Monday, July 30, 2018

Misappropriation Rule Not Applied To Litigation Finance Agreement

The District of Columbia Board on Professional Responsibility recommends that an attorney be disbarred for reckless misappropriation of funds due to a medical provider.

The board also affirmed a finding of a non-waivable conflict of interest in an unrelated (romance gone sour) matter. He represented his former girlfriend in litigation where their interests were directly adverse.

In a charge brought based on his admitted failure to repay a third-party litigation funder named Lawsuit Financial Corporation ("LFC")

we discuss – but do not adopt – the Hearing Committee’s conclusion that Rule 1.15 should apply to an alternative litigation-financing arrangement, in which an attorney undertakes a non-recourse obligation to pay a third-party lender a percentage of the fees that he recovers in a contingent fee representation. The substantive law relating to such arrangements is undeveloped, and the application of disciplinary misappropriation principles to such commercial arrangements raises weighty policy questions. Because we recommend Respondent’s disbarment on unrelated grounds, those complicated issues need not be resolved in this case. We therefore decline to find violations of Rules 1.15(a), (c), and (d) in the LFC matter

But the board had views

Here, as the Hearing Committee recognized, Respondent received the funds claimed by LFC in connection with a representation. LFC had purchased an interest in Respondent’s contingent fee recovery in cases he was handling in his capacity as an attorney admitted in the District of Columbia. The gross settlement amount was paid, jointly to Respondent and his client, in connection with a personal injury action  pending in a District of Columbia court. When Respondent received the settlement check, he deposited the entire amount in his trust account. A portion of those funds was client money, and LFC had a just claim to part of the amount due Respondent as attorney’s fees. Although Respondent disputed the amount of LFC’s claim, he concededly owed it at least $32,000 under the Agreements, and he obstinately failed to maintain that amount in his trust account. That failure, as explained by the Hearing Committee, violated the literal mandate of Rule 1.15 and, without more, would seem to constitute an intentional misappropriation requiring Respondent’s disbarment under the rubric of Addams. HC Rpt. at 78-80.

My view: If one violates the "literal mandate" of any rule, one has violated that rule. Wishing otherwise for policy reasons (as set forth below) does not alter or amend the ethical obligation.

We do not believe, however, that the analysis can or should end there. Respondent concedes that he failed to escrow the funds owed to LFC, but contends that his business dispute with a commercial litigation-finance company was beyond the reach of Rule 1.15. See R. Br. at 8-13. His argument is far from fanciful. Lawyers and law firms regularly engage in commercial transactions and, when they do, are subject to the ordinary rules of the marketplace. A lawyer who is claimed to be in default on a business loan need not escrow the amount in dispute, on pain of disbarment. The Agreements at issue in this case are commercial in nature. They did not affect any client’s financial interests, but instead were a small sample of a commercial litigation funding industry that has drawn sophisticated lenders distributing billions of dollars to bankroll a diverse range of lawsuits.

Application of Rule 1.15 to litigation funding arrangements could affect many of those transactions, possibly disrupting them in unanticipated ways. We are unaware of any judicial or disciplinary decisions applying Rule 1.15 (or its equivalents) to such arrangements, and the parties have candidly conceded they are aware of none.

The Hearing Committee recognized as much, and attempted to circumscribe its application of the Rule to the specific circumstances presented here, and not to “every commercial debt dispute by a lawyer.” HC Rpt. at 77. We question whether the Hearing Committee’s conclusion was correct, for three fundamental reasons.

First, LFC – the “third person” with a just claim seemingly contemplated by Rule 1.15 – was asserting its claim directly against Respondent, not against or through his client. The client’s financial interests were not at risk in the Agreements. Under those circumstances, the application of Rule 1.15 becomes less clear. The Court’s Rule 1.15 misappropriation decisions have consistently emphasized the fundamental value underlying the Rule: protection of the client’s interest and th eattendant confidence of the public in the legal profession...

Second, the pertinence of misappropriation principles to the Agreements in this case seems less certain because the funds provided by LFC were not “entrusted” by LFC to Respondent as a fiduciary; rather, those funds were sent to him in his role akin to that of a commercial borrower...

Finally, there are policy concerns that call into question the reasonableness of applying the concept of misappropriation to litigation funding arrangements. The Rules of Professional Conduct “are rules of reason. They should be interpreted with reference to the purposes of legal representation and of the law itself. . . .”

...Layering the misappropriation concept onto the commercial litigation funding marketplace would seem to expand the application of Rule 1.15 well beyond its fundamental purpose, the protection of clients’ interests.

In that regard, we cannot blind ourselves to the sanction applicable were we to find misappropriation here. In Addams and its progeny, the Court emphasized that severe sanctions are imposed in Rule 1.15 misappropriation cases, because misappropriation ‘“strike[s] at the core of the attorney-client relationship’ by undermining the public’s faith that attorneys will fulfill their duties as fiduciaries in handling funds entrusted to them by their clients.” Pierson, 690 A.2d at 948 (quoting Addams, 579 A.2d at 198-99); see also Dulansey, 606 A.2d at 190. Whether the stark threat of disbarment should hover over attorneys who enter into commercial litigation funding agreements where, as here, no client funds are at risk is also a serious question.

All of these difficult and subtle issues present themselves in the context of an industry that is itself in flux and of concern to courts, legislatures, and disciplinary authorities. Moreover, although ethics opinions in some states have approved such arrangements under certain conditions (see, e.g., New York, Florida, Nevada, New Jersey, South Carolina, and North Carolina), others have prohibited them (see, e.g., Maine, Utah, Michigan, Ohio, and Virginia). Neither the substantive legality nor the ethical propriety of such arrangements has yet been addressed in the District of Columbia.

For all of these reasons, we conclude that the propriety of applying Rule 1.15 to the litigation funding agreements in this case – which purport to be governed by Utah law – would be imprudent, since the resolution of that thorny question would not affect our recommended sanction. See, e.g., Travers, 764 A.2d at 250 (leaving resolution of an issue for a future case where case law “sparse and inconclusive”). Respondent committed reckless misappropriation in the Mack matter and, for that reason, must be disbarred.

Chair Robert Bernius authored In re Jonathan Dailey, which may be found at this link.

There are no concurring or dissenting opinions.

The hearing committee had reached a contrary conclusion, noting (aptly, in my view) that the litigation funder had a specific protected interest in the proceeds at issue

the Hearing Committee concludes that funds in Respondent's possession from his Hedgepeth fee, the rightful ownership of which was being challenged by LFC, should be treated no differently from a client's funds or a client's creditor's funds in terms of Respondent's obligation to segregate those funds in a trust account until the dispute with LFC was resolved.

(Mike Frisch)

Bar Discipline & Process | Permalink


This entire episode reminds me why young men and women do not want to practice law as solo practitioners. Remember the quote from the movie "Unforgiven": Bill Munny: "It's a hell of a thing killin' a man. You take away all he's got and all he's ever gonna have." That is what the Bar counsel tries to do every day to solo practitioners. They cannot fight the big guys, so we smaller men and women are their targets. Check the facts. It is true. But I will defeat them as justice will prevail.

Posted by: Jonathan C Daiiley | Oct 18, 2019 5:40:26 PM

Post a comment