Virginia State Bar v. Goggin

Present: All the Justices
VIRGINIA STATE BAR
v. Record No. 991943 OPINION BY JUSTICE ELIZABETH B. LACY
June 9, 2000
RODNEY GOODE GOGGIN, ET AL.
FROM THE CIRCUIT COURT OF STAFFORD COUNTY
Thomas A. Fortkort, Judge
In this appeal, the Virginia State Bar challenges the
judgment of the trial court that ordered funds in an
attorney's trust account distributed among claimants of the
funds on a pro rata basis. We will reverse the judgment of
the trial court and remand the case for entry of a new
distribution order because, to the extent possible, funds in
an attorney's trust account should be distributed in
accordance with clearly ascertainable ownership interests of
the funds.
The State Bar, in connection with an attorney
disciplinary proceeding, filed a complaint and petition
pursuant to Code § 54.1-3936. The State Bar sought
appointment of a receiver to take possession of the attorney's
trust account and other assets and to make recommendations
regarding the proper distribution of the assets. The trial
court granted the State Bar's petition and appointed a
receiver.
In his report filed with the trial court, the receiver
concluded that the amount of verified claims against funds
that were to be held in trust by the attorney exceeded not
only the amount in the trust account, but also the total
amount available to the receiver, including the attorney's
operating accounts, accounts receivable, and cash received
from the sale of assets. However, the receiver reported that
$375,764.27 of the available funds in the trust account could
be traced to deposits made on behalf of six specific
claimants. Based on the ability to trace these funds, the
receiver recommended that they be disbursed in accordance with
the ascertainable ownership interests. The receiver went on
to conclude that Code § 54.1-3936(E) prefers "trust creditors
over other creditors as to all [the] funds [available] whether
actually held in trust or not." The receiver proposed that
the remaining available funds be distributed among the trust
account claimants on a pro rata basis.
Following a hearing, the trial court rejected the
recommendation of the receiver regarding the disbursement of
funds and ordered that the funds be disbursed among all
claimants on a pro rata basis. In its ruling, the trial court
did not reject the receiver's conclusion that § 54.1-3936(E)
prefers trust account creditors over general creditors, nor
did it reject the methodology used by the receiver to trace
2
the ownership interests in the trust account. The basis for
the trial court's ruling was that it believed a pro rata
disbursement plan was "the fairest distribution scheme in a
totally unfair situation." The State Bar appealed, asserting
inter alia that the trial court's order failed to follow
"well-established Virginia case law regarding trusts," and the
"statutory directives set forth in Va. Code §§ 54.1-3936 and
6.1-2.23." We agree with the State Bar.
Clients' funds deposited in an attorney's trust account
are funds held in trust. As such, the claim of such clients
for return of the funds is more than merely a personal claim
against the attorney for the payment of the sum of money on
deposit. The clients retain an equitable or beneficial
ownership interest in the funds. Broaddus v. Gresham, 181 Va.
725, 731-32, 26 S.E.2d 33, 35-36 (1943). The deposit of one
client's funds in an account with funds of other clients does
not destroy the beneficial interest of the clients in the
funds so deposited. Thus, the clients are entitled to those
funds to the extent their equitable ownership interests can be
traced. *
*
Attorneys are authorized to deposit clients' funds in a
single trust account with a subsidiary ledger. See former
Virginia Code of Professional Responsibility, DR 9-103(A)(3),
Rules of Court, Part 6, Section II, now Rule 1.15(e)(iii),
effective January 1, 2000.
3
Furthermore, in this case, some of the funds deposited in
the attorney's trust account were deposited with the attorney
acting as a settlement agent and thus are subject to § 6.1-
2.23. That statute provides that such funds "shall be the
property of the person . . . entitled to them under the
provisions of the . . . agreement and shall be segregated
. . . in a manner that permits the funds to be identified on
an individual basis." This provision is consistent with the
principle that claimants to the proceeds of an attorney's
trust account retain ownership in those funds and are entitled
to recover the full amount of their identifiable ownership
interest where possible.
If all or part of a claimant's ownership interest cannot
be traced to specific funds in the trust account, the right to
recovery is not lost, but that right does not attach to funds
identified as owned by another. Under such circumstances, the
right to recovery runs to funds not traceable to a specific
owner, and a pro rata distribution would be appropriate.
For these reasons, we will reverse the distribution order
of the trial court and remand the case for entry of a new
distribution order consistent with the law set forth in this
opinion.
Reversed and remanded.
4