So you have read all of the Disciplinary Rules (back when they were called Disciplinary Rules), vigorously follow them, avidly and zealously service your clients and have led an otherwise charmed professional life. But what happens if you find yourself squarely in violation of a rule, and it wasn’t even you who did it?
Take the situation of John Q. Attorney.
John is the managing partner of a small firm in Nassau County. He has one associate and one paralegal. His firm is a general practice firm, handling mostly civil litigation matters and an occasional criminal appearance for a friend. John banked with a prominent national banking institution for his office needs. Prior to selecting the bank, John interviewed with the local institutions, weighed their respective offers concerning management, access, fees and available services, and deciding upon a nationally recognized institution which was not too much in the news lately. Carefully reading all banking service documents, John opened an operating account and an escrow account, together with several subsidiary escrow accounts in the names of his clients. As required, each subsidiary account was opened with the taxpayer identification number of the respective client, and was carefully maintained by John updating the same with each transaction for the client.
John enjoyed the bank’s services, was invited to the annual holiday party and the relationship flourished. Time went on and John’s business grew. With this growth came additional needs for capital for furnishings, renovations and improvement. John turned to his trusted business “partner,” his bank, for a line of credit. Business was good, the economy was thriving (or at least not choking) and John’s credit made him worthy of a line of credit. As before, John read all of the banking service documents, recognized the bank’s requirement of a personal guaranty for the line of credit and agreed that it was a good move for him and his business.
It is here that the story takes a turn. John was made a better offer by a different bank and, after much deliberation, determined to move his accounts and those of his clients, to the new bank – mostly. ‘Mostly’ because not all of John’s clients determined to sign the new forms, and were perfectly content to let their escrow accounts rest at the original bank. Thus, John kept at the initial bank a few accounts of certain clients, the escrow account and the business line of credit.
A little math now: John’s monthly payment on the line of credit was approximately $1,000. However, like some businesses, John’s cash flow was not even, so he determined to break up his monthly payment into two bi-weekly payments. John wanted to assure that this line of credit was satisfied sooner rather than later, and thus made two bi-monthly payments, each in the amount of $600 for a total of $1,200 per month, to accelerate the payoff of the line. John arranged for the bi-weekly payments from his new bank to the original bank, and made certain that each payment was sent as scheduled. However, John made an error. Although he made sure that the payments were sent, he did not confirm that they were credited properly. And so we come to the focus of this story.
The original bank was unable to properly process the bi-weekly payments, and instead determined that each payment was not a payment in principal and interest, but rather only a payment in principal, applying the payments on the “back end” of the line. What was the result? John’s line of credit was declared to be delinquent. Although frustrating, you as the reader may ask how this may involve the Rules of Professional Conduct. Almost there, bear with me.
Now that John’s office line of credit was delinquent, or at least delinquent in the eyes of the bank, the original bank made a determination of its own. It decided that because the line of credit was through John’s business, that it had the right to invade John’s business assets held in the name of the business to satisfy the “delinquency.” Thus, without notice to John, the original bank determined to invade the accounts in the name of the business to make up for the “shortfall” and invaded John’s clients’ escrow funds. And so we come to the problem. John has unknowingly and unwittingly violated 22 NYCRR §1200, Rules of Professional Conduct, Rule 1.15 “Preserving Identity of Funds and Property of Others; Fiduciary Responsibility; Commingling and Misappropriate of Client Funds or Property; Maintenance of Bank Accounts; Record Keeping; Examination of Records.” Section (a) thereof reads: “Prohibition Against Commingling and Misappropriation of Client Funds or Property. A lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not misappropriate such funds or property or commingle such funds or property with his or her own.”
In fact, a violation of these rules is so severe, that in accordance with Rule 1.15(j) the same reads: “A lawyer who does not maintain and keep the accounts and records as specified and required by this Rule, or who does not produce any such records pursuant to this Rule, shall be deemed in violation of these Rules and shall be subject to disciplinary proceedings.” Thus, a violation of these Rules will automatically result in disciplinary proceedings to determine the nature of the infraction and the appropriate treatment of the same, as well as sanction against the offending attorney.
These rules hold for sitting Judges as well as attorneys. “It is well settled that an attorney may not commingle personal funds with those held in trust for clients or others, nor may an attorney use an escrow account to pay personal expenses (see Matter of Kadish, 299 A.D.2d 78 [2nd Dept. 2002]; Matter of Land, 299 A.D.2d 83 [1st Dept. 2002]; Matter of Lasher, 296 A.D.2d 163 [2nd Dept. 2002]; Matter of Stevens, 294 A.D.2d 1 [1st Dept.], lv denied, 98 N.Y.2d 611 ; Matter of Croak, 277 A.D.2d 871 [3d Dept. 2000]; Matter of Summer, 238 A.D.2d 86 [4th Dept 1997]).” In re Mason, 100 N.Y.2d 56 (2003), involving the practices of a sitting Justice of the Court when he was initially an attorney in possession of client funds, which practice continued when appointed to the Bench. The end result was the removal of the Judge.
The treatment of escrow violations, whether the violations were intentional, as was alleged above, or unintentional, discussed below, oftentimes results in harsh treatment of the subject attorney, regardless of the circumstances surrounding the violation. In Matter of Pinello, 100 A.D.2d 64 (1984), the Court considered and rejected the Respondent’s claims of extreme emotional, psychological and physical distress at the time of the commingling, and determined to disbar the Respondent attorney. The Court, with dissenting opinions, stated: “[t]his court has consistently imposed the penalty of disbarment where an attorney has converted the escrow funds of a client or third party. (Matter of Borsher, 93 A.D.2d 322; Matter of Warfman, 91 A.D.2d 356; Matter of Nadel, 85 A.D.2d 8; Matter of Field, 79 A.D.2d 198; Matter of Stults, 77 A.D.2d 254, mot for lv to app den 53 N.Y.2d 606; Matter of Wolf, 73 A.D.2d 419; and Matter of Marks, 72 A.D.2d 399.) Whenever an attorney misappropriates funds from a client, faith in the legal profession is thereby eroded. An attorney, who steals from a client and thus violates the sacred trust reposed in him, should forfeit the right and the privilege to practice law. Only the ultimate punishment of disbarment can properly express our abhorrence for such conduct, protect the public and maintain confidence in the integrity of the legal profession.”
But this opinion is not applied universally, and not all cases end in an automatic loss of license. In two recent New York County cases, where the subject attorney Respondents expressed genuine remorse for “accounting laziness”, where no clients were injured and the admitted (and prohibited) practice of commingling personal and professional funds immediately ceased, the Department Disciplinary Committee which sought suspension of the respective attorneys in these matters, resulted in public censure. See Matter of Dyer, 2011 NY Slip Op 7383 (October 20, 2011); Matter of Marshburn, 70 A.D.3d 231 (2009) (both resulting in public censure). Compare, however, Matter of White, 80 A.D.3d 194 (2010), a Second Department case, where under comparable circumstances, mixed with a delay in cooperation with the investigation, and the attorney was suspended for a period of two years.
There is much interesting reading on the evolution of sanctions for escrow violations. (1)
And so we return to John.
What should he do? John did not actively steal money from his clients. However, there was clearly a payment from his clients’ accounts toward his office line of credit. But this payment was not authorized by John, indeed, he was not even aware of it until the next statement came out from the bank. No checks were dishonored, which had occurred in the matters cited above triggering the disciplinary proceedings, in fact no checks were even written and upon John discovering the bank’s actions, he forced the bank to refund the money wrongfully taken. The result is that no clients were injured. But, despite all of the foregoing, the use of client funds to pay for a personal obligation would still be considered the misappropriation of client funds.
As for what John should do, the answer is not very clear. Under Rule 8.3, “[a] lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer shall report such knowledge to a tribunal or other authority empowered to investigate or act upon such violation.” So does John turn himself in? Well, no, as the cited Rule refers to “another” lawyer who “committed a violation,” which excludes John on two counts.
But there are no guidelines or safe harbors for practitioners who are victims of banking errors or even crimes. On the one hand, you could end up like the attorney in Matter of Newman, 73 A.D.2d 1029 (1980), where a banking error in charges to an account caused the account to be overdrawn. The Court ultimately dismissed the petition and charges but with this warning:
Under these circumstances, and in view of the fact that there is no evidence that any other client suffered, or complained of, any loss or prejudice, we determine that, by reason of the lengthy investigation and prosecution of these charges, covering a period of some four years, respondent has been sufficiently punished for his delinquent conduct. In reaching this result, however, we caution respondent that his carelessness cannot be disregarded and that, in the event any future charges of professional misconduct are sustained against him, the court’s responsibility to safeguard the public from the mischief produced by lax attorneys will evoke a penalty more severe than a censure.
Or on the other, you could end up like the respondent attorney in Matter of Davis, 275 A.D.2d 76 (2000) where the attorney was disbarred, even though it was clear to the Special Referee that she was the victim of a professional confidence man.
The only obvious conclusion to be learned from this story (and that’s all that it is), is to monitor your and your clients’ accounts constantly, vigorously – perhaps incessantly or feverishly. This is not and ought not to be news for the readership. And while the modern practitioners are busy enough and this constant vigilance may create an additional burden, the consequences of an error of omission or commission are too great to ignore.
(1) STUDENT PROJECT: DISTRICT OF COLUMBIA COURT OF APPEALS: A SURVEY OF RECENT CASE LAW ON PROFESSIONAL RESPONSIBILITY AND CRIMINAL PROCEDURE: PART ONE: PROFESSIONAL RESPONSIBILITY: Attorney’s Commingling, Misappropriation and Conversion of Client’s Funds: Sanctions. 31 How.L.J. 331 (1988), Vincent Uchendu.