Client Security Funds

State funds that compensate clients of attorneys who have stolen their money. Monies for these funds come from attorney registration and bar association fees.

The PRACTICE OF LAW requires lawyers to hold money in trust that is legally owned by their clients. Lawyers often receive checks on behalf of their clients, whether as part of a jury award, an insurance settlement, a WORKERS' COMPENSATION award, or any number of legal and financial transactions. For attorneys who are in financial difficulties there is a temptation to dip into client funds. Such behavior is both unlawful and a violation of the canons of professional conduct. Victims of such FRAUD usually cannot recover their money from the attorney, as the attorney is typically bankrupt. In response, states have established client security funds to pay claims based on the misappropriation of client funds.

In 1959, the AMERICAN BAR ASSOCIATION (ABA) called on state bar associations to establish client security funds. During the 1960s many states established such funds and, by 2000, 49 states and the District of Columbia had established client security funds. In 1981, the ABA developed model rules for such funds. These rules were amended in 1989 as the Model Rules for Lawyers' Funds for Client Protection. States generally follow the model rules but are free to make their own modifications. The use of trust account overdraft notification, record keeping, and random audit rules have helped discourage attorneys from believing that they can use client funds, even temporarily, for their own purposes.

A key feature of client security funds is the funding mechanism: a portion of an attorney's annual registration or bar association fee is allocated to the fund. A victim of misappropriation files a claim with a client security board, which is made up of lawyers and nonlawyers. The board reviews each claim and determines under its rules how much of the claim it can pay. Client security fund rules specify a maximum amount a victim may be compensated, which, in serious cases, means that victims will not be fully compensated. Client security boards have discovered that lawyers who steal money often steal it from a number of clients, leading to multiple claims.

Client security funds cannot be used to pay clients who have alleged lawyer MALPRACTICE. In those situations a client must file a civil lawsuit to seek compensation. Likewise, client security boards do not consider fee disputes.