Tag: Conversion

A Cautionary Tale – Lawyer Reprimanded Where His Partner Converted Client Funds

BEFORE THE HEARING BOARD:

The attorney in this matter did not convert any client funds. He was essentially accused by the ARDC of failing to safeguard client funds because he was a signatory on the trust account and did not prevent his law partner from converting funds.

The Joint Stipulation describes the violation and the mitigation in this way:

“30.  By reason of the conduct described above, Respondent has engaged in the following misconduct:

  1. failure to hold property of clients or third persons that is in the lawyer’s possession in connection with a representation separate from the lawyer’s own property, by conduct including transferring settlement proceeds belonging to Flores, Benefits Administration, and Smith-Jenkins from the firm’s client trust account into the firm’s operating account, in violation of Rule 1.15(a) of the Illinois Rules of Professional Conduct (2010); and,
  2. failure to make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct, by conduct including failing to ensure that the firm instituted appropriate safekeeping measures for the firm’s clients’ funds, in violation of Rule 5.1(a) of the Illinois Rules of Professional Conduct (2010).
  1. FACTORS IN MITIGATION

31. Respondent has not been previously disciplined, has acknowledged and expressed remorse for his conduct, has made restitution to Dziedziak’s clients, and has been cooperative throughout the disciplinary proceedings. Respondent was a Captain in the U.S. Army during the Vietnam War and continued his public service over the next 30 years as a U.S. Attorney, Administrative Law Judge, and as an attorney for the Illinois Department of Family Services.  Respondent also previously participated as a member of the Commission’s Hearing and Inquiry Boards and has provided pro bono legal services to indigent defendants in criminal matters.”



Comment: the issue here is that the lawyer failed to stop his partner from converting funds. It is an unusual disciplinary case but one that can happen to any lawyer who fails to stop a dishonest partner from converting funds. The respondent here appears to have used his own personal funds to reimburse all the clients who lost money.



Edward X. Clinton, Jr.



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ARDC Hearing Board Recommends 60-day suspension for conversion of client funds

Filed April 6:

A lawyer who handled real estate matters converted client funds. Because he apologized, cooperated with the ARDC and presented evidence of mitigation, he received a very short suspension for conversion.

The misconduct findings are explained here:

Respondent converted escrow funds when he transferred the majority of these funds from his client trust account to his operating account and then shortly thereafter used most of the funds for his own purposes and without authority. After considering his role in transferring and spending the funds, the timing of his conduct, and his short-term need for funds, the Hearing Panel concluded his conversion was knowing and dishonest.
B.    Respondent is charged with failing to hold property of a client or third person that is in the lawyer’s possession in connection with a representation separate from the lawyer’s own property in violation of Rule 1.15(a).
Rule 1.15(a) of the Rules of Professional Conduct requires an attorney who is entrusted with client and/or third person funds in connection with a representation to hold such funds separate from his or her own funds and in a client trust account. Ill. Rs. Prof’l Conduct R. 1.15(a) (2010). When an attorney has used client and/or third person funds for his own purposes without authority, his conduct has been found to constitute conversion in accordance with disciplinary precedent even if the rightful owner has not made a demand for the funds. In re Karavidas, 2013 IL 115767, par. 62. A finding of conversion, while alone insufficient to justify the imposition of professional discipline, can support a finding that the attorney violated Rule 1.15(a) by failing to appropriately safeguard client funds and therefore, discipline is warranted. Karavidas, 2013 IL 115767, pars. 78-79.
Here, it is undisputed that Respondent commingled escrow funds related to the Olthoff/Harvey matter with his funds. Specifically, the evidence shows that on June 6, 2014, Respondent deposited $7,000 in escrow funds related to the Olthoff/Harvey matter into his client trust account. As he acknowledges, he was then obligated to hold these funds in his trust account on behalf of the Olthoffs and Harveys and in accordance with the terms of the May 31, 2014 occupancy agreement. Instead, between June 11, 2012, and June 13, 2012, prior to disbursing any funds with respect to the Olthoff/Harvey matter, Respondent transferred $7,000 from his trust account into his operating account without authorization. This transfer left a balance of $233.52 in his client trust account, which was $6,766.48 less than the $7,000 he should have been holding in his trust account on behalf of the Olthoffs and Harveys.
Respondent also admits that shortly after the $7,000 was transferred into his operating account, he spent the majority of the funds for his own purposes. In fact on June 19, 2014, after both transfers were made into his operating account but before disbursement occurred to the Olthoffs and Harveys, the balance in Respondent’s operating account dropped to $64.59. Accordingly, based on the evidence presented and the admitted facts, we find Respondent’s conduct undoubtedly violated Rule 1.15(a) as he both commingled and converted client and third person funds.
C.    Respondent is charged with engaging in conduct involving dishonesty, fraud, deceit or misrepresentation in violation of Rule 8.4(c). 
The Administrator also alleges Respondent acted knowingly in converting the Olthoff/Harvey escrow funds and accordingly, violated Rule 8.4(c). Rule 8.4(c) prohibits an attorney from engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation. Ill. R. Prof’l Conduct R. 8.4(c). The Illinois Supreme Court has recognized that while the uniqueness of each case makes it impossible to define every act or form of conduct that constitutes a violation of Rule 8.4(c), this rule is “broadly construed to include anything calculated to deceive, including . . . the suggestion of falsity.” Edmonds, 2014 IL 117696, pars. 53, 62.The Court, in making dishonesty findings, has recognized that “motive and intent are rarely proved by direct evidence, but rather must be inferred from conduct and the surrounding circumstances.” Id. at par. 54. Therefore, the Court has widely accepted the reliance on circumstantial evidence, where appropriate, in finding a violation of this Rule. See Id. at par. 55; In re Discipio, 163 Ill. 2d 515, 523-24, 645 N.E.2d 906 (1994); In re Krasner, 32 Ill. 2d 121, 127, 204 N.E.2d 10 (1965).
Here, the circumstantial evidence supports the conclusion that Respondent acted knowingly when using the funds in question. It is undisputed that Respondent personally transferred the funds from his trust account into his operating account, and at the time he made these transfers, he had access to both his trust account and operating account information. Taking this into consideration, we find the timing of these transfers highly concerning.
Respondent transferred almost all of the Olthoff/Harvey escrow funds into his operating account within one week of depositing the funds into his client trust account. He then spent the majority of these funds for his own purposes within a week. Moreover, on the days surrounding the transfers, his operating account had negative daily ending balances and insufficient funds to cover the expenses drawn on the account, which included his family health insurance premium and checks made payable to himself. Respondent’s need for these funds, even if only for the short-term, demonstrates a clear motive for the transfers.
We find implausible Respondent’s claim that at the time he made the transfers he was both unaware of the negative balance in his operating account and of the impending insurance premium deduction in large part due to poor bookkeeping practices. A simple review of his operating account information, which he had access to when he made the electronic transfers, would have shown the account’s repeated negative balances. With respect to the insurance premium, that same amount was deducted monthly both before and after June 2014. And, while he asserts that he thought the insurance premium amount had changed in June 2014, he offered insufficient evidence to corroborate his claimed belief. Moreover, he admittedly knew the funds transferred into his operating account were escrow funds and also that he had an ethical obligation to segregate escrow funds from his own. We find it unlikely that an attorney with this understanding would act so carelessly when handling escrow funds. So although we recognize Respondent was overwhelmed with his law practice in 2014, and as a result, might have had some deficiencies in his bookkeeping practices that year, we are unconvinced that his use of escrow funds was the result of these deficiencies. The more probable explanation, which the evidence supports, is that in June 2014 Respondent had a short-term financial need and he knowingly satisfied that need by using the funds in question.
Moreover, we find incredible Respondent’s assertion that he transferred the escrow funds into his operating account in mid-June because he had believed, based on a conversation with his client, that the Olthoffs would be moving out of the property before June 30, 2014, and that disbursement in the amounts of $1,500 to the Harveys and $5,500 to the Olthoffs would be necessary around that time. First, Respondent failed to offer any evidence to corroborate this belief. If a conversation to this extent had taken place, testimony from Respondent’s client regarding the conversation would have been of benefit. Also, the occupancy agreement does not contemplate the distribution of less than $2,500 to the Harveys and $5,500 to the Olthoffs if the Olthoffs moved out earlier than June 30, 2014. In addition, Respondent’s claim belief that disbursement might have been necessary in mid-June, fails to explain why he transferred the funds into his operating account when he could have just disbursed the escrow funds directly from his trust account and why he made two separate transfers of funds, two days apart, rather than transferring the funds on the same day in a single transaction. Respondent admittedly has no explanation for this conduct.
Respondent’s generally positive financial situation in 2014 and his ability to access additional funds if a need arose do not convince us that his conduct in using the escrow funds was unintentional. As discussed above, Respondent’s short-term need for funds in June 2014 was undeniable. Although he might have been able to legitimately gain access to funds some other way, including possibly borrowing money from family, the process for doing so would have been likely more complicated than a quick transfer of funds between accounts.
Based on the foregoing, we find the Administrator proved by clear and convincing that Respondent acted knowingly when he used the Olthoff/Harvey escrow funds, and as a result, violated Rule 8.4(c).
Comment: this is a case where the respondent acted appropriately in the discipline process. He admitted he was wrong, cooperated with the ARDC and took corrective measures. 

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ARDC Review Board Recommends Five Month Suspension for Lawyer Whose Trust Account Fell Short

Filed March 17:

This is an opinion of the ARDC Review Board, in which it recommended a five-month suspension for an attorney whose trust account fell short of required balances on several occasions. Further, the lawyer was slow in distributing settlement checks to two clients.

The lawyer avoided more serious discipline by taking responsibility for his actions, putting in new procedures to make sure that his trust account was properly handled and cooperating with the ARDC investigation.

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Iowa reinstates attorney previously disbarred for converting client funds

IOWA SUPREME COURT ATTORNEY DISCIPLINARY BOARD v. Reilly, Iowa: Supreme Court 2016 – Google Scholar:

Iowa has decided to reinstate an attorney, Michael Reilly, who was previously disbarred for converting client funds from his trust account. Reilly proved to the satisfaction of the Iowa Supreme Court that he had complied with all the conditions in the disbarment order, maintained constant employment and had come to terms with his gambling addiction.

The Opinion discusses a recent change in the rules in Iowa allowing a disbarred attorney to apply for reinstatement. Some states do not allow reinstatement of attorneys who have been disbarred. The court was swayed by Reilly’s reputation as an excellent attorney before he ran into trouble with the gambling addiction and by the fact that he had not gambled for 14 years. Further, Reilly had worked in a managerial role with his employer (during the time he was disbarred) without incident.

I can only wish Michael Reilly all the best and hope for his sake and for others that he does not relapse or incur further problems.

Edward X. Clinton, Jr.

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South Carolina Reprimands Attorney Who Failed To Safeguard Trust Assets

IN THE MATTER OF COX, SC: Supreme Court 2016 – Google Scholar:

This is a discipline case involving a lawyer who was responsible for supervising a paralegal who handled disbursements from the firm’s trust account. Unfortunately the employee converted in excess of $200,000. The lawyer who was her supervisor was the subject of this proceeding. The court explained its ruling as follows:

In total, Shaw misappropriated $349,227.34 through the issuance and negotiation of 201 checks. Seventeen of those checks totaling $75,766.95 were issued in connection with an underage client whose medical bills exceeded the total insurance available in the case. The child’s mother filed a complaint. The majority of the improperly issued and negotiated checks, including those issued in the child’s case, were issued on Mr. Saleeby’s files, however, some of the misappropriations occurred on respondent’s files and those of firm associates.
Respondent discovered Shaw’s misappropriation when the mother of one of his clients reported her son continued receiving medical bills after settling his case. Respondent learned a check had been issued in connection with the case to a person neither he nor his client’s mother recognized. Respondent attempted to reach Shaw as she had worked on the file, but she had since been terminated on other grounds. Shaw spoke with the office manager. Shaw admitted the payee was fictitious. Shaw failed to appear for a scheduled meeting with respondent, but provided the office manager with a cashier’s check for $17,288.61 and a list of files from which she had stolen money. The subsequent investigation revealed the theft was more widespread than Shaw acknowledged.
The firm reported Shaw to law enforcement. Shaw was charged with one count of breach of trust in excess of $10,000 and ten counts of forgery. She entered a guilty plea to breach of trust and fourcounts of forgery. Shaw was sentenced to a total of ten years imprisonment, suspended upon service of nine months and five years of probation. Shaw was ordered to pay $155,000 in restitution. The firm also filed a lawsuit against Shaw which it later voluntarily dismissed.
The firm incurred great expense to determine the total amount Shaw misappropriated and to repay the proper parties.
Respondent acknowledges Shaw’s theft could have been prevented if checks were only issued based on the disbursement sheet signed by the client and reviewed by the assigned attorney or if the assigned attorney reviewed the checks issued against the signed disbursement sheet. Respondent further admits Shaw’s theft could have been discovered and stopped had the backs of the cleared checks been reviewed during the monthly reconciliation process. In addition, respondent admits the firm was only reconciling the receipt and disbursement journal to the bank statement. Neither the disbursement sheets nor the client ledgers were used in the reconciliation process.
During some of Shaw’s employment, respondent was her direct supervisor and, at other times, Mr. Saleeby was her direct supervisor. Respondent acknowledges that, as a partner in the firm, he was required to make reasonable efforts to ensure the firm had measures in place giving reasonable assurance that the firm’s non-lawyer staff conducted themselves in a manner that was compatible with his professional obligations. Respondent further acknowledges that, as her direct supervisor during part of her employment, he was obliged to make reasonable efforts to ensure that Shaw conducted herself in a manner compatible with his professional obligations. Respondent admits the firm’s trust account practices were inadequate.
Respondent admits that his conduct violated the following provisions of the Rules of Professional Conduct, Rule 407, SCACR: Rule 1.15 (lawyer shall safekeep client property); Rule 5.3(a) (partner shall make reasonable efforts to ensure that firm has in effect measures giving reasonable assurance that non-lawyer employee’s conduct is compatible with professional obligations of lawyer); and Rule 5.3(b) (lawyer having direct supervisory authority over non-lawyer employee shall make reasonable efforts to ensure that employee’s conduct is compatible with professional obligations of lawyer). In addition, respondent admits his conduct violated the financial obligations of Rule 417, SCACR.

The lawyer was reprimanded but not suspended because he did not personally convert any funds.

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ARDC Hearing Board Recommends Two-Year Suspension for Theft

Filed September 18:

A lawyer acted as the trustee of a family trust and converted $360,000 of trust funds for his own use.

The Hearing Board recommended a two-year suspension. Additionally, the respondent cannot practice law until he reimburses the trust.

The summary of the opinion states:

“Respondent was charged with misconduct related to two matters. One matter involved a family trust, of which Respondent was trustee. Respondent intentionally and dishonestly took funds totaling more than $360,000 from the trust, conduct which warranted professional discipline. Respondent’s conduct in a civil lawsuit against him, based on his handling of that trust, did not warrant professional discipline and was not proven to prejudice the administration of justice. The other matter arose out of Respondent’s representation of a client in a civil lawsuit and involved allegations that Respondent failed to handle the matter diligently and properly communicate with the client, after the case was tried. The client did not testify, and the Hearing Board did not find the evidence sufficient to prove Respondent engaged in misconduct in handling her case. However, Respondent knowingly made false statements to the ARDC in its investigation of that case. We recommend a suspension for two years and until Respondent has satisfied the judgment against him in the civil case brought by his siblings.”

It is difficult for me to understand why the panel did not recommend disbarment.

Edward X. Clinton, Jr.

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