Bd. of Prof'l Responsibility of the Supreme Court of Tenn. v. Sheppard

• Decision Date: 13 August 2018
• Docket Number: No. M2017-00804-SC-R3-BP,M2017-00804-SC-R3-BP
• Citation: 556 S.W.3d 139
• Parties: BOARD OF PROFESSIONAL RESPONSIBILITY OF the SUPREME COURT OF TENNESSEE v. Michael Gibbs SHEPPARD
• Court: Tennessee Supreme Court

556 S.W.3d 139

BOARD OF PROFESSIONAL RESPONSIBILITY OF the SUPREME COURT OF TENNESSEE

v.Michael Gibbs SHEPPARD

No. M2017-00804-SC-R3-BP

Supreme Court of Tennessee, AT NASHVILLE.

January 10, 2018 Session Heard at Knoxville

FILED August 13, 2018

Alan D. Johnson, Brentwood, Tennessee, for the appellant, Board of Professional Responsibility.

Edward M. Yarbrough and W. Justin Adams, Nashville, Tennessee, for the appellee, Michael Gibbs Sheppard.

Sharon G. Lee, J., delivered the opinion of the Court, in which Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Holly Kirby, and Roger A. Page, JJ., joined.

Sharon G. Lee, J.

This is a direct appeal of a disciplinary proceeding against a Brentwood attorney arising out of the mismanagement of client funds held in trust. A hearing panel of the Board of Professional Responsibility determined that the attorney had violated Rules 1.15 (safekeeping property and funds) and 8.4 (misconduct) of the Tennessee Rules of Professional Conduct. The hearing panel recommended that the attorney be suspended for sixty days, to be followed by two years of probation under the supervision of a practice monitor, and that he complete fifteen hours of continuing legal education on law office management and trust accounting procedures. The chancery court modified the hearing panel’s decision by increasing the periods of suspension and probation and by imposing additional conditions of probation. We hold that the hearing panel’s decision was supported by material and substantial evidence and was not arbitrary, capricious, or an abuse of discretion. The chancery court, therefore, erred in modifying the hearing panel’s decision. We reverse the judgment of the chancery court and affirm the hearing panel’s decision.

I.

Michael Gibbs Sheppard graduated from law school in 1982. For many years, he worked for an insurance company in Ohio. In 1999, Mr. Sheppard was admitted to practice law in Tennessee. Six years later, he and attorney Perry A. Craft founded the law firm of Craft & Sheppard in Brentwood, Tennessee. Mr. Sheppard was the firm’s managing partner and was responsible for oversight of the firm’s financial records and trust account.

Between 2009 and 2013, client funds in three cases were commingled with law firm funds. Client funds were not maintained in Craft & Sheppard’s trust account but were transferred electronically to Craft & Sheppard’s operating account to pay expenses.

On November 17, 2014, the Board of Professional Responsibility ("Board") filed a Petition for Discipline against Mr. Sheppard, alleging that he had violated Rule 1.15 (safekeeping property and funds)¹ and Rule 8.4 (misconduct)² by, among other things, failing to maintain client funds in trust and by commingling client funds with law firm funds. In response, Mr. Sheppard did not dispute that he had mismanaged the trust account. He submitted, however, that his misconduct was not intentional but the result of his negligence and inexperience in trust account management. Mr. Sheppard also contended that the Board should not treat him any differently than his law partner, Mr. Craft, to whom the Board had issued only a public censure for his misconduct relating to the firm’s trust account.³

Hearing Panel Proceedings

On August 25, 2016, a hearing panel of the Board convened to hear the parties' evidence. Testimony focused mainly on the management of client funds received by Craft & Sheppard from settlements in the Utica, Shedd, and Ali cases.

In 2003, Utica, an insurance company, hired Mr. Sheppard to represent its interests in a subrogation claim arising out of a fire loss. After Craft & Sheppard was established, Utica became a client of the firm and Mr. Craft began handling the matter. Mr. Craft eventually settled the case for $145,000, which was deposited in the firm’s trust account in early February 2011. Utica and Craft & Sheppard disagreed about the amount of the attorney fee to be deducted from the settlement funds.⁴ Neither party had a copy of the fee agreement. The funds should have remained in trust until Utica and the firm resolved the fee dispute. See Tenn. Sup. Ct. R. 8, RPC 1.15(e). However by February 15, 2011, the funds in the trust account had fallen to $48,701.98; by February 28, 2011, the balance was only $7,077.58.

On April 26, 2011, Mr. Sheppard sent Utica an email stating, "[t]he settlement funds reside in our trust account and no one has ‘used’ these funds." Yet bank records reflected that the firm’s trust account balance on that date was only $104,850.62. In June 2011, Mr. Craft emailed Utica assuring it that "your funds are safe and secure in the firm’s trust account." The funds, however, were not safe and secure. Eventually, Utica and Craft & Sheppard settled their fee dispute for $130,000, each partner agreeing to pay Utica one-half of that amount. Mr. Sheppard filed for bankruptcy protection in March 2014, listing Utica as a creditor. He later settled his obligation to Utica for $27,000. According to Mr. Sheppard, Mr. Craft paid Utica only $30,000 of his share of the debt.

In the second case, Donna Shedd hired Craft & Sheppard to handle a wrongful death lawsuit against a doctor and a hospital, arising out of her daughter’s death. In July 2009, during the trial of the case, Ms. Shedd’s claim against the doctor was settled for $1,000,000; the case against the hospital resulted in a defense verdict. Craft & Sheppard deposited the settlement funds in the trust account. The firm withdrew its one-third contingency fee and paid litigation expenses, leaving about $400,000 in the trust account for Ms. Shedd’s share of the settlement. Shortly after Craft & Sheppard received the settlement funds, the father of Ms. Shedd’s deceased daughter moved to intervene in the lawsuit seeking one-half of the settlement proceeds. The trial court denied the request and the father appealed. Mr. Craft represented Ms. Shedd on appeal.⁵

In mid-December 2009, while the appeal was pending, the firm paid Ms. Shedd $200,000 from the trust account, which was roughly one-half of the remaining settlement funds. Therefore, the trust account balance should have been at least $200,000. Yet on December 18, 2009, the balance was $56,830.19; on February 26, 2010, there was only $11,497.29 in the trust account; on March 29, 2013, the balance fell to $8,281.39; and by April 29, 2013, the trust account balance was $9,357.59. On July 11, 2013, Craft & Sheppard paid Ms. Shedd $208,022.37 after Mr. Sheppard borrowed $125,000 to cover the deficit in the firm’s trust account.

In the Ali case, Craft & Sheppard deposited $400,000 in its trust account from the settlement of the personal injury claim in late December 2009 and withdrew its attorney fee. Mr. Craft, who had handled the matter, entered into an arrangement to "slow pay" the client’s portion of the settlement proceeds. As of February 26, 2010, the trust account balance was only $11,497.29, far less than the amount of client funds that should have been in the trust account. Eventually, Craft & Sheppard overpaid the Ali client more than $27,000.

Mr. Sheppard admitted in his testimony before the hearing panel that he had mismanaged the trust account by allowing client funds to be improperly transferred into the firm’s operating account. He explained that his actions were not intentional but the result of lack of oversight, inexperience in trust account management, inadequate recordkeeping, personal family and financial problems, and lack of knowledge of Mr. Craft’s arrangements with his clients. According to Mr. Sheppard, Mr. Craft mainly handled the Utica, Shedd, and Ali cases, and Mr. Sheppard was unfamiliar with the financial details of the cases. For example, Mr. Craft arranged the gradual payout of the Ali settlement without informing Mr. Sheppard, which resulted in an overpayment to the client.

Mr. Sheppard insisted that he tried to keep Mr. Craft informed about the firm’s finances by presenting him with written financial reports almost every day. The two reports admitted into evidence consist of one-page spreadsheets showing only the date, recipient, and amount of outstanding checks, as well as the balance of each of the firm’s three bank accounts, including the firm’s trust account.

Mr. Sheppard denied intentionally misleading Utica when he assured it that the disputed funds remained in the trust account. He explained that he did not realize the gravity of his mismanagement until he had to borrow money to pay the settlement proceeds owed to Ms. Shedd. Mr. Sheppard also noted that he had continued working to pay off the substantial debt owed to the firm’s creditors.

Mr. Craft testified that he trusted Mr. Sheppard to manage the firm’s finances. He denied ever seeing or accessing the firm’s bank account records or making any online transfers between the trust account and the operating account, and claimed to have relied exclusively on Mr. Sheppard for financial information. According to Mr. Craft, only Mr. Sheppard or his son had access to the online bank account records. Mr. Craft left the firm in July 2013.

A former Craft & Sheppard paralegal who worked for Mr. Craft after he left the firm testified that the firm’s financial records were on a laptop computer maintained by Mr. Sheppard’s son.

A lawyer who had previously worked as a law clerk at Craft & Sheppard and a former client both testified that Mr. Sheppard had a good reputation for veracity and worked hard for his clients. They also attested to the substantial amount of pro bono work Mr. Sheppard did for individuals, especially veterans and teachers.

The hearing panel found that Mr. Sheppard had failed to properly maintain and monitor client trust accounts, which resulted in the commingling of client funds, use of client funds to pay for operating expenses, and a diminished balance of client funds in the trust account. The hearing panel concluded that these actions constituted "knowing" violations of Rules of Professional Conduct 1.15 and 8.4, and that Mr....