Defalcation-misappropriation of money or funds held by an official, trustee, or other fiduciary. 
You or your collection agency hired an attorney to collect a bad debt and the good news is that job was accomplished. However, the bad news is you didn’t know about it and, worse, you didn’t receive your share of the proceeds of the collection.
First, I have to point out this is not a frequent phenomenon, but it is also not rare. However, the vast numbers of attorneys are indeed solidly honest professionals acting in your best interest to provide you with quality representation. Nevertheless, consider Arizona as an example. That State has over 29,000 lawyers and reports that in 2014 forty-three claims for defalcation were approved by their State Bar.
The typical scenario involves a lawyer falling behind in personal finances and then begins to commingle the funds held in trust for clients to pay his personal debts. The money collected for those clients goes unreported to either the client or the client’s collection agent. The first sign of a defalcation is the lack of status reports from the lawyer. They fall silent. Sometimes the reports, which are given simply don’t make sense in the sequence of the history or progress of the case.
If you are lacking a current, and I’ll stress “cogent” report from your lawyer, you must call him. Emphasize you need a written report with a full explanation of things. Certainly, it’s possible for a case to look apparently stalled and that can happen for good reason – but press your lawyer for a full understanding and a timetable.
However, if things get to the point where the lawyer is simply not responding at all to your requests, you or your debt collection firm must take action. If the debtor who owes you money is represented by counsel, that lawyer must be called to determine his view of the current status of the case. If you’re working with a debt collection company, they will do that for you. Regardless, this important step will typically quickly reveal if any money has been collected from the debtor by your lawyer.
If you are working through a debt collection company, they will be able to tell you if the lawyer is covered by a defalcation bond. If so, the debt collection company will take care of lodging a claim with the bonding company for recovery of the collected funds if the lawyer fails to promptly remit the net proceeds of the amounts collected. Bear in mind, proof of payment must be obtained from either opposing counsel or the debtor. Collecting from the bonding company may or may not require filing a new lawsuit against the bonding company.
If there is no bonding coverage or you are not working through a debt collection company, all hope is not lost. All states have a mechanism in place through their local State Bar Association for the protection of clients and that includes instances where a defalcation has happened. Here in California, lawyers are required to contribute to the Client Security Fund administered by the California State Bar Association’s Client Security Fund Commission. A prerequisite to filing a claim with the Client Security Fund is the filing of a complaint with the State Bar (a link to the claim form is shown below). Even if there is bonding coverage, the client may still file a complaint and a claim with the State Bar. However, the bonding company may not file a claim for reimbursement from the Client Security Fund.
Filing a claim with the State Bar is easy, but it is not a quick process at all. You will have to remain very patient. You should read the governing rules (see links below) and will need to submit an application also obtainable at the link shown below. Ultimately, if you collect from the Client Security Fund, your reimbursement will be less the fee you normally would have paid the lawyer. For losses occurring on or after January 1, 2009, the maximum allowable reimbursement is $100,000, and cumulative reimbursements to an applicant may not exceed $100,000 with respect to any individual attorney.
Consider this from the California State Bar Association:
“To qualify for reimbursement, you must be able to show that the money or property actually came into the lawyer’s possession and that the loss was caused by the lawyer’s dishonest conduct.
The types of dishonest conduct that may lead to reimbursement from the fund are:
- Theft or embezzlement of money or the wrongful taking or conversion of money or property;
- Failure to refund unearned attorney fees paid to the lawyer in advance where the lawyer performed no services, or an insignificant portion of the services;
- The borrowing of money from a client without the intention or reasonably anticipated ability to repay the money;
- Obtaining money or property from a client by representing that it would be used for investment purposes when no investment is made; and
- An act of intentional dishonesty or deceit that directly leads to the loss of money or property that actually came into the lawyer’s possession.
The fund may reimburse fees you paid the lawyer, but only in very limited cases. Fees are not reimbursable simply because you are dissatisfied with the services, or because the work was not completed.”
To the extent there is no bonding coverage or there is still a loss beyond the limits of any State’s Client Security fund, I note Section 523(a)(4) of the Federal Bankruptcy Code provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
Therefore, let’s say the Client Security fund reimbursed you up to their limit, but your losses are an additional $200,000.00. You may file a lawsuit against the offending lawyer for that additional amount, and he may not use a declaration of bankruptcy as a defense for avoiding the amounts still owed to you.
In summary
- Remain proactive and insist upon timely status reports from your lawyer or debt collector
- Find out from your debt collection agent about bonding coverage for the attorneys they utilize.
- If you determine a debt has been collected but that you haven’t received the proceeds act quickly to protect your right to recover.
- The vast majority of lawyers are ethical and honest, but you need to protect yourself from the few who might break from that fine tradition.
Links:
Complaint Form – California State Bar Association
California Client Security Fund Rules
California Client Security Fund Application
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