Little-known Minnesota board compensates victims of wayward lawyers

  • Article by: DAVID CHANEN , Star Tribune
  • Updated: January 31, 2014 - 11:31 PM

A little-known board funded by lawyers, not taxpayers, helps compensate the defrauded.

A virtually unknown Minnesota board approved another client financial fraud claim against disbarred Minneapolis attorney Deno Berndt this week, bringing the total shelled out to his 14 victims to $438,012.94.

Since its inception in 1987, the Minnesota Client Security Board has paid $6.8 million to the clients of 148 dishonest attorneys. The board’s cash flow comes mainly from a $12 annual registration fee from the state’s 28,000 active attorneys. No taxpayer dollars are involved.

Not every claim gets accepted, and a victim can’t ask for more than $150,000 — a liberal amount compared to most states. The board doesn’t cover losses from lawyer malpractice or negligence, only misappropriated money and property.

While the reimbursements for Berndt’s unethical indiscretions put a dent in the board’s coffers, it pales in comparison to that of criminally convicted Twin Cities lawyer Stephen Rondestvedt. His tab thus far: $853,189.

“I know attorneys are held to high standards, but we are talking about a relatively small amount of miscreant attorneys overall,” said Ken D. Butler, a Duluth attorney and the Client Security Board’s chair. “It happens in our profession and other businesses. You have to deal with it, and that’s too bad.”

The board, established and overseen by the state Supreme Court, paid out $373,000 during the last fiscal year ending in June. Almost all that money was covered by the lawyers’ fees, but an additional $51,000 was generated by interest income and restitution. The current fund balance sits at $3.6 million.

The most given to victims in a year was $759,000 in 2004. A large chunk of claims comes from probate or family court cases, but that can be skewed if one attorney becomes the source of multiple claims.

Claimants have three years from the time they learn of their attorneys’ dishonest actions to file a form with the board. The attorney involved is notified and asked to respond, which rarely happens because they know the complaint is valid, said Martin Cole, director of the Client Security Board. A seven-member group of attorneys and nonattorneys meets quarterly to vote on the requests.

‘Our collective obligation’

Before the board was created, the state’s Bar Association operated a similar operation. It was light on contributions and had a low dollar limit per claim, Cole said. The changeover to a Client Security Board occurred when the association realized it would be overwhelmed and unable to pay restitution in high-profile cases involving two dishonest lawyers who fled the state and later were convicted of crimes, he said.

At the time, the association had just $15,000 for potential victim claims against those attorneys, John Flanagan and Mark Sampson. The new Client Security Board ended up paying 26 claimants more than $500,000.

To build up its funds quickly, the board asked attorneys to contribute $100 the first year. There was some pushback from attorneys who don’t handle client funds, but they understood the need to make some recompense for colleagues who stole, said Julie Bennett, the board’s assistant director.

“It’s our collective obligation to pay those victims and make them as whole as possible,” Cole said. “This isn’t an insurance policy attorneys are paying into.”

Two ‘appalling’ cases

Nearly 40 claims were filed against Berndt and Rondestvedt, who were both disbarred. Unlike many states, Minnesota doesn’t have a limit on the total amount that can be paid out on a particular attorney. If not, it would be first-come, first-served or have to wait until every person had filed against the attorney to divide up the set limit, Bennett said.

Among their unethical and criminal actions, Berndt kept proceeds from the sale of a client’s house and Rondestvedt defrauded clients of $700,000 and stole more than $55,000 in Medicaid funds. Rondestvedt was sentenced to five years in prison for both crimes. Neither man could be reached for comment.

“You can find some rationalization if an attorney was sick or had other issues and didn’t do a good job with a client, and then the client wants their retainer back,” said board chair Butler. “The really appalling cases are when the attorney takes and hides money or doesn’t pay out funds. That’s just bad. That’s just wrong.”

Every state has a version of Minnesota’s Security Board, and annual payouts vary. Wisconsin issued $155,000 in approved claims and Illinois $986,000 during the last fiscal year. Some states struggle with funding because their bar associations run the security boards and lawyers aren’t required to join or pay annual fees. New Mexico’s board went dormant until a few years ago, Bennett said.

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