By Ellen A. Pansky

Pansky of Pansky Markle Attorneys at Law is a legal ethics specialist and a State Bar Certified Legal Malpractice Specialist. She advises, represents, and defends lawyers. The opinions this article expresses are the author’s own. Ethics articles are provided by LACBA’s longstanding Professional Responsibility and Ethics Committee.

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Mingling Can Be Fun; Commingling Can Result in Professional Discipline

California has strict rules governing the proper maintenance and handling of client trust funds. These rules include explicit recordkeeping requirements. Indeed, the failure to keep updated records relating to client trust funds, in and of itself, can be a disciplinary offense.

What Is Commingling?

Section (c) of Rule 1.15 of the California Rules of Professional Conduct (CRPC) prohibits the “commingling” of an attorney’s personal funds with client trust funds. The term “commingling” is something of a term of art in disciplinary law. Essentially, a lawyer cannot combine personal funds with client trust funds and must segregate the trust funds at all times. It is prohibited to: deposit client trust funds in a personal or business account of the lawyer; hold client funds in a bank account that is not clearly delineated as a “client trust account (CTA) or words of similar import;” fail to promptly distribute out of the trust account earned fees to which the attorney has attained a reasonably certain right; hold a cushion of funds in the trust account to guard against a future or inadvertent error; hold excessive amounts of non-client funds in an amount which exceeds a reasonable amount for bank charges and check fees;  or, pay non-client related expenses directly from the trust account even if the source of the payment is earned attorney fees that the lawyer has a right to utilize for the lawyer’s own purposes. All of these actions constitute commingling and would be considered violative of the CRPC requirements.

Rule 1.15(c) of the Rules of Professional Conduct requires that funds belonging to the attorney or law firm shall neither be deposited into nor otherwise commingled with client funds held in a trust account. The Rule provides limited exceptions for funds reasonably sufficient to pay bank charges and for funds belonging in part presently or potentially to the attorney or law firm, in which case the portion belonging to the attorney or law firm must be withdrawn at the earliest reasonable time after the attorney or law firm’s interest in that portion becomes fixed.

Rule 1.15(d)(3) requires specified bookkeeping records to be maintained on a monthly basis, in accordance with “Standards” that are appended to the rule. In the event that a lawyer fails to keep the specified required records, a disciplinary violation may be charged by the Office of the Chief Trial Counsel. In other words, even if the lawyer defeats a commingling charge, discipline may be imposed for the recordkeeping violations, standing alone.

Notably, in 2018, amendments to the rules were codified in rule 1.15(b), mandating that a flat rate fee in an amount in excess of $1,000 must be deposited into the CTA, unless the client consents in writing. Also, a “true retainer” is one that is paid exclusively to secure the lawyer’s availability to provide legal services.  In the event that the retainer fee is used to defray fees or costs relating to the legal services provided by the lawyer to the client, then the retainer is deemed to be an advanced fee, not a “true retainer,” and it must be deposited and properly maintained in the CTA.

Advanced fees that are not maintained in a CTA until earned may be deemed by the State Bar to have been misappropriated, as opposed merely commingled. The discipline for misappropriation is typically more severe than the discipline imposed for commingling without misappropriation.

Disciplinary Cases Based On Commingling

Standard  2.2 of the Standards For Attorney Sanctions For Professional Misconduct contained in the State Bar Court Rules of Procedure sets forth that the presumed sanction for commingling is an actual suspension of three months. The Standards explain that  presumed sanction for any specific act of misconduct is “a starting point” for the determination of the appropriate degree of discipline, and can be adjusted up or down depending on the application and balancing of mitigating and aggravating circumstances which are also described in  Standards 1.5 and 1.6. The charge of commingling without other significant violations or aggravating circumstances and with mitigating evidence has often resulted in a lower level of discipline than the presumed three months of actual suspension. Published State Bar case law over the years has fleshed out the ramifications of commingling a lawyer’s personal funds with client funds, or improper deposit of non-trust funds into the CTA.  Some examples of commingling violations that resulted in discipline include:

Dudugjian v. State Bar (1990) 52 Cal. 3d 1092: the California Supreme Court imposed a public reproval with conditions upon two attorneys who deposited client settlement funds into a law firm general account and withheld those funds with the mistaken belief that they were permitted to retain them as partial payment of their attorneys’ fees;

In the Matter of Respondent E (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 71: attorney was privately reproved for commingling and failing to retain disputed funds in trust in a single client matter. The misconduct was caused by an isolated mistake in an otherwise careful bookkeeping system. Extensive mitigating factors were present, and no aggravating circumstances were found. 

Kelly v. State Bar (1991) 53 Cal.3d 509: the Supreme Court imposed a three-year suspension, stayed, and three-year probation with conditions, including a 120-day actual suspension based on misconduct in two client matters involving commingling of client funds, failure to deposit client funds in trust, misappropriation of client funds and failure to promptly disburse client funds. Mitigation included 13 years of discipline-free practice, and the lack of  serious harm to petitioner's clients or others. The Supreme Court noted that “willful misappropriation” covers a wide range of conduct and does not always require disbarment.

In the Matter of McKiernan (Review Dept. 1995) 3 Cal State Bar Ct. Rptr. 420: the Review Department recommended a 90-day actual suspension for an attorney culpable of commingling and moral turpitude by gross negligence for issuing two NSF checks to a business knowing there were  insufficient funds in the client trust account to cover payment. The attorney took over three years to repay the amount owed to the business, and only after the business had filed a complaint with the State Bar. The attorney's misconduct was aggravated by indifference for failing to repay at least part of the money, for a pattern of misconduct given the repeated misuse of the client trust account over a prolonged period of time, and multiple acts, but mitigated by candor and cooperation, remorse and recognition of wrongdoing, many years of discipline-free practice, and limited weight for good character evidence.

In the Matter of Lawrence (Review Dept. 2013) 5 Cal. State Bar Ct. Rptr. 239 at 243: the Supreme Court found that, when the attorney failed to provide a written accounting of services performed,  the attorney’s interest in earned fees became fixed by the date on which all other funds associated with the case had been distributed. Once fixed, attorney fees must be promptly removed to avoid the commingling of funds.

In the Matter of Martin (Review Dept. 2020) 5 Cal. State Bar Ct. Rptr. 753: imposition of  a public reproval where the respondent was found culpable of two counts of commingling. The attorney utilized the client trust account to make a series of personal withdrawals and purchases totaling over $45,000 and deposited over $50,000 in personal funds into his trust account. The Review Department assigned moderate weight to aggravation on grounds of the attorney’s multiple acts of misconduct but found mitigation based on 15 years of discipline-free practice, no client harm, demonstration of good character  and for the pretrial stipulation to facts.  The trial judge had recommended a 90-day actual suspension from practice, based upon the presumptive sanction for the attorney’s misconduct under Standard 2.2(a). However, based upon the mitigating factors, including lack of client harm, a lengthy period with no disciplinary violations, and the character references, the Review Department ordered that the discipline be reduced to public reproval.

Words To The Wise

It is important to strictly adhere to the rules prohibiting any commingling of a lawyer’s personal funds—including earned fees- with client trust funds. Inattention to the duty to refrain from holding earned fees in a client trust account may result in serious disciplinary consequences, and uncorrected errors in handling client funds will undoubtedly lead to public discipline. Monthly reconciliation of all client trust accounts, including both IOLTA and non-IOLTA trust accounts, such as single purpose trust accounts and interest-bearing trust accounts in which the interest is distributed to the owner of the funds, must be diligently performed. Particularly now that every lawyer must attest under penalty of perjury in the annual Client Trust Account Protection reporting to compliance with the trust accounting rules contained in rule 1.15, avoiding the commingling of personal funds with client trust funds is crucial.