A Common Problem Draws An Admonition

The Vermont Supreme Court recently admonished an attorney

Upon review of the hearing panel decision in this matter, the Court concludes as follows: The decision presents a well-reasoned discussion and resolution of a problem common in legal practice, particularly for small firms and solo practitioners. Accordingly, the Court orders review of the decision on its own motion, adopts the hearing panel decision in its entirety as a final order of this Court, waives briefing and oral argument, and orders that the decision be published in the Vermont Reports.

The situation

The parties stipulated that Respondent violated Rules 1.15A, 1.15A(a) and 1.15A(a)(2) of the Vermont Rules of Professional Conduct by failing to safeguard client funds. Respondent admits that he did not timely reconcile his IOLTA account and did not keep accurate records of the client funds he held in trust. Disciplinary Counsel also charged Respondent with violating Rules 1.15(a)(1) and 1.15(d) of the Rules of Professional Conduct, alleging Respondent commingled Respondent’s funds with client funds in his client IOLTA account. Respondent denied the charge that he violated Rules 1.15(a)(1) and 1.15(d). The parties did not stipulate to the sanction to be imposed. Disciplinary Counsel asked the Hearing Panel to issue a public reprimand for all violations. Respondent argued that private admonition was the appropriate sanction in this case. The parties jointly requested a hearing on the merits of the contested charges and on the issue of sanctions.

The attorney was admitted in 1992 and has a two-person practice

In June 2012, Disciplinary Counsel selected Respondent’s IOLTA account for a compliance examination by the Professional Responsibility’s Program. Compliance examinations are part of the Program’s trust account oversight program.

Between 2003 and 2007, Respondent’s Firm retained an independent contractor to serve as the Firm’s bookkeeper. The bookkeeper was responsible for maintaining the Firm’s IOLTA account as part of the bookkeeper’s responsibilities. In 2007, Respondent’s Firm assigned the bookkeeping duties to one of its employees, paying the employee a monthly stipend for the work. The employee was responsible for maintaining the Firm’s IOLTA account, among other tasks.

At all times relevant to this disciplinary matter, Respondent’s Firm has used Quicken commercial bookkeeping software for financial record keeping. Respondent’s Firm used Quicken to record its deposits into, and withdrawals from, the Firm’s IOLTA account.

Shortly after the Firm was notified that Disciplinary Counsel would be conducting a compliance examination of the Firm’s trust accounts, the Firm’s bookkeeper suddenly quit the Firm. Respondent reviewed the Firm’s IOLTA account records and discovered the IOLTA account had not been reconciled for six months. The employee’s sudden departure caused Respondent significant concern, so Respondent hired an accountant to audit the Firm’s IOLTA account from 2007 to the present to determine if there were any improper transactions. Respondent’s independent audit commenced approximately three months before Disciplinary Counsel performed her compliance exam on September 19, 2012. Respondent also retained legal counsel to assist Respondent with his investigation. Part of counsel’s responsibilities included assisting Respondent with implementing accounting procedures that would bring, and keep, the Firm’s accounting practices in compliance with the Rules of Professional Conduct.

Disciplinary Counsel retained a CPA to conduct the audit, which led to a bar investigation.

Once the CPA examination was complete, Respondent took the initiative to retain a CPA, at Respondent’s sole expense, to assist Respondent in transforming his trust accounting practices so that Respondent was in compliance with the Rules of Professional Conduct. Respondent implemented his CPA’s recommendations.

Respondent acknowledged that his Firm did not reconcile its IOLTA account for approximately 9 months. Respondent admitted that, prior to the compliance examination, Respondent was not aware that the Rules of Professional Conduct required Respondent to maintain a record of each client’s IOLTA funds, including all deposits, disbursements, and running balances. Respondent rectified the error, taking advantage of all of the functions his Quicken software provides. Respondent is now able to identify the source of all receipts and disbursements recorded in the Firm’s IOLTA account, and has categorized all transactions by client.

As to the approximately $75,000 in stale outstanding checks, Respondent determined that these checks were related to real estate transactions Respondent handled. (During a real estate purchase, the buyer’s lawyer issues IOLTA checks to pay closing costs, including an IOLTA check to a title insurance company to pay the title insurance premium and another IOLTA check payable to the lawyer for the lawyer’s title insurance commission.) Respondent investigated these uncashed checks and determined that $74,714.00 was payable to the Firm for title insurance commissions. These checks were deposited or cashed by Respondent’s Firm between February 1, 2012 and September 19, 2012, the latter being the date of the compliance examination.

With respect to running balance of approximately $32,000.00, Respondent’s was able to resolve the issue. Respondent’s accountant found a few instances of transposed numbers and a double deposit entry that erroneously inflated the balance of Respondent’s IOLTA account. After correcting the IOLTA account entries, the balance accurately represented client retainers held for the payment of attorney fees once those fees are earned.

The parties disputed whether the attorney engaged in commingling and Disciplinary Counsel sought to amend the allegations

Not having the evidence necessary to prove commingling, Disciplinary Counsel asked to amend the charge to include violation of Rule 1.3, failure to exercise due diligence. Disciplinary Counsel argued that, taking Respondent at his word, Respondent took years, sometimes as many as 5 and 9 years, for Respondent to complete his post-closing duties. Disciplinary Counsel argued that Respondent was not diligent in completing his real estate duties.

Respondent argued that Respondent was completely unprepared to meet the new charge. As of the date of hearing, Respondent had not reviewed his real estate files and was unprepared to explain why, in any particular case, it took Respondent so long to complete his post-closing tasks so he could collect his fee and/or title insurance commission from the IOLTA account. Respondent argued that amending the charge without granting Respondent an opportunity to prepare and meet the charge was prejudicial.

The motion to add the diligence charge was properly denied.

Sanction for the violations

Respondent’s mental state was one of negligence. Respondent acted negligently when he failed to set up his Quicken accounting system in accordance with the Rules of Professional Conduct. For example, Respondent did not use Quicken to track IOLTA transactions by client or matter. Respondent was negligent when he failed to perform timely reconciliations of the IOLTA account. Respondent was also negligent when he failed to correct entry errors that led to an incorrect running balance of approximately $32,000. The Firm assigned the task of performing the bookkeeping tasks to an independent contractor, and then an employee. Respondent, however, was responsible for ensuring the trust account was administered according to the Rules of Professional Responsibility, and he failed to do so.

(Mike Frisch)