By David C. Carr
A State Bar Court hearing judge filed her decision this week recommending the disbament of Thomas V. Girardi.
Unless you have been living in cave over the last year[1], you have probably heard something about Mr. Girardi. Suffice to say that he was a great trial lawyer who was ultimately found to have misappropriated millions of dollars from his clients. Perhaps you know him from his celebrity wife, one Erika Jayne, who was a featured star on a “reality” televsion program called “Real Housewifes of Beverly Hills.” I know him as the man who taught me the law of medical malpractice at Loyola Law School.
A lawyer stealing millions of dollars from his clients is a rare event but, unfortunately, sufficiently common that it typically does not attract much mainstream media attention. Girardi did and not just because of Erika Jayne. In June 2021, the State Bar of California made an unprecendented admission that it had made “mistakes” in its handling of a number of complaints against Mr. Girardi going back almost 40 years. This followed on the heels of a sensational series of stories in the Los Angeles Times suggesting that Mr. Girardi had exercised his considerable political influence to escape punishment from the State Bar of California.
Following their undetailed admission that “mistakes were made” the State Bar set up a committee to suggest ways to prevent these unexplained mistakes from happening again. The commission has made its report and suggested a number of rule and regulatory changes that, if adopted, will significantly change the way California lawyers manage their client trust accounts.[2] Here is a summary of some of changes recommended by the committee:
Rule Changes
End Requirement That The Client Has to Ask for the Funds
Shift Burden to Lawyer To Explain Why Funds Not Promptly Delivered
“Rule 1.15 (d) requires attorneys to notify, account for, maintain records regarding, and disburse funds, securities, or property held for a client or other person. The committee believes that clients would be better served if the rule were revised to accomplish two purposes: (1) to relieve the client of the burden of requesting a disbursement of funds to which they are entitled in order to compel an attorney to proceed with disbursement; and (2) to replace the term “promptly” with a deadline measured by a time certain, such as 30 to 60 days. The committee discussed approaches to correcting these defects including establishing a clear timeframe for disbursement of funds (a rebuttable presumption of a 30–60-day disbursement timeframe from receipt of funds or resolution of any demands on those funds, for example), and a requirement that attorneys notify clients when settlement funds are received. This change would put the burden on the attorney to demonstrate why funds were not distributed by the deadline in the rule. There are many valid reasons, including pending disputes over some or all of the funds, the need to resolve liens placed against entrusted funds and waiting for deposited checks to clear before disbursing funds to the client. As things now stand, however, the burden is on the State Bar to prove that the attorney has violated the rules by holding on to funds for too long. Because the attorney is in possession of the relevant information, it makes sense to place the burden of proof on the attorney.
The Board of Trustees should direct the Committee on Professional Responsibility and Conduct to draft a revision or clarification of rule 1.15(d) to remove the burden of soliciting reimbursement from the client and to replace the term “promptly” with a deadline measured by a time certain, likely 30-60 days. The revised rule should provide that missing the deadline creates a rebuttable presumption that the rule has been violated.”
Clarify Duty to Communicate
“The committee reviewed the current framework for regulating attorney conduct with respect to failure to communicate about the receipt and disbursement of funds received on behalf of clients. The committee believes that it would be beneficial to clarify the meaning of ‘significant developments’ in Rules of Professional Conduct rule 1.4 to ensure that developments related to client funds are explicitly included, linking the requirements of CRPC 1.15(d)(1) to those of 1.4(a)(3).
The State Bar should direct State Bar staff to clarify rule 1.4 to ensure that developments regarding the receipt and disbursement of funds on behalf of clients are specifically included in the language of that rule, including reference to rule 1.15(d)(1).”
New Regulatory Requirements
Annual Registration of Client Trust Accounts
The State Bar should require, as part of annual license renewal, that every licensed attorney report whether or not they are responsible for one or more client trust accounts. If responsible, the attorney should be required to list the client trust accounts for which they are responsible by account number and financial institution. Rationale: The State Bar needs to collect this information to have a complete picture of the number of licensed attorneys who manage client trust accounts and the number of accounts. At the same time, the registration process would allow attorneys who are not responsible for client accounts to indicate this status. This registration information will allow the State Bar to distinguish the universe of attorneys who are responsible for one or more client trust accounts, from which a random sample of attorneys can be drawn for audit purposes (see below). This information should not be considered public.”
Annual Certification of Compliance
“The State Bar should require, as part of the annual license renewal process, that every attorney licensed by the State Bar who is responsible for client trust accounts certify in writing that they are knowledgeable about and compliant with the provisions of the Rules of Professional Conduct rule 1.15, ‘Safekeeping Funds and Property of Clients and Other Persons.’ Rationale: Every licensed attorney should be aware of rule 1.15 and know whether and how it applies to their practice of law. This certification would only be required from attorneys who indicate in the annual registration process outlined in recommendation 1 that they are responsible for one or more client trust accounts. Certification means that the attorney or their firm received funds or property from clients or third parties related to the representation of a client, maintained a client trust account, and followed all client trust account and safekeeping property rules. Requiring certification raises awareness of the requirements outlined in the rule and serves as notice that the State Bar is actively engaged in protecting client trust funds by monitoring compliance with this rule.”
Annual Self-Assessment by All Attorneys Responsible for Client Trust Accounts
“A self-assessment reports a small set of key indicators of client trust account managementpractices by attorneys. This self-assessment is envisioned as an online form through which attorneys would report key items for each client trust account, for example:
• Total number of bank deposits during the calendar year
• Total number of bank withdrawals during the calendar year
• End of year bank balance
• Total amount of all uncashed checks at end of year
• Total amount of all deposits at end of year
• Monthly three-way reconciliations completed
• Number and amount of any cash withdrawals or checks made payable to “cash”
• Number and amount of any transfers to or from other accounts
Rationale: Obtaining basic descriptive information provides the State Bar with information that allows it to focus on accounts that appear to be at risk for mismanagement. At the same time, the self-assessment report provides a tool for attorneys to evaluate their management of client trust accounts and take corrective action. Data solicited will be easily reported and will be based on items in other jurisdictions that have demonstrated value in exposing risk. In finalizing the self-assessment contemplated as part of the CTAPP, the State Bar will build upon the related effort underway by the Office of Professional Competence, which updated the Board of Trustees on planned self-assessments at a meeting in the summer of 2021.”
Compliance Reviews of Selected Attorneys by Certified Public Accountants
“Compliance reviews of selected attorneys should be conducted annually by an independent, third-party CPA at the expense of the law firm or attorney, based on policies and procedures developed by the State Bar in collaboration with the CPA community. Rationale: Compliance reviews are a method of examining records in a client trust account to ascertain whether key processes are being conducted and documented as required. A compliance review may be reported out as a series of yes-or-no questions, short narrative explanations, or checklists. For example, a compliance review might examine whether client trust accounts and their checks and deposit slips are labeled correctly; whether separate client ledgers have been established for each client trust account; or whether monthly three-way reconciliations have been conducted and documented correctly. Compliance reviews can also illuminate the effectiveness of rules and requirements, and lead to changes in rules or improved training designed to raise the level of compliance for all. Collaborative development of compliance review processes and procedures with the CPA community will be essential to ensuring that the reviews conducted by CPAs adhere to the standards and requirements of client trust accounting, which differ from the generally accepted accounting principles used by CPAs when compiling financial statements.”
Risk Review and Follow-Up
On the basis of compliance review results and complaint and charges data, the State Bar should follow up all compliance reviews with a response proportional and appropriate for those findings. This range of actions, listed in order of increasing scrutiny, might include:
1. File closed. If no deficiencies or only minor deficiencies are noted and corrected during compliance review or audit.
2. Written statement of deficiencies to be corrected within a specified deadline. Corrective action required may include a formal audit. Followed by subsequent submission of documentation by the attorney that errors have been corrected; upon receipt and review of acceptable findings/response, file is closed.
3. Selection for random or risk-based audit. A select number of attorneys with responsibility for client trust accounts should be audited every year.
4. Referral for investigation and possibly disciplinary action for cases that uncover more serious misconduct. Rationale: Only the State Bar has the authority to enforce the provisions of rule 1.15. Based on the experiences of other jurisdictions, it is anticipated that the overwhelming majority of findings will result in error correction that does not rise to the level of formal discipline. To that end, the State Bar should have at its disposal a graduated set of nondisciplinary interventions and sanctions. When findings suggest additional formal action is warranted, the State Bar should utilize the existing disciplinary system to investigate and prosecute individual cases”
Enhanced Lawyer Education
“The State Bar should invest in increased support for attorneys responsible for client trust account management, providing support through a variety of channels, for example:
1. A mandatory continuing legal education (CLE) course specific to client trust account management for attorneys who indicate that they have responsibility for client trust accounts;
2. Use of multiple channels (e.g., video, podcast, newsletter, website, print, and social media) to disseminate knowledge and highlight challenges and provide solutions for effective and compliant client trust account management;
3. Remedial programs to mentor, educate, and oversee attorneys; and
4. Presentations to local bar associations, law schools, and accountants regarding client trust account management.
Rationale: Attorneys, especially solo practitioners and those in smaller law offices, need support to ensure they are managing client trust accounts correctly. Other jurisdictions report that most error is inadvertent error, not based on fraudulent intent. Increasing the availability and formats of content related to the State Bar’s Handbook on Client Trust Accounting for California Attorneys would help make more attorneys more successful in managing these accounts.”
Recommendations Not Adopted: Additional Training for State Bar Staff
Despite the tantalizing admission that “mistakes were made,” the committee did not recommend any additional training for State Bar staff.
“The committee reviewed the current practices of the OCTC with respect to client trust account training. In the past year, OCTC has created and launched a series of four sessions totaling six hours of instruction on Fundamentals of Effective Client Trust Account Investigations and Prosecutions for all investigators and attorneys. The committee reviewed the content and plan for these training sessions. OCTC believes that these sessions represent a significant improvement over previous training in this area and will serve to improve OCTC’s work in client trust account matters. In addition, the committee reviewed the current training of [Special Deputy Trial Counsel] with respect to client trust account matters. This training is less robust and is not mandatory. The committee supports staff’s stated plan of mandating client trust account-related training for SDTC effective with the upcoming contract renewal period. The committee does not recommend any additional measures with regard to OCTC or SDTC training in this area.”
We may never know what the State Bar’s mistakes were in handling the Girardi matters. We will probably never know for certain if Mr. Girardi exercised influence over the State Bar’s handling of the many complaints against him. But we do know this: because of the Girardi Effect, the professional lives of California lawyers who maintain client trust accounts, including those who have done everything right, are about to become much more complicated.
[1] Probably not a bad idea.
[2] See https://board.calbar.ca.gov/docs/agendaItem/Public/agendaitem1000028317.pdf