Case Title: Matter of Fleischer

Citation: 102 N.J. 440, 508 A.2d 1115

Docket Number: 

State: new-jersey

Court: New Jersey Supreme Court

Date: 1986-05-28T00:00:00Z

Document:
102 N.J. 440 (1986) 508 A.2d 1115 IN THE MATTER OF EDWARD L. FLEISCHER, AN ATTORNEY-AT-LAW. IN THE MATTER OF H. BARRY SHULTZ, AN ATTORNEY-AT-LAW. IN THE MATTER OF JAY L. SCHWIMER, AN ATTORNEY-AT-LAW. The Supreme Court of New Jersey. Argued September 24, 1984. Decided May 28, 1986. *441 David E. Johnson, Jr., Director, argued the cause for the Office of Attorney Ethics. Justin P. Walder argued the cause for respondents (Walder, Sondak, Berkeley & Brogan, attorneys; Justin P. Walder and Dominic J. Aprile on the brief). PER CURIAM. These disciplinary proceedings involve three respondents, who constitute all the members of their former law firm. They are charged with various ethical infractions, most notably the misappropriation of clients' funds. Although one member of the firm, respondent Fleischer, was primarily responsible for *442 the firm's disbursements, all three respondents knew of and participated in the misappropriation. After a hearing, the District IX Ethics Committee (Ethics Committee) returned a presentment, finding, among other things, that respondents had knowingly used clients' funds for their own benefit. Thereafter the Disciplinary Review Board (DRB) found overwhelming evidence that respondents had intentionally misappropriated clients' funds. Relying on In re Wilson, 81 N.J. 451 (1979), the DRB recommended disbarment of all three respondents. Our independent review of the record leads us to the same conclusion. As found by the DRB, the facts are: Based on these findings, the DRB concluded: Before us, respondents have pressed the argument that they did not intentionally misappropriate their clients' trust funds. Our examination of the record, however, leads to the inescapable conclusion that the argument must fail and that respondents' intentional misappropriation has been established by clear and convincing evidence. Respondents formed their law firm in 1979 and struggled with a marginal law practice into the summer of 1981, when they terminated the employment of their bookkeeper. Left to their own devices, they ceased using their operating account, which was subject to a levy by a judgment creditor, and began to use their trust account as the sole firm bank account. The testimony of respondent Fleischer makes painfully clear that respondents knowingly commingled the operating and trust accounts to meet firm expenses, and on several occasions they wrote checks that were returned for insufficient funds. The following exchange between Mr. Deakin of the Ethics Committee, respondent Fleischer, and Mr. Walder, counsel for respondents, is illuminating: Although respondents seek to justify their misappropriations on the grounds of naivete, respondent Fleischer's testimony in response to interrogation by Mr. Kenny of the Ethics Committee, as supplemented by testimony of respondent Shultz, shows unmistakable awareness that respondents knew they were doing something wrong. Further testimony by Fleischer, in response to questions by Ethics Committee member Venino, makes clear that respondents used their trust funds to survive. In light of that testimony, respondents' contention that they did not intentionally misappropriate clients' funds is unbelievable. Equally incredible is their assertion that their ignorance of proper accounting and banking practices was at the root of the *447 problem. In support of their contention, respondents point to their practice of calling their bank before making disbursements to ascertain if there were sufficient funds. Their argument is that because the bank balance did not reflect outstanding checks, their overdrafts resulted not from intentional misappropriations, but from inadvertence. As further proof of their alleged innocence, respondents point to instances when they declined to withdraw funds from the account because they did not want to invade clients' funds for their own benefit. The DRB rejected that argument, stating that poor accounting procedures are no excuse for using clients' funds. We agree. We are not confronted here with an isolated or even an occasional bookkeeping mistake. Respondents admitted to a conscious joint decision to stop using their operating account and start using their trust account to pay all disbursements, including operating expenses. It is no defense for lawyers to design an accounting system that prevents them from knowing whether they are using clients' trust funds. Lawyers have a duty to assure that their accounting practices are sufficient to prevent misappropriation of trust funds. Former Disciplinary Rule 9-102, which was in effect at the time of respondents' misappropriations, mandated the deposit of trust funds in a separate account, prohibited commingling of those funds with other funds, and required the maintenance of appropriate records. The same requirements have been carried forward into Rule of Professional Conduct 1.15. Our dissenting colleague states that the evidence does not sustain the finding that funds of any clients were ever knowingly invaded. The dissent continues by asserting that the proof of respondents' misappropriation would be less persuasive if respondents had not admitted their defalcation. It also questions the reasonableness of inferring misappropriation of client funds because the combined trust and operating account was overdrawn at various times when trust funds should have been on deposit in that account. Hypothesizing that the *448 overdrafts might have been attributable to bank error or an Internal Revenue Service lien, the dissent urges a remand for the development of a more complete record. We disagree. The proof of the use of clients' funds is inescapable. Perhaps the case against respondents would be weaker if they had not admitted their wrongdoing, but the fact is that the defendants made the admissions. When a respondent, such as Mr. Fleischer, admits that a bounced trust account check demonstrates his awareness that he "did not have sufficient firm funds in the trust account * * *," we cannot ignore that admission. No member of the public could possibly have confidence in a disciplinary system that was blind to admitted misappropriations. Apart from respondents' concessions, the record conclusively demonstrates their use of specific clients' trust funds. In three separate instances, respondents overdrew the account that contained the trust funds. On December 13, 1982, in the Samaro to Baldasare (Samaro) matter, the firm deposited $2,000 of trust funds into its combined account. During the remainder of that month and January 1983, the firm's account had an overdraft or a negative balance on 20 separate days. In the Ocana to Abbott Laboratory (Ocana) transaction, the firm deposited $23,300 of trust funds for this client to its checking account. Subsequently, the firm issued a check to Ocana for $22,795, but it was returned for insufficient funds because the firm's bank account had been overdrawn to the extent of $4,885.55. When this check was redeposited, it bounced for a second time because the trust account was overdrawn to the extent of $9,451.08. The check did not clear until $10,000 of trust funds relating to another of the firm's clients was deposited into the joint trust account. On a third occasion, involving the account of Mario Lima and Maria Aurelio Lima (Lima), another check failed to clear. Based on deposits and expenditures relating to the Limas' account, there should have been $6,956.38 in the account when *449 the respondents issued a check for $1,335 to the Limas. Once again, the check was returned unpaid because the account had an overdraft balance of $490.45. The accountant retained by the Office of Attorney Ethics explained the self-evident proposition that "[i]f trust funds are supposed to be on hand as represented by the firm * * * then the bank account should never be overdrawn as long as those funds are supposed to be in possession of the firm regardless of co-mingling of funds." As the accountant concluded, it was "reasonable to infer that the overdraft balances indicate that the non-trust disbursements violated trust funds at least to the extent of the represented balances such as in the matters of Samaro, Ocana, and Lima." In the absence of any explanation by respondents, the overdrafts of the trust account establish misappropriation of those clients' funds. Even respondents' own accountant, Mr. Ontell, acknowledged to the accountant retained by the OAE that "the facts of the Samaro and Ocana transactions indicated a violation of trust funds." Although Mr. Ontell later filed affidavits in support of a request for a remand, he never withdrew from his acknowledgement that the Samaro and Ocana transactions established that respondents misappropriated clients' funds. Although respondents' accountant suggested the need for further analysis, we believe such analysis is unnecessary. With full knowledge that they should have maintained a trust account, respondents fired their bookkeeper and combined their trust and operating accounts so that they could use the trust funds for personal use and operating expenses. As the disbursements for December 1982 demonstrate, defendants used the combined account to pay personal expenses for themselves and their spouses, to pay themselves a draw, and to pay office expenses. In sum, respondents deliberately designed a system that would permit them to use trust funds for personal and professional use. Their need to use the trust funds arose because the income from their practice was insufficient to pay *450 expenses and to support themselves. At a firm meeting, they acknowledged that they were paying personal expenses from the combined account, but continued the practice as a matter of self-preservation. As a result, the dissent's assertion that the respondents were unaware until the present that they were using trust funds simply cannot stand. If the Court were to adopt the view of the dissent, respondents' conduct would constitute a handbook for larceny by lawyers. The dissent also asserts that the respondents are entitled to differentiated treatment, presumably on the premise that one or more of the respondents was less culpable than the others. We agree with the principle that alleged violations of the Rules of Professional Conduct should be determined individually, not collectively. Here, the evidence clearly and convincingly establishes violations by each of the respondents. The initial decision to combine the accounts was a joint decision of respondents, who thereafter regularly discussed the status of the account. Each of the respondents decided that the combined accounts should be used to pay for their firm and personal expenses. Although they knew that the practice was improper, each defendant individually decided to continue it because the firm had insufficient funds to stay afloat. Throughout the entire proceedings, respondents have been represented by the same counsel, and they have not sought to distinguish among themselves in terms of responsibility for their defalcation. In this context, we are unable to find that any of the defendants should be excused. All are culpable. Finally, respondents point to In re Fucetola, 101 N.J. 5 (1985), and In re Hennessy, 93 N.J. 358 (1983), to support their argument that disbarment is excessive. Unlike the present case, those matters involved charges only of improper record keeping, not of misappropriation. The evidence in Fucetola established that respondent failed to maintain proper trust records; it did not demonstrate that defendant misappropriated funds. 101 N.J. at 8-9. Consequently, we adopted the recommendation *451 of the DRB for a public reprimand. In Hennessy, the respondent did not maintain a ledger book and his use of trust funds to pay personal expenses resulted in "relatively minor shortages" that were not attributable to any particular client. 93 N.J. at 360. Consistent with the absence of any charge of misappropriation against the respondent, we decided that it was "unquestionably clear that he never intended to misappropriate funds." Id. Consequently, we held that a public reprimand was sufficient. Unlike the Hennessy and Fucetola cases, the matter before us involves more than just record keeping violations. Here, the three respondents combined their operating and trust funds for the express purpose of paying personal and office expenses. Furthermore, the overdraft balances in their trust account are attributable to an invasion of specific clients' funds. In short, this is a case of intentional misappropriation. Under Wilson, such a misuse of trust funds is not defensible on the ground that no client suffered a loss. 81 N.J. at 457-59. Also irrelevant is the fact that respondents' prior records are unblemished, Id. at 459-60; that subsequent misappropriations are unlikely, Id. at 460 n. 4; and that respondents are currently complying with the requirements for the maintenance of proper records, Id. at 459. The only appropriate sanction is disbarment. Respondents are ordered to reimburse the Ethics Financial Committee for appropriate administrative costs. Chief Justice WILENTZ and Justices CLIFFORD, HANDLER, POLLOCK, GARIBALDI and STEIN join in this opinion. Justice O'HERN has filed separate dissenting opinion. O'HERN, Justice, dissenting. I cannot concur in disbarment on the record before us. One or more members of the firm may eventually be found guilty of *452 a Wilson violation but the unique procedural posture of this case calls for further factual findings before I would vote to disbar. Under In re Wilson, 81 N.J. 451 (1979), a knowing misappropriation ordinarily will warrant disbarment. "[M]aintenance of public confidence in this Court and in the bar as a whole requires the strictest discipline in misappropriation cases. That confidence is so important that mitigating factors will rarely override the requirement of disbarment." Id. at 461. A Wilson violation almost invariably results in disbarment; thus, such a case will ordinarily engage our closest attention because the consequences for a lawyer are so final. Lawyers are entitled to no less fundamental procedural fairness than others facing disciplinary sanction. In re Ruffalo, 390 U.S. 544, 550, 88 S. Ct. 1222, 1225, 20 L. Ed. 2d 117, 122 (1968). I find the procedures in this case lacking and would therefore not vote to disbar. First, in the interests of cooperation, the respondents entered into a stipulation with the presenter at the District Ethics Committee level. No evidence was presented that funds of any client were ever knowingly invaded. The case against respondents consists of inferences drawn from their perhaps too contrite and perhaps too belated recognition that the intermingling of clients' funds with their own would almost inevitably result in some clients' funds being used for the firm's business purposes. Nonetheless, the respondents seemingly prepared for this case as if it were not a misappropriation case but rather a record-keeping case. At the opening of the hearing before the District Ethics Committee, a discussion took place concerning one phrase in Count Five of the Stipulation of Facts that stated that "[a]ny record keeping or bookkeeping discrepancies which may have existed were due to inadvertence and lack of bookkeeping skill. All records were maintained and accounted for." It has been suggested that deletion of this phrase from the stipulation should have alerted respondents to the fact that at the hearing they would be charged with knowing misappropriation. *453 The discussion of the deletion, however, concerned the fact that respondents recognized that during this period of time, their trust account, as well as their business and operating accounts, were handled under one account. Respondents were well aware of this fact. Conversely, it is not clear that they were aware of any knowing misappropriation. The case proceeded then solely on the basis of the complaint and the revised stipulation. Had the respondents chosen not to present any evidence to the Committee, it is quite inconceivable that one could have found them guilty of any knowing misappropriation. Nicholas D'Apolito, an accountant retained by the Office of Attorney Ethics, analyzed the reconciliation of the respondents' books by David T. Ontell, a Certified Public Accountant. In his affidavit, D'Apolito concluded that "based upon the follow-up work I have performed, I have not received from either Mr. Ontell or the firm any evidence to the contrary in dispute of the facts as stated in my affidavit of March 21, 1983 or this affidavit which would alter my conclusion that H. Barry Shultz, Esq., Edward L. Fleischer, Esq., and Jay Lawrence Schwimer, Esq. of the firm Shultz, Fleischer, & Schwimer have not maintained appropriate books and records to account for clients' funds as required by R. 1:21-6(b)(2) and this constitutes a violation of DR 9-102(A)(1) and (2), DR 9-102(B)(4) and DR 9-102(C)." Notably missing from the affidavit is any statement that definitely concludes that the individuals knowingly misappropriated any clients' funds at a particular time. D'Apolito had concluded in his previous affidavit that "[i]n absence of evidence to the contrary, it is reasonable to infer from the transactions noted above that the checks drawn * * * against the trust account * * * represent an invasion of * * * [some] * * * client's or [other] clients' trust funds." Secondly, apparently believing themselves not in mortal danger, respondents did not undertake to weigh their individual responsibility. They gave informed consent to a common defense to these charges. Nonetheless, it is clear from our cases that we evaluate professional responsibility not on a collective *454 basis but on an individual basis grading the responsibility of each of the individuals. See, e.g., In re Shamy, 59 N.J. 321, 326 (1971). There are sharp differences in responsibility among the individuals involved here and I simply find it unfair now, after stipulations have been entered, to join them all together. Finally, we must ourselves be clearly convinced that there was, in fact, an intentional invasion or knowing misappropriation of clients' funds. In re Sears, 71 N.J. 175, 197 (1976). We must look carefully, then, at the complaint of professional misconduct that was filed against these individuals. The first count of the complaint charged that the respondents commingled funds for approximately two years, in violation of Rule 1:21-6(a) and Disciplinary Rule 9-102(A). This continuation of unethical conduct was alleged to constitute gross negligence in the handling of clients' funds and to reflect adversely on the respondents' fitness to practice law. So much they have admitted. The second count charged them with failing to balance or close out many client trust accounts. Client ledger sheets were set out reflecting six undisbursed credit balances. The absence of ledger sheets, required by the Rule, was specified in twelve instances. Allegedly, eleven checks were shown in the account where a client ledger sheet existed but did not reflect the transaction. Respondents were charged with failure to maintain journals of receipts and disbursements and to reconcile their accounts. Each and every one of these matters was specifically addressed and the accounts were reconciled in the stipulation. The parties concede that the records were inadequate. The third count concerned seven specific instances of overdrafts made on the trust account. Each instance was dealt *455 with in the stipulation and all of the clients' funds were accounted for. The complaint stated that the trust account items that were returned represented "conclusive evidence of a prior invasion of a client's funds constituting misappropriation" and otherwise reflected adversely upon respondent's fitness to practice law. This evidence was concededly relevant to fitness to practice law, but I cannot conclude that a bounced check represents conclusive evidence of a prior invasion of a client's funds constituting misappropriation. We know that on many occasions, even through error, the Internal Revenue Service or others will seize an attorney's trust account funds, causing an unintentional return of a check. Banks frequently do not credit accounts with deposited funds for extended periods of time even though the funds are on hand. We could never conclude that, standing alone, a bounced check would constitute misappropriation. The fourth count alleges a series of account transactions, commencing in December 1981, that disclosed negative trust account balances. The count concluded that these "extensive and prolonged trust account shortages * * * reflect a dereliction of the fiduciary requirements of R. 1:21-6 and DR 9-102, and are evidence of misappropriation and misapplication of client funds in violation of DR 1-102(A)(4) and (6)." Respondents' accountant found certain instances of negative balances but concluded that it did not demonstrate misappropriation: The fifth count incorporates the allegations of the first four counts and concludes that "[t]hese failures of accountability led to their natural result in Respondents' operation of a `revolving' trust account wherein each new trust deposit was invaded as necessary to accommodate both office and personal expenditures *456 and disbursements on behalf of previously invaded trust deposits." The respondents conceded that they had an account in which trust and business funds were commingled, but they did not admit that they knowingly invaded clients' funds. Notwithstanding the fact that more than 22 specific items are mentioned in the several counts of the complaint, this Court makes no finding that the funds of any particular client were ever knowingly invaded on any specific occasion. The Court points to three specific matters (Samaro, Ocana and Lima) that are said to demonstrate an intent to invade clients' funds. But the majority's disposition does not turn upon an analysis of which partner drew on the funds or what that partner knew. Thus, I must examine the record for evidence of a knowing misappropriation of clients' funds. The detailed analysis submitted on behalf of the respondents explains that conclusions with respect to the invasion of trust funds based upon either bank statements or returned items are simply improper from an accounting viewpoint. Even as to the critical month of December 1982, when the Samaro incident occurred, respondents' accountant states that the "firm deposits in the trust account were $6,379.47 in excess of the $17,716.68 referred to * * * as non-trust disbursements [in the OAE's account]."[1] Respondents have never conceded that they misappropriated these funds. The affidavit that Mr. Fleischer filed with the District Ethics Committee stated: In addition, the record disclosed that respondents refrained from any draws on the account when they believed clients' funds would be involved. We recently noted in another case that questioning at oral argument "revealed that the OAE's position was not that knowing misappropriation had been established, but rather that respondent's negligence in handling money was sufficiently gross to warrant disbarment even [though] he did not know it was client's money. That is not the rule of Wilson." In re Noonan, 102 N.J. 157, 160-61 (1986) (emphasis in original). The majority takes note of the respondents' testimony at the committee hearing, concluding therefrom that respondents knowingly misappropriated funds. Ante at 444-447. This conclusion is based on respondents' testimony that they realized, at the time of the hearing, they had used clients' funds since checks had been returned for insufficient funds. The danger in such reasoning is that when lawyers are not contrite, they are criticized for not acknowledging their faults; when they acknowledge their faults, they are held to have confessed. Moreover, the statements are inconclusive, since they do not reflect the fact, which respondents clarified in further testimony, that they were discussing their present understanding. Respondents testified that they never intended to use clients' funds and always believed there were sufficient funds on hand. Charging these respondents with misappropriation of funds is akin to charging them with a crime. We would be hard-pressed to sustain criminal convictions against such disparately situated individuals based on the evidence that we have before us. The District Ethics Committee was not unaware of this problem and candidly acknowledged it: although finding it "inconceivable to this panel that respondents did not know that they were invading the funds of clients * * * [and] * * * using the funds of clients' funds for their own benefit," the Committee prefaced these comments by noting that "[i]t is the feeling of this *458 hearing panel that a complete audit should be done in this matter to resolve any doubt that the Disciplinary Review Board may have." Were these allegations presented against an individual, it might be appropriate to sustain a disbarment on a principle of gross neglect. See, e.g., In re Katz, 90 N.J. 272 (1982). But where we deal with such differentiated scope of responsibility, I think it is unfair to proceed on the theory of group ethical responsibility. Ontell, the accountant retained by the respondents specifically to examine the exhibits submitted to the District Ethics Committee and the affidavit of the auditor for the Office of Attorney Ethics, analyzed all of the documents and concluded that "[i]t cannot be stated that there has been an invasion and misappropriation of clients trust funds in the absence of a complete examination and audit by me and solely on the facts and analysis set forth in the Affidavit of Mr. D'Apolito." It was in response to this affidavit that Mr. D'Apolito, the OAE's auditor, stated that he would conclude only that respondents had not maintained appropriate books and records to account for clients' funds. D'Apolito did not state that he found an invasion of clients' trust funds. He did later qualify his affidavit to state, for example, that "[t]he facts stated in my [original] affidavit of March 21, 1983 relative to Samaro, Ocana and Lima would indicate that at the least [funds of] clients were put in jeopardy." I realize that it is very difficult to sort out the specifics of the charges as to each individual client's account. However, that responsibility is inescapable, especially where, as here, we seek to impose collective responsibility on the firm. Because of the complexity of this matter, I would remand it to a Special Master to determine whether individual client's funds were invaded, whether such invasion was a knowing invasion by the attorneys responsible, and the state of knowledge of each of the individuals involved. *459 For disbarment Chief Justice WILENTZ, and Justices CLIFFORD, HANDLER, POLLOCK, GARIBALDI and STEIN 6. Opposed Justice O'HERN 1. It is ORDERED that EDWARD L. FLEISCHER of MORGANVILLE, who was admitted to the bar of this State in 1969, be disbarred, and it is further ORDERED that EDWARD L. FLEISCHER reimburse the Ethics Financial Committee for appropriate administrative costs; and it is further ORDERED that EDWARD L. FLEISCHER be permanently restrained and enjoined from practicing law; and it is further ORDERED that EDWARD L. FLEISCHER comply with Administrative Guideline Number 23 of the Office of Attorney Ethics dealing with suspended, disbarred or resigned attorneys. It is ORDERED that H. BARRY SHULTZ of MORGANVILLE, who was admitted to the bar of this State in 1966, be disbarred, and it is further ORDERED that H. BARRY SHULTZ reimburse the Ethics Financial Committee for appropriate administrative costs; and it is further ORDERED that H. BARRY SHULTZ be permanently restrained and enjoined from practicing law; and it is further ORDERED that H. BARRY SHULTZ comply with Administrative Guideline Number 23 of the Office of Attorney Ethics dealing with suspended, disbarred or resigned attorneys. It is ORDERED that JAY L. SCHWIMER, of MANALAPAN, formerly of MORGANVILLE, who was admitted to the bar of this State in 1973, be disbarred, and it is further ORDERED that JAY L. SCHWIMER reimburse the Ethics Financial Committee for appropriate administrative costs; and it is further ORDERED that JAY L. SCHWIMER be permanently restrained and enjoined from practicing law; and it is further ORDERED that JAY L. SCHWIMER comply with Administrative Guideline Number 23 of the Office of Attorney Ethics dealing with suspended, disbarred or resigned attorneys. [1] Our Advisory Committee on Professional Ethics has provided that firms may draw against other clients' collected funds when mortgage and certified checks are presented at a real estate closing. Advisory Opinion 454, 105 N.J.L.J. 441 (May 15, 1980).