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South Carolina Supreme Court imposes 2 year suspension on lawyer who, inter alia, failed to comply with trust account rules and failed to properly supervise two paralegals who misappropriated trust funds

Hello everyone and welcome to this Ethics Alert blog which will discuss a recent South Carolina Supreme Court Opinion imposing a 2 year suspension upon a lawyer who, inter alia, failed to properly supervise two paralegals who separately misappropriated trust funds, violated trust account rules, engaged in a business transaction with a client without the required written full disclosure and waiver.  The case is: In the Matter of Chad Brian Hatley, Appellate Case No. 2012-212668, Opinion No. 27200 (12/12/12) and the opinion is online at: https://www.judicial.state.sc.us/opinions/HTMLFiles/SC/27200.pdf.

According to the opinion, the lawyer admitted in a consent agreement he had 3 insufficient trust account checks reported because he failed to maintain and reconcile the accounts and failed to ensure that the deposits were properly credited prior to disbursements.  He conducted an investigation and discovered that a former paralegal had misappropriated approximately $21,665.29 through numerous false entries on closing statements and issued multiple checks in small sums to herself.  The lawyer fired the paralegal before he discovered the misappropriation for attempting to conduct a real estate closing without his presence and, after discovering the misappropriation, he immediately contacted the paralegal’s new employer to advise them and the new employer apparently determined the paralegal had also committed fraud at its business.

While conducting an audit of his files related to the above matter, the lawyer discovered that another former paralegal had committed misappropriation in a single closing.  When a check for payment of taxes was returned because the seller had paid the taxes before the sale, the paralegal voided the check and allegedly wrote a new reduced check in the amount of $473.02 for the taxes.  The lawyer contacted the county office to question this reduced amount and discovered that the check was for property taxes on property owned by the paralegal.  The lawyer had terminated the paralegal before he discovered this misappropriation because of her poor work habits.  After discovering the misappropriation, the lawyer contacted the paralegal and she promised to repay the stolen funds. The paralegal then repaid $100.00 and the lawyer repaid the remaining $373.02 from his personal funds.  He also self-reported the matter to the disciplinary authorities and conducted a complete audit of his closing files and determined that this was the only instance of misappropriation by that paralegal.

The lawyer admitted that he received an insufficient funds notice on a closed IOLTA trust account and he said that the account was dormant and the funds had been transferred to a new IOLTA account.  He also admitted that the 2005 check on the closed account was found in a file and, instead of issuing a check from the new account, the 2005 check was forwarded to the title insurance company.  The lawyer admitted that the delay in transmitting the funds to the title insurance company was solely his responsibility.

In other non-trust account related matters, the lawyer represented a client in a real estate closing and then entered into a business relationship with the client without obtaining the required written waivers and disclosures as required by South Carolina Rule 1.8, RPC.  He failed to obtain a separate writing from the business agreement indicating he did not represent the client in the transaction and that the client should consult separate counsel; however, the business agreement between the lawyer and the client acknowledged that both parties had time to deliberate and consult with respective counsel.  The lawyer admitted that he did not comply with the rule but stated that the client was a seasoned real estate developer and had a son-in-­law who is an attorney licensed in South Carolina (which is not an actual defense to the alleged violation).

The lawyer also admitted that he incurred tax liens due to his failure to pay withholding taxes to file and pay income taxes.  He also admitted that he failed to pay a court reporter in a timely manner for services invoiced on April 30, 2008 and, on April 30, 2009, the probate court issued a Summons to Show Cause to the lawyer to explain why he had not paid the court reporter.  After receiving the Summons, the lawyer immediately paid the court reporter and, at the hearing on the unpaid bill, the lawyer said that the bill had been placed in the file by a staff member and he admitted that he understood that it was his responsibility and he apologized to the court, which sanctioned him in the amount of $500.00.  The lawyer admitted that he had also been required to appear before the probate court for failing to produce documents requested by the court and, when he appeared at the hearing, he blamed the problem on his staff.   He admitted that it was his responsibility and that he was responsible for any issues that arise in the practice of law.

The lawyer was also arrested and charged with two counts of Willful Attempt to Evade or Defeat a Tax, two counts of Failure to Pay a Tax, File a Return or Maintain Records, and six counts of Failure to Pay Over or Account for Withholding Taxes.  He said that he was attempting to take care of his failure to pay these taxes when he discovered that the Department of Revenue had started their investigation and that he paid all known outstanding withholding taxes before any criminal charges were filed.  The lawyer later pled guilty to one count of Failure to Pay a Tax, File a Return or Maintain Records and two counts of Failure to Pay Over or Account for Withholding Taxes and paid a fine of $5,000.00 and restitution in the amount of $26,867.00.

In still another matter, on March 15, 2011, the lawyer was retained by a client to pursue a reduction in alimony and he admitted that he did virtually nothing for five months.  He also admitted that he and the client discussed sending a letter regarding the ending of alimony payments; however, he did not tell the client that he sent the letter.  He also admitted that he filed the pleadings in the wrong county and did not include a request to terminate alimony that was requested by the client.  The lawyer also acknowledged that there was an invoice billing error but the client was never overcharged.

Finally, the lawyer admitted that he failed to recognize that he was obligated to pay $100.00 in court costs by February 17, 2012, when he signed a consent to a family court Civil Contempt Order dated January 17, 2012 in his personal family law case and, as a result of his failure to pay court costs, a bench warrant was issued his arrest.  The lawyer learned of the warrant before he was arrested, immediately paid it, and the court lifted the warrant.

The opinion accepted the terms of the consent agreement and suspended the lawyer from the practice of law in South Carolina for two (2) years retroactive to the date of his interim suspension (September 28, 2011) along with other conditions, including CLE and payment of costs.

Bottom line:  This opinion is a textbook example of why it is so critical for every lawyer to properly manage his or her office and closely supervise and monitor paralegals and other staff; especially anyone who has access to trust funds.  Of course, this lawyer had other problems as well, including apparently engaging in a business transaction with the client without the appropriate written disclosure and waiver, apparently failing to pay taxes, a court reporter, and his own court costs, failing to produce records, and failing to pay personal court costs.

Be careful out there!

Disclaimer: this e-mail does not contain any legal advice and the comments herein should not be relied upon by anyone who reads it.

Joseph A. Corsmeier, Esquire

Law Office of Joseph A. Corsmeier, P.A.

2454 McMullen Booth Road, Suite 431

Clearwater, Florida 33759

Office (727) 799-1688

Fax     (727) 799-1670

[email protected]

www.jac-law.com

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