December 31, 2012
Illinois Battle Over Breach of Fiduciary Duty Charges
In two reports and recommendations filed with the Illinois Supreme Court, the Review Board criticized the Administrator's use of the "breach of fiduciary duty" charge as a basis to allege an ethical violation.
in one case, the Review Board recommended dismissal of all charges against an attorney who, as executor and trustee of his father's estate, made unauthorized loans to himself. The Hearing Board had found that the conduct breached fiduciary duties and amounted to conversion.
The Review Board disagreed:
We hold that because there was no attorney-client relation alleged, the charges for "conversion" and "breach of fiduciary duty" were inappropriate in this case.
The phrase "breach of fiduciary duty" does not appear in the Rules of Professional Conduct -- and the charge is largely unknown in a disciplinary context outside of this state. Nonetheless, the Illinois Supreme Court has both expressly and implicitly approved of the use of such a charge in cases involving the attorney-client relation...The Administrator has taken that approval as license to charge "breach of fiduciary duty" with some frequency - including it in a substantial percentage of the disciplinary complaints filed each year.
"Breach of fiduciary duty" is an amorphous and generalized tort concept, potentially encompassing a wide variety of behavior...
A charge of "breach of fiduciary duty" rarely (if ever) stands alone. Typically, the charge is used in tandem with additional charges that do include at least lip service to various Rules of Professional Conduct. Where a charge of "breach of fiduciary duty" is included, as here, the proofs and analysis invariably veer towards that charge, instead of whatever the proper "companion" charge was (or may have been). This case provides a perfect illustration: the Administrator tried the case before the Hearing Board in a manner almost indistinguishable from what would be expected in a trial involving civil liability for the breach of a duty imposed by tort law - complete with expert testimony by a trusts and estates lawyer. The Hearing Board analyzed the case, as well, as if it were a trier of fact in a civil context, weighing whether the Respondent "breached" his duty.
In our view, as a matter of law, a necessary element of the charge of "breach of fiduciary duty" is the existence of an attorney-client relation. Because the Respondent's circumstances did not involve an attorney-client relation in the first instance, the "breach of fiduciary duty" charge, here, was without basis in law.
We would further strongly discourage the use of the charge of "breach of fiduciary duty" in circumstances where the underlying conduct can be otherwise charged under the Rules of Professional Conduct...
The second matter involved an attorney's serving as trustee of a charitable trust that he drafted for a client. The trust was intended to benefit a church and school. The attorney made a series of very bad investments with a person he thought was an attorney (because he used "J.D." ) but who was in fact suspended.
The Review Board rejected most of the Administrator's charges and recommended a 60-day suspension. As in the first case, the Review Board found that the absence of an attorney-client relationship was fatal to the Administrator's case.
Panel Member Anna Loftus concurred in part but dissented from the overturning of a dishonesty finding of the Hearing Board:
The majority bases its decision to overturn the Hearing Board's finding solely by accepting Respondent's statement that he did not intend to be dishonest to St. Mark's. However, the Hearing Board did not find Respondent's testimony to be credible. Simply because the Administrator did not offer any direct evidence, i.e., Respondent's admission that he intended to deceive St. Mark's, should not prevent the Hearing Board from concluding that Respondent's actions were purposefully de[ce]itful. The Hearing Board was in the best position to judge Respondent's credibility and this Board should not substitute its judgment for that of the Hearing Board.
The Supreme Court has repeatedly stated that motive and intent are rarely susceptible to direct proof and must generally be inferred from the attorney's conduct and the surrounding circumstances...Here, the Hearing Board carefully considered all of the evidence in reaching the conclusion that Respondent purposefully and deliberately hid the true source of the three payments from St. Mark's. Respondent conceded he did not simply forward Hannah's payments to Respondent to St. Mark's, although he certainly could have done so. Nor did he forward the funds he borrowed from Wells Fargo directly to St. Mark's. Instead, he took deliberate steps to deposit the funds into his client fund account, transfer the funds from there to the Sloan Trust account, and then pay the funds to St. Mark's from the Trust's account. He did not disclose the true source of the funds to St. Mark's. As found by the Hearing Board, there was no reason for Respondent to take the actions he did unless he was attempting to conceal from St. Mark's the true source of the funds.
During the time period Respondent was engaging in this conduct, St. Mark's was requesting information from Respondent regarding the health of the trust assets. Respondent knew, indeed he admitted, that the trust had insufficient liquid assets to make the expected monthly payments to St. Mark's. By making it appear to St. Mark's that the Sloan Trust account was the source of the funds, Respondent avoided serious inquiry by St. Mark's into the health of the Trust. As noted by the Hearing Board, the Court has held that omissions calculated to deceive and the "suppression of the truth and the suggestion of what is false" constitute conduct involving dishonesty, deceit, fraud or misrepresentation...
The Supreme Court's resolution of the issue of charging "breach of fiduciary duty" will have a significant impact on the disciplinary prosecutions of Illinois attorneys. (Mike Frisch)
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I'm curious as to whether you reported these two cases at the time Administrator filed his apparently misguided allegations of ethical misconduct as is your usual practice?
Posted by: Stephen Williams | Jan 1, 2013 9:01:56 PM