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Lawyer Theft: A Different Kind of Problem

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This blog illustrates a problem of attorney theft (defalcation) that I have discussed in a prior blog post, CPK in the news: comment on lawyer overcharging claim. Many potential clients contact our office believing they have the ultimate legal malpractice case because their former attorney did something so egregious, so clearly wrong (for example, defalcation), that they are "undoubtedly entitled" to recover damages from the attorney. They are sometimes wrong, but creative lawyering can save the day. The following is an example:

Mary, an older woman, had a dear friend, an older man named Edward. Edward had no wife and no children, and Mary was the primary beneficiary named in his will, with an estate of about $6,000,000 dollars. Before Edward died, he hired an attorney to centralize all of his bank accounts. Edward had placed millions of dollars in joint accounts with another friend (it was all Edward's money, and the friend's name was placed on the accounts for convenience only), and he instructed the lawyer to get the friend's name off the accounts, close the accounts, and temporarily place all of the money in the lawyer's IOLTA account.

The lawyer, Mr. X, collected Edward's money for him, by writing a few letters. When he distributed the money to Edward, it was short by $800,000.00. Mr. X had stolen it. When Edward complained, Mr. X tried to claim the $800,000.00 was his fee for writing the letters! Edward took his complaint the Office of Bar Counsel, and Mr. X wound up losing his license to practice, and was referred for criminal prosecution. In the meantime, Edward died, and thus Mary was the actual victim of the $800,000.00 theft.

Mr. X's malpractice insurance policy provides coverage for claims made against him for negligence. However, intentional bad acts, such as stealing client funds (called "defalcation"), are always excluded under malpractice insurance policies. Therefore, the insurer has no obligation to make payment to a client who suffers a defalcation. So what can a client like Mary do to get her stolen money back?

First, Mary approached the Client Security Board (CSB), about which I have written in a prior blog, The client security board: court of last resort? Mary met most of the requirements for reimbursement of her loss by the CSB. For example, she was (via inheritance from Edward) definitely the victim of a defalcation, not negligence. Second, the defalcating attorney had been disbarred. However, the CSB insisted that Mary first go after Mr. X's law partner, Mr. Q, even though Mr. Q did not steal the $800,000.00. Mary came to see me.

We took the case and asserted that the law partner had been negligent in failing to monitor the partnership's client escrow account, which thus allowed the defalcation to occur. The former law partner denied that he was liable for the intentional bad acts of his former law partner, who had since been disbarred. After litigation and intense negotiations, the law partner's insurer repaid two-thirds of the defalcated funds to Mary. Satisfied that Mary had done her best to recover the funds, the Client Security Board paid the balance.

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