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In re Smith

Supreme Court of New York, Appellate Division

December 8, 1911

In the Matter of WASHINGTON SMITH, an Attorney, Respondent.

APPLICATION by the Association of the Bar of the City of New York to discipline the respondent, an attorney of this court.


Einar Chrystie and Isham Henderson, for the petitioner.

Charles E. Lydecker, for the respondent.


This proceeding was referred to the official referee, who has reported that the respondent has misappropriated money of a client, the McCall Company, as alleged in the petition, and that the charge of gross professional misconduct is sustained; and on this report the proceeding is brought before the court for final action.

The respondent was admitted to practice in May, 1902, and in October, 1903, having determined to abandon the profession of the law and enter a mercantile business, applied to the McCall Company, a business corporation doing business in the city of New York, for a position as corresponding clerk, and was engaged by such company in such capacity at a salary of twenty dollars a week. He continued in such employ in that capacity until the spring of 1904, when the McCall Company organized a department designated as the 'legal department' and the respondent was placed at its head. He served in this capacity from May 9, 1904, until he left the employ of the McCall Company in April, 1906. Shortly after the establishment of this legal department, the respondent's salary was increased from time to time until he was paid fifty dollars a week. He received this salary regularly until he left the service of the company.

It is not disputed but that the relation between the respondent

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and the McCall Company while he was in charge of the legal department was that of attorney and client.

The first serious question of fact presented is as to the compensation that the respondent was to receive when placed at the head of the legal department of this corporation. The petitioner claims that his compensation for the services rendered to the company was the salary that he was paid and which he admits having received during the whole period of his connection with the company. The respondent claims that he was to be paid this salary and, in addition thereto, was to be paid one-third of the commissions that he received from attorneys to whom claims of the company had been sent when they divided such commissions with the respondent. There was evidence on behalf of the respondent that the plan for the establishment of a legal department was formulated by the respondent, and that, to induce the corporation to establish such a department, it was represented that the corporation could substantially reduce the expense involved in collecting small claims against its customers as he, the respondent, would be entitled to receive from attorneys to whom such claims were sent for collection, one-third of the fees for their services. It seems that attorneys to whom these claims were sent for collection were entitled to charge ten per cent of the amount collected; that when such claims were sent by a lawyer for collection, the lawyer sending the claims would be entitled to one-third of this ten per cent charged by the attorneys to whom the claims had been sent, and as the respondent was a lawyer he would be entitled to the return of that one-third of the ten per cent, which if received by the corporation would of course reduce the fees that it had to pay for the collection of these claims by one-third. That question was sharply litigated before the referee, the respondent being the principal witness on his own behalf, and he testified again and again as to the making of this contract by which he was to retain such one-third of the fees. Upon the whole testimony the referee has found against him on that contention, and that his testimony in that respect was untrue. It further appeared that for a considerable period after the establishment of this legal department, the respondent turned into the company all money

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that he received from the various attorneys to whom he sent these accounts for collection, but after April, 1905, instead of turning in the checks sent to him, he retained certain checks, had them cashed and appropriated the money to his own use; so that in April, 1906, when he left the employ of the company, the amount that the respondent had received and appropriated to his own use was about $1,532. These checks which the respondent cashed and the proceeds of which he appropriated were not only checks which included the respondent's portion of the fees to other attorneys which were repaid to him, but also checks sent to him for collections made by these other attorneys for the account of his client. Thus it was not merely the percentage of the attorneys' fees that the respondent collected and misappropriated, but the moneys actually collected on the claims and which concededly belonged not to the respondent but to his client. As to this money that the respondent misappropriated he had actually no possible claim. It was a misappropriation of his client's money without the slightest possible excuse. In the month of April, 1906, the officers of the company were informed that the respondent had been collecting and appropriating a portion of these collections, when the president of the company inquired of the respondent about it, and then asked the respondent to sign a statement containing the terms of the contract between the respondent and the company as testified to by the president. The respondent at that time, while not repudiating the truth of this statement as to the terms of his employment, stated that he wished to consult counsel before signing the statement, and subsequently left the employ of the company without signing it. The respondent attacks the finding of the referee, claiming that a fair consideration of the testimony did not justify a finding that the respondent's account of the terms upon which he was placed at the head of this legal department was not true; but we think the finding of the referee was amply sustained by the evidence. The conduct of the respondent during his employment was such as to strongly corroborate the testimony of the president of the corporation as to the terms of the respondent's employment, and it was clearly established that no such arrangement as claimed by the respondent was ever

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thought of at the time the respondent was placed at the head of the legal department. The respondent appropriated this money, not under a claim of right to a portion of these return commissions, but as money that he knew he was bound to return to the corporation. If the respondent was acting under any such contract as he alleges he had at the time he was placed at the head of this legal department, some statement would have been made as to the amount of the return commissions that he received, or an account would have been kept showing the division of the commissions that were returned to the respondent. But during the first year that he was in charge of this department he turned over to the company all collections that he made for the company, including the commissions that he received, making no claim against the corporation for any part thereof, and this notwithstanding the fact that he at times collected his regular salary in advance of the time it became due. All this is entirely inconsistent with his present claim, and his testimony before the referee is discredited. After this retention of money belonging to the corporation was discovered, the respondent brought an action against the corporation for legal services, claiming $10,000. That action seems not to have been prosecuted, and the corporation then commenced a proceeding against the respondent to collect the money that he had collected for it as attorney. In that case the respondent made the same claim that he made in this proceeding, and after an investigation before a referee appointed by the Supreme Court, the respondent's claim was disallowed and an order entered requiring him to pay to the company the amount of money that he had thus misappropriated. Subsequently, and after this proceeding had been commenced, the respondent complied with that order and repaid the money to the corporation. The ...

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