Fund serves as a bright star amid client losses

By David Pasternak
President, the State Bar of California

As we enjoy the holiday season, I would like to take this opportunity to highlight a State Bar program that is rarely publicized, but truly embodies the spirit of the season as well as the bar’s important public protection work.

The Client Security Fund, established under Business & Professions Code 6140.5, is a program fully funded by attorneys that reimburses unfortunate victims of attorney theft or acts equivalent to theft. When an attorney steals from a client, the consequences can be devastating – to the individual client as well as to the legal profession as a whole. The fund provides a unique opportunity to promote public confidence in the administration of justice and the integrity of the legal profession. As upstanding attorneys, you should be proud that your annual $40 contribution to that segregated fund serves such a worthy cause.

Since its inception in 1972, the fund has paid all qualified losses to consumers. The average payout is $5,000 to $7,000, although it can be as high as $100,000 per client.

The recipients of this money are by and large individuals for whom these losses are highly significant and who have no other source of recovery. A recent study of the data showed that in the past five years, the majority of California residents who received payments lived in ZIP codes where the income was at or below the state’s median.

Fund staff has been busy writing checks to those who were hit hard by the foreclosure crisis, many of whom ended up losing their homes. Even though only a small number of lawyers took illegal upfront fees for loan modification services, they often were involved in large operations affecting hundreds or even thousands of clients. 

Due largely to this loan modification crisis, the fund paid a record $11 million in 2013. And even though the housing market has stabilized, more payouts are still pending from past lawyer misconduct. This time lag is largely due to the process – the fund cannot process an application to resolution until after the attorney is disciplined by the California Supreme Court.

The fund is administered by the Client Security Fund Commission and comprised of four attorneys and three public members. Under the leadership of Chair Jonathan D. Libby, the members of the commission are dedicated volunteers appointed by the Board of Trustees. The commission conducts legal proceedings and issues decisions that are separate from the discipline system and that result in legal adjudications (the commission’s tentative and final decisions and notices of intention to pay). Applicants and respondents have due process rights. The California Supreme Court held that fund decisions must have findings of fact and conclusions of law and the decisions are reviewable in superior court mandamus proceedings. Fund decisions/defaults have collateral estoppel effect and form the basis of collections actions. A disbarred attorney cannot seek reinstatement unless they pay what they owe to the fund.

Although the Client Security Fund reimbursements can’t recover a client's home, the recipients have told us they are grateful, and we hope it at least restores some of their faith in the legal profession.

William Letendre of Bradenton, Fla., one victim who wrote a thank you note to the fund after receiving $3,995 for loan modification services that were never provided, said: “It is good to know that the State Bar of California has an organization to protect unsuspecting people from these kinds of situations. And thanks to all the honest attorneys who work so hard to protect their client’s rights.”

California’s fund receives and processes more applications per year than any of the other funds in the 49 states and the District of Columbia.

One note of caution: Even though the fund's average administrative cost per case disposition or claim paid is significantly less than the funds in other large states, the fund’s reserves have been depleted, which means that future payouts could be even further delayed. In order to avoid that unfortunate result and to ensure that the fund meets its important public protection goals, additional revenue streams need to be identified.

But for now, with the holiday season upon us, I hope you feel as grateful as I do that through the State Bar, California lawyers fund such a program and that it may continue for many years to assist the unfortunate victims of the few unethical attorneys who find their way into our profession.