Goldberg v. New Jersey Lawyers' Fund for Client Protection

• Decision Date: 08 May 1991
• Docket Number: No. 90-5757,90-5757
• Citation: 932 F.2d 273
• Parties: 24 Collier Bankr.Cas.2d 1745, Bankr. L. Rep. P 74,013 In re Harvey GOLDBERG, Debtor, v. NEW JERSEY LAWYERS' FUND FOR CLIENT PROTECTION and Chicago Title Insurance Company. Chicago Title Insurance Company, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 273

932 F.2d 273

24 Collier Bankr.Cas.2d 1745, Bankr. L. Rep. P 74,013

In re Harvey GOLDBERG, Debtor, v. NEW JERSEY LAWYERS' FUND FOR CLIENT PROTECTION and Chicago

Title Insurance Company.

Chicago Title Insurance Company, Appellant.

No. 90-5757.

United States Court of Appeals,

Third Circuit.

Argued Feb. 4, 1991.

Decided May 8, 1991.

Walter J. Fleischer, Jr. (Argued), Shanley & Fisher, Somerville, N.J., for appellant Chicago Title Ins. Co.

Daniel R. Hendi (Argued), Richard J. Hughes Justice Complex, Trenton, N.J., for appellee New Jersey Lawyer's Fund for Client Protection.

Before MANSMANN and SCIRICA, Circuit Judges, and POLLAK, District Judge. ^*

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This dispute in bankruptcy concerns whether one or both parties is entitled to proceeds from an Attorney Trust Account. Debtor Harvey Goldberg was a New Jersey attorney who misappropriated money entrusted to him by his clients. The New Jersey Lawyers' Fund for Client Protection ¹ and Chicago Title Insurance Company each claimed all or part of the remaining balance in Goldberg's Attorney Trust Account for reimbursements made to cover the losses suffered by Goldberg's clients. The district court held that the Client Protection Fund should be the sole recipient of Goldberg's Attorney Trust Account proceeds. We will reverse and remand for proceedings consistent with this opinion.

I.

On August 18, 1980, Goldberg was temporarily suspended from the practice of law and on January 22, 1988 he was disbarred. In re Goldberg, 109 N.J. 163, 172, 536 A.2d 224, 228 (1988). The disbarment resulted from a criminal conviction related to Goldberg's misappropriation of funds entrusted to him in a series of real estate transactions occurring between December 7, 1979 and May 20, 1980. On May 28, 1980, Richard Roth, President of the Passaic County Bar Association, took possession, as conservator, of Goldberg's practice, files, Attorney Trust Account, and Attorney Business Account. On July 25, 1980, Roth was appointed Custodial Receiver under New Jersey Court Rule 1:28-8 to take control of Goldberg's assets.

Every attorney who practices in New Jersey is required, under New Jersey Court Rule 1:21-6(a), ² to maintain at least two bank accounts, one designated an Attorney Trust Account and the other an Attorney Business Account. The purpose of these accounts is to aid the New Jersey Supreme Court's "supervisory control" over the practice of law. In re Jaffee, 74 N.J. 86, 90, 376 A.2d 1181, 1183 (1977).

The funds in the Attorney Trust Account, which are held in trust by the attorney for his client, remain the property of the client until they are withdrawn for their intended purpose (e.g., paying off mortgages). In re Goldberg, No. 89-1441, slip op. at 9-10 (D.N.J. July 23, 1990). The Attorney Trust Account must be separate from the attorney's business or personal accounts or any other fiduciary account that the attorney may maintain as an executor, guardian, trustee, receiver, or comparable fiduciary. The Attorney Business Account should contain all funds that the attorney received for professional services.

Both the Attorney Trust Account and the Attorney Business Account must be prominently labelled and maintained according to the bookkeeping requirements set forth under New Jersey Court Rule 1:21-6. Goldberg maintained an Attorney Trust Account for his real estate practice and labelled it as such ("Harvey Goldberg Trust Account").

Real estate settlements in New Jersey are conducted two different ways. In northern New Jersey, settlements are handled by attorneys who are approved by title companies to collect and distribute funds entrusted to them by mortgage lenders. In southern New Jersey, settlements are handled by title insurance agents who distribute the necessary settlement funds. Goldberg practiced law in northern New Jersey.

Beginning in 1975, Goldberg misappropriated funds from his Attorney Trust Account and other accounts for gambling. His actions remained undetected because he replaced misappropriated funds with his winnings or funds from new clients. In a typical transaction with one of Chicago Title's defrauded insureds, Goldberg would represent the insured at the real estate closing. The mortgagee would advance funds to Goldberg with instructions to pay off an existing prior mortgage. Instead of paying off the mortgage, Goldberg would make personal use of the funds. In re Goldberg, 12 B.R. 180, 182 (Bankr.D.N.J.1981). In these cases, he relied on his real estate expertise to calculate how long he could delay paying off the mortgages. When pressed for payment, he would replace funds taken from an older account with money received from a more recent transaction. In re Goldberg, 109 N.J. at 166-67, 536 A.2d at 225. Under their policies, Chicago Title reimbursed the mortgagee banks for the amounts that they were defrauded, thereby fulfilling their obligations to their insureds.

On September 26, 1980, an involuntary petition in bankruptcy under Chapter 7, 11 U.S.C. Sec. 303, was filed against Goldberg by, among others, Chicago Title. That same day, Chicago Title filed a complaint in bankruptcy contending, among other things, that it had paid in excess of $170,000 for claims filed by five of its insureds. It sought a declaration that Goldberg's debt be nondischargeable and requested relief from the automatic stay provisions of 11 U.S.C. Sec. 362. As a result, on October 7, 1980, Roth turned over to the bankruptcy trustee all of Goldberg's files, records, and funds from his frozen Attorney Trust Account (about $33,000) and his Attorney Business Account (about $11,000).

On April 9, 1981, the bankruptcy court declared the entire debt to Chicago Title nondischargeable under 11 U.S.C. Sec. 523(a)(4) ³ because it was incurred through Goldberg's fraud and embezzlement while acting in a fiduciary capacity. However, the court denied Chicago Title's motion for relief from the stay for insufficient cause and because the stay offered protection for other creditors.

On March 4, 1981, Chicago Title again sought relief from the automatic stay and made additional claims against Goldberg. After trial of Chicago Title's September, 1980 and March, 1981 complaints, the bankruptcy judge granted relief from the automatic stay, and found Goldberg's debt to Chicago Title nondischargeable for the sum of $264,546.95.

On May 18, 1981, the Client Protection Fund also filed a complaint against Goldberg. On March 13, 1985, the bankruptcy court found Goldberg's debt to the Client Protection Fund in the amount of $137,615.21 nondischargeable under 11 U.S.C. Sec. 523(a)(4) and 11 U.S.C. Sec. 727.

Since the time that Roth turned over the funds to the bankruptcy trustee, Goldberg's Attorney Business Account, which was deposited in his general bankruptcy estate account, increased in value because of interest and other funds that the bankruptcy trustee recouped. Goldberg's Attorney Trust Account increased solely because of interest. On March 8, 1988, the bankruptcy trustee advised the Client Protection Fund that he was holding $91,924.99 in Goldberg's general bankruptcy estate account and $57,692.95 in Goldberg's Attorney Trust Account.

On March 23, 1988, the Client Protection Fund sought release of the Attorney Trust Account proceeds from the bankruptcy court. Chicago Title filed a cross-motion for release of the same funds. The bankruptcy trustee took a neutral position on the distribution of the trust funds and filed no pleadings.

On September 30, 1988 the bankruptcy court issued an opinion and on November 30, 1988 it entered an order denying both motions. The bankruptcy court held that it was "uncontested that the funds in question were on deposit in [Goldberg's] Attorney Trust Account." In re Goldberg, No. 80-03994, slip op. at 5 (Bankr.D.N.J. Sept. 30, 1988). Moreover, the funds, which are held in trust by an attorney for his client, "remain as property of the client until they are withdrawn from the account for the purpose for which the funds are held." Id. at 6.

However, the court concluded that neither the Client Protection Fund nor Chicago Title was entitled to an equitable lien upon the funds. Instead, the funds in the Attorney Trust Account, plus interest, were to be included as an asset of Goldberg's general bankruptcy estate subject to the claims of the general creditors. The bankruptcy court's conclusion was based upon the apparent inability of either the Client Protection Fund or Chicago Title to trace the funds in the Attorney Trust Account to any particular client because Goldberg had commingled his own money with the funds of his clients. Both parties appealed to the district court.

The district court reversed the bankruptcy court, finding that the Client Protection Fund was entitled to all of Goldberg's Attorney Trust Account proceeds. The district court based its decision on a number of factors, most importantly, its conclusion that the bankruptcy court had misapplied the tracing requirement and had incorrectly determined that the money deposited in the Attorney Trust Account was the property of Goldberg's general bankruptcy estate. As the district court explained, "such a particularized tracing is not necessary. Rather, all that need be shown is that the client's interests are traceable to a separate, identifiable account." In re Goldberg, No. 89-1441, slip op. at 14 (footnote omitted).

Although the district court agreed with the bankruptcy court that the funds in the Attorney Trust Account belonged to Goldberg's clients, the district court determined that Goldberg's commingling of his own funds with those in the Attorney Trust Account "did not work to dissipate his client's equitable interests in that account. It is a well-settled principle of law that 'where a fiduciary com[m]ingles trust funds with his own, equity imposes a trust upon the entire fund.' " Id. at 10 (citation omitted).

The district court emphasized...