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UNITED STATES v. GERARD

May 21, 1996

UNITED STATES OF AMERICA
v.
WILLIAM J. GERARD, SR.



The opinion of the court was delivered by: CASTILLO

 Defendant William J. Gerard, Sr. is charged in a six-count indictment alleging mail fraud in violation of 18 U.S.C. § 1341 (Counts I, III, and V) and interstate transportation of property acquired by means of conversion or fraud in violation of 18 U.S.C § 2314 (Counts II, IV, and VI). *fn1" As will be explained more fully below, the indictment alleges that after negotiating a $ 2 million settlement on behalf a medical malpractice client in 1993, and while acting as a trustee of that client's trust, Gerard converted funds belonging to her and then attempted to conceal the conversion by falsely representing that the funds had been used for legitimate expenses and fees. Pursuant to Fed. R. Evid. 404(b), the government moves for the admission of certain evidence relating to three prior uncharged incidents in which Gerard allegedly (1) charged excessive fees for his legal services in 1985, (2) improperly collected a fee for legal services that he was not authorized to take in 1987, and (3) misused funds held by Gerard as escrowee in connection with a real estate closing in 1992. The government seeks to introduce evidence as to these three incidents as proof of intent, preparation, plan, knowledge and absence of mistake or accident. For the reasons that follow the government's motion is denied.

 BACKGROUND

 Indictment

 The indictment in this case alleges the following relevant facts. Gerard and his son, Gerard Jr., had their own law firm. In late 1991, Ethel Lawson retained the Gerards to represent her in a medical malpractice lawsuit. In or about February 1993, Lawson's medical malpractice case was settled for $ 2 million and the Gerards deposited the $ 2 million settlement check into their Client's Funds Account at a Chicago Bank. The government alleges that under Illinois law and the terms of Lawson's retainer agreement, the Gerards were entitled to $ 462,500 in attorneys' fees and that additional attorneys' fees could be collected by the Gerards only by court order.

 The indictment further alleges that the Gerards converted and misused monies belonging to Lawson without her authorization and then attempted to deceive Lawson by misrepresenting that they had used the money for legitimate expenses and fees. Specifically, on February 5, 1993, the Gerards became the trustees for a trust they had previously established for Lawson. By becoming trustees, the Gerards were able to convert and misuse Lawson's funds. The Gerards allegedly attempted to conceal from the state trial court that they would be acting as Lawson's trustees without supervision, and allowed the trial court to believe that a bank would also be acting as trustee.

 On February 23, 1993, the Gerards each deposited $ 450,000 (for a total of $ 900,000) from the settlement proceeds into their own personal accounts and deposited an additional $ 100,000 into their Clients' Funds Account. The remaining $ 1 million from the settlement proceeds were deposited in Lawson's trust fund account. The indictment further alleges that the Gerards converted approximately $ 35,500 of Lawson's money which they were holding in their Clients' Trust Funds Account and used that money to pay two attorneys who had worked on the Lawson matter--a debt allegedly owed by the Gerards, not Lawson. Gerard Sr. also allegedly used Lawson's money to pay for numerous telephone calls, made on a cellular phone, that had nothing to do with the Lawson matter or Ethel Lawson's interests.

 The indictment's mail fraud counts relate to conduct by the Gerards in causing a bank document (Count I), a dividend check (Count III), and a mobile phone bill (Count V) to be delivered by mail in execution of their scheme to defraud Ethel Lawson. The interstate transportation of stolen goods counts all relate to conduct by the Gerards in causing checks, representing Lawson's money, to be mailed interstate, knowing that money had been converted or obtained by fraud.

 Proposed 404(b) Evidence

 (1) Ruth Randolph

 The following facts relating to Gerard's prior conduct with a client named Ruth Randolph are drawn from the Illinois Supreme Court's opinion affirming Gerard's one-year suspension from the practice of law. In re Gerard, 132 Ill. 2d 507, 548 N.E.2d 1051, 139 Ill. Dec. 495 (1989). In 1985, Ruth Randolph, who was 84 years old at the time and in the hospital as a result of injuries suffered in a fall, asked Gerard to prepare a will for her. She also asked Gerard to help her find certain paper assets that she owned and which were missing. She told Gerard over the phone that she believed someone at the hospital had taken them. Over the phone, Gerard discussed with Randolph his fee for "recovering" the missing assets, indicating that he could charge a fixed rate of $ 175 per hour, or they could enter into a contingent fee. Randolph said she preferred a contingent fee agreement. On August 20, 1985, Gerard met with Randolph and presented a document he had prepared as the contingent fee agreement. The document--which was the first contingent fee agreement Gerard had drafted in his then 24 year career--stated: "This is to confirm my understanding that William J. Gerard Ltd. will receive as a retainer an amount equal to one-third of all assets recovered for the undersigned." Although this was the first contingent fee agreement Gerard had ever drafted, he did not consult any form books or any other reference sources. However, Gerard had served on the Chicago Bar Association's Professional Fees Committee for four years.

 At the time of drafting the agreement, Gerard did not know the nature of the assets, their value, or the complete circumstances of their disappearance. Some of these details were filled in at the meeting of August 20, at which time Randolph informed Gerard that the assets were certificates of deposit that she held in seven financial institutions which she named. Gerard still did not know the number of CDs involved or their value.

 At the August 20 meeting, Gerard and Randolph also agreed that Gerard would prepare a trust agreement and a will with a pour-over provision. Gerard and Randolph would be named as co-trustees. Gerard advised Randolph to place stock she owned as well as the CDs, if recovered, into the trust and Randolph accepted this advice. When Gerard left that day, he left the continent fee agreement with Randolph. He met with Randolph two days later so that she could execute the will and trust agreement that he had prepared. Randolph also gave Gerard the contingent fee agreement which she had signed.

  During the next month, Gerard contacted all seven of the financial institutions Randolph had named as having issued her CDs. Gerard found that all of Randolph's CDs were still safe in accounts under Randolph's name. Gerard also discovered that the total value of the certificates was approximately $ 450,000. *fn2" On September 26, 1985, Randolph gave Gerard a list of the banks she had named on August 20 and the number of CDs which each bank held for her, for a total of 23. This information corresponded with that obtained by Gerard through his inquiries to the banks.

 Having identified all of the "missing" CDs, Gerard reregistered each of them in the name of the trust he had established for Randolph. Gerard accomplished all of his work relating to these CDs by telephoning, visiting and writing letters to the banks and by meeting with Randolph. At no time were any adverse claims made by third parties, nor was litigation ever required. Gerard claims to have spent 160 hours within a period of two months "recovering" the CDs.

 Gerard began collecting his contingent fee on October 10, 1985, when he redeemed two CDs, now registered in the Randolph trust's name, and deposited the money in his corporate account. Gerard redeemed eight more CDs over the course of the next three months. On January 10, 1986, Gerard redeemed the tenth CD, which because it was unmatured was reduced by a penalty of $ 225, and deposited the resulting sum of $ 40,275 in his corporate account. By redeeming these ten CDs, Gerard collected a total fee of $ 159,648.60, which exceeds one-third of the $ 453,443.37 value of the CDs "recovered" by Gerard. The previous day, Randolph signed a document revoking the trust agreement and instructing Gerard, as co-trustee, to deliver to her all trust assets and trust documents, and to render an accounting for all transactions made during the trust's existence. Randolph mailed this revocation to Gerard, who states that he did not receive it until January 14, 1986.

 Gerard delivered all the requested documents to Randolph on or about January 31, 1986. At the same time Randolph signed a release prepared by Gerard, which stated that Randolph acknowledged the return of the trust assets and released Gerard from "all claims in connection with the trust."

 Randolph died seven months later. The executrix of Randolph's estate filed a complaint with the ARDC regarding Gerard's $ 159,648.60 fee. She also commenced in action in the Circuit Court of Cook County seeking the return of the fee. Gerard settled the civil action in November of 1987 (four months after the Administrator of the ARDC filed a complaint charging Gerard with misconduct). Under the terms of the settlement, Gerard's fee was renegotiated down to $ 28,000, which represents 160 hours of work at Gerard's $ 175 hourly fee. Accordingly, Gerard repaid the estate $ 131,648.60 plus interest. The settlement agreement included a release of claims whereby the executrix released all claims arising out of Gerard's representation of the estate. A clause in the settlement agreement provides states that "Gerard has asserted and continues to assert a right to said fees paid to him based on the terms of a disputed contingency contract . . . ."

 An ARDC Hearing Board panel conducted a hearing at which Gerard and two character witnesses testified. The panel found that Gerard's $ 159,648.60 fee was excessive and predatory, and that Gerard had engaged in conduct involving dishonesty, fraud and deceit. The panel recommended that Gerard be suspended from the practice of law for six months. Both Gerard and the ARDC Administrator filed exceptions with the Review Board. The Review Board accepted the panel's findings and conclusions of law, but it increased the severity of the recommended sanction to a one-year suspension. The Review Board also made two of its own conclusions: (1) Gerard's conduct was extreme overreaching and (2) Gerard acted fraudulently when he entered into the fee agreement because at that time there were no assets to be recovered. Significantly, however, neither the Review Board nor the hearing Board made any factual finding that Gerard knew this at the time of entering into the fee agreement. On appeal to the Illinois Supreme Court, the Court found that Gerard had charged an excessive fee, and suspended Gerard from the practice of law for one year.

 The government seeks to introduce the factual statement contained in the Illinois Supreme Court's opinion as well as portions of the opinion relating to an attorney's duties and ethical obligations.

 (2) Pauline Armstrong's Estate

 Gerard served as the attorney for the estate of Pauline Armstrong, who died in 1987. According to Michael Snyder, who was the executor of the Armstrong estate (and was Gerard's former partner), Gerard had to and ordinarily did submit his bills to Snyder in order to receive payment for services rendered to the estate. Gerard was not authorized to pay himself any monies from the estate without permission from Snyder. In December of 1988, Snyder became concerned about the amount of money being billed by Gerard as fees. So, he told Gerard that he wanted to see more specific information concerning the services that had been rendered.

 In connection with the administration of the Armstrong estate, certain real property was sold in December of 1988. Gerard submitted bills for the services he rendered in connection with the sale, and Snyder paid those bills. After the closing, Snyder asked to see the closing documents, which Gerard provided. Upon review of the documents, Snyder discovered that Gerard had received $ 9,000 from the proceeds of the sale, which Gerard had paid to him directly at the real estate closing rather than causing the money to be paid to the estate. Gerard had not previously informed Snyder that he had structured the closing in such a manner that the $ 9,000 would be paid to him directly, nor was Gerard otherwise authorized by Snyder to take that money.

 After discovering the $ 9,000 payment, Snyder met with Gerard and fired him from his position as the estate's attorney. Snyder told Gerard that he would have to report the matter to the Illinois Attorney Registration and Disciplinary Commission (ARDC). Gerard asked Snyder not to report the matter, and after talking to his client Snyder decided not to report it. Snyder told Gerard to repay the $ 9,000. Gerard repaid $ 4,000.

 (3) Elaine Tsiros

 In December, 1992, Elaine Tsiros wrote a $ 5,000 check made payable to "William J. Gerard, Escrowee." The check was intended as an earnest money deposit in connection with a real estate transaction. *fn3" The check was deposited into Gerard's Client Funds Account. She did not authorize the use of that money for any other purpose prior to the closing of the real estate transaction. By the end of December 1992, Gerard's Client Funds Account had only $ 534.14 in it; and, by April 7, 1992, the account contained only $ 21.96. On April 7, 1992, Gerard wrote two checks totalling $ 5,000, both of which were drawn on Gerard's personal checking account and included notations indicating that the checks related to the D'Cruz matter. The real estate transaction ultimately did not close and on April 11, 1992 Gerard wrote a check, drawn on his Client Fund Account for $ 5,000, payable to Tsiros' attorney for the purpose of returning Tsiros' earnest money deposit The government contends that this incident evidences Gerard's previous conversion of money that was entrusted to him and his efforts to conceal that conversion.

 ANALYSIS

 Fed. R. Evid. 404(b) ...


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