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Of bank failures and conflicts at new law firms

By Diane Karpman

Diane Karpman

It’s been a busy summer in the legal ethics community. Ethics wonks obsessed about certain issues that merit your consideration.

When the FDIC seized IndyMac Bank, the pictures of customers lining up to withdraw their funds made front pages across the country. As fiduciaries, lawyers are responsible for the safekeeping of client funds.

Generally, the FDIC guarantees each client for up to $100,000, if they have no other accounts in that institution. Maybe we should be asking clients where they bank to guarantee them full coverage for their funds? According to recent reports from the FDIC, 600 million uninsured depositors will recover about half of their money. If those are lawyers’ trust funds, guess who they will be looking to for the rest of their money.

Many lawyers hold huge sums of client funds that far exceed the FDIC limits. The easiest way to increase FDIC coverage is to spread the money among multiple banks. When you hold millions in a class action settlement, this could be an onerous burden. In Bazinet v. Kluge, 14 A.D. 3d 324 (N.Y. App. Div. 1st Dep’t 2005), the lawyer was deemed not liable for malpractice for putting more than a million dollars in one bank, which failed. The court held the bank’s demise as unforeseeable. However, this year there have been seven major bank failures, so another court might not consider bank failures unforeseeable when they are plastered across the front page.

IndyMac is also being investigated by the FBI for fraudulent mortgage lending practices and questionable subprime loans. Obviously, the subprime mortgage meltdown will result in many opportunities for lawyers. Brokers are approaching them offering to “perform services,” matching them with clients who are on the verge of foreclosure — for a fee.

Obviously brokers know about these victims, because they set up the junky mortgages in the first place. This gives them a second opportunity to take a bite of the apple — the clients. Lawyers in different areas have received copies of documents, some of which did not even have the names redacted. So much for the broker’s sense of a client’s privacy. It may also indicate why this isn’t a good person to do business with.

Finally, at the ABA meeting in New York, the most controversial topic was a proposed modification of Model Rule 1.10 (Imputation of Conflicts of Interest), that would permit “screening” of attorneys moving to law firms on the opposite side of cases. Consideration was postponed indefinitely (probably until Boston in ’09) by an astonishing vote of 192 - 191.

Another rendition of this issue is pending at the Conference of Delegates of California Bar Associations that would prohibit screening without client consent. That will be debated at the State Bar’s Annual Meeting this month in Monterey.

We must find a way of reconciling the issue of lawyer mobility without undermining the confidence clients justifiably place in their lawyers’ loyalty. And it seems that every vote really does count in these turbulent times.

• Legal ethics expert Diane Karpman can be reached at 310/887-3900 or at

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