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Archive for the ‘Professional Liability and MPL’ Category

The State Bar of California Moves to Suspend Michael Avenatti’s Law License

Posted on: June 11th, 2019

By: Paige Pembrook

On June 3, the State Bar of California filed a petition to place attorney Michael Avenatti – infamous for his past representation of Stephanie Clifford (a.k.a. Stormy Daniels) and his own present legal woes – on involuntary inactive status, which is the first step toward disbarment. The State Bar action follows Avenatti’s indictment for his alleged embezzlement of millions of dollars from clients in California, conduct that the Bar says poses “a substantial threat of harm to clients or the public.”

The State Bar petition primarily focuses on the case of former Avenatti client Gregory Barela, who alleges that Avenatti illegally withheld settlement funds and then repeatedly lied about it. Barela alleges that Avenatti did not disclose receipt of Barela’s settlement funds despite Barela’s repeated inquiries over several months, that Avenatti refused to provide an accounting of the settlement funds as required by California law, and that Avenatti presented Barela with a falsified settlement agreement that misrepresented that dates that payment would be received.

The State Bar stated that Avenatti provided no defense or response to the State Bar investigators. Avenatti disagreed and stated that he “offered to cooperate with the Bar and instead they decided to issue a press release as a stunt.” Avenatti has until June 13 to file a formal response and request a hearing, or else he will waive his right to a hearing.

Although the allegations in the State Bar petition to suspend Avenatti’s license appear extreme, all attorneys should be wary of misappropriating client funds in violation of California Rules of Professional Conduct, Rule 1.15, and Business and Profession Code section 610. Under Rule 1.15, attorneys have a duty to properly hold, manage, and account for money held in trust on behalf of clients, and sometimes on behalf of others. An attorney violates Rule 1.15 when the attorney’s trust account balance falls below the amount required to be held on behalf of his or her clients, and it is due to a willful act of the attorney, regardless of the attorney’s explanation. If the Rule 1.15 violation occurs due to the attorney’s dishonesty, recklessness, or grossly negligent management of the client trust account, then the misappropriation of client funds also violates Business and Profession Code section 6106 and almost always results in severe discipline, including possible disbarment.

Whether or not they are in the public spotlight, all attorneys must attentively manage their client trust account to ensure that they always contain the amounts held on behalf of clients. Otherwise, those attorneys may be exposed to State Bar discipline, disbarment, and civil liability to their clients, just like Avenatti.

For more information, please contact Paige Pembrook at [email protected].

Avoiding Legal Malpractice Tip: Do Stuff Early

Posted on: May 31st, 2019

By: Greg Fayard

Missing deadlines is a common source of lawyer malpractice. A blown statute of limitations can be most problematic, as the malpractice case focuses on the value of the underlying case (damages). A missed deadline usually is caused by one of three reasons: 1) simply not knowing the deadline; 2) a calendaring failure; or 3) believing you know when something is due, but you’re wrong. Some deadlines are well-known, but many are not. Well-known deadlines under California law, where I practice, include the five-year timeframe to bring a case to trial, or two years to bring a negligence claim. Other deadlines are less well-known, like the ten-year statute of repose to bring a claim for a latent construction defect, or whether transferring a case from Small Claims Court to the Superior Court is permissible after the limitations period for the Superior Court case has elapsed. (In California, it is not permissible. (Jellinek v. Superior Court (1991) 228 Cal.App.3d 652, 654).)

While waiting to the last minute to do something is of course better than forgetting a deadline, allowing the deadline to dictate when you do something puts the focus on the deadline as opposed to what may or may not be in the client’s best interests. So my legal malpractice avoidance tip is:  try to act before deadlines, not on them. That is—do stuff early.

 If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

HOAs and COAs increasingly confront owner challenges to regulation of short-term rental

Posted on: May 28th, 2019

By: Justin Boron

By now, it’s clear that short-term rentals are neither a passing fad nor the high-minded pretense that underpinned their growth—laid-back homeowners who connect through an online platform with other like-minded individuals just looking for a place to crash for a few nights.

Instead, the short-term rental market is a full-fledged, real-estate business disrupter that is highly profitable and attractive to condo owners in areas with vacation appeal.  For condominium and homeowner associations, the word ‘disrupter’ is all too true.

Take your pick of the “disruptions” that short-term rentals can cause HOAs and COAs.  Safety, noise and pollution, insurance issues, inability to obtain mortgage financing, short-term rental taxes, violation of condo rules and destruction of property by the transient renter.

In response, HOAs and COAs have tried to push back on short-term rentals by attempting to enforce existing restrictions in their governing documents or by adopting new restrictions on short-term leases.  But unit owners eager to take advantage of the income-potential in the short-term rental market aren’t going away quietly and have gotten ever-more creative in avoiding HOA and COA restrictions.

The battle-lines have been drawn, and many of the disputes are making their way to court.  Below are some of the more interesting cases involving short-term rentals and potential solutions to the problems they present.

Can A Condo Association Ban Short-Term Rentals?

Putting aside the question of whether it should, whether a COA or HOA can ban short-term rentals outright, of course, depends on the authority granted to the association and the board in the governing documents.

Many associations have some sort of restriction on leasing of units within the association, whether it is durational (e.g., no less than six-month rental terms), a ban on commercial use of a unit, or an owner-occupied requirement.  But on the other side, there are individual property rights that courts must balance.  HOAs and COAs have met court challenges when attempting to ban short-term rentals using these types of restrictions, which in almost every case, were not drafted with the short-term rental market in mind.

For example, several condo owners successfully argued that a condo association’s ban on short-term rentals was beyond its power because its founding documents did not grant the association the right to restrict leases by duration.  See Wilkinson v. Chiwawa Cmtys. Ass’n, 327 P.3d 614, 621 (Wash. 2014).

Condo owners waged a similar challenge based on an association’s attempt to rely on its covenants against commercial use to ban short-term rentals.  See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 261 (Colo. App. Ct. 2015).  The court agreed that short-term rentals used for sleeping and eating did not fit within the definition of a business use.

In instances where a HOA or COA lacks authority to ban short-term rentals in its governing documents, its next best option is likely to amend its governing documents according to the procedures supplied in them—typically a supermajority vote of the unit owners—to specifically ban short-term rentals.

Flouting An Owner Occupied-Requirement

HOAs and COAs might take comfort in condo documents that affirmatively require any units to be “owner-occupied.”  But an enterprising owner developed an interesting work-around for the owner-occupied requirement.  He placed his unit in an LLC, and then he sold small percentage shares of the LLC to would-be short-term renters that the LLC documents required the purchaser to sell back to the LLC at the end of their stay.  It allowed the short-term renter to say: “I’m not a tenant.  I’m a co-owner.”[1]

The COA could argue that the owner’s arrangement is essentially a time-share, which many COA and HOA documents prohibit.  But in omitting a particular block of time that a member of the LLC owns, it lacks one of the essential qualities of a timeshare.  A COA would likely be more successful in arguing that the substance of the arrangement should be considered over the form.  None of the “owners” of the LLC could say with a straight face that they believed they were investing in a real estate venture.

The Absent Owner Renting Short-Term Under The Radar

The most ubiquitous problem related to short-term rentals likely arises when an HOA or COA has effectively banned short-term rentals.  Despite a clear prohibition, there is often an absent owner who flouts COA rules and rents short-term.  To the extent his or her violations are detected, boards can likely be effective in enforcing rules with notice and fines.  If the measures are ignored, most states’ legislation for HOAs and COAs permit the association to obtain an injunction to end a unit owners’ violation.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] Marshal Granor, Emerging Trends and Hot Topics in Condominiums and Homeowners Association, Ch. 2 Short-Term Rentals (2019).

Avoiding Legal Malpractice Tip: Document, Document, Document

Posted on: May 24th, 2019

By: Greg Fayard

“Boy, I wish that was in writing!”

Having defended scores of attorneys over the years, more often than not, I wish my lawyer-client had either better documented his or her file, or memorialized a key conversation. It certainly helps defending legal malpractice claims when a pivotal issue is in writing as opposed to merely being oral.

While it is not possible to document every detail in a legal matter, having the mindset of documenting interactions with clients can reduce legal consequences should a client sue. A simple e-mail confirming a conversation, or a time entry stating the substance of a conversation can help in defending a legal malpractice claim. Letters work too, of course, but are more time-consuming. For a key strategy decision in a case, a quick “memo to file” in e-mail form works as well as something more formal. A lawyer’ mindset should be: something in writing is better than nothing in writing.

But writings are not only helpful in “defending” a claim. A contemporaneous writing on a key point or issue in a matter may be enough to dissuade the client from suing in the first place.

In sum: the lawyer who chooses to document a file, over not documenting, no matter how informal, will be in a better position in the event the client is later dissatisfied with the lawyer’s services.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

It is Time to Clean House – The Client Break-Up

Posted on: May 8th, 2019

By: Nancy Reimer

The end of tax season is an opportune time for certified public accounting firms to review their client roster to ensure existing clients are a good fit with the firm’s mission and culture. CPA’s are taught to exercise due diligence when accepting new clients. For example, a firm will  assess whether it has the required knowledge and skill to perform the work, whether the client’s expectations are reasonable, does its management team exhibit integrity and trustworthiness, had the client changed CPA’s often, is it negotiating down the fee, hesitant to pay a retainer, is the client delinquent in filing or does the client keep its records in poor condition? If satisfied with the answers, a firm will accept the client.

Once clients are in the door, however, should they stay? Is it difficult to get information timely from the client, does the client haggle over fees, fail to pay, act abusive towards staff, fake or inflate numbers to avoid tax payments or penalties, lack proper internal control or consistently fail to follow advice?

What about changes in the firm that may make servicing the client difficult? New technologies may make it difficult for certain clients to keep up, some clients may not be comfortable with online organizers and electronic engagement letters. Perhaps there is a staff-turnover losing technical expertise to perform certain services; or the cost of offering a service may outweigh the revenue generated by the service.

Firms should meet on an annual basis to review the direction of the practice and the client roster. It should determine how many clients it can comfortably serve, what services it performs best or at the highest rate of profit and the profile its ideal clients.  Problem or “toxic” clients should be terminated.

Once a firm has determined which clients it needs to terminate, it should devise a strategic plan for doing so. It is always a good practice to notify the firm’s insurer and liability carrier of its intent to terminate clients. Liability insurers may want to be informed of potential claims if a disgruntled client is terminated. Insurer’s loss prevention teams are experienced in terminating clients and may offer advice as to how to disengage a “problem” or “toxic” client.

Best practices dictate a disengagement letter sent by certified mail, return receipt requested is the best way to terminate a client. If, however, the client has formed a close personal relationship with a member of the firm then a face to face meeting may be warranted. Then a follow-up letter documenting the meeting should be sent.

Prior to notification, the firm should ensure all required documents are copied or scanned, all documents and authorizations are signed, all fees are paid (if possible) and all client documents are packaged and available for pick-up. Also, prepare the transfer authorization letter ahead of time for the client’s signature so the file can immediately be transferred to the successor CPA.

The disengagement letter need not identify any specific reason for the termination. Ideally, there are no impending, or tax filing, deadlines. If there are the firm should list those deadlines and what needs to be done to comply with the deadline. It is also a good idea to list all of the services the firm had performed for the client. If any projects are in progress, identify the stage of the project and what is necessary for completion.  The disengagement letter should identify the client’s responsibilities moving forward and issues to be addressed with the successor CPA. Finally, the firm should state it will assist in transferring the files to the successor CPA in accordance with the firm’s professional obligations.

If you have any questions or would like more information, please contact Nancy Reimer at [email protected].