Attorney Trust Accounts: Teaching the Basics Using a Classroom Simulation
by
Steven Wechsler

In recent years the legal profession has increasingly called upon legal educators to better prepare students for their entry into the active practice of law. In particular, the bar has been urging law schools to devote more attention to an assortment of skills and to the development of professionalism amongst their students, soon to be lawyers. Legal academics have responded, providing skills training in a wide variety of areas, including trial and appellate practice, effective legal research and writing, interviewing, counseling, and negotiation. These skills are taught using a broad array of techniques, such as live client clinics, simulations, externships, and classroom exercises.

The project described in this article focuses on a skill and body of knowledge that are central to the practice of law and that every lawyer should be conversant with, yet that receive little attention in most law school curricula: the technical ins and outs of maintaining the lawyer's trust account in accordance with the specific requirements of the jurisdiction's version of Model Rule 1.15 or Disciplinary Rule 9-102. The peculiar thing about this particular skill is that while every practicing lawyer may need to know it and be able to put it into action at a moment's notice, many lawyers never actually have to run a trust account in a lifetime of practicing law. Lawyers who practice as partners or associates in large law firms often find that someone else, such as a managing partner or possibly an accounting department, deals with these issues. Even lawyers who do not personally run trust accounts, however, are responsible for properly safekeeping clients' funds and should be conversant with the operation of these accounts. Moreover, in these days of increased lawyer mobility, a large-firm lawyer who was heretofore insulated from the day-to-day operation of the trust account may suddenly be a sole practitioner who must run his or her own account.

Law schools usually incorporate the subject of trust accounts into their professional responsibility courses. Typically, this coverage involves a review of the pertinent sections of the Model Rules and Model Code, with perhaps a few principal or note cases of lawyers who were disciplined for either deliberate or inadvertent mishandling of client funds. In most law schools, one would be unlikely to find more than a class hour devoted to the subject. From this short lesson, most students learn that as lawyers they must have a trust account, must not ever commingle their own money with that of their clients, and must never steal or even borrow money from the trust account. Occasionally, law faculty may devote more time to the subject; some CLE videos provide a higher level of detail.

These classroom discussions are certainly valuable. They call students' attention to the important rules concerning trust accounts and client funds and ideally imbue the students with some sense of the critical importance of these rules. The typical law school class, however, neglects extremely significant questions for the student about to be a lawyer: Exactly how am I supposed to carry out the mandate of the Rules or the Code? What books and records do I need to set up and maintain, and how do I go about entering each specific transaction?

Two factors may account for the lack of such specifics in typical law school curricula. First, many law students have little experience in business, financial, or accounting matters and have difficulty with these concepts. (In an informal poll of one of my own classes, only about half of the students claimed to reconcile their own checking accounts on a monthly basis; a significant number did not know what it meant to reconcile a bank account.) Second, the subject matter may seem obvious, to both those who are knowledgeable and those who are ignorant. People who have some accounting knowledge may find the details rather trivial, while those who don't may assume there is nothing much to be learned or that a computer program will handle all the problems.

The Trust Account Simulation

With this background in mind, I devised a semester-long simulation exercise to teach students how to operate a lawyer's trust account on a daily basis. The simulation has two goals. The first is to explicate the basic mechanics of running a trust account. These mechanics include identifying what books and records are necessary and how to enter various transactions into them, as well as learning how to reconcile the books to the monthly bank statement. To give the simulation even a rough resemblance to real life, the exercise requires a large number of transactions. Various problem transactions, such as how to deal with a returned settlement check, supplement the more mundane items.

The second goal of the simulation is to convey to students the importance of timely and accurate record keeping in their trust accounts. Since many busy law students tend to procrastinate, this attempt to inculcate values rests on a system of grading penalties intended to motivate prompt handling of transactions. My hope is that the lesson will carry over to actual practice.

Although I originally conceived of this simulation as just a trust account exercise, it soon became clear that to learn the lesson of "no commingling" students would have to maintain not only a trust account, but a business account as well. A side benefit of introducing the business account is that it prompts a discussion of the business side of the practice of law, as well as doubling the number of opportunities for learning to reconcile bank statements.

How the Simulation Works

At the beginning of the semester, the students receive an introductory handout describing the goals of the exercise and introducing them to the Rules or Code provisions that apply to trust accounts. The handout also includes all of the forms needed for setting up the necessary books and records and detailed instructions on how to do so. Each student creates a notebook containing both a business account and a trust account. Each account includes a check register with a running balance, checks, deposit slips, and a place to file bank statements. In addition, the trust account records include blank forms to be used for each client -- these are sub-accounts of the master trust account. This preliminary handout also reviews the class rules regarding record keeping and the submission of student work and stresses the stringent penalties that may be imposed for failing to make the necessary entries accurately and promptly.

Once the students have set up their books, they begin to receive transactions. A "transaction" is a piece of paper that describes an event requiring some entry in one or more of the student-attorney's records. It may include an incoming check described in the transaction. For example, a typical business account transaction might be, "Pay the phone bill. You owe the phone company $197.55." A typical trust account transaction might be, "You settled a case for Charlene Client for $150,000; attached below is the insurance company's check in settlement. You had this case on a one-third contingent-fee basis and have advanced the expenses listed below." This transaction would include a mock check for the mentioned amount, together with a list of expenses advanced on behalf of the client.

For each transaction, the student must decide what to do next. The transactions do not reveal which account they are intended to affect or what the student's appropriate action should be. In the examples given above, the student would need to draw a check for the phone bill and post it in the business account check register. The insurance check would have to be deposited in the trust account with entries made in that account's check register and in Charlene Client's sub-account. This action would be followed by a calculation and disbursal of the settlement to the client and the lawyer by drawing the appropriate checks out of the trust account, with the concomitant entries. This settlement transaction provides an opportunity to discuss in class the problem of how to deal with the disbursal of uncollected funds: How long must the lawyer wait before disbursing that settlement? Students must also obtain the client's endorsement (provided, upon request, by the professor) and draft a letter to the client explaining the final settlement and accounting in the case. Some of the more complex transactions raise a host of additional ethical issues.

Virtually every transaction requires some action regarding either an incoming or outgoing check. In addition to the book entries, the students must also actually process the checks and deposit slips. The professor acts as the bank or banks involved: Students drop off their incoming and outgoing checks, with appropriate paperwork attached, in the simulated "banking system" Ã?â?? actually a box outside the professor's office. With the aid of an assistant, the professor processes the checks, just as depositary and payor banks would in the real world. At one-month intervals, students receive bank statements with canceled checks for each of their accounts. They then must reconcile their books to their bank statements.

The professor collects the students' books of accounts in class at unannounced intervals and checks them for the promptness and accuracy of the entries. The exercise runs for approximately eight to ten weeks out of a 14-week semester, allowing time for class discussion and for down time while the books are out of the students' hands.

Conclusion

The trust account simulation exercise can work well in a variety of law school settings, such as a course in professional responsibility or lawyering skills, or a live-client clinic. This exercise involves a lot of work, for both faculty and for students. I believe, however, that it is probably the best way to teach this essential skill to law students who do not have a prior grounding in the subject.