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 disbarrment, 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 disbarrment.
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, disbarrment 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 disbarrment.
CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and LaVECCHIA join in JUSTICE ZAZZALI's opinion.
The opinion of the court was delivered by: Zazzali, J.
On an Order to show cause why respondent should not be disbarred or otherwise disciplined.
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 disbarrment. Our independent review of the record leads us to conclude that respondent should be disbarred.
Respondent was admitted to the New Jersey bar in 1971 and has an extensive ethics history. In 1988, he received two private reprimands for a conflict of interest in a criminal matter and for failing to safeguard client funds in a separate matter. Respondent was again privately reprimanded in 1992 for endorsing a client's name on a settlement check without the client's authorization.
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.
The present matter was initiated when the Honorable
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 ...