Report the Claim; Trust Account Abuse

Lawyer Messed Up Deal, Better Report

Koransky Bouwer & Poracky P.C. had an associate mess up. It ended up in Federal Court, then the 7th Cir. <here>.  Lots to put on the back of an associate.

The young associate filed a signed contract rather than send it to the parties as evidence that the deal was completed. The party not represented by the firm withdrew its acceptance before delivery of the contract to all parties, black letter law allows that. Client is justifiably upset.

While this is going on, the law firm that the associate works for, Koransky & Bouwer, renews its malpractice coverage with The Bar Plan, its professional liability carrier. In the process, there is a question that reads something like “are there any claims or potential claims in existence, now or before we renew?”  Firm, which knew about this problem, with one of the name partners being involved in the matter, said “no problem” [or words to that effect].

Client, not happy to have lost the contract sues the firm, who turns the complaint over to the PLP company.  It says something like “wait, from these dates and all, it appears you knew of this claim when you renewed your insurance, and you did not tell us.” Another black letter issue in the law is that a misstatement in an insurance application will void the application. So the Bar Plan says: “We have no duty to defend or pay for the claim!” K&B filed for declaratory judgment on that issue in ND Ind. federal court, the trial court said “sorry law firm, no coverage.” The 7th Circuit agreed.
Lesson? The quick response application often found in policy renewals is not your friend. Your duty to disclose still exists. Does that mean you must report every disgruntled client who might conceivably file a claim? This blog does not offer legal advice, but I recommend you read the underlying policy about when you need to submit a timely claim.

One lawyer has suggested that the insurance company should be required to show that it was prejudiced by the delay in the notice, but that is not the current state of the law, in this Circuit.

****

Watch the Trust Account

Edguardo Martinez Suarez is a Hamilton County lawyer, with a pattern of trust account problems. In 2006 he bounced a trust account check, which automatically brought the Disciplinary Commission in via the rule of mandatory reporting of bounced trust checks by a bank holding an IOLTA account. Suarez said “it is a mistake” but could not show how the mistake occurred. In 2009 the Commission demanded a CPA audit of the account, but the CPA reported there was a lack of documents to allow for an audit.

With that, the Commission started an in-house audit. The Supreme Court characterized the findings as many “violations, which took place from 2006 through 2012, includ[ing] at least six instances of paying personal and business expenses from the trust account, 55 instances of disbursing funds in excess of the amount held in trust for each corresponding client, and making 14 cash withdrawals.”

Then to compound problems he committed another violation, keeping more than “a nominal balance of” personal funds commingled to protect the account. But the court, in reviewing the Agreed Stipulation with Suarez, found three good things: no prior discipline history; no selfish motive on Suarez’s part; and, no client lost any funds from his violations.

The parties agreed to a 60 day suspension, stayed with two years probation. For two years he must: 1) maintain his trust account in accordance with the Disciplinary Commission’s 51 page white paper on Trust Account Management: Handling Client and Third Party Funds most recently updated in March 2012; 2) Have the Trust Account monitored by a CPA approved by the Commission, and have quarterly reports made to the Commission; and, 3) Agree that a violation of probation will cause the 60 day suspension to go into effect, and there will be no automatic reinstatement after the suspension. Finally, at the end of probation Suarez will be required to petition for dismissal of the probation. Somehow he was not ordered into the CLE on trust account management.

Seems like an appropriate disposition, as no clients were harmed by the mistakes. Management of the trust account is one of the most critical skills an attorney with trust account duties must have. Failure there is a ticket to Discipline World, and it is tough to get out with your skin intact.

There are CLE courses on Trust Account management, the DC staff often are speakers. Indiana’s Solo and Small Firm Conference has done sessions on this in 2004 and 2007, and likely will do more. ISBA-CLE and ICLEF do sessions annually. A great book is out there by one of the ABA’s most successful writers, Jay Foonberg titled “The ABA Guide to Lawyer Trust Accounts” (my version is dated 1996.)

Protect yourself and your clients and your license. Review Rule 1.15 of the Rules of Professional Conduct, and Admission & Discipline Rule 23 Sec. 29-30, and Overdraft Rule 2.

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3 thoughts on “Report the Claim; Trust Account Abuse

  1. I was both fascinated and sympathetic in reading about the Koransky case, as a former coverage litigator. The issue isn’t about when to “submit a claim,” but when and whether to disclose a potential claim to one’s malpractice insurer. The fact is that the downside to such a disclosure can be minimal. The insurer may investigate the claim independently while charging no extra premium. Or it may increase its premium after all, which the law firm surely wishes it could now pay instead of the nightmare litigation it has since been embroiled with. If the insurer then refused to cover the specific potential claim, the firm could have proactively secured coverage from another insurer albeit at an elevated premium.

    Either way, it’s terrifying to consider how a singular omission of failing to email a signature could create this entire ruckus. But such is the nature of transactional lawyering.

    • Good point. I call the event of finding out about a potential claim, and contacting the company as a “report the claim” moment, which you point out is not perfectly accurate. It is reporting a potential claim.

      I hope you enjoy, and keep me on my toes.

  2. Neil makes a great point about “claims” and the impact on premiums. I should have said “submit a potential claim” but in my practice, a dissatisfied client with an accusation is a claimant. Either way, get the word to your carrier before the suit is filed. They can do things to fix the situation, if appropriate.

    Having submitted potential claims to our insurer on occasion, I know nothing makes us review policies and practices more than calling the insurer. Thanks for reading.

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