Amended - 20120108

N.D.R. Prof. Conduct

RULE 1.15 SAFEKEEPING PROPERTY AND PROFESSIONAL LIABILITY INSURANCE DISCLOSURE

(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 deposited in one or more identifiable interest bearing trust accounts in accordance with the provisions of paragraph (f). 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 in the manner prescribed in paragraph (h). Guidance regarding what constitutes complete records is provided in the Appendix to this Rule.

(b) A lawyer may accept credit card payments or electronic funds transfer payments for unearned fees as temporary deposits into the lawyer's general operating account if the funds in which a client or a third-party has an interest are promptly transferred from the general operating account to the client trust account. A lawyer may deposit the lawyer's own funds in a client trust account only for the purpose of paying bank service charges and fees associated with credit card payments or electronic funds transfer payments related to that account, but only in an amount necessary for that purpose.

(c) A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.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, in connection with a representation, 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 property.

(e) When, in the course of representation, a lawyer is in possession of property 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 as to which the interests are not in dispute.

(f) Each trust account referred to in paragraph (a) shall be an interest bearing trust account in an eligible financial institution selected by a lawyer in the exercise of ordinary prudence. An eligible financial institution is a bank, savings bank, trust company, savings and loan association, savings association, credit union, or federally regulated investment company authorized by federal or state law to do business in North Dakota and insured by the Federal Deposit Insurance Corporation, the National Credit Union Share Insurance Fund, or the Federal Savings and Loan Insurance Corporation. Interest bearing trust funds shall be placed in accounts in which withdrawals or transfers can be made by the depositing lawyer or law firm without delay, subject only to any notice period which the depository institution is required to reserve by law or regulation.

(1) A lawyer who receives funds of clients or third persons shall maintain a pooled interest bearing trust account for deposit of all such funds received that are nominal in amount or expected to be held for a short period of time. The interest accruing on this account, net of any transaction costs, shall be paid to and administered by the North Dakota Bar Foundation in accordance with Administrative Rule 24 of the Supreme Court of North Dakota. The North Dakota Bar Foundation holds the entire beneficial interest in all interest monies accruing on this account.

(2) All funds of a client or third person shall be deposited in the account specified in paragraph (f)(1) unless they are deposited in:
(i) a separate interest bearing trust account for the particular client or third person on which the interest, net of any transaction costs, will be paid to the client or third person; or

(ii) a pooled interest bearing trust account with subaccounting which will provide for computation of interest earned by each client's or third person's funds and the payment thereof, net of any transaction costs, to the client or third person.
(3) In determining whether to use the account specified in paragraph (f)(1) or an account specified in paragraph (f)(2), a lawyer should take into consideration the following factors when deciding whether the funds to be invested may be utilized to provide a positive net return to the client or third person:
(i) the amount of interest which the funds would earn during the period they are expected to be deposited;

(ii) the cost of establishing and administering the account, including the cost of the lawyer's services and the cost of preparing any tax reports required for interest accruing to a client's or third person's benefit; and

(iii) the capability of financial institutions described in paragraph (f) to calculate and pay interest on individual accounts or subaccounts.
(4) As to accounts under paragraph (f)(1), a lawyer or law firm shall direct the depository institution:
(i) to remit interest or dividends, net of any service charges or fees, on the average monthly balance in the account, or as otherwise computed in accordance with an institution's standard accounting practice, at least quarterly, to the North Dakota Bar Foundation (the foundation); and

(ii) to transmit with each remittance to the foundation a statement showing the name of the lawyer or law firm for whom the remittance is sent, the rate of interest applied, and the amount of service charges deducted, if any, and the account balance(s) of the period in which the report is made, with a copy of such statement to be transmitted to the depositing lawyer or law firm.

(g) Lawyers who are admitted to practice in a jurisdiction other than the state of North Dakota and lawyers who are associated in a law firm with at least one lawyer who is admitted to practice in a jurisdiction other than the state of North Dakota are exempt from the requirements of paragraph (f) if the lawyer or law firm maintains a pooled interest bearing trust account for the deposit of funds of clients or third persons in a financial institution located outside the state of North Dakota and the interest, net of any service charges and fees, from the account is being remitted to the client or third person who owns the funds, or to a non-profit organization or government agency pursuant to the laws or rules governing lawyer conduct of the jurisdiction in which the financial institution is located. This exemption shall not relieve a lawyer from any of the other obligations imposed by this rule.

(h) A lawyer shall maintain or cause to be maintained on a current basis records sufficient to demonstrate compliance with the provisions of this Rule. Such records shall be preserved for at least six years after termination of the representation.

(i) A lawyer shall certify, in connection with the annual renewal of the lawyer's license and in such form as the clerk of the supreme court of North Dakota may prescribe, that the lawyer is complying with the provisions of this Rule.

(j) The form required in subsection (i) shall also contain a provision for each licensed lawyer to certify (1) whether the lawyer represents private clients; (2) if the lawyer represents private clients, whether the lawyer is currently covered by professional liability insurance; and (3) whether the lawyer intends to maintain such insurance during the next twelve months. A lawyer shall notify the clerk in writing within 30 days if the lawyer's professional liability coverage lapses, is no longer in effect, or terminates for any reason, unless the policy is renewed or replaced without substantial interruption. This information shall be disclosed to the public upon request.

(k) Lawyer trust accounts, as referred to in paragraphs (a) and (f), shall be maintained only in eligible financial institutions approved by the Disciplinary Board. Every check, draft, electronic transfer, or other withdrawal instrument or authorization must be personally signed or, in the case of electronic, telephone, or wire transfer, directed by one or more lawyers authorized by the law firm.

(l) A financial institution, to be approved as a depository for lawyer trust accounts, shall file with the Disciplinary Board an agreement, in a form provided by the Board, to report to the Board if any properly payable* instrument is presented against a lawyer trust account containing insufficient funds, whether or not the instrument is honored. The Disciplinary 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 may be maintained in any financial institution that does not agree to make overdraft notification reports. Any overdraft notification agreement must apply to all branches of the financial institution and may not be canceled except upon three days notice in writing to the Board.

(m) The overdraft notification agreement must provide that all reports made by the financial institution be in the following format:

(1) in the case of a dishonored instrument, the report must be identical to the overdraft notice customarily forwarded to the depositor, and should include a copy of the dishonored instrument, if a copy is normally provided to depositors;

(2) in the case of an instrument that is presented against insufficient funds but which instrument is honored, the report must identify the financial institution, the lawyer 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.

Reports must be made simultaneously with the notice of dishonor* 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 must be made within five banking days of the date of presentation for payment against insufficient funds.

(n) Every lawyer practicing or admitted to practice in this State shall, as a condition thereof, consent to the reporting and production requirements of this Rule.

(o) Nothing in this rule precludes a financial institution from charging a particular lawyer or law firm for the reasonable cost of producing the reports and records required by this rule.

(p) With respect to client trust accounts required by this Rule:

(1) only a lawyer admitted to practice law in this jurisdiction or a person under the direct supervision of the lawyer may be an authorized signatory or authorize transfers from a client trust account;

(2) receipts must be deposited intact and records of deposit should be sufficiently detailed to identify each item; and

(3) withdrawals must be made only by check payable to a named payee and not payable to cash, or by authorized electronic transfer.

(q) Trust account records may be maintained by electronic, photographic, or other media provided that they otherwise comply with these Rules and that printed copies can be produced. These records must be readily accessible to the lawyer.

(r) Upon dissolution of a law firm or of any legal professional corporation, the partners shall make reasonable arrangements for the maintenance of client trust account records.

(s) Upon the sale of a law practice, the seller shall make reasonable arrangements for the maintenance of trust account records.

COMMENT
[1] A lawyer should hold property of others with the care required of a professional fiduciary. All property that is the property of clients or third persons, including potential clients, must be kept separate from the lawyer's business and personal property. Monies that are the property of clients or third persons, including potential clients, must be held in one or more interest bearing trust accounts. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities. The determination of whether funds of a client or third person could be invested to provide a positive net return to the client rests in the sound judgment of each lawyer or law firm.

[2] If a lawyer chooses to accept credit card or electronic fund transfer payments of unearned fees, paragraph (b) allows temporary deposits into the lawyer's general operating account pending prompt transfer into a client trust account. This method of handling client funds avoids the direct deposit of electronic funds into a client trust account and eliminates the risk of chargebacks or transaction fees creating a negative balance in the trust account or compromising other clients' trust funds. While normally it is impermissible to commingle the lawyer's own funds with client funds, paragraph (b) provides the only situations in which it is allowed. Accurate records of the funds must be kept regarding which part is the lawyer's.

[3] Lawyers often receive funds from which the lawyer's fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.

[4] Paragraph (e) also recognizes that third parties, such as a client's creditor who has a lien on funds recovered in a personal injury action, may have lawful claims against specific 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. In such cases, when the third party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

[5] The obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal services. When a lawyer holds funds in a capacity other than as a lawyer representing a client, this Rule does not regulate the manner in which those funds are to be held and protected. For example, a lawyer who serves as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction.

[6] Guidance regarding the administration of trust accounts may be available from the Interest on Lawyer Trust Account Committee of the North Dakota Bar Foundation.

[7] Paragraph (p) enumerates minimal accounting controls for client trust accounts. It also enunciates the requirement that only a lawyer admitted to the practice of law in this jurisdiction or a person who is under the direct supervision of the lawyer may be the authorized signatory or authorize electronic transfers from a client trust account. While it is permissible to grant limited nonlawyer access to a client trust account, such access should be limited and closely monitored by the lawyer. The lawyer has a non-delegable duty to protect and preserve the funds in a client trust account and can be disciplined for failure to supervise subordinates who misappropriate client funds. See, N.D.R. Prof. Conduct 5.1 and 5.3.

[8] Authorized electronic transfers must be limited to (1) money required for payment to a client or third person on behalf of a client; (2) expenses properly incurred on behalf of a client, such as filing fees or payment to third persons for services rendered in connection with the representation; (3) money transferred to the lawyer for fees that are earned in connection with the representation and are not in dispute; or (4) money transferred from one client trust account to another client trust account.

[9] The requirements of subparagraph (2) of paragraph (p) that receipts must be deposited intact mean that a lawyer cannot deposit one check or negotiable instrument into two or more accounts at the same time, a practice commonly known as a split deposit.

[10] Paragraph (q) allows the use of alternative media for the maintenance of client trust account records if printed copies of necessary reports can be produced. If trust records are computerized, a system of regular and frequent (preferably daily) back-up procedures is essential. If a lawyer uses third-party electronic or internet based file storage, the lawyer must make reasonable efforts to ensure that the company has in place, or will establish, reasonable procedures to protect the confidentiality of client information. See, ABA Formal Ethics Opinion 398 (1995). Trust account records must be readily accessible and must be readily available to be produced upon request by the client or a third person who has an interest as provided in this Rule, or by the official request of a disciplinary authority, including a subpoena duces tecum. Personally identifying information in records produced upon request by the client or third person or by disciplinary authority must remain confidential and may be disclosed only in a manner to ensure client confidentiality as otherwise required by law or court rule.

[11] N.D.R. Lawyer Discipl. 6.1 provides for the preservation of a lawyer's client trust account records in the event that the lawyer is transferred to disability inactive status, inactive status, suspended, disbarred, disappears, or dies.

[12] Paragraphs (q) and (r) provide for the preservation of a lawyer's client trust account records in the event of dissolution or sale of a law practice. Regardless of the arrangements the partners or shareholders make among themselves for maintenance of client trust records, each partner may be held responsible for ensuring the availability of these records. For purposes of these paragraphs, the terms "law firm", "partner", and "reasonable" are defined in accordance with N.D.R. Prof. Conduct 1.0(d), (k), and (m).

APPENDIX
Rule 1.15(a) requires that a lawyer practicing in this jurisdiction shall maintain "[c]omplete records" of trust account transactions. The American Bar Association's Model Rules for Client Trust Account Records identifies the kinds of records that should be maintained in meeting the Rule's requirement:

(1) receipt and disbursement journals containing a record of deposits to and withdrawals from client trust accounts, specifically identifying the date, source, and description
of each item deposited, as well as the date, payee and purpose of each disbursement;

(2) ledger records for all client trust accounts showing, for each separate trust client and beneficiary, the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons or entities to whom such funds were disbursed;

(3) copies of retainer and compensation agreements with clients as required by N.D.R. Prof. Conduct 1.5;

(4) copies of accountings to clients or third persons showing the disbursement of funds to them or on their behalf;

(5) copies of bills for legal fees and expenses rendered to clients;

(6) copies of records showing disbursements on behalf of clients;

(7) the physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;

(8) records of all electronic transfers from client trust accounts, including the name of the person authorizing transfer, the date of transfer, the name of the recipient and confirmation from the financial institution of the trust account number from which money was withdrawn and the date and the time the transfer was completed;

(9) copies of monthly trial balances and quarterly reconciliations of the client trust accounts maintained by the lawyer; and

(10) copies of those portions of client files that are reasonably related to client trust account transactions.

This Appendix identifies the basic financial records that a lawyer should maintain with regard to all trust accounts of a law firm. These include the standard books of account and the supporting records that are necessary to safeguard and account for the receipt and disbursement of client and third person funds as required by this Rule. Consistent with paragraph (h) of this Rule, lawyers must maintain client trust account records for a period of six years after termination of each particular legal engagement or representation.

With respect to physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks identified in Appendix paragraph (7), the "Check Clearing for the 21^st Century Act" or "Check 21 Act", codified at 12 U.S.C. § 5001 et.seq., recognizes "substitute checks" as the legal equivalent of an original check. A "substitute check" is defined at 12 U.S.C. § 5002(16) as "paper reproduction of the original check that contains an image of the front and back of the original check; bears a magnetic ink character recognition ("MICR") line containing all the information appearing on the MICR line of the original check; conforms with generally applicable industry standards for substitute checks; and is suitable for automated processing in the same manner as the original check. Banks, as defined in 12 U.S.C. § 5005(2), are not required to return to customers the original canceled checks. Most banks now provide electronic images of checks to customers who have access to their accounts on internet-based websites. It is the lawyer's responsibility to download electronic images . Electronic images must be maintained for the requisite number of years and must be readily available for printing upon request or must be printed and maintained for the requisite number of years.

The ACH (Automated Clearing House) Network is an electronic funds transfer or payment system that primarily provides for the inter-bank clearing of electronic payments between originating and receiving participating financial institutions. ACH transactions are payment instructions to either debit or credit a deposit account. ACH payments are used in a variety of payment environments including bill payments, business-to business payments, and government payments (e.g. tax refunds). In addition to the primary use of ACH transactions, retailers and third parties use the ACH system for other types of transactions including electronic check conversion (ECC). ECC is the process of transmitting MICR information from the bottom of a check, converting check payments to ACH transactions depending upon the authorization given by the account holder at the point-of-purchase. In this type of transaction, the lawyer should review Appendix paragraph (8).

There are five types of check conversions where a lawyer should consider maintaining records identified in Appendix paragraph (8). First, in a "point-to-point purchase conversion", a paper check is converted into a debit at the point of purchase and the paper check is returned to the issuer. Second, in a "back-office conversion", a paper check is presented at the point of purchase and is later converted into a debit and the paper check is destroyed. Third, in an "account-receivable conversion", a paper check is converted into a debit and the paper check is destroyed, Fourth, in a "telephone-initiated debit" or "check-by-phone" conversion, bank account information is provided via the telephone and the information is converted to a debit. Fifth, in a "web-initiated debit", an electronic payment is initiated through a secure web environment. All electronic funds transfers must be recorded and a lawyer should not re-use a check number that has been previously used in an electronic transfer transaction.

The potential of these records to serve as safeguards may be realized if the monthly trial balances and quarterly reconciliations identified in Appendix paragraph (9) are regularly performed. The trial balance is the sum of balances of each client's ledger card (or the electronic equivalent). Its value lies in comparing it on a monthly basis to a control balance. The control balance starts with the previous month's balance, then adds receipts from the Trust Receipts Journal and subtracts disbursements from the Trust Disbursements Journal. Once the total matches the trial balance, the reconciliation readily follows by adding amounts of any outstanding checks and subtracting any deposits not credited by the bank at month's end. This balance should agree with the bank statement. Quarterly reconciliation is recommended only as a minimum requirement; monthly reconciliation is the preferred practice given the difficulty of identifying an error (whether by the lawyer or the bank) among three months' transactions.

In some situations, documentation in addition to that listed in Appendix paragraphs (1) through (9) may be necessary for a complete understanding of a trust account transaction. The type of document that a lawyer should retain under Appendix paragraph (10) because it is "reasonably related" to a client trust transaction will vary depending on the nature of the transaction and the significance of the document in shedding light on the transaction. Examples of documents that typically should be retained under Appendix paragraph (10) include correspondence between the client and lawyer relating to a disagreement over fees or costs or the distribution of proceeds, settlement agreements contemplating payment of funds, settlement statements issued to the client, documentation relating to sharing litigation costs and attorney fees for subrogated claims, agreements for division of fees between lawyers, guarantees of payment to third parties out of proceeds recovered on behalf of a client, and copies of bills, receipts or correspondence related to any payments to third parties on behalf of a client (whether made from the client's funds or from the lawyer's funds advanced for the benefit of the client).

Reference: Minutes of the Professional Conduct Subcommittee of the Attorney Standards Committee on 04/26/85 and 08/23/85; and Revised by the State Bar Association of North Dakota on 08/29/86 and approved by the Board of Governors on 09/06/86; Minutes of the Joint Committee on Attorney Standards on 11/14/03, 03/18/05, 06/14/05, 09/09/05, 06/10/08, 09/19/08, 11/07/08, 12, 01/08, 03/04/11; 09/16/11; 12/09/11, 06/13/12.