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Negative Balance: Trust Account Overdraft Notification and the ARDC

By: Althea K. Welsh, Chief of Intake, ARDC

August 27 , 2018

It is no accident that the longest and most-detailed provision of the Illinois Rules of Professional Conduct (IRPC) is Rule 1.15, which sets forth lawyers’ obligations relating to safekeeping client property. The length and breadth of this rule reflect the Illinois Supreme Court’s recognition that safekeeping client funds and property is among the most fundamental of lawyers’ fiduciary obligations and one that must be enforced by the lawyer disciplinary system. Paragraph (h) of Rule 1.15 provides a powerful mechanism to aid in the enforcement of this obligation by requiring lawyers to maintain their client trust accounts only at banks that have agreed to notify the ARDC whenever a trust account is overdrawn or contains insufficient funds to pay an instrument presented against the account. The Supreme Court’s official comment to Rule 1.15(h) explains that overdraft notification “is intended to provide early detection of problems in lawyers’ trust accounts, so that errors by lawyers and/or banks may be corrected and serious lawyer transgressions pursued.”

The ARDC investigates all trust account overdrafts reported by banks. Most of these investigations are handled in the ARDC’s Intake Division, which is responsible for screening and conducting initial inquiries into new complaints and reports made to the ARDC. When the ARDC receives an overdraft notice, Intake Counsel will send a letter to the lawyer requesting an explanation of the facts and circumstances surrounding the overdraft and copies of the lawyer’s trust account records for the relevant time period. The lawyer will also be invited to submit a letter of explanation from the bank if the lawyer believes the overdraft was caused by a bank error.

Most lawyers respond to Intake Counsel with an explanation and records reflecting that the overdraft resulted from error or inadvertence by the lawyer or, less often, by the lawyer’s bank. Some of the most frequent errors by lawyers include: attempting to draw on deposits before they have cleared the banking process, mixing-up trust and business account checkbooks, clicking on the wrong account during online banking, depositing funds to the wrong account, miscalculating distribution amounts, transposing numbers on checks or in accounting records, and failing to maintain contemporaneous and complete records of account activity. Additionally, a surprising number of trust account overdrafts occur when lawyers fail to notice that temporary (or “counter”) checks prepared for them by bank tellers have mistakenly been printed with the lawyer’s trust account number instead of the lawyer’s business or personal account number.

If the evidence shows that an overdraft was the result of error or inadvertence and that client funds were not misused or misappropriated, the ARDC usually will not pursue formal disciplinary charges. In many such instances, however, the evidence reveals one or more problems with the way the lawyer is using the trust account or with the lawyer’s recordkeeping practices that the ARDC will address in other ways. While commingling and other account-usage issues are not infrequent, deficiencies in lawyers’ record-keeping practices are far more common.

When the Illinois Supreme Court amended Rule 1.15 to provide for automatic overdraft notification in 2011, it also augmented the rule with detailed requirements regarding accounting records lawyers must prepare and maintain for all trust accounts. These records include a receipts journal, a disbursements journal, client sub-account ledgers and quarterly reconciliation reports. It is not unusual for lawyers who experience problems with their trust accounts to be unfamiliar with these specific requirements and to be using accounting systems that fall short of the rule’s requirements.

When problems with account usage or recordkeeping come to light in overdraft investigations, Intake Counsel will focus on identifying the specific practices that may not be consistent with Rule 1.15, educating the lawyer regarding the rule’s requirements, and ensuring that necessary practice corrections are made. This process may involve additional correspondence with the lawyer, telephonic communication, or an in-person meeting for the purpose of one-on-one instruction. Intake Counsel also provide lawyers with sample accounting journals and ledgers, and may require lawyers to view one of the ARDC’s webinars covering Rule 1.15, to complete written reports regarding practice changes they have implemented, or to submit future accounting records for a defined time period (typically three months) demonstrating full compliance with Rule 1.15.

Lawyers sometimes complain to Intake Counsel that the trust account recordkeeping requirements of Rule 1.15 are unnecessary and/or too onerous. The ARDC’s educational efforts with these lawyers include instilling the realization that the recordkeeping requirements benefit lawyers not only by reducing the risk of errors that may lead to overdrafts and disciplinary problems, but also by generating documentation that is then available to fulfill the lawyer’s fiduciary obligation to provide an accounting to the owners of funds held by the lawyer and to refute any charge that funds were handled improperly.

As might be expected, not all ARDC investigations into trust account overdrafts are resolved by Intake Counsel. In general, Intake Counsel will refer an overdraft investigation to one of the ARDC’s litigation groups if the evidence shows that the lawyer used client funds for the lawyer’s own business or personal purposes, if the lawyer fails to respond or to cooperate with the Intake investigation, if the lawyer responds but cannot or does not provide a satisfactory explanation for the overdraft, or if the lawyer shows an inability or unwillingness to make practice changes necessary to comply with Rule 1.15. If an overdraft investigation is referred to Litigation Counsel, it may still be concluded without the filing of formal disciplinary charges if additional investigation demonstrates that the lawyer did not take or misuse client funds and that the lawyer has made any practice changes necessary to fully comply with Rule 1.15. If Litigation Counsel’s further investigation confirms or produces evidence that the overdraft resulted from the lawyer’s use of client funds for the lawyer’s own business or personal purposes, formal disciplinary charges will usually result.

ARDC records show that between September 2011, when the overdraft notification rule became effective, and the end of 2017, banks sent 2,093 overdraft notices to the ARDC. Of these, only 42 led to the filing of formal disciplinary charges against the lawyers. As these figures indicate, the vast majority of overdraft notices sent to the ARDC do not involve intentional wrongdoing by lawyers and are addressed by the ARDC in ways that do not involve disciplinary charges. While lawyers should not fear that they will face discipline for an isolated inadvertent trust account overdraft, they should understand that any trust account shortage will lead to an ARDC inquiry. Lawyers can best guard against this possibility by educating themselves regarding the requirements of Rule 1.15 and then scrupulously adhering to those requirements in every particular.