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Client Protection Fund History

CPF Home | Application Form | Rules | Claim Examples
FAQs | Testimonials | History | CPF Committee

Overview

    The State Bar of Michigan's Client Protection Fund (Fund) is a program established by the State Bar of Michigan's Board of Commissioners on February 25, 1966 for the purpose of reimbursing clients who have been victimized by the few attorneys who violate the profession's ethical standards by misappropriating funds entrusted to them. In recognition of the legal profession's self-regulating status, all states and the District of Columbia have created client protection funds to reimburse members of the public victimized by dishonest lawyers. The National Action Plan on Lawyer Conduct and Professionalism of the 1999 Conference of Chief Justices calls for every jurisdiction to maintain a jurisdiction-wide client protection fund that "substantially reimburses" losses and is funded by a separate, dedicated assessment on lawyers.

Operations of the Michigan Client Protection Fund

    The Fund reimburses claims caused by the dishonest conduct of Michigan attorneys. Dishonest conduct is defined as wrongful acts committed by a lawyer in the nature of theft or embezzlement of money or the wrongful taking or conversion of money, property or other things of value. The loss must have arisen from an attorney-client relationship or other fiduciary relationship between the lawyer and the claimant, where the lawyer was admitted or licensed to practice law in Michigan at the time, and the dishonest conduct, has a significant nexus with the State of Michigan. The Fund will not reimburse clients for attorney malpractice, nor will it reimburse clients for fee dispute claims. A requirement for reimbursement is that the claimant must have reported the dishonest conduct to the Attorney Grievance Commission, law enforcement authority, or commenced a suit against the attorney.

    As of January 2004, the maximum amount payable to any individual claimant for the dishonest conduct of a single lawyer is $50,000, with the Fund reimbursing no more than $200,000 to all claimants for the dishonest acts of a single attorney. In cases where the reimbursable claims exceed the $200,000 cap, the payment is prorated among approved claimants. From 1991 to 2003, the caps were $25,000 per claimant and $100,000 per attorney, which ranked Michigan among the states with the lowest reimbursement rates relative to its size.

    The types of claims that are reimbursable, and at what amount, are set forth in the State Bar of Michigan Client Protection Fund Rules. Client Protection Fund staff receives, investigates and analyzes all claims submitted to the Fund, pursuant to the Fund's rules. The administrator prepares a report and recommendation for each claim that is then submitted to the Client Protection Fund Standing Committee for consideration. The Standing Committee consists of a minimum of seven attorneys who volunteer their services to the Fund. The Committee meets approximately three times a year. The Committee reviews the report and recommendation prepared by staff and votes to make a recommendation to the Board of Commissioners as to whether the claim should be paid or denied.

    A claimant or respondent may appeal the Standing Committee's recommendation . to the Board of Commissioners. The Professional Standards Committee, a subcommittee of the State Bar 's Board of Commissioners, reviews all appeals and all recommended payments. The Professional Standards Committee then makes a recommendation to the Board of Commissioners. The Board of Commissioners then has the final vote decision as to whether a claim is paid or denied. Both the Standing Committee and the Board of Commissioners have discretion to deviate from the Rules in deciding whether a claim should be paid if the circumstances so warrant. However, the Committee and the Board seldom exercise this discretion, doing so in only a few cases in the Fund's existence.

    Since the Fund's inception in 1966, it has received 2,254 claims. As of September 30, 2005, 755 claims have been paid in the amount of $3,995,045.58 while 1412 have been administratively closed, denied or voluntarily withdrawn by the claimant. The remaining 86 claims are pending. The majority of denials result from insufficient evidence or because the claim does not meet the program 's minimum criteria for consideration of the claim.

    Typically a sizeable percentage of the claims filed with the Client Protection Fund involve attorneys who suffer from substance abuse and dependence issues. Other underlying causes of claims include mental illness and gambling addictions. The Fund's staff indicates that there is evidence suggesting that the substantial increase in the number of claims during the last five years may be attributable to attorneys who have misappropriated client funds to support a gambling addiction. This evidence is a factor that the Client Protection Fund should be concerned with and be prepared to address in the future, should the trend continue and/or increase, as attorneys with gambling addictions pose a serious threat to their clients and the public. Because it can take a number of years for a gambling addiction to fully manifest itself , it is possible that the Fund will experience an increasing number of gambling-related claims during the coming years.

Funding of the Michigan Client Protection Fund

    Until 2003 the Fund was financed by an appropriation from the State Bar of Michigan. The appropriation was a line item in the general State Bar budget. Following an initial appropriation of $10,000 in 1966, annual appropriations of $40,000 were made to the Fund until 1975, after which funding was allocated on the basis of five percent of the State Bar membership dues. From 1981 to 200 3 4, the State Bar made a varying annual appropriation to the Fund. The Fund received no appropriation during the 1999, 2001 and 2002 fiscal years. The Fund receives additional, but minimal, funding through unspent judicial election campaign contributions that lapse to the Fund if they are not returned to the contributors . (Rule 7 (B)(2)(F) of the Michigan Code of Judicial Conduct.)

    Beginning with the 2003-2004 fiscal year, financing of the Fund changed to a direct annual assessment of $15.00 against from each very attorney on active status and or $7.50 from each attorney on inactive status. emeritus status in the State of Michigan. This change to the assessment method of financing brought Michigan into line with the majority of states that finance their client protection funds through direct assessments against lawyers.

    The Fund pursues collection efforts against the respondent attorneys, who are generally suspended or disbarred by the time the Fund has obtained subrogation rights from the victims. In 1991 2001, in recognition of insufficient staffing at the attorney level in the State Bar's Professional Standards Division, the Fund retained outside counsel to pursue its subrogation matters on a contingency fee basis (counsel receiving 40 percent of sums collected as fees). The following is a rough summary of the relevant collection numbers gathered by the Client Protection Fund:

  • Dollar amount of paid claims sent to outside counsel, from 2001 for collection: $382,627.44
    • Includes paid claims through June 2003
    • $32,000 of this cannot be collected because the respondent is unable to be located
    • $22,516 of this cannot be collected because the respondent is deceased (no assets)
    • $11,000 of this was discharged in out-of state bankruptcies
    • Collection efforts were pursued for the balance
  • Total amount received by outside counsel: $24,869.45
    • The Fund received $13,451.67 as its 60 percent share

    Although the 6.5% recovery rate is low, the Fund is well within national averages. Most other states report recouping approximately four to six percent of total claims paid. The jurisdictions that report recouping seven to 16 percent of total paid claims are states in which subrogation efforts are handled by the state attorney general's office or are larger funds that devote significant staff time to subrogation. Staff in other jurisdictions conclude that most successful recoveries are accomplished through criminal restitution orders.

    It is not only important to have funds available to pay claims, but also to have a reserve in anticipation of large loss payouts as well as to generate interest income for victimized clients. Until June 2002, the Fund had successfully maintained an approximately $1 million dollar balance. The ability to maintain this balance was due largely to the lower caps the Fund had on claims and to the strength of the investment market. With the decline in market performance and the absence of an increase in State Bar member dues for a long period of time, the State Bar of Michigan had difficulty maintaining an appropriate reserve and making consistent contributions to the Fund. Had t he assessment to the attorneys not occurred it was projected that the Fund would be depleted in less than three years.

Strengths and Weaknesses of the Michigan Client Protection Fund

    The Fund is a remarkably efficient and strong program based on its funding and staffing levels. despite having minimal staffing and marginal funding for a substantial period of time. Funds in other states vary widely in the size and composition of their staff. In many states, the administrators are attorneys. Other states, like Michigan, utilize a paralegal as the fund administrator. Until 1997, Michigan's administrator was a licensed attorney. Upon the attorney's retirement, a paralegal was hired to administer the Fund, with legal supervision and support provided by Regulation Counsel and Deputy Regulation Counsel. A legal secretary also provided part time clerical support to the Fund administrator.

    In the last two years, staffing necessity has caused the State Bar to expand the duties of the Fund's administrator to include several tasks not related to the Fund. The Fund is fortunate to have the services of a legal secretary who has deep institutional knowledge and an efficiency developed by long service to the Fund. The Fund also is fortunate to have an administrator who, although relatively new to the State Bar, has applied her information services skills to the Fund, resulting in the ability to begin the tracking and collection of data.

     

 

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State Bar of Michigan
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Lansing, MI 48933-2012
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