Opinion ID: 2357961
Heading Depth: 2
Heading Rank: 3

Heading: Commingling and Misappropriation of Funds

Text: Respondent does not dispute that he commingled funds he was holding in a trust account with funds from unidentified sources, and that he used funds from the trust account for personal and business purposes. Respondent maintains, however, that his actions were not in violation of DR 9-102(A), as that rule proscribes a lawyer from commingling funds of a client with funds belonging to the lawyer. [4] The question with which we are presented, therefore, is whether the proscription of DR 9-102(A) applies only to circumstances where a traditional lawyer-client relationship exists. That appears to be a question of first impression in the District of Columbia. In a recent decision, however, the District of Columbia Court of Appeals implied that the Rule 9-102(A) proscription against commingling of funds applies whenever an attorney has a fiduciary obligation. In In the Matter of Burka, 423 A.2d 181 (D.C. App.1980) [(en banc)], the court applied DR 9-102(A) where the court-appointed successor conservator of the estate of an adult ward made a series of unauthorized withdrawals totalling $41,000 from the estate checking account. The respondent conservator also made deposits in excess of $29,000 from unidentified sources into the estate checking account. After the respondent's removal as conservator the Auditor-Master found him accountable for $37,390.20, of which $11,661.00 was missing. Respondent subsequently made full restitution to the estate. The court affirmed the finding of the Hearing Committee and the Board on Professional Responsibility that respondent had violated DR 9-102(A) by his failure to keep all moneys from the ward's account deposited at all times in a separate identifiable bank account. [5] In holding that the respondent in Burka violated DR 9-102(A), the court implicitly recognized that funds of a fiduciary are encompassed in the definition of client funds. See also In the Matter of Vogel, 382 A.2d 275, 279-80 (D.C. App.1978) [(per curiam)] (court adopted findings and recommendations of Disciplinary Board, which, in interpreting DR 1-102(A)(4), rejected notion that a lawyer's responsibilities where funds of third parties are concerned should be treated differently from a lawyer's responsibilities in dealing with his client's funds). Other jurisdictions which have considered the question have stated that DR 9-102(A) should be applied when an attorney abuses his or her fiduciary duty, even where a conventional lawyer-client relationship does not exist. In Simmons v. State Bar of California, 70 Cal.2d 361, 450 P.2d 291, 74 Cal.Rptr. 915 (1969) [(per curiam)], the Supreme Court of California upheld the finding of a disciplinary board that an attorney had misappropriated funds. [6] The court noted that it was difficult to determine whether the petitioner received the funds he misappropriated in his capacity as a real estate broker or in his capacity as an attorney. The court stated that even if petitioner was acting as a real estate broker at the time he received the funds, having accepted the money in trust, [he] would still be held to the same high standard. 450 P.2d at 293 [74 Cal. Rptr. at 917]. The court, quoting Clark v. State Bar, 39 Cal.2d 161, 166, 246 P.2d 1, 3 (1952) [(per curiam)] (where an attorney, acting as guardian of an incompetent's estate, was disciplined for mishandling funds), further stated that [w]hen an attorney assumes a fiduciary relationship and violates his duty in a manner that would justify disciplinary action if the relationship had been that of attorney and client, he may properly be disciplined for his misconduct. 450 P.2d at 294 [74 Cal.Rptr. at 918]. In Johnstone v. State Bar, 64 Cal.2d 153, 410 P.2d 617, 49 Cal.Rptr. 97 (1966) [(per curiam)], an attorney was disciplined under California Rule 9 for willful violation of a trust involving money of a third person not a client of the attorney. The California Supreme Court stated: When an attorney receives money on behalf of a third party who is not his client, he nevertheless is a fiduciary as to such third party. Thus the funds in his possession are impressed with a trust, and his conversion of such funds is a breach of the trust. 410 P.2d at 618 [49 Cal.Rptr. at 98]. In State v. Freeman, 229 Kan. 639, 629 P.2d 716 (1981) [(per curiam)], the Kansas Supreme Court was faced with a case in which an attorney, acting as a trustee, had converted to his own use funds due the trust. The court stated: Although Sheila Hoffner [the beneficiary of the trust] was not Freeman's client, respondent's powers were to be used in a fiduciary capacity by the terms of the trust and we find his actions are as reprehensible as if he had been handling the money of a client, to whom he would owe the same fiduciary responsibility. 629 P.2d at 720. See also In re Draper, 317 A.2d 106 (Del.1974 [(per curiam)] (court found violation of DR 9-102(A) where lawyer was holding funds as correspondent for another lawyer). The facts presented to this Committee demonstrate that respondent breached his fiduciary obligation as trustee. Although no conventional attorney-client relationship existed, respondent owed a fiduciary obligation to both the Superior Court, which appointed him as trustee, and the beneficiaries of the trust account. The decisions cited above reflect the view, correctly in our opinion, that DR 9-102(A) should apply whenever an attorney assumes a fiduciary relationship and violates his duty in a manner that would justify disciplinary action if the relationship had been that of attorney and client. Thus, we are persuaded that respondent's conduct in the instant case is within the scope of DR 9-102(A). [7] In addition, in the instant case respondent's appointment as trustee by the Superior Court was presumably due in some measure to his reputation for integrity and competence. Respondent's conduct is clearly the type of behavior DR 9-102(A) was designed to deter with respect to client funds. Certainly respondent's obligations with respect to funds that came into his hands as a court-appointed trustee should be no less than his obligation with respect to funds of a client. To hold that DR 9-102(A) does not apply in the instant case would make no sense and would, indeed, be inconsistent with the purpose of DR 9-102(A). Respondent contends that his initial withdrawal of $3,300 from the trust account was inadvertent. In summary, respondent alleges that he asked his secretary to draw a check for $3,300 to pay the obligation of another client while he was out of the office, and his secretary drew the check on the wrong account. He further alleges that once he discovered the breached trust account, he initially considered replacing the funds he had withdrawn, but because of his busy schedule the matter escaped his attention. Subsequently, he decided to treat the account as a general checking account and made numerous deposits to and withdrawals from the account. He contends that his conduct in handling the trust account was appropriate because he personally had cash on hand at home to cover what was supposed to be in the account. (Respondent's Post Hearing Brief, pp. 3-4; Tr. pp. 52-54, 95-97) Courts have held that it will not suffice to absolve an attorney of a charge of commingling that his course of practice in this respect [was] the product of ignorance rather than design. In re Makowski, 73 N.J. 265, 374 A.2d 458, 461 (1977) [(per curiam)]. Thus, we need make no finding here as to whether respondent's initial breach of the trust account was intentional. We note, however, that on November 14, 1979, respondent's general client trust account (client account), on which respondent claims he intended to draw the $3,300 check, which was then certified, had a balance of only $1,564.14. (Bar Ex. 18) Thus, as Bar Counsel notes, respondent could not have obtained certification for a $3,300 check drawn on that account. (Bar Counsel's Post-Hearing Brief, pp. 12-13) After discovering the initial breach, respondent failed to replace the money he had withdrawn. Although respondent's self-described hectic schedule conceivably could account for the initial breach and some delay in respondent's discovery of the breach, it does not explain respondent's failure to replace the withdrawn funds once he discovered the breach; nor does it explain or excuse respondent's subsequent conduct with respect to the trust account. By respondent's own admission, after his discovery of the breach, he began a series of withdrawals from and deposits to the account. Respondent testified before the Auditor-Master that he wrote checks for his office rent and the office rent of his associates, for witness fees, for the automobile repair bills of his associates, for refunds of client fees, for his secretary's salary, for his debt to the Internal Revenue Service, for his law clerk's salary, and for other personal and business purposes unrelated to the trust. (Bar Ex. 10 at 16-32) Although respondent consistently deposited money from unidentified sources into the account, there were consistently shortages in the account for an almost 18-month period. (Bar Ex. 14) We have therefore concluded that respondent's conduct in depositing personal funds and funds from unidentified sources into the trust account constituted a commingling of funds in violation of DR 9-102(A). Respondent's use of trust funds for purposes unrelated to the purpose of the trust constituted misappropriation of funds. [8] Bar Counsel has charged that such misappropriation violated DR 9-102(A). See Specification of Charges, ¶ 11 (quoted in footnote 4, supra ). Respondent appears to contend that DR 9-102(A) extends only to commingling. See Respondent's Post Hearing Brief, pp. 18-19. DR 9-102(A) requires that client funds paid to a lawyer be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated. . . . Unauthorized withdrawals are inconsistent with the requirement to deposit client funds in an identifiable bank account in the jurisdiction, unless the requirement to deposit is to be given only a formal meaning. DR 9-102(A)(2), which is cast in terms of an exception to DR 9-102(A), deals with the circumstances under which funds to which both lawyer and client have a claim may or may not be withdrawn from an account or accounts required by DR 9-102(A). This evidences the intention of the draftsmen to require that a deposit, once made in compliance with DR 9-102(A), be maintained  not only free from commingling but also in the bank  until such time as withdrawal is authorized. Such a construction seems consistent with the purpose of DR 9-102(A), which is to provide against the possible loss of clients' funds. See Greenbaum v. State Bar, 15 Cal.3d 893, 544 P.2d 921, 126 Cal. Rptr. 785 (1976) [(per curiam)]. [9] Accordingly, we have concluded that DR 9-102(A) was intended to prohibit unauthorized withdrawals of the sort charged here as well as commingling, and we have concluded that respondent violated DR 9-102(A) by making such unauthorized withdrawals as well as by commingling. The Committee expressly rejects respondent's contention that in making unauthorized withdrawals he violated no ethical proscription because he always maintained sufficient funds to satisfy the requirement of the trust. (Respondent's Post Hearing Brief, p. 19) First, even if respondent did have sufficient cash on hand to cover the shortages, it would not excuse his breach of the trust or his unauthorized use of trust funds. Moreover, respondent has never demonstrated that he did in fact have access to replacement funds. Finally, the Committee rejects respondent's claim that his breach of the trust was cured when he reimbursed the trust account. Restitution is not a defense to the charge of having misappropriated trust funds. See In the Matter of Burka, 423 A.2d 181 (D.C.App.1980) [(en banc)]; In the Matter of Quimby, 123 U.S.App.D.C. 273, 359 F.2d 252 [257] (1966) [(per curiam)]; In the Matter of Wilson, 81 N.J. 451, 409 A.2d 1153 (1979).