In this Article
A Baltimore attorney now owes up to $3.3 million out of his own pocket. This is not his debt; it’s his client’s unpaid federal taxes. The case is still on appeal, but the facts already carry a warning that reaches well past one law firm in Maryland.
If you hold a trust account, sit as an officer or director of a client entity, or act as a fiduciary alongside your role as counsel, this case matters to you. It describes exposure that ordinary malpractice coverage doesn’t touch.
The statute doing the damage
The case turns on the Federal Priority Statute, 31 U.S.C. § 3713. Here’s how it works in practice. When an insolvent entity owes the federal government money, the government gets paid first. Anyone who helps distribute that entity’s remaining assets elsewhere, knowing that the federal debt was unpaid, can be held personally liable for the amount diverted.
What makes it dangerous for fiduciaries is what it doesn’t require. There’s no need to show fraud or intent to cheat the IRS. Knowledge of the insolvency, plus a hand in the distribution, can be enough.
⚠️ Watch Out: Liability under this statute isn’t capped at what you personally received. Courts have applied it to the full amount improperly distributed, even to funds that passed through to someone else.
What happened in United States v. Neuberger
Isaac Neuberger, an attorney at Neuberger Quinn Gielen Rubin & Gibber in Baltimore, directed Lehcim Holdings Inc. The company became insolvent while carrying a federal tax debt. According to the district court’s findings, Neuberger helped develop and execute a plan to move Lehcim’s assets out of the company while that debt sat unpaid.
The U.S. District Court for the District of Maryland found him personally liable. But instead of the full $3.3 million the IRS sought, the court limited his liability to roughly $1.9 million, tied to the specific transfers it found attributable to him.
The government wasn’t satisfied with that outcome. It has appealed to the Fourth Circuit, arguing that the district court erred in capping Neuberger’s liability at less than $3.3 million. The government wants him held responsible for the full amount of the debt.
💡 Pro Tip: The gap between the $1.9M assessed and the $3.3M sought usually comes down to one thing: which transfers a court finds the fiduciary personally directed, versus merely aware of. That distinction drives most of the litigation risk.
Why this reaches further than most attorneys assume
In practice, attorneys treat entity liability shields, such as LLCs and corporations, as a wall between a client’s debts and the client’s own assets. That wall doesn’t hold here. § 3713 liability attaches to the individual who directed or knowingly participated in the distribution. The entity structure around the transaction doesn’t matter.
A related, common mistake: assuming that wearing two hats, counsel to the entity and officer or director of it, only doubles your professional-responsibility exposure. It also doubles your financial exposure. Fiduciary conduct and legal advice can become legally inseparable once a court starts asking who knew what and when.
Practical safeguards
- Check federal tax status before authorizing any distribution from an insolvent or financially strained entity, not just state judgments or private creditor claims.
- Document the basis for each distribution as it happens, including what you knew about the entity’s tax position at the time.
- Separate roles where possible. If you’re both counsel and officer/director for a distressed client, bring in independent counsel before authorizing transfers. The conflict isn’t just ethical; it’s financial.
- Treat trust account duties and § 3713 exposure as distinct risks. They overlap, but they aren’t the same obligation.
The lesson: how to avoid Neuberger’s mistake
📌 Key Lesson: Neuberger’s exposure didn’t come from a single reckless act; it came from acting as both fiduciary and decision-maker without a checkpoint between the two roles. The fix isn’t complicated. It’s structural.
Three habits would have closed most of the gap in this case:
- Run a federal tax check before every distribution, not just when a creditor flags it. Insolvency plus unpaid federal debt is the trigger; treat it as a mandatory checklist item, not a judgment call.
- Don’t authorize a transfer you also advised on. If you’re counsel to the entity and the one directing the distribution, get a second, independent set of eyes before either happens.
- Assume the entity shield won’t protect you personally. Plan every distribution from an insolvent entity as if you, individually, will have to justify it to a court later, because under § 3713, you might.
The pattern to watch for isn’t dishonesty. It’s a fiduciary and a legal advisor being the same person, making the same call, with no one checking the work. That’s the mistake to eliminate from your practice.
The limits of what’s settled here
This case isn’t finished. The $3.3 million figure is what the government wants the Fourth Circuit to impose; it isn’t the law of the case yet. The appellate court could affirm the $1.9 million, restore the full amount, or remand the case for further findings.
That uncertainty is itself the lesson. Courts are still working out how far personal liability under this statute extends. An attorney acting as both counsel and fiduciary is precisely the fact pattern in which that boundary is tested.
If you currently hold both roles for a financially struggling client, the next step is simple: review those engagements now, before a court does it for you.
If you want to learn more, the district court’s ruling is a public record, filed in the D. Md. docket and available through GovInfo, and is worth reading directly rather than relying only on summaries. The Journal of Accountancy and Bloomberg Law also both discuss this case.
At The Chamberlain Accounting Firm, we regularly work with attorney trust accounts. Our practice is to check your reconciliation, client ledgers, and record-keeping against New Jersey’s requirements every week and tell you exactly where you stand.
Contact us or call (201) 371-3344 to ensure your books comply with the New Jersey IOLTA rules.
Frequently Asked Questions
Yes, under specific conditions. Federal Priority Statute § 3713 allows the government to pursue anyone who helps distribute an insolvent entity's assets while knowing its federal tax debt is unpaid. It also includes the entity's attorney if they acted as a fiduciary, such as an officer or director.
No. The statute requires only knowledge that the entity was insolvent, had an unpaid federal debt, and was involved in distributing its remaining assets. Ordinary awareness, combined with a hand in the distribution, can be enough.
No. The district court limited liability to about $1.9 million, but the government has appealed to the Fourth Circuit seeking the full $3.3 million. The Fourth Circuit could affirm the lower amount, restore the full figure, or send the case back for further findings.
Disclaimer: This article is provided for general informational purposes only and does not constitute accounting, tax, or financial advice. The information contained herein is not intended to be relied upon for specific tax, accounting, or financial decisions, and may not reflect current tax law or guidance. No opinion expressed herein may be used for the purpose of avoiding penalties under federal, state, or local tax laws. Readers should consult with a qualified accounting or tax professional regarding their specific circumstances. This communication does not create an accountant-client or advisory relationship.
