BEFORE THE VIRGINIA STATE BAR DISCIPLINARY BOARD
IN THE MATTER OF
ARTHUR C. ERMLICH
VSB Docket No. 01-021-0178
ORDER OF SUSPENSION
This matter was certified to the Virginia State Bar Disciplinary Board ("Board") by the Second District Committee, Section I, and was heard on September 27, 2002, by a duly convened panel consisting of John A. Dezio, chair, V. Max Beard, lay member, Joseph R. Lassiter, Jr., David R. Schulz, and Theophlise L. Twitty. The Respondent Arthur C. Ermlich, (hereinafter "Mr. Ermlich" or "Respondent"), was present and represented by Christopher M. Malone, Esquire. The Virginia State Bar (hereinafter "the Bar") was represented by Paul Georgiadis, Assistant Bar Counsel.
The Chair polled the panel members to determine whether any member had a personal or financial interest in this matter that might affect or reasonably be perceived to affect his or her ability to be impartial in this proceeding. Each member, including the chair, verified that they had no conflicts.
SUMMARY OF DECISION
Anita Dunn, a West Virginia resident, retained Mr. Ermlich to represent her in a personal injury matter. Subsequently she filed a complaint with the Bar alleging that Mr. Ermlich had failed to pay medical bills from the proceeds of her personal injury settlement, as listed on her settlement statement. Ms. Dunn stated that she was being pressed for payment of the charges by her health care providers, that she had on numerous occasions called Mr. Ermlich's office and had not been able to speak to him, nor had her calls been returned, despite promises to call her back with information concerning her questions.
A review of Mr. Ermlich's trust account statements revealed that his trust account had in effect been used as an operating account, from which non-client expenses had routinely been paid, including payroll expenses, personal property taxes on firm vehicles, condo fees, and clothing expenses. Transfers from the trust account to the firm operating account had been made in lump sums of varying amounts, often without identifying the specific case to which the transfers were related, and failing to keep any accounting of the actual sums due to be paid to Mr. Ermlich.
Mr. Ermlich's defense relied on his allegations that the improper payments from the trust account were made without his knowledge and were mistakes on the part of two longtime staff members, Carol S. Fleming, his personal secretary of 41 years, and Clifton T. Forrest, Jr., his investigator of 26 years. The personal secretary began doubling as bookkeeper in 1998 when Mr. Ermlich's longtime bookkeeper retired, and she testified that she did not know how to reconcile a bank account. Instead, the investigator reconciled the trust account. Mr. Ermlich delegated to Ms. Fleming the authority to sign checks drawn on the trust account. Ms. Fleming testified that funds were only drawn down and deposited to the operating account when she "knew" that there were funds in the trust account that had been earned by Mr. Ermlich. She testified that payroll was "occasionally" paid from the trust account when she did not have time to go to the bank to transfer funds from the trust account to the operating account. These payments were actually quite frequent (Bar Ex. 15-17), and on occasion Ms. Fleming wrote payroll checks to herself which she signed using the signature of Arthur C. Ermlich. On at least one occasion a payroll check drawn to herself was returned for nonsufficient funds, as were other checks drawn on the account. Although Ms. Fleming signed virtually all of the checks using the signature of Arthur C. Ermlich, Mr. Ermlich did sign at least two trust account checks in June, 2000, one of them being a check drawn to Nordstrom's for clothing. Both Ms. Fleming and Mr. Forrest testified that they had no training in trust account procedures and that Mr. Ermlich had never inquired about their knowledge of trust accounting.
Proceeds from Ms. Dunn's personal injury settlement were deposited to the trust account on or about November 18, 1999. On November 23, 1999, a check in the amount of $18,314.67 was paid to Ms. Dunn, representing her net share of the personal injury proceeds. The settlement statement signed by Ms. Dunn stated that $13,333.33 of Mr. Ermlich's one-third contingency fee was being paid to Mr. Ermlich, with no explanation as to how or when the remaining $3,333.33 was being paid. Also listed were medical expenses totaling $16,670.87, payable to seven health care providers. There was no identifiable check or checks in the amount of $13,333.33 paid to Mr. Ermlich. The medical expenses were not paid until August, 2000, after this bar complaint had been filed and numerous complaints had been made to Mr. Ermlich's office by Ms. Dunn and two of her health care providers. A monthly statement for the period ending November 30, 1999, was included in Bar Exhibit 14. Despite the fact that no other checks from the Dunn personal injury closing cleared the trust account in November, Mr. Ermlich's November 30 trust account statement indicated a balance of only $12,506.69. Mr. Forrest's hand-written "reconciliation" indicated a balance of $10,064.00 after deducting outstanding checks. There was no explanation offered as to the whereabouts of the remaining balance of the funds from the Dunn settlement which exceeded $30,000.00. The balance in the trust account dropped to $1,160.16 on December 31, 1999. On February 2, 2000, the Virginia Employment Commission asserted a lien against the trust account and captured $5,193.94 from the account causing numerous checks to be returned for nonsufficient funds.
Mr. Forrest and Ms. Fleming testified that "three or four months" after the Dunn settlement occurred they discovered a $50,000.00 shortfall in the trust account, but did not tell Mr. Ermlich because they did not wish to trouble him with that information. Ms. Fleming attributed the missing funds to the fact that she must have drawn down the Dunn fee for services twice, but had no documentation or work sheet to support her hypothesis. Forrest and Fleming anticipated that a large settlement would be received from the settlement of another matter, and stated that they planned to tell Mr. Ermlich at that time, when there were funds available to cover the shortfall. As luck would have it, the bar complaint was received August 12, 2000, within twenty-four hours of when the settlement proceeds became available, and they were able to pay Ms. Dunn's medical bills at that time. Bar Exhibit 19, a handwritten ledger prepared by Ms. Fleming purporting to be a subsidiary account ledger for Ms. Dunn's account, indicated that an additional $3,333.33 was drawn down at that time as fee for Mr. Ermlich's services. That would appear to conflict with Ms. Fleming's testimony and hypothesis that the Dunn fee had previously been drawn down twice. Mr. Ermlich claimed to have a complete lack of knowledge of the condition of his trust account until August 12, 2000, a position corroborated less than convincingly by his longtime employees.
The Bar took the position that the duties of being responsible for oversight of the trust account were not delegable, and that Mr. Ermlich was responsible for the errors regarding the trust account even if he had no knowledge of the violations.
The panel finds that the repeated violations of trust account requirements constitute gross violations of the standards of the profession. While it is hard to believe that Mr. Ermlich had no knowledge of the manner in which the trust account was handled, his responsibility is non-delegable. Furthermore, his total lack of oversight constitutes reckless disregard for proper trust accounting.
The panel finds the Respondent guilty by clear and convincing evidence of numerous ethics violations as set forth below, and suspends the Respondent's license to practice law in the Commonwealth of Virginia for a period of three years effective immediately.
FINDINGS OF FACT
1. During all times relevant hereto, Arthur C. Ermlich, hereinafter "Respondent", was an attorney licensed to practice law in the Commonwealth of Virginia.
2. Respondent represented Anita M. Dunn in a personal injury case.
3. On or about November 18, 1999, Respondent deposited a settlement check in the amount of $50,000 into his First Union Account # 2070004082573, hereinafter Escrow Account # 1.
4. On or before November 29, 1999, Respondent made fee and client disbursements from Escrow Account # 1 on the Dunn matter. Respondent's disbursement or settlement statement reflected amounts still to be disbursed of $16,670.87 owed to Dunn's health care providers and an additional fee owed to Respondent of $3,333.33. Respondent did not make any further disbursement to the health care providers until August 11, 2000. The August 11, 2000 disbursements were made from a second Escrow Account, Escrow Account # 2, established in March, 2000.
5. From November 30, 1999 to April 28, 2000, Escrow Account # 1 was out of trust as the account had funds less than total disbursements owed of $20,004.20 and less than the $16,670.87 owed to Dunn's health care providers.
6. On February 2, 2000, the Commonwealth of Virginia placed a levy upon Escrow Account # 1 for $5,193.94.
7. On March 1, 2000, Respondent opened a second escrow account, First Union Account # 2000004784647, hereinafter Escrow Account #2.
8. On August 11, 2000, Respondent made disbursements from Escrow Account # 2 in the amount of $16,670.87 to Dunn's healthcare providers. Escrow Account # 2 had less than $16,670.87 in the months of March, April, May, and July, 2000.
9. Respondent maintained a single subsidiary ledger for Dunn, although he made disbursements from both Escrow Account # 1 and Escrow Account # 2.
10. Respondent failed to keep a running balance or balance on hand for the subsidiary ledger of Dunn's escrowed funds.
11. During the relevant time periods, Respondent made disbursements from the escrow accounts that were not fee disbursements, not client disbursements, and not case disbursements, but were personal or for Respondent's law office administration including but not limited to condominium fees, office rent, staff payroll, and clothing expenses.
12. Although Respondent represented to Dunn in November, 1999 that he would shortly disburse amounts owed to Dunn's health care providers as set forth in his disbursement or settlement statement, Respondent failed to do so until August 11, 2000 in spite of the repeated requests of Dunn and of her health care providers to make such payments.
13. Although Dunn repeatedly inquired of Respondent and his office about the status of the payments owed to her healthcare providers, Respondent failed to inform Dunn of the status of payments and any problems preventing timely disbursement.
NATURE OF MISCONDUCT
The Board finds that such conduct on the part of Respondent constitutes misconduct in violation of the following Disciplinary Rules of the Virginia Code of Professional Responsibility:
RULE 1.4 Communication
(2) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.
DR 9-102. Preserving Identity of Funds and Property of a Client.
(B) A lawyer shall:
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the lawyer and render appropriate accounts to his client regarding them.
(4) Promptly pay or deliver to the client or another as requested by such person the funds, securities, or other properties in the possession of the lawyer which such person is entitled to receive.
DR 9-103. Record Keeping Requirements.
(A) Required Books and Records: As a minimum requirement, every attorney engaged in the private practice of law in Virginia, hereinafter called "attorney," shall maintain or cause to be maintained, on a current basis, books and records which establish his compliance with Disciplinary Rule 9-102. These records including all the reconciliations and supporting records required under Section (B) hereof shall be preserved for at least five years following completion of the fiduciary obligation and accounting period. For this purpose, the following books and records, or their equivalent, are required.
(3) Subsidiary ledger: A subsidiary ledger containing a separate account for each client and for every other person or entity from whom money has been received in trust shall be maintained. The ledger account shall by separate columns or otherwise clearly identify fiduciary funds disbursed, and fiduciary funds balance on hand. The ledger account for a client or a separate subsidiary ledger account for a client shall clearly indicate all fees paid from trust accounts.
(B) Required Trust Accounting Procedures: The following minimum trust accounting procedures are applicable to all trust accounts maintained by lawyers or law firms holding funds on behalf of clients who reside in this State, or from a transaction arising in this State, whether or not the lawyer or law firm maintains an office in this State.
(4) Periodic Trial Balance: A regular periodic trial balance of the subsidiary ledger shall be made at least quarter annually, within 30 days after the close of the period and shall show the trust account balance of the client or other person at the end of each period.
(a) The total of the trial balance must agree with the control figure computed by taking the beginning balance, adding the total of monies received in trust for the period and deducting the total of trust monies disbursed for the period.
(b) The trial balance shall identify the preparer and be approved by the attorney or one of the attorneys in the firm.
RULE 1.15 Safekeeping Property
(a) All funds received or held by a lawyer or law firm on behalf of a client, other than reimbursement of advances for costs and expenses, shall be deposited in one or more identifiable escrow accounts maintained at a financial institution in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:
(1) funds reasonably sufficient to pay service or other charges or fees imposed by the financial institution may be deposited therein; or
(2) funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, and the portion belonging to the lawyer or law firm must be withdrawn promptly after it is due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.
(c) A lawyer shall:
(3) maintain complete records of all funds, securities, and other properties of a client coming into the possession of the lawyer and render appropriate accounts to the client regarding them; and
(4) promptly pay or deliver to the client or another as requested by such person the funds, securities, or other properties in the possession of the lawyer which such person is entitled to receive.
(e) Record-Keeping Requirements, Required Books and Records. As a minimum requirement every lawyer engaged in the private practice of law in Virginia, hereinafter called "lawyer," shall maintain or cause to be maintained, on a current basis, books and records which establish compliance with Rule 1.15(a) and (c). Whether a lawyer or law firm maintains computerized records or a manual accounting system, such system must produce the records and information required by this Rule.
(1) In the case of funds held in an escrow account subject to this Rule, the required books and records include:
(i) a cash receipts journal or journals listing all funds received, the sources of the receipts and the date of receipts. Checkbook entries of receipts and deposits, if adequately detailed and bound, may constitute a journal for this purpose. If separate cash receipts journals are not maintained for escrow and non-escrow funds, then the consolidated cash receipts journal shall contain separate columns for escrow and non-escrow receipts;
(ii) a cash disbursements journal listing and identifying all disbursements from the escrow account. Checkbook entries of disbursements, if adequately detailed and bound, may constitute a journal for this purpose. If separate disbursements journals are not maintained for escrow and non-escrow disbursements then the consolidated disbursements journal shall contain separate columns for escrow and non-escrow disbursements;
(iii) subsidiary ledger. A subsidiary ledger containing a separate account for each client and for every other person or entity from whom money has been received in escrow shall be maintained. The ledger account shall by separate columns or otherwise early identify escrow funds disbursed, and escrow funds balance on hand. The ledger account for a client or a separate subsidiary ledger account for a client shall clearly indicate all fees paid from trust accounts;
(iv) reconciliations and supporting record required under this Rule;
(2) Deposits. All receipts of escrow money shall be deposited intact and a retained duplicate deposit slip or other such record shall be sufficiently detailed to show the identity of each item;
(3) Deposit of mixed escrow and non-escrow funds other than fees and retainers. Mixed escrow and non-escrow funds shall be deposited intact to the escrow account. The non-escrow portion shall be withdrawn upon the clearing of the mixed fund deposit instrument;
(4) Periodic trial balance. A regular periodic trial balance of the subsidiary ledger shall be made at least quarter annually, within 30 days after the close of the period and shall show the escrow account balance of the client or other person at the end of each period.
(i) The total of the trial balance must agree with the control figure computed by taking the beginning balance, adding the total of monies received in escrow for the period and deducting the total of escrow monies disbursed for the period; and
(ii) The trial balance shall identify the preparer and be approved by the lawyer or one of the lawyers in the law firm.
(i) A monthly reconciliation shall be made at month end of the cash balance derived from the cash receipts journal and cash disbursements journal total, the escrow account checkbook balance, and the escrow account bank statement balance;
(ii) A periodic reconciliation shall be made at least quarter annually, within 30 days after the close of the period, reconciling cash balances to the subsidiary ledger trial balance;
(iii) Reconciliations shall identify the preparer and be approved by the lawyer or one of the lawyers in the law firm.
(6) Receipts and disbursements explained. The purpose of all receipts and disbursements of escrow funds reported in the escrow journals and subsidiary ledgers shall be fully explained and supported by adequate records.
Additional charges under Rule 9-103(B)(1)(a) and Rule 1.15(a)(1 & 2), (b), (c)(1) & 2), (d), (h), and (i)(1) are DISMISSED for lack of clear and convincing evidence.
The panel notes the allegations that Mr. Ermlich maintained a trust account but failed to identify it as such. The testimony indicated that the trust account in question (Trust Account #1) was originally located at Signet Bank and identified as an "Escrow Account". However, when Signet Bank merged with First Union National Bank, Mr. Ermlich's office failed to notice that the new account statements and checks failed to identify the account as an attorney's fiduciary account. That error was discovered when the Virginia Employment Commission issued a lien against the account on February 2, 2000. After ascertaining that Trust Account #1 was indeed an attorney's fiduciary account, First Union restored the liened funds to the trust account and advised Ms. Fleming that it would be best to open a brand new trust account (Trust Account #2), which was done in March, 2000. The panel elects not to find any violations resulting from what was apparently an oversight on the part of Mr. Ermlich's bank.
IMPOSITION OF MISCONDUCT
The Board, having considered all evidence before it and having considered the nature of the Respondent's actions, and having considered the Respondent's prior disciplinary record, ORDERS pursuant to Part 6, Sec. IV, Para. 13C(3) of the Rules of the Virginia Supreme Court that the license of the Respondent, Arthur M. Ermlich, to practice law in the Commonwealth of Virginia be, and the same is hereby revoked effective September 27, 2002.
It is further ORDERED that, as directed in the Board's September 27, 2002, Summary Order in this matter, a copy of which was served on Respondent by certified mail, Respondent must comply with the requirements of Part 6, Section IV, Paragraph 13.M., of the Rules of the Supreme Court of Virginia. The time for compliance with said requirements runs from the September 27, 2002, effective date of the Summary Order. All issues concerning the adequacy of the notice and arrangements required by the Summary Order shall be determined by the Board. Pursuant to Part 6, Sec. IV, Para. 13.B.8.c. of the Rules, the Clerk of the Disciplinary System shall assess costs.
It is further ORDERED that a copy teste of this Order shall be mailed by certified mail, return receipt requested, to the Respondent at his last address of record with the Virginia State Bar, Suite B, 5477 Greenwich Road, Virginia Beach, VA 23462, and hand delivered to Paul D. Georgiadis, Assistant Bar Counsel, Virginia State Bar, 707 East Main Street, Suite 1500, Richmond, Virginia 23219.
Terry Griffith, Chandler and Halasz, Inc., P.O. Box 9349, Richmond, Virginia 23227, 804/730-1222, was the reporter for the hearing and transcribed the proceedings.
ENTERED this ____ day of October, 2002.
VIRGINIA STATE BAR DISCIPLINARY BOARD
By: _____________________________________ John A Dezio, Chair