January 28, 2019
In 1994, the Hearing Board of the Attorney Registration and Disciplinary Commission found it troubling that, fourteen years after the Illinois Supreme Court’s opinion admonishing attorneys to safeguard money or other property belonging to clients and third parties, the Hearing Board was still contending with attorneys who were either ignorant or scornful of their professional obligation to safeguard property. In re Van Beek, Commission Number 93 CH 34 (Hrg. Bd. Report at p. 15, April 15, 1994). At that time, the Hearing Board discussed at length the seriousness of mishandling property belonging to clients and third parties. Yet, in 2018, the Illinois Supreme Court sanctioned more than 20 attorneys for mishandling property.
The court opinion admonishing attorneys about safeguarding property was In re Clayter, 78 Ill.2d 276 (1980). Mr. Clayter, who had been licensed to practice law for almost 20 years, was hired to represent the seller in a real estate transaction. Pursuant to the real estate contract, Mr. Clayter received a $1,000 check from the buyer, which represented the buyer’s earnest money. Mr. Clayter deposited the check into a business account, not a client trust account or an escrow account. Mr. Clayter claimed that he later placed $1,000 in cash in a safe in his house. According to Mr. Clayter, the cash remained in his safe until he deposited the cash into a savings account that he used for client funds. Although Mr. Clayter had written “clients trust account” on the face of his account passbook, the savings account was in his name. In the meantime, the real estate transaction did not close, and the seller and the buyer disagreed as to who should receive the earnest money. Ultimately, Mr. Clayter deposited $1,000, plus $109 in interest, with a court that could determine who should receive the earnest money.
Mr. Clayter clearly commingled funds. Commingling occurs when an attorney does not keep property belonging to clients and third parties separate from the attorney’s own property. Clayter, 78 Ill.2d at 281. When Mr. Clayter deposited the buyer’s check into the business account, he commingled the earnest money with his personal funds. By doing so, Mr. Clayter endangered the seller’s and the buyer’s interests in those funds, since commingled funds may become assets of the attorney, especially if the attorney dies or becomes insolvent. Mr. Clayter thus violated his professional obligation to safeguard client and third-party funds.
The disciplinary matter of In re Enstrom, 104 Ill.2d 410 (1984), demonstrates the problem with an attorney failing to safeguard funds belonging to clients and third parties. Mr. Enstrom represented two clients in a personal injury claim against an insured of Home Insurance Company. During the pendency of the personal injury matter, the firm where Mr. Enstrom practiced law was dissolved. Mr. Enstrom became a partner in another law firm, but that firm also dissolved. Mr. Enstrom then received two drafts in settlement of his clients’ personal injury claim. He deposited those drafts into a personal bank account. Before he could disburse all of the funds and pay a $3,500 lien on the settlement, the Internal Revenue Service levied the bank account for unpaid withholding taxes allegedly owed by one of the dissolved firms. Consequently, Mr. Enstrom could not use the funds to pay the lien. The lienholder sued Mr. Enstrom, one of his clients, and the Home Insurance Company. A court entered a monetary judgment against Mr. Enstrom, and the Illinois Supreme Court disciplined him for violating his professional obligation to safeguard client and third-party funds.
As the Clayter court warned, and the circumstances in Enstrom shows, it is essential that an attorney hold client and third-party funds “in such a manner that there is no doubt that the attorney is holding it only for another and that the money does not belong to him personally.” Clayter, 78 Ill.2d at 281. Attorneys can satisfy their obligation to segregate client and third-party funds by depositing the funds into one or more separate and identifiable interest- or dividend-bearing client trust accounts. Ill. Rule of Prof. Conduct 1.15(a). Attorneys must also maintain records of property held on behalf of a client or third party. Since 2011, Illinois Rule of Professional Conduct 1.15(a) lists the records that an attorney must prepare and maintain, and it requires an attorney to make appropriate arrangements for the maintenance of those records in the event of a law firm’s closing, sale, dissolution or merger.
The directives in Rule 1.15(a) are applicable to tangible property like bonds, jewelry or other items that cannot be deposited into a client trust account. The comment to Rule 1.15 states, for example, that securities should be kept in a safe deposit box unless some other form of safekeeping is warranted by special circumstances. Similar to the client trust account, an attorney should identify a safe deposit box holding a client or third party’s tangible property as a client safe deposit box. So too, a client safe deposit box may not hold an attorney’s property, and the attorney must keep records identifying each item held in the client safe deposit box and the person for whom the attorney is holding the item. See Client Trust Account Handbook at https://www.iardc.org/ClientTrustAccountHandbook.pdf.
Not only was the Clayter court concerned about commingling, but it also warned attorneys about converting funds. In an attorney disciplinary matter, conversion occurs when a client or third party is deprived of their funds or property, permanently or for an indefinite period of time, due to an act that the client or third party did not authorize. In re Karavidas, 2013 IL 115767, ¶62-63, 999 N.E.2d 296, 310. Conversion may occur by law as it did in the Enstrom matter when the IRS levied Mr. Enstrom’s bank account, seizing funds belonging to a third party. Conversion may also occur when the balance in a client trust account falls below the amount of funds that the attorney is supposed to be holding for clients and third parties. For example, in the matter of In re Wasik, Commission No. 2016PR00132, Mr. Wasik agreed to hold $1,800 for the benefit of his client and another person. Mr. Wasik properly deposited the funds into a client trust account, but, over the course of eight months, the balance in the client trust account fell below $1,800 due to withdrawals from the account to pay for Mr. Wasik’s own business or personal obligations. Since Mr. Wasik had no authority to use any of the $1,800 for himself, he converted funds that he was supposed to be holding for other persons.
Attorneys who convert funds violate Rule 1.15 and, therefore, are subject to disciplinary sanctions ranging from reprimand to disbarment, depending on the facts and circumstances in each case. Neither ignorance of the Rule nor poor bookkeeping practices will excuse or negate an attorney’s conversion of funds. See e.g. In re Timpone, 157 Ill.2d 178, 194-95 (1993). Overdraft protection will not excuse or negate conversion. In re Mayster, Commission Number 99 CH 59 (Review Board Report at 6, Dec. 28, 2001). Lack of a dishonest or fraudulent motive will not prevent the Illinois Supreme Court from sanctioning an attorney for violating Rule 1.15. See e.g. In re Mulroe, 2011 IL 111378, 956 N.E.2d 422. So too, attorneys may be sanctioned if they withdraw funds, without authority, for payment of their fees; attorneys simply do not have the right to help themselves to whatever funds are within reach to satisfy a client’s bill unless they have authority to use the funds in payment of the bill. See In re Kitsos, 127 Ill.2d 1 (1989). The Court has made it clear that attorneys are strictly prohibited from taking, without authority, property that they are holding in connection with a representation. As the Court reiterated in In re Rotman, 136 Ill.2d 401, 420 (1990), “[i]t is a simple rule, easy of application and admitting of no exception: do not steal your client’s money.”