ACH payments – electronic payments made from one account to another through the Automated Clearing House (ACH) Network – are 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 ACH 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:

Lack of Communication May Cause Mishandling of Funds

Law firm accounting staff are sometimes the last to know funds are coming. This is not a good thing. Lawyers must communicate to the accounting department promptly and in writing regarding expected delivery and disposition of client funds. Leaving staff in the dark creates nothing but headaches.

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, not the accounts receivable clerk. If law firm management treats this responsibility seriously, individual lawyers are more likely to comply.

Applying Payments When the Client has Multiple Open Matters

The client with multiple open matters is 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 Should I Do When the Client Rounds Up or Overpays?

To answer this, we must return 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.  Consider this example: 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.

Remember: there is no amount of money too small to be deposited
in the lawyer trust account if it belongs to the client.  

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.

WIP Isn’t an Excuse to Take Money that Belongs to the Client

Proper disposition of client funds is not affected by work-in-progress (WIP).  Even if 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.  [For more on this topic, see the postscript below.]

Redirecting the Client Who Remits ACH Payments to the Wrong Account

What about the client who habitually directs ACH payments to the firm’s general operating account, whether the fees 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. Consider the postscript discussion below.]

Processing Refunds of Litigation Costs When ACH is Involved

Consider this scenario:

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 by the court reporter.

To whom does the refund belong?

Let’s go back to fundamentals.  To answer this, we have to know the details surrounding the firm’s payment and client billing. 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.
• 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 proactively about refunds or other accounting adjustments.  Ask vendors to contact you before issuing a check or initiating an ACH credit – 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.

ACH Processing Time Getting Faster

95% of financial institutions are expected to enable same-day processing of credit transactions this year under Phase 1 of a new rule adopted by the Electronic Payments Association®, the trustee and rule maker of the ACH Network.  Faster processing of debit transactions will come in 2017.  Why should law firms care?

Faster processing is good news for everyone who uses ACH because it allows for same-day correction of mistakes.  A common example would be an employer who pays employees using ACH for direct deposit.  With the faster processing, the employer can correct a payroll mistake the same day to ensure employees are paid on time.  See “Bank Transactions, Including Payroll, Will Soon Be Faster.”

All Rights Reserved 2016 Beverly Michaelis

Postscript

Crafting a Workaround to Keep Client Overpayments Based on WIP

Can a law firm craft a fee agreement “workaround” to this issue – one that permits the firm to keep client funds if there is sufficient pending, unbilled WIP?

Oregon ethics opinions lean toward allowing all sorts of payment terms so long as they are covered in a written fee agreement: 18% annual interest, keeping attorney fee awards, and collecting your fee up front in a structured settlement payout.  At this stage, the client can walk away if he/she doesn’t like the deal.

But wouldn’t such a workaround unethically defeat the client’s right to dispute the bill? As a default proposition, fees are not earned until the client has been billed.

Here’s my best guess: if you wish to attempt this be prepared to comply with Oregon RPC 1.15, RPC 1.5, and Ethics Opinion 151:

For purposes of this opinion, the term fixed-fee agreement includes any fee agreement in which the lawyer’s charge for specified services is a fixed dollar amount, regardless of when the lawyer is paid or how much work the lawyer must do and regardless of the name applied by the lawyer to the agreement—e.g., “flat fee,” “nonrefundable retainer,” “prepaid legal fee,” etc.

The opinion makes clear that the ethical requirements applied to fixed fee agreements (discussed here) apply to:

• Any fee agreement
• Regardless of when the lawyer is paid
• Regardless of how much work the lawyer must do
• Regardless of the name given by the lawyer to the agreement

The only wiggle room here is that we don’t know the “fixed dollar amount” up front. In the WIP scenario it would be the difference between the amount billed by the firm and the client’s rounded-up payment.

Hmmm.  Is that enough of a distinction to ignore Opinion 151, RPC 1.15, and RPC 1.15? Perhaps the safest answer is: just don’t do it.