The Peter-Paul Principle: Random Audit Leads To Disbarment
A matter that began with a 2012 random audit has led to a disbarment by the New Jersey Supreme Court.
The Disciplinary Review Board report
The random audit revealed respondent’s knowing misappropriation of both client and escrow funds between June 2012 and August 2013. Respondent routinely withdrew funds from his attorney trust account for personal or business use, invading client and escrow funds and creating shortages in the trust account. Moreover, the audit revealed that respondent had engaged in “lapping,” that is, taking one client’s funds to pay trust obligations owed to another client -in a nutshell, “robbing Peter to pay Paul,” but always making certain that “Peter’s funds” were replenished when it was time to repay “Peter.” See In re Brown, 102 N.J. 512, 515 (1986). Respondent admittedly made multiple deposits of cash and of fee checks into his attorney trust account to cover trust shortages, negative client balances and obligations as they became due.
During the ethics hearing and before us, respondent admitted that he had “lapped” clients’ and third parties’ funds. He claimed, however, that, despite his status as a CPA, he “wasn’t aware it was happening” because he was not diligent in his recordkeeping and had problems with his QuickBooks program. Moreover, during the ethics hearing, respondent repeatedly admitted that he did not have the prior authorization of both parties, in respect of escrow funds, to use those funds to pay the obligations of other clients or third parties, but asserted that he always sought verbal authorization from his client to do so.
He nonetheless denied knowing misappropriation but
Following a de novo review, we are satisfied that the record clearly and convincingly establishes that respondent was guilty of unethical conduct. Specifically, we determine that respondent knowingly misappropriated client and escrow funds, representing deposits in real estate and business transactions, through repeated “lapping” of his attorney trust account funds. Indeed, respondent admitted doing so, claiming only that his conduct was “inadvertent,” versus knowing. His affirmative defenses to the allegations of knowing misappropriation are of no moment, and constitute nothing more than obfuscation of the truth – that he had blatantly used his attorney trust account as he saw fit, with no regard to the interests of his client, third parties, fellow attorneys, or the bright-line ethics rules governing attorney trust accounts.
The DRB quoted the seminal Wilson and Hollendonner precedents
Accordingly, because respondent knowingly misappropriated client trust funds and third-party escrow funds, disbarment is the only appropriate sanction, pursuant to the principles of Wilson and Hollendonner. We so recommend. Therefore, we need not address discipline for his additional ethics violation of practicing law while ineligible.
(Mike Frisch)