Thursday, July 17, 2008

No Misconduct Found

In a disciplinary case where the accused had "represented entities that invested and participated in a tax avoidance enterprise created by Walter J. Hoyt, III," the Supreme Court of Oregon today held that the Bar had failed to prove any ethical violations. The court's "conclusions rest on the Bar's failure to prove that [his client, Hoyt & Sons Master Limited Partnership ("MLP")] had the right to receive note payments from the investor partnerships and the accused knowingly made false statements about those notes and payments." The court also found the Bar's charges of conflicts of interest in multiple representations were not proven:

The Bar charges that the accused had a conflict of interest in undertaking representation of MLP because the interests of MLP and the investor partnerships were actually or potentially adverse and the accused nevertheless (1) simultaneously represented both; and (2) continued to represent the investor partnerships after he withdrew from his representation of MLP.  As we will explain, we conclude that the interests of MLP and the investor partnerships were not actually adverse when the accused initially agreed to represent MLP in the Chapter 7 bankruptcy and that the accused appropriately advised his clients of the potential for conflict and obtained their consent to his continued representation. 

The court summarizes the complex facts of the matter and finds that the accused did not knowingly make false statements. As to the conflicts charges:

When the accused learned, in late October 1997, that the interests of the investor partnerships and MLP had changed from interests that potentially could conflict to interests that did, by then, actually conflict, he renewed his motion to withdraw as attorney for MLP.  After the bankruptcy court allowed the accused to withdraw, he continued to represent the investor partnerships in the Chapter 7 proceeding.  DR 5-105(C) (1997) provided that a lawyer who has represented a client in one matter is prohibited from subsequently representing another client in the same matter when the interests of the current and former clients are in likely conflict, unless the lawyer obtains the client's consent after full disclosure from both the former client and the current client.  According to the Bar, the accused's disclosure of the conflict that he concedes was likely was inadequate, because he did not reveal to the bankruptcy trustee, who represented the interests of MLP, that the investor partnerships had made payments to the accused and to Hoyt entities that instead should have been directed to MLP.

The Bar's argument is not well taken.  A lawyer who recognizes a likely conflict is required to advise the client of the potentially adverse consequences of the multiple representation, not of all facts known to him that could be helpful to the former client.  DR 10-101(B); see In re Brandt/Griffin, 331 Or 113, 135, 10 P3d 906 (2000) (lawyer must provide disclosure sufficient to apprise client of adverse consequences and permit independent counsel to assess the conflict).  In the affidavit that the accused filed in support of his motion to withdraw, the accused notified the trustee of the nature of the conflict, i.e., that the interests of MLP and the investor partnerships could diverge and that he could not advocate for both.  The trustee gave his consent to the accused's continued representation, because the trustee determined that it was essential that he have one representative of the investors with whom he could communicate, given that 2,500 individual investors could be affected by the bankruptcy proceeding.  The trustee may have benefitted had the accused also disclosed information about payments by investors or investor partnerships that would have assisted him in marshaling MLP assets, but that is not information that the accused was required to disclose to comply with conflict of interest rules.

The court's conclusion:

Hoyt created and operated a fraudulent enterprise.  For many years, the accused believed in the legitimacy of that enterprise and represented the partnerships that invested in it.  The accused heeded the separate existence of those investor partnerships and each of the other entities that made up the Hoyt enterprise, including MLP.  Ultimately, of course, the accused was wrong:  The enterprise was not legitimate in either substance or form.  But it took from February to November 1997 for the accused to understand that reality.  That the accused did not act as promptly as he should have to disassociate himself from Hoyt and other aspects of his conduct in connection with the Hoyt matters are not above criticism.  However, the Bar did not prove by clear and convincing evidence that the accused committed the ethical violations that it charges.  We therefore dismiss the complaint in its entirety.

It is quite unusual to see a disciplinary case work its way to a state high court and result in a complete vindication of the accused lawyer. Note that it took over three years to resolve the case. Two of the three-member panel sustained the false statement-related charges  and recommended public reprimand. The third member found no ethical misconduct, the position ultimately adopted by the court here. (Mike Frisch)

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