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New Proposed Rule for Self Reporting


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The newly proposed rules regarding trust accounting are designed to better protect the public by facilitating the early detection of theft and internal errors in attorney trust accounts.  One proposed rule in particular represents a fairly significant change in the reporting requirements when an error or misappropriation is discovered in the trust account.  Currently (at least until the Supreme Court certifies any proposed rules  the Bar submits) Rule 1.15-2(o) of the Rules of Professional Conduct requires a lawyer who discovers misappropriation or misapplication of trust funds to inform the State Bar of this discovery.  Many attorneys already interpreted this rule as requiring a report to the State Bar even when there was just a clerical or accounting error in the trust account.  Ethics Counsel with the State Bar confirmed, however, that this rule was not intended and did not require an attorney to self-report every mistake or accounting error in the trust account. As everyone has made a mistake involving the trust account at one time or another, to require every error to be reported would be unreasonable and unduly burdensome on the State Bar.

The newly proposed Rule, however, would now require, not only self-reporting misappropriation or intentional misapplication of trust funds, but also any mistake in the trust account if the error is not discovered and rectified on or before the next quarterly reconciliation.  The proposed amendment is as follows:

(p) Duty to Report Misappropriation. A lawyer who discovers or reasonably believes that entrusted property has been misappropriated or misapplied shall promptly inform the trust account compliance counsel (TACC) in the North Carolina State Bar Office of Counsel. Discovery of intentional theft or fraud must be reported to the TACC immediately. When an accounting or bank error results in an unintentional and inadvertent use of one client’s trust funds to pay the obligations of another client, the event must be reported unless the misapplication is discovered and rectified on or before the next quarterly reconciliation required by Rule 1.15-3(d)(1). This rule requires disclosure of information otherwise protected by Rule 1.6 if necessary to report the misappropriation or misapplication.

The new proposed language is in bold print. In the event that an attorney does not discover and rectify the mistake within the requisite time frame, at the point in time that the attorney DOES discover the problem, he or she must report that fact to the trust account compliance counsel, Peter Bolac.  It is interesting to note that the proposed rule appears only to require reporting when the banking or accounting error results in an unintentional and inadvertent use of one client’s trust funds to pay the obligations of another client, AND the misapplication is not discovered and rectified timely.  As there could be errors in the trust accounting that do not result in the use of one client’s trust funds to pay the obligation of another client, it appears these kinds of errors would never require self-reporting.  I wonder if that is what was intended…