(This article appeared in Journal 24,4, December 2019)
My family has a dog named Zellie. She is a mixed breed rescue from Saving Grace, a wonderful dog rescue in Wake Forest, North Carolina. (Unabashed plug for Saving Grace—it is fantastic; let me know if you are looking for a new family member!
Recently my daughter said she was going to send me some money through Zellie. I thought that was weird. She lives in Atlanta and Zellie lives with me in North Carolina. Plus, Zellie is a dog. I couldn’t quite figure out the logistics. Turns out, she was going to send the money through Zelle, NOT Zellie. Honestly, I still didn’t understand the logistics. My suggestion that she simply send me a check was met with an audible eyeroll. Potential clients, particularly younger ones, may have a similar reaction to a law firm policy of accepting only cash, check, or chickens for the payment of legal fees. But what is a lawyer’s professional responsibility when considering or using money transfer services such as Zelle?
According to its website, “Zelle is an easy way to send money directly between almost any US bank accounts typically within minutes. With just an email address or mobile phone number, you can quickly, safely, and easily send and receive money with more people, regardless of where they bank.” This type of application is known as a peer-to-peer or person-to-person (P2P) money transfer service.
There are numerous other P2P services including Venmo, Cash App, PayPal, Google Pay, and Apple Pay. For your sake and mine, I am not going to try to explain precisely how each of these payment services operate. (For more details on these services, go ask a millennial.) Broadly speaking, some of these applications move money directly from one bank account to another bank account, while other applications move the money through an intermediary “digital wallet.”
Until recently, lawyers were prohibited from using intermediary payment services for entrusted funds. RPC 247 states that advance fees, mixed funds, and money advanced for costs must be deposited “directly” into a trust account. RPC 247 relied on Rule 1.15-2, which states that “[a]ll trust funds received by or placed under the control of a lawyer shall be promptly deposited in either a general trust account or a dedicated trust account of the lawyer.” On March 27, 2019, however, the North Carolina Supreme Court approved the following new comment to Rule 1.15:
[13] Client or third-party funds on occasion pass through, or are originated by, intermediaries before deposit to a trust or fiduciary account. Such intermediaries include banks, credit card processors, litigation funding entities, and online marketing platforms. A lawyer may use an intermediary to collect a fee. However, the lawyer may not participate in or facilitate the collection of a fee by an intermediary that is unreliable or untrustworthy. Therefore, the lawyer has an obligation to make a reasonable investigation into the reliability, stability, and viability of an intermediary to determine whether reasonable measures are being taken to segregate and safeguard client funds against loss or theft and, should such funds be lost, that the intermediary has the resources to compensate the client. Absent other indicia of fraud (such as the use of non-industry standard methods for collection of credit card information), a lawyer’s diligence obligation is satisfied if the intermediary collects client funds using a credit or debit card. Unearned fees, if collected by an intermediary, must be transferred to the lawyer’s designated trust or fiduciary account within a reasonable period of time so as to minimize the risk of loss while the funds are in the possession of another, and to enable the collection of interest on the funds for the IOLTA program or the client as appropriate. See 27 N.C.A.C. 1B, Section .1300.
Under the revised comment, lawyers are permitted to use an intermediary payment service if the service is reliable and trustworthy. The lawyer has the personal responsibility to determine whether a particular service meets those standards. Specifically, “the lawyer has an obligation to make a reasonable investigation into the reliability, stability, and viability of an intermediary to determine whether reasonable measures are being taken to segregate and safeguard client funds against loss or theft and, should such funds be lost, that the intermediary has the resources to compensate the client.”
The investigatory responsibilities set out in comment [13] are no joke considering the technical intricacies of the operations used by these payment services. The ABA has opined that the risk profile of peer-to-peer transactions will be tied to the risk profile of the underlying payment methodology. According to the ABA, a peer-to-peer transaction will have greater protections if it is based on a payment methodology that affords greater protection. The ABA urges lawyers to choose a service that offers the same kinds of protections provided by other payment options, such as credit and debit cards.
Comment [13] specifically approves of the use of credit or debit cards for collecting client funds. An exception to the prohibition on intermediary payment services has previously been allowed for credit card payments. Interestingly, the Ethics Committee approved of the use of “Master Charge and other credit card services” in 1977. See CPR 129. Because the CPRs are not available in the Handbook or online, CPR 129 is reproduced here in its enlightening entirety:
CPR 129
(October 27, 1977)
Inquiry: Is it ethical for an attorney to offer Master Charge and other credit card services to clients for the payment of fees charged for services rendered to such clients?
Opinion: Yes.
Further guidelines for the acceptance of credit card payments are set out in RPC 247, Payment of Fees by Electronic Transfer (1997); 97 FEO 9, Credit Card Chargebacks Against a Trust Account (1998); and 2009 FEO 4, Credit Card Account that Avoids Commingling (2009). Pursuant to RPC 247, credit card fees or discount charges assessed against the trust account must be properly accounted for and must not be paid with client funds unless the funds were specifically collected for that purpose. In discussing credit card chargebacks, 97 FEO 9 provides that, “[u]nder all circumstances, a lawyer is ethically compelled to arrange for a payment (from his or her own funds or from some other source) to the trust account sufficient to cover the chargeback in the event that a chargeback jeopardizes the funds of other clients on deposit in the account.”
Regardless of whether the application uses an intermediary account, it is the lawyer’s responsibility to ensure that the use of the P2P application is compliant with all of the lawyer’s professional responsibilities. Rule 1.15 requires a lawyer to manage a trust account according to strict recordkeeping and procedural requirements. The specific recordkeeping requirements set out in Rule 1.15 may prove problematic depending on the operation of the P2P application.
Above all, Rule 1.15 requires lawyers to safekeep entrusted property. Lawyers need to carefully scrutinize the security of the application before linking their trust account to any mobile or online application. 2011 FEO 7 addresses security concerns that arise when a law firm uses online banking to manage a trust account. As noted in 2011 FEO 7, “[f]inancial transactions conducted over the internet are subject to the risk of theft by hackers and other computer criminals.” Nevertheless, 2011 FEO 7 provides that law firms may use online banking to manage a client trust account if the recordkeeping and fiduciary obligations in Rule 1.15 can be fulfilled. The opinion states that a lawyer must use reasonable care to “minimize the risk of loss or theft of client property specifically including the regular education of the firm’s managing lawyers on the ever-changing security risks of online banking and the active maintenance of end-user security.” See also RPC 209 (noting the “general fiduciary duty to safeguard the property of a client”) and 98 FEO 15 (requiring a lawyer to exercise “due care” when selecting depository bank for trust account).
Similar security concerns/obligations are emphasized in 2011 FEO 6, Subscribing to Software as a Service while Fulfilling the Duties of Confidentiality and Preservation of Client Property. The opinion provides that:
the use of the internet to transmit and store client data [or, in this instance, data about client property] presents significant challenges. In this complex and technical environment, a lawyer must be able to fulfill the fiduciary obligations to protect confidential client information and property from risk of disclosure and loss. The lawyer must protect against security weaknesses unique to the internet, particularly “end-user” vulnerabilities found in the lawyer’s own law office. The lawyer must also engage in frequent and regular education about the security risks presented by the internet.
(Lawyers also need to consider the duty to protect client information as set out in Rule 1.6. Certain P2P applications incorporate social media features. Lawyers need to be mindful of any social media aspects to a payment service that might disclose confidential client information, including payments made by client to lawyer.)
Finally, lawyers need to consider whether the use of the P2P application will result in the comingling of lawyer and client funds. Rule 1.15 prohibits commingling of entrusted property and attorney funds. Some applications only allow a lawyer to choose one account where transferred funds get immediately and directly deposited. Other applications accept payment on behalf of a user and retain the funds in an account within the application; the user must then proactively retrieve the funds from the application’s account to complete the transfer of funds into the user’s bank account of choice. In the case of entrusted client funds, this type of application essentially places entrusted client funds in a nonattorney trust account until retrieved by the lawyer. Revised comment [13] states that such funds “must be transferred to the lawyer’s designated trust or fiduciary account within a reasonable period of time so as to minimize the risk of loss while the funds are in the possession of another, and to enable the collection of interest on the funds for the IOLTA program or the client as appropriate.” Considering the purpose and language of Rule 1.15, including the vulnerability of client funds remaining in a nonattorney trust account, the potential harm to be suffered by the client, and the lawyer’s requirement to safeguard those client funds, anything less than prompt transfer of those funds to the lawyer’s trust account upon becoming available would not be reasonable. Such applications are also ripe for potential commingling of the lawyer’s personal funds, earned fees, and client funds. At the very least, a lawyer would be wise to set up a separate account through which any transactions consisting of client funds are directed. Though having multiple accounts may be tedious (and will increase the lawyer’s record-keeping and monitoring efforts), the potential for client harm and related misconduct outweigh any concerns of convenience.
It is each lawyer’s responsibility to ensure that the transfer method employed by a P2P service complies with the lawyer’s professional responsibilities. This will be no easy task given the security concerns that arise with an application that involves the transfer of client funds and links directly to a lawyer’s trust account. For a lawyer who performs fixed or flat rate fee services, the risk of using P2P payment services may be minimal. However, with entrusted funds, the ethical issues are more complex and include the strict record keeping requirements and the prohibition against commingling associated with traditional transfers and handling of entrusted funds. For these reasons, a lawyer may want to forego the use of these newfangled P2P payment services when it involves entrusted funds and stick with cash, check, credit card, or chickens instead.
Suzanne Lever is assistant ethics counsel for the North Carolina State Bar.