Utah Supreme Court Clarifies Law Of Entrusted Funds
The Utah Supreme Court has issued its second significant decision on the law of entrusted funds in the past few days.
We hold that, for a presumption of disbarment, the [Office of Professional Conduct] must prove knowledge at the time of the transfer or withdrawal in cases where an attorney’s bank account dips below the amount that is supposed to be held for the attorney’s clients. Accordingly, we hold that the OPC failed to meet its burden of proof regarding the operating and trust account shortfalls. We also hold, however, that Mr. Bates knowingly failed to safeguard client funds. Suspension is the presumptive sanction, and we affirm the district court’s order for a five-month suspension in light of the mitigating factors.
The attorney had opened his own practice within six months of his admission.
The firm flourished and expanded for a few years but hit a bump
Just six months after beginning to practice law, Abraham Bates started his own law firm, Wasatch Advocates. Mr. Bates solely owned and operated Wasatch Advocates. Although the firm started with only six employees, its clientele rapidly expanded, and, within a single year, it employed thirty-seven people to meet the growing workload. In order to deal with the increasing expenses, Mr. Bates established lines of credit to maintain enough money in the firm’s operating account. He regularly made draws against these lines of credit.
Although he managed the operating and trust accounts on his own with the assistance of his receptionist in the beginning, the accounting became more complicated as the firm’s income and expenses quickly grew. Mr. Bates retained a certified public accountant to perform monthly reconciliations, auditing, and tax work. Later, as the practice expanded, Mr. Bates hired an accounting firm to do more frequent reconciliations and to train Mr. Bates and his staff in accounting procedures. Despite this, he noticed that there were still accounting issues, such as his receptionist mistakenly depositing client money into the operating account and earned fees into the trust account. At the accounting firm’s suggestion, a chief operating officer was also hired to help with the firm’s accounting practices. However, even after taking these corrective measures, the operation of the firm’s accounts remained chaotic.
In January 2012, Wasatch Advocates imploded due to changing economic circumstances and the abrupt departure of a significant proportion of Mr. Bates’ staff. Around the time of the firm’s dissolution, John Liti, a former client, filed a bar complaint against Wasatch Advocates resulting in an OPC investigation. During the investigation, the OPC focused heavily on Mr. Bates’ accounting practices and identified possible violations in other client matters. The only matter at issue on this appeal is the F.A. Apartments matter. The OPC alleges that Mr. Bates’ actions amount to intentional misappropriation of F.A. Apartments’ funds and merit disbarment in two different instances: his management of F.A. Apartments’ funds held in the trust account and his management of a retainer paid by F.A. Apartments that was held in the operating account.
The duty
Attorneys occupy a position of trust because their clients rely on their honesty, skill, and good judgment. When an attorney intentionally misappropriates a client’s funds, it undermines the public’s trust in the entire legal profession and discredits the legal system in general…
In order to protect the “foundation[s] of . . . trust and honesty that are indispensable to the functioning of the attorney client relationship,” disbarment is usually appropriate in cases of intentional misappropriation of client funds…
However, not all misappropriation cases are intentional. To receive a presumption of disbarment, an attorney must “knowingly” misappropriate a client’s funds “with the intent to benefit the lawyer or another or to deceive the court.” UTAH SUP. CT. R. PROF’L PRACTICE 14-605(a)(1). On the other hand, if an attorney negligently misappropriates a client’s funds, the presumptive sanction is a public reprimand. Id. 14-605(c)…
For a presumption of disbarment, the OPC must establish that the attorney knowingly engaged in misconduct at the time the misconduct occurred.
Here, the evidence established knowing commingling but not intentional misappropriation
The evidence at trial demonstrated that, despite hiring qualified accountants and a chief operating officer to help him, Mr. Bates was grappling with significant organizational difficulties associated with a quickly growing business and his own lack of experience. In short, as the district court stated, “Bates was in way over his head . . . on a scale which a more experienced lawyer would have avoided.”
The evidence in this case corroborates Mr. Bates’ testimony at trial, supporting the inference that he unwittingly used his client’s funds for the firm’s payroll. Because he was not aware he was using client funds when the transfer was made, his actions were not knowing. Rather, they were negligent, with a presumptive sanction of a public reprimand…
We hold that the OPC failed to meet its burden of proof that Mr. Bates knowingly misappropriated his client’s funds. We do, however, hold that he knowingly commingled client funds and that he created the risk of injury to his client by later using F.A. Apartments’ money. Suspension is the presumptive sanction for Mr. Bates’ actions in commingling client funds without the intent to benefit himself or another.
Our post on the earlier decision is linked here. (Mike Frisch)