2017 CO 101
Colo.2017Background
- Philip M. Kleinsmith, sole practitioner at Kleinsmith & Associates (K&A), handled 74 foreclosure matters for U.S. Bank and retained First American Title to provide title services.
- First American billed K&A $57,338; U.S. Bank paid K&A that amount, and Kleinsmith deposited the payment into K&A’s operating account.
- Instead of remitting the amounts to First American, Kleinsmith used the funds to pay K&A operating expenses; First American sued K&A in Montana and obtained a judgment against the firm.
- Attorney Regulation Counsel investigated; the Presiding Disciplinary Judge (PDJ) found reasonable cause, the court suspended Kleinsmith, and the PDJ later found as a matter of law that Kleinsmith violated Colo. RPC 1.15A(b), former 1.15(b), and 8.4(c).
- The Hearing Board disbarred Kleinsmith and ordered restitution; Kleinsmith appealed arguing (1) the funds were firm property (not Third‑party funds) so conversion did not occur, and (2) the PDJ’s rule interpretation violated due process and equal protection.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kleinsmith knowingly converted funds (violated Colo. RPC 8.4(c)) | Attorney Regulation Counsel: funds from U.S. Bank were entrusted to Kleinsmith to pay First American; using them for firm expenses was knowing conversion | Kleinsmith: funds became K&A operating funds once received; thus no conversion of third‑party funds | Held: Kleinsmith knowingly converted funds intended for First American; violated Colo. RPC 8.4(c) |
| Proper reading of Colo. RPC 1.15A/1.15B — trust vs operating funds | Counsel: Rule 1.15A(b) requires prompt delivery of funds a third party is entitled to, so these funds belonged to First American despite deposit location | Kleinsmith: Rules create categories (pure trust, unincurred expense trust, operating funds); funds for incurred expenses are operating funds available to firm | Held: Deposit location does not permit treating third‑party funds as firm property; rule requires turning over funds third parties are entitled to, so conversion occurred |
| Due process / vagueness challenge to professional rules | Kleinsmith: rules are vague about which funds must be treated as trust funds vs operating funds; cannot fairly understand proscribed conduct | Kleinsmith claims ambiguity caused arbitrary disciplinary exposure | Held: Rules are sufficiently clear for licensed lawyers; taking funds intended for a third party for personal/firm use is readily understandable misconduct; vagueness claim rejected |
| Equal protection challenge | Kleinsmith: as an agent of a law corporation he is treated differently than non‑lawyer corporate agents | Kleinsmith did not assert suspect class or fundamental right | Held: Regulation of attorneys furthers legitimate state interest; disparate treatment is rationally related to that interest; claim rejected |
Key Cases Cited
- People v. Varallo, 913 P.2d 1 (Colo. 1996) (attorney’s knowing use of client funds for personal benefit constitutes misappropriation and violates professional conduct rules)
- People v. Finesilver, 826 P.2d 1256 (Colo. 1992) (attorney converted client payments intended for third‑party title companies; disbarment affirmed)
- People v. Lavenhar, 934 P.2d 1355 (Colo. 1997) (attorney improperly used funds intended for another; conversion and disbarment affirmed)
- In re Bilderback, 971 P.2d 1061 (Colo. 1999) (failure to honor a lien against settlement funds held to violate professional conduct rules)
- In re Gilbert, 346 P.3d 1018 (Colo. 2015) (standards of review for attorney discipline decisions)