Lawyer Bankruptcy and Client Money
By Hope C. Todd
Unfortunate economic conditions have prompted several calls by D.C.
Bar members to the Ethics Help Line inquiring: 1) whether a lawyer must
report a filing for bankruptcy to the District of Columbia Office of
Bar Counsel (OBC), and 2) whether a lawyer’s law license will
be impacted by filing for bankruptcy. Although the short answers are
“no” and “no,” there are important ethical implications
that arise from each of these questions.
The act of filing for bankruptcy protection does not constitute conduct
that triggers a lawyer’s mandatory duty to report various violations
and occurrences to OBC.[1] In the District
of Columbia, there are only three rules governing lawyer conduct that
require mandatory reporting to OBC—Rule 8.3 of the D.C. Rules
of Professional Conduct and Sections 10 and 11 of Rule XI of the District
of Columbia Court of Appeals’ Rules Governing the Bar[2]—such
that failure to report could result in disciplinary consequences.[3]
Rule 8.3(a) determines when a lawyer is required to inform
OBC about unethical conduct by another lawyer:[4]
“a lawyer who knows that another lawyer has committed a violation
of the Rules of Professional Conduct that raises a substantial question
as to that lawyer’s honesty, trustworthiness, or fitness as a
lawyer in other respects . . .” must report that lawyer’s
conduct to “the appropriate professional authority.”[5]
Although Rule 8.3 does not require a lawyer to report his or her own
ethical misconduct, there are two other rules that require a D.C. lawyer
to self-report in certain instances. Pursuant to Section 10(a) of Rule
XI, if a lawyer is convicted of a crime or pleads guilty or nolo
contendere to a criminal charge in a District of Columbia
court, a court outside of the District, or any federal court, the lawyer
must, within 10 days from the date of such a finding or plea, file a
certified copy of the court record or docket entry of the finding or
plea with the D.C. Court of Appeals and with the Board on Professional
Responsibility.[6] Additionally, Section
11(b) of Rule XI requires that any member of the D.C. Bar, “upon
being subjected to professional disciplinary action by another disciplining
court, shall promptly inform Bar Counsel of such action in writing.”[7]
Although a member of the D.C. Bar is not required to report a filing
for bankruptcy protection to the disciplinary system, an applicant for
admission to the D.C. Bar is required to answer whether he or
she “has ever filed a petition for bankruptcy” and to provide
requested details about such filing(s) on the application for admission.
Indeed, admissions committees nationwide are interested in an applicant’s
ability to manage his or her finances,[8]
and filing for bankruptcy is a relevant factor in evaluating that ability.
The heart of this inquiry involves not so much a concern about an individual’s
financial history but, rather, reconciling any potential deficiencies
in an individual’s past financial conduct with the future certainty
that, as a lawyer, the applicant will be held to the highest standard
of care as a fiduciary of other people’s money. As D.C. Bar Counsel
Wallace E. “Gene” Shipp so often aptly declares, “If
you can’t trust your lawyer with your money, who can you trust?”
A lawyer has a fundamental ethical obligation to protect client
property in the lawyer’s possession. Thus, the “safekeeping
of property” rules in every jurisdiction require that a
lawyer maintain and preserve the property of clients and third parties
separate from the lawyer’s own property. Whether a lawyer’s
bar license will be impacted by a bankruptcy filing will depend largely
on whether the lawyer is properly maintaining his or her operating and
client accounts prior to any filing.
What does it mean to keep client money “separate?”
Simply put, it means that a lawyer must place client money into a trust
account or into an escrow account.[9]
It means that a lawyer must not place client funds into the lawyer’s
personal account or business operating account.[10]
The mixing of client and lawyer money, known as “commingling,”
is a serious ethical violation.
Why must client money be held separately? To protect the clients’
funds: 1) from the lawyer’s business and personal creditors (should
the lawyer, for example, file for bankruptcy); 2) from the lawyer’s
intentional or negligent spending or “borrowing” of the
funds for the lawyer’s own business or personal purposes; and
in some cases 3) until a claim against the funds by a third party can
be adjudicated. As the California Supreme Court articulated many years
ago:
Are there any exceptions to the duty to maintain client funds separately?
Yes. D.C. Rule 1.15(d) permits a lawyer to treat advances in fees
and expenses as the lawyer’s property if—and only
if—the client gives informed consent to that arrangement. As the
D.C. Bar Legal Ethics Committee explained recently in Legal Ethics Opinion
348:
Rule 1.15(d) permits the deposit of advance fees into a lawyer’s
operating account provided that the client provides informed consent.
Such fees are treated as the lawyer’s property, although she has
the obligation to and must have the wherewithal to repay them promptly
if she does not earn them. To ensure that the consent provided by a
client is “informed consent,” the lawyer must explain that,
unlike fees deposited in a trust account, these fees can be attached
by the lawyer’s creditors because legally they are the lawyer’s
property.[12]
Admittedly, the exception in Rule 1.15(d) creates a hole in the ability
of the ethics rules to protect funds that clients are otherwise entitled
to have returned to them. In In Re Mitchell, the exception led
to a disciplinary problem for a lawyer who failed to promptly communicate
to his client that the lawyer had filed for bankruptcy. In that matter,
the client’s unearned $10,000 fee advance had been deposited into
the lawyer’s operating account and, thus, upon the lawyer’s
filing for bankruptcy, had become part of the property of the lawyer’s
estate, subject to the provisions and preferences established under
the substantive law.[13] To be clear,
the disciplinary violation in Mitchell was not the loss of the
client’s advanced fee to the lawyer’s creditors but, rather,
the court found the problem resulted from the lawyer’s failure
to take reasonable measures to protect the client’s interests
by promptly notifying the client about the bankruptcy.[14]
A final consideration for any lawyer contemplating bankruptcy is that
he or she will likely need to disclose the existence of all trust accounts
in the filing. Such disclosures allow the bankruptcy trustee to search
for debtor assets and to ensure that the lawyer is not hiding his or
her own assets in the trust accounts.[15]
In conclusion, whether bankruptcy is an unlikely possibility or an
imminent probability, maintaining and preserving clients’ funds
separate from lawyers’ funds pursuant to Rules 1.15(a) and 1.19(a)
is assuredly the best way to protect clients’ property from lawyers’
creditors. No doubt, such care also goes a long way in protecting lawyers
from being caught up in the disciplinary system.
Notes
[1] A quick survey of the rules and procedures
of other bars, as is the case in the District of Columbia, suggests
that Maryland, Virginia, California, Florida, New York, and Texas do
not require a lawyer to report a bankruptcy filing to either the state
bar or to the state’s lawyer disciplinary authority.
[2] As a condition of membership, the
D.C. Bar requires lawyers to file a registration statement with their
annual membership dues, which includes certain demographic information
such as current residence and office addresses, telephone numbers, and
other jurisdictions in which they are admitted to practice law, including
date of admission. See Rule II, Section 2(3) of the D.C. Court
of Appeals’ Rules Governing the Bar. Failure to comply with Rule
II may result in an administrative suspension.
[3] Rule XI is available at www.dcbar.org/inside_the_bar/
structure/bar_rules/rule11.cfm.
[4] This requirement, however, is subject
to the confidentiality requirements of Rule 1.6 and other law. See
Rule 8.3(c).
[5] This rule, which is very broad, requires
a D.C. lawyer not only to report known misconduct of another D.C. lawyer
to OBC, but also to report known misconduct of a lawyer not admitted
in the District of Columbia to that lawyer’s appropriate disciplinary
authority (e.g., to the jurisdiction(s) in which the other lawyer is
admitted).
[6] See Rule XI, Section 10. Disciplinary
Proceedings Based Upon Conviction of Crime.
[7] Rule XI, Section 11(a). Reciprocal
Discipline (a) Definition. As used in this section, (1) “state”
shall mean any state, territory, or possession of the United States,
and
(2) “disciplining court” shall mean (a) any court of the
United States as defined in Title 28, Section 451 of the United States
Code; (b) the highest court of any state; and (c) any other agency,
commission, or tribunal, however denominated, that is authorized to
impose discipline effective throughout a state.
[8] For example, Maryland, Virginia,
California, Florida, New York, and Texas all require individuals seeking
admission to the Bar to indicate on their written applications whether
they have ever filed for personal bankruptcy.
[9] See Rules 1.15(a) and 1.19(a).
Pursuant to Rule 1.15(e) of the Rules of Professional Conduct and Appendix
B of the Rules Governing the Bar, Interest on Lawyers’ Trust Accounts
(IOLTA) should be used for all client funds that “are nominal
in amount or expected to be held for a short period of time.”
An IOLTA is a type of pooled clients’ trust account in which the
interest revenue accrued is forwarded quarterly by the banking institution
to the D.C. Bar Foundation for the benefit of legal services providers.
[10] Similarly, the lawyer’s
money must not be kept in a trust account or escrow account. Rule 1.15(f)
clarifies that a lawyer may place “a small amount of the lawyer’s
funds into a trust account for the sole purpose of defraying bank charges
that may be made against the account.”
[11] See In re Hessler 549 A.2d
700 (DCCA 1988), quoting Clark v. State Bar, 39 Cal.2d
161, 246 P.2d 1, 5 (1952) (citing Peck v. State Bar, 217 Cal.47,
51, 17 P.2d 112, 144 (1932)).
[12] D.C. Legal Ethics Op. 348 (Accepting
Credit Cards for Payment of Legal Fees) (2009).
[13] This column does not address the
underlying law related to the filing of a petition for bankruptcy under
either Chapter 7 or Chapter 11 of the United States Bankruptcy Code.
11 USCS 7 (2008); 11 USCS 11 (2008).
[14] See In Re Mitchell, 727
A.2d 308 (D.C. 1999). At the time of the court’s decision, Mr.
Mitchell’s client had been able to recover only $4,200 of the
unearned legal fees through a settlement with the bankruptcy trustee
that occurred 18 months after the bankruptcy petition was filed. The
court found that in failing to notify his client until 16 months after
the filing, Mr. Mitchell had failed to “take timely steps to the
extent reasonably practicable to protect the client’s interest
under Rule 1.16.” Significantly, the court reasoned that pursuant
to the Bankruptcy Code, the client may, in fact, have been able to arrive
at a better settlement with the bankruptcy trustee earlier in the proceeding
and, in any event, should have been given that opportunity by his counsel.
[15] Intentionally hiding lawyer assets
in a trust account is likely to constitute both commingling under 1.15(a)
and dishonest conduct under Rule 8.4(c).
Legal Ethics counsel Hope C. Todd and Saul Jay Singer are available
for telephone inquiries at 202-737-4700, ext. 3231 and 3232, respectively,
or by e-mail at ethics@dcbar.org.
Disciplinary Actions Taken by the Board on Professional Responsibility
Hearing Committees on Negotiated Discipline
IN RE GARLAND H. STILLWELL. Bar No. 473063. June 4, 2009. The Board
on Professional Responsibility’s Hearing Committee Number Eleven
recommends that the D.C. Court of Appeals accept Stillwell’s petition
for negotiated disposition and suspend him 60 days for violation of
Rules 1.7(b)(1) and 8.4(c).
Disciplinary Actions Taken by the Board on Professional Responsibility
Original Matters
IN RE RICHARD W. ALLISON JR. Bar No. 491626. June 30, 2009. The Board
on Professional Responsibility recommends that the D.C. Court of Appeals
disbar Allison. Allison pleaded guilty to charges of conspiracy to commit
mail and wire fraud in violation of 18 U.S.C. §§ 1341, 1343,
and 1349, crimes involving moral turpitude per se, for which disbarment
is mandatory under D.C. Code § 11-2503(a) (2001).
IN RE MICHAEL RJ DAVIS. Bar No. 470652. June 1, 2009. The Board on
Professional Responsibility recommends that the D.C. Court of Appeals
disbar Davis by consent.
Disciplinary Actions Taken by the District of Columbia Court of
Appeals
Reciprocal Matters
IN RE BINCY Y. ABRAHAM. Bar No. 467279. June 11, 2009. In a reciprocal
matter from New Jersey, the D.C. Court of Appeals suspended Abraham
three months with fitness as identical reciprocal discipline. Abraham
was suspended in New Jersey for violating New Jersey Rules of Professional
Conduct 1.15(a) (failure to safeguard funds), 1.7 (conflict of interest),
5.4(c) (allowing third party to direct and regulate lawyer’s professional
judgment in rendering legal services to others), 8.4(c) (misrepresentation),
and 1.15(d) (record keeping).
IN RE VINCENT M. AMBERLY. Bar No. 365590. June 25, 2009. In a reciprocal
matter from Virginia, the D.C. Court of Appeals imposed substantially
different discipline and suspended Amberly 30 days. The Virginia State
Bar Disciplinary Board admonished Amberly and ordered that he complete
six hours of continuing legal education within a year. The Virginia
board found that by failing to serve a counterclaim on the opposing
party, but then misrepresenting that he had served the counterclaim
in court pleadings in open court and to Virginia Bar Counsel, Amberly
(1) knowingly made a false statement of fact or law to a tribunal, (2)
knowingly made a false statement of fact or law in the course of representing
a client, (3) knowingly made a false statement of material fact in connection
with a disciplinary matter, and (4) engaged in conduct involving dishonesty,
fraud, deceit, or misrepresentation which reflects adversely on his
fitness to practice law.
The Office of Bar Counsel compiled the foregoing summaries of disciplinary
actions. Informal Admonitions issued by Bar Counsel and Reports and
Recommendations issued by the Board on Professional Responsibility are
posted on the D.C. Bar Web site at www.dcbar.org/discipline.
Most board recommendations as to discipline are not final until considered
by the court. Court opinions are printed in the Atlantic Reporter and
also are available online for decisions issued since August 1998. To
obtain a copy of a recent slip opinion, visit www.dcappeals.gov/dccourts/appeals/
opinions_mojs.jsp.
