Law Firm’s Deposit Of Two-Party Insurance Checks Is “Conversion”

A Grosse Pointe law firm engaged in statutory conversion by depositing two-party checks into its Interest on Lawyers Trust Account (IOLTA), the Michigan Court of Appeals has ruled.

Michigan Rule of Professional Conduct 1.15 requires attorneys to deposit short-term or nominal funds of clients and third persons into IOLTA accounts. Interest generated on these accounts is paid to the Michigan State Bar Foundation and helps fund civil legal aid services.

The plaintiff in VHS of Michigan Inc. v Jones, et al. (Docket No. 355953) was doing business as Detroit Medical Center Sinai-Grace Hospital. The plaintiff filed this lawsuit seeking its share of no-fault insurance funds that had been received by the defendant, Dailey Law Firm PC, and deposited into the firm’s IOLTA account. The insurance checks were made payable to two parties: the Dailey Law Firm and the hospital. The plaintiff claimed the defendant violated MCL 600.2919a(1) and converted the funds to its own use by depositing the checks into its IOLTA account and refusing to remit payment to the plaintiff. The Wayne County Circuit Court granted summary disposition to the plaintiff.

The Court of Appeals affirmed, finding the plaintiff presented sufficient evidence that the defendant law firm converted the checks “for its own use” and “did not present sufficient documentary evidence refuting this assertion.”

In its decision, the Court of Appeals emphasized that an instrument payable to “2 or more persons not alternatively” requires action by “all parties.”

Judges Kathleen Jansen, Mark J. Cavanagh and Michael J. Riordan were on the panel that issued the unpublished opinion.

Background

Jay Juan-Jarmaine Jones was injured in an auto accident. He hired the defendant under a contingency fee agreement to help him secure insurance coverage. The defendant helped Jones get coverage under the Michigan Assigned Claims Plan (MACP), which assigned the claim to Citizens Insurance Company.

As part of his medical treatment, Jones underwent two magnetic resonance images (MRIs) at the plaintiff’s subsidiary, Detroit Medical Center Sinai-Grace Hospital. Afterward, the plaintiff sent Citizens Insurance two invoices totaling $10,592. Citizens Insurance then sent the defendant two checks totaling $9,532.80, which reflected a reduced rate negotiated by Citizens Insurance and the plaintiff. The checks were payable to “Sinai Grace Hospital and Dailey Law Firm PT.”

The defendant deposited the checks to its IOLTA account but did not remit payment to the plaintiff. When the plaintiff asked the defendant for payment, the defendant asserted that it intended to keep one-third of the total amount which represented the attorney fees negotiated under the contingency fee agreement with Jones.

The plaintiff filed this lawsuit in Wayne County Circuit Court, claiming the defendant unlawfully converted the funds for its own use. The requirements for statutory conversion under MCL 600.2919a(1) are, in part: “1) A person damaged as a result of either or both of the following may recover 3 times the amount of actual damages sustained, plus costs and reasonable attorney fees: (a) Another person’s stealing or embezzling property or converting property to the other person’s own use. …”

The plaintiff moved for summary disposition, arguing that it was entitled to the entire amount of funds and the defendant was responsible for treble damages arising from the conversion. The trial court granted the plaintiff’s summary disposition motion and awarded $9,532.80 in damages against Jones and treble damages totaling $28,598.40 against the defendant.

The defendant appealed.

Evidence Unrebutted

On appeal, the defendant argued the trial court erred in granting the plaintiff’s motion for summary disposition on the basis of conversion because there was no evidence that it converted the funds for its own use.

“We disagree,” the Court of Appeals said.

The defendant presented two arguments on appeal: 1) its actions did not amount to a conversion and 2) it did not deposit the checks into its IOLTA account for its “own use.”

The Court of Appeals rejected the defendant’s argument that its actions did not constitute conversion, which is defined under common law as “any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.”

Here, the checks were made payable to the hospital and the defendant, the Court of Appeals pointed out. Under MCL 440.3110(4) of the Uniform Commercial Code, if an instrument is payable to two or more persons not alternatively, “it is payable to all of them and may be negotiated, discharged or enforced only by all of them,” the appeals court said.

“In other words, when an instrument is payable to two or more payees the instrument may only be acted upon by ‘all’ the payees,” the Court of Appeals wrote. “Consequently, in this circumstance, a court may find a conversion where only one payee acts on an instrument.”

To support its argument, the plaintiff presented copies of the checks showing they were payable to the hospital and the defendant. The plaintiff also presented an email from a lawyer at the defendant’s firm stating, “I have received some payments for [Jones] and have deposited all to Dailey Law Firm, PC IOLTA. I do not have record of any checks made payable to DMC. The checks I have received from Citizens are made payable to Sinai Grace and Dailey Law Firm, PC.”

The plaintiff’s evidence was basically unrebutted by the defendant, the Court of Appeals said. “In response to [the plaintiff’s] motion for summary disposition, [the defendant] only offered one exhibit - copies of the front of the Citizens checks including [the defendant’s] deposit slip purportedly showing [its] deposit of the Citizens checks into its IOLTA. Evidence of the Citizens checks with the deposit slip to the IOLTA did not bolster [the defendant’s] contention it did not convert the Citizens checks. … Therefore, the trial court did not err in finding that [the defendant] converted the Citizens checks.”

Meanwhile, the defendant further argued that a conversion did not occur because it intended to only keep a portion of the funds. “There are two problems with this argument,” the Court of Appeals said. “First, while [the defendant] argued its intent was to only keep a portion of the funds, [it] actually kept all the funds. … Moreover, [the defendant’s] argument it intended to only keep a portion of the funds did not effectively refute [the plaintiff’s] argument [it] converted the funds. … [The defendant] presented to the trial court no documentary evidence to this effect. Consequently, [it] failed to meet its burden as the nonmoving party and there was no error on this basis.”

Next, the Court of Appeals examined whether the defendant converted the funds for its “own use.” To refute the plaintiff’s argument that it kept the checks for its own use, the defendant pointed to MRPC 1.15 and asserted the rule requires that all disputed funds be deposited into the IOLTA account. “Again, the only evidence [the defendant] offered were the copies of the fronts of the Citizens checks and a deposit slip purporting to show the deposit of the funds into [the] IOLTA,” the Court of Appeals wrote. “Construing this evidence in a light most favorable to [the defendant], all [the] proffered evidence shows is the deposit of all the funds into its account. … If [the defendant] wanted to effectively refute the claim the funds were not for its own use on the basis of MRPC 1.15, at the very least, [it] should have presented some evidence showing its prompt remittance of two-thirds of the funds to [the plaintiff]. By only presenting evidence of its deposit of all the funds to its IOLTA, [the defendant’s] argument regarding its obligation under to the rules of professional responsibility did not refute [the] argument [the defendant] intended to keep the funds for its own use.”

Based on the foregoing, the plaintiff “satisfied its burden showing documentary evidence [the defendant] converted the Citizens checks for its own use,” the Court of Appeals held. “Once the burden shifted, [the defendant] did not present sufficient documentary evidence refuting this assertion. Therefore, the trial court did not err in granting summary disposition on the basis of statutory conversion because there was not a genuine dispute of fact as to whether [the defendant] converted the Citizens checks for its own use.”

In conclusion, the Court of Appeals rejected the defendant’s argument that it held an attorney’s charging lien over the funds received from the checks. “By awarding [the plaintiff] the entire amount of funds from the Citizens checks, the trial court effectively restricted [the defendant] from recovering attorney fees …. This order did not, however, prevent [the defendant] from receiving compensation for its efforts. … To the extent [the defendant] believes it is owed attorney fees, [its] remedy is to file suit against Jones. Because the trial court’s order did not limit [the defendant’s] rights in this regard, there is no error for which reversal is warranted.”