Lawyer Didn't Have to Tell Firm's Clients Suspicions About Owner's Business Practices

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By Joan C. Rogers

April 24 — A lawyer violated no duty to his then-firm's clients in a personal injury case by not telling them of his suspicions about the “business practices” of the firm's principal—who later was disbarred—either while he was still with the firm or after he left, the Indiana Court of Appeals held April 22.

Before the lawyer left the firm, the court said, he had become concerned about some aspects of its operations but he was unaware that the owner was embezzling client funds. By the time he learned that clients' cases were being settled without their knowledge, the lawyer had moved to a different firm and the clients knew he was no longer their attorney, Judge Cale J. Bradford said.

A review of decisions from other jurisdictions indicates that lawyers are often not so fortunate in these types of cases. (See box.)

Ponzi Scheme

The ruling means that Timothy Devereux does not have to reimburse former clients Jim and Diana Love for settlement funds that William Conour stole from them after Devereux left Conour's firm.

The court grounded its holding on the lawyer's unawareness of any particular misconduct involving the clients. “[I]n light of the facts of this particular case, we find that Devereux satisfied his legal duty to the Loves based on his lack of knowledge of any specific wrongdoing by Conour relating to the Loves,” the court stated.

Conour, once a highly respected Indiana bar member, is now serving a 10-year federal prison sentence for wire fraud arising from a massive Ponzi scheme involving settlement funds from personal injury cases.

Conour convinced some of his clients to accept monthly payments rather than a lump-sum settlement, and then secretly settled other cases and used those proceeds to fund the installment payments he had promised to make. Along the way, he helped himself to millions of dollars.

Something's Fishy

Devereux joined Conour Law Firm LLC as an associate in 2008 but terminated his employment on Dec. 22, 2011, due to concerns he had about Conour's failure to timely pay expenses and expert witness fees.

Just before leaving, Devereux also became aware that a “case verification report” Conour prepared for a lender contained inaccurate information and that Conour had not delivered settlement proceeds from a wrongful death case to a client.

Shortly after his departure, Devereux shared his concerns with Indiana disciplinary authorities and the FBI. He contacted them again a couple of months later when he learned in a case he brought with him to his new firm that Conour had settled it without their clients' knowledge or consent.

Unbeknownst to Devereux, Conour also settled the Loves' case behind their back in February 2012. Devereux found out about the unauthorized settlement in July 2012 when the Loves' new counsel sent him a demand letter claiming Devereux should have warned them that they were in danger of being victimized.

No Specific Knowledge

The appellate court affirmed summary judgment for Devereux in the Loves' malpractice suit. It said he did not violate any duty to them before or after severing his ties to Conour's law practice.

“We must not view the matter through the lens of hindsight, but rather must look to what Devereux knew at the time he is alleged to have committed legal malpractice by failing to warn the Loves of Conour's potential wrongdoing,” Bradford said.

The court agreed with Devereux that his decision not to discuss his suspicions about Conour with the Loves did not amount to a breach of duty.

“[A]lthough Devereux had concerns about some of Conour's actions relating to the operation of the firm, at that time, Devereux's suspicions related only to what he classified as poor business practices,” the court said.

The court emphasized that Devereux did not have any specific knowledge of any wrongdoing relating to the Loves, any mishandling of active cases or any wrongdoing other than delaying payments.

Devereux did not have access to the firm's financial records and did not know if there was a reasonable explanation for the delayed payment of settlement proceeds, the court noted. No one disputed his claim that he never had an ownership interest in the Conour firm, it added.

The evidence was insufficient, the court concluded, to create a material fact issue as to whether Devereux knew, or even should have known, that Conour would steal client funds.

Not Your Counsel Anymore

Devereux notified the Loves in a Dec. 29, 2011, letter about his change of firms and offered to continue representing them at his new firm.

Although the Loves did not respond, Devereux unwittingly remained listed as a counsel of record in their case until April 2012, when he found out the Conour firm had not followed its usual practice of filing withdrawal notices for departing attorneys.

The court decided that Devereux had no duty to warn the Loves when he learned in February 2012 that Conour had been secretly settling other clients' cases.

By that time, the court said, Devereux had not served as the Loves' attorney for nearly two months. Jim Love admitted that as of Dec. 29, 2011, he knew Devereux was no longer his attorney, the court noted. That admission undercut the Loves' claim that Devereux remained their attorney or retained some duty to them after he left the firm, it said.

Judges Margret G. Robb and Patricia A. Riley concurred in Bradford's opinion.

David T. Kasper, Julia Blackwell Gelinas and Maggie L. Smith of Frost Brown Todd LLC, Indianapolis, represented Devereux. Jon R. Pactor, Indianapolis, represented the plaintiffs.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/Devereux_v_Love_No_49A021404CT260_2015_BL_114236_Ind_Ct_App_Apr_2.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

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Circumstances in Which Lawyers Can Be Held Liable for Colleague's Theft of Client Funds 

When a lawyer embezzles client funds, the unhappy clients often seek to recover the vanished money from any other attorneys associated with their case. Decisions that go the clients' way typically involve misconduct by a lawyer who was not in the same firm as the lawyer from whom recovery is sought:

Tormo v. Yormark, 398 F. Supp. 1159 (D.N.J. 1975) (jury question whether New York lawyer was negligent in referring personal injury clients' case to New Jersey lawyer who ultimately embezzled their settlement funds).

Duggins v. Guardianship of Washington Through Huntley, 632 So. 2d 420 (Miss. 1993) (attorney who associated another lawyer to represent guardianship in medical malpractice action was engaged in joint venture with other lawyer and was vicariously liable for his misappropriation of settlement proceeds).

Estate of Spencer v. Gavin, 2008 BL 85949, 946 A.2d 1051, 24 Law. Man. Prof. Conduct 206 (N.J. Super. Ct. App. Div. 2008) (lawyer with close business ties to attorney who pilfered funds from their common client had duty to report lawyer's misconduct and may be liable for damages if he knew about theft but kept silent).

Law Office of Oscar C. Gonzalez, Inc. v. Sloan, 2014 BL 239923, 447 S.W.3d 98 (Tex. App. 2014) (lawyer who referred client to office-sharing colleague with knowledge of that lawyer's prior misconduct and substantial disciplinary history held liable for failing to safeguard client's settlement funds).

On the other hand, the protection of a firm's limited liability structure may prevent recovery from a firm member who had no knowledge of a colleague's theft of client funds. See, e.g., Babb v. Bynum & Murphrey, PLLC, 643 S.E.2d 55, 23 Law. Man. Prof. Conduct 208 (N.C. Ct. App. 2007) (lawyer who was unaware that his partner was pilfering trust fund is shielded from individual civil liability by state LLC law).