Disbarment Factor

A single justice of the Massachusetts Supreme Judicial Court has affirmed the disbarment of an attorney with a foreclosure practice for his involvement in misappropriation. 

The problem began with an employee misappropriation

Although the respondent denied knowing that Moss misappropriated funds, the hearing committee did not credit this testimony and cited to several sources, including testimony from Scofield, Donovan, and Feige. Specifically, testimony at the hearing established that the respondent discussed the IOLTA deficit with Feige and Scofield. Starting on February 28, 2011 Feige provided the respondent and Scofield with a weekly summary of the firm’s finances which showed that the firm’s accounts payable significantly exceeded the accounts receivable, sometimes by as much as three-fold. Testimony at the hearing, corroborated by email correspondence, demonstrates that the respondent was actively involved in the firm’s financial decisions.  The respondent was involved in deciding which vendors to pay, the amount to be paid, and the timing of the payments, including payments made to ancillary businesses in which the respondent had an ownership interest.

After the new CFO was in place

As the firm’s new chief financial officer, Feige continued and expanded the firm’s misuse of 101 TA funds. In 2011, the financial pressures on the firm grew after this court issued its decision in U.S. Nat’! Bank v. Ibanez, 458 Mass. 637 (2011), requiring that a lender have possession of the promissory note prior to commencing a foreclosure action. As a result of the Ibanez decision, pending foreclosure cases were unable to move forward, but the firm continued to incur expenses. For several months after the decision, the firm did not receive any new foreclosure work and began to operate at a loss.

The bar came calling

In August 2011, as a result of five bounced checks drawn on the firm’s IOLTA accounts, bar counsel opened an investigation. Bar counsel requested an explanation and supporting financial documents. Earlier in the summer of 2011, the respondent, Scofield, Feige, and Donovan met to review Donovan’s preliminary findings on the extent of the misuse of client funds under Moss. Nevertheless, by the time bar counsel opened the investigation, this analysis remained ongoing and the firm’s financial records were still not in compliance. Knowing the poor state of the firm’s financial records, Feige and Donovan both expressed concerns over bar counsel’s requests. The respondent hired a legal ethics attorney, who taught Donovan how to perform three-way reconciliations, as required by Mass. R. Prof. C. 1.15. However, Donovan was unable to reconcile the accounts and bring the accounts current due to a lack of funds. To comply with the request from bar counsel, Donovan created a second set of Quick Books which were submitted to bar counsel. On the basis of the false records, bar counsel closed the investigation on May I, 2012.

But continuing problems brought the bar back

The firm was again investigated by bar counsel. On August 2012, after a check for $370,000 drawn on an IOLTA account was returned for insufficient funds, bar counsel opened a second investigation of the respondent and Scofield. This investigation was also closed on the basis of false statements made by Feige to bar counsel. The hearing committee subsequently found that these statements were not truthful during the current investigation. Although Feige reported to bar counsel that the check was an accounting error, a review of financial records showed otherwise.

Two other firms were brought into the practice

On August 28, 2013, after learning that the firm would not be able to issue an IOLTA check, [new partner] Geaney also learned that more than $3 million was missing from the IOLTA accounts. Geaney called a meeting with the respondent, Scofield, and Connolly. At the meeting, Donovan and another member of the accounting department informed the partners that they had used IOL TA funds to cover firm expenses per instructions from Feige.

The partners discussed options on how to proceed, including firing Feige. The respondent testified that he wanted to fire Feige but did not have the authority. The hearing committee did not credit this testimony, as all the other partners testified that the respondent had the authority to fire Feige. Nor did the hearing committee credit respondent’s argument that the firm’s restructuring, including the respondent’s purported resignation on May 16, 2013, left the respondent without the authority to fire Feige.

Respondent later declared bankruptcy.

A second count involved the ethics of a “factoring” agreement

On November 8, 2012, the firm entered into a factoring agreement with Durham Commercial Capital Corp. (Durham) under which the firm agreed to sell its accounts receivable to Durham. The respondent signed the agreement, which included a statement confirming that the firm was solvent. The agreement granted Durham a security interest in the firm’s accounts receivable; however, the firm previously had granted the same assets to a creditor as collateral.  Although the respondent testified that he believed the firm was solvent at the time that he entered into the agreement with Durham, the hearing committee did not credit his testimony as the respondent knew that on multiple occasions the firm was unable to cover payroll and outstanding debts including as of October 2012.

The respondent further violated the rules of professional conduct as, pursuant to the factoring agreement, the firm granted Durham access to confidential client information prior to seeking and securing permission from those clients to disclose the information.  Further, the firm failed to inform clients that it granted Durham sole possession of all records and computer servers containing confidential client information as collateral.

The justice rejected Respondent’s claim that his due process rights were violated by denying his request to depose three witnesses. He was given full ability to cross-examine these witnesses at the hearing.

Sanction

regardless of the respondent’s motive, whether he was operating the firm for his personal gain or attempting to keep the firm afloat for the benefit of its employees and clients, it does not change the fact that IOLTA funds were misappropriated and the respondent did not, as a supervising attorney, take the necessary steps to ensure that the firm properly managed the IOLTA accounts. The respondent’s failure to establish effective measures to ensure that the IOLTA accounts were managed properly is especially egregious given that the office of bar counsel investigated his firm for the same offense on two prior occasions.

Associate Justice Budd authored the decision. (Mike Frisch)