Thursday, October 14, 2021
The New Jersey Supreme Court rejected the majority finding below of intentional misappropriation and concluded that censure should be imposed for negligent mishandling of entrusted funds.
The case demonstrates the court's lack of commitment to the principles articulated in the 1979 decision in In re Wilson, a case long regarded as an important precedent in matters involving knowing misuse of entrusted funds. See my updated comments below.
The Disciplinary Review Board majority found knowing misappropriation and recommended disbarment.
An overdraft led to a demand audit, which had found numerous recordkeeper violations but no misappropriation
As respondent constructed her records, she realized that, eighteen months earlier, in January 2016, she had advanced unrelated client trust funds to pay a debt owed by her client, John Petrelli, “while awaiting reimbursement of the [trust funds] by Petrelli.” On October 5, 2017, respondent reported this information to the OAE
From the DRB dissent where some members favored a three-month suspension and others a reprimand or censure
when the Supreme Court says that disbarment will “almost” always be the discipline imposed [for intentional misappropriation] , it plainly envisions the possibility of reasoned exceptions.
In our view, there is a world of difference between conduct showing bad character or wanton indifference and conduct that exhibits an isolated lapse of judgment unlikely to result in actual harm. Our ethics system, at its best, ought to take into account such meaningful distinctions in culpability in determining discipline – even for charges of knowing misappropriation. The unique confluence of facts in this case should make it an exception to the rule.
The facts are detailed in the majority decision and need not be repeated here. Suffice it to say that respondent’s conduct is the most “technical violation” of Wilson we have seen. In ways, respondent’s conduct was more an oversight, closer on the scale to a negligent misappropriation. After a large snowstorm and her husband’s medical emergency kept respondent out of her office for three days, she returned to find a letter from her adversary threatening to abruptly void a recent settlement if the agreed payment was not received in three days. To protect her client, respondent cut a check. Respondent was not conscious of any meaningful risk that writing a settlement check from her trust account would jeopardize the funds of other clients. It did not cross her mind. That is not surprising, given that there was no real-world risk to other clients.
Five days before she wrote the check, she had instructed her client to “immediately” send funds to cover the settlement, which she understood he would do. Because her client had a consistent track record of making payments promptly, she expected the same on this occasion. Under these circumstances, it was reasonable to expect that the settlement funds from respondent’s client would be received before the settlement check drawn on her trust account was even deposited.
Unfortunately, her client’s money to fund the settlement arrived a few days later. Respondent had enough funds available in her business account to cover any shortfall. Moreover, the bulk of the money in respondent’s trust account was held as a deposit relating to a pending sale of her sister’s home, which was expected to later be used by the sister to buy their mother’s home. Respondent in turn expected to and did eventually share in the proceeds once their mother’s estate was settled.
Any risk to funds entrusted to respondent by other clients was remote, theoretical, and negligibly brief. There was no motive other than to protect her client’s settlement; no self-interest; no dishonesty; no premeditation or plot; no obfuscation; no recurrence; no harm; and no grievance by any client. After later realizing her incomplete knowledge of proper recordkeeping, respondent responsibly took a course to increase her awareness of trust fund management. She also self-reported the incident by highlighting it to the Office of Attorney Ethics, which had not previously known of this lapse. Respondent thereafter fully and truthfully cooperated with the OAE investigation.
Nothing about this incident suggests that respondent lacks professional integrity. In our view, disbarring a lawyer with an unblemished record and an admirable reputation after nearly twenty years of practice based on a fleeting, isolated oversight would be far too harsh a sanction. It is worth noting that the District Ethics Committee below found negligent misappropriation only and recommended a censure.
I'm not sure I have a problem with this result but the court should have explained how this was either negligence (a tough sell on the facts) or an exceptional circumstance.
A voluntary self-report where there is little to no likelihood of detection is a huge mitigating factor in my eyes.
I took that position as a disciplinary prosecutor in this case. (Mike Frisch)
UPDATE: I've now taken a closer look at the DRB majority report in this very important matter.
The District Ethics Committee found negligence and recommended a censure. On review, the DRB majority - consistent with any common understanding of the term - found the conduct was knowing and that disbarment was compelled under the court's In re Wilson precedent.
The court's order finds negligence without any explanation, in a way that sub silentio overrules Wilson.
When it comes to professional discipline for mishandling entrusted funds (aka other people's money), New Jersey appears to have a shadow docket.