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Iowa Supreme Court Attorney Disciplinary Board v. Smith

Supreme Court of Iowa

November 17, 2017

KENNETH J. SMITH, Respondent.

         On review of the report of the Iowa Supreme Court Grievance Commission.

          Tara M. van Brederode and Patrick W. O'Bryan of O'Bryan Law Firm, Des Moines, for complainant.

          David L. Brown of Hansen, McClintock & Riley, Des Moines, for respondent.

          MANSFIELD, Justice.

         This attorney disciplinary proceeding requires us once more to address proper trust account procedures. The attorney maintained individual client trust account records on handwritten ledger cards but failed to regularly reconcile those records with bank records. One of his answers to the annual questionnaire propounded by the Client Security Commission was therefore inaccurate, although not intentionally so. During a routine audit, a substantial trust account deficit was uncovered in one client account. The attorney immediately wrote a check to cover the deficit, and no client suffered harm. The attorney forthrightly accepted responsibility and has updated his trust account practices.

         The Iowa Supreme Court Attorney Disciplinary Board (the Board) charged the attorney with violating Iowa Court Rule 45.2(3) and Iowa Rule of Professional Conduct 32:8.4(c). The Iowa Supreme Court Grievance Commission found a violation only of rule 45.2(3) regarding the failure to reconcile the accounts. The commission recommended a public reprimand.

         Upon our review, we agree with the commission that only rule 45.2(3) was violated and that a public reprimand is appropriate.

         I. Background Facts and Proceedings.

         Kenneth Smith was admitted to the Iowa bar in 1973 and has practiced in a law firm in Newton since his admission. Smith is now a name partner in that firm. He is a seasoned trial attorney and does a significant amount of transactional legal work.

         Historically, the firm kept track of its individual client trust balances using handwritten ledger cards. At some point, it supplemented the system with an accounting software program. Smith was responsible for maintaining the firm's client trust account. He also enlisted the services of an accounting firm located within the law firm's building. To reconcile the client trust account, Smith stated his general practice was to look at ledger cards only for individual accounts he believed had some activity in the past month.

         In June 2013, a representative of the Client Security Commission performed a regular audit of the client trust account of Smith's law firm. The auditor found what appeared to be a negative balance in the trust account of $47, 365.95 as of August 15, 2012. Through further investigation, the auditor identified five specific client accounts with issues: Agro-Ray, L.L.C.; Smith Farms; Smith-Kriegel; Smith-Klaassen; and an "unknown" account consisting of a single $11, 000 entry.[1] The main contributor to the August 15 deficit was a negative balance of approximately $46, 000 in the Smith Farms account.

         The ledger cards were confusing. Some of the transactions on the cards were not listed in chronological order. There were also concerns about possible inaccuracies. Smith's outside bookkeeper therefore reconstructed the ledgers to clarify the transactions and the balances. After the ledger cards were reconstructed, the auditor concluded there had been a negative balance of nearly $50, 000 in the client trust account as of April 30, 2013. This deficit was the result of a negative balance of $48, 700 in the Agro-Ray account that had not been immediately apparent from the original Agro-Ray ledger card.

         When Smith was informed by the auditor of the deficit, he immediately deposited a check for $50, 000 in the trust account. Smith's accountant continued to verify and reconstruct the ledgers. After all the individual client accounts had been verified and restated approximately two months later, the auditor determined there was an additional deficiency of $813.11. Smith wrote a second check to cover this amount, plus a $100 cushion.

         Agro-Ray is an entity owned and funded by Smith and two others. It purchases farmland in Ukraine. The account had two problematic transfers that each caused deficits at different times. The first was a $65, 000 transfer in February 2012, simply labeled "wire transfer-Ken." At the time of that transfer, the account showed only $600 available. In March 2012, when the account once again had a positive balance, another transaction labeled "transfer to Agro-Ray" produced a $48, 450 deficit. As noted, the final shortfall at the time of the audit was $48, 700.

         The other three accounts that the auditor initially identified also were affiliated with Smith in various ways. Smith-Kriegel and Smith-Klaassen were used for the sale of assets out of the estate of Smith's father. Smith and his sister were the beneficiaries of that estate and the persons entitled to receive those proceeds.[2] Smith Farms functioned as the other side of the same coin: an account established so Smith and his sister could pay estate-related expenses.

         The additional $813.11 deficit that was discovered later consisted of discrepancies in six other client accounts. Smith was not affiliated with those clients.

         When the first stage of the audit had been completed that uncovered the $50, 000 deficit, the auditor wrote in an email,

I reported to you in June that this IOLTA may have a deficiency of approximately $50, 000.00 and that the attorney immediately deposited this amount back into the Trust account. The deficiency centers around real estate transactions that he is a part of. At or near the time the deficiency originated, the attorney may have had sufficient funds of his own to cover the deficiency that were reflected on other sub-account ledger cards - possibly ...

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