Attorney's Wife became embroiled in litigation with an ex-employee of her chiropractor practice. Wife lost a judgment in excess of $500,000. Attorney, who was a creditor-debtor and bankruptcy attorney apparently represented her in that litigation, with co-counsel, and then represented her in the post-judgment enforcement proceedings as well. The judgment was also against the community property of Attorney and Wife, i.e., the community property of Attorney was also exposed to the judgment.
Even before the judgment, when the outcome of the litigation started looking doubtful for Wife, Attorney took steps to frustrate the later collection of the judgment. After the verdict, Attorney filed promissory notes in favor of himself, his law firm, and another corporation he controlled (Olympic Mortgage) against his Wife and her practice, secured by a deed of trust on Wife's condo and her accounts receivables, for a total of $160,000.
Attorney then "began to shift personal and community funds into his trust account, which had the effect of concealing the funds from the trustee and creditors."
The assets shifted into Attorney's trust account -- an account which by law must consist solely and only of the funds of an Attorney's clients and none other, and particularly not personal funds -- consisted of $17,000 from Attorney's personal account (later used to pay his co-counsel's legal bill), refund checks from his health insurance carrier for $6,375, and the proceeds from the sale of a boat owned by himself and his wife.
The creditor hired a collection attorney (Atwood) to collect the judgment. Atwood successfully garnished various accounts of Attorney and Wife for $22,000 but did not garnish Attorney's trust account.
After that, Attorney and Wife started using Attorney's "trust account as their primary personal and corporate account . . .." They transferred $18,000 of Wife's receivables and $8,000 from her personal investment account to Attorney's trust account. Wife then signed Attorney's name to trust account checks to make payroll for more than $9,000 and paid the mortgage on her condominium.
Even after Wife and her companies filed for bankruptcy, as will next be related, she wrote another $4,000 in payroll checks and deposited more than $70,000 into the account from an insurance check received for damage to her condo.
Attorney eventually filed a Chapter 7 bankruptcy for Wife and her practice. However, the bankruptcy filing "contained numerous misstatements and omissions of material information". Attorney failed to disclose that he was married to Wife, was an officer of Wife's company (which filed for bankruptcy), or that he owned Olympic Mortgage -- all in violation of Bankruptcy Law and procedure which has special rules and duties for "insiders" such as Attorney.
Further, Attorney failed to disclose many assets in the bankruptcy filing, not the least of which were the assets in his trust account that he had a legal duty to turn over to the Bankruptcy Trustee. Attorney failed to disclose the sale of a clinic owned by Wife that netted $50,000 within one year of the bankruptcy filing, Wife's transfers to the trust account, and Wife's receipt of the insurance claim -- all "key assets" of Wife's bankruptcy estate.
Because of these omissions, misstatements, and fraudulent encumbrances, the paperwork [Attorney] filed painted a false picture of bankruptcy estates with limited assets that were either exempt or fully encumbered. If Atwood had not asked the trustee to take a closer look, [Wife's and her practice's] bankruptcies could have proceeded jointly as a "no asset" case and been discharged automatically 60 days after the creditors meeting. Instead, the trustee sought discovery, and [Attorney] resisted these efforts to such an extent—failing to produce requested documents and instructing [Wife] to leave an examination while being questioned—that the court sanctioned him for bad faith. Even after he was sanctioned, [Attorney] failed to produce all the documents ordered by the court.
But the Trustee, alerted by Atwood, did look further into Attorney's and Wife's financial affairs, and was able to sell Wife's condo for over $200,000 and recover other assets. However, the Creditor
received just $150,000 of her $500,000 judgment. An attorney for the trustee reported spending "vastly more" resources on this case than on a normal bankruptcy case and commented that the bankruptcy system would simply not function if all cases proceeded as this one did.
Finally, Attorney attempted an improper ex parte communication with the Bankruptcy Judge, whose assistance blocked the attempt.
The Washington State Bar Association filed a formal complaint against Attorney charging him with 9 counts of misconduct relating to the foregoing. After investigation, the hearing officer found against Attorney on all 9 counts and recommended that he be disbarred. The Washington Supreme Court, sitting En Banc (i.e., all the Justices heard the case), agreed with the disbarment.
In general, Attorney argued that there were "innocent explanations" for his conduct, or that the false bankruptcy filings were simply inadvertent errors from a rushed filing, but nobody on the Court bought that. Instead, the evidence was clear and convincing that Attorney was actively taking steps to try to defeat the collection of the judgment against Wife's and his own assets.
Attorney's ethical violations were spelled out by the Court as follows:
Attorney committed felonies in violation of 18 U.S.C. sec. 152 by "fraudulently transferring, receiving, and concealing bankruptcy assets", which violated Rules of Professional Conducts 8.4(b) and (d) by criminal conduct and conduct prejudicial to the administration of justice. Attorney also violated Section 152 by failing to report the sale of the boat, and Attorney's and Wife's ownership of LLCs interests that were not disclosed.
Attorney violated Rule of Professional Conduct 1.15(A) by commingling personal and client funds in his trust account. Here, Attorney tried to argue that the funds were really those of his Wife or her practice as his clients, and that clients can put anything into an Attorney trust account and use it for any purpose, but the Court rejected that on the basis that the funds must relate to the Attorney's representation of clients and for no other purpose, i.e., an attorney trust account is nothing like a general trust that clients can use as a piggybank.
In aggravation, the hearing officer " the hearing officer found six aggravating factors: prior disciplinary offenses, dishonest and selfish motive, pattern of misconduct, multiple offenses, refusal to acknowledge the wrongful nature of the misconduct, and substantial experience in the practice of law." No mitigating factors were found. Thus, concluded the Court:
[Attorney] willfully and fraudulently concealed assets and submitted false filings and claims in the bankruptcy of his wife and her corporation. His innocent explanations for these actions failed to persuade the hearing officer or the Board, and we reject them. Given the severity and willfulness of his pattern of misconduct, and his refusal to accept responsibility for his actions, disbarment is the correct sanction and is not disproportionate. We affirm the Board's unanimous recommendation of disbarment.
And with that, Attorney's legal career, started in 1970, came to a ignominious ending.
ANALYSIS
By improperly trying to protect his Wife's assets (and his own assets to the extent they were community property), Attorney self-immolated his own legal career and reputation, all to try to save a couple of hundred thousand dollars from creditors.
The technical aspects here are obvious: An Attorney cannot make or assist in false bankruptcy filings, or use an Attorney trust account to hide personal assets from creditors (or even just commingle funds). These points require no additional commentary.
What does require commentary is to point out that these efforts all failed -- the Bankruptcy Trustee, alerted by Creditor's attorney Atwood, was able to ferret out these transactions and assets, and recover what was left for the bankruptcy estate. So, not only did Attorney pay the ultimate professional price for his efforts, disbarment, but his efforts totally flopped. It was not a good exchange by any standard.
Unfortunately, Attorneys have a tendency to rationalize bad conduct in the post-judgment setting. They are not cheating creditors in their mind, but only protecting their clients. But there are glowingly bright lines than cannot be crossed, and moving assets out of the reach of creditors who hold a judgment clearly crosses those lines. By contrast, legitimate asset protection planning must be done before a "claim" (i.e., an event giving rise to liability) has occurred. This case has nothing to do with legitimate asset protection planning, and everything to do with plain old fraud on creditors.
Those bright lines are the same in bankruptcy, but there are additional lines that not only require Attorneys to make full and fair disclosures of their clients' assets and certain pre-bankruptcy transfers, but also require Attorneys to hand over a debtor's assets to the Bankruptcy Trustee.
Here, Attorney did everything wrong and was disbarred for everything. But if the Court had parsed each of these acts individually, each would have independently supported disbarment.
An Attorney cannot use the client trust account as a hiding place for assets. To the contrary, a client trust account must be limited in its use to holding only moneys that are necessary to fulfill a client's representation and for no other purpose. Yet, time and again, Attorneys are caught using their attorney trust accounts either as a piggybank for their clients, as in this case, or as a conduit for some transfer meant to cheat creditors.
While the facts of this case are egregious, Attorneys should be wary that they could very easily get their ticket punched by the State Bar in much less sinful circumstances.
CITE AS
Disciplinary Proceeding Against Thomas F. McGrath, 2013 WL 4482451 (Wa., 2013) (En Banc). Full Opinion at http://goo.gl/GvSrJ3
This article can be found at http://onforb.es/17iDep7 and http://goo.gl/yVXO9O
