Client Protection Fund History

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, as authorized by the Michigan Supreme Court, on February 25, 1966, for the purpose of reimbursing clients who have been victimized by 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 such funds to reimburse members of the public victimized by lawyers who engaged in dishonest conduct as defined by the rules.

Michigan Client Protection Fund Staffing

    The Claims submitted to the Client Protection Fund are managed thought the State Bar of Michigan Client Protection Fund Department (CPF Department). The CPF Department is staffed by a paralegal with legal supervision and support provided by the Professional Standards Assisting Counsel. The paralegal serves as the claims administrator for claims submitted to the Fund. A legal secretary also provides support for the operation of the CPF Department. Jurisdictions vary in the operation of their fund and claims administration. Other jurisdictions, like Michigan, utilize a paralegal as the fund administrator. Prior to 1997, Michigan’s administrator was a licensed attorney.

Operations of the Michigan Client Protection Fund

    Claims submitted to the Fund are administered with the Client Protection Fund Rules (Rules) as approved by the Board of Commissioner. The Fund does not reimburse claims when the attorney made a mistake (negligent), a fee dispute between the client and attorney, or the client is unhappy with the legal services provided by the attorney. 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 within the specific period of time as provided in the Rules.

    As of July 2014, the maximum amount payable to any individual claimant for the dishonest conduct of a single lawyer is $150,000. There is a $375,000 maximum amount paid to all claimants for the dishonest acts of a single or group of attorneys regarding the same course of conduct (aggregate maximum). In cases where the reimbursable claims exceed the $375,000 cap, the payment is prorated among approved claims. From 2003 to 2014, the caps were $50,000 per claimant and $200,000 aggregate maximum, and from 1991 to 2003, the caps were $25,000 per claimant and $100,000 aggregate maximum.

    The types of claims that are reimbursable, and at what amount, are set forth in the Rules. The CPF Department receives, investigates, and analyzes all claims submitted to the Fund, pursuant to the Rules. The administrator prepares a report for each claim for consideration by the Client Protection Fund Standing Committee. The Standing Committee generally meets quarterly during the bar year to review staff’s report and makes a recommendation to the Professional Standards Committee, a subcommittee of the Board of Commissioners. The Professional Standards Committee makes a recommendation to the Board of Commissioners for final determination on the claim.

Funding of the Michigan Client Protection Fund

    Beginning with the 2003-2004 bar year, the Fund is financed by a direct annual assessment of $15.00 from each active Michigan attorney and $7.50 from each inactive Michigan, as well as attorneys admitted temporarily in Michigan in accordance with the pro hac vice rule. 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 assessment method has been successful in that the fund balance has achieved an appropriate reserve amount consistent with the Board of Commissioner’s requirement.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) Additionally, the Fund receives contributions by court order, examples include when a member of the State Bar passes away and there are excess funds in their IOLTA account that cannot be attributed to a client.

    Prior to 2003, the Fund was financed by an appropriation from the State Bar of Michigan, which 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 2000, the State Bar made a varying annual appropriation to the Fund. The Fund received no appropriation during the 1999, 2001, and 2002, fiscal years.

    For more information regarding income to the Fund, please see the Client Protection Fund Annual Reports.

Initiatives Undertaken by the Michigan Client Protection Fund

    Over the years, there have been changes to the CPF Rules and the Michigan Rules of Professional Conduct to improve the claims administration process and to reduce the potential for undetected misappropriation. Some of the major initiatives are briefly described below.

    In November 2009, the Board of Commissioners approved amendments to the CPF Rule 1(A) to further clarify the Fund’s “purpose and scope” statement. The 2009 amendments also included changes to CPF Rule 9(C)(3) to remove the contingency fee limitation and therefore expand its application to misappropriation of settlement proceeds by a Michigan attorney received during representation of a client.

    On September 15, 2010, Michigan Rule of Professional Conduct (MRPC) 1.15A, the Trust Account Overdraft Notification (TAON) rule took effect. The TAON rule is intended to serve as an early warning sign for potential misappropriate of client or third party funds held in trust by a lawyer. The Michigan Supreme Court adopted the TAON Rule on December 15, 2009, based on a 2008 proposal by the State Bar of Michigan as a result of recommendations made by the Standing Committee.

    On July 24, 2015, the Board of Commissioners approved amendments to CPF Rule 11 to embrace the use of plain language rather than legalese to describe the review process when a claimant or respondent objects to a claim determination. These amendments also streamlined the review process and clarify the standard of review and the required burden of proof.