Title: In the Matter of Jack N. Frost, An Attorney at Law.
Citation: N/A
Docket Number: d-106-00
State: new-jersey
Issuer: new-jersey Supreme Court
Date: April 5, 2002

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). ZAZZALI, J., writing for a unanimous Court. This is an attorney disciplinary case. Respondent, Jack N. Frost, was admitted to practice in New Jersey in 1971. He has been the subject of discipline on at least five separate occasions between 1988 and 1998 for misconduct that has included dishonesty and failure to safeguard escrow funds, among other things. Respondent is currently suspended from practice, based on an earlier Order of suspension. The present matter arose from respondent's conduct in a personal injury/workers' compensation case. Respondent represented Bruce Hagerman, who was seriously injured in February 1988, when he fell off the roof of a five-story building while operating an air broom manufactured by Aeroil Products Company, Inc. (Aeroil). Hagerman subsequently retained attorney Michael Rubino to represent him in litigation relating to the accident. Rubino recommended that respondent handle the matter and in March 1988, respondent became co-counsel. Respondent filed a workers' compensation claim petition in Hagerman's behalf and a third-party products liability action against Aeroil. In October 1990, respondent and Rubino settled the third-party action against Aeroil for $500,000, consisting of a $400,000 cash payment and a $100,000 annuity. Respondent deposited the settlement check into his trust account and made disbursements to Hagerman, to himself, and to Rubino. He then also disbursed a check in the amount of $79,000 to CNA Insurance Companies in satisfaction of its workers' compensation lien on the third-party settlement proceeds. Rubino previously had entered into negotiations with CNA in an attempt to compromise CNA's lien and believed that he and CNA had agreed to a reduced amount of $79,000. However, CNA refused to accept the check, denied that it had compromised its lien, and notified Rubino that it was returning the unnegotiated check to respondent. Respondent then transferred the funds from his trust account to his escrow account under Hagerman's name. He contended that he had done so because he believed that once CNA rejected the tender of funds, the funds belonged to Hagerman. During an appointment in early October 1991, respondent approached Hagerman about a loan to him. According to respondent, he advised Hagerman to seek the advice of independent counsel and that he would not do the deal unless he sought such counsel. Hagerman consulted with Rubino, who advised him against making the loan to respondent. Hagerman then communicated with respondent and refused to make the loan. Two weeks later, and notwithstanding Hagerman's previous indication to respondent that counsel had advised against making the loan, respondent communicated with Hagerman, again concerning a possible loan. Ultimately, Hagerman agreed to a loan in the amount of $79,000 (the funds that CNA had refused). Using a power of attorney form document, respondent drafted a loan agreement in which he agreed to pay CNA the full $79,000 within 90 days if CNA demanded payment. In addition, he represented that he owned six acres of unencumbered land worth between $150,000 and $200,000 and an unencumbered one-half interest in a house in North Carolina on which properties respondent would give Hagerman a first mortgage, if so requested. In fact, respondent's interest in the property had been purchased by his wife six years earlier, with respondent acting as his wife's counsel. In October 1991, respondent transferred $80,636.89 from the Hagerman sub-account to his principal escrow account and issued three escrow account checks to Hagerman. Hagerman then endorsed two of the checks to respondent - one for $39,000 and the other for $40,000, and negotiated the third one in the amount of $1,636.89 himself, for interest earned on account. Respondent then used the funds for his own purposes. Subsequently, CNA sought payment of its lien and eventually filed suit against respondent, Hagerman, Rubino, and Aeroil's insurer for payment. Although respondent offered to settle the matter, CNA rejected that offer. Ultimately, after respondent filed for Chapter 11 bankruptcy, Hagerman and Rubino entered into a settlement agreement with CNA, pursuant to which Hagerman paid $10,000. Although respondent represented to the bankruptcy court that he would pay Hagerman's share of that settlement, as well as his attorneys' fees, as of October 1999, he had not done so. The matter was heard by a special master, who found respondent guilty of negligent, as opposed to knowing misappropriation of the escrow funds (the $79,000). The special master also found that respondent had failed to safeguard funds belonging to CNA, and that he had engaged in a course of conduct that was dishonest and deceitful because he never had any intention of providing security for the loan and misrepresented the extent of his assets. The special master further found that the loan transaction was not at arm's length and constituted a prohibited business transaction with a client. He recommended that respondent be suspended for one year consecutive to his 1998 two-year suspension. On its de novo review of the matter, the Disciplinary Review Board (DRB) agreed with the special master's findings and recommendation, concluding that respondent effectively borrowed the money from Hagerman after first temporarily releasing the funds to him, a party-in-interest. The DRB further found that respondent breached his fiduciary duty to CNA, arising out of the lien negotiations between CNA and Rubino, because he never obtained CNA's consent to disburse the $79,000, in violation of RPC 1.15(a). Finally, the DRB found that respondent had engaged in a prohibited business transaction and in conduct that was dishonest and deceitful when he entered into a contract that was patently unfair and unreasonable to his client, misrepresented the extent of his interests in certain assets, and never intended to provide security for the loan. However, a majority of the DRB declined to recommend respondent's disbarment, noting both that he had engaged in negligent misappropriation (and not knowing misappropriation) and that the matter pre-dated most of respondent's extensive ethics history. Thus, the majority voted to impose a one-year consecutive suspension. Two members of the DRB voted for disbarment. The Supreme Court granted the OAE's Petition for Review. HELD: Jack N. Frost, an attorney, who obtained his client's consent to borrow escrow funds and who then used those funds without obtaining the consent of the other party who had an ownership interest in them, is disbarred for his knowing misappropriation of escrow funds, compounded by his other misconduct in his dealings with his client and by his extensive ethics history and profound lack of professional good character and fitness. 1. Respondent's loan transaction with his client constituted a conflict of interest and a prohibited business transaction in violation of RPC 1.8(a). A lawyer is required to maintain the highest professional and ethical standards in his or her dealings with clients. Here, respondent took advantage of an unsophisticated client whose trust he gained through the attorney-client relationship. (pp. 12-15) 2. Respondent engaged in conduct involving dishonesty, fraud, deceit, or misrepresentation when he entered into a loan agreement with his client that was patently unfair and unreasonable to his client, misrepresented the extent of his interests in certain assets, and never intended to provide security for the loan. (pp. 15-16) 3. The record presents clear and convincing evidence that respondent knowingly misappropriated funds belonging to CNA. (pp. 16-20) 4. The fact that Hagerman consented to respondent's use of the funds in question is irrelevant. As escrow agent, respondent required the consent of both parties to use the funds for his benefit. (pp. 20-21) 5. Respondent's belief that the funds were Hagerman's alone is not based on any verifiable facts and cannot excuse his failure to perform his ethical duties. (pp. 20-24) 6. In the case of knowing misappropriation, disbarment is an appropriate penalty even if the lawyer did not possess the subjective intent to steal the money but only intended to borrow it. (pp. 24-25) 7. Even if respondent committed negligent, rather than knowing misappropriation, his conduct in this matter coupled with his extensive ethics history and his profound lack of professional good character and fitness compels the conclusion that respondent should not be allowed to practice law in New Jersey. (pp. 25-28) CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and LaVECCHIA join in JUSTICE ZAZZALI's opinion. IN THE MATTER OF JACK N. FROST, An Attorney at Law. ____________________ Argued January 15, 2002 -- Decided April 5, 2002 On an Order to show cause why respondent should not be disbarred or otherwise disciplined. Brian D. Gillet, Deputy Ethics Counsel, argued the cause on behalf of the Office of Attorney Ethics. Frank P. Sahaj argued the cause for respondent (Younghans, Burke &amp; Sahaj, attorneys). The opinion of the Court was delivered by ZAZZALI, J. In October 1996, a Judge of Workers' Compensation contacted the Office of Attorney Ethics (OAE) when testimony at a hearing before him suggested that respondent, Jack N. Frost, may have misused client funds. The OAE subsequently conducted a demand audit of respondent's books and records. Shortly thereafter, the OAE filed a complaint against respondent alleging violations of the Rules of Professional Conduct (RPC), including RPC 1.8(a), conflict of interest/prohibited business transaction with a client; RPC 1.15(a), knowing misappropriation of escrow funds and failure to safeguard the funds of a third party; and RPC 8.4(c), conduct involving dishonesty, fraud, deceit or misrepresentation. The OAE later added the charge of failing to cooperate, in violation of RPC 8.3. Special Master Miles S. Winder, III, issued a presentment finding respondent guilty of negligent misappropriation rather than knowing misappropriation. The Special Master also found respondent guilty of the remaining charges in the complaint, except for the charge that respondent failed to cooperate with the OAE, noting that the disorganized and disjointed responses made by [respondent] were very close to non-cooperation. The Special Master recommended that respondent receive a one-year suspension consecutive to the two-year suspension that respondent was then currently serving. Respondent's two-year suspension expired in November 2001. As of the date of oral argument, respondent had not yet applied for reinstatement. Upon a de novo review of the record, the Disciplinary Review Board (DRB) concluded that the Special Master's determination was fully supported by clear and convincing evidence in the record. Six members of the DRB voted for a one-year suspension and two public members voted for disbarment. Our independent review of the record leads us to conclude that respondent should be disbarred. In In re Wolk, 82 N.J. 326, 327 (1980), the Court disbarred an attorney who misled a client by counseling her to invest in a building in which the attorney had an interest. In so holding, the Court admonished that it will no more tolerate the hoodwinking of helpless clients out of funds in a business venture that is essentially for the benefit of the lawyer than it will outright misappropriation of trust funds. Id. at 335 (citing In re Wilson, 81 N.J. 451 (1979)). Similarly, in Smyzer, supra, 108 N.J. at 49, the Court disbarred an attorney who entered into fraudulent and deceptive business transactions with clients, failed to protect their investments, failed to fully explain investments to the clients, and failed to disclose his interests in the companies. The Court found that the attorney had deceived his clients in order to protect his investment in a company whose financial condition was rapidly deteriorating. Id. at 57. The Court also was troubled by the lack of independent consultation concerning those investments. In that respect, the Court cautioned that a passing suggestion that the client consult a second attorney [will not] discharge the lawyer's duty when he [or she] and his [or her] client have differing interests. Id. at 55. Thus, a lawyer must take every possible precaution in ensuring that his [or her] client is fully aware of the risks inherent in the proposed transaction and of the need for independent and objective advice. Ibid. In the present case, respondent participated in a business transaction with his client without the appropriate safeguards and without disclosing a conflict of interest. Respondent drafted the loan agreement and all of its terms, made misrepresentations in respect of the alleged collateral to induce his client to participate in the transaction, and did not perform title or lien searches or prepare security agreements in respect of the property. Although the agreement stated that respondent owned two properties and that respondent's law firm was worth in excess of $2,500,000, respondent did not give his client a security interest in those assets and did not provide his client with documentation of those assets. Indeed, respondent did not own the six acres of land identified as unencumbered in the loan agreement he prepared. As stated by the Special Master, there was no discussion of payment of more than the compromise amount to the worker's [sic] compensation carrier . . . no discussion of what would happen if [respondent] went bankrupt. Simply put, there was no discussion of the financial issues that affected Hagerman because the lawyer in the transaction was acting in dual capacities as both lawyer and business partner. Respondent's subsequent failure to repay Hagerman and CNA, even after CNA filed suit seeking payment of its lien, highlights the worthlessness of the loan agreement. In sum, respondent took advantage of an unsophisticated client whose trust he gained through the attorney-client relationship. B. Conduct Involving Dishonesty, Fraud, Deceit or Misrepresentation in Violation of RPC 8.4(c) Both the Special Master and the DRB concluded that respondent engaged in conduct involving dishonesty, fraud, deceit or misrepresentation when he entered into a loan agreement with his client that was patently unfair and unreasonable to his client, misrepresented the extent of his interests in certain assets, and never intended to provide security for the loan. We agree. RPC 8.4(c) provides that it is professional misconduct for a lawyer to engage in conduct involving dishonesty, fraud, deceit or misrepresentation. In the present case, respondent violated that rule when he misrepresented in the loan agreement that he owned land worth at least $150,000. Respondent's testimony that he had forgotten that his wife owned the property is at best disingenuous. The record indicates that prior to the instant matter respondent and his wife planned to protect their assets by putting them in respondent's wife's name. In fact, respondent had deeded his interest in their residence to his wife before 1991. C. Knowing Misappropriation of Client Funds in Violation of RPC 1.15(a) Both the Special Master and the DRB concluded that respondent committed negligent, rather than knowing, misappropriation. We disagree. RPC 1.15(a) requires that a lawyer hold property of clients or third persons that is in [his or her] possession in connection with a representation separate from the lawyer's own property and that the property so held be appropriately safeguarded. Misappropriation is any unauthorized use by the lawyer of clients' funds entrusted to him [or her], including not only stealing, but also unauthorized temporary use for the lawyer's own purpose, whether or not he [or she] derives any personal gain or benefit therefrom. In re Wilson, 81 N.J. 451, 455 n.1 (1979). Knowing misappropriation consists simply of a lawyer taking a client's money entrusted to him [or her], knowing that it is the client's money and knowing that the client has not authorized the taking. In re Noonan, 102 N.J. 157, 160 (1986). Thus, the attorney's state of mind or motives are largely irrelevant. Although in the present case respondent's client authorized the withdrawal of the funds, the consent of the third party, CNA, also was required, as will be discussed below. In In re Howard, 121 N.J. 173 (1990), an attorney received a settlement payment on behalf of his client and promptly deducted his fees and costs. The attorney was to hold in trust $11,000 to cover the estimated amount due on a workers' compensation lien owed to the insurance company. Id. at 175. However, the attorney eventually depleted the trust account to $4,600 or $6,400 less than the $11,000 [the attorney] had agreed to hold in trust to pay the compensation lien. Ibid. Sixteen months after the settlement, the attorney paid the lien, which had been compromised to $11,707.67. Ibid. The Court concluded that the attorney's actions constituted knowing misappropriation of client funds. Id. at 177. According to the Court, during this sixteen-month period, [the attorney] did not maintain in his trust fund sufficient funds to pay [the insurer's] lien. All the parties in the [] case agreed that [the attorney] would pay [the insurer's] lien from the settlement proceeds deposited in his trust account. Hence, with respect to the lien [the attorney] acted as the depository of funds. His actions were akin to those of escrow agent. [In] In re Hollendonner, . . . we held that 'an attorney found to have knowingly misused escrow funds will confront the disbarment rule of In re Wilson . . . .' Accordingly, we conclude that respondent knowingly invaded funds that were to be used to pay [the insurer's] compensation lien. Such action constitutes a knowing misappropriation of funds under In re Wilson . . . . [Id. at 178 (citations omitted).] In In re Hollendonner, 102 N.J. 21, 22 (1985), an attorney was charged with misappropriation of escrow funds and improper record keeping. Although he obtained the consent of his client to withdraw the escrow funds, he failed to obtain the consent of the third party. Id. at 28-29. The Court noted that it is a matter of elementary law that when two parties to a transaction select the attorney of one of them to act as the depository of funds relevant to that transaction, the attorney receives the deposit as the agent or trustee for both parties. Id. at 28 (citing Mantel v. Landau, 134 N.J. Eq. 194, 195 (Ch. 1943), aff'd, 135 N.J. Eq. 456 (E. &amp; A. 1944)). The Court further explained that [t]he parallel between escrow funds and client trust funds is obvious. So akin is the one to the other that henceforth an attorney found to have knowingly misused escrow funds will confront the disbarment rule of In re Wilson . . . . [Id. at 28-29 (citation omitted).] However, the Court declined to apply the rule of automatic disbarment retroactively given the absence of clear and convincing evidence that [the attorney] invaded the escrow funds with knowledge that the use of those funds was improper and in view of the fact that the case presented the first occasion that the Court addressed the near identity of escrow funds and trust funds. Id. at 29. Instead, the Court imposed a one-year suspension. Ibid. This record presents clear and convincing evidence that respondent knowingly misappropriated funds belonging to CNA. Respondent came into possession of CNA's funds as a result of the settlement of a third-party lawsuit. Shortly after receiving the settlement proceeds, respondent forwarded a check for $79,000 to CNA in an effort to satisfy CNA's workers' compensation lien pursuant to N.J.S.A. 34:15-40. That respondent was aware of the existence and the amount of CNA's lien is undisputed. That respondent sent the check to CNA in satisfaction of the lien evidences his awareness that the funds did not belong to him or his client. Thus, when CNA returned the check to respondent, respondent had a duty to safeguard the funds and deposit them in his escrow account. Regardless of who was the rightful owner of the funds at that time, respondent was an escrow agent and was well aware that the money was not his property. The fact that Hagerman consented to the use of the funds is irrelevant. As noted in In re DiLieto, 142 N.J. 492 (1995), [a]n attorney cannot satisfy his or her professional responsibility with respect to escrow funds by simply relying on information from a client . . . . 'It is not enough simply to follow a client's instructions.' [Id. at 506-07 (quoting In re Wallace, 104 N.J. 589, 593 (1986).] It is undisputed that the $79,000 was a loan from Hagerman to entitled to fees from the $79,000. In Gifis, supra, 156 N.J. at 323-24, the Court rejected a similar argument. While representing a seller in a real estate transaction, the attorney took a $51,000 deposit that he was holding in escrow with the consent of his client, but without the consent of the buyer. Id. at 328-29. He also used a $10,000 settlement that was to be held in escrow and a $6,500 deposit without the consent of either party. Id. at 331, 345. In concluding that the attorney was guilty of knowing misappropriation of client funds, the DRB rejected the attorney's argument that, based on his understanding of the transaction and the law, the funds belonged to his client. Id. at 362. The DRB noted that such a mistake of law would not have exonerated [the attorney] from responsibility of knowing misuse of escrow funds. Id. at 352. In In re Barlow, 140 N.J. 191, 192 (1995), an attorney drew a check to himself knowing that the funds were intended to be used to pay unpaid invoices for title insurance and surveyors' fees on two separate closings. The attorney claimed that by drawing the check to himself and depositing the funds in his business account, he intended to pay those expenses from that account. Id. at 197. However, he failed to pay the first invoice until three months later, and finally paid the last invoice nearly three years later. Ibid. The Court noted that at the time the funds were transferred to his business account, it was short approximately $187.50. Id. at 197-98. Instead of paying the expenses, the attorney issued checks to pay personal expenses. Id. at 198. The Court rejected the attorney's contention that he had an honest belief that his actions did not constitute knowing misappropriation. Id. at 198- 99. Like the attorneys in Gifis and Barlow, respondent is a long- time practitioner who has compromised hundreds of workers' compensation liens. His tender argument that he believed CNA's return of the check changed the character of the funds is simply unbelievable. Further, respondent misled Hagerman when respondent said that the $79,000 belonged to Hagerman alone. Clearly, respondent's belief that the funds were Hagerman's alone is not based on any verifiable facts and cannot excuse his failure to perform his ethical duties. Even if respondent committed negligent, rather than knowing, misappropriation, we would conclude that disbarment is the appropriate penalty. [I]n the totality of the circumstances respondent has demonstrated that his ethical deficiencies are intractable and irremediable. In re Templeton, 99 N.J. 365, 376 (1985). Respondent's extensive ethics history and his profound lack of professional good character and fitness compels the conclusion that respondent should not be allowed to practice law in New Jersey. Ibid. Respondent's disciplinary history further supports our conclusion that disbarment is necessary. Respondent has received two private reprimands and three suspensions for thirteen separate instances of misconduct. Respondent consistently has demonstrated a disregard for the Rules of Professional Conduct, and [w]e are unable to conclude that respondent will improve his conduct. In re Cohen, 120 N.J. 304, 308 (1990). [T]he totality of the evidence against respondent reveals a pattern of intentional deception and dishonesty that clearly and convincingly demonstrates 'that his ethical deficiencies are intractable and irremediable.' His conduct has destroyed 'totally any vestige of confidence that [he] could ever again practice in conformity with the standards of the profession.' [DiLieto, supra, 142 N.J. at 507 (quoting Templeton, supra, 99 N.J. at 376).] The only way to protect the public and prevent a reoccurrence of respondent's behavior is by his disbarment. In the present matter, respondent participated in a conflict of interest transaction with his client without first securing the appropriate safeguards for his client or the third party. He made misrepresentations in respect of his finances, the true ownership of his assets, and his financial position in order to induce his client to participate. It is axiomatic that [a]n attorney should refrain from engaging in a business transaction with a client who has not obtained independent legal advice on the matter. . . . [A]n attorney's judgment can be impaired by his [or her] self-interest. In such a situation, an attorney has a duty to explain carefully, clearly, and cogently why independent advice is needed. [In re Doyle, 146 N.J. 629, 643 (1996) (citations omitted).] Respondent was concerned only with his own self-interest _ obtaining a loan from Hagerman. Respondent knew that Rubino, his co-counsel on the underlying case, had advised Hagerman against entering into the loan transaction. Respondent's failure to respect Hagerman's hesitancy in engaging in the transaction, and his subsequent overreaching in convincing his client to enter into a transaction fraught with risk, demonstrates unethical conduct in violation of the Rules of Professional Conduct. Respondent's conduct is even more egregious considering that funds were beginning to leave the account before Hagerman agreed to the loan. This Court has not hesitated to order disbarment where a lawyer uses his position to advance personal interests at the expense of clients. In re Yaccarino, 117 N.J. 175, 182 (1989); see also Smyzer, supra, 108 N.J. at 48-49 (ordering disbarment where attorney misled clients into participating in business transaction in which he had interests); In re Servance, 102 N.J. 286, 286-87 (1986) (ordering disbarment where attorney misrepresented to clients that attorney had knowledge of nature and soundness of clients' investments); Wolk, supra, 82 N.J. at 327 (disbarring attorney who represented client in business matter in which attorney was personally involved). Considering respondent's conduct in this matter, including his conflict of interest, his deceit and fraud, and even assuming that the misappropriation was only negligent, disbarment is appropriate. The DRB's observation that the present misconduct predates most of the actions for which respondent has been disciplined, a fact which may be relevant in other settings, is not relevant here. As noted, respondent's ethics history spanning the last fifteen years demonstrates an absolute disregard for his professional responsibility. His demonstrated contempt for his oath, on so many occasions, establishes that respondent is an unrepentant recidivist. He has had not one, but five opportunities to rehabilitate himself. Experience informs us that he is not entitled to, and the public should not have to endure, yet another opportunity for gross misconduct. The ultimate goal of attorney discipline is to preserve the confidence of the public in the integrity and trustworthiness of lawyers. To that end, the discipline to be imposed must reflect the gravity of the misconduct in light of all relevant circumstances. In re Nigohosian, 88 N.J. 308, 315 (1982). In order to maintain confidence in the integrity of the bar, we conclude that the appropriate penalty is disbarment. Respondent shall reimburse the Disciplinary Oversight Committee for appropriate costs. So Ordered. CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and LaVECCHIA join in JUSTICE ZAZZALI's opinion. IN THE MATTER OF : JACK N. FROST : O R D E R AN ATTORNEY AT LAW : (Attorney No. 266621971) : It is ORDERED that JACK N. FROST of PLAINFIELD, who was admitted to the bar of this State in 1971, be disbarred and that his name be stricken from the roll of attorneys of this State, effective immediately; and it is further ORDERED that JACK N. FROST be and hereby is permanently restrained and enjoined from practicing law; and it is further ORDERED that JACK N. FROST comply with Rule 1:20-20 dealing with disbarred attorneys; and it is further ORDERED that JACK N. FROST reimburse the Disciplinary Oversight Committee for appropriate administrative costs. WITNESS, the Honorable Deborah T. Poritz, Chief Justice, at Trenton, this 5th day of April, 2002. CLERK OF THE SUPREME COURT NO. D-106 IN THE MATTER OF JACK N. FROST, An Attorney at Law. Decided April 5, 2002 Order returnable January 15, 2002 Opinion by Justice Zazzali