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Good News About Lawyers: Client Protection Funds

Lawyer joke: What do you call 200 lawyers on the bottom of the sea? Answer: A good start.

As we slog through the shutdown, the need for something positive to contemplate is real. Given all the jokes about lawyers, they might seem an unlikely source of uplift. The truth is that lawyers and judges do something terrific that is little known or understood.

As with any profession, Law is a barrel in which there are a few rotten apples. That’s the bad news. The good news is (1) how few there are and (2) what all the honest lawyers do to address the harm done by the dishonest few.

What they do is maintain a Client Protection Fund. (By way of full disclosure, I served as director and counsel to New Jersey’s Fund for thirty years.)

The Basic Concept

Each state disciplines unethical lawyers. The rules (of professional conduct, or RPCs) tend to be similar across various jurisdictions, but not identical. Generally, a lawyer who has done something terrible, like stealing from a client, can expect to be disbarred.

All of which is good and necessary to prevent harm to future clients. But what happens to the clients already harmed? What happens to them, hopefully, is a remedy provided by the bench and bar of the state. Among the remedy’s names are Lawyers’ Fund for Client Protection, Client Security Fund, or Client Protection Fund. We’ll just use “Fund”.

Whatever it’s called, the concept is simple: a trust fund paid for by the state’s lawyers and judges to reimburse clients of dishonest lawyers. The Supreme Court appoints a cream-of-the-crop board of trustees to run every aspect of the Fund’s operation. This includes deciding claims, hiring and firing staff, safeguarding and investing the Fund’s assets, and proposing rule changes to the Supreme Court to which it reports.

The mission is to pay claims based on dishonest conduct (not malpractice) by a lawyer within an attorney-client or fiduciary relationship. The American Bar Association has a model rule for Funds (https://www.americanbar.org/groups/professional_responsibility/resources/client_protection/), and the National Client Protection Organization has a set of Standards (under “Resources” at www.ncpo.org).

Together, the Model Rule and the Standards lay out the characteristics of a Fund that matter most.

Most Important: the Fund’s Nature as a Trust

It’s hard to believe anything could be more important to a Fund than adequate resources, but something is – an independent organizational structure as a trust. To put it bluntly, being well funded doesn’t matter if those assets or income can be taken away for any other purpose. If the Fund is anything but a trust, and beholden to those who don’t “get” client protection, there is ultimately no Fund.

The threat is no mere hypothetical. When Fund Trustees and their staff do their jobs well, the Fund grows a reserve even while paying all valid claims. Others inevitably find that reserve irresistible. If a Fund is just another committee among many, or a mere line item in a vast bureaucracy’s budget, the risk can range from outright taking of the Fund’s money to simply diverting needed income elsewhere.

Recognizing the Fund’s nature as a trust exposes a delicious irony in threats against it: taking from it is a theft, the very sort of behavior that gets lawyers disbarred. That doesn’t mean it can’t happen, unfortunately.

So, the term “trustee” is not used lightly here. The role goes well beyond that of “committee member”. Trustees of a Fund have fiduciary duties with respect to the trust: to the Supreme Court as grantor; to the state’s lawyers as benefactors; and to the public as potential beneficiaries.

Financial Health

What is a Fund without steady, secure, and adequate funding? Well, nothing. If underfunded enough, it actually may be worse than nothing – an embarrassing sham.

Decades of national experience show that a Fund can fully reimburse nearly all claimants with an annual assessment of between $25 and $50 per lawyer. (The amount needed depends on cost of living and whether loss prevention mechanisms exist.) Anyone doubting that this is a tremendous bargain need only check the cost of comparable fidelity bonds for all lawyers.

Indeed, how do Funds do it? The first key is to collect the assessment every year, good and bad, growing the reserve when claim payments are mercifully low. The second is to exempt very few attorneys. Every honest lawyer can argue “I don’t contribute to the risk” covered by the Fund.  This misses the whole philosophical foundation of the Fund – see below.

Another key is to pursue recovery from the disbarred lawyer, and anyone else liable from how the theft occurred. It’s hard work, but worth the effort; Jersey has recovered $24M of the $92M paid since 1969.

Finally, Funds must not listen to anyone arguing it has “too much”. Unless a Fund is fully endowed – fully paying each year’s claims and expenses out of the reserve’s income – it doesn’t have too much. The “Murphy’s Law” of Client Protection is this: Any Fund that reduces or eliminates its assessment because it has “too much” will be decimated by catastrophic claims. Soon. Since victims of catastrophic losses are no less deserving, the Trustees have a duty to build a substantial reserve.

Accessibility

A Fund can’t help people who don’t know about it. Law clients who need the Fund must be able to find it. The Fund should not be the Bar’s little secret. If lawyers have been disbarred for theft, but the Fund is getting no claims, something’s amiss.

Some lawyers hate admitting a Fund is needed, but that’s just silly. Human nature being what it is, all professions could use a Fund – more on that later. At least the Law has one; if done well, it’s a source of pride. Robust efforts to get the word out should reflect that pride.

Publicity for a Fund isn’t always easy, though. It’s still bad news that sells. When a lawyer is suspended or disbarred, there are headlines. Indicted, convicted, or sentenced: definitely headlines. When a Fund supported by every lawyer and judge in the state takes care of each victimized client, however – not so much.

One other aspect of accessibility: After they find the Fund, clients must be able to file a claim without experiencing Dante’s nine Circles of Hell. What is required to file a claim should be clear and doable.

Responsiveness to the Need

There are two aspects to responsiveness: the reimbursement’s amount and timing. The only sensible goal for a Fund is to replace every dime stolen as quickly as possible.

What’s the message to a client, and to the public, when a Fund pays 20 cents on the dollar of a valid claim? We kinda, sorta regret what happened? We don’t care enough to make you whole, but we wanted to make a gesture? Lawyers are 20% trustworthy? Other ways to limit claims, like needless disqualifications and limitations in the rules, similarly thwart the purpose of the Fund.

Timeliness matters, too. A claim should not outlive its claimant. Getting the evidence needed can be a chore, but once a claim is proven, relief should be on the way.

Trouble in this area – a Fund paying too little or too slowly – is often a funding problem in disguise.

Philosophical Foundation: the Compact

In submitting ourselves to the rule of law, “We, the People” place special trust in the highest court of the state (often called the Supreme Court). Such courts not only are the last appeal in court cases but run the judicial branch of government under state constitutions. In leading the systems of justice, it sensibly follows, these supreme courts regulate lawyers and the practice of law.

In deciding who may practice law (through bar admissions) and who may not (with discipline), the Supreme Court is telling the public which individuals are worthy of their trust. This is a very big deal.

As New Jersey Chief Justice Robert Wilentz said in a landmark 1979 case, In Re Wilson:

“Whatever the need may be for the lawyer’s handling of clients’ money, the client permits it because he trusts the lawyer.

It is a trust built on centuries of honesty and faithfulness. Sometimes it is reinforced by personal knowledge of a particular lawyer’s integrity or a firm’s reputation. The underlying faith, however, is in the legal profession, the bar as an institution. No other explanation can account for clients’ customary willingness to entrust their funds to relative strangers simply because they are lawyers.” [My emphasis]

Thus, when a client is hurt for trusting a lawyer, “Gee whiz” is not an acceptable response by the bench and bar.

Much better is what a Fund says to clients in replacing all the stolen money: “You were not wrong in trusting your lawyer. Clients need to trust their lawyers for our system to work. The lawyer was wrong in abusing your trust. On behalf of all the state’s honest lawyers and judges who make your award possible by paying into this Fund, we are sorry you had this terrible experience. We hope this award helps you going forward and begins to restore your faith in the profession.”

Restoring public trust vital to the justice system, the Fund is the best response to lawyer wrongdoing in light of the Compact between the People and the Court. It is essential to the rule of law.

Not Without Controversy

The Fund is not really controversial. It generally enjoys wide support. Now and then, though, a lawyer will complain “Am I my brother’s keeper?”  To which there are at least three replies:

  1. The Fund doesn’t do this for the dishonest lawyers, but for their deserving clients. After paying, the Fund goes after the disbarred lawyers to collect.
  2. See Chief Justice Wilentz, above.
  3. Of all the heroes in the Bible available to quote, you chose Cain? Really?

The Fund’s merits are clear enough that it is difficult to oppose publicly, but not everyone gets it. So, the Fund is not without controversy. The corresponding need for education never ends.

How Few Are the Dishonest Lawyers?

Very few. In its 51-year history, the New Jersey Fund has paid claims against 840 lawyers. There are currently about 98,330 lawyers licensed in New Jersey. So, in over a half century the Fund has paid claims against 0.85% of lawyers licensed now. Add in all the lawyers who have passed away (and those disbarred) over these years, and there’s little doubt that the percentage drops at least to one-half of one percent.

Note that 840 respondents in 51 years means that an average of 16 to 17 lawyers “go bad” each year.

Those few can do a lot of damage, however. The 840 have cost the Fund $92,471,845, or an average of $110,086 each. You wouldn’t expect anyone to get disbarred over nickels and dimes, but some do. They balance off the huge claims in the statistics.

One Last Subtle Point

The Fund is a moral imperative, not a legal one. Lawyers are not liable for the misdeeds of total strangers, just because they’re in the same profession. Clients do not have claims of right, but of grace; their claims are not causes of action.

The Fund exists because it’s the right thing to do, not because it is legally compelled. Therein lies its beauty. Deciding claims in their discretion makes it more incumbent on the Trustees to do justice, not less. I’ve known many trustees from all over the country. Almost every one has been passionate about getting claims right and protecting the Fund. Anyone not so inclined should resign, or simply decline the appointment.

For those who argue that Law is no longer a profession but “merely” a business, the Fund is Exhibit A why they’re wrong. The hallmark of true professionals is that they put the interests of clients before their own.

Other professions should consider it. The March 15 Philadelphia Inquirer had a story about a Pennsylvania payroll service that had failed to pay clients’ payroll taxes for years. Not only were the clients’ funds missing, but the IRS was looking for interest and penalties. Losses in the millions apparently have no remedy in that industry.

Conclusion

Law clients facing ruin for having trusted a lawyer, only to have a Fund restore their life’s savings, do not consider 200 lawyers on the bottom of the sea “a good start”. (There may be one ex-lawyer they wouldn’t mind seeing there, though.) Many a claimant has wept with joy and relief upon learning of a Fund award; there are hearings I will never forget. So, is an independent, well-funded, accessible, and responsive Fund good for the legal profession? You bet.

Working on something that is both this good and this prudent is quite a privilege. And, done right, Client Protection Funds are amazingly good for everyone – the bench, the bar, the public, the system. All 50 states plus the District of Columbia have a Fund. None is perfect, but most are quite good and diligently working toward the aspirations not yet attained.

I thought you’d like to know.

Ken Bossong

© 2020 Kenneth J. Bossong

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Superior Forces

Lawyers all over the country are brushing up on a legal doctrine called Force Majeure. Why? Because it is the key lens for viewing deals disrupted by the pandemic. Since COVID-19 is disrupting almost all human interactions, Force Majeure and related doctrines are well worth examining. If you haven’t already, you’ll be hearing the phrase soon – and often.

When the Law names a concept or a doctrine, it usually resorts to Latin. You may have heard phrases like quid pro quo (“this for that”) or res ipsa loquitur (“the thing speaks for itself”) bandied about recently, for example. Force Majeure is French (“superior force”). So, there’s that.

What really makes Force Majeure interesting and not only for lawyers, though, is how aspects of the doctrine relate to our every-day approach in facing adversity. There are lessons for life in considering what matters here. (No, it’s not that hordes of readers are combing the Internet for posts on the law of Contracts. And no, what follows is not legal advice, obviously.) So, what is it?

The Concept

In ordering our affairs, we seek to hold each other, and ourselves, to doing what we promise to do. Courts are not pleased with those who breach contracts, and assess money damages for doing so. We value promise-keeping.

What happens, though, when an abnormal, outside event prevents one or both sides of an agreement from doing what they promised? That is, if a force superior to the parties’ intent intervenes? (Note: we’ll refer to this simply as the “event”. Also, to do what was promised is to “perform”.)

If someone has a contract with a town or a county to fix a road’s potholes (don’t we wish!) and an earthquake destroys the road, what happens to each side’s obligations? Or if one is hired to paint a barn that burns to the ground? The possibilities of events beyond the parties’ control (whether the cause be nature – floods, earthquakes – or mankind – terror attacks, war) are endless. The potential for complexity far exceeding these plain examples is limited only by the scope of our entanglements.

Sophisticated written contracts often contain Force Majeure clauses. In them, a parade of catastrophes is listed with some attempt to agree in advance who gets to skip, change, or delay performance – and under what circumstances. Some clauses include a catch-all provision to deal with events not mentioned.

After The Event

After the event occurs, if everyone agrees what should happen next, there’s no legal problem. (There are always the hardships and heartaches involved in picking up the pieces, unfortunately.) When the parties disagree, however, even after trying mediation, the courts ultimately must decide.  Was the event a Force Majeure? If so, how does it affect what the parties promised to do?

If there is a contract with a Force Majeure clause, the court will interpret and enforce that language. As in many areas of law, state law will govern. While that means the law will vary some, certain kinds of issues generally will matter:

  • If not completely unforeseen, the extent to which the event was unavoidable or not within the control of the parties  
  • Whether the event directly caused the inability to perform
  • To what extent there was a true inability to perform
  • Whether there were any attempts to perform
  • If the doctrine applies, what the appropriate remedy should be

The burden of proof is on any party seeking to invoke Force Majeure. Obviously the cases will depend on their facts, but there’s no doubt that COVID-19 will present numerous, daunting legal problems.

When There Is No Force Majeure Clause

It is possible to have either (a) an enforceable contract that is verbal rather than written, or (b) a written contract that does not contain a Force Majeure clause. Either way, there may still be a remedy. To address this very briefly, two similar doctrines of law have evolved in our so-called “common law”, on a case-by-case basis.

Impracticability is not just impracticality with an extra syllable, so lawyers can have another word nobody else says. It means something is beyond simply not practical to do, even if not quite impossible. If impracticable, it can’t be put into practice under the circumstances. So, parties invoking the doctrine must show the event to have been beyond their control and destructive to one or more of the contract’s essential assumptions.

Then there is Frustration. This is not exactly what Muddy Waters was singing about in “I Can’t Be Satisfied”, later inspiring the Rolling Stones’ “(I Can’t Get No) Satisfaction”. It is frustration of purpose. So, again, if parties reach an agreement based on assuming certain things will or won’t happen, and an event not their fault later shatters their assumption(s), relief may be available. Was the purpose of the contract frustrated?

[For anyone wanting more detail on the three doctrines, a quick search will provide scads of information. Continuing Legal Education is going berserk with courses on all this – all webinars, to be sure.]

Digging Deeper Into What Matters

In the flood of litigation expected in the wake of COVID-19, courts will have much to consider. Whether there are Force Majeure clauses to interpret, or doctrines like impracticability or frustration to apply, judges will find themselves asking similar questions:

Was performance impossible, or so difficult that it might as well have been impossible? Or was it just annoying, inconvenient, or somewhat more difficult or costly than anticipated? How difficult is too difficult?  Did the pandemic cause the impossibility in this case? Was it even relevant?

Did the parties act honestly and in good faith? Try to perform? Seek to limit the harm or avoid the negative consequences? Seek alternative solutions? Communicate?

Is there a way out of the situation that makes sense? Can justice be done? Is one side trying to take advantage? Is the event just an excuse to renege, or an attempt to renegotiate a deal one regrets? Should the contract simply be void? What if some sort of under-performance is possible, and better than nothing?

Equity and the Truly Superior Forces

Like anything else, the Law is not perfect. Limitations and imperfections exist, whether in statutes, common law, rules, or regulations. Inflexibility is therefore problematic. Up steps Equity, the conscience of the Law. Equity does not oppose the Law, but supplements it with an overriding concern for fairness and good sense. By the way, “Equity” (or “Chancery”) sometimes denotes a division in the court system where remedies other than money damages are sought. Equity’s principles or “maxims” are generally available to interweave with the Law, however.

Of all the old Equity maxims, my favorite is this: He who seeks Equity must do Equity. Wise words, those.

Honesty, fair dealing, good faith, reasonableness, decency, concern for the big picture – these are the kinds of things courts will be looking for in deciding Force Majeure (and related) cases. They’re also what we demand of ourselves and each other when we are at our best.

These are the truly superior forces.

The wise among us don’t wait for the courts to tell us so on a case-by-case basis. What the courts decide to do always carries tremendous significance, but is not as important as what we decide to do – every day, in matters large and small.

The current saying is “We’re all in this together.” In a sense that’s always true, not only during a pandemic and not just with respect to health.  Behavior, good and bad, matters. Bad behavior harms not just the victim but the perpetrator as well, and then ripples through the community. The same is true for the benefits of the good.

Our system and our way of life depend upon our embrace of truly superior forces – among them honesty, fair dealing, good faith, reasonableness, decency, and concern for the big picture. Whether our being “all in this together” ends up a blessing or a curse depends on us.

Ken Bossong

© 2020 Kenneth J. Bossong