Musings on Trust Funds and Ethics

If you are not in that part of the legal business which involves representing Banks on lending matters, you may not know that Banks love trust deposits. They pay a ridiculously low amount of interest on them, and while the firm’s mixed trust account (the “General Trust Account”) requires some managing, it does not take much effort to service the individual interest-bearing investment accounts for specific clients (the “Individual Accounts”). It is good business to have.

On the other hand, law firms like bank lending work. Less now than back in the days when it was more profitable, but still.

So what would be more natural than a law firm saying to a Bank, “How about we plunk $10,000,000 of trust funds into your Bank and you remember us when it comes time to hand out lending files?”

At my friend Martin’s firm, that happened all of the time over a good number of years, and the lending practice flourished.

Two of the managing partners of Martin’s firm, both of whom represented Banks, saw nothing wrong with this. They carefully managed their portfolio of trust funds by spreading the money among the Banks which were sending lending work. Everyone was happy.

Then came a new managing partner who did not represent Banks. The General Trust Account with the firm’s main banker was one thing because the interest at an agreed upon rate goes to the Law Foundation of Ontario and not to the clients anyway, so who cares? But she also looked at those Individual Accounts and decided that the ethical thing to do was to seek out the best interest rate for the client every time a new account was set up. Even if the difference in rates was minimal, the firm owed it to the client to get the best rate. So, if the highest rate did not come from a Bank that sent the firm lending work, she still sent the funds to them.

Believe it or not, doing this had never occurred to the two prior managing partners. It was not because they were unethical. It was just because their business promotion goals had blinded them to the issue.

Well, anyway, the trust funds stopped going to the favoured Banks. The Bank lending work dried up and went to other firms which gave their Bank clients large trust deposits. The ethical purists were happy. The lawyers who did Bank lending work were unhappy, as was the accounting department which now had to deal with more Banks.

Lawyers owe their clients a fiduciary duty to put the interests of the client ahead of their own.  It can occasionally be inconvenient.

Those of you who read my articles from time to time may know that my wife and lawyer Maureen McKay occasionally (well more than occasionally, really) has something to say about what I write. However, since it is my article, I always claim the last word. So here we go again:

Editorial comment by Maureen: The fiduciary duty is at the very core of the lawyer-client relationship. If you have a problem with that, it is time for a ‘re-looksee’ at your career choices.

Editorial comment by Murray: Maureen is never that practical when it comes to ethics. And she is not going to get much bank lending work.

This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.