PROBLEM AREAS IN LEGAL ETHICS – MIDTERMS EXAM

GROUP 1

Cusi, Ronald Arvin C.

Delos Reyes, Mervyn Jef F.
Landicho, Laurie Carr L.
Ramos, Samuel G.

I. CONCEPT OF TRUST ACCOUNT

Trust account is a property, fund, money held in trust to an attorney commenced

with lawyer-client relation at the time an attorney is retained with the retainer’s fee.

There are two concepts of retainer’s fee, the first refers to the act of the client by
which he engages the services of an attorney and to render legal advice or defend or
prosecute the client’s cause in court. The client’s cause is the initial professional act
of an attorney which is the determination if there is indeed a cause of action of the
plaintiff client or possible defense for the defendant client.

An acceptance fee may either be general or special. General engagement is one

the purpose of which is to secure beforehand the services of an attorney for any
legal problem in the future. Concrete example is when a lawyer is engaged by
organization as legal counsel on retainer’s basis. Special engagement is one the
purpose of which is to secure the service of an attorney has reference to a particular
case.

The second concept of retainer’s fee may refer to the fee which a client pays to
an attorney known as retaining fee. This is a preliminary fee paid by the client to
insure and secure the lawyer’s future services. The reason is to remunerate the
lawyer for being deprived by being retained by one client of the opportunity of
rendering services to other clients and receiving pay from such other client.

The trust account commences initially right after the payment by client to attorney
the acceptance fee and/or retainer’s fee. At this point there is no substantial
professional service rendered by the attorney but the acceptance of fees carries with
it the obligation to hold money in trust and disbursed or spends the same for the
cause of his client. Subsequent payments by client to his attorney must likewise be
in accordance with the need of the cause of the client litigation cost.

The litigation cost shouldered by the client and directly paid to attorney is an
initial exercise of attorney’s holding in trust the fund of his client, even if substantial
of which is for the professional services which the lawyer has the right to use for
whatever purposed personal to him, provide that the trust of client is alive in the
heart of the lawyer. Simply stated, counsel must enjoy the fruit of his genuine
professional service to his client.

a. TRUST ACCOUNT IN THE PHILIPPINES

In light of the fiduciary relationship between attorney and client, Canon 16

requires that a “lawyer shall hold in trust all moneys and properties of his client that
may come into his possession” and Rule 16.1 states that a “lawyer shall account for
all money or property collected or received for or from the client.”
A lawyer may receive money or property for or from his client in the course of
his professional relationship with his client. The lawyer holds such money or property
in trust and he is under obligation to make an accounting thereof. Such money or
property may include the following:
The money collected by a lawyer in pursuance of a judgment in favor of his
client is held in trust. So is money of a client not used for the purpose for which it
was entrusted to his counsel. Thus, the client’s money given to his lawyer intended
as filing fees and other legal fees for the counterclaims in the answer he filed for his
client, who was not paid for such purpose because the counterclaims were
compulsory and required no payment of fees, is money of the client which the lawyer
should account. A lawyer also holds for the benefit of his client any property
redeemed with the client’s money and registered in the lawyer’s name or any fund
received by him from a judgment creditor as consideration for his desisting from
participating in the public sale of the client’s property.

b. TRUST ACCOUNT IN OTHER JURISDICTIONS (US)

 In other jurisdictions, the essence of client trust account is contained in these
three words: client, trust and accounting.

Client – These duties arise in the context of an attorney-client relationship,

regardless of whether you are paid for your services, and are as inviolable as
your duty to maintain client confidences. These duties may also be owed to third
parties.

Trust – The willingness of people to trust a complete stranger with money just
because the stranger is an attorney is a fundamental aspect of the attorney-client
relationship, and maintaining that trust is the duty of every individual attorney and
a matter of supreme public interest.

Accounting – the way to fulfill your client’s trust is to be able at any time to make
a full and accurate accounting of all money you’ve received, held and paid out on
their behalf.

Client trust accounting is more than keeping money in the bank. A bank account
is something that you have; client trust accounting is something you do in order to
know – and show to your clients that you know – how much of the money is in your
trust account.

What is a Client’s Trust Account?

A client’s trust account is a special bank account where client funds are kept safe
until it is time to withdraw those funds. Whether it is referred to as a client funds
account or a lawyer trust account, using a client’s trust account is good business
sense for lawyers who are holding money such as a retainer (or any other money) on
behalf of a client for their case.

Creation of an IOLTA Program

When a client gives you a “nominal” amount of money, or you will be holding a
client’s money for “short period of time,” Business and Professions Code of different
state states that you must hold the money in a common client trust bank account
which is set up so that the interest the account earns will be paid to the State Bar of
whatever state it has jurisdiction over the client.
 Since most attorneys at some time holds money for clients that is nominal in
amount or wil be held for a short period of time, the chances are that the lawyer will
need to set a common client trust bank account, which for convenience we’re
referred to as IOLTA account (IOLTA stands for Interest On Lawyers Trust
Accounts).

The most significant innovation is the creation of a comprehensive IOLTA

program. Arkansas lawyers are now required to convert all of their trust accounts into
interest-bearing accounts in which either the client or the IOLTA foundation will
receive the interest payments. In Arkansas, lawyers must certify compliance with this
rule when paying their annual Arkansas Supreme Court license renewal fee.

c. HISTORICAL OVERVIEW

The original 32 Canons of Professional Ethics were adopted by the American Bar
Association in 1908. They were based principally on the Code of Ethics adopted by
the Alabama State Bar Association in 1887, which in turn has been borrowed largely
from the lectures of Judge George Sharswood, published in 1854 under the title of
Professional Ethics, and from the fifty resolutions included in David Hoffman’s A
Course of Legal Study (2d ed. 1836). Since then a limited number of amendments
have been adopted on a piecemeal basis.

One of the earliest ethics codes described a virtuous lawyer in these words: “Tell
me a man is dishonest and I will answer that he is no lawyer. He cannot be because
he is careless and reckless of justice; the law is not in his heart, is not the standard
and rule of his conduct.”

The first publication to set out rules for the legal profession may have been David
Hoffman, a Baltimore practitioner as part of a course in legal study. One of
Hoffman’s fifty resolutions stated: “I will retain no client’s funds beyond the period in
which I can, with safety and ease, put him in possession of them”. Another resolution
condemned commingling: “I will on no occasion blend with my own, my client’s
money: if kept distinctly as his it will be less liable to be considered as my own.”
(1836)

Pennsylvania Judge George Sharswood, whose ethical prescriptions greatly

influenced the first American Bar Association’s (ABA) ethical code, wrote that
“mutual trust, confidence and goodwill” are the essence of the lawyer-client
relationship. “Money and other trust property coming into the possession of a lawyer
should be promptly reported, and never commingled with his private property or used
by him, except with the client’s knowledge or consent. (1896)

Alabama adopted most of Sharswood’s prescriptions into the nation’s first official
code of ethics for lawyers. The code was first adopted by the Alabama Bar
Association in 1887. The ABA code, ABA CANONS OF PROFESSIONAL ETHICS,
was approved in 1908. Canon 11 which deals with client funds is almost identical to
Sharswood’s statement as cited.

II. PROVISIONS OF LAW REGARDING TRUST ACCOUNT IN RELATION TO

LEGAL ETHICS

 1908 Code of Professional Ethics (American Bar Association) *These

canons of the American Bar Association were adopted by the Philippine
Bar Association as its own in 1917 and in 1946.

Canon 11. Dealing with trust property

Money of the client or other trust property coming into the possession of
lawyer should be reported promptly, and except with client’s knowledge and
consent should not commingled with his private property or be used by him.

 ABA Model Code of Professional Responsibility which was adopted by

the House Delegates in 1969 and became effective in January 1, 1970.

Canon 9. A lawyer should avoid even the appearance of professional

impropriety

Ethical considerations

Ec 9-5 separation of the funds of a client from those of his lawyer not only
serves to protect the client but also avoids even the appearance of
impropriety, and therefore commingling of such funds should be avoided.

Ec 9-7 a lawyer has an obligation to the public to participate in collective

efforts of the bar to reimburse persons who have lost money or property as a
result of the misappropriation or defalcation of another lawyer, and
contribution to a client’s security fund is an acceptable method of meeting this
obligation.

Disciplinary rules

Dr 9-102 preserving identity of funds and property of a client

(a) -all funds of clients paid to a lawyer or law firm, other than advances for
costs and expenses, shall be deposited in one or more identifiable bank
accounts maintained in the state in which the law office is situated and no
funds belonging to the lawyer or law firm shall be deposited therein except as
follows:

(1) -funds reasonably sufficient to pay bank charges may be deposited

therein.

(2) -funds belonging in part to a client and in part presently or

potentially to the lawyer or law firm must be deposited therein, but the portion
belonging to the lawyer or law firm may be withdrawn when due unless the
right of the lawyer or law firm to receive it is disputed by the client, in which
event the disputed portion shall not be withdrawn until the dispute is finally
resolved.

(b) -a lawyer shall:

(1 -)promptly notify a client of the receipt of his funds, securities, or

other properties.

(2) -identify and label securities and properties of a client promptly

upon receipt and place them in a safe deposit box or other place of
safekeeping as soon as practicable.

(3) -maintain complete records of all funds, securities, and other

properties of a client coming into the possession of the lawyer and render
appropriate accounts to his client regarding them.

(4) -promptly pay or deliver to the client as requested by a client the

funds, securities, or other properties in the possession of the lawyer which the
client is entitled to receive.
 Canons of Professional Ethics (CPE)

Canon 11. Dealing with trust property

The lawyer should refrain from any action whereby for his personal benefit or
gain he abuses or takes advantage of the confidence reposed in him by his
client.

Money of the client or collected for the client or other trust property coming
into the possession of the lawyer should be reported and accounted for
promptly and should not under any circumstances be commingled with his
own or be used by him.

 Code of Professional Responsibility (CPR) June 21, 1988

Canon 16 - a lawyer shall hold in trust all moneys and properties of his client
that may come into his profession.

a. CASE LAW JURISPRUDENCE ON TRUST ACCOUNT

 Spouses Lopez vs. Atty. Limos (A.C. No. 7618, 16 February 2016).
Respondent violated Rule 16.01 and 16.03, Canon 16 of the CPR when she
failed to return the amount of P75, 000.00 representing legal fees that
complainants paid her. Thus, a lawyer’s failure to return upon demand the
funds held by him on behalf of his client gives rise to the presumption that he
has appropriated the same for his own use in violation of the trust reposed in
him by his client. Such act is a gross violation of general morality, as well as
professional ethics.

 Spouses Concepcion vs. Atty. Dela Rosa (A.C. No. 10681, 03 February
2015). The rule against borrowing of money by a lawyer from his client is
intended to prevent the lawyer from taking advantage of his influence over the
client. The rule presumes that the client is disadvantaged by the lawyer’s
ability to use all the maneuverings to renege on his obligation. Respondent’s
act of borrowing money from a client amounting to P2.5 M and blatantly
refusing to pay the same was a violation of Rule 16.04 of the CPR.
  Yu vs. Atty. Dela Cruz (A.C. No. 10912, 19 January 2016). The conversion
by a lawyer of funds entrusted to him by his client is a gross violation of
professional ethics and a betrayal of public confidence in the legal profession.
After the decision was rendered in favor of the complainant, and a writ of
execution issued. Respondent issued a check purportedly to settle the case
only to have the check bounce for insufficiency of funds.

 Cooperman’s Case. First judicial decision to invalidate a non-refundable

retainer on the ground that it was unethical. Cooperman was a lawyer charge
with fifteen violations centering around his use of nonrefundable retainer
agreements.

 Arens vs. Committee on Professional Conduct. The Supreme Court

sanctioned two lawyers who did not refund the unearned portion of a
refundable fee.

III. PROBLEM AREAS WITH REGARD TO CLIENT’S TRUST ACCOUNT

A. Misappropriation of funds.

A lawyer may receive money or property for or from his client in the course of
his professional relationship with his client. The lawyer holds such money or property
(such as money collected by a lawyer in pursuance of a judgment in favor of his
client or money of a client not used for the purpose for which it was entrusted to his
counsel) in trust and he is under obligation to make an accounting thereof.

A lawyer entrusted by his client of amounts for specific purpose but did not
spend the money for such purpose and instead misappropriated the same for his
personal use may be suspended or disbarred.

Ways Lawyers Misappropriate Clients’ Funds

1. Pocketing payments - a lawyer takes client’s money without reason and

uses it for his own purpose/s.
2. Misapplication – a lawyer puts client’s money in the wrong place, such as in
the account of another client, even temporarily
3. Charging for service never provided – a client pays for lawyer’s services
that the lawyer does not provide
4. Fraud - a lawyer intentionally deceives a client for his own financial gain such
as convincing him/her to invest in a fraudulent manner
5. Overcharging – charging too much for legal services provided
6. Misuse of Trust – a lawyer accepts retainer in trust while not having a trust
account
7. Breach of law society orders – ignoring orders to refund a client

CASE LAW JURISPRUDENCE ON MISAPPROPRIATION AND NON-

ACCOUNTING OF CLIENT’S FUND

 Atty. Augusto G. Navarro, For And In Behalf Of Pan-Asia International

Commodities, Inc., Complainant, Vs. Atty. Rosendo Meneses III [CBD
A.C. No. 313. January 30, 1998]. Refusal and/or failure of respondent to
account for the sum of money he received for an amicable settlement that
was not finalized and concluded proves beyond any shadow of a doubt that
he misappropriated the same. Such conduct indicating his unfitness for the
confidence and trust reposed on him, or showing such lack of personal
honesty or of good moral character as to render him unworthy of public
confidence, constitutes a ground for disciplinary action extending to
disbarment.

 The Florida Bar v. Michael Eugene Wynn, (No. SC-1323) [Foreign

Jurisdiction]. Misuse or misappropriation of client funds is one of the most
serious offenses a lawyer can commit, and disbarment is presumed to be the
appropriate punishment. Florida Supreme Court suspended a lawyer for 1
year for failing to repay client funds and conditioning payment of the funds to
the client on withdrawal of her Bar complaint. This case clearly illustrates that
lawyers are held to an extremely strict and fiduciary standard when handling
client funds and, as the opinion states, disbarment is presumed to be the
appropriate punishment for misuse or misappropriation of client funds. In
 addition, it is unethical for a lawyer to condition repayment of client funds to a
withdrawal of a Bar complaint (or an agreement not to file a complaint).

B. Commingling of Funds

Lawyer shall keep the funds of each client separate and apart from his own
and those of others kept by him. Failure to return gives rise to the presumption that
the lawyer has appropriated the fund for his own use (Sison v. Valdez, July 31 2017)

This obligations flows from the highly fiduciary character of attorney-client

relationship. An attorney should keep a record and report promptly the money of the
client that has come to his possession and at all times reputation for honesty and
fidelity to private trust should be maintained.

Failure to do so is violation of Canon 16 of CPR and failure to return funds

may constitute a prima facie evidence of swindling or estafa (Belleza v. Atty Macasa,
July 23, 2009). Any violation to the said obligation may result to disbarment
depending on circumstances of the case. (Licuanan v. Atty. Melo, February 9 1989)

In US jurisdiction, ABA Model Rule 1.15, the rule upon which many states’
rules are based, requires that lawyers avoid commingling by keeping the funds of
clients and third persons separate from those of the lawyer. Commingling occurs
when a lawyer holds his or her own funds in the same account that is holding client
or third party funds. Commingling is, itself, a violation of the ethics rules and may
subject a lawyer to discipline.

C. Conversion

Even if a lawyer maintains a separate, identifiable trust account and the kinds
of records required in his or her jurisdiction, there is still a risk that the lawyer will be
accused of conversion of client or third party funds notwithstanding that the lawyer
did not intend to convert such funds and without realizing that the funds were
converted.

IV. CONCLUSIONS AND RECOMMENDATIONS

Because of the fiduciary character of attorney-client relationship, they must

act with care in handling their client’s money. David Hoffman wrote that lawyers must
be careful in their adherence to their minor duties because of “culpable ambition,
false pride, the love of lucre, and even dishonesty sometimes make silent, insidious
and almost imperceptible inroads”.

The Philippines may adopt the establishment of an IOLTA program. In US the

IOLTA program uses the funds to finance charitable and educational endeavors,
improvements to administration of justice, and provides indigent and low-income
persons with legal services.