kanBARoo Court. 36th Installment. Securing Client Funds

If the California Supreme Court tolerates the State Bar Court, the practical importance of client-fund security is one of its reasons. While strict ethical liability is legally indefensible, it seems to enhance fund security by simplifying proof, supposedly creating a greater incentive to avoid impropriety. We can ask two questions. Does the measure accomplish this purpose? Does it accomplish it better than alternatives?

Strict ethical liability neither prevents misappropriation by staff nor yields rapid reimbursement. Katie Lee is the only defrauded person to get restitution, and she got it directly from J.B. Kim, the criminal mastermind, not by any action of the State Bar. The State Bar lacks the instrumentalities to hasten recovery of embezzled funds; the coercive powers of the criminal justice system are more powerful, the comprehensive powers of the civil law system more adaptable. A smoothly functioning legal system, however, should afford clients complete security against theft. Even the criminal justice system and civil law do not provide immediate recovery, which would require insuring funds held for clients. Laws barring insurance and indemnification for intentional torts, an archaic limitation rooted in moralism, block this alternative.

Even so, the mere threat of civil action induced Kim to pay part of his damages to defrauded person Katie Lee, and its effect dims when compared to what she might have recovered with an able attorney. While Lee's attorney, Scott A. Meyers, Esq., threatened me with a lawsuit on behalf of his other client, the chiropractor, he never sued me or even threatened a lawsuit on Lee's behalf. Meyers's sheer ignorance of the law likely caused his reluctance to litigate, as Meyers is the kind of attorney who neither knows nor knows how to find out that a business is liable for the intentional torts of its employees, including punitive damages.

Readers, if not the State Bar Court, are bound to have noticed that "strict ethical liability" is self-contradictory. Ethics concern the propriety of conduct, ethical strictures necessarily apply to the conduct of the person charged, and the State Bar Court's jurisdiction is inherently ethical. Concerned with assessing danger to the public, the Bar necessarily must focus only on the conduct of the Member, whereas civil law concerns a broader range of priorities and is free to fix penalties pragmatically. The courts distinguish between ethical and pragmatic rules, as they hold punitive damages assessable despite the absence of owner culpability. The laws concerning corollary matters are construed accordingly, for example, the owner can insure against punitive damages due to the misdeeds of staff. As the 9th Circuit held, interpreting California law:

"Indemnity for [damages because of the wrong-doing of insured's agent] is not contrary to public policy because the insured in such a case is guilty of no wrong-doing, but simply has the misfortune to be legally responsible for the wrong-doing of another." (Dart Industries, Inc. v. Liberty Mutual Ins. Co. (9th Cir. 1973) 484 F.2d 1295, 1298.)

Even without insurance-law reform, civil action provides a more practical vehicle for deterring embezzlement. Kim targeted his Korean victims because he knew they couldn't get able counsel. Otherwise, why would they accept Kim as effectively their attorney, without even so much as a retainer agreement bearing a lawyer's signature? Provided a client is well represented, the threat of punitive damages — which cannot be discharged in bankruptcy — is a powerful deterrent, and one that would be applied within a year of filing under California "fast track" rules. Yet the State Bar is oblivious of the problems of service delivery to recent immigrants. Worse, it enforces anti-partnership provisions, construing them overbroadly, to bar immigrant litigants from getting better lawyers than Scott A. Meyers, Esq.

kanBARoo Court, 3rd Installment: CHARGES

The Notice of Disciplinary Charges (NDC), the State Bar's complaint, consists of 28 counts in 25 pages, applying to seven complainants and eight jurisdictional and general allegations The counts themselves repeat the same offenses and kinds of conduct, which at least has the merit of easier summary. To summarize this matter efficiently, while using the Office of the Chief Trial Counsel 's language, I will state the preliminary allegations verbatim and then report the specific offenses alleged.

These are the "Jurisdiction and General Background" allegations:

1. STEPHEN R. DIAMOND ("Respondent") was admitted to the practice of law in the State of California on September 24, 1996, was a member at all times pertinent to these charges, and is currently a member of the State Bar of California.
2. These general background allegations apply to each and every count contained in this Notice of Disciplinary Charges, and are incorporated in each count, below, as if set forth fully therein.
3. In or about mid-2004 Jae Bum Kim ("Kim"), a non-attorney, leased office space at 1200 Wilshire Blvd., Suite 312, Los Angeles, California , 90017 ("the Wilshire Blvd Office). Kim had previously worked as the office manager for an attorney at the same address. The attorney had consolidated his practice in another location, and Kim took over the lease.
4. Thereafter, Kim hired a staff of "case managers," including but not limited to, Andy Shin (a/k/a Andy Kim), Dana Chung, Robin Lee, Micky Park, and Evan Chang, and a receptionist, Elsa Villa (hereinafter referred to collectively and individually as "staff"), to form a putative law office. At the time, no attorney worked in the Wilshire Blvd office.
5. In or about September 2004, Kim and Respondent entered into an agreement regarding the formation of a personal injury law practice (known as Essence Professional Law Corporation, or, alternatively, as the Law Offices of Stephen R. Diamond, A Professional Law Corporation) Respondent oppened a Client Trust Account (CTA), account no. 046800046, and a business operating account (General Account), account no. 500011734, at the Koreatown Galleria Branch of Hanmi Bank in Los Angeles.
6. Kim and staff, thereafter, through at least September 2005, signed up personal injury clients, performed legal work on their files, entered into settlement negotiations with defendant's insurance carriers, settled cases, endorsed settlement checks, made deposits and withdrawals from Respondent's CTA, all pursuant to the agreement entered into between Kim and Respondent in or about September 2004. Kim and staff speak Korean, and Respondent does not. Most of Respondent's clientele at all relevant times were Korean speaking.
7. Over the course of their (approximately) one year association, Respondent worked part-time in Wilshire Blvd office, and Kim paid Respondent approximately $5,000 per month in cash. More than $1.330,000 was deposited and withdrawn from Respondent's CTA in that time. Activity ceased in Respondent's CTA at the end of September 2005; its balance was approximately $583, and remained at that sum through at least in or about January 2006.
8. More than 200 clients' matters were settled by Kim and staff from September 2004 to September 2005. The corresponding settlement checks were endorsed by Kim and staff," [sic] and deposited into Respondent's CTA. The funds from the settlements were thereafter withdrawn in the form of checks, primarily negotiated in two ways: cashing at a check cashing service located at 3rd Street Liquors in Los Angeles, near the Wilshire Blvd office; or deposited directly into Respondent's General Account. In both instances, the checks were routinely negotiated after affixing the purported endorsement of the payee.

I list the complainants here to uncover possible information concerning their propensity to commit fraud. To anticipate, I suspect the alleged victims' complicity in the operation. The complainants are:

a) Nan Young Yoo; b) Katie Lee; c) Richard Kim, D.C.; d) Wan Ki Chung; e) Seung Duk Lee; and f) the California State Bar, Office of the Chief Trial Counsel. (Where more than one person was involved in a particular accident, I list only the lead complainant.)

The alleged victims' charges comprise: a) Aiding the Unauthorized Practice of Law; b) Failure to Notify of Receipt of Client Funds; c) Failure to Maintain Client Funds in Trust Account; d) Failure to Respond to Client Inquiries/Failure to Inform Client of Significant Development; e) Failure to Release File; and f) Moral Turpitude.

Charges stemming directly from the Office of the Chief Trial Counsel comprised: g) Misuse of Client Trust Account/Commingling; h) Forming a Partnership with a Non-Lawyer; and i) Permitting Misuse of Name.

The case is not yet at issue, as my Motion for Reconsideration of the Motion to Dismiss the Notice of Disciplinary Charges is under submission to the Hon. Richard A. Honn, Supervising Judge of the State Bar Court, Hearing Department. Thus, I have not yet actually answered the NDC, although I have filed three responsive pleadings on questions of law. The Motion to Dismiss the NDC, however, contains a statement of my version of the events, included in the moving papers as a voluntarily provided Statement of the Case. I reproduce that section of my Motion to Dismiss the Notice of Disciplinary Charges here:

Respondent hoped to test in practice his theoretical ideas concerning the effective delivery of legal services to non-mainstream cultures. If necessary, the enterprise would also test respondent's interpretation of rule 1-310 of the Rules of Professional Conduct, because of the contractual terms on which respondent ventured. J.B. Kim agreed to fund and staff the office operations and provide a skilled negotiator. Kim would report directly to respondent, and respondent would have ultimate control of the office and complete control of the practice of law within it. Respondent, viscerally averse to the mechanics of financial management and effectively incompetent in their execution, sought to delegate the operational responsibility for keeping the books, while maintaining a robust system to monitor Kim’s compliance.

Respondent’s favorable bargaining position allowed respondent to negotiate these terms. Kim wanted to remain in the business of law-office support, where Kim had 15 years of experience and public service awards in helping deliver legal services to the Korean community. Kim’s crisis arose when the attorney who had employed him, James Chu, Esq., decided to exit the practice of law. [FN1] Respondent’s willingness to accept minimal remuneration also enhanced his bargaining position. Respondent received $5,000 per month.

Kim’s acts of frank criminality undermined any pristine test of the legal services delivery system, as Kim ensnared some eight Korean immigrants and one non-Korean (“Defrauded Persons,” hereafter), who allowed or suffered the unlawful prosecution of their lawsuits by non-attorneys, who received no supervision on these secret cases. Kim conspired with respondent’s staff to keep Kim’s criminal conduct secret. Having stolen their right to representation by a lawyer, Kim then proceeded to rob these Defrauded Persons’ money.

Kim, Shin, and colleagues plotted undetected by respondent communicating in their native language. Respondent—relying on his clients to report any complaints, problems, or anomalies—thought the absence of client complaints verified the operation’s correctitude and did not entertain the possibility that each and every employee would cooperate in keeping Kim’s operation secret. Kim had only recently hired most of the staff, whom Kim and respondent instructed on respondent’s ultimate authority. When respondent finally received a complaint from Scott Meyers, Esq., despite the fraudulent and extortionate character of Meyers’s demands, respondent immediately investigated. Finding he could not rely on his staff, respondent promptly closed his office.

{FN1] Kim and staff did not work for respondent full time, as they continued to contract with Chu to wind down his office and help him close his case. Respondent's investigation of Kim's misconduct in respondent's office triggered Chu's concern. Chu discovered embezzlement of funds totaling some $30,000.

Much more follows in subsequent installments.

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