Lawyers' Fund for Client Protection
May 7, 1993
Chief Justice E. Norman Veasey
Justice Joseph T. Walsh
Justice Henry R. Horsey
Justice Randy J. Holland
Justice Andrew G. T. Moore, II
RE: Twenty-Five Year Anniversary Report - Lawyers' Fund for Client Protection
Dear Chief Justice Veasey and Justices:
On behalf of the Trustees of the Lawyers' Fund for Client Protection, I am pleased to submit to you a report summarizing the operation, development and growth of the Lawyers' Fund for Client Protection during its first 25 years of existence.
This report indicates that the essential purpose of the Fund has been achieved in the past 25 years in that meritorious claims filed by clients against the Fund have been 100% reimbursed.
Noteworthy in this report is the fact that of the thousands of lawyers practicing in Delaware
from January 1, 1968 through December 31, 1992, only nine lawyers have mishandled client's funds
necessitating reimbursement by the Fund.
cc: All Trustees of the Lawyers' Fund for Client Protection
On January 1, 1993, the Lawyers' Fund for Client protection of the Bar of Delaware celebrated its twenty-fifth anniversary. The Fund came into existence on January 1, 1968 by order of the Supreme Court under Supreme Court rule 32A. According to Rule 32A (now Rule 66), the purpose of the Fund is: "to establish, as far as practicable, the collective responsibility of the Profession in respect to losses caused to the public by defalcations of members of the Bar, acting either as attorneys or as fiduciaries...." The Lawyers' Fund for Client Protection advances this purpose by reimbursing persons who suffer loss due to dishonesty or defalcations of Delaware attorneys. Honoring their "collective responsibility," all members of the Delaware Bar support the Fund through annual assessments.
During the first twenty-five years of its existence, the Fund has disbursed over $363,000 to victims of attorney misconduct. At the same time, the Fund has grown in financial stability and has gained the respect and confidence of both the Bar and the public. The Fund has also acquired additional duties. These include the annual review of financial records of selected attorneys and/or law firms to assure compliance with requirements regarding safekeeping of client funds. This latter function, hopefully, decreases the need for the Fund's remunerative functions; it prevents the type of attorney misconduct that can result in claims against the fund.
The Fund has a bright future. Due to the continued regular collection of assessments, a claims history which has not overly burdened its resources, and careful investment of its monies by its Trustees, the fund now enjoys an enviable financial position. The Fund's balance as of December 31, 1992 was $1,326,111.
With its fair and full review of all claims filed against the Fund and its regular enforcement of fiduciary requirements, the Fund has protected the public over the past twenty-five years. With its strong financial position and the continuing support of the Bench and Bar, the Fund and the public can anticipate an even brighter future.
The first client protection fund in the world was established in New Zealand in 1929. The bar associations of Vermont and Oregon established the first two American funds in 1958. By the time the Delaware fund was established in 1968, approximately ten states had established similar funds. However, Delaware was one of the first states in which such a fund was authorized by Supreme Court rule rather than by the Bar Association.
At the present time, nearly all of the states have active client protection funds.
APPLICABLE RULES AND REGULATIONS
As previously mentioned the Delaware Supreme Court established the Fund through Rule 32A, effective January 1, 1968. When new Supreme Court rules were adopted in March 1978, Rule 66 replaced Rule 32A. The authorizing rule has been amended a number of times over the last twenty-five years. Some of the more notable changes are: (1) successive amendments which have raised the upper limit of monies allowed in the Fund before the Fund reaches "sufficiency," which means that thereafter members of the Bar are assessed only a minimum fee for the Fund's support - from $100,000 originally to $200,000 in 1972, to $500,000 in 1981, to $1,000,000 in 1984; (2) an amendment effective May 31, 1975, authorizing the Trustees to conduct annual audits of the books and records of selected members of the Bar to verify compliance with Interpretive Guideline No. 2 of D.R. 9-102 (now Rule 1.15); (3) a 1987 amendment changing the total number of Trustees from seven to nine and providing for two non-lawyer (or public) Trustees; (4) a 1990 amendment giving the Trustees the power "to advance and pay incidental litigation expenses in those cases deemed by the Trustees to either directly or indirectly affect the purposes of the trust fund and its efficient administration"; (5) an amendment in 1992 changing the name of the fund from the Clients' Security Trust Fund to the Lawyers' Fund for Client Protection.
Rule 66 outlines the structure and general purposes of the Fund as well as the powers and duties of Trustees and officers. The Rule also contains provisions regarding assessments - the primary source of additional monies for the Fund. In addition, the Rule includes general provisions regarding claims against the Fund.
Interpretive Guideline No. 2 to Rule 1.15 of the Delaware Lawyers' Rules of professional Conduct also contains provisions applicable to the Fund. The Guideline details record keeping requirements regarding both nonfiduciary and fiduciary funds of attorneys and provides that on or before May 31 of each year, every attorney must file with the Trustees of the Fund a certificate of compliance with Rule 1.15 and the Guideline and an accompanying questionnaire. The Guideline further provides that the financial records of attorneys are subject to audit to determine the accuracy of the certificates of compliance, and that the chairperson of the Trustees must certify to the Clerk of the Supreme Court each year the names and addresses of any attorneys who have not filed the required certificate and questionnaire.
In 1992, the Trustees recommended, and the Supreme Court approved, an amendment to Interpretive Guideline No. 2 concerning members of the Delaware Bar associated with multi-state law firms having their principal offices outside of Delaware. Under the amendment, these Bar members are required to produce the books of account and records of their firms for examination during audits conducted pursuant to the Guideline. Also in 1992, the Supreme Court approved, on the Trustees' recommendation, amendments to Guideline No. 2 broadening the scope of the random audits and requiring certain additional accounting procedures.
The Fund is also governed by the Regulations of the Trustees of the Lawyers' Fund for Client Protection of the Bar of Delaware. The Regulations provide, in a more detailed fashion than Rule 66, for the structure and operation of the Fund, including meetings, officers, specific procedures regarding claims, and further provisions regarding random audits pursuant to the Guideline.
ABOUT THE FUND: STRUCTURE AND PROCEDURE
Provisions regarding the structure and the procedures of the Fund, including the powers and duties of Trustees and officers, the procedures for claims, and the specifics regarding random audits, can be found in the rule, the guideline, and the Regulations.
There are nine Trustees, with seven lawyer members and two non-lawyer or public members. Five Trustees constitute a quorum. The Trustees are appointed by the Supreme Court, with at least one Trustee appointed from each county, and serve without compensation (except for expenses reasonably incurred in the performance of their duties). Three officers - a Chairperson, a Treasurer, and a Secretary - are elected by the Trustees from their membership.
The powers and duties of the Trustees, listed in Rule 66(c), include the following:
- receiving, holding, managing, and distributing monies received by the fund;
- authorizing payment of claims;
- adopting regulations concerning administration of the Fund and claims procedures (i.e., the Regulations currently in effect);
- enforcing claims for restitution and advancing litigation expenses;
- investing the monies of the Fund;
- employing and compensating consultants, agents, legal counsel and employees;
- delegating the power to provide routine acts;
- suing or being sued in the name of the Fund;
- performing other necessary or proper acts; and
- requiring submission of financial data by attorneys, conducting random audits, and reporting non-compliance to the board on professional Responsibility.
The award or denial of claims against the Fund is committed to the sole discretion of the Trustees pursuant
to Rule 66(g). The Trustees may consider the following factors in exercising their discretion:
- the amounts available to the fund:
- the size and number of claims likely to be presented in the future;
- the total amount of losses caused by the misconduct of one attorney or group of attorneys;
- unreimbursed amounts of claims recognized by the Trustees in the past as valid;
- the amount of the claimant's loss as compared with the amount of losses sustained by others;
- the degree of hardship suffered by the claimant; and
- any contributory negligence of the claimant.
Trustees are allowed to consider claims for losses caused by the defalcation(s) or dishonesty of members of the Delaware Bar within the practice of the profession in the following cases: (1) where the attorney has resigned, died, been adjudged insane, been disbarred or otherwise disciplined, been convicted of embezzlement or misappropriation of client property, or whose whereabouts is unknown; or (2) where the claim has been certified by the Board on professional Responsibility as an appropriate case for consideration. The statute of limitations for the presentation of claims is two years from the date of discovery of the attorney's dishonesty by the claimant.
Claims are to be submitted in writing under oath. The Regulations themselves give a suggested form for a statement of claim. Following submission of the claim, it is assigned by the Chairperson of the Trustees to an individual Trustee for investigation. Following this investigation, the Trustee files a report and recommendation with the Secretary of the Trustee. Thereafter, the Trustees vote on the claim, which may be approved only by the affirmative vote of five Trustees. For any claim granted, the Trustees are subrogated to the amount of the claim and may require a successful claimant to execute necessary documents to that effect.
A spouse, law partner, associate, or co-conspirator of, or shareholder in a professional association with a guilty attorney may not file a claim with the Fund. Neither may a claim be filed if the guilty attorney was bonded or the loss otherwise covered. Finally, any attorney representing a claimant before the Fund may not receive compensation for such representation.
Each year, the Trustees must select at least ten lawyers and/or law firms whose books and records are to be audited to ascertain whether they comply with Interpretive Guideline No. 2. At the present time, the Fund actually directs audits of thirty-five lawyers and/or law firms per year. Audits are performed by certified public accountants employed by the Fund for that purpose.
The following men and women have served as Officers and Trustees over the past twenty-five years.
The Honorable Clarence E. Southerland - 1968-1969
Robert H. Richards, Jr., Esquire - 1969-1970
David F. Anderson, Esquire - 1970-1985
Harold Schmittinger, Esquire 1985-present
Vincent A. Theisen, Esquire - 1968-1982
William Prickett, Esquire - 1982-1990
Joseph M. Kwiatkowski, Esquire - 1990-present
Harold Schmittinger, Esquire - 1968-1985
W. Laird Stabler, III, Esquire - 1985-1987
Morton Richard Kimmel, Esquire - 1987-present
David F. Anderson, Esquire - 1968-1985
Joseph H. Flanzer, Esquire -1968-1984
Robert H. Richards, Jr., Esquire - 1968-1971
Harold Schmittinger, Esquire - 1968-present
The Honorable Clarence E. Southerland - 1968-1969
Vincent A. Theisen, Esquire - 1968-1988
Houston Wilson, Esquire - 1968-1980
The Honorable James M. Tunnell, Jr. - 1969-1983
William Prickett, Esquire 1971-1991
Robert L. Halbrook, Esquire - 1981-1988
L. Susan Faw, Esquire - 1983-1986
W. Laird Stabler, III, Esquire - 1984-1992
Morton Richard Kimmel, Esquire - 1985-present
The Honorable Jean Ashe Crompton - 1987-1992
Robert McCoy (public member) - 1987-present
David McMillan (public member) -1987-1991
James A. Fuqua, Esquire - 1988-present
Joseph M. Kwiatkowski, Esquire - 1988-present
Bernard Daney (public member) - 1991-present
Richard H. May, Esquire - 1991-present
Barbara D. Crowell, Esquire - 1992-present
Donald C. Taylor, Esquire - 1992-present
For approximately ten years, the Fund has had an official Supreme Court liaison - a Supreme Court justice who serves the Fund in an advisory position and attends regular meetings of the Trustees. For the last seven years, the Honorable Joseph T. Walsh has served in this position. Prior to that time, the Honorable Andrew D. Christie served as liaison. (At the time of their service as Trustees, the Honorable Clarence E. Southerland, a former Chief Justice of the Delaware Supreme Court, and the Honorable James M. Tunnell, Jr., a former Justice, had retired from the Court.)
FINANCIAL HISTORY OF THE FUND
Throughout its history, the Fund has experienced steady growth which has taken it from a position of uncertainty with regard to its ability to respond to potential claims to a place of relative stability. A financial history of the Fund must include three aspects: (1) mandatory assessments upon Delaware attorneys and the resulting growth of the fund; (2) response to claims; and (3) financial management and investment strategy of the fund.
The Supreme Court, through the promulgating Court rule, authorized a system of graduated assessments to support the Fund. Today's Rule provides for the same basic plan of graduated assessments: for members of the Bar admitted less than five years, $10.00; admitted more than five years but less than ten years, $35.00; admitted more than ten years, $100.00. (The present Rule also provides for reduced assessments for Bar members who are full time employees of governments or corporations). The Rule also provides, however, that when the Fund reaches a certain upper limit, the Trustees are to file a certificate of sufficiency with the Supreme Court, and thereafter the annual assessment upon every member of the Bar is to be $10.00, notwithstanding the above system of graduated assessments.
The upper limit imposed upon the Fund by the original Rule 32A was $100,000. In its first year, the Fund collected $23,000 in assessments from attorneys. By May 12, 1972, the total balance of the fund was $102,346.47. However, a certificate of sufficiency was not filed because the Supreme Court amended Rule 32A to raise the limit to $200,000 effective January 1, 1972.
It was not until the end of 1980 that the Fund again reached sufficiency. This time, however, the Supreme Court did not act immediately to raise the limit, and accordingly the assessment for 1981 was a uniform $10.00. On November 19, 1981, the Supreme Court amended Rule 66 to increase the upper limit of the Fund to $500,000 effective January 1, 1982, and the assessment returned to the previous graduated scale.
By the end of 1984, the Fund had again reached sufficiency with a balance of $537,910.35. However, the Supreme Court amended Rule 66 on December 20, 1984, to increase the Fund limit from $500,000 to $1,000,000.
By April 30, 1989, the Fund balance had reached $1,024,067.24. The Supreme Court has not yet acted to raise the limit of the Fund. Accordingly, in each calendar year since that date, the assessment has been $10.00 for all attorneys.
The first claims were filed against the Fund in 1968. All three of these claims involved the alleged defalcations of the same attorney and totaled more than $100,000. This was significantly greater than the fund's balance at that time. After consideration of the claims, two were approved and the third rejected. Payment, however, was deferred, pursuant to the rule's provision that the Trustees, in exercising their discretion, could consider the amounts available and likely to become available to the fund for payment of claims.
In 1969, the Fund granted an additional claim against the same attorney and disbursed a total of $24,000 for all three claims that had been granted. These payments represented a percentage of the full claims determined to be valid, again pursuant to the Trustees' discretion.
During the next few years no additional claims were filed, giving the fund the opportunity to achieve greater financial stability.
In early 1974, the Trustees were informed of very substantial claims against the Fund arising from the defalcations of a single attorney. The Trustees were again faced with the possibility of near or total depletion of the Fund. Four of the claims against the attorney were found to be invalid and denied. However, the five claims found to be valid totaled in excess of $160,000.00, which was greater than the balance then contained in the fund. After negotiations initiated by the Trustees, two non-lawyer parties to a transaction forming the basis of one of the claims agreed to contribute $60,000 in partial reimbursement of the loss, and in June 1974 the matter was completely settled by the Trustees with a payment from the fund of $100,613.00.
There were no additional claims against the Fund in 1975. However, in 1976, the Trustees received a very substantial claim against the estate of a deceased attorney, ten claims against another attorney who had been disbarred, and two claims against an absconding attorney. The Trustees advised the Supreme Court and the members of the Bar that if all of these claims were granted, they would fully deplete the Fund. (As of April 29, 1976, the Fund had assets in the principal sum of $154,743.00). In 1977, the fund granted the 10 claims involving the disbarred attorney in the total amount of $33,379.64. this amount, as with a number of prior claims, was a percentage of the total found to be due. In accordance with Rule 32A, further payment on these claims and action on other claims were deferred until the Trustees had given consideration to available funds and to all other known claims, which approximated $100,000.
On March 10, 1979, the Trustees authorized payment of the balance on the 1976 claim. Also in 1979, the Trustees paid another claim involving the same attorney for $33,580.64.
In 1980, a single claim was filed. This claim was eventually resolved when the attorney involved paid the amount claimed.
In 1981, the Trustees paid a fairly small claim out of the Fund in the amount of $5,129.00.
In 1982, the Trustees paid out $33,295.51 on a sizeable claim involving the defalcations of an attorney with regard to a single estate. The trustees also granted a claim for $13,213.76 involving another attorney.
The rest of the eighties saw only relatively small claims paid out of the fund: one in 1984 for $1,200.00, and two in 1987 involving a single attorney for $300.00 and $200.00 respectively.
In 1990, a total of ten claims involving the same attorney was recognized as valid by the Trustees, and a total of $7,153.42 was paid in satisfaction of these claims. Two other claims involving the same attorney were ultimately denied.
In 1992, the defalcation of a deceased attorney, which had been discovered by the clients after the attorney's death, was granted in the amount of $10,000.00. At the close of 1992, two claims were pending before the Trustees.
During the second half of its existence, the Fund has not again been threatened with total depletion. The Trustees have been able to pay the full amounts of all claims awarded without seriously threatening the fund.
Based on available records going back to the inception of the fund, the Trustees during the first twenty-five years granted no fewer than thirty-nine claims totaling $363,817.31. These claims, however, involved the defalcations of only nine attorneys.
Financial Status and Investment History
The Trustees established the first agency investment account for the Fund in 1970. At that time, $47,578.00 was deposited in the account out of a total fund balance of $52,000. Since that time, the Trustees have pursued the same general investment strategy - insuring a high rate of return, a secure investment, and liquidity of funds.
In the seventies, the monies of the Fund were invested in high-grade commercial paper. In 1984, the Trustees authorized those managing the agency account to seek higher yields on United States Treasury notes, while retaining the basic investment strategy of keeping funds in safe, liquid, and high-yield securities. In November 1992, the Trustees approved the investment of 20% of the funds in the Rodney Square Growth and Income Fund, and 80% in fixed income investments (e.g., Treasury and agency securities).
By December 31, 1992, the Fund balance was $1,326.111. This represents a point of unprecedented stability, which is particularly impressive in a day when I other states client protection funds are experiencing significant, and in some cases severe, financial difficulties.
LEGAL CHALLENGES TO THE FUND
The Fund has weathered two significant legal challenges to its constitutionality and validity over the last twenty-five years.
The first challenge arose soon after the establishment of the Fund, in 1968. A member of the Bar, purportedly in order to test the constitutionality of Rule 32A, refused to pay the required assessment. Thereupon, the Trustees referred the matter to the Censor committee of the Supreme Court, which upheld the validity of the rule. The attorney appealed the case to the Delaware Supreme Court, where Chief Justice Walkout rendered an opinion. In re Member of Bar, Del. Supr., 257 A.2d 382 (1969).
The attorney alleged that Rule 32A was unconstitutional for two reasons: (1) that the power of the Supreme Court over members of the Bar was limited to the negative right to discipline; and (2) that the assessment imposed by the rule constituted a tax which the Court was without power to impose. In denying these contentions, the Court emphasized its inherent power to establish the Bar and maintain its standards. This power is justified by the need for the proper administration of justice, which is possible "only if the procedures and practices of the courts are fair and reasonable, and the officers of the court, the lawyers, are competent and ethical." Id. at 383.
The Court found that the purpose of the Fund - establishing the collective responsibility of the profession for losses to the public caused by attorney misconduct - "falls within the scope of our inherent power." Id. This was because "[t]he proper administration of justice will falter if the Bar as a whole loses the confidence of the public as to legal service to which it has a maintained monopoly." Id. Such a loss of confidence would occur, the Court believed, if the Bar failed to take responsibility for its members who defrauded their clients. Accordingly, the Court found, rule 32A was a valid and reasonable method of exercising the Court's power to maintain the standards of the Bar. Id. at 384.The Court further held that the payment required under the rule represented an assessment and not a tax, and therefore was not unconstitutional. Id. at 385.
The attorney's subsequent appeal to the United States Supreme Court was dismissed. 396 U.S. 274 (1970).
Another significant legal challenge arose in the early eighties, when an attorney refused to submit to a random audit pursuant to Interpretive guideline No. 2, arguing that the requirement that he produce his financial records for examination was invalid, unenforceable, and unconstitutional under both the federal and Delaware constitutions and violated his right to due process. In re Kennedy, Del. Supr., 442 A.2d 79 (1982). Specifically, the attorney argued that the audit process would violate both his own right to privacy and that of his clients, as well as the attorney-client privilege.
The Court rejected the attorney's argument and affirmed the validity of the audit procedures. According to the Court, a lawyer has no personal or professional right to privacy regarding the lawyer's handling of funds belonging to other persons. Id. at 89. Moreover, the Court found that even if the attorney had such a right to privacy, it would be subject to reasonable governmental regulation, and that the challenged requirements qualified as such. Finally, the Court held that an attorney could not validly raise the attorney-client privilege to resist scrutiny was to determine whether the attorney had fulfilled certain ethical obligations to the attorney's clients.
THE FUTURE: NEW CHALLENGES AND NEW HOPES
The Trustees are constantly seeking ways to improve both the service of the fund to claimants and their own performance as a regulatory and disciplinary body. For instance, in recent years they have worked to increase public awareness of the Fund and its resources: the Trustees have distributed an informational brochure to the public regarding the fund. Moreover, the two-year time limit for the filing of claims was only recently (in 1989) lengthened from one year upon the Trustees' recommendation.
In the area of regulatory and disciplinary enforcement, the Trustees significantly expanded compliance checks in 1991 to include (1) test of specific transactions for fiduciary funds; (2) examination of quarterly payroll tax returns and deposits of taxes due; (3) examination of bank statements for evidence of overdrafts and returned checks; and (4) tests of specific real estate settlements to determine complete and timely payment of funds received. In 1992, the Supreme Court endorsed additional changes expanding the scope of compliance checks, mandating additional accounting practices, and requiring Delaware Members of multi-state law firms to make the firm's books available during random audits.
At the same time, the Trustees are striving to improve the financial status of the fund while preserving its historic stability. This objective has motivated recent changes in the investment makeup of the fund.
During the last twenty-five years, the Lawyers' fund for Client Protection has established a tradition which may be difficult to emulate as the Fund enters the twenty-first century. However, today's Trustees are confident that, with the continued support and cooperation of the Bar, they will successfully meet the challenges of the future as they continue to achieve the essential objectives of the Fund.
Lawyers' Fund for Client Protection of the Supreme Court of Delaware
The Renaissance Centre | 405 N. King Street | Suite 420 | Room 4016 | Wilmington, DE 19801
Phone: (302) 651-3942 | Email: LFCP@delaware.gov