FOR THE RESPONDENT FOR THE INDIANA SUPREME COURT
DISCIPLINARY COMMISSION
James F. Groves Donald R. Lundberg, Executive
Secretary
205 W. Jefferson Blvd. Seth Pruden, Staff Attorney
Suite 502 115 West Washington Street, Suite 1165
South Bend, IN Indianapolis, IN 46204
IN THE
SUPREME COURT OF INDIANA
______________________________________________________________
IN THE MATTER OF )
) Case No. 20S00-9904-DI-238
CHARLES A. DAVIS, JR. )
__________________________________________________________________
DISCIPLINARY ACTION
__________________________________________________________________
January 10, 2001
Per Curiam
The respondent, Charles A. Davis, Jr., improperly partnered with his
client in a variety of business dealings funded primarily by an earlier
$200,000 personal injury settlement he negotiated on the client’s behalf.
The business ventures ultimately proved unsuccessful, as did the
partnership between the respondent and his injured client. The client lost
much of her settlement money. We suspend the respondent from the practice
of law for 18 months as a result of his misconduct.
Having been admitted to the bar of this state in 1978, the respondent
is subject to this Court’s disciplinary jurisdiction. The Disciplinary
Commission charged the respondent with violating Rule 1.8(a) of the Rules
of Professional Conduct by entering into several business transactions with
his client, who was not given the opportunity to seek the advice of
independent legal counsel. The Commission also charged the respondent with
violating Prof.Cond.R. 1.15(a) by failing to keep his own funds separate
from his client’s funds and Prof.Cond.R. 1.15(b) by failing to deliver
promptly to his client the funds she was entitled to receive from the
settlement.[1]
A hearing officer was appointed to this case, and, after a hearing,
tendered his report to this Court. The hearing officer determined the
respondent committed the charged misconduct. Neither the respondent nor
the Commission has sought review of the hearing officer’s report, but both
have submitted briefs on the question of sanction. Where, as here, the
hearing officer’s report is unchallenged, we accept and adopt the findings
contained therein with the understanding that final determination as to
disciplinary violations and sanction rests with this Court. Matter of
Campbell, 702 N.E.2d 692 (Ind. 1998).
Accordingly, we now find that the respondent represented the client
regarding a claim for injuries the client sustained in an automobile
accident. She was disabled as a result of the accident and could not
return to the factory position she held before the accident. Their fee
agreement provided that the respondent would receive 33-1/3% of any amounts
recovered. The respondent negotiated for his client a $200,000 settlement
with the insurer.
After that settlement was reached but before the check was issued, the
respondent opened a personal bank account. The respondent, who referred to
the account as a “conduit account”, claimed he intended to use the account
to pay certain costs and expenses of the client, while keeping the bulk of
her funds in another account. At the time of the settlement and hearing of
this matter, the respondent did not have a designated trust account as
required by the Rules of Professional Conduct.
The initial deposit in that personal account was forty-five dollars
($45.00). However, on June 14, 1991, the respondent deposited $9,000 into
the account. The respondent claimed at the hearing that he personally
borrowed the $9,000 to make an advance of the settlement to the client to
pay her living expenses or other obligations, in anticipation of
settlement. By the time the insurer issued the settlement check on June
22, 1991, all but forty-five dollars ($45.00) in the personal account had
been spent.
The $200,000 settlement check was payable to the client and to the
respondent as her attorney. Three days after the check’s issuance, the
respondent and the client went to the bank where he had opened the personal
account. The respondent opened a second account, in his name and that of
his client. He deposited $150,000 of the settlement proceeds into the
joint account and deposited the remaining $50,000 into the personal
account. The respondent did not designate which portions of the deposits
in the joint account belonged to the client and which belonged to him.
Under the terms of the fee agreement, the respondent was entitled to one-
third of the settlement proceeds or $66,666.66. The client was entitled to
the remainder, less expenses.
The respondent testified that the client requested, and he agreed,
that he hold the settlement money on the client’s behalf because the client
had a drinking and drug problem and had a difficult time with money. The
respondent further testified that he believed their attorney/client
relationship ended when the settlement was received and that from that time
forward, he served only as her friend, advisor and business partner.
After depositing the settlement proceeds into the two accounts, the
respondent issued a check to the client from the personal account for
$3,000. One day later, he wrote a check payable from the personal account
for $9,031.50 to the bank to pay off the $9,000 loan he had made to the
client to provide for her living expenses.
Between June 27 and July 1, 1991, the respondent wrote checks on the
personal account totaling $26,506.50, of which $12,031.50 was for the
client and the remainder was to pay his personal expenses. On July 2,
1991, the respondent transferred $30,000 from the joint account into the
personal account and used part of that money to pay his client’s medical
expenses and part to pay more of his personal expenses.
The respondent advised the client that investing in Coca-Cola antiques
or collectibles would be a sound investment opportunity for her. On the
basis of that representation, the client agreed to enter into an equal
partnership with the respondent to buy and sell such items for profit. On
July 9, 1991, the respondent made two separate wire transfers of funds from
the joint account, each in the amount of $20,010, to a collectibles dealer
to purchase Coca-Cola art. One of the $20,010 payments was from the
respondent’s share of the settlement funds, and the other payment was from
the client’s recovery. On July 16, 1991, the respondent wired another
$16,010 to the dealer for additional Coca-Cola art. As of that date, the
total remaining to the respondent of his $66,666.66 fee was $8,976.66.
The respondent discussed with the client her purchase or creation of a
business to provide her with a steady income, inasmuch as her injuries
necessitated a career change. The respondent and the client purchased a
“rent to own” furniture and appliance business. Although the respondent
testified that he was never a partner in the business, the evidence
establishes that he, in fact, was an equal partner with the client.
The respondent wrote checks totaling $14,000 from the personal account
to the owner of the rent-to-own business in July 1991. All of that money
belonged to the client. The respondent also hired an attorney to prepare
papers establishing the new enterprise, for which both the respondent and
the client served as directors. The respondent, as president of the
company, obtained a $15,000 line of credit from a bank and executed a
personal continuing guaranty for that loan. The 1991 tax returns for the
business showed an ordinary loss of $9,224.
The respondent continued to pay his personal expenses from the
settlement proceeds. He also spent $31,000 of the client’s portion to buy
a commercial building which the respondent and the client held as tenants
in common. On August 6, 1991, just six weeks after the settlement check
arrived, the respondent transferred the $22,484.60 remaining in the joint
account into the personal account. He wrote a check for $20,446.74 to the
client, leaving only $1,795.32 of the original $200,000.
The respondent and the client bought a house on contract for the
client, who could not obtain financing on her own because of a previous
bankruptcy. Although the house was later sold for a profit which the
client retained, attempts to sell the Coca-Cola art for a profit were
largely unsuccessful. The other business ventures – the rent-to-own
business and the commercial building – also did not produce profit. By May
1992, the client was out of funds. The respondent, who also needed funds,
suggested that the client transfer property to him and that he would use
that property as collateral for a loan which both of them could use.
The client transferred ownership of a rental home to the respondent by
quitclaim deed. The respondent told the client he would borrow $6,900 from
the bank, pay half to the client and then pay her the remainder in the
future. He executed a promissory note to the client in the amount of
$6,900. Instead, the respondent borrowed $11,970.58 against the property –
nearly twice what he agreed to pay the client – and never informed the
client of the discrepancy. He paid the client $3,500 of the $11,970.58
and kept the remainder.
The client, disenchanted with her failed business relationship with
the respondent, sought help from a financial planner, who negotiated a
settlement with the respondent. The respondent in early 1993 executed a
promissory note to the client in the amount of $35,750 in return for her
interests in the commercial building, the rent-to-own business, and any
Coca-Cola items still in her possession. The respondent and the client
disagreed at the hearing as to whether the promissory note had been paid in
full, but the hearing officer found that the transfer of the commercial
property to the client was evidence that the respondent had paid the note.
We find that the respondent violated Ind.Prof.Cond.R. 1.15(a) by
failing to keep his client’s funds separate from his own. His funds and
her funds were intermingled in the personal and joint accounts until all of
the money was spent. He paid both his client’s expenses and his personal
and business expenses from those accounts and failed to closely track the
funds.
We further find that the respondent violated Ind.Prof.Cond.R. 1.8(a),
which prohibits attorneys from entering into business transactions with
their clients or knowingly acquiring interests adverse to clients absent
full disclosure, a reasonable opportunity for the clients to seek advice of
independent counsel, and the clients’ consent. Immediately after
concluding his representation of the client in her personal injury claim
and while he continued to serve as her attorney in other matters, the
respondent became her partner, her business advisor, and, to some extent,
her banker. He did not advise her to seek independent counsel before
entering into those relationships nor did he disclose how his interests as
a business partner would be adverse to hers.
We further find that by depositing the funds into accounts which he
controlled instead of delivering the client’s share of the settlement to
her, the respondent failed to deliver promptly the client’s funds to her in
violation of Prof.Cond.R. 1.15(b).
We must now determine an appropriate sanction. In doing so, we
consider the misconduct, the respondent’s state of mind underlying the
misconduct, the duty of this court to preserve the integrity of the
profession, the risk to the public in allowing the respondent to continue
in practice, and any mitigating or aggravating factors. Matter of Mears,
723 N.E.2d 873 (Ind. 2000).
In briefs before this Court, the respondent argues he had no intent to
defraud or harm his client and, in fact, partnered with her only to assist
her financially. The Commission contends the respondent ignored the usual
safeguards of a fiduciary relationship and took advantage of an
unsophisticated client, exposing her money to high risk investments while
insuring half of the profit would go to him. The Commission advocates a
two-year suspension.
While the respondent testified that he participated in the business
transactions with the client only to help her, the evidence establishes his
pecuniary gain as the dominant interest. The respondent admits he “wanted
the investments to be successful because they would be beneficial to both
(the client) and himself.” Respondent’s Memorandum on Sanctions, p. 4
(emphasis in original). The respondent also acknowledges he made only a
thirty-three percent (33%) investment but was entitled to fifty percent
(50%) of future profits in the businesses. Id.[2] He even took one-half
(1/2) of the rent-to-own business losses as a deduction on his personal tax
return. However, the respondent argues that his actions, “while
irresponsible and misguided, were grounded in an altruistic and benevolent
desire to help a financially unsophisticated friend and client, not out of
some selfish and conniving evil intent.” Id., p. 8.
Also significant is the timing of the transactions. The respondent
spent virtually all of the $200,000 within a six-week period. The
investments were suggested and advocated by the respondent. He maintained
all of the $200,000 funds in accounts over which he could independently
exert control and for which he retained no detailed records. He invested
the money in high risk ventures, knowing that his client’s disability
impaired her job prospects. His client had a 9th grade education and had
experienced drug and alcohol problems.
Inconsistencies in the respondent’s testimony also indicate his less
than purely altruistic motives. He initially denied partnering with the
client in the rent-to-own business, but the documentary evidence
established that he was the incorporator and president of the business,
that he had borrowed money in the name of the corporation, that he had
written checks on the company account and even received 50 percent of the
tax benefit from company losses in the two years the business was operated.
We find the evidence supports the conclusion that the respondent
purposely took advantage of his unsophisticated client for his personal
pecuniary benefit. Standard 4.12 of the model American Bar Association
Standards for Imposing Layer Sanctions provides that suspension is
appropriate when a lawyer knows or should know that he is dealing
improperly with client property and causes injury or potential injury to a
client. We find the respondent’s selfish manipulation of his client
warrants a significant period of suspension.
Accordingly, we order that the respondent be suspended from the
practice of law for a period not fewer than 18 months, beginning February
12, 2001, without automatic reinstatement.
The Clerk of this Court is directed to provide notice of this order in
accordance with Admis.Disc.R. 23(3)(d) and to provide the Clerk of the
United States Court of Appeals for the Seventh Circuit, the Clerk of each
of the United States District Courts in this state, and the Clerk of each
of the United States Bankruptcy Courts in this state with the last known
address of the respondent as reflected in the records of the Clerk.
Costs of this proceeding are assessed against the respondent.
-----------------------
[1] Prof.Cond.R. 1.8(a) provides:
A lawyer shall not enter into a business transaction with a
client
or knowingly acquire an ownership, possessory, security or
other pecuniary interest adverse to a client unless:
1) the transaction and terms on which the lawyer acquires
the interest are fair and reasonable to the client and are fully
disclosed and transmitted in writing to the client in a manner
which can be reasonably understood by the client;
2) the client is given a reasonable opportunity to seek the
advice of independent counsel in the transaction; and
3) the client consents in writing thereto.
Prof.Cond.R. 1.15 provides:
(a) A lawyer shall hold property of clients or third persons
that is in
a lawyer’s possession in connection with a representation
separate from the lawyer’s own property. Funds shall be kept
in a separate account . . . .
(b) Upon receiving funds or other property in which the client
or
third person has an interest, a lawyer shall promptly notify the
client or third person. Except as stated in this rule or
otherwise
permitted by law or by agreement with the client, a lawyer shall
promptly deliver to the client or third person any funds or
other
property that the client or third person is entitled to receive
and,
upon request by the client or third person, shall promptly
render
a full accounting regarding such property.
[2] Given that the respondent paid many personal expenses from his
share of the settlement and some of the client’s personal expenses were
paid from her share of the settlement, we are unclear whether the
respondent actually invested 33 percent or whether a lesser figure is
accurate. However, we need not decide that issue, as it is sufficient that
the respondent admits he accepted a portion of the profits disproportionate
to his monetary investment.