ACH payments – electronic payments made from one account to another through the Automated Clearing House (ACH) Network – are becoming increasingly popular among law firms.  Why is ACH so appealing? First, ACH payments are received more quickly and reliably. 

Consider the typical paper transaction: law firm generates a bill and mails it to client.  Client receives the bill, writes a check, and places it in the mail to the firm.  When the paper check arrives in the mail, staff must open, process, and deposit the payment, then wait for funds to be collected.  With electronic payments, many (or all) of these steps are eliminated.

Second, ACH payments support law firm sustainability efforts since fewer resources are consumed in electronic processing versus traditional checks (paper, ink, fuel for transportation, etc.)  Additionally, clients like the convenience and cost savings – no more printing paper checks and getting them into the mail on time.

Do ACH Payments Pose Ethical Concerns?

ACH payments are simply a means to an end (i.e., a different vehicle for the funds) and, as such, are ethically neutral.  The biggest trap lies in forgetting that all the usual trust accounting rules still apply.  For example:

A large institutional client sends funds to its law firm via ACH payments.  Law firm accounting staff may or may not know the funds are coming.  The institutional client has multiple open matters with the firm.  It can be difficult to discern to which matter the payment should be applied, as the client frequently “rounds up.”  Whether the funds are fully earned or not, the client habitually directs the ACH payments to the law firm’s general operating account.

This scenario raises a number of issues – some practical, some ethical:

• Law firm staff may not know the funds are coming.  Based on complaints I’ve heard, this is a real phenomenon.  The best cure is enforcement of existing accounting procedures and leadership by example from law firm management.  Lawyers must communicate promptly and in writing to the accounting department regarding expected delivery and disposition of client funds.  The most persuasive argument may be that the individual lawyer, not the firm or accounting department, is ethically accountable for proper handling of the client’s money.  If the ACH payment is not processed correctly, bar discipline will look to the responsible lawyer for answers.  If law firm management treats this responsibility seriously, individual lawyers are more likely to comply. 
• The client with multiple open matters is often challenging, no matter how payment is received. Ideally, the client would clearly indicate how to apply its payment.  But if not, the responsible lawyer should confer with the client immediately and confirm the client’s directions in writing
• What happens when the client “rounds up” or overpays?  Go back to trust accounting fundamentals.  If the client overpays its bill, the portion representing the overpayment belongs to the client, not to the firm.  When funds belong in whole or part to a client, they must be deposited into the lawyer trust account.  If the client remits an ACH payment in the amount of $10,100 toward a billing with an outstanding balance of $10,024, the payment should be received in the lawyer trust account.  The firm can then pay itself $10,024 – the amount owed – and seek direction from the client about how to refund or apply the overpayment of $76 presently being held in trust.  Keep in mind that no amount of money is too small to be deposited in the lawyer trust account if it belongs to the client.  And when funds belong in part to the firm and in part to the client – always the case in an overpayment scenario – they must be handled in the same manner as settlement proceeds.  Deposit or receive the funds into trust, wait for them to clear (if applicable), pay the firm, then obtain client consent to process the overpayment.  This is true even if there is work-in-progress (WIP) and the overpayment would be earned in the next billing cycle.  Fees are not earned until the work is done and the client is billed.  Keeping client money on the premise that the work is “done” even though the client has not been invoiced is unethical and deprives the client of its right to dispute the firm’s fee.  
• The client habitually directs ACH payments to the firm’s general operating account, whether the funds are earned or not.  The key here is the word “habitually.”  In the case of a one-time event, it is understandable that a firm may need to transfer funds out of the general operating account and into trust to correct a client’s mistaken payment.  However, if a client is repeatedly transferring trust account funds into the law firm’s general operating account, the lawyer and firm are responsible for redirecting the client and working out a better payment scheme.  If a client persists despite the firm’s best efforts, it may be easier to change the fee arrangement or billing procedure so payments received are always earned.  [Author’s note: earned upon receipt billing arrangements and/or modification of existing fee arrangements raise additional ethical issues and should be approached cautiously.]

Next, consider this scenario involving a vendor:

A law firm remits litigation costs to a court reporting firm via ACH payment on a client’s behalf.  The ACH payment is sent from the law firm general operating account into the account designated by the court reporting firm.  As the result of an accounting adjustment by the court reporting firm, a portion of the law firm’s payment is later refunded to the firm.

To whom does the refund belong? 

Return again to trust accounting fundamentals and focus on the details surrounding the firm’s payment and billing to the client.  Two outcomes are possible:  If the firm advanced the court reporter’s fee from the general operating account as a litigation cost and the client had not yet reimbursed the firm when the refund was received, the refund belongs to the firm.  Deposit the refund in the law firm general operating account and adjust the client’s billing statement accordingly.  However, if the firm billed the client and was reimbursed for the original amount charged by the court reporter, the refund belongs to the client.  Deposit the refund in the lawyer trust account and process it in the same manner as an overpayment from the client. 

Avoid problems by talking to your vendors now to ensure that refunds or other accounting adjustments are handled properly.  Ask vendors to contact you before issuing a check or initiating an ACH payment – especially those with whom you incur client costs.  If the vendor coordinates with accounting staff before the refund is processed, the law firm can ensure that the client is credited (if necessary) and funds are received into the proper account.

 Copyright 2013 Beverly Michaelis