Unauthorized Practice of Law: Pitfalls for NC Attorneys and Out-of-State Law Firms

The more things change, the more they remain the same.

Recently, the ABA Section of Litigation published an article discussing a 2018 ethics opinion of the Indiana Supreme Court Disciplinary Commission warning its lawyers about the potential pitfalls in a trend of Indiana attorneys being approached by nonlawyer companies or out-of-state law firms to establish an ongoing affiliation for providing legal services in Indiana without registering with the state bar.  The Indiana commission cautioned that such an affiliation can put the Indiana attorney at risk of violating multiple ethics rules.  The ABA article noted similar warnings issued in other states.

In North Carolina, we have also seen an increase of this activity and the accompanying allegations of unauthorized practice of law [“UPL”].  Often, a national or out-of-state law firm approaches a young or solo NC lawyer to be “of counsel” to their firm so the firm can then provide legal services in NC. 

The details vary, but the fundamentals are consistent.  From a UPL standpoint, situations like this can be a potential pitfall for both sides of the equation.

Under North Carolina law, even if it hires an NC lawyer to handle NC cases, an out-of-state law firm looking to set up shop in NC must register as an interstate law firm with the NC State Bar.  As part of that registration, the NC lawyer must certify to the State Bar that all professional services rendered to NC citizens by the firm are only provided by a duly licensed active member of the NC State Bar, and that other lawyers in the firm not licensed in NC will abide by the NC Rules of Professional Conduct.  In addition to registering with the NC State Bar, the law firm will also likely need a Certificate of Authority to transact business as a foreign professional corporation from the NC Secretary of State’s office.

For the NC attorney, failure to follow the appropriate procedure may result in a bar grievance for assisting in the unauthorized practice of law in violation of the NC Rules of Professional Conduct, Rule 5.5(f).  The attorney may also face potential civil liability for assisting another person to commit the unauthorized practice of law.

The out-of-state law firm may also be exposed to potential civil liability and action by the NC State Bar for engaging in the unauthorized practice of law.  The NC State Bar Council and any of its committees appointed for that purpose (such as the Authorized Practice Committee) have the authority to investigate UPL allegations.  Following such an investigation, the State Bar may issue a warning letter, issue a cease and desist letter, or seek an injunction to prohibit a person or business from engaging in the unauthorized practice of law depending on the circumstances. 

There are also criminal law implications.  District attorneys may investigate and prosecute unauthorized practice of law as a misdemeanor criminal offense.  Other more serious felony offenses, such as false pretenses, could be involved where an unlicensed person accepts fees while in engaging in the unauthorized practice of law.

The facts may change, but these laws have remained the same.  Know the potential pitfalls for both the NC attorney and the out-of-state firm looking to practice in NC.  Review and follow NC law and the procedures outlined by the Administrative Rules of the State Bar, 27 N.C.A.C. Chapter 1E, Section .0200.  Under the right circumstances, an arrangement like this can be ethical and beneficial to the NC lawyer, to the interstate law firm, and to clients. 

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For Peace of Mind – Part II

In our last blog, we talked about Policies and Procedures manuals and the reasons it is important to have a manual for your firm – no matter the size.  This blog is going to focus on another important aspect of policies and procedures – your remote workers policy. 

More and more firms (and, of course, other businesses) are giving employees the flexibility of working from home.  In some cases, attorneys will work full time from their home offices.  Along with all of the benefits of working from home, there can be security concerns.  We need to make sure that we are guarding the confidentiality of our clients just as carefully in these home office situations.

Below is a list of items you may want to consider including in your remote worker policy:

  • Employee should have a dedicated workspace.
  • Computer provided by the firm, accessed by assigned user only, credentials are never shared, and it is used for work only.
  • Computer should be locked when not in use and should be password protected.
  • Malware/virus software should be maintained and updated by the firm’s IT personnel.
  • Wi-Fi/Internet at home – high-speed connection with ample signal strength and must be secured with WPA or greater encryption.
  • Laptops should not be accessed in off-site locations utilizing public/open Wi-Fi connections.  If the employee must work at an off-site location, the employee should use his/her phone as a hot spot.
  • Laptop should be password protected, encrypted, and kept safe and secure – preferably never left in the car.  If laptop must be left in the car, it should be put in the trunk or somewhere completely out of sight.
  • Any documents containing confidential, privileged or other protected information that are printed at home need to be shredded.
  • No work documents should be accessed from any personal computer.
  • When taking work-related phone calls at home (or at any other location), employee should make certain no one can hear the conversation.
  • Clients should only be contacted using firm email accounts.  Gmail and other web-based email accounts are not as secure. 
  • Employees should email personal contacts using only their personal email accounts.  Personal email accounts should not be integrated with the firm email account.

The above list is certainly not an exhaustive list but instead offers some suggestions to get you started. We also advise our clients to institute cell phone and e-security policies. We recommend working with your IT professional to develop your own comprehensive remote worker and e-security policies. 

Since statistics show that remote work is here to stay, it benefits us, our clients, and our employees to have clear, specific guidelines in place. 

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For Peace of Mind

Many small firms or solo practices do not have a written Policies and Procedures Manual (“PPM”). When I ask, attorneys usually respond that it’s just a solo practice with just a couple of employees so they don’t think it is necessary. Some attorneys say they want to do it, but don’t know where to start. Others say they have been meaning to do it and haven’t gotten around to it. And still others can’t see the benefit in having one, as they have never needed it before.

There are very good reasons to create a PPM for your law firm, no matter what the size. First, as an owner of a business, if you are trying to practice law and remember everything you are supposed to do to run your business, something’s gotta give. In other words, tasks may fall through the cracks because your focus is on your clients. A conflict check may get skipped, you might forget some aspect of staff training, or you could miss preparing a trust account reconciliation report. The PPM creates a sort of “to do” list for reference, so you don’t have to remember everything.

Second, the Rules of Professional Conduct require that you have measures in place “giving reasonable assurance” that all lawyers and non-lawyer staff conform to the Rules of Professional Conduct. Rules 5.1 and 5.3. Having a PPM is a reasonable step to help ensure you and your staff are in compliance with the ethics rules.

Third, having a PPM would be good evidence, in a disciplinary proceeding, to show that you do have measures in place to help ensure compliance. While having a written PPM is not specifically required under the ethics rules, it can persuasive evidence of compliance in response to a grievance.

Fourth, it will save you time and money in the long run. As a business owner, you can expect staff changes on a regular basis. You may have had a paralegal or a firm administrator who has been working with you for 20 years, and who has institutional knowledge about how things work at the firm. But what if they suddenly leave? Having a document you can show new hires about how your firm works, and procedures already in place to ensure smooth sailing, will streamline training, saving you time and expense.

Fifth, because a PPM can also serve as your playbook for running your law firm, it can help preserve this institutional knowledge when a longtime employee leaves.

Importantly, any PPM should be a dynamic, not a static, document. As your firm changes, grows, or improves efficiency, you should modify your PPM accordingly. Some topics to address in any PPM include, but are not limited to:

  • New Client Intake Procedures
  • Conflict Checking
  • Communications with Clients
  • Client Confidentiality
  • Record-Keeping; Maintaining Client Files
  • File Retention and Destruction
  • Trust Accounting
  • Escheatment of Unclaimed and Abandoned Property
  • e-Security Measures
  • Closure of Client File and Disengagement
  • Client Forms and Engagement Agreements
  • Time-keeping and Billing
  • Accounting
  • Managing Calendars and Deadlines
  • Nonlawyer Staff Training and UPL

The PPM can be as detailed as you need, and may cover a variety of law practice management issues or best practices as well. If you want to put together a PPM, it may be as simple as opening a Word document. A good place to start is writing down how you manage (or how you want to manage) a client matter from the first phone call from a client, through intake procedures, engagement letters, staff assignment, billing and collections, trust accounting, communications about the status of the case, until final resolution of the case. Think about what you would want your staff to do in every case, without fail, and write it down. Think about what you want your staff to know and how best to impart that knowledge to each and every new hire.

We regularly assist clients in creating or modifying their PPMs. Know that creating a PPM will take some time and thought on the front end, and will require that you revisit it periodically. An effective PPM will never be finished, but having it should give you some peace of mind.

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Retaining Good Employees — Begins with You

A consistent question I receive from practice owners and professionals is, “How do I keep good associates?”  Lawyers and other professionals come and go, and no law firm or profession is immune from this trend.  Young professionals seem to hop from firm to firm, or want to strike out on their own, once they get a bit of experience under their belt.  When you are training new associates, ideally, you are training them to be experienced, self-reliant, and productive–in other words–the kind of professional that could leave your firm and start their own practice.  The attributes that you want your associates to have are the same attributes that make them ready to practice on their own.

So, how do you keep good attorneys or any employees for that matter?  There is no magic bullet or sure-fire way to retain talented employees, but there are things that you can do, beyond paying a fair salary, to encourage your employees to stay. 

1)            Open Communication and Teamwork – Let your associates know that they can come to you with anything.  Foster an environment of open communication and working as a team.  Make clear that they can come to you with concerns, problems, or even if they make a mistake.  You can work together to find a solution.

2)            Be a Mentor – In addition to imparting knowledge in your field of practice, instill your own core values in your employees.  Show them how you care about and value your clients and your employees.  Show, by example, your values of honesty, trust, dedication, and perseverance, or whatever your core values may be.  You can also encourage your associates to take on more responsibilities and try different tasks.  Then you can show them patience and trust when working with them in these new areas.

3)            Get Feedback – Ask your staff how you are doing as a boss and listen to what they have to say.  Value their input, because they are part of a team.  Then implement changes based upon their input.  If you foster an environment of trust, employees will be more likely to share this kind of constructive criticism. 

4)            Create a Positive Environment – Again, this positive environment starts with your positive outlook and attitude.  Have a bit of fun or show your sense of humor.  Show gratitude for and appreciation of your employees.  Bring in lunch or dessert once a month.  Celebrate employee birthdays or work anniversaries. Engage in team building activities.

5)            Talk about the Future – Many professionals are reluctant to follow this advice, but it is important.  If you don’t share enough about what you see as the future of the firm, and how that associate fits into that future, you will likely lose that employee to a better offer or their willingness to risk starting their own practice.  Don’t keep your staff wondering or guessing about the future.  Share your vision with them and let them know you would like them to be a part of it.

Finally, it all starts with hiring the right person, i.e., an associate who is a good fit for your firm. A person who is solely interested in making a buck is not likely the person who will stay and is not likely a person whom you would want to stay in your firm.   So, choose carefully.

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For the Civil Procedure Pocket of Your Utility Belt

I like to believe every attorney has an inner nerd who loves to pick up cool procedural tips.  Maybe it’s just me.  I squirrel them away because you never know which procedural tidbit will become the difference between winning and losing a case. 

The North Carolina Court of Appeals recently issued a published opinion that was a little gift to our inner nerds.  It was a question of how a voluntary dismissal without prejudice in another state, and expiration of the time to refile in that state, affected a later suit on the same claim in North Carolina.

In Barefoot v. Rule, No. COA18-1160 (N.C. Ct. App. May 21, 2019), plaintiff Sheena Barefoot filed a personal injury claim in Tennessee on June 28, 2016, against defendant Jacquelyn Patricia Rule.  The claim arose out of an auto accident that occurred in North Carolina on July 3, 2015, but both parties were Tennessee residents.  The Tennessee statute of limitations for personal injury claims is one year, while it is three years in North Carolina.

On November 16, 2016, the Tennessee trial court entered an order granting Plaintiff Barefoot a voluntary dismissal without prejudice under Tennessee’s rule 41.01, which is similar to North Carolina’s Rule 41(a)(1).  Both rules permit re-filing within one year after the first dismissal even if the limitations period has run on the original claim.  

After the statute of limitations ran in Tennessee for both the original personal injury claim and the one-year period to re-file the lawsuit, on April 5, 2018, Plaintiff Barefoot filed suit in North Carolina alleging essentially the same claims.  Although her claim was barred in Tennessee, the statute of limitations as to the original personal injury claim had not yet run in North Carolina.

In the North Carolina lawsuit, Defendant Rule argued the claim was barred by the doctrine of res judicata because the plaintiff had failed to re-file her action within the time allowed after her voluntary dismissal in the Tennessee lawsuit.  The defendant argued the Tennessee dismissal had become a final judgment with res judicata effect as to the suit in North Carolina.  The trial court agreed and granted judgment on the pleadings in favor of the defendant.

The Court of Appeals, however, disagreed.  The issue at the core of the appeal, as the Court saw it, was how a voluntary dismissal without prejudice operates between states.

The Court of Appeals reviewed both Tennessee and North Carolina case law interpreting the effect of a voluntary dismissal without prejudice.  In both states, a voluntary dismissal without prejudice returns the parties to their original positions, as though the first suit had never been filed.  This frees a plaintiff to switch from state court to federal court or to switch from one state’s courts to another state’s courts to file a new lawsuit, and the rules of the second court will govern the new lawsuit. 

In this case, after the plaintiff dismissed her lawsuit in Tennessee, she was left exactly where she was before her Tennessee lawsuit commenced – she was free to file her lawsuit in Tennessee or North Carolina as an entirely new claim.  The Court therefore concluded the Tennessee dismissal order did not have res judicata effect as to the lawsuit in North Carolina.  The trial court’s decision was reversed and the case remanded.

Stash this one away in the civil procedure pocket of your litigation utility belt.  You never know when it might come in handy. 

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Take a Lawyer to Lunch

When I first began practicing law in North Carolina, one of my primary mentors told me about a strict policy he followed concerning filing sanction motions against an opposing attorney. His practice was to invite an opposing lawyer to lunch before potentially filing a motion for sanctions against that attorney.  The primary reason for this procedure was to ensure that he had considered the position and other potential facts and circumstances from opposing counsel.   It was essentially a private principle of professionalism to make sure he had the rest of the story, and potentially preserve an important professional relationship, before filing any pleading that explicitly or at least implicitly accused another lawyer of improper conduct.

            In the many years since getting that excellent advice, I have followed it consistently and fortunately have never filed a motion for sanctions against an opposing attorney. However, I’ve also expanded the principal to include other types of communications.  For example, before sending a letter or email to opposing counsel that might suggest some sort of improper conduct, I’ve strived to speak with the attorney either in person or at least by phone.  While I can’t say that this prevented me from sending every adverse communication over the years, there have been many instances where I was very glad that I reached out to make that personal contact and, in many instances, never sent the letter, email or other communication.  In contrast, on the rare occasions where I have sent that type of accusatory communication without making personal contact, I typically regret it and wish that I had done so.

            While this principle is not perfect, I believe that if opposing lawyers would have more personal communications, including going to lunch or some other meeting, there would be much less acrimony and fewer unprofessional exchanges among lawyers. It is simply harder to file pleadings and send other communications making allegations against an attorney that you know personally. Additionally, understanding others’ positions and being empathetic is a critical part of being a successful attorney.

            I strive to be like some of my mentors, Ed Gaskins and Judge Franklin Dupree, who treated all lawyers and everyone else involved in the legal and judicial process with respect and professionalism. Taking a lawyer to lunch, or otherwise having direct personal communication, before making any professional accusation is certainly a good way to start. 

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We Passed!

Well, now I can say we’ve been audited by the State Bar! You may know that we called up Anne Parkin, the State Bar Auditor, and asked that our trust account be audited this quarter, since we weren’t lucky enough to be chosen randomly. The audit went very smoothly. Here are some takeaways:

  • Anne likes to see the quarterly reports being done on a monthly basis. When we showed her that we already did this, her eyes lit up.
  • She will look at all of your cancelled trust checks for the year, and will make sure the signatures are originals (no signature stamps), you have copies of the fronts and backs of all checks, the client matter name/number appears on the memo line, and the checks are the proper size.
  • She only reports consistent violations, not the occasional oversight, to the Office of Counsel.
  • If you have a large number of transactions in trust each month, Anne may pick a random transaction to review, and look at all of the supporting source documents (checks, deposit slips, receipts, wire transfer instructions) herself.
  • She reviews 12 months of records, including all source documents, starting with your current monthly reconciliation and going backwards.
  • For every audit she does, she prepares an audit report with a list of corrections, if any, and submits the report to the State Bar Trust Account Compliance Counsel for review.

According to Anne, things that will result in a referral to grievance include, consistent failure to reconcile (monthly or quarterly), very poor or woefully inadequate record keeping, a pattern of errors, especially where the errors are not documented and corrected within a quarter, and negative client balances that do not have sufficient explanation and have not been corrected within a quarter.

If Anne does note relatively minor errors/deficiencies in your record-keeping, she will prepare a Trust Corrections Request Form, noting the deficiencies. Then, you will be given 30 days to provide evidence of the correction to the State Bar Trust Account Compliance Counsel, Leanor Hodge.

If Anne finds no errors in her audit of your trust account, she will provide you a copy of her report, with the notation, “No follow up needed.” Woohoo, we passed! Although we were confident that we were following all the trust accounting rules, it is always nice when the State Bar agrees. We regularly assist attorneys in preparing for an upcoming trust audit, but it is a good idea not to wait until the State Bar comes knocking at your door. If your trust account needs a procedural check up, let us know. We’d be happy to take a look.

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Voluntary Trust Account Audit

The Tenth Judicial District was the lucky district selected for the State Bar’s random attorney trust account audit program this quarter. But I didn’t feel lucky–our trust account wasn’t chosen. I decided that I would no longer stand on the sidelines while others had all the fun. So, I called up the State Bar Auditor, Anne Parkin, and asked her to please, please audit our trust account, too. She obliged.

Lost my mind, you say? No, no, there is a method to my madness (and no doubt, some at my firm would call me crazy). I have been advising attorneys about trust accounting issues for 25 years now, including 10 years at the State Bar. I have helped attorneys come into compliance, defended disciplinary matters dealing with trust account issues, helped them prepare the necessary trust reports for State Bar compliance counsel, and performed trust account mini-audits. But, although I know what goes on in a State Bar audit, I have never sat through one myself.

I think this will be a great learning opportunity for me and for the attorneys in my firm who will be advising attorneys on trust accounting. And, yes, I am looking forward to this. Not to worry, I will keep you posted on the outcome. All I can say for now is…bring it on, Anne!

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Use Your Resources

You’re competent in the area of law you practice.  Of course you are!  But have you ever had some unusual circumstance occur in the middle of a perfectly “normal” case where, all of the sudden, you need to take some type of action or make a very quick decision?  You have never dealt with this particular issue before, and it is likely you never will again.  You immediately research this issue, but there is nothing on point and really no direction at all.  You are under pressure, and you need help.  This is not the time for your pride to get in the way.  You have to take care of your client.  Call that colleague you know can shed some light on this issue.  Competence doesn’t mean you know everything.  A very wise attorney recently told me, “Being a good lawyer means knowing when you use your resources.”  There are always resources.  Someone always knows someone who can give you direction.  If you cannot think of who to call first, start with your professional liability provider.  Most providers will provide this type of support.  And if a colleague contacts you and needs a little guidance, make some time to respond.  If you cannot help, you may know someone who can, and in turn become a resource yourself.

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It’s a New Year: Resolve to Reconcile

If you read the quarterly State Bar Journal disciplinary section, you know that ignoring the trust account can result in severe disciplinary action.  Do you know to whom every penny in your trust account belongs?  Can you provide a client an accounting promptly?  Are you maintaining all required records, including copies of both sides of negotiated checks?  A good rule of thumb is that every transaction into or out of the trust account must have a supporting document, and that supporting document must indicate the client whose funds are impacted.  What you want is a paper trail.  You also need to maintain a general ledger for the account, which is like a check book register.  It is your internal record for all the transactions in the account in date order with a running balance.  You need to be able to create a list of individual client balances as of a certain date each quarter, although looking at this list monthly would be better.  The list must always have positive client balances–see a negative balance, and you know there’s a problem.  You will need this general ledger, the list of client balances, your bank statement and the supporting transaction documents to do your quarterly reconciliation.  As an added precaution, we recommend that you do these reconciliations monthly, but that is not required by the rules.  On a monthly basis, you are only required to reconcile your bank statement to your general ledger.

At the end of a representation, you must also be able to create a ledger for any client showing where all of their money has gone.  The ledger should also reflect a running balance and an ending balance of zero.   If you hold client funds longer than a year, you are required to provide an accounting (ledger) to the client annually.  There is also a quarterly review report which requires you to pull three random client transactions and verify each transaction with the source documentation.

The State Bar has forms on their website for these monthly and quarterly reports, and we can also provide these reports to you.  We are now offering trust account procedural audits for a flat fee.  We can assess your trust account record-keeping, and note deficiencies.  We can also provide you a checklist to assist with your reconciliations in the future and may be able to suggest a better, or more efficient way, to handle the trust account.  Let us know if we can assist you.  It’s never a bad idea to have someone look over your shoulder.

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