Saturday, April 15, 2017

Responsibility

In re PRB No. 2013-145, 2017VT 8

By Elizabeth Kruska

Let me sum up (or tl;dr, in the parlance of our times), attorneys have to keep their client trust accounts up-to-date, accurate, reconciled, and accurate. Did I mention accurate?

As a lawyer, I know that one thing we lawyer-types like to joke about is how we don’t like numbers. I used to have lots of cases with a particular former prosecutor who would frequently say things like, “I’m a lawyer! I don’t know anything about counting!” This is someone who is a good lawyer, who I like very much, and yes, who was no good at counting. Numbers are no joking matter, though, when it comes to other people’s money. And by people, I am referring to a specific group of people: clients.

I know we have a pretty varied audience, including lawyers and non-lawyers alike. For non-lawyers, and for readers who haven’t experienced how hourly legal fees generally work, I’ll be glad to explain. Suppose Client hires Lawyer to represent him in a case and Lawyer will charge an hourly fee. Lawyer gets a retainer from Client and bills hourly against the retainer. The retainer is always Client’s money, and Lawyer has to earn the money by doing the work. If the case is finished before the retainer runs out, Lawyer gives back to Client what’s left. In the meantime, though, the retainer sits in Lawyer’s client trust account. This is also sometimes referred to as an IOLTA (interest on lawyers’ trust accounts) account. Any interest that gets generated by the money in the account doesn’t belong to either the client or the lawyer; the bank collects it and distributes the interest to the Vermont Bar Foundation, which uses that money for funding various low-income legal assistance projects.

This doesn’t mean that every time a lawyer is retained by a client that he or she has to open a new bank account. Lawyer could have one pooled interest-bearing trust account. Suppose Lawyer represents three clients in different cases, all of which paid retainers and are billed hourly. Their money all goes into the same bank account. But each client’s money is still his or her own money, and must be kept track of separately.

And that’s where things can go wrong. See, it’s not so hard to have a few clients with these kinds of retainers. Suppose Client A has a balance of $1000, Client B has a balance of $4000, and Client C has a balance of $500. Lawyer has to keep separate ledgers for each client. And the total of those ledgers must to be checked against the bank balance. In this scenario, you’d expect the bank balance to be $5500. But if the bank statement comes and shows a balance of $6000, that means there’s something from the ledgers that hasn’t been entered properly, and that there might be earned funds sitting in the IOLTA account that need to be moved. Or worse, the bank statement comes and shows a balance of $3000, which means there’s money missing somewhere. And if there’s money missing, that could end up hurting a client, since it’s always the client’s money until it’s earned.

This explanation is a lot more simple than it really is. Busy firms with many more clients need to be able to keep track of what they’re doing and when money is earned and when and how it gets moved. Lawyers are generally pretty busy people, and usually have a bookkeeper or other financial person to help with this. But if that person messes up, it’s ultimately the lawyer’s responsibility to keep oversight and control of the account.

Why this long-winded explanation about this? Because it’s helpful to understand the nature of these accounts before diving in to the opinion (hint: it’s about IOLTA accounting). Keeping track of IOLTA accounting is really important. Clients trust lawyers with their cases and also with their money. It’s a big deal for someone to send a lawyer several thousand dollars for representation, and the clients need to know that their money is going to be safe and accounted for properly. Lawyers need to make sure they have systems in place to keep track of all this.

So, here’s what happened in this particular case. Back in 2012, Disciplinary Counsel decided to review Lawyer’s IOLTA account for compliance. This happens a lot and to lots of lawyers. The Professional Responsibility Program requires compliance examinations from time to time; these can be done completely at random.

Lawyer had been in practice for 20 years or so at the time of the compliance examination. Lawyer worked at Firm. Between 2003 and 2007, Firm had an outside bookkeeper come in to, well, come in and keep the books. That stopped and in 2007 Firm started having an internal employee do the bookwork. Employee used Quicken. As I understand it, Quicken is very customizable, and is used by lots of small businesses of all varieties, including law firms. Right after Firm learned that it was going to be audited, Employee quit. It was very sudden.

Lawyer was worried about this, so he (I believe Lawyer is a man based on the opinion; if I’m wrong about that I apologize) hired a certified public accountant and a lawyer to help investigate whether there were problems.

Spoiler alert: there were problems.

The transactions in the IOLTA account were not categorized by client or by matter. This is a problem. First of all, the rules say you have to organize by client or matter. Second, if you didn’t do that, how would you know how much money each client had in the account? Since the money always belongs to the client until it’s earned, there needs to be a way to keep track of how much money in the account belongs to each client.

Also, it wasn’t clear that the Quicken register had been reconciled against any bank statements. The Rules of Professional Conduct require regular reconciliation of the trust account balance. Also, from a common-sense standpoint, you’d want to do this pretty regularly to make sure you know what’s in your account and if there are any errors; it is all someone else’s money.

Last, there were a lot of uncashed checks out of the IOLTA account, payable to Lawyer. Some of which were about 10 years old. The funds weren’t appropriately distributed.

So, based on all these issues, Disciplinary Counsel started an investigation and filed a complaint against Lawyer. Lawyer worked with a CPA to bring the account into compliance, and changed his accounting practices so that the problems would be solved and wouldn’t re-occur. Lawyer acknowledged that some problems occurred, and made changes to fix the situation. This was exactly the right thing to do.

As for the uncashed checks, it turns out those checks were actually for earned funds for Lawyer. Lawyer did some work involving real estate. During a real estate closing, the buyer’s lawyer will issue several checks out of an IOLTA account. In this case, that also included issuing checks to Lawyer, as he was entitled to a commission related to title insurance. These were the checks that weren’t cashed. Some were nearly 10 years old, and the total was close to $74,000. It didn’t harm any client that those checks went uncashed, since those would have been funds earmarked to be paid out to Lawyer anyway. 

The problem with this, in the eyes of Disciplinary Counsel, is that the funds from those uncashed checks were actually earned funds for Lawyer. Lawyers cannot commingle their own funds with client funds. This looked like commingling to Disciplinary Counsel, since some of these checks were so old, and the money was just sort of hanging around in the account. Lawyer disagreed and explained that after a real estate closing there’s a lot of other stuff to be done, like recording deeds and other things. Once all that post-closing work was done, then Lawyer would deposit that check. If the check hadn’t been cashed, it’s possible he hadn’t earned the funds yet.

So, they had a hearing before the Professional Responsibility Board, and the Board agreed that Lawyer violated the client trust accounting rules relative to the IOLTA accounting and reconciling (or not reconciling, as the case was here).

Just before the hearing started, though, Disciplinary Counsel wanted to amend the complaint to include a charge of failure to exercise due diligence. In support, Disciplinary Counsel pointed to the issues with the IOLTA account and also the fact that Lawyer didn’t cash the previously-discussed checks for several years. This, argued Disciplinary Counsel, rose to the level of failure to exercise due diligence. Lawyer objected to the amendment of the charge. Lawyer was unprepared to defend against this particular charge, and did not have notice that it was going to be added. The Board agreed with Lawyer, and did not permit the amendment.

By the time the case went to hearing, it had been going on for several months, and the original investigation had started before that, so the amended or additional charge could have been included before the first day of the hearing.

Secondly, Lawyer gave an explanation about the uncashed IOLTA checks. He said his practice was to cash the checks when he knew the fee or commission was actually earned. If he hadn’t cashed it, it’s because he didn’t know if it was actually earned. The investigation looked at the account, but did not include a deep dive on the files corresponding to the uncashed checks, so it really wasn’t clear if Lawyer had earned those fees or not. And since the money in the IOLTA account always belongs to the client until such time as it’s earned, it’s not as if Lawyer would have been in the right to assume he had earned the fees. He might not have, and if he cashed the checks, would have paid himself money he didn’t actually earn. And that would be bad because it would hurt the client.

In a case like this, Disciplinary Counsel has to prove by clear and convincing evidence that a violation of the Rules of Professional Conduct took place. If that’s proven, then the Board is guided by the American Bar Association’s disciplinary standards to figure out the right sanction.

The Board had to consider the duty violated, the lawyer’s mental state, any actual or potential injury caused by the misconduct, and any aggravating or mitigating factors.

It was clear that there was an IOLTA violation here. That falls under the duty to safeguard a client’s property. It was determined that Lawyer’s mental state was one of negligence. Quicken is customizable, and could have been set up to track the requirements in the Rules of Professional Conduct. But, Lawyer didn’t do it that way. It was also negligent not to reconcile the account in a timely way, and for failing to correct errors that led to an incorrect running balance. Even though there was a bookkeeper and then an employee doing this work, ultimately it’s up to Lawyer to make sure it was done in accordance with the rules.

Luckily, there was no injury to any client. No client lost money. But, if an IOLTA account isn’t properly monitored and reconciled, there is potential for injury to a client.

Here, as soon as Lawyer learned of the compliance examination, he hired a CPA and a lawyer to help figure out if there was a problem. When Lawyer learned of the problems, a new system was put in place and the accounts were appropriately reconciled. This is the only disciplinary action that Lawyer has ever encountered. Lawyer was very cooperative. All of that worked in Lawyer’s favor. Lawyer had been in practice for over 20 years at that point, though, and the Board felt that worked against him—probably because he has a lot of experience and should have known to stay on top of the accounts better.

Factoring all this together, the Board determined that a private admonition was the right sanction. The Board looked back at some prior similar cases where admonition was the result; this helped them to determine that this was the right result here.

SCOV has the ability to review Professional Responsibility decisions. They selected this one, and adopted the Professional Responsibility Board’s opinion and admonished Lawyer.

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