(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of
the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity,
portions of any opinion may not have been summarized).
Argued January 15, 2002 -- Decided April 5, 2002
ZAZZALI, J., writing for a unanimous Court.
This is an attorney disciplinary case.
Respondent, Jack N. Frost, was admitted to practice in New Jersey in 1971. He has been the subject of discipline
on at least five separate occasions between 1988 and 1998 for misconduct that has included dishonesty and failure to
safeguard escrow funds, among other things. Respondent is currently suspended from practice, based on an earlier Order
of suspension.
The present matter arose from respondent's conduct in a personal injury/workers' compensation case. Respondent
represented Bruce Hagerman, who was seriously injured in February 1988, when he fell off the roof of a five-story
building while operating an air broom manufactured by Aeroil Products Company, Inc. (Aeroil). Hagerman subsequently
retained attorney Michael Rubino to represent him in litigation relating to the accident. Rubino recommended that
respondent handle the matter and in March 1988, respondent became co-counsel. Respondent filed a workers'
compensation claim petition in Hagerman's behalf and a third-party products liability action against Aeroil.
In October 1990, respondent and Rubino settled the third-party action against Aeroil for $500,000, consisting of a
$400,000 cash payment and a $100,000 annuity. Respondent deposited the settlement check into his trust account and
made disbursements to Hagerman, to himself, and to Rubino. He then also disbursed a check in the amount of $79,000 to
CNA Insurance Companies in satisfaction of its workers' compensation lien on the third-party settlement proceeds. Rubino
previously had entered into negotiations with CNA in an attempt to compromise CNA's lien and believed that he and CNA
had agreed to a reduced amount of $79,000. However, CNA refused to accept the check, denied that it had compromised
its lien, and notified Rubino that it was returning the unnegotiated check to respondent. Respondent then transferred the
funds from his trust account to his escrow account under Hagerman's name. He contended that he had done so because he
believed that once CNA rejected the tender of funds, the funds belonged to Hagerman.
During an appointment in early October 1991, respondent approached Hagerman about a loan to him. According
to respondent, he advised Hagerman to seek the advice of independent counsel and that he would not “do the deal” unless
he sought such counsel. Hagerman consulted with Rubino, who advised him against making the loan to respondent.
Hagerman then communicated with respondent and refused to make the loan.
Two weeks later, and notwithstanding Hagerman's previous indication to respondent that counsel had advised
against making the loan, respondent communicated with Hagerman, again concerning a possible loan. Ultimately,
Hagerman agreed to a loan in the amount of $79,000 (the funds that CNA had refused). Using a power of attorney form
document, respondent drafted a loan agreement in which he agreed to pay CNA the full $79,000 within 90 days if CNA
demanded payment. In addition, he represented that he owned six acres of unencumbered land worth between $150,000
and $200,000 and an unencumbered one-half interest in a house in North Carolina on which properties respondent would
give Hagerman a first mortgage, if so requested. In fact, respondent's interest in the property had been purchased by his
wife six years earlier, with respondent acting as his wife's counsel.
In October 1991, respondent transferred $80,636.89 from the Hagerman sub-account to his principal escrow
account and issued three escrow account checks to Hagerman. Hagerman then endorsed two of the checks to respondent -
one for $39,000 and the other for $40,000, and negotiated the third one in the amount of $1,636.89 himself, for “interest
earned on account.” Respondent then used the funds for his own purposes. Subsequently, CNA sought payment of its lien
and eventually filed suit against respondent, Hagerman, Rubino, and Aeroil's insurer for payment. Although respondent
offered to settle the matter, CNA rejected that offer. Ultimately, after respondent filed for Chapter 11 bankruptcy,
Hagerman and Rubino entered into a settlement agreement with CNA, pursuant to which Hagerman paid $10,000.
Although respondent represented to the bankruptcy court that he would pay Hagerman's share of that settlement, as well as
his attorneys' fees, as of October 1999, he had not done so.
Respondent's conduct in the matter was reported to the Office of Attorney Ethics (OAE) by the workers'
compensation judge who ultimately presided over Hagerman's compensation hearing. Pursuant to that report, the OAE
conducted a demand audit of respondent's records in December 1996. In July 1998, the OAE filed a formal complaint
against respondent charging him with violations of RPC 1.8(a) (conflict of interest/prohibited business transaction with a
client); RPC 1.15(a) (knowing misappropriation of escrow funds and failure to safeguard funds of a third party); and RPC
8.4(c) (conduct involving dishonesty, fraud, deceit, or misrepresentation).
The matter was heard by a special master, who found respondent guilty of negligent, as opposed to knowing
misappropriation of the escrow funds (the $79,000). The special master also found that respondent had failed to safeguard
funds belonging to CNA, and that he had engaged in a course of conduct that was dishonest and deceitful because he never
had any intention of providing security for the loan and misrepresented the extent of his assets. The special master further
found that the loan transaction was not at arm's length and constituted a prohibited business transaction with a client. He
recommended that respondent be suspended for one year consecutive to his 1998 two-year suspension.
On its de novo review of the matter, the Disciplinary Review Board (DRB) agreed with the special master's
findings and recommendation, concluding that respondent effectively borrowed the money from Hagerman after first
temporarily releasing the funds to him, a party-in-interest. The DRB further found that respondent breached his fiduciary
duty to CNA, arising out of the lien negotiations between CNA and Rubino, because he never obtained CNA's consent to
disburse the $79,000, in violation of RPC 1.15(a). Finally, the DRB found that respondent had engaged in a prohibited
business transaction and in conduct that was dishonest and deceitful when he entered into a contract that was patently
unfair and unreasonable to his client, misrepresented the extent of his interests in certain assets, and never intended to
provide security for the loan. However, a majority of the DRB declined to recommend respondent's disbarment, noting
both that he had engaged in negligent misappropriation (and not knowing misappropriation) and that the matter pre-dated
most of respondent's extensive ethics history. Thus, the majority voted to impose a one-year consecutive suspension. Two
members of the DRB voted for disbarment.
The Supreme Court granted the OAE's Petition for Review.
HELD: Jack N. Frost, an attorney, who obtained his client's consent to borrow escrow funds and who then used those
funds without obtaining the consent of the other party who had an ownership interest in them, is disbarred for his knowing
misappropriation of escrow funds, compounded by his other misconduct in his dealings with his client and by his extensive
ethics history and profound lack of professional good character and fitness.
1. Respondent's loan transaction with his client constituted a conflict of interest and a prohibited business transaction in
violation of RPC 1.8(a). A lawyer is required to maintain the highest professional and ethical standards in his or her
dealings with clients. Here, respondent took advantage of an unsophisticated client whose trust he gained through the
attorney-client relationship. (pp. 12-15)
2. Respondent engaged in conduct involving dishonesty, fraud, deceit, or misrepresentation when he entered into a loan
agreement with his client that was patently unfair and unreasonable to his client, misrepresented the extent of his interests
in certain assets, and never intended to provide security for the loan. (pp. 15-16)
3. The record presents clear and convincing evidence that respondent knowingly misappropriated funds belonging to
CNA. (pp. 16-20)
4. The fact that Hagerman consented to respondent's use of the funds in question is irrelevant. As escrow agent,
respondent required the consent of both parties to use the funds for his benefit. (pp. 20-21)
5. Respondent's belief that the funds were Hagerman's alone is not based on any verifiable facts and cannot excuse his
failure to perform his ethical duties. (pp. 20-24)
6. In the case of knowing misappropriation, disbarment is an appropriate penalty even if the lawyer did not possess the
subjective intent to steal the money but only intended to borrow it. (pp. 24-25)
7. Even if respondent committed negligent, rather than knowing misappropriation, his conduct in this matter coupled with
his extensive ethics history and his profound lack of professional good character and fitness compels the conclusion that
respondent should not be allowed to practice law in New Jersey. (pp. 25-28)
8. Respondent's ethics history spanning the last fifteen years demonstrates an absolute disregard for his professional
responsibility. He is not entitled to, and the public should not have to endure, another opportunity for gross misconduct. In
order to maintain confidence in the integrity of the bar, the appropriate penalty in this case is disbarment.
CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and LaVECCHIA join in
JUSTICE ZAZZALI's opinion.
SUPREME COURT OF NEW JERSEY
D-
106 September Term 2000
IN THE MATTER OF
JACK N. FROST,
An Attorney at Law.
____________________
Argued January 15, 2002 -- Decided April 5, 2002
On an Order to show cause why respondent
should not be disbarred or otherwise
disciplined.
Brian D. Gillet, Deputy Ethics Counsel, argued
the cause on behalf of the Office of Attorney
Ethics.
Frank P. Sahaj argued the cause for respondent
(Younghans, Burke & Sahaj, attorneys).
The opinion of the Court was delivered by
ZAZZALI, J.
In October 1996, a Judge of Workers' Compensation contacted
the Office of Attorney Ethics (OAE) when testimony at a hearing
before him suggested that respondent, Jack N. Frost, may have
misused client funds. The OAE subsequently conducted a demand
audit of respondent's books and records. Shortly thereafter, the
OAE filed a complaint against respondent alleging violations of
the Rules of Professional Conduct (RPC), including RPC 1.8(a),
conflict of interest/prohibited business transaction with a
client; RPC 1.15(a), knowing misappropriation of escrow funds and
failure to safeguard the funds of a third party; and RPC 8.4(c),
conduct involving dishonesty, fraud, deceit or misrepresentation.
The OAE later added the charge of failing to cooperate, in
violation of RPC 8.3.
Special Master Miles S. Winder, III, issued a presentment
finding respondent guilty of negligent misappropriation rather
than knowing misappropriation. The Special Master also found
respondent guilty of the remaining charges in the complaint,
except for the charge that respondent failed to cooperate with the
OAE, noting that the “disorganized and disjointed responses made
by [respondent] were very close to non-cooperation.” The Special
Master recommended that respondent receive a one-year suspension
consecutive to the two-year suspension that respondent was then
currently serving. Respondent's two-year suspension expired in
November 2001. As of the date of oral argument, respondent had
not yet applied for reinstatement. Upon a de novo review
of the record, the Disciplinary Review Board (DRB) concluded that
the Special Master's determination was fully supported by clear
and convincing evidence in the record. Six members of the DRB
voted for a one-year suspension and two public members voted for
disbarment. Our independent review of the record leads us to
conclude that respondent should be disbarred.
On November 18, 1997, respondent was suspended for three months for five separate instances of misconduct, including charging an unreasonable fee, conflict of interest, asserting a frivolous claim, lack of candor toward a tribunal, failure to act with fairness to an opposing party and counsel, untruthfulness in statements to others, assisting in the unauthorized practice of law, conduct involving dishonesty, fraud, deceit or misrepresentation, failure to expedite litigation, and conduct prejudicial to the administration of justice. In re Frost, 152 N.J. 25, 25-26 (1997). On the same day, the Court imposed a six- month suspension, consecutive to the three-month suspension, for gross neglect and lack of diligence in three matters, failure to communicate in two matters, and a pattern of neglect. In re Frost, 152 N.J. 23, 23-24 (1997).
In November 1998, respondent received a two-year suspension for failure to safeguard escrow funds and conduct involving dishonesty, fraud, deceit or misrepresentation. In re Frost, 156 N.J. 416, 416 (1998). Specifically, respondent breached an escrow agreement, failed to honor mortgage closing instructions, and prepared misleading closing documents. Id. at 416-17.
Lawrence G. Moncher, J.W.C., informed the OAE that he had presided over a workers' compensation matter in which respondent had represented the petitioner, Bruce Hagerman. According to Judge Moncher, testimony presented during hearings before him revealed that respondent may have mishandled client funds. Consequently, in November 1996, the OAE notified respondent that a demand audit would be conducted in December 1996.
In July 1998, the OAE filed the instant complaint against respondent. Shortly thereafter, this Court appointed Special Master Winder to hear the matter. After a prehearing conference, respondent moved to disqualify Special Master Winder on the ground that he had heard prior ethics complaints against respondent. The motion was denied and the DRB rejected respondent's appeal. The Special Master conducted a hearing in September and October of 1999.
The following facts were adduced at the hearing. In February 1988, Bruce Hagerman (Hagerman), a commercial roofer employed by E.R. Barrett Roofing Company, suffered serious injuries when he fell off the roof of a five-story building while operating an air broom manufactured by Aeroil Products Company, Inc. (Aeroil). Hagerman subsequently hired Michael Rubino (Rubino) to represent him in litigation relating to the accident. In the past, Rubino had referred several matters to respondent. A few weeks later, Rubino recommended that respondent handle the case and, in March 1988, respondent became co-counsel representing Hagerman. On behalf of Hagerman, respondent filed a workers' compensation claim petition and a third-party products liability action against Aeroil.
In October 1990, respondent and Rubino settled with Aeroil for $500,000, consisting of a $400,000 cash payment and a $100,000 annuity. Respondent deposited the check in his attorney trust account on November 19, 1990. Four days later, respondent made a disbursement to Hagerman. Two days after that, he made a disbursement to himself and Rubino.
Prior to the Aeroil settlement, Rubino attempted to negotiate a compromise with CNA Insurance Companies (CNA) in respect of the workers' compensation lien that existed as a result of the payment of Hagerman's workers' compensation claim by his employer. Based on those discussions, Rubino testified that he believed he had compromised CNA's lien to $79,000, and also had agreed to a one- third reduction of future medical payments for Hagerman. Rubino sent a letter to CNA confirming his understanding. By letter dated December 3, 1990, respondent sent CNA a trust account check in the amount of $79,000. However, CNA refused to accept the check, denied that it had compromised its lien, and notified Rubino that it was returning the unnegotiated check to respondent.See footnote 11 Respondent testified that he believed that he had “tendered the funds” to CNA and that CNA had rejected the tender. According to respondent, because he believed that the funds legally belonged to Hagerman, he transferred the funds from his trust account to his escrow account under Hagerman's name.
During an appointment with Hagerman in early October of 1991 to discuss the results of respondent's research on CNA's lien, respondent approached Hagerman about a loan. According to respondent, he advised Hagerman “to seek independent counsel” and that he “would not do the deal unless [Hagerman] sought independent counsel.” Respondent stated that Hagerman replied that he wanted to think about the loan. Hagerman subsequently contacted Rubino and Rubino advised him against lending the funds to respondent. Hagerman then contacted respondent and refused to loan him the funds.
According to Hagerman, respondent contacted him approximately two weeks later concerning the possible loan. Respondent told Hagerman that the escrow account provided a very low interest rate and that he would pay a rate of fifteen percent interest on a loan. Respondent allegedly informed Hagerman that although he was legally entitled to the funds he would be required eventually to pay CNA $79,000. Hagerman denies that respondent so advised him. In any event, Hagerman agreed to the loan. Respondent used a power of attorney form document to draft the loan agreement. The agreement contained the following additional terms:
a. As of October 17, 1991, $80,636.89 was to be held in escrow;
b. Hagerman agreed to lend $79,000 to respondent at an annual interest rate of fifteen percent;
c. Respondent was to pay Hagerman $987.50 per month until full payment of the principal, with a lesser amount as the principal was paid down;
d. Respondent could make full or partial payments without penalty;
e. All payments of principal were to be deposited in a special escrow account;
f. Respondent was to pay the full $79,000 within ninety days if CNA demanded payment;
g. If respondent defaulted on the loan, he would hold Hagerman harmless and indemnify Hagerman for all expenses and attorneys' fees incurred by Hagerman;
h. Respondent represented that he owned six acres of unencumbered land worth between $150,000 and $200,000 and an unencumbered one-half interest in a house in North Carolina; if so requested, respondent would give Hagerman a first mortgage on those properties;
i. Respondent represented that his law firm's assets were worth more than $2,500,000, after payment of all debts.
(Emphasis added).
Although respondent represented that his six acres were unencumbered, respondent's interest in that parcel had been purchased by respondent's wife in July 1985, with respondent acting as his wife's counsel. The deed, which respondent prepared, did not list his name.
In October 1991, respondent transferred $80,636.89 from the Hagerman sub-account to his principal escrow account and issued three escrow account checks to Hagerman. Hagerman endorsed two of the checks to respondent, one for $39,000 and the other for $40,000. Hagerman negotiated the third check, in the amount of $1,636.89, for “interest earned on account.” It is undisputed that the $40,000 check was deposited in respondent's attorney business account, and that respondent used the funds for law firm expenses. It is unclear what happened to the $39,000 check. Respondent initially told the OAE that he deposited $22,000 in his payroll account and put the $17,000 balance into his “pocket.” However, at the ethics hearing, respondent testified that the $39,000 check was deposited in his wife's checking account. In any event, respondent did not deposit the $39,000 check in either his trust or his business account. Respondent did not have a personal checking account and used his attorney business account as his personal checking account.
In November 1991, respondent and CNA settled the lien dispute. CNA prepared a settlement agreement whereby respondent would pay CNA $83,740 by April 24, 1992. If payment was not received by that date, respondent “individually and on behalf of [Hagerman]” would be required to pay CNA reasonable attorneys' fees and costs incurred to enforce the agreement. However, respondent did not sign the settlement agreement and failed to make any payments to CNA. He testified that he did not sign the agreement because it did not comport with the terms he had negotiated with CNA.
In June 1992, CNA filed a civil actionSee footnote 22 against Hagerman, respondent, Rubino, Rubino's law firm, and Aeroil's insurer for payment of its workers' compensation lien. At a hearing on an Order to Show Cause, respondent advised the court of the loan from Hagerman. In August, respondent offered to settle the CNA action by paying CNA $95,000. In correspondence, respondent stated that the Hagerman loan was secured by fees from a separate case and that the borrowed “money was disbursed to pay the bills of the Law Firm.” Apparently, CNA rejected the offer.
In October 1992, respondent filed for Chapter 11 bankruptcy, resulting in a stay of his participation in the CNA action. In December 1995, Hagerman and Rubino entered into a settlement agreement with CNA, pursuant to which Hagerman paid $10,000 in February 1996 as part of the settlement. Respondent represented to the bankruptcy court that he would pay Hagerman's $10,000 share of the CNA settlement, as well as Hagerman's attorneys' fees, allegedly from the interest on the $79,000 loan. However, as of the date of the Special Master's report, CNA had not been paid the $79,000. Finally, Hagerman's workers' compensation case, which apparently had been delayed by the CNA action, was settled in 1996.
At the conclusion of the hearing, Special Master Winder found that respondent was guilty of negligent, rather than knowing, misappropriation, that respondent failed to safeguard funds belonging to CNA, and that he engaged in a course of conduct that was dishonest and deceitful because he never had any intention of providing security for the loan and misrepresented the extent of his assets. In respect of the loan agreement, the Special Master concluded that the transaction was not at arm's length and constituted a prohibited business transaction with a client. He recommended that respondent be suspended for one year consecutive to his 1998 two-year suspension.
The DRB agreed with the Special Master's findings and recommendation, concluding that respondent effectively borrowed the money from Hagerman after first releasing the funds, although temporarily, to Hagerman, a party-in-interest. The DRB agreed that respondent owed a fiduciary duty to CNA arising out of the lien negotiations between CNA and Rubino. Despite the law of tender, respondent breached that duty because he never obtained CNA's consent to disburse the $79,000, in violation of RPC 1.15(a). The DRB further determined that respondent engaged in a prohibited business transaction and in conduct that was dishonest and deceitful when he entered into a contract that was patently unfair and unreasonable to his client, misrepresented the extent of his interests in certain assets, and never intended to provide security for the loan.
However, the DRB declined to impose disbarment, observing that respondent was guilty of negligent, and not knowing, misappropriation, and that the present matter pre-dated most of respondent's extensive ethics history. The DRB noted that if the present matter had been addressed simultaneously with the prior matter for which respondent had received a two-year suspension, respondent would have simply received a three-year suspension. Thus, the DRB recommended that respondent be suspended for one year to run consecutive to that two-year suspension. Two public members of the DRB voted to impose disbarment. The OAE subsequently filed a petition for review and respondent filed a cross-petition.
with a Client in Violation of RPC 1.8(a)
The Special Master and the DRB concluded that respondent's
loan transaction with his client constituted a conflict of interest and a prohibited business transaction in violation of RPC 1.8(a). We agree.
RPC 1.8(a) prohibits an attorney from entering into a business transaction with a client unless, among other things, the transaction and the terms are fair and reasonable to the client. Indeed, “[a] lawyer is required to maintain the highest professional and ethical standards in his [or her] dealings with his [or her] clients.” In re Smyzer, 108 N.J. 47, 57 (1987) (citing In re Gavel, 22 N.J. 248, 262 (1956)). Furthermore,
all transactions of an attorney with his [or her] client are subject to close scrutiny and the burden of establishing fairness and equity of the transaction rests upon the attorney. . . . If the burden is not satisfied, equity has regarded such transactions tainted so as to constitute a constructive fraud. . . .
[In re Gallop, 85 N.J. 317, 322 (1981)
(citations omitted).]
In In re Wolk,
82 N.J. 326, 327 (1980), the Court disbarred
an attorney who misled a client by counseling her to invest in a
building in which the attorney had an interest. In so holding,
the Court admonished that it “will no more tolerate the
hoodwinking of helpless clients out of funds in a business venture
that is essentially for the benefit of the lawyer than it will
outright misappropriation of trust funds.” Id. at 335 (citing In
re Wilson,
81 N.J. 451 (1979)). Similarly, in Smyzer, supra, 108
N.J. at 49, the Court disbarred an attorney who entered into
fraudulent and deceptive business transactions with clients,
failed to protect their investments, failed to fully explain
investments to the clients, and failed to disclose his interests
in the companies. The Court found that the attorney had “deceived
his clients in order to protect his investment in a company whose
financial condition was rapidly deteriorating.” Id. at 57. The
Court also was troubled by the lack of independent consultation
concerning those investments. In that respect, the Court
cautioned that “a passing suggestion that the client consult a
second attorney [will not] discharge the lawyer's duty when he [or
she] and his [or her] client have differing interests.” Id. at
55. Thus, “a lawyer must take every possible precaution in
ensuring that his [or her] client is fully aware of the risks
inherent in the proposed transaction and of the need for
independent and objective advice.” Ibid.
In the present case, respondent participated in a business
transaction with his client without the appropriate safeguards and
without disclosing a conflict of interest. Respondent drafted the
loan agreement and all of its terms, made misrepresentations in
respect of the alleged collateral to induce his client to
participate in the transaction, and did not perform title or lien
searches or prepare security agreements in respect of the
property. Although the agreement stated that respondent owned two
properties and that respondent's law firm was worth in excess of
$2,500,000, respondent did not give his client a security interest
in those assets and did not provide his client with documentation
of those assets. Indeed, respondent did not own the six acres of
land identified as unencumbered in the loan agreement he prepared.
As stated by the Special Master,
there was no discussion of payment of more
than the compromise amount to the worker's
[sic] compensation carrier . . . no discussion
of what would happen if [respondent] went
bankrupt. Simply put, there was no discussion
of the financial issues that affected Hagerman
because the lawyer in the transaction was
acting in dual capacities as both lawyer and
business partner.
Respondent's subsequent failure to repay Hagerman and CNA,
even after CNA filed suit seeking payment of its lien, highlights
the worthlessness of the loan agreement. In sum, respondent took
advantage of an unsophisticated client whose trust he gained
through the attorney-client relationship.
B. Conduct Involving Dishonesty, Fraud, Deceit or
Misrepresentation in Violation of RPC 8.4(c)
Both the Special Master and the DRB concluded that respondent
engaged in conduct involving dishonesty, fraud, deceit or
misrepresentation when he entered into a loan agreement with his
client that was patently unfair and unreasonable to his client,
misrepresented the extent of his interests in certain assets, and
never intended to provide security for the loan. We agree.
RPC 8.4(c) provides that it is professional misconduct for a
lawyer to engage in conduct involving dishonesty, fraud, deceit or
misrepresentation. In the present case, respondent violated that
rule when he misrepresented in the loan agreement that he owned
land worth at least $150,000. Respondent's testimony that he had
forgotten that his wife owned the property is at best
disingenuous. The record indicates that prior to the instant
matter respondent and his wife planned to protect their assets by
putting them in respondent's wife's name. In fact, respondent had
deeded his interest in their residence to his wife before 1991.
C. Knowing Misappropriation of Client Funds in Violation of
RPC 1.15(a)
Both the Special Master and the DRB concluded that
respondent committed negligent, rather than knowing,
misappropriation. We disagree.
RPC 1.15(a) requires that a lawyer “hold property of clients
or third persons that is in [his or her] possession in connection
with a representation separate from the lawyer's own property” and
that the property so held be “appropriately safeguarded.”
Misappropriation is “any unauthorized use by the lawyer of
clients' funds entrusted to him [or her], including not only
stealing, but also unauthorized temporary use for the lawyer's own
purpose, whether or not he [or she] derives any personal gain or
benefit therefrom.” In re Wilson,
81 N.J. 451, 455 n.1 (1979).
Knowing misappropriation “consists simply of a lawyer taking a
client's money entrusted to him [or her], knowing that it is the
client's money and knowing that the client has not authorized the
taking.” In re Noonan,
102 N.J. 157, 160 (1986). Thus, the
attorney's state of mind or motives are largely irrelevant.
Although in the present case respondent's client authorized the
withdrawal of the funds, the consent of the third party, CNA, also
was required, as will be discussed below.
In In re Howard,
121 N.J. 173 (1990), an attorney received a
settlement payment on behalf of his client and promptly deducted
his fees and costs. The attorney was to hold in trust $11,000
“to cover the estimated amount due on a workers' compensation
lien” owed to the insurance company. Id. at 175. However, the
attorney eventually depleted the trust account to “$4,600 or
$6,400 less than the $11,000 [the attorney] had agreed to hold in
trust to pay the compensation lien.” Ibid. Sixteen months after
the settlement, the attorney paid the lien, which had been
compromised to $11,707.67. Ibid.
The Court concluded that the attorney's actions constituted
knowing misappropriation of client funds. Id. at 177. According
to the Court,
during this sixteen-month period, [the
attorney] did not maintain in his trust fund
sufficient funds to pay [the insurer's] lien.
All the parties in the [] case agreed that
[the attorney] would pay [the insurer's] lien
from the settlement proceeds deposited in his
trust account. Hence, with respect to the
lien [the attorney] acted as the depository of
funds. His actions were akin to those of
escrow agent. [In] In re Hollendonner, . . .
we held that 'an attorney found to have
knowingly misused escrow funds will confront
the disbarment rule of In re Wilson . . . .'
Accordingly, we conclude that respondent
knowingly invaded funds that were to be used
to pay [the insurer's] compensation lien.
Such action constitutes a knowing
misappropriation of funds under In re Wilson .
. . .
[Id. at 178 (citations omitted).]
In In re Hollendonner,
102 N.J. 21, 22 (1985), an attorney
was charged with misappropriation of escrow funds and improper
record keeping. Although he obtained the consent of his client to
withdraw the escrow funds, he failed to obtain the consent of the
third party. Id. at 28-29. The Court noted that “it is a matter
of elementary law that when two parties to a transaction select
the attorney of one of them to act as the depository of funds
relevant to that transaction, the attorney receives the deposit as
the agent or trustee for both parties.” Id. at 28 (citing Mantel
v. Landau,
134 N.J. Eq. 194, 195 (Ch. 1943), aff'd,
135 N.J. Eq. 456 (E. & A. 1944)). The Court further explained that
[t]he parallel between escrow funds and client
trust funds is obvious. So akin is the one to
the other that henceforth an attorney found to
have knowingly misused escrow funds will
confront the disbarment rule of In re Wilson .
. . .
[Id. at 28-29 (citation omitted).]
However, the Court declined to apply the rule of automatic
disbarment retroactively given “the absence of clear and
convincing evidence that [the attorney] invaded the escrow funds
with knowledge that the use of those funds was improper” and in
view of the fact that the case presented the first occasion that
the Court addressed the “near identity of escrow funds and trust
funds.” Id. at 29. Instead, the Court imposed a one-year
suspension. Ibid.
This record presents clear and convincing evidence that
respondent knowingly misappropriated funds belonging to CNA.
Respondent came into possession of CNA's funds as a result of the
settlement of a third-party lawsuit. Shortly after receiving the
settlement proceeds, respondent forwarded a check for $79,000 to
CNA in an effort to satisfy CNA's workers' compensation lien
pursuant to N.J.S.A. 34:15-40. That respondent was aware of the
existence and the amount of CNA's lien is undisputed. That
respondent sent the check to CNA in satisfaction of the lien
evidences his awareness that the funds did not belong to him or
his client. Thus, when CNA returned the check to respondent,
respondent had a duty to safeguard the funds and deposit them in
his escrow account. Regardless of who was the rightful owner of
the funds at that time, respondent was an escrow agent and was
well aware that the money was not his property.
The fact that Hagerman consented to the use of the funds is
irrelevant. As noted in In re DiLieto,
142 N.J. 492 (1995),
[a]n attorney cannot satisfy his or her
professional responsibility with respect to
escrow funds by simply relying on information
from a client . . . . 'It is not enough simply
to follow a client's instructions.'
[Id. at 506-07 (quoting In re Wallace, 104
N.J. 589, 593 (1986).]
As escrow agent, respondent required the consent of both parties
to use the funds for his benefit. In re Gifis,
156 N.J. 323, 359-
60 (1998). However, respondent entered into the loan agreement
with Hagerman, for his own benefit, without first obtaining the
permission of CNA and knowing that CNA still was owed at least
$79,000.
We agree with the Special Master and the DRB that
respondent's “tender” argument does not exonerate respondent.
Respondent contends that he is not guilty of knowing
misappropriation because the law of tender applies and therefore
he had no obligation to hold the funds in escrow. Neither the
case law relied upon by respondent nor the common law concept of
tender supports respondent's position. The common law concept of
tender provides that if a creditor refuses to accept money
tendered by a debtor title to the money reverts to the debtor.
74 Am. Jur. 2d Tender §§ 33, 35 (2001). However,“legal tender is
that kind of [payment] which the law compels the creditor to
accept in payment of his debt when tendered by the debtor in the
right amount.” Black's Law Dictionary 1467 (6th Edition 1990)
(emphasis added). Here, CNA did not accept the $79,000 check
tendered by respondent because CNA believed that it had not
compromised its lien to $79,000. Thus, CNA rightfully rejected
the payment. Furthermore, respondent cites no authority for the
proposition that title or ownership of the funds passed from CNA
to Hagerman, with respondent acting as escrow agent for Hagerman
alone. CNA did not lose the benefit of the statutory lien simply
by exercising its right to reject a check insufficient to satisfy
the lien.
Respondent cites In re Shelly,
140 N.J. 501, 513 (1995),
where we found that an attorney did not knowingly misappropriate
funds based on the “unique facts” of the case, including the
“long-standing and exceedingly informal nature of [the attorney's]
professional relationship with [his client], especially concerning
the payment of [the attorney's] fees.” Such is not the case here.
Respondent also cites In re Rogers,
126 N.J. 345 (1991), in
support of his argument that he had a “reasonable or good faith
basis” to believe that the money belonged to his client. However,
in In re Callaghan,
162 N.J. 182, 182-83 (1999), this Court
affirmed the DRB's recommendation of disbarment for knowing
misappropriation of client funds, rejecting the attorney's
argument that he had a good faith belief that he was entitled to
fees and had no intent to steal or borrow client funds. In
recommending disbarment, the DRB commented that
while [the attorney's] belief of entitlement,
if reasonable, could save him from a finding
of knowing misappropriation with respect to
the disbursements as fees, that argument does
not apply to the loans to himself.
(Citations omitted).
It is undisputed that the $79,000 was a loan from Hagerman to
respondent. The record does not indicate that respondent was
entitled to fees from the $79,000.
In Gifis, supra, 156 N.J. at 323-24, the Court rejected a
similar argument. While representing a seller in a real estate
transaction, the attorney took a $51,000 deposit that he was
holding in escrow with the consent of his client, but without the
consent of the buyer. Id. at 328-29. He also used a $10,000
settlement that was to be held in escrow and a $6,500 deposit
without the consent of either party. Id. at 331, 345. In
concluding that the attorney was guilty of knowing
misappropriation of client funds, the DRB rejected the attorney's
argument that, based on his understanding of the transaction and
the law, the funds belonged to his client. Id. at 362. The DRB
noted that “such a mistake of law would not have exonerated [the
attorney] from responsibility of knowing misuse of escrow funds.”
Id. at 352.
In In re Barlow,
140 N.J. 191, 192 (1995), an attorney drew a
check to himself knowing that the funds were intended to be used
to pay unpaid invoices for title insurance and surveyors' fees on
two separate closings. The attorney claimed that by drawing the
check to himself and depositing the funds in his business account,
he intended to pay those expenses from that account. Id. at 197.
However, he failed to pay the first invoice until three months
later, and finally paid the last invoice nearly three years later.
Ibid. The Court noted that at the time the funds were transferred
to his business account, it was short approximately $187.50. Id.
at 197-98. Instead of paying the expenses, the attorney issued
checks to pay personal expenses. Id. at 198. The Court rejected
the attorney's contention that he had an honest belief that his
actions did not constitute knowing misappropriation. Id. at 198-
99.
Like the attorneys in Gifis and Barlow, respondent is a long-
time practitioner who has compromised “hundreds” of workers'
compensation liens. His “tender” argument that he believed CNA's
return of the check changed the character of the funds is simply
unbelievable. Further, respondent misled Hagerman when respondent
said that the $79,000 belonged to Hagerman alone. Clearly,
respondent's belief that the funds were Hagerman's alone is not
based on any verifiable facts and cannot excuse his failure to
perform his ethical duties.
In the case of knowing misappropriation, disbarment is an appropriate penalty even if the lawyer did not possess the subjective intent to steal the money but only intended to borrow it. In re Warhaftig, 106 N.J. 529, 533 (1987). “[M]aintenance of public confidence in this Court and in the bar as a whole requires the strictest discipline in misappropriation cases. That confidence is so important that mitigating factors will rarely override the requirement of disbarment.” Wilson, supra, 81 N.J. at 461.
In Smyzer, supra, 108 N.J. at 48, the Court disbarred an attorney who entered into fraudulent and deceptive business transactions with clients, failed to protect their investments, failed to fully explain investments to them, and failed to disclose his interests in the companies. In so holding, the Court warned:
In view of the trust placed in an attorney by his [or her] clients and the attorney's often superior expertise in complicated financial matters, a lawyer must take every possible precaution in ensuring that his [or her] client is fully aware of the risks inherent in the proposed transaction and of the need for independent and objective advice.
[Id. at 55 (emphasis added).]
Even if respondent committed negligent, rather than knowing,
misappropriation, we would conclude that disbarment is the
appropriate penalty. “[I]n the totality of the circumstances
respondent has demonstrated that his ethical deficiencies are
intractable and irremediable.” In re Templeton,
99 N.J. 365, 376
(1985). Respondent's extensive ethics history and his “profound
lack of professional good character and fitness” compels the
conclusion that respondent should not be allowed to practice law
in New Jersey. Ibid.
Respondent's disciplinary history further supports our
conclusion that disbarment is necessary. Respondent has received
two private reprimands and three suspensions for thirteen separate
instances of misconduct. Respondent consistently has demonstrated
a disregard for the Rules of Professional Conduct, and “[w]e are
unable to conclude that respondent will improve his conduct.” In
re Cohen,
120 N.J. 304, 308 (1990).
[T]he totality of the evidence against
respondent reveals a pattern of intentional
deception and dishonesty that clearly and
convincingly demonstrates 'that his ethical
deficiencies are intractable and
irremediable.' His conduct has destroyed
'totally any vestige of confidence that [he]
could ever again practice in conformity with
the standards of the profession.'
[DiLieto, supra, 142 N.J. at 507 (quoting
Templeton, supra, 99 N.J. at 376).]
The only way to protect the public and prevent a reoccurrence of
respondent's behavior is by his disbarment.
In the present matter, respondent participated in a conflict
of interest transaction with his client without first securing the
appropriate safeguards for his client or the third party. He made
misrepresentations in respect of his finances, the true ownership
of his assets, and his financial position in order to induce his
client to participate. It is axiomatic that
[a]n attorney should refrain from engaging in
a business transaction with a client who has
not obtained independent legal advice on the
matter. . . . [A]n attorney's judgment can be
impaired by his [or her] self-interest. In
such a situation, an attorney has a duty to
explain carefully, clearly, and cogently why
independent advice is needed.
[In re Doyle,
146 N.J. 629, 643 (1996)
(citations omitted).]
Respondent was concerned only with his own self-interest _
obtaining a loan from Hagerman. Respondent knew that Rubino, his
co-counsel on the underlying case, had advised Hagerman against
entering into the loan transaction. Respondent's failure to
respect Hagerman's hesitancy in engaging in the transaction, and
his subsequent overreaching in convincing his client to enter into
a transaction fraught with risk, demonstrates unethical conduct
in violation of the Rules of Professional Conduct. Respondent's
conduct is even more egregious considering that funds were
beginning to leave the account before Hagerman agreed to the loan.
This Court has “not hesitated to order disbarment where a
lawyer uses his position to advance personal interests at the
expense of clients.” In re Yaccarino,
117 N.J. 175, 182 (1989);
see also Smyzer, supra, 108 N.J. at 48-49 (ordering disbarment
where attorney misled clients into participating in business
transaction in which he had interests); In re Servance,
102 N.J. 286, 286-87 (1986) (ordering disbarment where attorney
misrepresented to clients that attorney had knowledge of nature
and soundness of clients' investments); Wolk, supra, 82 N.J. at
327 (disbarring attorney who represented client in business matter
in which attorney was personally involved). Considering
respondent's conduct in this matter, including his conflict of
interest, his deceit and fraud, and even assuming that the
misappropriation was “only” negligent, disbarment is appropriate.
The DRB's observation that the present misconduct “predates
most of the actions for which respondent has been disciplined,” a
fact which may be relevant in other settings, is not relevant
here. As noted, respondent's ethics history spanning the last
fifteen years demonstrates an absolute disregard for his
professional responsibility. His demonstrated contempt for his
oath, on so many occasions, establishes that respondent is an
unrepentant recidivist. He has had not one, but five
opportunities to rehabilitate himself. Experience informs us that
he is not entitled to, and the public should not have to endure,
yet another opportunity for gross misconduct.
The ultimate goal of attorney discipline is to preserve the
confidence of the public in the integrity and trustworthiness of
lawyers. To that end, the discipline to be imposed must reflect
the gravity of the misconduct in light of all relevant
circumstances. In re Nigohosian,
88 N.J. 308, 315 (1982). In
order to maintain confidence in the integrity of the bar, we
conclude that the appropriate penalty is disbarment. Respondent
shall reimburse the Disciplinary Oversight Committee for
appropriate costs.
So Ordered.
CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG,
VERNIERO, and LaVECCHIA join in JUSTICE ZAZZALI's opinion.
SUPREME COURT OF NEW JERSEY
D-
106 September Term 2000
IN THE MATTER OF :
JACK N. FROST : O R D E R
AN ATTORNEY AT LAW :
(Attorney No. 266621971) :
It is ORDERED that JACK N. FROST of PLAINFIELD, who was admitted
to the bar of this State in 1971, be disbarred and that his name be
stricken from the roll of attorneys of this State, effective
immediately; and it is further
ORDERED that JACK N. FROST be and hereby is permanently
restrained and enjoined from practicing law; and it is further
ORDERED that JACK N. FROST comply with Rule 1:20-20 dealing with
disbarred attorneys; and it is further
ORDERED that JACK N. FROST reimburse the Disciplinary Oversight
Committee for appropriate administrative costs.
WITNESS, the Honorable Deborah T. Poritz, Chief Justice, at
Trenton, this 5th day of April, 2002.
CLERK OF THE SUPREME COURT
NO. D-106 SEPTEMBER TERM 2000
Application for Disposition
Order to Show Cause Why Respondent Should Not be Disbarred or
Otherwise Disciplined
IN THE MATTER OF
JACK N. FROST,
An Attorney at Law.
Decided April 5, 2002 Order
returnable January 15, 2002 Opinion by
Justice Zazzali
Footnote: 1 1According to respondent, CNA sent a cover letter with the returned check and the letter did not assert a claim for more money. However, neither party presented a copy of this letter and, as noted by the Special Master, there was speculation that no such cover letter existed. Footnote: 2 2The complaint actually was filed by Continental Insurance Company, which had been acquired by CNA, and which will be referred to herein as CNA.