Tie Goes To The Lawyer

The New Jersey Supreme Court has imposed a three-year suspension in light of the findings of the Disciplinary Review Board on misappropriation

And the Court having determined on its own motion pursuant to Rule 1:20-16(b) to review the decision of the Disciplinary Review Board;

And respondent having been ordered to show cause why respondent should not be disbarred or otherwise disciplined;

And the Court having declined to find on this record knowing misappropriation;

And the Court having determined that a three-year suspension is the appropriate quantum of discipline…

From the DRB report

Although we unanimously determine that respondent violated the Rules of Professional Conduct, we are unable to reach a consensus among the six participating Members regarding whether respondent knowingly misappropriated client funds and, thus, could not agree on the appropriate quantum of discipline.

As set forth below, three Members found that respondent knowingly misappropriated client funds and, therefore, voted to recommend to the Court that he be disbarred. The remaining three Members concluded, given the unique facts of the case, that the OAE had not established, by clear and convincing evidence, respondent’s knowing misappropriation of client funds. For the totality of his misconduct, these Members voted to impose a three-year suspension.

The DRB report (185 pages!) shows unanimity on finding multiple disciplinary rule violations but three members found that intentional misappropriation was not proven.

Clients

The OAE’s seven-count complaint, charging more than forty violations of the Rules of Professional Conduct, alleged that respondent engaged in myriad misconduct stemming from his representation of a group of ninety-nine plaintiffs across two federal lawsuits asserting theories of civil liability pursuant to the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962, in connection with purported unlawful foreclosure actions.

Three disagreed on that key issue

 to establish a knowing misappropriation of client funds, the evidence must clearly and convincingly demonstrate that the attorney used entrusted funds, knowing they belonged to a client and knowing that the client had not authorized him or her to do so. Intent to steal or defraud and dishonesty are irrelevant. So long as the attorney knows the funds are not the lawyer’s and knows that the client has not consented to the taking, the absence of evil motives, the good use to which the funds are put, the attorney’s good character, and the lack of prior discipline, are all irrelevant.

In this matter, there is no dispute that, on April 11, 2013, respondent issued a $14,118.45 RICO ATA check, made payable to Metis, for the new computer system he had purchased for his law office. At the time of his disbursement, respondent held in his RICO ATA – a dedicated trust account that he opened for the sole purpose of holding the RICO clients’ funds –approximately $23,000, comprised of the monthly payments each client had paid toward litigation expenses, in accordance with the terms of the Retainer Agreements (again, the Litigation Funds). Respondent admitted that, on that date, only $4,520 of those funds constituted “administrative fees” to which he was entitled. Thus, the remainder constituted Litigation Funds. On April 15, 2013, just four days after he disbursed the funds, respondent’s bookkeeper and paralegal, Veronica, expensed the purchase, pro rata, on the client ledgers for each of the thirty-three RICO I clients. Thus, at the time of the $14,118.45 disbursement, respondent indisputably used Litigation Funds belonging to thirty-three clients to pay for his newly purchased computer system.

The special master erroneously concluded, according to these three Members, that the Litigation Funds were akin to a “retainer on account of costs” and, unlike escrow or client funds, incapable of being misappropriated. However, as the OAE observed, a retainer is “compensation paid to an attorney to ensure that he or she will render legal services at some point in the future.” Michels, New Jersey Attorney Ethics, (GANN 2023), at § 34:1. Stated differently, a retainer is an advance payment for legal fees and, on occasion, expenses incidental to the representation. In fact, in New Jersey, unless a client instructs otherwise, an attorney is permitted to place a retainer for unearned legal fees in a business or operating account, rather than a trust account. See In re Friedrich, 250 N.J. 291 (2022) (citing In re Stern, 92 N.J. 611, 619 (1983).

Here, the clients’ monthly payments to respondent were not retainers intended to compensate him for legal fees. Indeed, respondent’s entitlement to legal fees was entirely contingent on a favorable judgment or settlement. Rather, the client’s monthly payments were intended, by virtue of the express terms of the Retainer Agreements, to be held in a “special trust account,” administered by respondent, “for the lawsuit proceeding purpose” which included, among other things, hiring and paying for experts and other lawyers. Further, it was undisputed that Veronica maintained client ledgers for each client, itemizing and documenting each expense, pro rata, among each of the RICO clients. Moreover, respondent’s duty to hold those client funds, inviolate, was cemented by the fact he held the clients’ funds in a separate ATA that he opened and dedicated solely to the RICO matters. Compare In re Stein, 97 N.J. 550, 564 (1984) (when legal fees are held in trust, the client must be given notice before a lawyer can take a legal fee from the account).

Consequently, the cases upon which the special master relied to support a sanction less than disbarment are not dispositive because, in each of those cases, the attorney used advance legal retainer fees for personal purposes; not client funds designated solely for future litigation expenses.

Conclusion

although intent to steal is irrelevant in determining whether an attorney commits knowing misappropriation, there must, nevertheless, be clear and convincing evidence that the attorney knew that the use of client funds was unauthorized. Here, the record established that respondent paid for his law firm’s upgraded computer system without the authorization of the thirty-three RICO I clients, whose money comprised the Litigation Fund at the time of the purchase. Nor did respondent hold a reasonable belief that the clients had authorized him, through Taylor, to use their funds for the computer purchase.

These three Members reject respondent’s ever evolving attempts to justify his unauthorized use of his client funds.

(Mike Frisch)