Argument Recap: Disciplinary Counsel v. Laurence Parnoff, SC 19626

 Practice Book § 2-47A requires the disbarment of any lawyer who has knowingly misappropriated a client’s funds.  Last week, the Connecticut Supreme Court heard arguments in the appeal of Disciplinary Counsel v. Laurence Parnoff, in which the Office of the Chief Disciplinary Counsel argued that both the trial court and the Appellate Court got it wrong when they concluded that Attorney Parnoff’s conduct in closing an escrow account and taking those funds for his personal use was merely negligent and not a “knowing misappropriation” of client funds.  No Connecticut appellate court has previously considered the application of Practice Book 2-47A and therefore this case will be the Supreme Court’s first opportunity to rule on what conduct constitutes a knowing misappropriation.

Parnoff Fails To Maintain Disputed Funds In An Escrow Account

Attorney Parnoff represented Darcy Yuille in a claim against her former employer.  In her retainer agreement, Yuille agreed to pay Parnoff a contingency fee of 40% of her recovery if she prevailed on her bad faith claim.  After winning more than $1 million at arbitration, Yuille contested the 40% contingency – $438,413.17 – as being in excess of the fees permitted under Conn. Gen. Stat. §52-251(c).  Yuille also demanded that another attorney, Laura Mooney, who had made an appearance in the bad faith litigation on Yuille’s behalf, be paid out of Parnoff’s share of the award.  In 2004, Yuille agreed that Parnoff could take $125,000 of the judgment and Parnoff agreed to hold the balance of the disputed fee in escrow until the resolution of the dispute.

Parnoff sued Yuille for breach of contract based upon her refusal to agree to his fee.  The complaint alleged that Parnoff has held the disputed sum in escrow as he was required to do under the Rules of Professional Conduct.  In May 2010, the jury awarded Parnoff an amount that was significantly less than the funds then held in the escrow account, which by that time had grown to nearly $364,000.  In July 2010, the escrow account was closed pursuant to Parnoff’s instructions, and all of the funds were deposited into his personal account.  Parnoff appealed the judgment in the case against Yuille and the Appellate Court reversed, holding that Parnoff was not entitled to recover based on the retainer agreement because it violated the statutory limits on attorneys fees.  The case was remanded to determine what amount, if any, Parnoff is entitled to receive.

Disciplinary Case

Separate from the civil litigation between Parnoff and his client, Yuille filed a grievance against Parnoff and the statewide grievance committee ultimately ordered that a disciplinary case be brought against him.  This is the case being heard by the Supreme Court.

Under Rule 1.15(f) of Connecticut’s Rules of Professional Conduct, Parnoff was required keep the disputed portion of his fees in escrow so long as the dispute over those funds remained unresolved.  The trial court held that this rule required Parnoff to escrow the disputed funds until the appeal process was exhausted, notify Yuille when he withdrew the funds, and provide her with a full accounting of any disbursements made.  Parnoff’s rationale for failing to maintain the funds in escrow – his belief that Yuille would be “satisfied” if Parnoff simply paid Mooney her fee – was dismissed by the trial court as both factually incorrect and unreasonable under the circumstances.

However, the trial court also found that Parnoff’s various failures were not a reflection of any lack of integrity or an intent to deceive Yuille and therefore the trial court concluded that Parnoff’s conduct did not give rise to a knowing misappropriation that would have required disbarment for 12 years under Practice Book § 2-47.  Instead, after weighing various factors under the American Bar Association’s Standards for Imposing Lawyer Sanctions, the trial court imposed only a formal reprimand on Parnoff and required him to escrow what remained from the disputed funds – some $71,000.

On appeal to the Appellate Court, the Disciplinary Counsel argued that the trial court used the wrong standard in assessing whether Parnoff knowingly misappropriated the funds.  The Appellate Court rejected this argument explaining that the Disciplinary Counsel had “confounded the difference between a general intent to engage in conduct and a specific intent to cause a result or act with knowledge that such a result will occur.”  According to the Appellate Court, Practice Book § 2-47 required a specific intent or knowledge and the trial court’s findings were consistent with that standard.  The Appellate Court construed the trial court’s findings as being “in essence” that Parnoff had lacked the knowledge that any of the funds belonged to Yuille because Parnoff believed that the funds were no longer disputed and that he was no longer required to maintain the disputed funds in an escrow account, even if those beliefs were unreasonable.

On appeal to the Supreme Court, the Disciplinary Counsel urges the adoption of the two-pronged standard for knowing misappropriation adopted in New Jersey:  (1) knowledge that the money belonged to the client, and (2) knowledge that the client has not authorized the transfer.  The Disciplinary Counsel argues that a lawyer’s subjective intent is irrelevant under this standard.  The Disciplinary Counsel also argues that the trial court’s findings necessarily compel the conclusion of knowing misappropriation:  the trial court found that Parnoff understood his ethical obligations to keep disputed funds in escrow and Parnoff knew that his case against Yuille remained unresolved.

In addition to criticism for improper references to the factual record and for raising arguments not made to the Appellate Court, Parnoff responds that there can indeed be a negligent misappropriation, such as in cases where there are bookkeeping errors or a failure to supervise or where, as the trial court found here, Parnoff held an unreasonable belief that the funds were no longer in dispute.