Monday, February 05, 2007

Revised Proposed Rules: Changes for Lawyers as Fiduciaries

On January 27, 2007, the Disciplinary Board of the Supreme Court of Pennsylvania published a Notice of Proposed Rulemaking in the Pennsylvania Bulletin, as Document No. 07-114, 37 Pa.B. 394 (1/27/2007), regarding the effects of an overdraft in an attorney's fiduciary account, where acting as an executor or trustee, or in other fiduciary roles.

The proposal is in in the form of amendments to existing
Rule 1.15 ("Safekeeping Property") of the Pennsylvania Rules of Professional Conduct (Pa. R. Prof. Conduct), and to Rule 221 ("Funds of clients and third persons; Mandatory overdraft notification") of the Pennsylvania Rules of Disciplinary Enforcement. The amendments would bring funds or other property held by lawyers as a fiduciary within the scope of those rules, which currently apply only to a lawyer's client escrow account.

Such a concept has a history, as the Notice indicates in its first paragraph:

On June 10, 2006, The Disciplinary Board of the Supreme Court of Pennsylvania published a Notice of Proposed Rulemaking, Volume 36, Pennsylvania Bulletin, page 2801.

In light of the comments received in response to that Notice, the Disciplinary Board has made changes to the proposed amendments to Pennsylvania Rule of Professional Conduct 1.15 and Pennsylvania Rule of Disciplinary Enforcement 221.
The "comments received" from members of the bar were extensive & thoughtful. The Philadelphia Bar Association, the Allegheny County Bar Association, and the Pennsylvania Bar Association, through their respective practice sections, submitted detailed analyses of the previous proposed changes.

The Disciplinary Board responded by withdrawing its prior proposal for further consideration. Members of the bar awaited the Board's further response. The recently published Notice contains that further response.

The Notice was drawn to the attention of the Bar by Daniel B. Evans, Chair of the Real Property, Probate & Trust Law Section, of the Pennsylvania Bar Association, in his RPPT listserv posting on February 2, 2007.

The Notice invites further comment on the revised proposal:

Notice is hereby given that The Disciplinary Board is considering recommending to the Supreme Court that these Rules be amended as set forth in Annex A and Annex B. The changes to Rule of Professional Conduct 1.15 permit attorneys acting as fiduciaries to exercise appropriate fiduciary judgment, make prudent investments, and administer fiduciary assets in accordance with law and accepted practice.

The definition of ''Financial Institution'' is broadened to permit deposit of IOLTA funds in various instrumentalities in addition to traditional banks and savings and loan associations to the extent that such instrumentalities chose to qualify as ''Eligible Institutions'' under Rule of Disciplinary Enforcement 221(h), as well as to permit investment of entrusted funds in or through such entities, consistent with the Prudent Investor Rule or other applicable law.

Interested persons are invited to submit written comments regarding the proposed amendments to the Office of the Secretary, The Disciplinary Board of the Supreme Court of Pennsylvania, First Floor, Two Lemoyne Drive, Lemoyne, PA 17043, on or before March 1, 2007.

The amendments define the term "Rule 1.15 Funds" and then alter language throughout the two rules to maintain the basic principles of separation & safeguarding of such assets held, and retention of records relating to administration.

A revised Rule 1.15, consistent with the form published with the Notice, would provide (if finalized), in part, as follows:

(b) A lawyer shall hold all Rule 1.15 Funds and property separate from the lawyer's own property. Such property shall be identified and appropriately safeguarded.

(c) Complete records of the receipt, maintenance and disposition of Rule 1.15 Funds and property shall be preserved for a period of five years after termination of the client-lawyer or Fiduciary relationship or after distribution or disposition of the property, whichever is later. A lawyer shall maintain, in electronic or hard copy form, with backup at least monthly on a separate electronic storage device, the following books and records for each Trust Account and for any other account in which Fiduciary Funds are held pursuant to Rule 1.15(l):

(1) all transaction records provided to the lawyer by the Financial Institution or other investment entity, such as periodic statements, cancelled checks, deposited items and records of electronic transactions; and

(2) check register or separately maintained ledger, which shall include the payee, date and amount of each check, withdrawal and transfer, the payor, date, and amount of each deposit, and the matter involved for each transaction.

The amendments are far more complex, however, in the interweaving with the principles of "IOLTA" and "Non-IOLTA" accounts, which involve account interest earnings, and with reporting upon the occurrence of an overdraft.

These and other concerns will be addressed, I am certain, by the same folks in Philadelphia, Pittsburgh, and statewide who commented on the prior proposal.

Comments must be received in writing by the Disciplinary Board no later than Thursday, March 1, 2007.

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Update: 02/07/07:

On February 6, 2007, an article appeared in the Morning Call (Allentown, PA), reporting an egregious case that the proposed rule changes likely are intended to address by early intervention.

"Allentown lawyer stole $225,000 from client, prosecutors say", Matt Birkbeck reports that an Allentown lawyer, John J. Keller, 61, was held without bail pending a hearing. He reportedly "stole $225,000 from a client, siphoning the money to pay employee expenses and buy personal items, federal prosecutors said Monday."
Attorney John J. Keller, 61, of 1037 N. 28th St., was held without bail pending a detention hearing today in Allentown after a federal grand jury returned a 17-count indictment charging him with wire fraud. Keller allegedly stole the money over two years from his Interest On Lawyer Trust Account, or IOLTA.

If convicted, Keller could receive a sentence of life in prison and a $5 million fine. * * *

Most attorneys maintain IOLTA accounts, which keep clients' money separate from their own. But according to the indictment, in February 2002 Keller began to withdraw the client's money from his IOLTA account for personal and business needs. He continued to take varying amounts until 2004, when T.S. learned the account had been depleted despite receiving several written statements from Keller that $225,000 remained.
See also: "Allentown lawyer ordered to have evaluation", also by Matt Birkbeck, of The Morning Call, published on February 7, 2007:
An Allentown lawyer charged with stealing money from a client was ordered Tuesday to remain in federal custody and undergo psychiatric testing. * * *

Assistant U.S. Attorney Seth Weber requested the psychiatric analysis on Monday after portraying Keller as a threat to himself and others. * * *
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