State Bar of Arizona Ethics Opinions

09-03: Trust Accounts; Safekeeping Property
11/2009

An Arizona-licensed lawyer who maintains an office in Arizona but whose law firm also has an office in another jurisdiction may keep trust funds in a trust account held outside of Arizona provided that the client (or third person, where relevant) consents and the account is held at an approved financial institution. If the account is a pooled trust account on which interest and dividends are not paid to clients, the interest and dividends on the funds from the Arizona-licensed lawyer must be paid to the Arizona Foundation for Legal Services and Education.

FACTS

An Arizona lawyer operates out of the Arizona office of a multistate law firm that has a home office in another jurisdiction. The law firm holds all client funds, including those from the Arizona office, in the home office’s trust account in the other jurisdiction. The law firm’s home office in the other jurisdiction performs all accounting and financial recordkeeping.

QUESTIONS PRESENTED

1.  May an Arizona-licensed lawyer who maintains an office in this state but whose law firm has an office in another jurisdiction use the non-Arizona office’s trust account to hold funds for Arizona matters and Arizona clients?

2.  If so, must:
a.  The non-Arizona office’s trust account be held only in a financial institution authorized by Rule 43(g), Ariz. R. Sup. Ct.?
b.  The interest income on funds held in the other jurisdiction for Arizona matters and clients be paid to the Arizona Foundation for Legal Services and Education pursuant to Rule 43(f)(2), Ariz. R. Sup. Ct.?
c.  The lawyer advise Arizona clients, in writing, that their money will be held in a trust account in a jurisdiction other than Arizona?

APPLICABLE ARIZONA RULES OF PROFESSIONAL CONDUCT (“ER __”)

ER 1.15  Safekeeping Property

(a)  A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account 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.

. . . .

OTHER RELEVANT RULE

Rule 43, Ariz. R. Sup. Ct.

(a) Duty to Deposit Client Funds and Funds Belonging to Third Persons; Deposit of Funds Belonging to the Lawyer. Funds belonging in whole or in part to a client or third person in connection with a representation shall be kept separate and apart from the lawyer's personal and business accounts. All such funds shall be deposited into one or more trust accounts that are labeled as such. The location of the trust account shall be controlled by the provisions of ER 1.15(a). No trust account required by this rule may have overdraft protection

. . .

(f) Pooled Trust Account; Separate Client Trust Account.

2. A lawyer or law firm receiving client funds shall maintain a pooled interest-bearing or dividend-earning trust account for deposit of client funds unless the funds are expected to earn net income for the client in excess of the costs incurred to secure such income. The interest or dividends accruing on this account, net of any reasonable service or other charges or fees imposed by the financial institution or investment company in connection with the account, shall be paid by the financial institution or investment company to the Arizona Foundation for Legal Services and Education, and shall be used solely for the following purposes: to pay the actual administrative costs of this interest or earnings on lawyers' trust accounts (IOLTA) program; to fund programs designed to assist in the delivery of legal services to the poor; to support law-related education programs designed to teach young people, educators and other adults about the law, the legal process and the legal system; to fund studies or programs designed to improve the administration of justice; and to maintain a reasonable reserve therefor.

3. All client funds shall be deposited in an account as specified in subsection 2 above unless they are deposited in:

A. A separate interest-bearing or dividend-earning trust account for the particular client or client's matter on which the interest or dividends, net of any reasonable service or other charges or fees imposed by the financial institution or investment company in connection with the account, will be paid to the client; or

B. A pooled interest-bearing or dividend-earning trust account, with subaccounting provided by the lawyer or the law firm, which will provide for computation of interest or dividends earned by each client's funds and the payment thereof, net of any reasonable service or other charges or fees imposed by the financial institution or investment company in connection with the account, to the client.

. . .

5. Lawyers or law firms depositing client funds in accounts as specified in subsection 2 above shall direct the depository institution or investment company:

A. To remit interest or dividends, net of any reasonable service or other charges or fees imposed by the institution or company in connection with the account, as computed in accordance with the institution's or company's standard accounting practice, at least quarterly, to the Arizona Foundation for Legal Services and Education….

. . .

(g) Authorized Financial Institutions. The State Bar and the Foundation shall establish regulations governing approval and termination of approval status for financial institutions, and shall annually publish a list of approved financial institutions. A financial institution shall be approved as a depository for lawyer or law firm trust accounts only if the institution annually files with the State Bar, on the provided form, an agreement to comply with the rules and regulations. The agreement shall include the duty of the institution to report to the chief bar counsel in the event that any properly payable instrument is presented against a lawyer trust account containing insufficient funds, regardless of whether the instrument is honored or not. The manner of report shall be determined by the State Bar. No lawyer or law firm trust account shall be maintained in a financial institution in Arizona that does not agree to make such reports. The agreement shall apply to all branches of the financial institution and shall not be canceled except upon thirty (30) days advance written notice to the State Bar.

. . .

(j) Applicability of Rule. Every lawyer admitted to practice law in Arizona shall comply with the provisions of this rule regarding funds received, disbursed or held in Arizona, and funds received, disbursed or held on behalf of an Arizona client or a third person in connection with the representation of an Arizona client.

OPINION

This opinion addresses where an Arizona-licensed lawyer who practices in this state may or must physically maintain his or her trust account and whether that lawyer may pool trust funds with those of non-Arizona lawyers in his or her law firm. [1]

The applicable Ethical Rule, ER 1.15, which governs a lawyer’s safekeeping of property of clients or third persons, answers the general question of where any Arizona-licensed lawyer, regardless of where he or she practices or offices, may keep trust funds. The relevant portion of ER 1.15(a) states: “Funds [of clients or third persons] shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person.”

Arizona adopted ER 1.15(a) verbatim from Rule 1.15(a) of the American Bar Association Model Rules of Professional Conduct. There is a dearth of authority interpreting the language at issue in this opinion, perhaps because the language is so clear. In an informal opinion without extensive analysis, one other state that has adopted Rule 1.15(a) has applied the relevant portion of ER 1.15(a) to conclude that if an attorney’s sole office is in Missouri, the attorney must have a trust account in Missouri “unless Attorney obtains the consent of each client to keep the funds in Kansas.” See, e.g., Missouri Ethics Op. 980099 (undated). A noted treatise, however, states, without citation to authority, that Model Rule 1.15(a) requires that “all lawyers and law firms must have at least one trust account in a local banking institution that is separate from their office or personal accounts.” G. Hazard and W. Hodes, The Law of Lawyering (3d ed. 2002 supp.) at §19.4, p. 19-7 (emphasis added).

Against this thin background, we look at the plain language of the rule. In ER 1.15(a), because the disjunctive “or” is used between “where the lawyer's office is situated” and “elsewhere,” “elsewhere” must mean somewhere other than “in the state where the lawyer's office is situated.”

Under the facts presented, the lawyer is licensed in and practices in Arizona, but is part of a multistate law firm and desires to keep funds required to be held in trust in an account outside of Arizona. The plain language of ER 1.15(a) provides the lawyer with two options for where to hold the funds belonging to clients or third persons: (1) in a separate account maintained “in the state where the lawyer’s office is situated,” which, under these facts, would be Arizona, or (2) in a separate account maintained “elsewhere with the consent of the client or third person.” Thus, with the consent of the client or third person, the Arizona lawyer could hold the funds in a trust account outside of Arizona.

If the Arizona lawyer holds the funds in a trust account outside of Arizona, the Arizona lawyer still must comply with Rule 43. Rule 43(j) (“Every lawyer admitted to practice law in Arizona shall comply with the provisions of this rule regarding funds received, disbursed or held in Arizona, and funds received, disbursed or held on behalf of an Arizona client or a third person in connection with the representation of an Arizona client.”).

This means that the out-of-state trust account nonetheless would have to be held at an authorized financial institution pursuant to Rule 43(g) and, if the account is a pooled account under Rule 43(f)(2), the interest and dividends would have to be paid to the Arizona Foundation for Legal Services and Education (AZFLSE).

Under the facts presented, the interest and dividends on the funds contributed by the Arizona lawyer must be able to be calculated and paid to the AZFLSE. For this reason, it may be impossible for the law firm to have one pooled account that mixes trust funds from the Arizona lawyer with trust funds from non-Arizona lawyers, yet still complies with Rule 43(f)(2). The practical solution may be for the law firm’s home office to hold the funds from the Arizona lawyer in a segregated account, the dividends and interest on which are paid directly to the AZFLSE.

Having a segregated Rule 43(f)(2) account dedicated to funds from the Arizona lawyer also may help the law firm should there be an issue with trust-accounting rules in the state in which the law firm’s home office is located. This opinion assumes that the lawyer and law firm will assure that any trust account held out of state complies with or is exempted from that other state’s trust-accounting requirements.

Finally, while it may be a best practice for the Arizona lawyer to obtain in writing the necessary consent to hold the trust funds “elsewhere,” ER 1.15(a) does not require it. The Ethical Rules explicitly provide when consent to lawyer conduct must be confirmed in writing. See, e.g., ER 1.7(b) (“Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if each affected client gives informed consent, confirmed in writing….”).

CONCLUSION

An Arizona-licensed lawyer who maintains an office in Arizona but whose law firm also has an office in another jurisdiction may keep client money in the non-Arizona office’s client trust account provided that the client (or third person, where relevant) consents. If the Arizona-licensed lawyer chooses to use the non-Arizona office’s client trust account, that account must be maintained at an approved financial institution as required by Rule 43(g) and the interest on funds held in the account that would otherwise be held in an Arizona account must be identified and paid to the Arizona Foundation for Legal Services and Education pursuant to Rule 43(f)(2).

Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. This opinion is based on the Ethical Rules in effect on the date the opinion was published. If the rule changes, a different conclusion may be appropriate. © State Bar of Arizona 2009

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[1] This opinion assumes that a lawyer maintains a trust account. Not all lawyers must have trust accounts, however. A trust account is required only when the lawyer holds funds of a client or a third party. ER 1.15(a).