On review of the report of the Grievance Commission of the Supreme Court of Iowa. Grievance commission reports respondent committed numerous violations of the rules of professional conduct and recommends suspension.
Charles L. Harrington, Des Moines, for complainant.
Michael J. Cross, Hampton, Pro se.
The Iowa Supreme Court Attorney Disciplinary Board (Board) charged attorney Michael J. Cross with violations of several of our ethical rules governing an attorney's management of client trust accounts after an audit revealed numerous trust account irregularities. The Board also charged Cross with violations of several other ethical rules for failing to file employee-payroll-withholding-tax declarations and pay these taxes for years 2009 through 2011, for failing to file state and federal income tax returns for
years 2009 through 2011, and for failing to supply the Board with requested documentation concerning these alleged tax violations. Finally, the Board charged Cross with improperly practicing under a trade name in violation of our ethical rules. After a hearing, a division of the Grievance Commission of the Supreme Court of Iowa found Cross violated a number of our ethical rules. The commission recommended we suspend Cross's license for one year. It also recommended that we require Cross to demonstrate he has satisfied all outstanding payroll and income tax liabilities due state and federal taxing authorities as a condition of reinstatement. Upon our de novo review, we concur in most of the findings of rule violations, and agree with the commission that a one-year suspension is appropriate.
I. Factual Background.
Cross was admitted to practice law in Iowa in 1973. He currently works in Hampton, Iowa, as a solo practitioner. This case turns on an audit performed by the Client Security Commission on Cross's client trust account and accounting records in 2012. The audit showed noncompliance with a number of our rules.
A. The 2012 Audit.
On May 22, 2012, an auditor with the Client Security Commission contacted Cross by phone. This call was made in response to a report received by the Client Security Commission expressing concern about Cross's financial and physical health and the potential risk to his clients. The auditor made an appointment to meet with Cross at his office for May 30. During their conversation, Cross informed the auditor that his records were not up to date but that he would spend the weekend preparing them for review.
When the auditor arrived for the May 30 meeting, Cross informed the auditor that he had not performed any trust account reconciliations since November 2009. At that time, Cross had experienced difficulties with his accounting software and simultaneously discovered a $99.60 difference between the bank balance and the total of the client subaccounts, which he could not explain. Cross also informed the auditor that he had failed to maintain contemporaneous client ledgers since November 2009. While Cross had attempted to reconstruct the client ledgers over the preceding weekend using bank statements, he had been unsuccessful in completing the task. He was also unable to provide the auditor with a check register. Over the course of the next several months, Cross was able to reconstruct several client ledgers. However, these reconstructed ledgers
comprised only a sample of the ledgers that should have been available, and Cross never provided a complete set of client ledgers to the auditor.
In performing the audit, the auditor identified three bank accounts relevant to Cross's client-trust-account management practices: (1) the client trust account; (2) the Cross Law Firm account; and (3) a bank account in the name of MJC Services, Inc. (MJC). The Cross Law Firm account was the primary business operations account for Cross's practice until 2010. However, when Cross opened the MJC account in 2010, it became the primary business operations account for the firm. Cross used the MJC account to protect his assets from levies by creditors.
Due to the complete lack of record keeping, the auditor was required to reconstruct a journal for the trust account from bank statements. The auditor then conducted an extensive audit by cross-referencing the reconstructed journal with the few client ledgers provided by Cross and bank statements from the other accounts. Based on the audit, the auditor concluded " Cross completely lost control and accountability for client funds deposited in his trust account" and " generally treated all the funds in the accounts as his funds to do with as he chose without regard to whether his fees had been earned or not and without notifying clients of withdrawals." The auditor further concluded, " Cross . . . committed nearly every wrong possible in handling client funds and managing an attorney's trust account," and enumerated the following list of deficiencies:
(1) " Failed to perform monthly reconciliations" ;
(2) " 'Borrowed' from the trust account" ;
(3) " Paid personal and business expenses from the trust account" ;
(4) " Overdrawn specific client subaccounts" ;
(5) " Overdrawn the trust bank account" ;
(6) " Withdrawn cash from the trust account" ;
(7) " Failed to maintain client subaccounts" ;
(8) " Failed to deposit client funds in [the] trust account when required" ;
(9) " Taken fees before they were earned" ;
(10) " Commingled trust funds with non-trust funds" ;
(11) " Withheld and failed to deposit a portion of cash receipts" ;
(12) " Failed to provide clients with written notification of withdrawal of trust funds" ; and
(13) " Failed to maintain trust account records for six years."
Specifically, the audit revealed that as of November 2009, eight client subaccounts had negative balances, totaling $11,736.80. One subaccount, entitled " Cross Law Firm," had a negative balance of $11,132.64, and another subaccount, entitled " MJC Services," had a negative balance of $80.10. The subaccount names and negative balances suggested that as early as November 2009, Cross had been withdrawing unearned fees from the trust account. Also significant, on February 23, 2011, Cross transferred $8500 by check from the MJC account to the trust account so the trust account would balance.
The audit also revealed that on 102 separate occasions between 2009 and 2012, Cross
used the trust account to pay personal credit card bills by electronic transfer. On four separate occasions in 2010, these payments resulted in the trust account being overdrawn. The audit further established that at various times Cross used the trust account to pay personal and business expenses, including heating bills, cell phone bills, office telephone bills, office supply bills, and the corporate filing fee for the incorporation of MJC in 2009.
The audit further revealed that after the MJC account was opened in 2010, Cross stopped using the Cross Law Firm account almost entirely. Additionally, he began using the MJC account for the receipt and disbursement of client funds, without regard to whether he should handle such funds through the trust account. With respect to eleven identifiable clients, the audit demonstrated that Cross deposited advance fee payments and prepaid expenses in the MJC account as opposed to the trust account. For example, as it relates to K.A., whom Cross represented in a dissolution of marriage action, the audit revealed that as of November 12, 2010, Cross had earned sixty dollars in his representation of her. However, on that same date, Cross deposited a $600 fee payment from K.A. into the MJC account. Additionally, the audit established that Cross systematically failed to provide clients with contemporaneous written notifications and accountings of withdrawals from the trust account, with the exception of several real estate closings and probate matters.
B. Tax Matters.
In the audit report, the auditor also noted that
Cross's secretary reported that Cross had been making only net payrolls for some
time. That is, while withholding taxes from employee wages were calculated and
shown as withheld, Cross failed to file employee-payroll-tax declarations,
failed to segregate these funds, and failed to pay these taxes to the
appropriate taxing authorities. Cross admitted this during the audit. Cross also
admitted that he had not filed his federal or state income tax returns for the
years 2009 through 2011, and that his combined payroll and income tax debt
C. Client Security Commission Form.
For the years 2009 through 2012, Cross completed and signed a " Combined Statement and Questionnaire" for the Client Security Commission. Despite his lack of record keeping and the audit findings to the contrary, Cross certified that he kept all client funds and retainers in a separate account from his own, he performed monthly reconciliations of the trust account with bank statements and client ledgers, he preserved client-trust-account records for six years, and he never overdrew the trust account.
II. Procedural History.
On September 25, 2013, the Board requested that Cross provide it with documentation concerning his employment-payroll taxes and income taxes. On October 24, Cross responded to the Board indicating that he needed more time to respond to its request. Cross never supplied the Board with the requested documentation.
Based on the completed audit, the Board filed its
complaint against Cross on March 4, 2014. The complaint alleged numerous
violations of the Iowa Rules of Professional Conduct and the Iowa Court Rules.
In his original answer, Cross denied many of the allegations in the complaint
and maintained he had not violated any of our ethics rules. His original answer,
however, admitted several factual allegations forwarded by the Board.
Specifically, with respect to the Board's charge that
he improperly commingled client funds with his own, Cross's answer stated:
Respondent admits he did not use his trust account solely for unearned fees or funds of clients, but did deposit earned fees into said account to avoid creditor levy [and] paid office expenses and personal expenses out of the trust account . . . .
The Board also filed and served Cross with a request for admissions. Cross failed to respond to this request.
On March 17, the Board served Cross with requests for production of documents and interrogatories. He did not respond to them. On May 16, the Board filed a motion to compel responses to the document requests, interrogatories, and prior request for admissions. Cross did not resist the motion, and the commission ordered him to serve responses no later than June 16. The commission threatened to impose sanctions if Cross failed to comply with the June 16 deadline. Additionally, the commission deemed admitted the requests for admissions Cross had failed to answer.
Cross failed to respond to the Board's document requests or interrogatories by the June 16 deadline. As a result, on July 14, the commission imposed sanctions. Specifically, Cross was precluded at the hearing from offering any witnesses or evidence other than his own testimony, objecting to any of the Board's exhibits, cross-examining any witnesses presented by the Board, and testifying other than in mitigation. In addition, several facts alleged in the Board's complaint were deemed established for the purposes of the action. Specifically, the commission ruled as established: (1) Cross failed to deposit unearned fees and prepaid expenses into the trust account with respect to eleven separate clients; (2) Cross failed to maintain a check register for the trust account since November 2009; (3) Cross failed to perform trust account reconciliations since 2009; (4) several clients had negative balances in their subaccounts at various times, indicating other client funds had been used for their purposes; (5) the trust account was overdrawn on four separate occasions in 2010; and (6) Cross's client security questionnaires for years 2009 through 2012 were not truthful.
In July, an evidentiary hearing was held before the commission. At the hearing, Cross filed an amended and substituted answer in which he admitted all but one of the factual allegations in the Board's complaint, and all but one of the alleged rule violations in the Board's complaint. Specifically, Cross denied that he had failed to deposit unearned fees into the trust account and improperly taken fees before they were earned. Consequently, Cross maintained he had not violated any of our ethical rules prohibiting such conduct. However, as noted above, the commission had already ruled this conduct as established for the purposes of the action.
At the hearing before the commission, Cross did not testify. Instead, he made a " professional statement" in which he noted he had " admitted each and every violation except the violation concerning depositing unearned fees." Cross attempted to explain that it was his general practice in dissolution cases to charge a flat fee of approximately $500 after he met with a client for the second time but prior to the filing of the petition. Prior to these second meetings, Cross generally prepared documents including " the petition, original notice, confidential information form[s], statistical report[s], and discovery documents." Cross asserted that during these second meetings, he would typically review these documents with the client. Therefore, while the audit and records demonstrated that he had deposited client funds
in the MJC account prior to filing the petition--possibly indicating he had failed to deposit unearned fees into the trust account--those funds had in fact been earned by the conclusion of the second meeting. Cross admitted, however, that in each of the instances in which he charged a flat fee, he " requested $185 towards ...