Fast Moves in the Nutmeg State
After Connecticut, states now wary of raids on client security funds
Posted Aug 1, 2009 8:10 PM CDT
By G. M. Filisko
Blame it on recession-fueled desperation. That may be the best explanation for the Connecticut General Assembly’s attempt earlier this year to help plug a gaping $8 billion hole in the state budget by taking $2 million from the client security fund that is supported by dues paid to the Connecticut Bar Association.
The legislature passed a bill authorizing the transfer at a late-night session during the height of the budget crisis, and Gov. M. Jodi Rell quickly signed it.
But the bar fought the law, and the bar won.
After a campaign by the bar to block the transfer, the legislature backed off. The money eventually was restored to the client security fund, and Rell recently signed a bill passed by the legislature that protects the fund from such incursions in the future.
On May 29, the Connecticut bar was recognized for its efforts when it received the Isaac Hecht Law Client Protection Award from the National Client Protection Organization during the ABA’s 25th National Forum on Client Protection, held in Chicago. (Hecht was treasurer of the Maryland Client Security Trust Fund from its creation in 1967 until his death in 2003.)
Although the dust has settled in Connecticut, recession-related threats to client protection funds still lurk, and lawyers who oversee those funds are on high alert.
QUICK ON THE DRAW
It all happened so quickly, remembers livia DeFilippis Barndollar, who was Connecticut bar president during the turmoil over the client security fund.
“In the middle of the day on Feb. 25,” says Barndollar, whose term ended in July, “I happened to be at the Connecticut Supreme Court talking to the chief judge, who said, ‘There’s an attempt to attack the client security fund, but it’s not going to happen.’ ” But after midnight, Barndollar received an e-mail message informing her that a bill allowing the state to siphon $2 million from the fund had passed the General Assembly. Gov. Rell quickly signed it. “Within a couple of days,” says Barndollar, “it was law.”
There was a slight problem, however. The client security fund wasn’t supposed to be within the legislature’s reach. Connecticut’s fund, like similar ones in nearly every other state, was established by the supreme court and is funded by a slice of the dues paid by bar association members. Whether states call them client security funds, client protection funds or some other variation, those funds are held in trust and paid out to victims of lawyer misconduct when no other source of restitution is available.
“Taking those funds was not only a breach of trust and an invasion into funds that might be needed for victims of attorney defalcation,” says Barndollar, a partner at Marvin, Ferro, Barndollar & Roberts in New Canaan, “but it was also a violation of the separation of powers.”
Barndollar and other Connecticut bar officials tried to explain to state legislators why their action was so egregious, but, at least initially, they got the brush-off.
“Some began to understand,” she says, “but others were saying that maybe over the summer we could have a talk about it.”
Unwilling to be filibustered, the bar’s house of delegates held an emergency meeting to decide whether it should go to court in efforts to halt the funds transfer.
“Some people thought that would be a mistake politically and that there may be an issue as to standing,” Barndollar says. The majority, however, voted to sue.
“In the end, we decided that if we got knocked out of the box because of standing, we’d determine whether the fund would have to come in as plaintiff,” says Barndollar. “But it was worth the effort for the CBA to join the issue and get taken seriously.”
Barndollar says she received encouragement from ABA President-elect nominee Stephen N. Zack of Miami as they discussed the Connecticut crisis at a bar meeting.
“Lawsuits are always last resorts,” says Zack, a partner at Boies Schiller & Flexner in Miami who becomes president-elect in early August at the close of the ABA Annual Meeting. “But the CBA had attempted to negotiate this matter and run up against a stone wall. It appeared the only option that could protect the fund was litigation. To me, it was clearly appropriate for the bar to protect its rights and, more important, the clients who’d be affected by this action.”
The CBA filed suit on March 30. In the meantime, it launched a campaign to educate legislators and the public about the fund’s origins and purpose. Barndollar says ABA President H. Thomas Wells Jr., whose term will end at the close of the annual meeting, played an important role in this effort.
“The client security fund is not an appropriate source to bail out the state budget,” wrote Wells, a partner at Maynard Cooper & Gale in Birmingham, Ala., in a letter to the Hartford Courant, which helped turn public support in the Connecticut bar’s favor. “That’s when it started to pick up steam,” says Barndollar. Before that, “the public didn’t really understand what we were upset about.”
Connecticut Associate Supreme Court Justice Joette Katz also penned an editorial criticizing the lawmakers’ actions. The state treasurer even jumped in, distancing herself from the decision.
On April 3, the General Assembly agreed to restore the funds to the client security funds, but, Barndollar says, “we introduced amendments so that it would be clear in the future that this shouldn’t happen.” On May 7, Rell signed into law a statute specifically prohibiting use of fund money for any purpose other than that specified by the state supreme court.
MORE BATTLES TO COME
The battle in Connecticut has galvanized the client security fund community. “When word of that action got out, it probably sent a chill through everyone in this room,” said John S. Gleason, president of the National Client Protection Organization in Denver, when he presented the Isaac Hecht award to Barndollar.
At a roundtable discussion that followed, it was clear that the recession has raised concerns among client security funds around the country. Even bar associations experiencing funding shortages may be tempted to view their relationships with the funds a bit differently. For 2009, for instance, the State Bar of Arizona reduced the portion of member dues directed to the client security fund from $30 to $10, with the difference staying in the bar’s revenue fund.
“We have a current fund balance of about $3 million,” says Geoffrey Sturr, chair of the state’s client protection fund. “We’ve been paying out $200,000-$300,000 per year, so we’ve not been paying out at the rate we thought, and the fund has grown. The fund, in consultation with the board of governors, agreed it would be appropriate to reduce the assessment to $10.”
But in Gleason’s view, “a bar association is no different than the state legislature. The funds are supposed to be untouchable, but they’re not so untouchable if you let the bar association take them. Every incursion into these funds weakens their very existence.”
Other factors may also affect the financial well-being of client security funds, including drops in bar membership, caps or reductions in fund contributions and, perhaps most ominous, increases in lawyer misconduct and substance abuse, both of which lead to increased claims for compensation from funds.
“It’s not impossible that we’ll experience an increase in the number of claims and the dollar amounts because of this economic climate,” says Janet Green Marbley, the administrator of the Ohio client security fund based in Columbus and chair of the ABA Standing Committee on Client Protection. “If there isn’t an increase in fees to keep up with the growth in claims, that could have a long-term effect on the fund’s operation.”
Fund administrators also worry that the economy may breed “atomic” cases of lawyer wrongdoing that will obliterate funds. Arkansas currently has a case that could do just that. Little Rock lawyer Steven E. Cauley has pleaded guilty to wire fraud and contempt in connection with the disappearance of $9.3 million recovered in a class action case in which he was financial custodian.
As of early June, the Arkansas client security fund had slightly more than a half-million-dollar balance with expected upcoming payouts of about $200,000. “We haven’t received any claims related to Cauley,” says Michael E. Harmon, who oversees the fund in Little Rock. “However, this was a class action suit, and I don’t know how many people make up the class or how large any class payouts were to be. We could be running into a situation here.”
If funds are unable to meet claims, the profession could take a hit in the public eye. “A big part of our mission is to improve the profession’s image by helping victims harmed by dishonest members,” says Marbley. “We’re one of the few professions that attempts to reimburse clients out of our own pockets. I think we need to show we’re serious about that commitment.”