Lawyers’ Professional Responsibility Following Third-Party Theft From a Trust Account

In a recent Formal Ethics Opinion, the North Carolina State Bar (NCSB) opined on a lawyer’s professional responsibility when a third party unaffiliated with the lawyer’s firm steals funds from the firm’s trust account.

While taking care to note that the opinion in no way reflected upon any consequences in terms of legal liability, the NCSB noted that lawyers should not be held professionally responsible for third-party theft where the theft is not facilitated by a violation of the Rules of Professional Conduct (the Rules). However, lawyers must always be able to demonstrate that they have managed their trust accounts and supervised their non-lawyer personnel in accordance with the Rules of Professional conduct.

Do the Rules of Professional Conduct Require Lawyers to Replace Stolen Funds?

The first inquiry the NCSB addressed in 2015 Formal Ethics Opinion 6 was whether a lawyer is required to replace stolen trust funds under the following circumstances:

• A third-party creates counterfeit checks and draws them against the lawyer’s trust account.
• The third-party is unaffiliated with the lawyer and the lawyer properly supervised all non-lawyer staff in accordance with the Rules.
• The lawyer also properly maintained the trust account pursuant to Rule 1.15-3.
• The lawyer had no knowledge of, and no opportunity to prevent, the theft.

Ultimately, while the lawyer would be obligated to conduct a prompt investigation and take steps to prevent future thefts, he or she would not be required to replace the stolen funds. Given the facts as described, the lawyer would have satisfied his or her fiduciary responsibilities.

The NCSB also addressed the similar scenario of a thief hacking the firm’s computer system in order to steal trust account funds. In this situation, it also found that the lawyer should avoid liability for the stolen funds – provided that the lawyer had met her or her obligations regarding security under Rule 1.15.

However, under different circumstances (for example, if the theft was proximately caused by a violation of the Rules relating to non-lawyer supervision or trust account management) the NCSB noted that the lawyer could be obligated to replace the stolen funds.

What Are the Lawyer’s Responsibilities Regarding Outstanding Checks?

As a related issue, the NCSB also addressed the lawyer’s professional responsibility under the original fact pattern with respect to outstanding checks. It proposed two different scenarios:

• The lawyer has issued outstanding checks under the trust account, but the account’s remaining funds are sufficient to cover the checks.
• Same as previous; however, there are now insufficient funds to cover the checks.

In both situations, the NSCB felt that the lawyer’s responsibilities to his or her clients would be the same: The lawyer must ensure that one client’s funds are not used to satisfy another client’s obligations. This would require (i) issuing stop-payment notices to the bank holding the account, and (ii) demanding that the bank be held liable in the event that it honored a fraudulent check. Of course, the lawyer should abstain from issuing any additional checks until the issue is resolved.

With respect to the payees, the NCSB simply instructed that the lawyer should provide notice of the problem.

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The attorneys at Cheshire Parker Schneider & Bryan, PLLC have decades of experience in professional responsibility matters in North Carolina. If you are facing disciplinary action, put our experience on your side. For more information about our experience and what we can do to help, call (919) 833-3114 or contact us online today.