THE LUCK OF THE DRAW

A church received $1,000,000 from its property insurer because of hurricane damage.  At about the time the money was received, the church was faced with a sexual harassment claim.  The church decided the money would be safer from the sexual harassment claimant if the money was held in the trust account of the church’s lawyer.  It is unknown how the church thought putting the money out of sight in their lawyer’s trust account would protect it.  As it turned out, the church feared the wrong person.

The lawyer for the church transferred the money from the lawyer’s trust account to another account which appeared to be owned by the lawyer.  The lawyer spent the money on himself.  The theft was discovered.  The lawyer fled but was captured in another state and extradited.  The lawyer was convicted and drew a prison sentence of fifteen years and disbarred.  Like all wrongdoers, it sometimes seems, the lawyer was gone, dead or insolvent, and in this case two of three.

However, a portion of the million dollars was used by the lawyer to make payroll in his law firm.  His non-partner associate was paid from the proceeds in his routine by-monthly paycheck.  The non-partner associate somehow discovered or was told about the theft, or part of it, after the fact and had no control over the trust account.  The non-partner associate did not immediately report it to the church but hoped another law firm engagement would domino and that money could be used to repay the church.

The court in First United Pentecostal Church v Parker, Slip. Op. (Tex. 2017) held that the these facts stated at least a claim for breach of fiduciary duty against the non-partner associate for failing to timely report the theft.  The remedy would be disgorgement of any part of the proceeds received by the non-partner associate.  At trial, the non-partner associate might have other defenses; it is likely the church will be accused of unclean hands in depositing the money in the lawyer’s trust account presumably to put it out of the reach of a possible victim of sexual harassment.

Also, while the church may have had sufficient property insurance, it seems likely the church believed it did not have coverage for a sexual harassment claim such that asset protection efforts, no matter how misplaced, to the church seemed justified.  In any event, if the scheme was to hide assets, which is not necessarily clear from the court opinion, hiding them in a law firm trust account is not typically going to work and most lawyers would not be a party to it.  It should also be noted that clients generally do not have the means to protect themselves from their own lawyer’s avarice.

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