The client trust account is the financial center of a personal injury practice. Settlement checks, insurance drafts, advance cost repayments, and lien holdbacks all move through it. The rules governing those movements come from Rule 1.15 of the ABA Model Rules of Professional Conduct as adopted in each state, state bar IOLTA program regulations, and, in some states, specific statutory provisions. Violations range from technical record-keeping failures that bar counsel addresses with a warning letter to intentional misappropriation that results in disbarment. Between those extremes sits a wide category of common PI firm errors that are neither technically intentional nor excused by ignorance of the rules.
The Core Prohibition: No Commingling
The foundational rule is that client funds must be held separately from the attorney's own funds. Settlement proceeds belong to the client, and any portion of those proceeds that has not been earned or approved for disbursement cannot be moved to the firm's operating account. Earned attorney fees and approved cost reimbursements are the only items that belong in the operating account, and they can be transferred there only after the client's written authorization to disburse and only after the settlement check has actually cleared.
Commingling violations in PI firms typically take one of two forms. The first is advancing case costs from the trust account. Attorneys sometimes pay filing fees, expert witness fees, and medical record costs from client trust funds rather than from the firm's operating account. This is a commingling violation in most states because case costs are not client funds; they are the firm's expenditure, to be reimbursed from the settlement when it arrives. Pay case costs from operating and track them as advances to be repaid at settlement.
The second common commingling problem is leaving attorney fees in the trust account after the settlement disbursement is complete. Once the settlement has been properly distributed, the attorney fee portion must move to operating promptly. Funds sitting in trust that have no client-side purpose become co-mingled funds with every subsequent client deposit into the same account.
Settlement Proceeds: The Step-by-Step Process
The settlement disbursement process must follow a specific sequence:
- Deposit the settlement check. The check, whether issued to the client alone or jointly to the client and attorney, goes into client trust. Joint checks require the client's endorsement before deposit.
- Wait for the check to clear. Do not disburse any portion of the settlement until the funds have cleared the issuing bank. A returned check after premature disbursement creates a trust account deficit, which is itself a bar violation.
- Resolve outstanding liens. Medicare, Medicaid, health insurer subrogation, hospital liens, and government liens must be identified and resolved before funds are disbursed to the client. Where a lien amount is disputed, retain the disputed portion in trust until resolution. Releasing funds to the client before a known lien is resolved exposes both the client and the attorney to personal liability to the lienholder.
- Provide the client with a written disbursement statement. The statement must show the gross settlement, the attorney fee, each cost item being deducted, each lien payment being made, and the net amount the client will receive. The client must approve this statement before any funds are moved.
- Disburse to each payee in accordance with the approved statement. Write separate checks or initiate separate transfers to the client, the lienholder, the firm's operating account for fees, and the firm's operating account for cost reimbursements. Each transfer must correspond to a line on the approved disbursement statement.
The Individual Client Ledger
Every state requires that the attorney maintain a separate ledger for each client's trust account activity. The ledger must show every deposit, every disbursement, and the running balance attributable to that client's funds. The aggregate of all individual client ledgers must reconcile to the trust account bank statement. Most trust account software performs this reconciliation automatically, but the reconciliation must still be reviewed and signed off by the attorney responsible for the account.
Record retention requirements vary by state but are typically three to five years from the date of the transaction. In California, Business and Professions Code section 6148 and the State Bar's trust accounting rules require five-year retention of trust account records. Audit requests from state bar investigators can come without notice; records must be available on demand.
Electronic Payments and IOLTA Accounts
Electronic settlement payments via ACH or wire transfer are now common in PI cases. The same rules apply regardless of payment method: the funds go to the designated trust account, and no disbursement occurs until the transfer is confirmed as settled and available. Wire transfers settle same-day and typically clear the hold period faster than paper checks, but the disbursement sequence remains identical.
Some insurance carriers issue electronic payment cards for settlement proceeds. These present a specific compliance issue because the funds may appear immediately available but may not have fully settled. Confirm with the issuing institution before treating the balance as cleared and available for disbursement.
The Most Common Bar Complaints in PI Firms
State bar trust account complaints against PI attorneys fall into predictable categories: disbursing before the check cleared, failing to hold lien amounts in trust pending resolution, not providing the client with a disbursement statement, transferring fees to operating before client authorization, and losing records that can no longer be produced on audit demand. None of these require intent to steal; all of them constitute violations that bar counsel pursues.
The practice management resources for PI firm operations, including intake-to-close workflow and billing systems, are at lawyerstrend.com/category/practice-operations. For lien resolution and disbursement accounting in complex settlements, including Medicare, Medicaid, and government program recovery, see lawyerstrend.com/category/liens-and-settlement.