6 Aug 08

A few months back I posted an entry regarding how easy it is for law firms to setup credit card processing (Credit Card Processing: Not such a naughty word anymore), and one easy way discussed was using PayPal. Well, I had a wonderful comment posted by Nicole in South Africa which really does make the question more interesting.

Nicole writes:
To be honest as a client I get nervous if I see a PayPal sign on any reputable law firms website. Here in South Africa all fees have to be in a trust account so it would never apply here hopefully.

Are legal professionals in the USA not required to keep a trust account?

But then again I doubt you guys there have half the corruption we have here in our legal system.

Thank you Nicole! I hadn’t considered the international aspect of the question.

Though I can’t directly address our issue of corruption and the statistics, my gauge of the legal environment here is the there is “minimal” corruption. Saying “none” would be naive of me since I’m sure the bar associations have all these ethics and conduct rules for a good reason!

In the USA each state regulates their lawyers by issuing the “bar license”. Some lawyers are licensed to practice in multiple states and beyond that some states have “reciprocity” for bar licenses (for example a lawyer licensed in Washington doesn’t have to go through the complete licensing process to practice in Oregon or Washington DC).

So, with that in mind each state bar association produces codes of conduct and ethics and lots of other detailed rules on practicing law. In the State of Washington (as well as many other states), the bar association produces many operating procedures for how firms has to handle client money. “Recognizing income” is one of the standards. So in order for a law firm to accept payment from a client they have to have earned that money. Sounds pretty obvious, but the confusion stemmed from “retainers” or “flat fee” arrangements where money is collected prior to any (or most) legal work is performed. (The term “flat fee” is ripe for heated debate on whether it constitutes “earned fees”)

With that said, if the firm has “earned the fees” then they can deposit the funds directly into their operating account. If the firm has not earned them (meaning the client is either pre-paying or issuing a retainer payment) then we, the law firm, have to deposit the funds into a trust account, even if the client owes $100 and they pay $101. It all has to go to trust OR returned to the client. If you deposit it into trust you can take your earned portion since the client intended to pay for the invoice. Any remaining funds will be held in trust until the client requests them be returned or we notify (with ample time to contest) the client that we are applying the funds to other earned fees.

So, that said, the Washington State Bar Association says we can technically accept payments via credit card for invoices. And we can accept credit cards in payment of retainers/pre-pays, however the monies received for retainer/pre-pay has to be deposited directly into the trust account. Therefore PayPal would not work in the State of Washington for processing retainers, but would definitely suffice for processing invoice (earned fees) payments.

So, is PayPal directly endorsed or addressed by the State of Washington? To tell you the truth, I’ve never heard of any firms actually using it (including my own). So, I’m not sure they’ve even addressed the issue directly. Since many businesses and individuals use it as “legal tender” then I can’t imagine the bar association objecting to using PayPal for payment of invoices, yet I could see them contesting significantly to using it for retainer payments.

UPDATE: I stand corrected. I had originally wrote in California as a state with reciprocity, but that is not true. I’ve modified the article to Washington DC as another state with reciprocity to Washington State.

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