State Bar Moves Forward on Client Trust Account Audits

The State Bar is moving forward with random audits of attorney client trust accounts.  A presentation to the Regulation Admissions and Discipline Oversight Committee (RAD) Thursday April 17 detailed preliminary steps taken to institute such audits, including determination of the sample population and necessary changes in statutes or rules to authorize such audits and create an enforcement mechanism.  A consultant has been engaged to work on the sample issue and the State Bar Office of General Counsel has been tasked with reviewing the existing law and recommending changes.  It is hoped that the costs of such audits can be reduced by relying on attorney self-reporting through a detailed questionnaire, rather than relying on teams of full-fledged auditors to examine records

The Bar recognizes that it currently does not have the authority to conduct such an audit unless there has been a client complaint (Bus. & Prof. Code section 6091.) There was discussion at RAD about instituting the audits as a voluntary program, in part (OGC) perhaps to determine how serious a problem non-compliance with the client trust account rules is.

Either voluntary or compelled compliance with an audit request raises privilege issues because misappropriation of client funds raises the possibility of criminal prosecution.  An attorney’s statutory duty to cooperate with a State Bar investigation is circumscribed by the availability of Constitutional or statutory privileges (Bus. & Prof. Code section 6068(i).)  Would these Constitutional or statutory privileges be available to the respondent in an audit?  The State Bar is required by statute to furnish evidence of criminal conduct to the prosecuting agencies (Bus. & Prof. Code section  6044.5)(a)) essentially making the State Bar an agent of the prosecutor.  Would a response mandating disclosure of misappropriation be an unreasonable search and seizure under the Fourth Amendment if there is no client complaint?

Californian’s have a Constitutional right to privacy under Article I, section 1 of the state constitution.  That right extends to financial records and specifically to client trust records (Hooser v. State Bar (2000) 84 Cal. App. 4th 997.)  Attorneys also have duty to maintain the confidences of their clients “at every peril to themselves.” (Bus. & Prof. Code section 6068(e).)   Production of an attorney’s client trust account records in the course of a State Bar investigation usually requires extensive redaction of the confidential information concerning other clients.

It is unknown whether these issues are within the purview of the OCC’s review of enabling legislation.

It is to be hoped that the proposal for random client trust account audits, once fully fleshed out, will be subject to the public comment process at the Board of Trustees level.  But another concept discussed at the Board level at its January 2014 meeting, requiring advanced fees in trust, suddenly found itself embedded in AB 1515 without such vetting.

The ongoing transformation of the State Bar has introduced some uncertainty in the process by which lawyers have input into these proposals. It’s probably not too early for California lawyers to make themselves heard informally on the issues raised by random client trust account audits.


UPL and the Lawyer’s Halo of Trust

The Question

At the last panel of the State Bar Ethics Symposium in San Francisco in April 2014, John Steele posed a question to his fellow panelist, Chas Rampathal, General Counsel of Legal Zoom, about what ethical rules presented the biggest obstacles to the provision of alternative legal services.  Unfortunately, time ran out before the question could be fully discussed.

A recent published Review Dept. decision may help fill in the answer.  In the Matter of Huang deals with a highly commoditized form of legal service, representing borrowers in loan modification, and a lawyer’s culpability of aiding the unauthorized practice of law.

The Halo of Trust

Despite our negative image, lawyers are still perceived as professionals who can be trusted.   Non-lawyer legal service providers do not yet share this halo of trust.  Part of the purpose of lawyer discipline proceedings is to maintain that halo and non-lawyers legal service providers lack it because there are no comparable mechanisms to police their behavior.   Because what they do is illegal.  At least sometimes.

In the matter before us the clients engaged the services of respondent. They expected and were entitled to have the services of an attorney in evaluating and settling their personal injury claims. Instead, they got the services of an adjuster and his negotiators, housed in offices bearing respondent’s name, with phones answered in respondent’s name and correspondence and negotiations conducted in respondent’s name, with little or no input from respondent.

In the Matter of Bragg (Review Dept. 1997) 3 Cal. State Bar Ct. Rptr. 615 (1997 WL 215942).  Bragg involved an attorney who entered into a business relationship with a non-attorney “adjuster” to process his pre-litigation personal injury cases.  California Insurance Code section 15007 provides for a “public insurance adjuster [which] includes one who, for compensation, assists an insured in negotiating for or effecting a claim on behalf of an insured.

The Magic of the Lawyer’s Mantle

Bragg’s argument was essentially if the adjuster could do what he does on his own, how can I be culpable of aiding the unauthorized practice of law?  The Review Dept.’s answer was that those activities by a lay person, even if sanctioned by statute, become the unauthorized practice of law when that person is working under the aegis of an attorney.

Strangely, Bragg was not charged by the Office of Chief Trial Counsel (OCTC) with aiding the unauthorized practice of lawin violation of Rule Prof. Conduct 1-300(A). But they also had charged Bragg with acts of moral turpitude in his relationship with Hickman.  The Review Dept. found that Bragg “knew that he was abdicating his responsibilities as an attorney and acted purposefully in allowing Hickman to engage in activities which constituted the practice of law.”  OCTC didn’t spot the 1-300 violation; but Bragg was expected to.

The gravamen of what the Review Dept. articulated is a false advertising argument.  You hired an attorney but you got an adjuster.  You are entitled to individualized legal counsel, even if all you really wanted was the medical bills paid and legal extra cash.  In Richard Susskind‘s terms, you are entitled to (and presumably paying for) the “bespoke” legal services of a lawyer.   But something else comes with those “bespoke” services;  the expectation of an individual relationship of trust.

When a lawyer is involved, the nature of the service changes, transmutes.  It’s now imbued with the intangible, almost mystical, aspect of the lawyer as counselor.  Just as other cases dealing with unauthorized practice of law, there is almost religious qualify ascribed to the attorney-client relationship;  indeed, Benninghoff v Superior Court (2006) 136 Cal.App.4th 61, 68 speaks about what a “defrocked” lawyer may or may not do.

Huang, like Bragg, had an opportunity come his way.  It knocked in the form of the loan modification practice of an attorney who files had been seized by the Orange County DA.  Attached to those 100 files were two non-attorneys, Martinez and Campos, who operated under the name National Mitigation Service (NMS.) Mr. Huang had only been admitted three years when he began working with Martinez and Campos.  He told the Orange County and the State Bar that he would be hiring NMS to “process” the files.

The State Bar apparently did not inquire closely into what Huang’s role would be in that processing.  But just three years later it charged Huang with aiding the unauthorized practice of law.  The hearing judge found that the State Bar did not prove its that charge by clear and convincing evidence.  The Review Dept. seemed incredulous:

Huang created a lay negotiating service that permitted non-lawyers to practice law and elevated profit above the clients’ interests. …. “Although [loan modification] services might lawfully have been performed by . . . brokers, and other laymen, it does not follow that when they are rendered by an attorney, or in his office, they do not involve the practice of law. People call on lawyers for services that might otherwise be obtained from laymen because they expect and are entitled to legal counsel.” By delegating all the work on loan modification cases to nonattorney staff, Huang failed to “competently evaluate the client’s claim and represent the client appropriately.” [citing Bragg] Accordingly, we find he violated rule 1-300(A) in all eight client matters.

Emphasis added.  Huang’s practice had between 500 and 800 clients.  Those familiar with loan modification practice under programs like HAMP will know that it bore little relationship with the type of real time negotiating that lawyers typically engage in, except for occasional instances where a lawyer’s clout will have an impact.  This has changed a little with the enactment with the Homeowners Bill of Rights which has given lawyers a new and expanded potential role in loan modification.   But by and large it is the kind of commoditized legal service that could be more cheaply performed by someone who does not have the legal training of a lawyer.


The Missing Ingredient: Vitamin T

One can see why the Review Dept. granted OCTC’s motion to publish Huang.  It re-states the core selling value of the legal profession that lawyers are offering a highly individualized product:  a special relationship of trust with client.   That kind of personal attention to the client is often lacking when dealing with a highly commoditized high-volume practice such as loan modification.  Many aspects of a commoditized law practice can be more cheaply accomplished by non-lawyers but the lawyer has to be involved, not only in supervising the non-lawyers (who may know more about the subject matter of the practice) but to fulfill the client’s expectation of trust.  That means contact with the client.

Part of the reason that halo rests so heavily on the lawyer’s head is that lack of enforcement mechanisms like professional discipline for non-lawyer legal providers, a consequence of their general prohibition.   The State Bar of California is creeping slowly toward recognizing legal providers who are less credentialed than lawyers but the trend in the short term is to maintain, and indeed strengthen the remedies for non-lawyers delivering legal services.  The State Bar is actively seeking the ability to recover attorneys fees and costs in civil actions against such non-lawyers through former Assembly Bill 852.  A prior almost identical bill was vetoed by Gov. Brown after vocal opposition by the California Association of Legal Document Assistants (CALDA).

To bring the discussion full circle, Legal Zoom has found that the marketplace for commoditized legal services delivered by non-lawyers only went so far under the UPL rules.   So Legal Zoom now offers legal services from attorney licensed in all jurisdictions through its group legal plans.  The web site promises to help consumers “Find An Attorney You Can Trust” and “Build a Long Term Relationship With An Attorney You Can Trust..”


AB 1515 Dies a Quiet Death — For This Year

The California State Assembly approved AB 1515, the bill that would require California attorneys to place unearned advanced fees in trust by a vote of 79-1.  The bill is now been assigned to the Senate Judiciary Committee.

The State Bar Board of Trustees has tabled the recommendation from its Operations Committee that the Bar sponsor the bill.  It seems likely that the bill will be amended to carve out criminal defense and bankruptcy work.

John Steele and I had the pleasure of discussing the pros and cons of AB 1515 with the Santa Clara Bar Association Board. They asked excellent questions, including whether there is an empirical evidence regarding the role advanced fees play in funding solo and small firm practices.  Usually, there is little or no empirical evidence supporting the adoption of a new discipline rule and this time is not different.  It’s assumed that placing advanced fees in trust will increase public protection.  Moreover, its assumed that the quantum increase in public protection whatever negative consequences, intended or unintended, flow from the rule change.

The rationale for this rule change now is the state of the Client Security Fund, which paid out $11 million in 2013, most of which is claimed to be because of unearned fees claims.  But Client Security Fund rules only allow payment when the conduct amounts to conversion:

Client Security Fund Rule 3.431 (B): “Failure to refund unearned fees received in advance for services when the attorney performed an insignificant portion of the services or none at all. Such a failure constitutes a wrongful taking or conversion. All other instances of an attorney’s failure to return an unearned fee or the disputed portion of a fee are outside the scope of this provision and not reimbursable under these rules.”

Is placing advanced fees in a client trust account really going to address this type of dishonest conduct?  Carolyn Elefant at raises the question of whether there is a better way to help solo and small firm practices fund their cash flow AND protect consumers from being ripped off than the the traditional and costly method of requiring placing advanced fees in trust.  I have seen the power of credit card companies to bring fraudulently run businesses to a halt in the loan modification context where the business model is built on credit card payments.  Ms. Elefant dares to ask whether we even need the traditional client trust account given the protections that can be built into electronic payments.

The impact of financing in the provision of low cost legal services is acknowledged by the State Bar itself.

 But that issue never made it to the discussion of AB 1515–at least this year.  The news now comes that AB 1515’s sponsor Lorena Gonzalez had requested that bill be “held in Committee” — meaning it is dead for this year, to await revival next year in what hopefully will be a more scrupulous examination than this years’s strange process. 

Quaker Oaths

Bus. & Prof. Code section 6067 requires that every new attorney “take an oath to support the Constitution of the United States and the Constitution of the State of California, and faithfully to discharge the duties of any attorney at law to the best of his knowledge and ability.” (sic) Beginning May 23, new California lawyers will be sworn in with an additional section added to their oath: Continue reading

Hobgoblins Bedevil State Bar Task Force

 “A foolish consistency is the hobgoblin of little minds — Emerson

The State Bar Task Force on Discipline Standards had its initial meeting on Friday May 12 at State Bar HQ in San Francisco.  There to gird their loins for a battle with the hobgoblin which has haunted California disciplinary jurisprudence since 1986: the Standards for Attorney Sanctions for Professional Misconduct. The Standards were, in their own words “adopted by the Board of Trustees to set forth a means for determining the appropriate disciplinary sanction in a particular case and to ensure consistency across cases dealing with similar misconduct and surrounding circumstances.”  Of course, there was no Board of Trustees in 1986, Continue reading


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