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Bar Journal - September 1, 1999

A Summary of the Public Protection Fund

By:
 

INTRODUCTION

How many "lawyer jokes" did you hear last week? Common perceptions of attorneys include that they are too interested in money, they manipulate the legal system without any concern of right and wrong, and they file too many unnecessary lawsuits.1  Some perceptions of the positive aspects of attorneys are that their first priority is to their clients and they know how to cut through the bureaucratic red tape.2  However, for a small minority of attorneys, the client is not their first priority. In these cases, the attorney has taken advantage of the client thereby disgracing the profession. In the end, the unfortunate clients are left destitute and need help. What happens to those clients? The New Hampshire Supreme Court and the New Hampshire Bar Association (NHBA) have attempted to solve this problem by establishing a public protection fund.

The NHBA petitioned the supreme court to establish a client protection fund to address the reimbursement of clients who were subject to the theft of funds by New Hampshire attorneys. After referring the matter to the Advisory Committee on Rules, a recommendation was returned to the court that it adopt the rule establishing the fund under the new name of the Public Protection Fund (PPF).3  In considering this matter, the court solicited and received comment from the bench, bar, legislature, executive branch and the public.4  In a 1998 opinion by Chief Justice Brock, the court promulgated a rule establishing the PPF as Supreme Court Rule 55. Legislation was passed to require the court to report annually on the status of the PPF and to require a certain minimum yearly financial assessment on attorneys for inclusion in the PPF. This undertaking to protect the public has produced a great deal of attention to the need for and role of this type of fund.

HISTORY OF PROTECTION FUNDS

Client protection funds trace their beginnings to the early 20th century when English Commonwealth countries first developed programs to compensate victims of lawyer theft. New Zealand emerged as a leader in the development of client protection remedies, particularly with the 1908 passage of a provision requiring solicitors to deposit client funds into bank trust accounts. In 1939, Alberta became the first Canadian province to establish an assurance fund. The state of Vermont became the first state to establish a client protection fund in January 1959.6 

In 1961, the NHBA created a client indemnity fund to reimburse clients who suffered losses at the hands of legal counsel.7  The fund was administered by the Clients' Indemnity Fund Committee. This committee reviewed and investigated all claims, and submitted payment recommendations to the NHBA Board of Governors. There was no legislative oversight.

Between 1961 and 1985, revenue for the client indemnity fund was generated by either mandatory assessments on all bar members or allocations from bar dues. During this period, the fund paid 38 claims totaling $74,712.00. By 1985, the fund had accumulated a reserve of approximately $123,000.00. As a consequence of a favorable claims history, a sizable reserve, and income earned on the reserve, the NHBA ceased annual contributions to the fund in 1985. However, by 1992, as a result of an upsurge of claims, the client indemnity fund was almost depleted. Even though a large number of voluntary contributions were made to the fund by NHBA members, the revenues raised were insufficient to provide adequate protection to affected clients.8

PURPOSE OF A PUBLIC PROTECTION FUND

A public protection fund is a pool of money funded and maintained by a bar association or lawyer regulatory agency. Its purpose is to reimburse clients who have suffered financial loss due to the theft of funds by lawyers. Lawyers belong to the only profession that has established mechanisms to reimburse clients who have suffered financial losses due to the misconduct of its members. Every jurisdiction in the United States and Canada, except Colorado, has a lawyer's fund for client protection. These funds are financed solely by lawyer contributions.9 

According to a survey on client protection funds, these funds in the United States currently have approximately 43 million dollars in reserve.10  The goal of these funds is not to punish lawyers financially for the mistakes of fellow attorneys, but to educate them and make them better attorneys.11 

CURRENT EVENTS

On December 28, 1989, John Fairbanks, an attorney who was also a part-time district court judge, was indicted by a Sullivan County grand jury on charges alleging he transferred 1.8 million dollars of his clients' money to his personal accounts from December 1983 to April 1989. The money was entrusted to Fairbanks by his law practice clients or belonged to beneficiaries of trusts and heirs of estates that were administered by him. At least 25 former clients or their estates filed claims against Fairbanks totaling more than six million dollars. Fairbanks, who was a lawyer for 40 years, resigned from the court and the NHBA on June 6, 1989. In December 1989, when the police went to the summer home of Fairbanks to arrest him, he was gone. Fairbanks' body was found in Las Vegas in 1994.12 

After the actions of John Fairbanks came to light, the public's trust in attorneys in New Hampshire was shaken. In response, legislation was proposed in 1996 to require New Hampshire attorneys to purchase a bond as insurance to their clients.13  The legislature established a study committee to examine bonding and other alternatives to protect client funds held by lawyers.14  At the same time, the Advisory Committee on Rules recommended that the supreme court adopt rules to require bonding.15  The NHBA, while in favor of protecting the public, did not approve of requiring bonds.16 

In cooperation with members of the legislature, the NHBA proposed the concept of a client protection fund.17  On November 1, 1996, the legislative study committee recommended that the court "use its rule-making authority" to "protect the interests of citizens in client-attorney relationships."18  The NHBA's petition to the supreme court and the adoption of Supreme Court Rule 55 are the NHBA and court's response to the need for client protection.19 

THE COURT'S DECISION

The court stated "[t]he task of supervising and disciplining attorneys within this State falls squarely upon the shoulders of this Court".20  "In exercising the power to discipline members of the bar, we have the obligation both to protect the public and to promote confidence in and respect for the bar."21  The court indicated that adoption of the PPF rule is an important step in its continuing efforts to protect the public.22  The court noted that the NHBA had a distinguished and honorable history, but that the creation of the PPF is necessary because of the unscrupulous conduct of a few attorneys.23 

The court stated that integrity is essential to the practice of law and that lawyers are members of a unique profession, privileged to serve the public responsibly and credibly.24  The court stated in Astles' Case, that:

In today's society, more than ever before, the legal profession touches and affects nearly every facet of private and public life. Without debating the merits of this pervasiveness, one indisputable consequence of such an increase has occurred: the need for maintaining and requiring the highest possible levels of honesty and trustworthiness from the legal practitioners in this State.25 

The court stated that lawyers have a responsibility to maintain public trust and uphold public service with integrity.26  Any violation of that honesty and trust affects the profession as a whole. The comments to the American Bar Association (ABA) Model Code of Professional Conduct, which are included in the New Hampshire Rules of Professional Conduct, articulate this duty and state that when a client security fund has been established, a lawyer should participate.27  The court addressed the need for all members of the bar to be included in the responsibility to fund the PPF.28  Because of the collective responsibility to fund the PPF, all members who pay dues to the bar contribute.29 

Opponents of the PPF believe that a mandatory fund will not discourage unethical behavior by lawyers and will, in effect, force honest lawyers to subsidize the acts of the few less-principled members of the bar. They also contend that the PPF will not satisfy all claims which may be filed. And finally, they argue that lawyers should not be mandated to insure malpractice in their chosen profession when other occupations are not similarly bound. The court did not find these arguments persuasive.30 

The court, in rebuttal, stated that the personal stake that lawyers have in the fund, from their contributions, will create a more watchful bar. While the court is aware that not all claims will be covered, the PPF will provide a significant number of victims with at least some restitution without unduly burdening bar members. Through the use of mandatory contributions, revenue for the fund is guaranteed and the fund will compound during the years of low demand. The court points out that the PPF is designed as a last resort for victims, after pursuing civil and criminal remedies.31 

Opponents of the PPF also contend that the NHBA's advocacy in petitioning the supreme court exceeds the limits placed on it by Petition of Chapman.32  In Chapman, the court stated that the association should limit its activities before the court to, among other things, matters directly related to education, ethics, competence, integrity, and the regulation of the legal profession as a body.33  The court noted that in this case, the PPF clearly and directly concerns the integrity of the profession.34 

Opponents of the PPF further contend that the PPF is an unconstitutional tax and a violation of equal protection under the state constitution. This argument claims that lawyers are not being treated in the same manner as other professionals.35  In response, the court cited to a North Carolina case in which the state bar association challenged its public protection fund in the supreme court. The court stated it did not impose a tax, which is a legislative function, rather adopted an act to aid the court in the administration of justice.36  Further, the New Hampshire Supreme Court cited Petition of Grimm, where it held that the state may "treat professionals differently according to the needs of the public in relation to each."37  The court provided that the rational basis for treating attorneys differently was that there was a need to protect the public from the few members of the legal profession who might engage in criminal conduct.38 

There are limits on recovery from the fund. The goal of the fund is to protect victims "from proven losses resulting from embezzlement, conversion, or theft of client funds by lawyers."39  The maximum reimbursement with respect to the conduct of any one lawyer is $150,000.00 with an annual cap of all claims on the fund of $1,000,000.00.40  The court indicated that the PPF provides that no payments are made from the fund with respect to a defalcation by an individual lawyer until all other remedies are exhausted and until all claims have been finalized with respect to the offending lawyer.41 

The court realizes that full recovery by all victims in all circumstances may not occur. However, the PPF does provide a reliable mechanism for the bar to meet its responsibility to the public. The court ordered the creation of the PPF and retained jurisdiction over matters regarding the fund in order to provide greater public protection and to enhance the integrity of the legal profession.42 

PROVISIONS OF THE FUND

The purpose of the public protection fund is to provide a public service and to promote public confidence in the administration of justice and integrity of the legal profession. This is achieved by providing some measure of reimbursement to clients who have lost money or property due to misappropriation by their lawyers in violation of their fiduciary relationship.43 

The supreme court rule states the NHBA shall provide a fund establishing a reimbursement mechanism for proven losses resulting from embezzlement, conversion, or theft of client funds by lawyers, and for this purpose, the court shall annually assess a sum to be paid by all dues-paying members of the NHBA. The administration of this fund is subject to review by the court. A committee has been created to establish the terms, conditions, claims procedures, scope of coverage, cost, and funding mechanisms.44 

The nine-member committee that administers the fund is appointed by the president of the NHBA with the approval of the NHBA's Board of Governors, and includes at least two public members. Five members constitute a quorum. All decisions of the committee are made by a majority of the members present and voting. The committee has the power to propose regulations to clarify the intent of the rule that will become effective after review and approval by the court. Decisions of the committee as to whether or not to pay claims and the amount of payments are within the committee's discretion, subject to the annual limits stated above, and are reviewable only for clear abuse of discretion. Review of decisions of the committee is by a panel of three retired judges, appointed by the New Hampshire Supreme Court, whose decisions are final.45 

Within 120 days after the end of each fund year, the NHBA must report to the court about the claims made, approved and paid, assessments received, income earned, and expenses incurred in the preceding fund year. Reasonable expenses incurred by the NHBA in administering the fund, including overhead, staff time, and professional fees, are reimbursed by the fund as a cost of operation, subject to the review and approval of the court.46 

Any claims against the fund must be submitted in writing, under oath, and explain specifically the prohibited conduct which led to the losses in question. The claim must be submitted within three years of the time when the victim first discovered or reasonably should have discovered the defalcation and the resulting losses. The claim cannot be submitted later than one year after the lawyer in question has been suspended or disbarred from practice, or has died or has been judged mentally incompetent before the suspension or disbarment proceedings have been commenced or concluded.47 

Any payment from the fund may be made only after the lawyer in question has been suspended or disbarred from practice (or if the lawyer has died or been judged mentally incompetent before the suspension or disbarment proceedings have commenced or concluded). As a condition of payment, the claimant must execute a subrogation agreement in favor of the fund against the offending lawyer and the offending lawyer's law firm and against third parties in the amount recovered by the claimant from the fund. Payments will be made only after exhaustion of all available assets, insurance, and sureties of the offending lawyer and the offending lawyer's law firm. Payments will also be made only to victims who have lost money or property as the result of the misappropriation of the lawyer. No payments shall be made to any assignee, subrogee, or successor of such victim. The heirs or legatees of deceased victims may be eligible for payment from the fund. Payments must be made only at the end of each fund year. Payments, with respect to an individual lawyer, shall not be made until all claims have been finalized with respect to that lawyer.48 

The maximum amount of reimbursement to all claimants against the fund in respect to conduct of any one lawyer is $150,000.00 in the aggregate. The maximum amount of reimbursement to any one claimant, against the fund in any fund year, regardless of the number of lawyers involved in the misconduct, is also $150,000.00. The maximum amount of reimbursement to all claimants against the fund in any fund year is $1,000,000.00 The maximum amount which may be paid on a claim is the dollar value of the money or property lost by lawyer misappropriation and does not include interest on the amount lost or money spent attempting to collect the funds. If payable claims against a lawyer exceed $150,000.00, then all payable claims against that lawyer are reduced in proportion to their relative value in order to reduce total payments as a result of that lawyer's conduct to $150,000.00 If payable claims in a single fund year exceed $1,000,000.00, then all payable claims for that fund year are reduced in proportion to their relative value in order to reduce total payments for that year to $1,000,000.00.49 

This rule took effect on June 1, 1998, and payments from the fund are made only for defalcations occurring on or after that date. Fund years run from June 1 to May 31.50 

THE SENATE BILL

In the 1998 legislative session, Senate Bill 367, which requires the supreme court to report annually on the status of the PPF and requires a certain minimum yearly assessment of $100.00 on active, practicing attorneys for inclusion in the PPF, was passed. The bill provides that the court must report annually, by October 1, to the governor, the president of the senate, and the speaker of the house of representatives on the status of the PPF established by rule of the court and administered by the NHBA. The report must include a description of the amount of revenues received by the NHBA under the fund, the number of claims, and the amount paid out to claimants from the fund. The effective date of the legislation is January 1, 1999.

FOLLOW-UP TO THE COURT'S DECISION ESTABLISHING THE FUND

Since June 1, 1998, the NHBA has assessed fees to begin the creation of the PPF. New Hampshire lawyers are assessed $50.00 a year. Those lawyers with five years experience or less pay $35.00 and judges are assessed a fee of $40.00 The fund is mandatory and anyone who does not pay has to appear before the Professional Conduct Committee.

The first meeting of the PPF committee was on October 8, 1998. In that meeting, the committee began to address the procedures needed to establish the operation of the fund.51

CONCLUSION

In following the lead of the court, "[t]he task of supervising and disciplining attorneys within this State falls squarely upon the shoulders of this Court" and "[i]n exercising the power to discipline members of the bar, we have the obligation both to protect the public and to promote confidence in and respect for the bar."52  The court is attempting to enforce its power to supervise attorneys while struggling with the desire to protect the public from attorneys who stray from their control. The goal of the PPF is to reimburse clients who are victims of their own attorneys. The court's intention is to use the imposition of the fees to self-regulate the profession. It begs the question, will the cost to attorneys deter the conduct or provide a safety net for the furtherance of unethical conduct?

ENDNOTES

1.

"What America Really Thinks About Lawyers", Nat. L.J., Aug. 18, 1986, at S-3.

2.

Id.

3.

In re the Proposed Public Protection Fund Rule, 142 N.H. 588, 707 A.2d 125 (1998).

4.

Id.

5.

Id.

6.

Harriet Turney and John A. Holtaway, "Client Protection Funds - Lawyers Put Their Money Where Their Mouths Are", 9 No. 2 Prof. Law 18.

7.

PPF Rule, supra, at 125.

8.

Id. at 125-126.

9.

Turney, supra at 18.

10.

Id.

11.

Id. at 20.

12.

The Patriot Ledger, News, Monday, March 28, 1994.

13.

New Hampshire Bar News, "Public Protection Fund Appointments Criticized", Vol. 9, No. 10, October 21, 1998.

14.

PPF Rule, supra at 125.

15.

Id.

16.

New Hampshire Bar News, supra.

17.

Id.

18.

Id.

19.

PPF Rule, supra, at 125. 20. PPF Rule, supra, at 126, citing Petition of Burling, 139 N.H. 266, 268, 651 A.2d 940, 941 (1994).

21.

Id., citing to Burling at 139 N.H. 272, 651 A.2d at 944.

22.

Id. at 126.

23.

Id.

24.

Id.

25.

Astles' Case, 134 N.H. 602, 606, 594 A.2d 167, 170 (1991)

26.

PPF Rule, supra, at 126.

27.

Id., citing to N.H. R. Prof. Conduct 1.15 comment.

28.

Id. at 127.

29.

Id.

30.

Id. at 126.

31.

Id.

32.

Petition of Chapman, 128 N.H. 24, 509 A.2d 753 (1986).

33.

Id. at 126.

34.

Id. at 127.

35.

Id. at 128.

36.

Beard v. North Carolina State Bar, 320 N.C. 126, 357 S.E.2d 694, 696 (1987).

37.

PPF Rule, at 128.

38.

Id.

39.

Sup. Ct. R. 55(2).

40.

Sup. Ct. R. 55(4).

41.

PPF Rule, at 128.

42.

Id.

43.

PPF Rule, supra at Appendix 2.

44.

Id.

45.

Id.

46.

Id.

47.

Id.

48.

Id.

49.

Id.

50.

Id.

51.

New Hampshire Bar News, "Public Protection Fund Appointments Criticized", Vol. 9, No. 10, October 21, 1998.

52.

PPF Rule, supra, at 126.

The Author

Nicole Coppes-Gathy, Class of 2000, Franklin Pierce Law Center, Concord, New Hampshire.

 

 

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