CLIENT PROTECTION FUND REVISITED: A SPECIFIC PROPOSAL

By William F. Gallagher

In the November/December 1995 issue of the Forum we published a proposal for a Client’s Protection Fund (13 Forum 458). That proposal was in the form of legislation creating a Client’s Protection Fund to be administered by a panel of five members appointed by the Chief Justice and the Chairpersons of the Judiciary Committees of the House of Representatives and the Senate. The proposal was generated by recent defalcations and lawyer misconduct resulting in losses to the public approaching $15 million. A variety of proposals surfaced besides the one put forth by CTLA. Brian Mahon, president of the Connecticut Bar Association, the organization which currently administers a Client Security Fund, appointed a Task Force to study issues related to the future of the CBA’s Client Security Fund, including its "viability as a Connecticut Bar Association entity, funding, controls and review of all current rules and regulations."

CTLA was requested to participate on the CBA Task Force. President Sheldon in turn requested the Editor to serve as a member of this Task Force. After several meetings the Task Force made several recommendations to the House of Delegates of the Connecticut Bar Association. Edward Sheehy, then president-elect of the CBA, reported to the House of Delegates as chair of the Client Security Fund Task Force. The principal recommendation of the Task Force is:

CTLA, recognizing that its proposal presented an awkward separation of powers issue, and also recognizing that all lawyers have a common interest in this issue, fully endorsed the CBA Task Force Proposal. In fact, during the course of the Task Force’s meetings CTLA drafted a detailed proposal to implement the Task Force recommendation: a Client Protection Fund administered by the CBA but mandated by rule of court requiring each licensed attorney in this state to contribute $100 to the Fund.

The CBA Task Force did not go so far as to endorse the detailed proposal that was drafted. Rather, it endorsed the concept, leaving the details to be worked out after the idea was accepted.

We reprint that detailed proposal here. It seeks to add §§31C to 31K to the Practice Book. The proposal recognizes that even though the CBA is a voluntary bar association, due process requirements must be afforded if these rules of court are adopted. The leading case on this issue is Saleeby v. State Bar of California, 39 Cal.3d 547, 702 P.2d 525 (1985). California, unlike Connecticut, has an integrated bar. Much of the Saleeby decision is based on this fact, however, Saleeby outlines the due process requirements of a Client’s Protection Fund. The principles articulated are:

We have drafted the proposed rules with these procedural due process requirements in mind. We have also taken into consideration the manner in which the existing CBA Client Security Fund operates. We believe that the proposal is workable, will not create a new bureaucracy, will not cost the State any money, and addresses definitively a major problem that a few bad lawyers have brought about.

Our impression is that the bar is in agreement on this issue. We need to act now and in a manner that will rectify the problem. The Client Security Fund as it now exists raises $550,000 per year by assessing the 11,000 CBA members $50. There are 23,000 lawyers licensed in this State. If all licensed lawyers were required to pay $100 to the CBA Fund, the funds generated annually would rise to $2.3 million. With this infusion of cash, the Client Protection Fund can make whole those claimants who are victimized by dishonest lawyers. If the problem in the future is reduced to a point where a $100 assessment can be reduced, the proposal has within it the flexibility to bring this about.

It is up to the judges of the Superior Court to adopt the necessary rules to implement what the bar is in agreement on. The proposal set out here can serve as a blueprint. If the judges do not act, the proposed rules can be easily changed to proposed legislation. In fact, this has already been done. We recognize that there is strong sentiment among several lawyer-legislators that legislation in this area is inappropriate, and it is properly the realm of the rule-making powers of the judiciary. We agree. We also recognize that there is an urgent need for action, and that legislation will in all probability pass constitutional separation of powers muster.

Lawyers now pay a legislatively-imposed $450 license fee. If that fee is constitutionally permissible, it is difficult to understand why a legislatively-imposed $100 mandatory contribution to a client protection fund would not be constitutionally permissible. In addition, in Bartholomew v. Schweizer, 217 Conn. 671, 682 (1991), the court’s most recent pronunciation on the issue, a statute will be upheld in the absence of a "demonstrated infringement on the fundamental powers or responsibilities of a coordinate department of government." If the legislature is compelled to act in default of judicial action, we believe that there would be no fundamental infringement of the judiciary’s powers, and that such legislation ought to pass constitutional muster.

The following rules are a draft proposal to implement a Client Protection Fund. The draft rules propose a fund to be administered by the CBA, but mandated by rule of court, requiring each licensed attorney in the State to contribute $100 to the Fund.

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DEFINITIONS

(a). 1. "Administrator" means the person designated by the Connecticut Bar Association to administer the Fund.

2. "Client" means any person or entity, other than a governmental entity or agency, entering into an attorney-client relationship or fiduciary relationship with a lawyer.

3. "Committee" means the Client Protection Fund Committee of the Connecticut Bar Association.

4. "Fund" means the Client Protection Fund of the Connecticut Bar Association.

5. "Lawyer" means a person who, at the time of the conduct complained of, was licensed to practice law in this State.

6. "Claim" means the application to the Committee for recovery of a "Reimbursable Loss."

7. "Claimant" means the one making a claim.

8. "Embezzlement" means the fraudulent appropriation of another’s money or property by a lawyer to whom it has been entrusted or into whose hands it has lawfully come, or the loss of money or property occasioned by the dishonest conduct of a lawyer.

9. "Reimbursable Loss" means a pecuniary loss caused by embezzlement (i) occurring after October 1, 1996, (ii) in Connecticut, (iii) by a lawyer, (iv) which arose out of and during the course of an attorney-client relationship or fiduciary relationship, which but for that relationship with the claimant the pecuniary loss could not have occurred.

(b). For a pecuniary loss to be a Reimbursable Loss, the lawyer whose conduct is alleged to have caused the loss must either

(c). "Reimbursable Loss" does not include any of the following:

CLIENT PROTECTION FUND

(a). The purpose of the Client Protection Fund is to promote public confidence in the administration of justice and the integrity of the legal profession by reimbursing losses caused by the dishonest conduct of lawyers licensed to practice law in the State of Connecticut occurring in the course of a lawyer-client or fiduciary relationship between the lawyer and the claimant.

(b). The Connecticut Bar Association is authorized and directed to establish and maintain a Client Protection Fund to reimburse claimants for losses caused by dishonest conduct committed by lawyers licensed to practice law in the State of Connecticut. It shall appoint a Client Protection Fund Committee to administrate the Fund, and an Administrator to oversee its efficient operation.

(c). All attorneys duly licensed in the State of Connecticut shall pay a $100 annual fee to the Connecticut Bar Association for deposit into the Client Protection Fund.

(d). Reimbursement of losses shall be within the discretion of the Committee to the extent of funds available. The Committee shall first make a determination upon documentary evidence submitted and its own investigation. It shall then advise the lawyer and the claimant of the decision, and afford the claimant or lawyer a full hearing if reconsideration is requested. If funds are insufficient to pay a claim in full at the time the claim is adjudicated, the claimant may reapply in later years until the loss is paid in full, provided no subsequent claims shall be allowed if submitted more than two years from the adjudication of the original claim or the timely filed subsequent claim. The Committee has discretion under §6(b) to limit the amount of recovery of any claim.

(e). A lawyer whose dishonest conduct results in reimbursement to a claimant shall be liable to the Fund for restitution. Disciplinary orders imposing a suspension or probation shall include a provision requiring the disciplined attorney to reimburse the Fund for any Client Protection payments arising from his or her conduct prior to the termination of the period of suspension or probation. Prior to filing a petition for reinstatement, a petitioner shall reimburse the Fund for all Client Protection payments arising from a petitioner’s conduct. The petition must be accompanied by a statement from the Administrator indicating that all such payments have been made.

(f). The Committee shall allocate on an annual basis the amount of money in the Fund which may be used to pay claims.

(g). The Administrator and the Committee may make reasonable charges to the Fund to provide for administration of the Fund, provided however that all Committee members shall serve without compensation.

(h). The Connecticut Bar Association shall maintain the Client Protection Fund at a level not to exceed $2,000,000. If at the beginning of each calendar year the claims pending against the Fund for the previous calendar year are less than the amount left in the Fund, the mandatory assessment for licensed attorneys may be reduced by a percentage determined by the Committee, and approved by the Chief Justice.

ADMINISTRATION OF THE CLIENT PROTECTION FUND.

(a). The Committee shall consist of eighteen (18) members appointed by the president of the Connecticut Bar Association. Terms of the Committee members shall be for one year.

(b). The Committee shall conduct meetings as frequently as required, set rules for voting, establish a quorum and establish other policies, procedures, and rules as required to carry out their duties and responsibilities as provided herein.

(c). A member of the Committee who has or has had a lawyer-client relationship or financial relationship with a claimant or any lawyer who is the subject of a claim shall not participate in the investigation or adjudication of that claim.

(d). Expenses of Committee members shall be reimbursed from the Fund. Expenses shall be limited to out-of-pocket travel and meal expense, and in no event shall a Committee member receive compensation for his or her services to the Committee.

(e). The Administrator of the Client Protection Fund shall be appointed by the president of the Connecticut Bar Association. The Administrator shall serve without compensation, but may make reasonable charges to the Fund to provide for administration of the Fund, as provided in §2(g) hereof.

INVESTMENT OF THE FUND

(a). All monies allocated to the Fund shall be held in a separate account in the name of the Fund, provided however that money allocated to the Fund may be co-mingled with other monies for investment purposes only. Such monies may be invested or reinvested in the same manner as funds of the state employees retirement system, and the interest arising from the investment shall be credited to the Fund. The Administrator of the Fund shall require that the interest earned on the Client Protection Fund shall be paid to an organization qualified under §501(c)(3) of the Internal Revenue Code of 1986. The Administrator is authorized to create such an entity if necessary.

(b). This program shall not require the banking corporations or financial institutions receiving such funds, holding such accounts and paying interest thereon to the depositors of the account to perform any additional administrative functions or assume any additional responsibilities or obligations in connection with such program or the accounts so maintained.

ELIGIBLE CLAIMS

(a). Amount. The amount recoverable by any one claimant for reimbursable loss in a single calendar year shall not be limited, except that the Committee may limit the amount paid in any calendar year based on the availability of funds, in which event the claimant may reapply in later years for the balance of the claim, subject to the time limitation set out in §2(d).

(b). Conditions. For a claimant to recover a reimbursable loss, the claimant must show that reasonable efforts have been made to obtain reimbursement for the loss from the lawyer or from other reasonably available sources, including by way of example, the lawyer’s partner or partners, the lawyer’s firm, the lawyer’s estate, or any applicable bond or insurance.

(c). Form and Time Limitation. The claimant shall submit a claim made under oath on forms provided by the Committee. A claim against the Fund must be made no later than two years from the date of the final event making the loss for which reimbursement is sought a reimbursable loss.

(d). Procedure.

1. The lawyer shall be notified of a claim by sending a certified letter to the address on file with the clerk for Hartford County, as required by §26 of the Rules of Practice.

2. The Statewide Grievance Committee shall be notified by the Committee of every claim.

3. The Committee may review the records, decisions and reports of investigations by the Statewide Grievance Committee for the sole purpose of determining whether a claim should be granted. The Committee may conduct additional investigation in connection with any claim.

4. The Committee may request that testimony be presented. If testimony is requested, the claimant and the lawyer shall, upon request, be given a reasonable opportunity to be heard. The rules of evidence shall not apply except to the extent required to afford fundamental fairness to all parties.

5. A recommendation regarding any claim shall be determined on the basis of all information submitted to the Committee. Notice shall be given to the claimant and the lawyer of the Committee’s action. Such notices shall be given by mail to the claimant’s last known address and to the lawyer’s address on file with the clerk for Hartford County.

6. The Committee may, in its discretion, recommend payment of a reimbursable loss or any part of a reimbursable loss at any time, or may defer recommendations regarding payments of any or all reimbursable losses until the latter part of the calendar year to determine the total amount of reimbursable losses claimed in relation to the total amount of monies in the Fund. No claimant or any other person or entity shall have any vested right or interest in the Fund.

7. Payment from the Fund to a claimant shall be made only on condition that the claimant assign to the Connecticut Bar Association the rights of the claimant against the lawyer whose conduct caused the reimbursable loss in an amount equal to the amount of payment received by the claimant from the Fund plus any costs incurred by the Committee or the Connecticut Bar Association in recovering the amount of payment from the lawyer or the lawyer’s estate, personal representative, assign or successor in interest. This assignment shall provide that the claimant will cooperate in any proceeding commenced for recovery of the amount of payment. The Connecticut Bar Association or its assignee may bring such action for recovery of the amount of payment as deemed advisable.

DETERMINATION OF CLAIM

(a). Payment of a claim shall be made only on affirmative vote of a majority of members of the Committee. The decision to pay a claim shall be reflected in an order of the Committee.

(b). In determining the amount of any payment, the Committee may consider:

(c). The Committee order shall be filed with the Administrator of the Fund, the Statewide Grievance Committee, and shall be sent to the claimant and the lawyer. For purposes of further proceedings, the time shall be computed from the date notice issues by the Committee of its order, which date shall appear on the first page of the order.

REQUEST FOR RECONSIDERATION

(a). The claimant or the lawyer may within twenty days of the issuance of notice of the order request reconsideration of the order by filing a written request for reconsideration with the Administrator of the Fund. The request shall state the basis of the request for reconsideration and whether a hearing is requested. If no request for reconsideration is received within the twenty day period, the Committee’s order shall become final. If a request for reconsideration is received, the Administrator shall forward the request to the Committee. The Committee may assign the request to a panel designated by it to review the request.

(b). If the request for reconsideration is referred by the Committee to a panel, the panel shall be composed of not less than two lawyers, may include not more than one non-lawyer, and may consist of a Reviewing Panel of the Statewide Grievance Committee. Members of the Committee may serve on such a panel.

(c). At the Committee’s request, the panel shall review the order submitted by the Committee and the request for reconsideration. The panel may consider any and all information obtained by the Committee from the claimant, the lawyer, or during its investigation, and may request the Committee to conduct additional investigation. The panel shall convene a hearing at which both the claimant and the lawyer may appear. The panel shall prepare a report and recommendation to the Committee. The report of the panel shall contain sufficient findings of fact to inform interested parties and a reviewing court of the basis of its decision. The claimant or the lawyer shall be entitled to present information in support of their respective claims at the time of the hearing. The rules of evidence shall not apply except to the extent required to afford fundamental fairness to all parties.

(d). The decision of the panel on reconsideration shall be filed with the Committee, and notice issued to the claimant and the lawyer. The Committee may affirm, reject, or modify the panel’s decision, as it sees fit, with sufficient additional findings as may be necessary to inform interested parties and a reviewing court of the basis of its decision. The action of the Committee shall be filed with the Administrator, and notice given to the claimant and the attorney. The form of the Committee’s determination of the action taken by the reconsideration panel shall be clearly labeled "final order" and shall include an explanation of rights of appeal from such final order.

APPEAL

(a). A claimant or lawyer may appeal to the Superior Court a final order by the Client Protection Fund Committee. The appeal shall be filed with the Clerk of the Superior Court for the Judicial District of New Haven within thirty days from the issuance of notice of the final order by the Committee. A copy of the appeal shall be served in accordance with §120 on the Administrator, as agent for the Client Protection Fund Committee.

(b). Within 30 days after the service of the appeal, or within such further time as may be allowed by the court, the Client Protection Fund Committee shall transmit to the reviewing court a certified copy of the entire record of the proceeding appealed from, and shall include the Committee’s record in the case, a copy of the reconsideration panel’s record in the case, which shall include a transcript of any testimony heard by it, and a copy of all orders and final orders issued. By stipulation of all parties to such appeal proceedings, the record may be shortened. The court may require or permit subsequent corrections or additions to the record.

(c). The appeal shall be conducted by the court without a jury and shall be confined to the record. If alleged irregularities in procedure before the Client Protection Fund Committee are not shown in the record, proof limited thereto may be taken in the court. The court, upon request, shall hear oral argument.

(d). The appellant shall file a brief within thirty days after the filing of the record by the Client Protection Fund Committee. The Client Protection Fund Committee shall file its brief within thirty days of the filing of the appellant’s brief. Unless permission is given by the court for good cause shown, briefs shall not exceed thirty-five pages.

(e). Upon appeal, the court shall not substitute its judgment for that of the Client Protection Fund Committee as to the weight of the evidence on questions of fact. The court shall affirm the decision of the Committee unless the court finds that substantial rights of the appellant have been prejudiced because the Committee’s findings, inferences, conclusions, or decisions are:

If the court finds such prejudice, it shall sustain the appeal, and, if appropriate, rescind the action of the Committee or take such other action as may be necessary. For purposes of further appeal, the action taken by the Superior Court hereunder is a final judgment.

(f). In all appeals taken under this section, costs may be taxed in favor of the Client Protection Fund Committee in the same manner, and to the same extent, that costs are allowed in judgments rendered by the Superior Court. No costs shall be taxed against the Client Protection Fund Committee.

PAYMENT OF CLAIM

The Administrator shall pay claims out of the Client Protection Fund in accordance with an order of the Committee. During all periods in which an interested party may make a request for reconsideration, and during all appeal periods, payment shall be stayed. If reconsideration or an appeal is filed, payment shall be stayed until there is a final order of the Committee or the court. The Committee may require as a condition of payment that the claimant execute such instruments, take such action or enter into such agreements as the Committee requires, including assignments, subrogation agreements, and trust agreements.