harris A. Gilbert
Donna Simpson Massa
Barbara J. Moss

APPROVED AND ADOPTED BY THE BOARD

It is not clear, however, whether a nonrefundable retainer would be valid. A client who has just paid a lawyer
$50,000 to perform all occupational health and safety work for a factory that burns down the next day, obviating the
need for any legal work, can probably recover the retainer even if it was solemnly called "nonrefundable" in the
agreement. Moreover, because the nonrefundable feature chills the client's right to discharge the lawyer ..., it has been
held that such a clause is invalid and the lawyer is only entitled to the reasonable value of his or her services after
discharge. See Modern Legal Ethics, Wolfram p. 506; Jacobson v. Sassower, 122 Misc.2d 863, 474 N.Y.S.2d 167
(1983), affirmed 107 A.D.2d 603; 483 N.Y.S.2d 711 (1985).
11

93

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 92-F-128(a)
_____________________________________________________________________________
Inquiry is made concerning the ethical/fiduciary responsibilities
relating to retainer fees, advanced fees, advanced costs and expenses,
flat fees, pre-paid fees, and nonrefundable retainer fees.
_____________________________________________________________________________
Ethical Consideration 2-19 of the Code of Professional Responsibility states:
EC 2-19
As soon as feasible after a lawyer has been employed, it is desirable
that he reach a clear agreement with his client as to the basis of the
fee charges to be made. Such a course will not only prevent later
misunderstanding but will also work for good relations between the
lawyer and the client. It is usually beneficial to reduce to writing
the understanding of the parties regarding the fee, particularly when
it is contingent. A lawyer should be mindful that many persons who
desire to employ him may have had little or no experience with fee
charges of lawyers, and for this reason he should explain fully to
such persons the reasons for the particular fee arrangement he
proposes.
Disciplinary Rule 9-102(A) of the Code states, in part:
DR 9-102 - Preserving Identity of Funds and Property Of A Client
(A)

All funds of clients paid to a lawyer or law firm, including advances for
costs and expenses, shall be deposited in one or more identifiable
insured depository institutions maintained in the state in which the law
office is situated.
...No funds belonging to the lawyer or law firm shall be deposited
therein except as follows:

(1)

Funds reasonably sufficient to pay services charges may be
deposited therein:

95

Formal Ethics Opinion 92-F-128(a)

Page 2

(2)

Funds belonging in part to a client and in part presently or potentially
to the lawyer or law firm must be deposited therein, but the portion
belonging to the lawyer or law firm may be withdrawn when due
unless the right of the lawyer or law firm to receive it is disputed by
the client, in which event the disputed portion shall not be withdrawn
until the dispute is finally resolved.

(8)
(1)

A lawyer shall:
Promptly notify a client of the receipt of his funds, securities, or other
properties.
Identify and label securities and properties of a client promptly upon
receipt and place them in a safety deposit box or other place of
safekeeping as soon as practical.
Maintain complete records of all funds, securities and other properties
of a client coming into the possession of the lawyer and render
appropriate accounts to his client regarding them.
Promptly pay or deliver to the client as requested by a client the funds,
securities or other properties in the possession of the lawyer which the
client is entitled to receive.

(2)
(3)
(4)

Advanced fees or flat fees may be earned fees or unearned fees, depending upon the
circumstances.
All unearned attorney fees of any kind or nature paid by or on behalf of a client to
an attorney are funds which belong in part to the client. These unearned attorney fees include
retainer fees, unearned advanced fees, general retainers, special retainers, flat fees, pre-paid fees,
etc. These funds must be deposited in a trust account to be withdrawn only when due, unless the
right of the attorney or other payee to receive funds is disputed by the client. In the event of a
dispute, the disputed portion shall not be withdrawn until the dispute is resolved.
The same fiduciary duties described above are applicable to non-monetary
property delivered to an attorney as security for unearned fees. Such security deposits are required
to be placed in trust and safekeeping.
All earned fees belong solely to the attorney and need not be placed in a trust
account. An attorney may receive an advanced earned fee in the nature of an unrefundable retainer
fee in the following limited instances: (1) to compensate the attorney for being available to
represent a client, (2) to compensate the attorney for committing time for representation precluding

96

Formal Ethics Opinion 92-F-128(a)

Page 3

acceptance of other employment, (3) to compensate the attorney for being precluded from taking
an adversary interest or position because of conflicting interests or because of the receipt of
privileged information. Advanced fees or flat fees involving criminal law, domestic or family law
or juvenile law ay be earned fees. Fees for routine legal services completed and fully delivered to
the client within a reasonable period of time may be earned fees. Routine legal services may
include wills, trusts, contracts, notes, deeds, tax returns, opinion letters or other such matters.
Earned fees of this kind and nature do not have to be placed in trust accounts and are subject to the
strict limitations of Disciplinary Rules 2-106(A) and (B) of the Code; and, pursuant to DR 2110(A)(3), 2-110(B)(4) and other applicable legal authorities may be subject to accountability and
refunding in certain instances.
In all instances where advanced or flat fees are deemed to be earned fees there must
be a clear understanding with the client that the fees are earned fees and unrefundable.
This

11th day of

December , 1992.
ETHICS COMMITTEE:
W. J. Michael Cody
Walker T. Tipton
Thomas H. Rainey

APPROVED AND ADOPTED BY THE BOARD

97

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION 92-F-128(b)

Reconsideration of 92-F-128(a) relating to refundable
and nonrefundable fees has been requested.

A request for reconsideration of Formal Ethics Opinion 92-F-128(a) has been made stating
that the opinion is not supported by the Code of Professional Responsibility; conflicts with the
Code's prohibition against commingling; provides an opportunity to manipulate income; and, is
unworkable and impractical. Adoption of the New York rule, that title and ownership of all fees
paid to the lawyer belong to the lawyer, has been advocated.
A practice has arisen for lawyers to require clients to pay advanced fees, flat fees, retainer
fees, prepaid fees, etc., before the lawyer commits to perform legal services. This is done not only
to guarantee payment of some or all of the fees but to insure that the client believes in the cause
and is willing to make a financial commitment to pursue the matter. This is a prevalent practice
among all lawyers.
Disciplinary Rule 9-102 of the Code of Professional Responsibility, embodied in Tennessee
Supreme Court Rule 8, provides that the identity of all funds and property of a client should be
preserved. Emphasis of "all funds" is intended. DR 9-102 requires all funds belonging in part to a
client and in part presently or potentially to the lawyer to be maintained in trust. The rule permits
the portion belonging to the lawyer to be withdrawn "when due" unless the right of the lawyer to
receive it is disputed by the client. The disputed portion shall not be withdrawn until the dispute is
finally resolved. DR 9-102 also provides that no funds belonging to the lawyer shall be deposited
in the lawyer's trust account "except" as permitted by the rule.
The dual requirements of the rule to preserve and maintain the identity of the funds of a
client; and not to commingle the lawyer's funds are harmonious and not inconsistent. The rule
expressly provides for the withdrawal of funds belonging to the lawyer. The ethics opinion
likewise provides for the withdrawal of fees when they become earned. There is no inherent tension
in the fiduciary duties required by DR 9-102.
The ethics opinion clearly provides that earned fees belong solely to the lawyer, and given
a clear understanding with the client, non-refundable retainer fees are permitted and considered to
be earned fees.

98

Formal Ethics Opinion 92-F-128(b)
-----------------------------------------

Page 2

The ethics opinion follows the prevailing rule which has been the traditional standard in
Tennessee and nationwide for many years. The New York rule, providing that title and ownership
of all fees paid to the lawyer belongs to the lawyer, is under attack. The New York Supreme Court,
Appellate Division, Second Department in the case of In re Cooperman, N.Y.Sup. Ct., App.Div.
2d Dept., No. 90-00429, 1/25/93, recently ruled that lawyers cannot charge nonrefundable fees,
stating that such a practice violates the ethical duty to refund the unearned portion of a fee,
impinges on the client's absolute right to terminate the client-attorney relationship, and leads to
attempts to collect excessive fees when the lawyer is discharged. The court also ruled that nonrefundable fees are imbued with an absoluteness that conflicts with DR 2110(A)(3).
Ethics Opinion 92-F-128(a) permits advanced earned fees in the nature of a non-refundable
retainer fee in certain instances; to compensate the lawyer for being available to represent the
client; to compensate for committing time for representation precluding acceptance of other
employment; and, to compensate for being conflicted out of accepting adverse employment. The
ethics opinion permits earned advanced or flat fees in criminal, domestic or juvenile matters, and
routine legal services. All instances involving prepaid fees are subject to a clear understanding
with the client, preferably in writing, that the fees are earned and non-refundable.
There are presently no compelling reasons why the traditional rule embodied in Formal
Ethics Opinion 92-F-128(a) should be abandoned in favor of the old New York rule, providing
that all advanced fees belong to the lawyer, now under attack; or, the potentially revised New York
rule prohibiting non-refundable retainers.
This 10th day of September, 1993.
ETHICS COMMITTEE:
Thomas-H. Rainey
Herman Morris, Jr.
Walker T. Tipton

APPROVED AND ADOPTED BY THE BOARD

99

BOARD OF PROFESSIONAL RESPONSIBILITY
OF THE
SUPREME COURT OF TENNESSEE
FORMAL ETHICS OPINION NO. 2010-F-154
______________________________________________________________________________
Inquiry is made regarding the propriety of requesting or requiring plaintiff’s
attorney to enter into agreements or releases which require the attorney to insure
payment of medical bills or liens or to indemnify and hold harmless any party being
released.
______________________________________________________________________________
Inquiry is made as follows:
May a plaintiff’s attorney be required to execute a Release which requires that attorney to
ensure that medical expenses and liens applicable to his or her client are paid from the settlement
proceeds, when the representation is made during settlement negotiations that an agreement with
the medical lien holder has been reached and payment will be made from the settlement proceeds?
May an attorney representing a plaintiff in personal injury litigation be required to
indemnify and hold harmless any party being released as a result of the settlement negotiations
from any medical expenses and/or liens which that attorney has represented will be satisfied and/or
settled from applicable settlement proceeds, or which the law requires to be satisfied from any
settlement?
It must first be determined to what extent a plaintiff’s attorney is obligated to withhold
settlement proceeds from the client to pay outstanding medical bills or liens.
Rules of Professional Conduct (RPC) 1.15(c), as amended July 8, 2009, provides:
(c) Upon receiving funds or other property in which a client or third person has an
interest, a lawyer shall promptly notify the client or third person. Except as stated
in this Rule or otherwise permitted by law or by agreement with the client, a lawyer
shall promptly deliver to the client or third person any funds or other property that
the client or third person is entitled to receive and, upon request by the client or
third person, shall promptly render a full accounting regarding such funds or other
property. If a dispute arises between the client and a third person with respect to
their respective interests in the funds or property held by the lawyer, the portion in
dispute shall be kept separate and safeguarded by the lawyer until the dispute is
resolved. (underlining added)
100

Comment [10] to RPC 1.15 provides:
Third parties, such as a client’s creditors, may have just claims against funds or
other property in a lawyer’s custody. A lawyer may have a duty under applicable
law to protect such third-party claims against wrongful interference by the client
and accordingly may refuse to surrender the property to the client. However, a
lawyer should not unilaterally assume to arbitrate a dispute between the client and
the third party. If not inconsistent with the interests of the client, the lawyer may
file an interpleader action concerning funds in dispute between the client and a third
party. (underlining added)
Tennessee Formal Ethics Opinion 87-F-109, adopted September 16, 1987, considered this
issue prior to the adoption of the Rules of Professional Conduct and provided as follows:
This ethics opinion holds that a lawyer who has notice that a creditor of the client
has a lien or assignment to the funds held on behalf of the client is ethically
obligated to segregate and retain the disputed funds until the dispute is resolved.
Payment of the disputed amount into court for a resolution of the matter is
permissible after the parties have had a reasonable opportunity to resolve the
dispute.
If there is no legitimate dispute about who is entitled to all or part of the funds in the
attorney’s possession, the attorney must disburse the undisputed portion of the funds to the client
or the third person as is appropriate. D.C. Ethics Op. 293 (1999); N.Y. State Op. 717 (1999).
However, if the attorney is aware that a third person has a “just claim”, the attorney may not ignore
the third person’s interest, but is ethically obligated to disregard his client’s demands for the funds
in the attorney’s possession and to hold the funds until the dispute is resolved. Id.
As provided in RPC 1.15, cmt. [10], the third person must have a “just claim” as to which
“applicable law” imposes “a duty” on the attorney before RPC 1.15 imposes an obligation on the
attorney to distribute the settlement funds to the third party or to safeguard the funds until a dispute
is resolved. The phrases “just claims” and “duty under applicable law” have been construed to
mean that the only type of third party “interest” which the attorney should preserve for a third
person for whom the attorney has not agreed to serve as escrow agent is a matured lien on the
disputed funds. Pa. Ethics Op. 2003-4 (2003); D.C. Ethics Op. 293 (1999). The term “interest” has
been deemed to extend to a valid assignment by the client and to rights created by order of a court.
Absent such an interest, the attorney has no ethical duty to withhold the funds from the client Id.
Unless the lawyer knows that the third person has a just claim, the attorney should deliver the
funds to the client. Id.
A review of ethics opinions regarding this issue make it clear that the mere assertion by a
third person or entity that they are entitled to funds in the possession of the attorney does not
obligate the attorney to comply with Rule 1.15 to remit the funds to the third person or to safeguard
101

the funds until the dispute is resolved.1 .1 A “just claim” which Rule 1.15 obligates the attorney
to honor is one which relates to the particular funds in the lawyer’s possession. Ariz. Ethics Op.
98-06 (1998); D.C. Ethics Op. 293 (1999). Mere debts of the client that come to the attention of
the attorney are not “interests” protected by Rule 1.15. A lawyer is not required to pay the general
unsecured creditors of the client, including judgment creditors, who have not attached or garnished
the funds in the lawyer’s possession. Ariz. Ethics Op. 98-06 (1998); D.C. Ethics Op. 293 (1999);
Conn. Informal Op. 95-20 (1995) (mere assertion of claim insufficient to create duty). D.C. Ethics
Op. 293 (1999) held that the following were “just claims”:
Conn. Informal Ethics Op. 01-08 (2001), a lawyer has a duty to deliver the client’s property to the client upon the
client’s demand, despite a third party’s claim to the property, unless the lawyers knows of: (1) a valid judgment relating
to disposition of the property; (2) a valid and perfected statutory contractual or judgment lien against the property; (3)
a letter of protection or similar obligation specifically entered into to aid the lawyer in obtaining the property; or (4) a
written assignment, signed by the client, counsel or other individual with such authority conveying interest in the
property to another person or entity. Md. Ethics Op. 97-20 (1997) (lawyer may disburse entire settlement to client
where hospital failed to timely submit bills to insurer and thus had no legally valid claim); Ariz. Ethics Op. 88-6
(1988) (third-party claim that is not perfected lien or assignment does not affect client’s right); Colo. Ethics Op. 94
(1993) (lawyer must distribute promptly to client if third person’s claim does not arise out of statutory lien, contract,
or court order); Conn. Informal Ethics Op. 95-20 (1995) (lawyer has no duty to act on mere assertions of third-party
interests or to investigate whether third persons have interests in the client property); Phila. Ethics Op. 86-134 (1986)
(lawyer must disburse to client without retaining anything for physicians who are owed payment, provided that there
is no agreement between doctors and client regarding proceeds from settlement); Md. Ethics Op. 94-19 (1993) (lawyer
must disregard client instruction not to pay creditor where client had a valid agreement with creditor); Ohio Supreme
Court Ethics Op. 95-12 (1995) (lawyer must disregard client’s instruction not to pay physician when client entered
earlier agreement to pay medical expenses from such proceeds); S.C. Ethics Op. 94-20 (1994) (if lawyer knows client
has executed valid doctor’s lien he may not comply with client’s instruction to disregard it); Ariz. Ethics Op. 98-06
(1998) (“actual knowledge” of assignment, medical lien, statutory lien, and letter of protection can trigger lawyer’s
duty to protect nonclient’s interests); Alaska Ethics Op. 92-3 (1992) (lawyer may not follow client’s instruction to
disregard facially valid assignment or statutory lien in favor of client’s creditor; lawyer should advise client that he
will withhold disputed funds until dispute is resolved); Cal. Formal Ethics Op. 1988-101 (lawyer whose client agreed
to pay recovery proceeds to health care provider may not disburse all money to client upon client’s request); Md.
Ethics Op. 96-16 (1996) (lawyer whose client instructs him not to pay creditor-despite client’s subrogation agreement
with creditor-must hold funds until dispute is resolved); Mich. Informal Ethics Op. RI-61 (1990) (lawyer may not
disburse to client if aware of outstanding lien; instead must initiate court proceedings to resolve which portion of funds
belong to lien holder and client); R.I. Ethics Op. 95-60 (1996) (lawyer cannot obey client’s instruction to refuse
reimbursement to health insurer where insurer has legally enforceable interest in the funds); R.I. Ethics Op. 95-31
(1995) (lawyer, whose client agreed in writing to pay wife one-half of personal injury proceeds, cannot ignore contract
and must keep disputed portion of award separate until resolution); S.C. Ethics Op. 93-14 (1993) (attorney who agreed
to honor all written statements signed by client regarding lien for medical care provider may not ignore client’s
instruction to do otherwise); Iowa Ethics Op. 89-32 (1989) (lawyer may sign agreement to withhold amount client
owes his doctor from settlement and submit the money directly to the doctor); Wash. Ethics Op. 185 (if lawyer
guaranteed payment to creditor, he must-after advising client of effect of such guarantee-pay creditor unless there is
good faith dispute as to amount of debt); N.C. Ethics Op. 2001-11 (2002) (lawyer authorized by client to pay medical
provider upon settlement may, when client changes mind, hold disputed funds in trust until impasse resolved by
agreement or court order; even though no lien, lawyer should honor representation made to third party); Pa. Ethics
Op. 2004-118 (2004) (lawyer who settled client’s suit and escrowed money to satisfy workers’ compensation lien
must continue to hold funds notwithstanding client’s demand to give client the money); S.C. Ethics Op. 05-08 (2005)
(even in absence of letter of protection, lawyer who knows that insurer has subrogation claim against settlement
proceeds may not pay all proceeds to client but must retain sufficient funds to pay subrogation claim); Mo. Ethics Op.
970215 (1997) (lawyer who advised client to agree with creditor to pay outstanding debt out of proceeds of settlement
of unrelated matter may not thereafter disburse settlement funds to client without consent of creditor, even if client
asks lawyer not to pay creditor; lawyer may hold funds in lawyer’s trust account for reasonable period of time to allow
for resolution and should thereafter file interpleader action if necessary).
11

102

(1) an attachment or garnishment arising out of a money judgment against the client;
(2) a statutory lien that applies to the proceeds of the suit being handled by the lawyer;
(3) a court order relating to the specific funds in the lawyer’s possession;
(4) a contractual agreement, commonly known as an authorization and assignment,
made by the client and joined in or ratified by the lawyer
The determination of whether, and to what extent, the third person’s claim rises to the level
of a colorable interest worthy of protection under Rule 1.15 is a matter of substantive law. Pa.
Ethics Op. 2003-4 (2003). In performing that analysis, one should consider whether the client
signed a third party reimbursement form, participation agreement or other document addressing
the right of subrogation; whether the right to subrogation is statutory and/or subject to federal preemption; whether the right of subrogation is secured or unsecured; and whether the attorney or
client has represented to the third party that it would be paid. Id.
It is concluded that RPC 1.15(c) does not obligate an attorney to pay the settlement funds
to the third person or to safeguard the funds until the dispute is resolved unless one of the following
exist: (1) an attachment or garnishment arising out of a valid judgment relating to disposition of
the funds; (2) a valid and perfected statutory, contractual or judgment lien against the property; (3)
a letter of protection or similar obligation specifically entered into to aid in obtaining the funds;
(4) a written assignment or authorization signed by the client, counsel or other individual with
authority conveying interest in the funds to the third person or entity; or (5) a court order relating
to the funds in the attorney’s possession. See ftnt. 1 at page 3.
Arizona Ethics Op. 98-06 (1998) analyzed this issue with respect to twelve different factual
scenarios. The opinion held that in situations: (1) in which the attorney had notice of the medical
provider’s lien signed by the client, but not recorded, (2) in which the medical provider’s lien was
signed by the client and by the attorney, (3) in which the attorney orally agreed to reimburse the
medical provider from settlement proceeds, (4) in which the attorney or client had signed a letter
of protection in favor of the medical provider, (5) in which the client had signed an assignment in
favor of the medical provider, or (6) in which both the client and the attorney signed an assignment
in favor of the medical provider, the attorney was required to comply with Rule 1.15 to protect the
interest of the medical provider. In situation (7) in which a statutory lien was facially incomplete
or untimely, but had been properly recorded, the attorney was required by Rule 1.15 to protect the
provider’s interest by holding the funds in dispute, but could contest the lien by interpleader or
other proper means. In situations: (8) in which the attorney was aware of medical services provided
by the medical provider because medical bills had been provided to the attorney by the client, but
for which the provider had made no demand upon the attorney, (9) in which the medical provider
had simply sent copies of the client’s medical bills to the attorney, (10) in which the provider
simply sent a letter to the attorney demanding payment for medical bills, (11) in which the attorney
simply knew that the medical provider had treated the plaintiff, but the medical provider had no
lien nor assignment and had taken no other demand action with regard to the bills, or (12) in which
the medical provider’s lien was not signed by the client nor attorney and was not recorded, the
attorney was not required to notify nor disburse funds to the medical provider in compliance with
103

Rule 1.15. The determinations made in the Arizona Opinion are consistent with and adopted in
this opinion.
An attorney should not disburse the funds in his possession to a third person if the client
contests the issue.2 . 1 If the attorney has a “good faith doubt” as to who is entitled to receive the
disputed funds, the attorney must investigate, notify the third person, hold only the disputed funds
and resolve the dispute by negotiation, arbitration or interpleader if necessary.3 . 2
If there is a legitimate dispute as to ownership of the funds, an attorney “should not
unilaterally assume to arbitrate a dispute between the client and a third party.” RPC 1.15, cmt.
[10]. The comment provides that filing an interpleader action is one alternative to resolve the
dispute. The Rules of Professional Conduct do not otherwise prescribe the method of resolving the
dispute nor impose a duty upon the attorney holding such funds to initiate an action in any
particular forum or within a particular time frame. Such issues are controlled by the substantive
law governing fiduciaries. Pa. Ethics Op. 2003-4 (2003).
If the attorney ignores a duty owed to a third person and pays the disputed amount directly
to the client, the lawyer may be held liable to the third person. Such liability is a matter of
substantive law beyond the scope of this opinion. Aetna Cas. & Sur. Co. V. Gilreath, 625 S.W.2d
269, 274 (Tenn. 1981), citing Motors Ins. Corp. v. Blakemore, 584 S.W.2d 204, 207 (Tenn. App.
1978), held:
… a lawyer will be held civilly liable to a non-client where he knowingly
participates in the extinguishment of a subrogation interest of a non-client third
party and delivers to his client funds that he knows belong to the third party and
knows or should know, that he has thereby placed the funds beyond the reach of
the third party …
See also, Hankins v. Seaton, 1998 Tenn. App. LEXIS 419 (Tenn. Ct. App. June 25, 1998) (attorney
liable for failure to honor a signed subrogation agreement); Greenwood Mills, Inc., v. Burris, et.
1 2
Conn. Informal Ethics Op. 95-20 (1995) (lawyer cannot pay money to third person over client’s objection); Pa.
Ethics Op. 92-89 (1992) (lawyer, whose client was ordered to pay arrearage in child support, cannot release escrow
proceeds from real estate sale without client consent); R.I. Ethics Op. 2007-02 (2007) (where the client insists that the
settlement proceeds be disbursed to the client, and where the inquiring attorney has received no notice of a claim from
the health insurer, the inquiring attorney must disburse the settlement funds to the client).

Ariz.Ethics Op. 88-6 (1988) (lawyer may disburse money if he has concluded that one party is entitled to it under
applicable law; but if good faith doubt, he should deposit into trust account pending resolution of matter and initiate
an interpleader action or other proceeding to resolve the dispute); Ariz. Ethics Op. 98-06 (1998) (“actual knowledge”
of assignment, medical lien, statutory lien, and letter of protection can trigger lawyer’s duty to protect nonclient’s
interests; but good faith doubt requires lawyer to place disputed portion of funds in trust pending resolution of
conflicting claims); Ohio Supreme Court Ethics Op. 95-12 (1995) (lawyer should hold disputed portion of funds until
resolution by arbitration or court action); Utah Ethics Op. 00-04 (2000) (if client in good faith disputes creditor’s
interest and instructs lawyer not to disburse property, counsel must protect property until dispute is resolved); Wash.
Ethics Op. 185 (if lawyer guaranteed payment to creditor, he must-after advising client of effect of such guaranteepay creditor unless there is good faith dispute as to amount of debt).
23

104

al., 130 F.Supp.2d 949 (D.C. Tenn. 2001) (attorney liable for failure to pay ERISA subrogation
interest).
Tennessee Formal Ethics Opinion (TFEO) 97-F-141, issued February 4, 1998, addressed
clauses proposed by defense attorneys for inclusion in releases to settle personal injury cases. The
opinion held, in part:
The attorney’s signature on a release should vouch only for the fact that the client
releases the defendant. A requirement that a plaintiff’s attorney become a party to
a release might create conflict of interest between plaintiff’s attorney and the
plaintiff in violation of DR 5-101(A). Therefore, these clauses are prohibited except
in cases where the plaintiff’s attorney releases a claim for attorney fees.
RPC 1.7(b), Conflict of Interest: General Rule, provides in part:
(b)
A lawyer shall not represent a client if the representation of that client may
be materially limited by the lawyer’s responsibilities to another client or to a third
person, or by the lawyer’s own interests, unless:
(1)
(2)

the lawyer reasonably believes the representation will not be
adversely affected; and
the client consents in writing after consultation.
***

Comment [8] to RPC 1.7 provides in part:
The lawyer’s own interests should not be permitted to have an adverse effect on the
representation of a client . . . If the probity of a lawyer’s own conduct in a
transaction is in serious question, it may be difficult or impossible for the lawyer to
give a client detached advice. A lawyer may not allow related business interests to
affect representation, for example, by referring clients to an enterprise in which the
lawyer has an undisclosed interest.
Arizona Opinion 03-05 (2003) considered the same question posed in the second paragraph of the
inquiry herein. The Arizona opinion held, in part:
The mere request that an attorney agree to indemnify Releasees against lien claims
creates a potential conflict of interest between the claimant and the claimant's
attorney. The attorney's refusal, for ethical reasons, to accede to such a demand as
a condition of settlement could prevent the client from effectuating a settlement that
the client otherwise desires.

105

The insistence upon an attorney's agreement to indemnify as a condition of
settlement could, for example, cause the lawyer to recommend that the client reject
an offer that would be in the client's best interest because it would potentially
expose the lawyer to the payment of hundreds of thousands of dollars in lien
expenses, or litigation over such lien expenses.
The attorney's acceptance of such a condition would also create a conflict of interest
with an existing client under ER 1.7 because the client's failure or refusal to repay
a lien could make the client's lawyer its guarantor.
That might materially limit the representation by virtue of the lawyer's own interest
in having the client (rather than the lawyer) pay the liens in full. Even if the lawyer
were willing to accept that potential financial burden, and even if the lawyer were
ethically permitted to provide such financial assistance, such an agreement might
compromise the lawyer's exercise of independent professional judgment and
rendering of candid advice in violation of ER 2.1.
While ER 1.2 requires an attorney to abide by a client's decision whether to accept
an offer of settlement, a settlement agreement that requires the attorney to
indemnify, or hold the Releasees harmless, violates ER 1.8.
Since, under ER 1.8, an attorney cannot ethically provide financial assistance to a
client by paying, or advancing, the client's medical expenses before or during
litigation, an attorney cannot ethically agree, voluntarily or at the client's or
Releasees' insistence, to guarantee, or accept ultimate liability for, the payment of
those expenses.
The ethics rules relied upon in the Arizona Opinion are consistent with Tennessee Rules of
Professional Conduct 1.7(b), 2.1, 1.2, and 1.8(e) and that opinion’s conclusions are adopted
herein.4 . 1It is apparent that requiring a plaintiff’s attorney to enter into agreements posed in the
inquiry, particularly requiring that the attorney indemnify and/or hold harmless any party being
released or subrogation interest holder from medical expenses or liens, creates a conflict between
the interests of the plaintiff’s attorney and those of their client. Consistent with TFEO 97-F-141,
such agreements and/or clauses are prohibited. As discussed herein, the actions which are the
subject of the first paragraph of the inquiry are obligations imposed upon the plaintiff’s attorney
by RPC 1.15(c). The attorney is obligated to safeguard the funds in his possession until any dispute
between the client and the third person regarding the funds is resolved. It is apparent that whether
the funds in the attorney’s possession rightfully belong to the client or to the third person or entity
may well not be determined at the time that the release resolving the lawsuit is executed. The
attorney cannot be required to breach the ethical obligations imposed upon the attorney by RPC
See also: Mo. Formal Op. 125 (2008) (it is a violation for an attorney to propose a settlement that includes a
provision that would involve a violation of any of the Rules of Professional Conduct by another attorney); Ill. Adv.
Op. 06-10-(2006); Kan. Op. 01-5 (2001).
14

106

1.15(c) by signing an agreement regarding disposition of the funds prior to the resolution of the
dispute. If the attorney makes misrepresentations in settlement negotiations regarding payment of
medical bills or liens, as posed in the inquiries, the attorney’s conduct will be subject to Rules of
Professional Conduct, including 4.1(a) and 8.4(c), and/or to liability pursuant substantive law
beyond the scope of this opinion.
This 12th day of March, 2010.

ETHICS COMMITTEE:
Thomas S. Scott, Jr.
Virginia Anne Sharber
William C. Bovender

APPROVED AND ADOPTED BY THE BOARD

107

Go to Top

Document Meta Data

Primary Meta Data for PDF File
Key Value
Author Julie Turner
Creator Julie Turner
Description empty
Keywords empty
ModifyDate Tuesday, March 28, 2023 12:15 PM -05:00
PageCount 112
PDFVersion 1.6
Subject empty
Title empty
Additional Meta Data for PDF File
Key Value
Comments empty
Company Board of Professional Responsibility
ContentTypeId 0x010100790E4DF368EB294B8CEE312CA6319EF3
CreateDate Tuesday, March 28, 2023 12:07 PM -05:00
CreatorTool Acrobat PDFMaker 23 for Word
DocumentID uuid:f66a48d2-ddff-411e-b64d-c03f21f1e5ff
FileName tn-attorneys-trust-account-handbook-2023.pdf
FileSize 840 kB
FileType PDF
FileTypeExtension pdf
Format application/pdf
HasXFA No
InstanceID uuid:70427931-40ed-4892-84ee-301b0d6cf82d
Language EN-US
Linearized No
MetadataDate Tuesday, March 28, 2023 12:15 PM -05:00
MIMEType application/pdf
PageLayout OneColumn
Producer Adobe PDF Library 23.1.125
SourceFile tn-attorneys-trust-account-handbook-2023.pdf
SourceModified Tuesday, March 28, 2023 4:59 PM +00:00
TaggedPDF Yes
XMPToolkit Adobe XMP Core 9.0-c000 79.cca54b0, 2022/11/26-09:29:55

Go to Top

Assistance Request

Request Accessibility Assistance

Go to Top