Short Guide To Trust Accounting And Three-Way Reconciliation

 Above the Law has a very short reminder of the basis related to trust accounting here.  Go read it for a quick refresher course.

How not to practice law: gamble away clients' funds

So, here is the second installment of the day in the "how not to practice law category" and again, as usual, the punchline says it all.  This one involves a lawyer who reportedly lost over $8 million in client funds at a casino.  The attorney will reportedly plead guilty to wire fraud and money laundering. She faces upwards of 20 years and has already agreed to pay $8,785,045 to recoup five investors.  You can read the story here.  

So what are the odds that she will get disbarred?  (See what I did there?...  "the odds"... get it?...)

Quick review of the basics of handling money

IPethics&Insights has a short post reviewing the basics on handling clients' money, firm bank accounts and the like, here.

Iowa Supreme Court rejects recommendation to disbar lawyer because of insufficient notice in the complaint; correct result?

The Legal Profession blog is reporting on a case from Iowa in which the Supreme Court refused to adopt a recommended sanction because according to the court, the attorney did not have sufficient notice of the possibility that he faced disbarment.  The court held that

The complaint only alleged he obtained retainers and did not deposit them into his trust account, even though the retainers had not been earned. [The lawyer] admitted, as required by the commission’s sanction, all the allegations in the complaint, but the possibility that he faced a revocation of his license to practice law was not raised until the conclusion of the hearing. . . .Under the circumstances, [the lawyer] did not have a fair opportunity to know the issue of theft was in play and to produce evidence to show he had a future colorable claim to the retainer.

I am with the Disciplinary Board that recommended disbarment on this one.  An allegation that the attorney "obtained retainers and did not deposit them into his trust account, even though the retainers had not been earned" is, by definition, an allegation of misappropriation and anyone who went to law school knows that misappropriation, if proven, is more than likely going to result in disbarment.  In short, if the accusation is for misappropriation, any lawyer knows that they are facing disbarment.  I would say that not knowing this is, in and of itself, incompetence.

So, I am willing to be convinced that I am wrong, but for now, I stand with the Board.  Granted, the complaint may have been drafted better, but I don't find the court's conclusion convincing.

What do you have to do to get disbarred in Wisconsin?! Court rejects request to disbar attorney who misappropriated money from a client with diminished capacity while serving as guardian

Misappropriation of clients' funds is often considered to be one of the worst types of misconduct and usually results in disbarment.  In fact, it should result in disbarment.  If you steal money from your client, you should be disbarred.  Period; end of story.  That's always been my position and, typically, courts agree with it.  But every now and then there are exceptions.  Recently I wrote about an Illinois Review Board decision that suggested an attorney should not be disbarred for stealing client's money because the client did not know the lawyer had stolen the money and because the attorney had a good reason to steal the money.  As I said in my original post, that's absurd.

Not to be outdone, now comes an opinion by the Wisconsin Supreme Court rejecting the Office of Lawyer Regulation's recommendation to disbar an attorney who misappropriated almost $50,000 from a client with diminished capacity while serving as a guardian.  

One big problem in this case was that the attorney did not set a separate account to manage the money in guardianship.  He simply deposited the money in his trust account, which is a problem in and of itself.  Then, on top of that, as in many of these cases, the attorney claimed he had poor accounting or record keeping, and thus that he did not keep good records of the money going in and coming out of his trust account.

The attorney's claims are designed to suggest that he was merely negligent and that the fact he ended up misappropriating client money was not intentional.  Making the distinction between negligence and intent can be critical to avoid disbarment, of course; and here the court apparently bought the lawyer's argument.

I guess I understand there can be a distinction between negligence and intent, but at some point we have to decide how serious we are about misappropriation.  For me, the distinction is irrelevant.  If an attorney is so negligent that he or she can't figure out they are stealing client money, they should not be allowed to represent clients.  

The Wisconsin case is even worse because the attorney had been disciplined in the past for trust account violations.  So here we are dealing with an attorney who claims he was negligent when, in fact, he had been disciplined in the past.  I don't buy it.  Although I tend to be a hard-liner on this issue, I will not discard the possibility that I can be convinced to not disbar an attorney for a first offense if I am convinced the problem was caused by pure negligence.  But here we are dealing with an attorney who knew, or should have known, what he was supposed to do and decided not to change his practices.  I agree with the OLR's recommendation.  The attorney should have been disbarred.

Illinois Review Board issues opinion that suggests minor sanction is in order for misappropriation if there was a good reason to misappropriate

Although there are always exceptions, misappropriation of client's funds will almost always result in disbarment.  This is certainly true in Illinois, where almost every year misappropriation ranks as one of the top types of misconduct that results in disbarment.  And this is a not a bad thing.  If you steal money from your client you should be disbarred. Period; end of story.  That is what I teach my students.  But, like I said, there are always exceptions.  The hard question is what are the reasons for which we should make an exception.

This is why I was surprised to read about this decision of the Illinois Review Board recommending a mere 30-day suspension for a case of misappropriation because the Board apparently thought the misappropriation was done for "sympathetic reasons."

I understand that every case is different and that the Board should consider arguments in favor of mitigation, but it always troubles me when a decision seems to suggest that there are good reasons to steal and bad reasons to steal and that you will not get in serious trouble if you steal for a good reason. Aside from going against the vast majority of the cases on the issue, this type of reasoning sets a bad policy.

In particular, the court considered as a mitigating factor the fact that the client was not aware that the lawyer had misappropriated the funds.  Again, I understand that the Board is essentially saying that the client was not harmed by the misconduct, but what it says can also be interpreted to mean that the better the lawyer is in hiding the misconduct from the client, the lesser the sanctions should be.  This does not make much sense to me.

I think the opinion should be reversed and a stronger sanction should be imposed.  

Competence means more than knowing the law

I always make a point of reminding my students that being competent includes understanding the day to day operation of law practice and the management of an office.  A recent case from Nebraska illustrates this.  In this case, State of Nebraska v. Sundvold, the Nebraska Supreme Court suspended an attorney for three years followed by probation for two years on reinstatement in part because he was not equipped to manage his law practice.  The attorney had worked in-house for an insurance company before entering private practice and proved not to be ready for it.  He did not have any experience in the financial aspects of the the practice of law. He had never negotiated a fee, handled client funds, drafted a contract for the provision of legal services, worked with a billing system or utilized a trust account.  For more, go to the Legal Profession blog here.

UPDATE on the proposed amendments to the Florida rules

Earlier today I posted a comment about proposed changes to the rules in Florida.  See here.  I just received the proposed new text and here are my comments.

First, the rule will use the following definitions:

(A) Retainer. A retainer is a sum of money paid to a lawyer to guarantee the lawyer's future availability. A retainer is not payment for past legal services and is not payment for future services. 

(B) Flat Fee. A flat fee is a sum of money paid to a lawyer for all legal services to be provided in the representation. A flat fee may be termed "non-refundable."  

(C) Advance Fee. An advanced fee is a sum of money paid to the lawyer against which the lawyer will bill the client as legal services are provided.

The choice of words is interesting.  The proposal is using the word "retainer" to mean what other jurisdictions call a "classic retainer" while it is using the words "advance fee" to define what others call a "security retainer."

The Comment to the rule explains the analysis related to the issue of whether a fee can be non refundable:

     A lawyer may require advance payment of a fee but is obliged to return any unearned portion. . . . A lawyer is not, however, required to return retainers that, pursuant to an agreement with a client, are not refundable. A nonrefundable retainer or nonrefundable flat fee is the property of the lawyer and should not be held in trust. If a client gives the lawyer a negotiable instrument that represents both an advance on costs plus either a nonrefundable retainer or a nonrefundable flat fee, the entire amount should be deposited into the lawyer's trust account, then the portion representing the earned nonrefundable retainer or nonrefundable flat fee should be withdrawn within a reasonable time. An advance fee must be held in trust until it is earned. Nonrefundable fees are, as all fees, subject to the prohibition against excessive fees.

Although I am not totally convinced the language used in the definitions is the best, as I said in my previous post, I think the analysis this proposal is much better than the one offered in many of the cases that have been decided on this issue.

Florida Bar of Governors proposed amendment to clarify the concept of flat fees and retainers

I have often complained about the confused state of the law as it relates to the notion of non refundable "flat fees" which in many jurisdictions converts the flat fees into security retainers.   Go here for an example of the problem and here and here for more.

Into this mess, now comes the Florida Bar Board of Governors which has proposed an amendment to Florida's Rule 4-1.5.  The amendment states that non refundable fees are considered earned on receipt and must not be placed in lawyers’ trust accounts.  I have not seen the exact language of the proposal (I requested a copy here).  However, I can say that I think saying that non refundable fees are earned on receipt seems like a good idea, but only as long as the total amount of the fee remains reasonable, which is the accepted standard to evaluate any fee's ethical validity.

According to Lawyers Ethics Alerts, the proposed language in the comment to the rule provides: “A nonrefundable retainer or nonrefundable flat fee is the property of the lawyer and should not be held in trust. If a client gives the lawyer a negotiable instrument that represents both an advance on costs plus either a nonrefundable retainer or a nonrefundable flat fee, the entire amount should be deposited into the lawyer’s trust account, then the portion representing the earned nonrefundable retainer or nonrefundable flat fee should be withdrawn within a reasonable time. An advance fee must be held in trust until it is earned. Nonrefundable fees are, as all fees, subject to the prohibition against excessive fees.”

Attorneys disciplined when employees steal money from clients

In two recent cases, attorneys have been disciplined when employees stole money from clients. In one case, it was a paralegal and in the other it was a secretary (who also happened to be the attorney's wife). The key to remember here is that in these cases, discipline is not imposed as a form or vicarious liability. The attorneys are not disciplined for the other person's misconduct. The attorneys are disciplined for their own misconduct in not having mechanisms in place to supervise or control in a way that would prevent the misconduct of the employees. Read more about these recent cases here and here.

How not to practice law: Steal money from clients, then argue in your defense that you needed the money!

Here is another installment of the on-going series on how not to practice law.  In this new case, a lawyer was disbarred for, among other things, stealing money from clients.  That's not newsworthy, of course, since that is the typical sanction for misappropriation (although I just posted a story about a case in which the attorney unjustifiably in my opinion, got away with a lesser sanction).  What is interesting about this particular case is the explanation given by the lawyer "in his defense." 

In response to charges of theft of estate funds, the attorney testified that he  used the funds because he needed them for his business operations in difficult times and that it was all due to "the worst financial crisis in our nation's history."   In other words, he claimed he stole the client's money because the economy was bad and he needed the money.  The court said the lawyer's testimony can only be characterized as "a lame attempt to rationalize his theft."  I agree.  If you think that argument is going to help your case, you better look for another line of work.  Oh, wait!, you do need to look for another line of work because you just got disbarred!  

You can read the full opinion here.

Lawyer steals money from clients but does not get disbarred because he had been in the military; I don't get the connection

The Legal Profession blog is reporting on a recent opinion from the Ohio Supreme Court in which an attorney was indefinitely suspended  for  violations of the Rules of Professional Conduct in  his dealings with more than 20 bankruptcy clients including the fact that the attorney accepted fee advances from those clients but deposited the unearned fees in his office operating account and spent the clients’ funds on personal and office  expenses without performing the legal services for which he had been retained. In other words, that he stole client's money.

You would think this is not newsworthy since stealing from clients is essentially the easiest way to get disbarred, right?  But that is the strange thing.  Here, the attorney was not disbarred.  There is a distinction between indefinite suspension (a suspension that can be lifted) and disbarment (which, at least in theory, is permanent).

What made the difference in this case?  In imposing an indefinite suspension rather than permanent disbarment, the court noted as mitigating factors that the attorney had served in the U.S. Air Force for 20 years,  expressed sincere remorse and  accepted  full responsibility for his actions, cooperated with disciplinary authorities, and was making ongoing attempts to make restitution to his clients.  You can read the opinion here.

I don't understand this. The lawyer has admitted that he stole money from clients in multiple instances but he doesn't get disbarred (which the court says is the proper sanction for misappropriation) because he is a veteran? What does military service have anything to do with anything? With all due respect to the members of the military all of whom should be admired for their courage, why should military service operate as a mitigating factor and not other kinds of service? What if a lawyer had been a nurse for 20 years before going to law school, or a high school teacher or a firefighter? How do we make the distinction? 

I just don't think past military service is relevant at all.  The lawyer may have served the country admirably for 20 years in the past, but now he was stealing money from clients.  He should have been disbarred.

You always risk disbarment

One of the first important lessons I always try to get my students to learn is that given the fact that the rules don't provide for sanctions, and the fact that there is so much inconsistency when it comes to sanctions, no matter what the conduct is "you always risk disbarment."  To illustrate this, I assign In re Lamberis, 443 N.E.2d 549 (Ill. 1982), in which the hearing board, the review board, the administrator of the disciplinary system, the majority opinion of the Supreme Court and a couple of dissenting judges all proposed different sanctions for the conduct, which wasn't even in the context of the practice of law.  (The suggested sanctions were censure, suspension for 3 months, suspension for 6 months and disbarment). 

In any case, here is a new case that can also be used to remind everyone that you always risk disbarment.  The Legal Profession blog is reporting that the Maryland Court of Appeals has disbarred an attorney who withdrew an amount of money from his attorney trust account resulting in an overdraft of $5.24.

Is it really worth it to risk disbarment for $5 and change...?  I don't think so.  

How not to practice law: do everything wrong when leaving your firm

Here is a new installment in our running list on how not to practice law:  the Florida Supreme Court has suspended  two attorneys for misconduct in connection with their departure as employees of a law firm.  In the process of preparing to leave the firm, the attorneys solicited firm clients, made misrepresentations to the firm and clients, copied files without authorization and more.  The court found the use of the files amounted to criminal theft, dishonesty and conduct prejudicial to the administration of justice. The case is called Florida Bar v. William Henry Winters.

Two recent cases illustrate basic principle of lawyer accounting: if the client overpays, you can't pocket the money!

Suppose you go to a store and pay with a $10 bill, but thinking you paid with a $20, the cashier gives you more change than you deserve. Would you correct the error?   You don't need to tell me... but let me tell you this, if you are a lawyer and the cashier is a client paying for your bill, you better....!

Two separate cases reported this month in the Legal Profession blog deal with the issue.  In the first one, Iowa Supreme Court Attorney Disciplinary Board v. Ries, Jr, an attorney was suspended for not refunding the clients after it was pointed out they had paid the bill twice.  The attorney charged the client a $500 retainer but, after the representation ended, the final invoice failed to credit the $500 that had already been paid. The attorney then did not pay attention to the client's concerns when the client discovered the error and complained the attorney had been paid $500 more than he was entitled to.

In the second case, the Minnesota Supreme Court imposed an indefinite suspension of no less than two years to an attorney who had engaged in a pattern of misrepresentations, failed to maintain a trust account and failed to pay an arbitration award.  Among other things, at one point the attorney was to receive an initial retainer payment of $1,000. She mistakenly was paid $5,000 which she did not place in escrow and did not refund when she was confronted with the error and discharged.

How not to practice law: use your client's money to pay gambling debts

In a new case from New Jersey, the state Supreme Court has disbarred an attorney for misappropriation which included the use of money from a clients' trust account to pay gambling debts.  Obviously, using clients' money for personal purposes is one of the worst and dumbest things a lawyer can do, and, as we know it typically leads to disbarment.  

However, since gambling can be an addiction, I am not ready to pass judgment on this particular case.  If jurisdictions have established programs for lawyers addicted to alcohol and drugs, should they also provide help to gambling lawyers who have lost control of their extracurricular activities?

Go here for more information.

How not to practice law: lie to cover up your mistakes

I sometimes tell my students that my kids (ages 7 and 5) could teach some aspects of the course:  don't steal, don't take what's not your etc.  Here is another simple lesson I have already taught that my kids:  if you realize you made a mistake don't lie to try to cover it up, it will only make matters worse.  Instead, admit it and try to find a way to fix it.  Try to minimize the consequences if possible but ultimately accept them and learn your lesson from the experience.

Here is a new case that illustrates this.  The Legal Profession blog is reporting that the Massachusetts Supreme Judicial Court has ordered a two-year suspension in a case where the attorney had committed negligent misappropriation.  In response, the attorney made false representations to Bar Counsel and submitted false documents to support his explanation.

Note that the charge here was based on negligence.  That is significantly different that cases where the attorney knowingly tries to steal money from clients.  The attorney made a mistake; an important mistake, clearly, and a mistake that would have consequences, but there is no question that lying about it made it worse.

Former White House Aide suspended for one year only over definition of "moral turpitude" -- UPDATED

In March of 2010, I reported the story that appears below. The case was appealed and the Court of Appeals just announced its decision affirming the decision.  If you remember the original story, go to the bottom for the more recent update.


March 12, 2010:

The Blog of the Legal Times is reporting today that the D.C. Board on Professional Responsibility has recommended to the D.C. Court of Appeals that former White House aide Claude Allen, who pleaded guilty in 2006 to one misdemeanor count of theft of property, be suspended from the practice of law for one year.

Allen, who at one point was nominated by President Bush to the U.S. Court of Appeals for the Fourth Circuit, admitted that, on several occasions, he bought an item at a Target store and then later went back to the store with the receipt, pulled an identical item off the shelves, and used the receipt to “return” it, allowing him to keep the purchased item at no cost.

On these facts, the Board recommended a suspension because, according to its report, bar counsel "failed to prove moral turpitude." Had bar counsel proven moral turpitude, the lawyer would have been disbarred. According to the report, the Board stated that "Allen’s actions were “deceptive and dishonest”" but not enough to show moral turpitude.

I am sorry, I must be missing something.... Let's review,... so the guy goes to the store, lies, cheats and STEALS... repeatedly.... for kicks and giggles.... (I am guessing a White House aide, federal appeals court nominee does not really need a few things from Target that badly!).... and that is not moral turpitude?!?

I guess I have to review what 'moral turpitude' means....

Ok, so let's see... According to the BLT, the Board's report states that “Dishonesty is an important factor in analyzing whether criminal conduct rises to the level of moral turpitude, but not every criminal act of dishonesty involves moral turpitude . . . The key factor, the report says, is “dishonesty for personal gain.""

Hmm... Let me see if I get this.... go to Target, ...lie, ....cheat, ....steal, .... keep money..... "dishonesty for personal gain"?....... Yeah, sorry, ... still don't get it...

How is the conduct here not "dishonesty for personal gain"? Can someone explain this to me?

The guy is a convicted liar and a thief and you are telling me that his conduct is not evidence of dishonesty for personal gain!?

Is the Board saying that it is not so bad because the guy stole "only" about $800 or so.... So stealing is not so bad as long as it is not that much? Is that what you are telling me? Is that a lesson you'd like me to teach my 5 year old?

I think I have made my point. I hope the court disregards the recommendation and does the right thing here. This guy should be disbarred. Period. If he needs psychiatric help, get him help, do whatever, but don't allow him to represent people whose property, lives and money depend on him until he shows he can be trusted. Shame on the Board.

More on the story here.  You can find the Board's report through this link.

UPDATE:  September 8, 2011

More than a year since the decision of the DC Board on Professional Responsibility, the DC Court of Appeals has affirmed the decision and imposed a one year suspension.  On appeal, Bar Counsel had requested that the Court reject the Board's conclusion and order disbarment.  As I argued back when the Board's decision was issued, I agree with Bar Counsel.

But the Court did not agree, holding that a misdemeanor should never be considered, per se, a crime involving moral turpitude - even if it could be considered to be a "serious crime."  But that was not the end of the question.  Finding that the conduct did not involve moral turpitude per se, the court had to evaluate the specific facts of the case to determine if, under the circumstances, the conduct should be considered to have involved moral turpitude.  The court concluded that it did not.

Bar counsel argued that the conduct involved moral turpitude because it was intentional dishonesty for personal gain.  The court saw it slightly differently concluding that, although "it is clear that respondent committed an intentional act of dishonesty, . . . and because respondent kept the stolen items, he actually personally gained from the commission of the theft," the lawyer's actions "were not so much motivated by a desire for personal gain as by psychological disturbances."

I understand the court's reasoning, but I remain unconvinced, particularly when the Hearing Committee who heard the original evidence did not give credit to the testimony of the attorney's doctor whose opinion and diagnosis was described as imprecise and "changing" -- which I take to be a nice way of saying it was unconvincing to say the least.

Judge for yourself and let me know what you think....  The case is called In re Claude A. Allen and the opinion of the court is available here.

For more on the story go to the Blog of the Legal Times and the Legal Profession Blog.

How not to practice law: use client's money to shop at Walmart and then claim misconduct is due to "poor bookkeeping"

In a recent decision called Grievance Administrator v. Trott (available here), the State of Michigan Disciplinary Board disbarred an attorney for mishandling client's funds.  Among other things, the attorney used money from his client's trust account to pay personal expenses at stores and to pay for his utility bills. 

It is not unusual for attorneys caught commingling and misappropriating money to claim the misconduct is due to carelessness rather than intent and to claim the problem is in their "poor bookkeeping", which, of course, they promise to improve in the future. 

The court in this case, suggested the attorney had the good sense not to make that stupid claim and added that

"[a]ttempts to blame misuse of client funds on poor bookkeeping practices seldom make any sense. With respect to the handling of trust funds, "poor bookkeeping" is often actually a refusal to assign priority to the lawyer's role as a fiduciary. The public is asked to trust lawyers with their confidences, their liberty, and their fortunes. The public is also asked to trust lawyers as repositories of funds. The duty to keep client and third party funds safe and separate from lawyer funds is a fundamental one."

For more on this case go to the Legal Profession blog here.

Illinois amends lawyer trust account guidelines

The Supreme Court of Illinois has announced amendments to existing lawyer trust account guidelines. The new amendments to Rule 1.15 of the Illinois Rules of Professional Conduct help clarify the obligations that all lawyers have to manage and protect client funds. Go here for more on the story. Go here to view the new rule changes.