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Ethics Byte

Consumer alert or lawyer alert?

By Diane Karpman

Diane KarpmanRecently, there has been an increased emphasis by the State Bar on the prosecution of trust account misconduct. The Office of the Chief Trial Counsel (OCTC) has set up a special task force dedicated to dealing with major trust account defalcation. A new proposal currently out for public comment would permit the OCTC to post a “Consumer Alert” at the beginning of the member’s web page when significant trust account violation charges are filed. This clearly stigmatizing alert may be the first information a client may receive about a lawyer. This would apply to all lawyers, not just to probate, trust practices or personal injury law, which seem particularly susceptible to these types of misconduct. 

Some of you may recall that a few years ago, the OCTC began posting Notices of Discipline Charges on a members’ web pages after filing in the State Bar Court, but that is at the bottom and requires a couple of “clicks.” Under this proposal, however, the alert, in bold print, will be the first thing that a consumer would find. In terms of how things work at the State Bar, it’s important to note that all information prior to the Notice (formal charging document at the State Bar Court) is generally confidential.

A new vertical prosecution team has been established in the OCTC. It’s important to know that cases involving misappropriation or a violation of Rule 4-100 are a snap to prove. The prosecutor need only present the bank records and a conviction is almost automatic. Either money being held for another is in the trust account or it’s not. For prosecutors, money cases are economical and do not require elaborate theories, with contradicting witness testimony. “Money counts” are black and white.

The fundamental fiduciary duties imposed by Rule 4-100 create (almost) a strict liability type of duty for lawyers holding client or third-party funds. Inadvertent or unintentional thefts sometimes occur because lawyers are often numerically challenged. However, close monitoring of the trust account is a primary duty of an attorney. Sometimes an attorney intends only to “borrow” money for a short time, intending to pay it back. In addition, the cases involving dishonest or rogue secretaries looting the trust account are legion.

The easiest way for California lawyers to lose their licenses is to have a banking irregularity in their trust accounts. An irregularity can be either misappropriation (theft) or mere “dipping.” Dipping occurs when a specified amount is being held for a particular client, and the amount in trust falls below that amount, even for a few days. Remember that the return of one check for insufficient funds causes the bank to notify the OCTC. The mere fact that the balance in an attorney’s trust account has fallen below the total of amounts deposited in and purportedly held in trust supports a conclusion of misappropriation. Greenbaum v. State Bar (1976) 15 Cal.3d 893.

Commingling of the lawyer’s funds in the trust account often occurs when a lawyer’s right to the funds held in trust vests, such as fees being earned, and he/she fails to remove the funds. Commingling can endanger the client’s funds. However, a lawyer’s later restoration of funds wrongfully or erroneously withdrawn from a trust account (by placing personal funds into the trust account to cover the shortfall) is not prohibited commingling. Guzzetta v. State Bar (1987) 43 Cal. 3d 962.

In New Jersey, intentional misappropriation automatically results in disbarment. In In Re Wilson, 81 N.J. 451 (1979) California takes a more nuanced position. Mismanagement of the trust account and careless supervision of staff can be important factors in terms of finding whether the conduct was intentional. Not all trust account violations rise to the level of wilful misappropriation. Only when an attorney’s handling of a trust account rises to at least gross negligence will a misappropriation be found. For example, when a shortfall in an account was due to a single bookkeeping error, which remained undetected for several months due to an attorney’s inadequate monitoring of the account, the State Bar Court found a violation of Rule 4-100 but declined to label the conduct “misappropriation.” In the Matter of Respondent F (Review Dept. 1992) 2 Cal. State Bar Ct. Rptr. 17.

I know that these concepts produce the highest level of anxiety for lawyers. During the last 14 years, we have discussed these ideas in this column, but with the change in focus of the OCTC, we have even more good reasons to be obsessive about our trust accounts.

• Diane Karpman is a legal ethics expert [expert witness]. She can be contacted at 310-887-3900 or