By David C. Carr
Two years ago, the State Bar implemented the Client Trust Account Protection Program (CTAPP). The aim of CTAPP is to deter client trust account misconduct through the imposition of a layer of regulation on top of the discipline system. The advent of CTAPP is part of the fallout from the Girardi scandal. Girardi was able to move money between trust and business accounts, that helped to conceal his theft. Of course, this problem did not begin with Girardi. One legal review article referred to misappropriation from the client trust account as “the perfect crime.” Client trust account misconduct can be difficult to detect. Requiring the reporting of client trust account overdrafts has been helpful in detecting misconduct. It is ineffective for detecting the practice flush with money that has been paying the last client settlement with a current client’s settlement money. “Robbing Peter to Pay Paul” can go on for a very long time as long the cash flows in, just as in a Ponzi scheme. But when something stops the cash flow, the whole thing falls apart quickly. This is what happened to Girardi.
Poor or nonexistent record-keeping is usually a part of this scenario. It is also part of less serious misconduct by good-intentioned lawyers who are not closely supervising the bookkeeping. It is aided by a level of ignorance about the black letter rules of law governing management of the client trust account (principally California Rule of Professional Conduct 1.15.) For this reason, it is built on a reporting scheme built out from the regulatory licensing mechanisms contained in Title 2 of the State Bar Rules, entitled Title 2: Rights And Responsibilities Of Licensees. CTAPP requires reporting of specific information about each client trust account including reporting of client trust account balances each year as part of the annual licensing process. On the education side, it requires a certification that the lawyer knows the client trust account rules and is observing them.
This approach has been called “active management.” The discipline system has been called a fireman that only arrives after the house has burned down. Active management is aimed at preventing the fire from occurring. The CTAPP experience has sadly revealed that there is a substantial amount of ignorance and mismanagement regarding client trust accounts. CTAPP, to this point, seems to justify its existence, even if its execution has been poor in some aspects. In July 2014, 5,000 attorneys were administratively suspended for CTAPP compliance, many of them without adequate notice of the suspension.
However, “active management” is about to become active at a whole new level with the initiation of random client trust account audits. This move has been discussed for many years. It is finally arriving as the latest step in the CTAPP campaign.
New California Rule of Court 9.5.5 enacted by the Supreme Court requires the State Bar to establish CTAPP trust account certification, annual client trust account registration, and self-assessment but also provides that for a mandatory Compliance Review: if selected by the State Bar, a licensee must complete and submit to the State Bar a client trust counting compliance review to be conducted by a certified public accountant at the licensee’s expense. Possible additional actions based on the results of a compliance review may include an investigative audit, a notice of mandatory corrective action, and a referral for disciplinary action.
At the heart of the new random audit component of CTAPP, new Business and Professions Code section 6091.4, effective January 1, 2025, makes compliance with the audit request mandatory and makes inapplicable attorney-lawyer privilege and work product protection to the request:
(a) Notwithstanding subdivision (e) of Section 6068, Article 3 (commencing with Section 950) of Chapter 4 of Division 8 of the Evidence Code, the Attorney Work Product doctrine as restated in Chapter 4 (commencing with Section 2018.010) of Title 4 of Part 4 of the Code of Civil Procedure, or any other law, licensees of the State Bar, limited liability partnerships, or law corporations registered with the State Bar shall, pursuant to a request made as part of a compliance review or investigative audit being conducted by or at the direction of the State Bar, provide to the State Bar or its agents all requested information, records, or communications, including, but not limited to, account journals, client ledgers, fee agreements, client files, and billing statements related to the receipt, holding, and disbursement of funds, securities, or other property in which the licensee, limited liability partnership, or law corporation knows or reasonably should understand a client or other person has an interest.
New Business and Professions Code section 6091.3, effective January 1, 2026, will require financial institutions to collect and retain a lawyer’s State Bar license number by when a client’s trust account is opened. It also requires that financial institutions begin annually providing specified information on client trust accounts associated with attorney State Bar license numbers that mirror the CTAPP self-reporting requirements. Undoubtedly, this information will be checked against the information self-reported to CTAPP.
Random client trust audits are used in many states to enforce client trust account rules. California, with more lawyers and more client trust accounts than any other jurisdiction, has been historically reluctant to spend money on random client trust audits. That reluctance is now over. If a California lawyer has not made triple sure that all applicable client trust requirements are being adhered to, the time to do that is now. Reading the State Bar’s Client Trust Handbook is a necessity: https://www.calbar.ca.gov/Attorneys/Conduct-Discipline/Client-Trust-Accounting-IOLTA/Client-Trust-Accounting-Handbook. Attending State Bar Client Trust Accounting School may be advisable. Information on that and many other educational resources are available at https://www.calbar.ca.gov/Attorneys/Conduct-Discipline/Client-Trust-Accounting-IOLTA/Client-Trust-Accounting-Resources#training.