Thomas L. BLACKMON, Plaintiff and Appellant, v. Louis H. HALE et al., Defendants and Respondents.
Blackmon appeals that part of a judgment in favor of defendants Hale, Lee, United California Bank, and Bank of America on his suit to recover $23,500. The validity of his judgment for $23,500 against defendant Adams is not contested.
In July 1961 Adams, an attorney, undertook to represent Blackmon in the latter's proposed purchase of a note and mortgage on real property in Nevada. At that time Adams practiced law in Lancaster in partnership with defendant Hale under the name Adams and Hale. The two attorneys had been partners since 1952, but from November 1958 to May 1961 they had had a third partner, defendant Lee, and during that period the three practiced law under the name Adams, Hale and Lee. On 31 May Lee withdrew from the firm, and Adams and Hale continued the practice under the name Adams and Hale. Neither the firm of Adams and Hale nor the firm of Adams, Hale and Lee conducted any business other than the practice of law.
About the middle of July 1961 Adams told Blackmon he would need funds to make an offer for the Nevada mortgage. Blackmon said he would put up the money, but he wanted it placed in a trust account so it would be available for the offer, would remain there until accepted, and be returned if not used. Adams instructed him to make out a check to Adams and Hale Trust Account and said ‘in this manner that he could offer this money to these people and it would be available.’ Thereafter, on 17 August, Blackmon purchased a cashier's check for $24,500 from Bank of America in Bellflower, payable to the order of Adams and Hale Trust Account, and mailed it to Adams in Lancaster. On 18 August the check was endorsed ‘Adams and Hale Trust Account, by J. C. Adams, partner,’ endorsed ‘Adams, Hale and Lee Trust Account,’ and deposited in the Adams, Hale and Lee Trust Account at the California Bank in Lancaster.
During the existence of the Adams, Hale and Lee partnership the firm maintained a trust account at California Bank in the name Adams, Hale and Lee Trust Account. Withdrawals from the account were authorized on the signature of Hale alone or on the joint signatures of Adams and Lee. After Lee's departure from the firm on 31 May, Adams and Hale continued to use the same account under the same name for the deposit of trust moneys and did not open a separate trust account under the name Adams and Hale. Prior to 1958 they had had a trust account in that name at the California Bank, but for several years that account had been either dormant or closed.
On 31 August the partnership of Adams and Hale was dissolved. Thereafter on 6 September Adams sought Hale's signature on a check for $21,386 drawn on the Adams, Hale and Lee Trust Account and payable to J. C. Adams Trust Account. This check represented over 80 per cent of the money in the Adams, Hale and Lee Trust Account. After some conversation between the two attorneys, the nature of which we do not know, Hale signed the check and delivered it to Adams. With this check for $21,386 the latter opened a new account at Security First National Bank under the name, J. C. Adams Trust Account, and over the next four months diverted this money to his own use. Nothing was paid on the real estate mortgage purchase for which the money had been put up, and in due course Blackmon demanded his $24,500 back. He received $1,000 from Adams in April 1962, but the balance of $23,500 remained unpaid.
At the time of trial Adams did not appear, and judgment went against him by default. Blackmon testified he did not know Hale, that he had not been a client of the law firm of Adams and Hale, or of Adams, Hale and Lee.
Liability of the Banks
Blackmon sought judgment against California Bank (now United California Bank) and Bank of America on the theory that a cashier's check payable to the order of Adams and Hale Trust Account could only be deposited in an account of the same name; alternatively, that the signatures of both Adams and Hale as co-trustees were required for an effective endorsement of the check; and alternatively, that the depositary bank had constructive notice of possible misappropriation by the individual defendants. We think each of these theories is wholly inapposite to the facts of the case.
It clearly appears that the cashier's check was credited to the precise account for which it was intended at the time the check was drawn and that Blackmon's money found its way into the account to which both Blackmon and Adams intended it should go. The incompleteness or irregularity of the name of the payee of a check is inconsequential if the check reaches its intended destination. Obviously, the destination here was the trust account used by Adams and by the firm of Adams and Hale for the deposit of trust moneys, and it is immaterial that the account carried the slightly different designation of Adams, Hale and Lee Trust Account. We think the views expressed by Justice Moore in a slightly different context in Schweitzer v. Bank of America, 42 Cal.App.2d 536, 540–544, 109 P.2d 441, 444, completely dispose of this first contention: ‘The reason for the rule is that the drawer intended the check to be endorsed by the identical person to whom it was delivered. Under such circumstances the drawee bank is to be protected when it has paid the check upon such endorsement. [Citations.] The soundness of the rule obtains in the fact that the money has actually been paid to the person for whom it was really intended. * * * While a name may serve to identify an individual, yet if the check was received by the identical person to whom the drawer intended to deliver it, and was by that person endorsed with the name to which it was made payable, the bank owed no further obligation with reference to it. [Citation.]’
The second theory of bank liability, lack of an effective endorsement, is rebutted by the fact that the cashier's check was properly endorsed by Adams, Hale and Lee, who were the representatives of the account for which the check was intended. Additionally, California Bank in the exercise of due care obtained an additional endorsement on the check from Adams appropriate to the closed or dormant Adams and Hale Trust Account. We do not emphasize this additional endorsement, however, for we think the Adams, Hale and Lee endorsement fully served the purpose of depositing the money in that particular account.
On this point some slight digression is appropriate, for the trial court, as well as defendant banks, concluded that since the cashier's check was payable to an account and not to an individual it became a bearer instrument which needed no endorsement. We do not agree with this view, for we look on the check as an order instrument payable to the order of those persons authorized to deposit and withdraw from the particular account involved. (Pacific Indemnity Co. v. Security First Nat. Bank, 248 Cal.App.2d 75, 86–93, 56 Cal.Rptr. 142; Commercial Code, section 3110(1)(e).)1 While the Commercial Code did not become effective in California until 1 January 1965 and therefore has no direct application to this case, we think the rule it sets forth has always been good law. (Young v. Hembree, (1937), 181 Okl. 202, 73 P.2d 393.) In Scala v. Miners' & Merchants' Bank, 64 Colo. 185, 171 P. 752, the Supreme Court of Colorado held that a check payable to ‘The Royal Consulate of Italy’ was payable to order and not to bearer because it designated the payee with reasonable certainty. To the same effect is the statement in 1 Witkin, Summary of California Law, page 584: ‘But where an instrument is made payable to the order of ‘Estate of X,’ the term is intended as an abbreviated designation of the executor or administrator, and it should be considered order paper.'
The third theory of bank liability is that the depositary bank should make good any misappropriation of trust money by the individual defendants because the deposit in an Adams, Hale and Lee Trust Account rather than in an Adams and Hale Trust Account gave the bank constructive notice of possible misappropriation. Thereafter, according to this theory, the bank should have required the signatures of all trustees of the Adams, Hale and Lee Trust Account before permitting withdrawals from that account. But a bank is authorized to honor withdrawals from an account on the strength of the signatures authorized by the signature card, which serves as the contract between the depositor and the bank for the handling of the account. Sections 952 and 953 of the Financial Code relieve the bank from liability for honoring a check drawn on an account in breach of a trust but in compliance with the signature card. (Desert Bermuda Properties v. Union Bank, 265 A.C.A. 163, 167–170, 71 Cal.Rptr. 93.) If the bank had no actual knowledge of a breach of trust, it cannot be held liable to the beneficiary of the trust on a theory of improper endorsement or withdrawal when the endorsement or withdrawal was authorized by the signature card. (United States Fidelity & Guaranty Co. v. First Nat. Bank, 18 Cal.App. 437, 123 P. 352.) In the present case there was no evidence whatsoever of any knowledge by the bank of a breach of trust.
We conclude that the basis for any liability of the banks is wholly lacking, that the finespun theories of plaintiff on this subject are merely elaborate attempts to distort the law of negotiable instruments in order to find a solvent party from which to recoup a loss.
Liability of Hale as a Partner
At the time Adams received the cashier's check for $24,500 payable to Adams and Hale Trust Account, he was practicing law in partnership with Hale. He deposited this money in the firm's trust account, which carried the designation Adams, Hale and Lee Trust Account. Thereafter, by means of Hale's signature on a check, Adams obtained $21,386 from this account and misappropriated it during the following four months. We have no reliable evidence when the balance of the $24,500, i.e., $3,114, was withdrawn from the Adams, Hale and Lee Trust Account, or at whose instigation, or under whose signature.
It is apparent that Hale's liability must be considered in the light of the two separate capacities in which he appears in the case: first, as a partner in the firm of Adams and Hale, and second, as a trustee of funds on deposit at the bank.
Hale's liability as a partner is controlled by the Uniform Partnership Act (Corp.Code, §§ 15001–15045). Under that act a partnership is bound to make good the loss when a partner acting within the scope of his apparent authority receives money of a third person and misapplies it. (Corp.Code, § 15014.) In turn each partner is jointly and severally liable for what is chargeable to the partnership under the previous section. (Corp.Code, § 15015.) It follows that a partner is liable for misappropriation by another partner of money coming into the partnership. (Gibson v. Henley, 131 Cal. 6, 63 P. 61; Gift v. Ahrnke, 107 Cal.App.2d 614, 618, 237 P.2d 706.) The rule applies to partners after dissolution of their partnership if the money came into the partnership before dissolution (Orlopp v. Willardson Co., 232 Cal.App.2d 750, 754–755, 43 Cal.Rptr. 125; Credit Bureaus of Merced County v. Shipman & Davis Lumber Co., 167 Cal.App.2d 673, 334 P.2d 1036; Corp.Code, § 15036(1)(2), and, of course, it applies to partnerships among lawyers (Gibson v. Henley, supra; 26 A.L.R.2d 1340, 1343.)
At bench both the name of the payee on the cashier's check and the names of the endorsements on the check suggest that the partnership of Adams and Hale came into possession of a third person's money entrusted to it, which money was later misappropriated by one of the partners. If this happened in the course of partnership business, then the partnership jointly, Adams severally, and Hale severally, each became bound to make good the loss. The critical issue on this phase of the case is whether Adams' employment by Blackmon qualifies as usual and customary employment of an attorney and thus falls within the course of partnership business. Adams apparently undertook to clear title to real property in Nevada and negotiate the purchase of a mortgage interest in that property on behalf of Blackmon. He also undertook to handle the money needed to close the transaction and safeguard it while the purchase was pending. Employment for such purposes is generally considered employment connected with the practice of law. (State Bar of California v. Superior Court, 207 Cal. 323, 335, 278 P. 432; Nellis v. Massey, 108 Cal.App.2d 724, 728, 239 P.2d 509; Schee v. Holt, 56 Cal.App.2d 364, 365, 132 P.2d 544.) Since Adams was employed in a legal capacity by Blackmon during the time he was practicing law in partnership with Hale, it would ordinarily follow that in carrying out this employment Adams was acting on behalf of the law firm of Adams and Hale and as a consequence Blackmon acquired the added security of dealing with a firm. Although there is a dearth of case law in California on the liability of an attorney for the misapplication by his partner of money entrusted to the partner to purchase a mortgage, that issue has been extensively litigated in England, where it is well settled that the receipt of a client's money for investment on mortgage is a receipt by an attorney in the usual course of business. Misappropriation of such money by an attorney who is a member of a law firm imposes a duty on the other members of the firm to make good the loss.
A review of the English cases is instructive. We start with the opinion of Lord Mansfield in Willet v. Chambers (1778), 98 Eng.Rep. 1377. Money had been entrusted by a client for specific investment on mortgage to two attorneys in partnership, one of whom misappropriated the money. In allowing the client to recover from the other partner, Mansfield declared that the business of conveyancing by an attorney included arrangements for receiving and placing out money, that such was a customary practice carried on by attorneys in order to profit from the fees and charges for drawing the resulting conveyances. Since the matter fell within the scope of the partnership business, the partnership was liable to account for moneys which came into its possession and which were later lost through the rascality of its agent.
The same conclusion was reached in Blair v. Bromley (1847), 67 Eng.Rep. 1026, aff'd 41 Eng.Rep. 979, whose facts closely parallel those of the case at bench. Two solicitors in partnership, William Bromley (the subsequent embezzler) and Joseph Bromley, had formerly practiced separately each with his own clientele. Before the formation of the partnership, William Bromley acted as solicitor for Blair. After the formation of the partnership the firm acted as solicitors for Blair, but in the transaction of the partnership business William and Joseph attended to different portions, and the business of Blair, especially that part of it which related to the investment of his money on mortgage, continued to be handled by William. During the existence of the partnership William misappropriated £4500 of Blair's money which had come into the partnership's possession for reinvestment, on mortgage. Because William continued for many years to send Blair money which purportedly represented the payment of interest on the mortgage, the fraud was not discovered until long after the dissolution of the partnership, at which time William was bankrupt and suit was brought against Joseph. Joseph defended on the ground that Blair's business had been exclusively conducted by William, and on the further ground that investment of money on mortgage did not fall within the scope of the partnership business. The court adopted Blair's argument that a person dealing in the ordinary course of business with a firm of several partners is entitled to the joint security of all partners, that all partners are liable to answer for the fraud of one of them. The court also found that the investment related to partnership business for which the partnership was liable, since the money had gone into the firm's bank account. The subsequent dissolution of the partnership had no effect on the firm's duty to account for money entrusted to it, for the mere fact that two partners choose not to continue their partnership does not discharge either of them from liability incurred as a result of the joint receipt of money during their partnership. The court held Joseph liable for the money his partner had misappropriated.
The same result was reached in Eager v. Barnes (1862), 54 Eng.Rep. 1263, where money was sent by Eager to his solicitor, Bridger, for reinvestment on mortgage. Bridger, practicing in partnership with Barnes, deposited Eager's money in the solicitors' joint account and the following month drew out the money and misappropriated it. Subsequently Bridger died insolvent. His surviving partner, Barnes, was held liable to Eager for the misappropriation of his partner. In pointing out that the transaction was in the usual course of a solicitor's business, the court said:
‘The usual course of a solicitor's business, when there are partners in it, is for each partner to have his own clients, and separately to transact their business. Where, however, as in this instance, money is received by one member of a partnership for the express purpose of a special investment, and it is paid by him into the partnership account instead of being properly invested, and when the proceeds of that account are received by the firm, it is impossible to say that one partner is not liable for the misconduct of the other in the misapplication of the funds.’ (pp. 1264–1265.)
(See also, Harman v. Johnson (1853), 118 Eng.Rep. 691; St. Aubyn v. Smart (1867), L.R. 5 Equity 183, affirmed (1868), L.R. 3, Chancery 646; Plumer v. Gregory (1874), L.R. 18 Equity 621; Lloyd v. Gray, Smith & Co. (1912), A.C. 716; and cases cited in 136 A.L.R. 1110.)
From this review we see that employment of an attorney for the purpose of acquiring a security interest in real property has traditionally been employment connected with the practice of law, that the receipt of a client's money for this purpose is a receipt of money in the ordinary course of legal business for which an attorney's partners may be required to account. Since Adams and Hale were partners at the time of the receipt of Blackmon's money, Hale would ordinarily become fully responsible for the embezzlement of Blackmon's money by Adams. Such liability does not impute any wrongdoing to Hale but merely reflects the liability of attorneys as partners for moneys entrusted to the partnership or one of its members in the usual course of business.
The same liability for money entrusted to the partnership in the usual course of business applies to both the $21,386 turned over by Hale to Adams and the $3,114 about whose disposition we have no information. If the money came into the possession of the partnership, then the partnership acquired a duty to account for it.
These rules would ordinarily result in the imposition of an absolute liability on Hale for his partner's misappropriation, except for the fact that Blackmon gave the following testimony about the transmission of the cashier's check to Adams:
‘THE COURT: Were you a client of the law firm of Adams and Hale at that time?
‘THE WITNESS: No, sir.
‘THE COURT: Had you been at any time within the year 1961 a law client?
‘THE WITNESS: No, sir.
‘THE COURT: Were you at any time thereafter a law client?
‘THE WITNESS: No, sir.
‘THE COURT: Of either Adams, Hale or Lee?
‘THE WITNESS: No, sir.’
This testimony seems inconsistent with Blackmon's transmission of a cashier's check payable to Adams and Hale Trust Account and Blackmon's testimony that he knew Adams and Hale practiced as the firm of Adams and Hale, and we do not think this inconsistency was satisfactorily resolved at the trial. The court found that Blackmon was a client of Adams, and it also found that Adams practiced law in partnership with Hale. Yet, the court concluded that Blackmon was not a client of the firm of Adams and Hale. How or why this came about was never adequately explained. It may be that when Blackmon forwarded his money to Adams he intended not to entrust money to the firm of Adams and Hale; or, it may be that when Blackmon testified at the trial he was under a misapprehension about his legal relationship with the firm of Adams and Hale. These matters should be clarified by further testimony and by specific findings. If Blackmon intended not to entrust money to the possession of the partnership of Adams and Hale, then Hale would be absolved of partnership liability for the handling of this money. On the other hand, if Blackmon had no specific intention on the subject but merely dealt with Adams in the regular course of business and followed his instructions how to make out the check, then, as in the English cases where the client dealt primarily with one solicitor in a firm, he may have acquired the added benefit and security of dealing with a firm.
Liability of Hale as a Trustee
Hale's other capacity in this litigation is that of trustee of money deposited in the Adams, Hale and Lee Trust Account.
By opening a trust account attorneys make themselves voluntary trustees of money placed in that account in the regular course of business and acquire the duties and liabilities of trustees with respect to such money. (Rule 9, Rules of Professional Conduct of the State Bar, Bus. & Prof.Code, § 6076.) Where there is more than one trustee for a particular account each trustee becomes an agent for his co-trustees as well as an agent authorized to act for the trust itself. Rarely do all trustees join in accepting money for deposit in their trust account. More commonly, a client deals with a single trustee, whose authority to deposit a client's money in the trust account does not depend on the specific consent of the other trustees to the particular deposit. By continuing to use the Adams, Hale and Lee Trust Account Hale made himself a co-trustee of money going into that account.
An attorney's liability as a trustee may parallel his liability as a partner, or it may exist independently, for attorneys who are not partners may unite as co-trustees to operate a trust fund account. The liability of a trustee for the wrongful acts of his co-trustees differs from that of a partner in that it is based on negligence. Civil Code, section 2239, states:
‘A trustee is responsible for the wrongful acts of a co-trustee to which he consented, or which, by his negligence, he enabled the latter to commit, but for no others.’
If it develops that Hale is not liable to Blackmon as a partner in the firm of Adams and Hale because Blackmon never entrusted any money to the partnership, Hale may still be liable to Blackmon as a trustee because of his negligence in handling the money which went into the trust account. Hale, possessing authority to withdraw from the trust account, signed a check for $21,386 payable to the order of J. C. Adams Trust Account and delivered it to Adams. We do not know what Adams said to induce Hale to sign the check, but we do know that Hale signed the check without consulting Blackmon. We also know that without Hale's or Lee's signature Adams could not have gotten possession of the money.
The question here—was Hale negligent in turning over money in this fashion to the sole control of Adams? A trustee is required to exercise reasonable supervision over the conduct of his co-trustee in relation to the trust, and his failure to do so may amount to negligence. This rule is summarized in Restatement of the Law of Trusts (2d ed.), section 224(2):
‘A trustee is liable to the beneficiary, if he * * *
‘(b) improperly delegates the administration of the trust to his co-trustee; or * * *
‘(d) by his failure to exercise reasonable care in the administration of the trust has enabled his co-trustee to commit a breach of trust; * * *
‘Illustration to Clause (d):
‘A and B are co-trustees. A improperly permits B to have the sole custody and management of the trust property and makes no inquiry as to his conduct. B is thereby enabled to sell the trust property and embezzle the proceeds. A is liable for breach of trust.’
This rule is followed in California, where it is well established that a trustee may become liable for the default of a co-trustee to whom he has turned over management of trust property. (Fox v. Tay, 89 Cal. 339, 348–349, 24 P. 855, 26 P. 897; Bermingham v. Wilcox, 120 Cal. 467, 52 P. 822; Estate of Whitney, 124 Cal.App. 109, 117–120, 11 P.2d 1107.) In each of these cases a trustee was held liable for the default of his co-trustee because of the trustee's own negligence in relinquishing supervision of the trust property to his co-trustee.
The practical reason for the rule is found in the increased risk of loss which arises on the transfer of trust money from the control of co-trustees to the exclusive control of an individual trustee. According to Bogert, co-trustees are the rule rather than the exception. (Bogert on Trusts, 2d ed., § 584.) Patently, the object in having co-trustees is to double the control over trust property, and it follows that a trustee who abdicates his responsibility as trustee by turning over control of property to a co-trustee without having received authority to do so, has greatly increased the risk of loss to the trust and thereby exposed himself to the charge of actionable negligence. (Bogert on Trusts, 2d ed., §§ 585–586; Scott on Trusts, 3d ed., § 2242; Keeton, Law of Trusts, pp. 322–324.) As stated in the annotation, Liability of Cofiduciary, 65 A.L.R.2d 1024, 1092–1093. ‘* * * a fiduciary who thus surrenders assets to the exclusive possession or control of a cofiduciary has an impressive burden of explanation if he is to avoid liability for misconduct on the part of the cofiduciary.’ On the surface it would appear gross negligence for Hale as trustee to turn over to Adams as co-trustee exclusive possession and legal control of money belonging to Blackmon. Such total relinquishment of responsibility would appear negligent, regardless of Hale's lack of direct contact with Blackmon and his lack of knowledge of Blackmon's dealings with Adams. What Hale could not help knowing was that as a consequence of his conduct the protection of co-trustees over trust money was being supplanted by the lesser protection of a single trustee. Granted that the deposit of money in a trust account creates only a temporary and transitory kind of trust, still the trustee has a duty to properly exercise the limited responsibilities he assumed when he agreed to the establishment of the trust account
Hale, of course could have secured authority for his discharge from the trust, but so far as we know he made no attempt to do so. Authority for the discharge of a trustee (other than by court order) may come from the extinction of the trust, the completion of the trustee's duties under the trust, or the consent of the beneficiary. (Civ.Code, § 2282.) Clearly, the present trust had not been extinguished, nor had the duties of the trustees been completed. Hale could only have been discharged from his trust with the consent of the beneficiary—and this he did not get. In the absence of a valid discharge Hale continued to bear a responsibility for the administration of the trust.
It is difficult to think of any explanation which would justify Hale's abdication of control over the trust and absolve him from liability for negligence. Nevertheless, Hale may have an explanation, and he is entitled to an opportunity to give it. The trial court should permit the fullest development of the facts, and thereafter make specific findings on the issues of Hale's negligence as a trustee and whether such negligence enabled Adams to misappropriate Blackmon's money.
In addition to the issue of Hale's liability for the loss of the $21,386, we have the further question of Hale's liability for the balance of Blackmon's money, $3,114. We have no reliable information what happened to this money after it went into the trust account. Adams' answers to interrogatories, admitted in evidence only against him, declared that $2,500 of this money went from the trust account into the Adams and Hale general partnership account.2 This was denied by Hale, but none of the parties produced any documentary evidence on the subject. Concerning the balance of $614, we have no information whatsoever. The situation, then, is that $3,114 went into the trust account, and thereafter neither Adams nor Hale produced any reliable accounting for it. A trustee is under a duty to keep accurate accounts of his dealings with trust property, and when he fails to do this the burden rests on him to prove the items by satisfactory evidence. (Purdy v. Johnson, 174 Cal. 521, 527, 163 P. 893; Estate of McCabe, 98 Cal.App.2d 503, 220 P.2d 614; 4 Witkin, California Law, p. 2929.) Once the beneficiary makes a prima facie case of unexplained loss to trust, the burden of negating a breach of trust shifts to the trustee. (Bogert, Trusts and Trustees, 2d ed., § 871, pp. 89–90.) As the court said in Bruns v. State Bar, 18 Cal.2d 667, 672, 117 P.2d 327, 330, ‘It would be a distortion of justice to permit a trustee, or attorney handling funds of a client, to escape responsibility by the simple act of not keeping any record or data from which an accounting might be made.’ We think the burden of explaining what happened to this money rested on both Adams and Hale.
Liability of Lee
To a considerable extent our discussion of the liability of Hale clarifies the position of Lee.
Lee obviously has no liability as a partner for the loss of Blackmon's money. He withdrew from the law firm on 31 May, and Blackmon's money was never entrusted to any firm of which he was a member. Since there was no evidence that Lee held himself out as a partner or permitted others to pass him off as a partner, justification for partnership liability on Lee does not exist.
Lee, however, did continue as a trustee of the trust account at California Bank, and the account was not closed until 2 February 1962. He did sign one check on that account subsequent to August 1961. Lee therefore continued to possess the liability of a trustee for the wrongful acts of a co-trustee which by his negligence he enabled the latter to commit. (Civ.Code, § 2239.) Is there any act of Lee's that can be considered negligent in relation to the handling of Blackmon's money? According to Lee's testimony, which was uncontradicted, he knew nothing of the deposit, he received none of the money, he took no part in the mechanics or authorization of the deposit, and he took no part in the mechanics or authorization of the withdrawals. On the record before us there are no negligent acts or omissions of Lee's which enabled Adams to misapply Blackmon's money. Thus the factual basis for a finding of negligence does not exist. Nor was there a duty to account, for all the evidence indicates that Blackmon never heard of Lee and Lee never heard of Blackmon, and that Lee's status as a trustee with respect to this money was purely nominal. (Kellum v. San Mateo County Title Co., 127 Cal.App. 276, 283, 15 P.2d 876.) As to Lee, the judgment in his favor was proper.
Safeguarding Clients' Funds in a Trust Account
The gross inadequacy of existing methods of safeguarding money of a client in the hands of his attorney is starkly apparent from the facts in this case. Rule 9 of the Rules of Professional Conduct of the State Bar of California (Bus. & Prof. Code, § 6076) purportedly covers the subject:
‘A member of the State Bar shall not commingle the money or other property of a client with his own; and he shall promptly report to the client the receipt by him of all money and other property belonging to such client. Unless the client otherwise directs in writing, he shall promptly deposit his client's funds in a bank or trust company, authorized to do business in the State of California, in a bank account separate from his own account and clearly designated as ‘Clients' Funds Account’ or ‘Trust Funds Account’ or words of similar import * * *.'
In spite of this rule we find Blackmon still struggling in 1969 to obtain an accounting for money turned over to his attorney in 1961. When Blackmon sought redress from the courts in 1962 he met all the technical defenses which an ingenious debtor can devise against his creditor. Even against Adams judgment was not entered until 1967, and for a flagrant violation of a fiduciary trust Adams was not disbarred until 1968, almost seven years after the event. (Matter of Disbarment of Adams, 68 A.C. No. 26, July 3, 1968 Minutes, pp. 3–4.)
Rule 9 in its present form not only fails to provide suitable protection for a client against the dishonesty of his own attorney, but perhaps operates as a tool of persuasion which a dishonest or unscrupulous attorney can use to gain control of money belonging to his client. In the present case Adams in effect persuaded Blackmon to turn money over to him by representing that the money would be placed in his firm's trust account. This has a resonant, confidence-producing sound of safety and integrity, but it would have been more accurate for Adams to have advised his client:
Turn your money over to me and I'll take care of it, but if I steal it you will have no recourse against anyone but me Not only that, but as your attorney I may claim offsets for fees earned and disbursements made on your behalf and prevent any accounting or audit of the money for years, during which time you will have no remedies against me except to usual ones of any creditor pressing a contested claim against a denying debtor.
When we look closely at the concept of trust funds account, we see how easily it may be used to mislead a client about the actual status of money turned over to his attorney. To a layman untrained in legal analysis the name, trust funds account, may suggest some outside control and responsibility over the account; some periodic audit of the account; and some fiduciary in the background to make good on embezzlements and defaults. None of this protection exists in a trust funds account as presently operated, and as we have seen in the present case, even a named trustee may not easily be required to make a particular embezzlement good. In its present form Rule 9 may adequately serve to protect a client against an attorney's creditors, but it furnishes little or no protection against mjsappropriation by the attorney himself and it provides no summary remedy for the defrauded client against his own lawyer. Indeed, by seeming to promise more than it can deliver, the rule may op erate as a trap for the unwary, and in that respect have a pernicious effect.
When we compare the supervision over attorneys in California in the handling of money with that exercised over solicitors in England we find the contrast startling. Provision for a fund for the compensation of loss to third persons due to the dishonesty of a solicitor or his employee has existed in England since 1941, and to date all established claims of solicitor dishonesty have been paid in full. (Solicitors Act 1957, § 32, and Second Schedule, Solicitors Act 1965, § 15; Cordery on Solicitors (6th ed.) pp, 9, 549–550, 571–572, 578.) In addition to this, however, a solicitor who handles other people's money must have his accounts audited every 12 months. To make this audit effective the Law Society has adopted detailed rules for the keeping of accounts by solicitors and for the audit of such accounts by qualified accountants. (See Solicitors Act 1957, §§ 28–32; The Solicitors' Accounts Rules 1967; The Solicitors' Trust Accounts Rules 1967; The Accountant's Report Rules 1967, all found in Cordery on Solicitors (6th ed.) pp. 547–550, 680–691.)
England has also adopted a procedure under which a solicitor may be summarily compelled to respond in court to a proper demand for an accounting of third party moneys in his possession. (Cordery on Solicitors (6th ed.) pp. 172–173, 633.) This procedure is described in 36 Halsbury's Laws of England (3d ed.) pp. 202–203:
‘A solicitor who, as solicitor for a client has received and has in his hands money of the client, may be ordered, on application being made by or on behalf of that client or his personal representatives, under the court's inherent jurisdiction over its officers, to account for money received or paid and to pay over to the client, or into court, the balance due to the client after deducting any money owing to the solicitor by the client for costs or other reason. If misconduct was not alleged the application was formerly a proper one to make at chambers, and it is now usually made there by summons under a special rule of court, and the order may be enforced by attachment if it comes within an exception to the Debtors Act, 1869, and the payment is defined with sufficient certainty.
‘If the solicitor is a partner in a firm, an order may be made against all partners if the money has been paid to the firm and not been applied as the client directed, but an order may be refused as against the firm where the business was transacted by one partner and the money was not paid to the firm and the other partners did not know of its having been received, or where the other partners were not guilty of any misconduct.’
These rules have been codified in the Solicitors Act of 1957 under which the Law Society has been given extensive powers to require accountings from its members. (Solicitors Act 1957, schedule 1.) But, significantly, the inherent jurisdiction exercised by the courts over solicitors prior to the enactment of the statute has been expressly continued. (Solicitors Act 1957, § 50(2).) ‘The basis of that jurisdiction is that a solicitor is an officer of the Supreme Court and it is incumbent on the court to see that the conduct of its officers is beyond reproach and to punish those whose conduct is unbecoming their office.’ (Cordery on Solicitors (6th ed.) p. 505.) While in past decades many English cases dealt with the subject of embezzlement and misappropriation of clients' moneys by solicitors, few such cases have been reported since World War II, a circumstance which suggests that the remedies adopted by the Law Society have substantially achieved their purpose. (See, Lawyers and Their Work, Johnstone & Hopson (1967), pp. 505–508; 42 Notre Dame Lawyer 382, 386.)
By 1967, twenty client security funds had been established in foreign jurisdictions, starting with New Zealand's in 1929. Within the United States, 28 states and eight local bar associations (including Los Angeles) had client security funds of one sort or another by that year. (42 Notre Dame Lawyer 382, 388–389, 399.)
Unfortunately, the State Bar of California, instead of leading in this work, has been lagging. Although the State Bar has been studying the matter since 1961 (36 Cal. State Bar Journal 957, 963), it has yet to take action. We think it urgent that the State Bar not only institute a client security fund but also put in effect stronger measures than presently exist for the protection of clients' money in the hands of attorneys, a combination of measures which would do more to improve the respect of the general public for attorneys than all the press agentry and public relations programs of the past decade.3 The accumulation of large sums of money by the State Bar is not a prerequisite to improved protection of clients' money, for much can be done to strengthen this protection in advance of the formation of a security fund. Procedures to make it more difficult for an attorney to misappropriate his clients' money and to prevent embezzlement before it happens may provide greater long-term benefits than more elaborate and more expensive schemes to reimburse money which has already been taken. In this as in other fields an ounce of prevention may be worth a pound of cure.
Without attempting to specify in detail the protective measures which should be put in effect, we direct the attention of the State Bar to two which have proved their usefulness elsewhere. First, a requirement that attorneys deliver periodic statements of account to clients and obtain a periodic audit of trust funds in their possession. New Zealand, the jurisdiction with the oldest and most successful client security fund, requires solicitors to give their clients monthly accountings for money held in trust and to obtain an audit of their trust accounts three times a year. (42 Notre Dame Lawyer 382, 389.) Offhand, we can think of no other group entrusted with money belonging to third persons which is not required to periodically account for it. Second, the use of summary procedure to require an attorney, as part of his professional responsibility as an officer of the court, to account to the court on demand for trust money in his possession. Adoption of these two requirements would promote more careful handling of trust money by attorneys and operate as a deterrent against its misapplication. The State Bar with the approval of the Supreme Court, or the Supreme Court alone, could adopt rules of procedure to require periodic audit of trust money and compel summary accountability in court for trust money in the possession of attorneys. (Bus. & Prof.Code, §§ 6076, 6103.)
Such measures as periodic audit and summary accounting in court are designed to safeguard clients' money in the hands of attorneys before misappropriation, misapplication, or embezzlement occurs. But in addition to these ounces of prevention some pounds of cure in the shape of a clients' security fund are required. Although a few voluntary bar associations, such as the Los Angeles County Bar Association, have commendably attempted to fill the gap by the creation of clients' security funds to cover its members in limited amounts, these funds may fail to cover those attorneys for whose activities the protection of a security fund is most needed.4 We do not think any voluntary plan of limited coverage furnishes an adequate solution to the problem of client security. A statewide clients' security fund is long overdue, and we urge the State Bar of California to adopt both the preventive and the compensatory measures which have demonstrated their effectiveness elsewhere.
The judgment for United California Bank, Bank of America, and Lee is affirmed. The judgment for Hale is reversed.
1. Commercial Code section 3110:‘(1) An instrument is payable to order when by its terms it is payable to the order or assigns of any person therein specified with reasonable certainty * * * It may be payable to the order of * * *‘(e) An estate, trust or fund, in which case it is payable to the order of the representative of such estate, trust or fund or his successors * * *’The Uniform Commercial Code comment on paragraph (e) states in part:‘The provision extends the same principle to an instrument payable to the order of ‘Tilden Trust.’ or ‘Community Fund’. So long as the payee can be identified, it is not necessary that it be a legal entity; and in each case the instrument is treated as payable to the order of the appropriate representative or his successor,'
2. We think Adams' statement that $2,500 of Blackmon's money had been transferred to the Adams and Hale partnership account should have been admitted in evidence against Hale. A trustee is the agent of his co-trustee, and an admission against interest of one trustee is evidence against a co-trustee. So far as appears this trust has never been discharged or terminated, and Hale continues to carry a trust responsibility. (Cf. Evidence Code, §§ 1224, 1230.)
3. The Committee Chairman of the Law Society of England stated with respect to clients' security funds:‘It is so far the most important step the Law Society has taken in the field of public relations * * * and has done more than anything else to enhance the prestige and honor of this profession.’The Secretary of the Law Society of New Zealand stated: ‘I think that it is universally accepted that the existence of the Fund has been most beneficial to the confidence which the public have reposed in the legal profession.’(42 Notre Dame Lawyer 382, 386, 389.)
4. Stanley L. Johnson, Executive Director of the Los Angeles County Bar Association has advised the court the defendant Adams was never a member of that Association.
FLEMING, Associate Justice.
ROTH, P. J., and HERNDON, J., concur.