DISTRICT OF COLUMBIA COURT OF APPEALS BOARD ON PROFESSIONAL RESPONSIBILITY

Transcription

1 DISTRICT OF COLUMBIA COURT OF APPEALS BOARD ON PROFESSIONAL RESPONSIBILITY In the Matter of: : : HENDRITH V. SMITH, : Bar Docket No : Respondent. : REPORT AND RECOMMENDATION OF THE BOARD ON PROFESSIONAL RESPONSIBILITY Respondent was admitted to the District of Columbia Bar on January 6, He had not previously been admitted to any bar. He opened an office as a solo practitioner in the spring of Within the first eight months of his law practice, Respondent had engaged in a misappropriation involving a small amount of third party funds he had received on behalf of one of his clients in settlement of a personal injury complaint. The primary issue in this case is whether that misappropriation should be deemed to be at least reckless or should be considered negligent, in light of the circumstances surrounding the misconduct. Respondent s primary argument for a finding of negligence is that he was a brand new, solo practitioner and he misunderstood the rules. He understood that he had to have a trust account for client funds and had used one in other cases in which he held client funds. He did not understand that he was required to hold third party funds in trust, separate from his own funds.

2 The Hearing Committee found that Respondent had commingled funds belonging to third parties with his own, in violation of Rules 1.15(a) and 1.17(a). 1 The Committee also found that Respondent had misappropriated third party funds. The Committee found that Bar Counsel had not established that Respondent engaged in conduct involving dishonesty, in violation of Rule 8.4(c). The Committee concluded that Respondent s misappropriation was negligent and recommended a one-month suspension. Bar Counsel has excepted to the Hearing Committee s finding on the charge of dishonesty and to the Committee s conclusion that the misappropriation was negligent. This case presents a difficult issue of how far the disciplinary system should go in accepting a mistake as to the obligations concerning the use of entrusted funds as a basis for finding negligent misappropriation. The Court has accepted a similar argument as a basis for a finding of negligent misappropriation in In re Travers, 764 A.2d 242 (D.C. 2000), In re Ray, 675 A.2d 1381 (D.C. 1996) and In re Fair, 780 A.2d 1106 (D.C. 2001). 2 In our view, the cases accepting the defense of misunderstanding of the governing requirements are distinguishable and should not be applied in this case. The argument that an attorney did not understand his ethical requirements has the potential to eviscerate the strict rules that protect entrusted funds. We consider ourselves bound by In re Anderson, 778 A.2d 330 (D.C. 2001), and In re Addams, 579 A.2d 190 (D.C. 1990)(en banc) to recommend that the Court find Respondent guilty of reckless misappropriation and, accordingly, to disbar him. 1 Bar Counsel withdrew a charge of failing to communicate his fee to the client, in violation of Rules 1.5(b) and (c). 2 Fair s precedential value is minimal because of the unique circumstances of that case, as emphasized in the Court s opinion. 780 A.2d at

3 FACTS Respondent came to this country from the Bahamas in He worked his way through college, graduate school and law school. He lived with a relative on the Eastern Shore and commuted to the District of Columbia School of Law, graduating in After law school, Respondent worked for a time at a firm in Washington, D.C. He then returned with his family to the Bahamas and considered remaining there. Respondent took the District of Columbia bar exam in January 1996 and passed. He traveled from the Bahamas to be sworn in January Sometime in the spring of 1997, Respondent moved back to the District of Columbia and opened his law practice. He took a mandatory bar course on the handling of entrusted funds in December 1997, after the events at issue here. Shortly after opening his law practice, Respondent opened two accounts at Nations Bank, a Business Economy Checking Account and an IOLTA account. In July 1997, Respondent began representing Ms. Salha Saleh in a personal injury matter. Ms. Saleh had been represented by another attorney, Roberta Wright, who referred the case to Respondent, because it appeared that the case would not be settled without litigation. Ms. Wright had executed an Assignment and Authorization Agreement ( A & A ) with a medical provider, Neurodiagnostic Associates. Respondent negotiated a settlement. On or about September 8, 1997, the Maryland Automobile Insurance Fund issued a check made payable to Salha Saleh and Respondent in the amount of $2,920.36, in settlement of Ms. Saleh s personal injury claim. Ms. Saleh endorsed the check. She understood that Respondent would deposit the check and take out his attorney s fees. She understood that all of the additional money was owed to medical providers. Ms. Saleh 3

4 wanted the balance paid to her in order to pay the medical bills herself. Respondent agreed to try to negotiate a reduction in the medical bills. On or about September 15, 1997, Respondent deposited the $2, in his business account. The account had outstanding fees, so the account was credited with $2, Respondent was entitled to an attorney s fee of $ from the proceeds of the settlement. The remaining $1, were required for the payment of medical bills. On October 23, 1997, Respondent wrote to Ms. Saleh indicating that he had been unable to negotiate a reduction in the medical bills and that he could not make payment directly to her. He stated that he had paid Neurodiagnostic. He attached a copy of a check made out to Neurodiagnostic for $1,220 and his cover letter to Neurodiagnostic. He stated also that he would pay the remaining medical bills. Ms. Saleh was angry that Respondent was paying the medical bills directly rather than to her. After a telephone call in which Ms. Saleh hung up on Respondent, he wrote to her on October 29, 1997, enclosing a check for the balance of the settlement monies, $727.89, with the notation Balance from settlement medicals. He indicated that he expected her to pay the rest of the bills herself. The check for $ was deposited by Ms. Saleh and presented for payment on November 18, There were sufficient funds in the account to cover the check when it was presented for payment. The Neurodiagnostic check dated October 23, 1997, was mailed to Neurodiagnostic at Suite 216 in the Washington Hospital Physicians Office Building. During this period, Neurodiagnostic moved to Suite 2600 in an adjoining office tower of the same complex. Neurodiagnostic did not receive the October 23, 1997 check. On or about October 30, 1997, 4

5 Respondent was informed by Neurodiagnostic that the check had not been received. Respondent was told to wait to see if the check was received and, if not, to reissue the check. When Respondent was told to reissue the check, he did so. He issued another check for $1,220, dated December 4, That check was received by Neurodiagnostic on December 8, 1997, and presented for payment on December 12, There were sufficient funds in the account to cover the check when it was presented for payment. From September 15, 1997, when the settlement money was deposited in his account, until November 18, 1997, when Ms. Saleh cashed the $ check, Respondent was obliged to have at least $1, in his business account to cover the amounts due the medical providers. From September 17, 1997 through October 14, 1997, however, and again from October 20 through November 12, 1997, Respondent s business account balance was below $1, From November 18, 1997 until December 12, 1997, when Neurodiagnostic cashed its check, Respondent was obliged to have at least $1,220 in his business account to cover the outstanding check. From November 26 through November 28, 1997, however, the balance in Respondent s business account was below $1,220. During these periods, the checks causing the account to fall below the amount needed to cover the entrusted funds were for a variety of business and personal reasons. Respondent testified and the Hearing Committee found that, during the period of time relevant to these allegations, Respondent believed that the settlement money did not have to be deposited into his IOLTA account, because it was a small amount of money and it was not owed to the client but to third party providers. Respondent also testified that, based on his inquiries to 5

6 the bank and his efforts to keep track of his deposits and checks, he believed that there were sufficient funds in his account to cover any check he wrote. ETHICAL VIOLATIONS There is no doubt that Respondent is guilty of misappropriation. Misappropriation occurred when the balance in Respondent s business account dipped below the amount Respondent was required to hold in trust for his client s medical providers. In re Micheel, 610 A.2d 231, 233 (D.C. 1992). Bar Counsel also charged Respondent with dishonesty and has excepted from the Hearing Committee s conclusion that Bar Counsel did not prove that violation. The basis for Bar Counsel s charge of dishonesty is Respondent s letter to his client on October 23, 1997, stating that he had mailed a check to Neurodiagnostic for $1,220. The Hearing Committee found no indication at all that Respondent did not believe what he was saying in the letter.... There is no indication in the record that Respondent intended to mislead Ms. Saleh. In fact there is an indication that Respondent was trying to be responsible by seeing to it that Neurodiagnostic got paid by resisting his client s pressure to pay the settlement check directly to her. We agree with the Hearing Committee that there is no evidence of dishonesty on this record. SANCTION The troublesome issue here is the appropriate sanction for Respondent s misappropriation. One of the difficulties in evaluating the record in this case is that the hearing was conducted before the Court s decision in Anderson. Prior to Anderson, there was confusion over whose burden it was to demonstrate that misappropriation was the result of negligence or something more. 778 A.2d at 332. Bar Counsel believed that it was the Respondent s burden to 6

7 demonstrate that misappropriation was the result of simple negligence. Id. at 335. Thus, in this case, Bar Counsel relied on the evidence that Respondent knew that he was obligated to protect the money to which the medical providers were entitled and that the balance in the account in which entrusted funds were held dipped repeatedly below the amount Respondent was required to hold in trust. Bar Counsel did not present additional evidence to demonstrate that the misappropriation was reckless or intentional. Respondent testified that at all relevant times, he believed that he had sufficient funds to cover any check he wrote. Tr He was not asked whether he believed he had sufficient funds to cover the amount he was required to hold in trust. At oral argument, conducted after Anderson, Bar Counsel pointed to documentary evidence that Respondent made numerous automated account inquiries, on days in which the balance in the account was below the amount Respondent was required to hold in trust. Although he was not questioned at the hearing about what he learned from these inquiries, Respondent was asked by a member of the Hearing Committee whether the automated account inquiries reflected in his bank records were instances in which he had contacted the bank to obtain his balance. He affirmed that they were. Tr Thus, Bar Counsel argues, Respondent must have known that the funds in the account were not sufficient to cover the entrusted funds and his continued use of the money in the account to pay his business expenses constitutes an intentional use of entrusted funds for his own purposes. We do not think it can be determined on this record what Respondent learned from any given inquiry, because of the potential discrepancy between the balance reported in response to a request during the day and the ledger balance reported on the bank statements. On the other hand, we do think the repeated inquiries establish that Respondent must have learned, on at least 7

8 some occasions that the balance in the account was insufficient to cover the funds he was required to hold in trust for the medical providers. The inquiries were made almost daily during periods when it appears that the balance never was above the amount of the entrusted funds. He then continued to write checks for business and personal expenses with knowledge that the account balance was below, or at least perilously close to being below, what he was required to hold in trust. That conduct demonstrates recklessness in dealing with his business account. We arrive at this conclusion while crediting Respondent s testimony that he mailed a check for $1,220 to Neurodiagnostic on October 23, 1997, that he believed would be cashed. Even accepting that, after October 23, 1997, Respondent believed that Neurodiagnostic had been paid, there were numerous days before October 23 when the balance dipped below $1, and numerous days after October 23, 1997, when the balance dipped below the $ needed for the other medical providers. Respondent s method of keeping track of his business account continually subjected him to the risk that there would be insufficient funds in the account when a check was presented for payment. In the period immediately preceding his deposit of the settlement funds at issue here, several checks were presented for payment and were returned by the bank because of insufficient funds. One of those checks, written for $1,150.00, was returned for insufficient funds on September 11, It was presented again on September 17, 1997, and cleared only because the settlement proceeds at issue here had been deposited on September 15, There were no checks returned for insufficient funds in October 1997, but four checks were returned for insufficient funds between November 7 and November 19, Four checks were returned for insufficient funds between December 1 and December 8,

9 Even assuming that Respondent believed, on October 23, 1997, that there were sufficient funds to cover the check to Neurodiagnostic and, on October 29, 1997, that there were sufficient funds to cover the check to his client, he must have known that the balance reported by the bank on any given day might not reflect checks that had been written, but had not cleared. Thus, for instance, when Respondent continued to write checks on the account in the days immediately following October 23, 1997, he must have known that he might be reducing the balance before the October 23, 1997 check had cleared. In fact, it appears from the bank records that if the October 23, 1997 check had been presented for payment on any day between October 23 and November 17, 1997, there would have been insufficient funds in the account to cover the check. Similarly, if the October 29 check had been presented for payment on any day between November 5 and November 17, 1997, there would have been insufficient funds in the account to cover the check. 3 It is risky business for a lawyer to operate his business checking account in this fashion. When the checking account contains entrusted funds, the risk is imposed on the third parties who are entitled to those funds. The disciplinary system has made clear that that risk is unacceptable. The difficulty with a finding of reckless misappropriation and the consequent mandatory disbarment here is that it appears that Respondent honestly did not believe that third party funds are subject to the same requirements as are client funds. The fact that Respondent had set up and used an IOLTA account for settlement funds that included client funds supports his testimony 3 Respondent suggested that his practice was not reckless because he thought the bank would cover his overdrafts. There was no evidence presented that Respondent in fact had overdraft protection. Even if he had such protection, it would not prevent a finding of reckless misappropriation when Respondent knowingly or recklessly allowed the balance in the account to dip below the amount he was required to hold in trust. In re Pels, 653 A.2d 388, 394 (D.C. 1995). 9

10 that he simply did not understand the rules regarding third party funds. Respondent also testified very convincingly and sympathetically before the Hearing Committee. He described his background, the effort it had taken for him and for his whole family for Respondent to be able to become a member of the bar. He expressed remorse for his misconduct and apologized to his client for subjecting her to the disciplinary process. He told the Hearing Committee that [t]here is nothing that I have worked so hard for, that I have given up so much for, that I have sacrificed so much for to finish to see that my bar is on the line. The Hearing Committee clearly believed that Respondent did not mean to do anything dishonest or anything that violated the ethical rules. He was a new practitioner and he made a serious mistake. Under Anderson, the issue is whether Respondent s conduct has been shown to be reckless or intentional. 778 A.2d at 338. On this record, it is hard not to find that his conduct in dealing with the third party funds was reckless. Respondent knew that he was obligated to protect the money to which the medical providers were entitled. He considered himself bound by the Assignment and Authorization signed by his predecessor attorney, yet he demonstrated an unacceptable disregard for the safety and welfare of entrusted funds. Id. The troublesome issue before us is whether Respondent s misunderstanding of the rules that governed his conduct warrants a finding that his misappropriation was negligent. Generally, a mistake of this sort does not excuse misconduct. 4 If it did, every lawyer who violates a disciplinary rule would defend himself by saying that he did not understand the rule. The 4 A misunderstanding regarding the governing ethical rules is distinguishable from a genuine mistake of fact regarding the attorney s entitlement to funds. See In re Haar, 698 A.2d 412 (D.C. 1997)(where the court found negligent misappropriation when the attorney withdrew settlement proceeds on the mistaken belief that he was entitled to take the funds as his fee). 10

11 argument against such a defense is particularly apparent in this context. The goal of protecting client and third party funds would be undermined if lawyers who commingle funds were excused by their failure to understand the disciplinary rules. Despite the general rule, the Court has considered a Respondent s honest mistake as to the requirements governing his conduct in determining whether a misappropriation was negligent or reckless. In Travers, for instance, the attorney took fees from the estate he represented without obtaining prior court approval. 764 A.2d at 245. The Court found that the attorney s misappropriation was negligent, because he did not believe that the requirement for prior court approval applied to him. Id. at 250. Similarly, in Ray, the Court found negligent misappropriation, where the attorney did not know he could not take fees without an accounting. 675 A.2d at In significant respects, the argument for a finding of negligence in this case is more powerful than it was in Travers. In Travers, the attorney refused to refund the fees he had taken, even after he was told in a ruling by the Court that his interpretation of the governing statute was wrong. 764 A.2d at 246. In this case, Respondent paid the third party providers and his client the funds to which they were entitled. The record supports the Hearing Committee s finding that Respondent s misconduct was the result of his ignorance of the governing ethical principals. He established an IOLTA account and used it for all settlement funds that included client funds. Thus, his testimony that he just did not understand that the requirement applied to settlements involving only third party funds is credible and distinguishes this case from those in which a lawyer simply did not bother to learn or attempt to comply with the ethical rules. Respondent testified that he now does understand 11

12 the rules and will not make the same mistake again. He also testified that he has hired an accountant to remedy his inadequate accounting practices. Although Respondent presents a sympathetic case, we decline to extend Travers and Ray to the facts here. The statute that was violated in those cases was not fundamental to the ethical standards imposed on lawyers, as illustrated by the fact that, subsequent to the misconduct, the statute was repealed. The rule of which Respondent was unaware, that third party funds must be kept inviolate, is fundamental to the standards governing the legal profession. We do not think it wise to extend Travers and Ray to a defense based on an attorney s failure to understand the fundamental rules governing his conduct as a lawyer. This is an unfortunate case. It is another case where a solo practitioner did not have the support he needed to avoid serious ethical missteps in the first months of his practice. Respondent has taken steps to ensure that he does not repeat this mistake. On these facts, disbarment is a harsh sanction. Under the standards set out in Anderson, however, we find that Respondent s misappropriation was reckless. We decline to recommend that a mistake as to the governing ethical requirements should render that misconduct negligent. There remains the question whether there is any basis for suspending or staying the sanction of disbarment. We understand the Court in Pels to have said that, absent extraordinary circumstances, a division of the Court has no authority to stay a disbarment, except in cases presenting Kersey type mitigation. 653 A.2d at 398. Pels also found that the facts of that case, where the misappropriation occurred during his first representation of a plaintiff in a contingent fee personal injury matter, id. at 389, were not sufficient to warrant a finding of extraordinary circumstances. Id. at

13 There are factors cited in Pels that are not present here, including 1) the lengthy time during which the misappropriation occurred, and 2) Respondent s failure to turn over the funds to his client after the bills had been paid. Id. at Nevertheless, we do not believe that the facts of this case, sympathetic though they be, qualify as extraordinary circumstances as envisioned by the Court. Accordingly, viewing ourselves bound by Addams, 579 A.2d at 191, we recommend that the Respondent be disbarred. BOARD ON PROFESSIONAL RESPONSIBILITY By: Elizabeth G. Taylor Dated: February 14, 2002 All members of the Board concur with this Report and Recommendations except Mr. Baach and Mr. Wolfson, who did not participate. 13