In the realm of legal practice, attorneys often serve as neutrals in various capacities such as parenting consultants, arbitrators, mediators, and more. These roles involve handling third-party funds, leading to questions about where these funds should be held—particularly in a trust account or a business account. In Minnesota, the answer is…the business or operating account is the proper place to hold ADR related funds.
Let’s examine why trust accounts in Minnesota should not hold the money of neutrals, using insights from a topical article published by OLPR Director Susan Humiston (link to the article is below) and the relevant rules.
Rule 2.4(a), Minnesota Rules of Professional Conduct (MRPC)
This rule acknowledges that a lawyer serves as a third-party neutral when assisting two or more individuals in reaching a resolution. This role can encompass arbitrators, mediators, or other capacities facilitating dispute resolution.
This rule outlines the safekeeping of funds: “All funds of clients or third persons held by a lawyer…shall be deposited in one or more identifiable trust accounts.” However, when a lawyer acts as a neutral, the parties involved are not considered clients of the neutral. Therefore, funds held by the neutral are not “in connection with a representation.”
The rule further specifies that “No funds belonging to the lawyer or the law firm shall be deposited” into the trust account, except for service charges or funds payable to both the client or third person and the lawyer or law firm. This indicates that funds not related to representation, such as advance fees for neutral services, should not be in a trust account.
The Minnesota Supreme Court has interpreted Rule 1.15(a), MRPC, stating that it explicitly requires funds held in connection with a representation to be deposited into a trust account. Personal funds or fees to which lawyers are entitled should not remain in the trust account.
It’s important to note that there is no duty to self-report a violation of the rules. While lawyers are required to report certain misconduct by others if they know of it (Rule 8.3(a), MRPC), there is no duty to self-report. However, it is recommended that lawyers revise their business practices to hold advance third-party neutral fees in their business account, not the trust account.
Confidentiality Rules: Neutrals have strong confidentiality rules, similar to lawyers. Rule 114.08(e) of the Minnesota Rules of Practice provides an exception to confidentiality if disclosure is required by a professional code.
Reporting Misconduct: If required to report lawyer misconduct learned of while serving as a neutral, it may be done consistent with neutral confidentiality obligations. Lawyers can seek guidance if unsure about reporting specific misconduct.
The rules are clear that if lawyers are holding other people’s money for purposes not related to client representation, those funds do not belong in the trust account. While the instinct may be to treat all handling of funds the same, it’s essential to follow the precise guidelines to protect the funds and avoid ethical violations.
If lawyers have questions regarding trust accounts and handling third-party funds, they are encouraged to reach out to the ethics hotline for guidance. Understanding and adhering to these rules not only ensure compliance but also safeguard the funds placed in trust, promoting transparency and ethical practice in legal services.
“Clients and parties involved in Alternative Dispute Resolution (ADR) trust attorneys and neutrals with their hard-earned funds. It is not only a legal responsibility but a moral obligation to know where to place these funds and to respect the sanctity of the trust account. Mishandling of these funds not only breaches ethical guidelines but erodes the very trust upon which ADR processes are built.”
Kristi Paulson | PowerHouse
