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Trustees of Clients'' Security Fund of Bar of New Jersey v. Miller

August 2, 1989


Dwyer, P.J. Ch.


Jerome A. Vogel ("receiver"), receiver for Charles E. Miller ("Miller"), whose license to practice law has been revoked, has filed his final account for approval and instructions as to distribution.

Pursuant to a verified complaint filed under R. 1:28-8 on September 12, 1982, plaintiff sought the appointment of a custodial receiver for the entire estate of Miller, including his law practice. The said complaint recited that Miller had been suspended from the practice of law on September 3, 1982 and that plaintiff had received 14 potential claims against the Clients' Security Fund of the Bar of New Jersey ("CSF") related to the activities of Miller totaling over $900,000. By order dated September 21, 1982, Jerome A. Vogel was appointed the receiver.

The complaint stated that Miller had to defend a counterclaim for divorce and equitable distribution which Lois Miller filed in Miller's action to divorce her. The action was allowed to proceed.

The order of appointment provided in part:

(a) The Receiver was . . ." appointed Custodial Receiver of the entire estate of Miller, including his law practice and is hereby directed to take possession of all books, papers and records of the defendant, which he can ascertain of the

law practice of the defendant, and anything of value whatsoever, and hold the same until the further order of this court, except that said Receiver shall have authority to take such steps with respect to the law practice of the said Charles E. Miller as may be necessary for the protection of the clients of Charles E. Miller, his creditors and his estate."

(e) Without further order of the court, the defendant, his agents, servants, and employees were restrained from selling, assigning, transferring, mortgaging or hypothecating or in any manner disposing of any of his assets or anything of value belonging to him, or from interfering with said Receiver in taking possession of and managing his property.

(f) "That on notice to the Receiver, all persons with claims against Charles E. Miller may take such steps in prosecution of their claims as they deem reasonably necessary to protect their interests up to but not inclusive of the attainment of a judgment and that any entry of any judgment against Charles E. Miller or against any of the assets in which Charles E. Miller has an interest shall be on applications to the Receiver on ten (10) days notice to the Receiver, or with the consent of the Receiver."

A copy of the order of appointment was published in October 1982.

The receiver filed a report, including an inventory of law-office furniture, in November 1982. The receiver stated that he had received files both open and closed of Miller but that there was no index or catalogue to them. There was no accounts receivable ledger or other records from which to determine what monies were due Miller. The receiver stated that he had an index created for the files. He made arrangements for the handling of the files, including agreements with attorneys who received the files for ultimate payment for the work done by Miller on the files.

With respect to the law office, the receiver recommended that the month-to-month tenancy be terminated and the physical assets sold.

The receiver further stated that the records revealed Miller had purchased a substantial home in the Village of Westhampton Beach, Town of Southhampton, Suffolk County, New York on September 25, 1981. The records also revealed that, on August 13, 1982, Miller conveyed said premises to himself and

Shirley Dayon as tenants in common giving as their address 360 East 72nd Street, New York, New York.

Receiver further stated that a lawsuit had been started in the County of New York against Miller charging that, while an attorney, he had received in the period April 1980 to January 1981 $75,000 from plaintiff for the purpose of investing in secured and low risk loans. Instead Miller had used said funds to pay part of the purchase price for the aforesaid home.

The receiver also stated that Miller with the advice of his own counsel had indicated a willingness to give a deed for his interest in the property.

The receiver filed a complaint for instructions based on his report and an order to show cause, directed to the CSF, the Passaic County Prosecutor, and Miller, was sought. The court granted it.

After hearing, an order was entered, which in relevant part authorized the sale of the law office property, obtaining ancillary letters of appointment within the State of New York and retaining a New York attorney to appear in the lawsuit to take appropriate action by way of defense to, and assertion of, claims to the real estate, and an order limiting the period within which creditors could assert claims to three months as well as the publication thereof.

On December 9, 1982, an order was published limiting the time within which creditors could file claims to three months from the date of publication of the order.

The summary of the account is stated as follows:

Charges of the Receiver:

a. Deposits into the checking ac-

count $45,524.99

b. Withdrawals 45,509.37


c. Deposits into money market ac-

count $68,960.06

d. Withdrawals 13,733.22


Balance in hands of Receiver $55,242.46

Expenses incurred by Receiver in

administration of the estate $18,134.00

The receiver did not request a specific dollar amount for his services, but did submit a detailed affidavit of services and disbursements. The disbursements total $535.50. The remainder reflects time spent on the matter at the then-prevailing hourly rates. The total for both is $18,134.

Copies of the accounting were sent to the Internal Revenue Service, the New Jersey Division of Taxation, CSF, State of New Jersey, Department of Labor Office of Controller, and Miller. No objections were filed. The receiver did not include any schedule of claims that had been filed with him pursuant to the order limiting creditors' time to file.

The receiver did include a copy of a letter, dated March 13, 1984, addressed to Miller at the address for his law office from the New Jersey Department of Labor Office of the Controller enclosing a notice of claim for $242.55.

In response to the notice for a settlement of the account, the New Jersey Division of Taxation filed a copy of a certificate of debt ("COD") for unpaid New Jersey gross income taxes, dated January 31, 1984, aggregating $15,188 for taxes, plus interest and penalties of $5,146.90 for the years 1976, 1978, 1979, 1980 and 1981. Pursuant to N.J.S.A. 54:48-1 et seq. the COD had been filed with the clerk of the court and docketed as a judgment.

The letter stated $35,634.41 was due and payable.

Based on N.J.S.A. 54:49-1 et seq., it was claimed that the COD was a lien on all of Miller's property and the State was entitled to preference in the distribution of Miller's assets.

Based on Trustees, Clients' Sec. Fund of the Bar of New Jersey v. Beckman, 143 N.J. Super. 548, 364 A.2d 15 (Ch.Div. 1976), wherein the court said that so far as applicable the priorities set forth under the Bankruptcy Act should be followed,

the Division of Taxation claimed that it was also entitled to a priority under 11 U.S.C.A. ยง 507(a)(7).

CSF filed an affidavit listing a total of $337,788.43 which CSF had paid to those who had filed a claim based on monies that Miller had taken. There were 35 claims listed.

Under the rules and regulations of the CSF, the trustees have some discretion as to the amount to be paid on any one claim taking into account the available resources of the CSF. The trustees had set a maximum of $25,000 as the amount that could be paid on any one claim in 1982 and 1983.

There are eight claims on which the maximum amount was paid. Daniel R. Hendi, who signed the affidavit, by letter supplement stated that the amount of the losses above the $25,000 paid on each of the eight losses. The total is $1,003,435.68.

CSF bases its claim on the assignments and subrogation agreements it received from those to whom it paid money in satisfaction of all, or part, of the claims of those persons against Miller for embezzling their funds.

In short, CSF urges that to the extent the receiver is holding the proceeds of properties which Miller acquired by use of the embezzled funds such proceeds are not, and the property from which they were derived was not, Miller's property.

Tax liens do not attach to embezzled funds or the product thereof. First National Bank v. Hill, 412 F. Supp. 422 (N.D. Ga.1976); Atlas, Inc. v. United States of America, 459 F. Supp. 1000 (D.N.D.1978).

The embezzler is subject to income tax on the amount embezzled in the year of embezzlement. James v. United States, 366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246 (1961). A lien may be placed on the embezzler's property.

Since the embezzler is under a duty to repay to the persons from whom the funds were embezzled, such funds, or the proceeds thereof, are not the embezzler's property to which

a tax lien can attach. See First National Bank v. Hill, supra; Atlas, Inc. v. United ...

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