When it comes to the ethics of accepting client funds via credit-cards or electronic payment service providers (ePSP), some ethics opinions and rules are a bit akin to a reversed analogy: trying to pour old wine into new bottles.
Attorneys must be diligent and careful in order to understand how a particular ePSP handles transactions because a violation of the ethical rules about handling client funds brings the swiftest and most severe of penalties from the Attorney Grievance Commission. So being mindful of our duties before we sign up for a slick online payment platform is key.
Michigan Rule of Professional Conduct §1.15 houses the bedrock principles of our duties about client funds: do not comingle client funds with our own, and unearned fees must be placed into client trust accounts only. And these principles still firmly govern us, although we have been presented with an array of new bottles into which we can pour our earned and unearned “wine.”
Consistent with those principles, the SBM Ethics Committee details the obligations attorneys have when accepting client funds via credit-cards in its Opinions RI-344 and RI-168. These opinions are comprehensive and should be read before entering into a relationship with any credit-card processor.
To summarize the opinions, an attorney should ideally open two merchant accounts in order to accept credit-cards from clients: one for earned fees (where funds are deposited into an operating account), and one for unearned fees (where funds are deposited into a client trust account). The credit-card processor must deposit the full amount of any transactions processed for unearned fees into the client trust account and deduct any transaction or processing charges and chargebacks related to those transactions from the attorney’s operating account.
By following that process, client funds travel directly from the client’s credit-card issuer through the attorney’s merchant-account processor to the attorney’s client-trust account, in the case of unearned fees. And here is the key to keeping client funds secure and meeting our ethical duties: client funds are never held or deposited into any account besides the attorney’s own client trust account.
By contrast, if an attorney accepted client funds via PayPal, he or she would have violated his or her duties under MRPC §1.15. This is because after PayPal charges the client’s credit-card, it deposits the funds into the attorney’s PayPal account. The attorney’s PayPal account is not a client trust account. In fact, it is not an “account” at all: it is just a contractual payment right between PayPal and the attorney. So PayPal could hold the funds pursuant to its terms of service, for as long as it would like, or potentially have one of its creditors garnish the actual bank account that PayPal uses to hold the funds.
Although this article does not provide enough space to address whether any individual ePSP is ethically compliant, you should now have enough knowledge to understand what to look for in order to assess an ePSP’s compliance with our ethical duties. And remember, these rules only govern transactions for client funds. If you have earned fees, can use any ePSP that has security safeguards in place to protect your client’s confidential payment information; but, know that you accept the risk of loss in case you do not receive the funds from the ePSP that your client paid to it.
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About the Authors:
David Szostek is a partner at Edward Allen Law, where he practices business law, intellectual property, and litigation. Victoria Vuletich teaches professional responsibility at Western Michigan University Cooley Law School and has a private ethics practice that serves Michigan lawyers and law firms.