Legal Ethics

Lawyers as Fiduciaries - Applications of the Rules of Professional Conduct

1. A CLIENT RELATIONSHIP IS REQUIRED FOR MOST RULES

Most Rules either refer to “a client” or begin with words like, “In representing a client . . . .” In cases involving such rules, whether there is an attorney-client relationship “is very important, for if there was no attorney-client relationship, there could be no violation of Rules 1.4 and 1.7.” In re Perry, 494 N.W.2d 290, 294 (Minn. 1992). Rules of this type do not apply when a lawyer is acting only as a fiduciary.

2. SOME RULES APPLY EVEN WHEN A LAWYER-FIDUCIARY PROVIDES NO LEGAL SERVICE

The most important Rules that apply without a lawyer-client relationship include Rule 8.4(c) (forbidding dishonesty and such) and Rule 8.4(d) (forbidding conduct “prejudicial to the administration of justice.” As explained below, discipline authorities may well regard most conduct of a lawyer in a fiduciary capacity as subject to Rule 8.4(d).

3. SOME RULES APPLY WHEN THERE IS MERELY A CONNECTION WITH A REPRESENTATION

When is conduct of a lawyer who serves as a fiduciary, but only incidentally as a lawyer, subject to the Rules of Professional Conduct? “More often than you might think” is the answer. The answer comes in part from a recent case, In re Ahl, 2013 WL1225526 (Minn., March 21, 2013) and in part from prior cases. Ahl applied the Rules which govern the trust accounts that lawyers maintain for clients to a trust for which Ahl acted almost entirely as trustee, rather than lawyer. Ahl also found that excessive trustee fees constituted “conduct prejudicial to the administration of justice,” even though the trust was not court-qualified. Rule 8.4(d).

4. TWO QUESTIONS RAISED BY IN RE AHL

A. Tardy Distributions and the Rules. Suppose that a lawyer, serving as trustee, does not make distributions at the times specified in the trust. Suppose, also, that trust assets are being held in a mutual fund, in the name of the trust, rather than in a lawyer trust account. Has the lawyer violated Rule 1.15(c)(4), requiring prompt payouts from a lawyer trust account?

B. Excess Fees and the Rules. Suppose that the lawyer, serving as trustee of a trust that is not court-qualified, charges trustee fees that are found to be unreasonable, though not dishonest. Has the lawyer-trustee violated Rule 8.4(d), by conduct “prejudicial to the administration of justice?” It should be noted that Ahl was not alleged to have charged an “unreasonable fee,” in violation of Rule 1.5(a), because Rule 1.5 applies only to a fee for “legal services.” Rule 1.5(a)(1), (3).

5. IN RE AHL

A. Answers. In Ahl, the Minnesota Supreme Court answered the two questions above affirmatively. However, because the matter was presented to the Court on stipulation, the Court provided no reasoning to support and explain its answers.

B. Importance. The court’s holdings in Ahl may imply that Minnesota lawyers who serve as trustees, or in other fiduciary roles, are broadly subject to Rule 8.4(d). In Ahl, the court’s referee found misconduct warranting a suspension of at least two years, the parties accepted that recommendation and the court adopted it.

C. Facts.

1. Referee Findings. The findings of fact of the court’s referee were ultimately undisputed by Ahl and the OLPR.

2. Background. In 1993, Ahl’s aunt Beverly, a widow with children, decided to enter a convent. Beverly asked Ahl to take custody of her assets, for eventual distribution to children and grandchildren. The only service Ahl performed as a lawyer was to draft an irrevocable lifetime trust, under which Ahl was appointed as sole trustee. Ahl invested the assets in a mutual fund.

3. Failures to Distribute, Fees, Lies. In 1996, 1997 and 2002, when Beverly’s children reached age 35, the trust mandated full distributions to them were mandated by the trust. However, Ahl did not then make any these distributions. Ahl paid a substantial portion of trust assets to herself as fees, including fees for services to beneficiaries who should have received their full distribution before the fees were charged. Ahl also made false statements to lawyers for beneficiaries, claiming that after-the-fact reconstructed time records for her services had been created at the times of the services. The beneficiaries received substantial amounts both from settlement of a civil suit against Ahl and from distributions of trust assets after Ahl’s resignation.

4. Limited Legal Service. Ahl’s only legal service was to draft the trust Beverly requested. There were no allegations that Ahl’s limited acts as a lawyer violated any Rule nor that she acted as lawyer for the trust during the years of trust administration.

D. OLPR Charges. The Office of Lawyers Professional Responsibility (OLPR) charged that Ahl’s failures to make required distributions, and Ahl’s transfers of trust assets to herself, as fees, involved conduct that was both dishonest, in violation of Rule 8.4(c), and “prejudicial to the administration of justice,” in violation of Rule 8.4(d). The court’s referee, however, found sufficient evidence to sustain only the Rule 8.4(d) charges. OLPR also charged that Ahl’s failure to make required distributions violated Rule 1.15(c)(4), which requires prompt pay out, from a lawyer trust account, of funds that a client or third person has requested. Application of this Rule begs the question of whether funds of a trust, that are connected with a client representation only in the remote fashion found here, may or must be deposited in a lawyer trust account, as opposed to the mutual fund that Ahl chose.

E. Questions Implied by In re Ahl

1. Some or All? If failure to make timely trust distributions violates Rule 1.15(c)(4), do other lawyer trust account rules apply to lawyers serving only in fiduciary capacities? For example, if a lawyer serving as trustee of a small grantor trust, for the sole benefit of a close family member, does not “render appropriate accounts,” has the lawyer violated Rule 1.15(c)(4)?

2. Pick Some? Must lawyers serving as trustees deposit all trust funds in an “interest bearing trust account,” rather than in equities? Rule 1.15(a). The common sense answer would seem to be “no,” but, if so, on what basis was it determined that Rule 1.15(c)(4) applies to lawyer-trustees, but other provisions of Rule 1.15 do not apply?

3. Fees, the “Administration of Justice,” and a New Catch-All Rule? OLPR acquiesced in the referee’s finding that Ahl’s fees were not dishonestly charged. Ahl, in turn, acquiesced in the finding that her fees were “prejudicial to the administration of justice.” Rule 8.4(d). The court adopted the parties’ stipulation. This agreement, however, does not preclude several questions. Is the administration of a non-court qualified trust part of the administration of justice? If the term “of justice” applies outside of court and governmental affairs, then may Rule 8.4(d) be applied to any conduct that is found, retrospectively, to “reflect adversely on fitness to practice law?” If not, why not? If so, then will DR 1-102(A)(6), a catch-all rule which the court repealed, in 1985, have been revived? (DR 1-102(A)(6) forbade conduct reflecting adversely on fitness to practice.)

F. What About Varriano?

1. Ahl/Varriano. Ahl makes, or appears to make, lawyer-fiduciaries subject to Rule 1.15. Another recent case, however, emphasized the difference between lawyer trust accounts and other accounts. In re Varriano, 755 N.W.2d 282 (Minn. 2008).

2. Varriano’s Trust Account Violation Varriano deposited a check from a former client (KH) into his trust account, and then made disbursements to himself and to KH. Unknown to Varriano, the check had a forged endorsement. Among the charges against Varriano were that he improperly deposited the check in his trust account. The Court sustained that charge. The Court explained, “Rule 1.15(a) explicitly requires that funds held in connection with a representation be deposited into a trust account. Implicitly these are the only types of funds that belong in a trust account.” Id. at 289.

3. Why was Ahl Subject to Trust Account Rules? When Ahl held trust funds, did she do so “in connection with a representation?” Ahl’s only legal service –drafting the trust – was provided years before the distribution failures that were found to violate Rule 1.15. The trust appears to have stood in relation to Ahl, as KH stood in relation to Varriano – a former client. Indeed, Ahl did not hold trust funds in a lawyer trust account at all, but in a mutual fund that included equity investments. Why, then, should Ahl be subject to trust account rules?

4. Ahl Could Not Hold Trust Funds in a Lawyer Trust Account If Varriano’s holding governs – only funds held “in connection with a representation” may be deposited in a lawyer trust account -- then funds held only in a fiduciary capacity may not be held in a trust account. If so, however, Ahl could not ethically have deposited trust funds in a lawyer trust account.

5. Questions Why, in light of Varriano, was Ahl’s handling of funds of a trust subject to Rule 1.15? Is a lawyer, whose only service as a lawyer is to draft a trust, still regard as acting as a lawyer when acting as trustee? Does a lawyer, acting solely as fiduciary, violate Rule 1.15, as interpreted by Varriano, by depositing funds in a lawyer trust account? If a lawyer, acting solely as fiduciary, holds trust assets in an account that is not a lawyer trust account, is the lawyer’s conduct subject to all, or only some, provisions of Rule 1.15?

6. A PRIOR LAWYER-TRUSTEE DISCIPLINE CASE – IN RE PERRY

A. Several lawyers, acting as fiduciaries, have been disciplined. A case that can be both compared and contrasted with Ahl was In re Perry, 494 N.W.2d 290 (Minn. 1992).

B. Facts. Perry served many years as in-house counsel, without any misconduct. He later used an employment buyout to begin operations of TCBY franchises. Perry was trustee of a trust for the benefit of his mother. When funds for the TCBY venture ran short, Perry put his mother’s trust funds to use in his TCBY venture.

C. Dishonesty Central in Perry. Unlike Ahl – who was found not to have acted dishonestly in trust fund transfers – Perry was found to have dishonestly used trust funds to cover TCBY financial shortages. Ahl lied to cover up financial conduct that was found to be improper but not dishonest, but Perry’s financial conduct was itself dishonest.

D. Client and No Client Rules. Perry violated Rules 1.7 and 1.4, governing conflicts and communications. These Rules require an attorney-client relationship. The relationship was readily found, because Perry appeared in court on behalf of the trust. Perry’s most serious misconduct – taking his mother’s trust funds for his business-- violated the proscription of Rule 8.4(c) against dishonesty, a proscription which does not require an attorney-client relationship.

E. Ahl and Perry Distinguished. Ahl’s legal services were limited to drafting the trust in question. While acting as trustee, Ahl (unlike Perry) did not also act as counsel. Also in contrast to Perry, Ahl’s most serious misconduct – not making required distributions and transferring a large portion of trust funds to herself, for fees – was not found to be dishonest. Because this misconduct raised serious issues of fitness as a lawyer, other Rules were stretched to cover Ahl’s conduct.

7. A FORERUNNER - IN RE FRANKE

A. Facts. Duane Franke was a lawyer who owned Estate Management Corporation (EMC). EMC and, in a few cases, Franke himself, acted as conservator and guardian for estates and persons. In re Franke, 345 N.W. 224 (Minn. 1984). Franke and his law firm provided related legal services. Franke and EMC routinely engaged in undisclosed self-dealing with client assets. Acting as guardian of the person, EMC and Franke were sometimes so indifferent to the welfare of wards that intentional abandonment was found. “We condemn in strongest terms respondent’s virtual abandonment of Elise Mason, with its life-threatening consequences.” Id. at 228. Franke was disbarred.

B. Code/Rules. Franke’s conduct was governed by the Code of Professional Responsibility, which was superseded by the Rules of Professional Conduct in 1985. The court applied Code provisions to Franke’s conduct as lawyer, as fiduciary, and as owner/principal of a fiduciary entity. Because many Rules apply more specifically than the Code to lawyers representing clients, those Rules would apparently not apply to lawyers acting as fiduciaries. Both the Code and the Rules broadly proscribe violations of fundamental tenets, such dishonesty and “conduct prejudicial to the administration of justice.” However, the Code contained a catch-all prohibition (against “other conduct reflecting adversely on fitness to practice law”), which Franke violated but which has no counterpart in the Rules.

C. Some Legal Services. In Franke, Perry and Ahl, the lawyer-fiduciaries provided some legal services, but Ahl provided by far the smallest amount and Franke provided by far the greatest amount.

8. CONCLUSIONS AND UNRESOLVED ISSUES

A. Ahl was properly disciplined for lying to beneficiaries’ counsel about the dates her time records were created. In addition, Ahl’s administration of her aunt’s trust warrants strong disapproval. If there were a Rule prohibiting “conduct reflecting adversely on fitness to practice law,” Ahl would have violated that Rule. However, there is no such Rule. Was Ahl properly disciplined under other Rules?

B. As to Rule 1.15(c)(4), governing lawyer trust accounts, Ahl does not explain why that Rule is properly applied to an account which has no substantial relationship with legal services. Varriano emphasized that no funds except those connected with an attorney-client representation could be deposited in a lawyer trust account. How then, could trust account Rules be applied, in Ahl, to an account whose separation from lawyer trust accounts had been mandated? The Court does not customarily explain disciplines that are imposed pursuant to stipulation, but some such disciplines raise important ethics issues.

C. As to Rule 8.4(d), before Ahl the Court had already applied the Rule broadly in many cases. Nonetheless, the connection in Ahl between administration of a non-court qualified trust and the “administration of justice” seems tenuous. Ahl raises the question, “Has Rule 8.4(d) been adopted as a catch-all Rule, to be applied to any conduct that reflects adversely on fitness to practice, but is not prohibited by some more specific Rule?” Put differently, are OLPR and the Court reviving, bit by bit, the catch-all Rule which the Court repealed in 1985?

D. OLPR is very cooperative in providing materials and responding to inquiries about discipline cases. In a colloquy of April 23-25, 2013, I asked OLPR whether, going forward, it will apply Rules 1.15 and 8.4(d) to lawyers acting solely as fiduciaries under non-court-qualified trusts. The question is far from hypothetical, as I, like many lawyers, serve in such a capacity. OLPR indicates it will decide such matters on a case-by-case basis.