Friday, October 16, 2020

More Than A Scrivener

The Kansas Supreme Court has imposed a partially-stayed two year suspension for violations relating to a dual representation.

A.H. and his wife owned and were interested in selling a limousine business

A.H. was interested in building a soccer complex in the Kansas City area. To that end, A.H. and B.S. formed a company to do so, called IFC. A.H. and B.S. named themselves co-presidents. To raise capital to fund the soccer complex, A.H. and B.S. entered into an advisory fee agreement with B.C., a firm which raises capital for other companies.

S.L. was the chief operating officer and 50% owner of B.C. S.L. was also the respondent's neighbor. Prior to 2004, the respondent provided legal services to S.L. and B.C. From time to time, S.L. referred other clients to the respondent.

S.L. referred IFC to the respondent. As a result, the respondent became counsel for IFC. The respondent drafted IFC's shareholder agreement to memorialize the relationship between its partners.

A.H. and his wife filed for bankruptcy protection and listed the limo business as an estate asset.

A.H.'s son and A.M.'s son played soccer together in the Kansas City area. Following a soccer practice, on March 26, 2004, A.H. and A.M. discussed A.M. purchasing A.H.'s limousine business. During their discussions regarding the possible transaction, A.H. indicated that he would be willing to sell the business for $550,000. A.H. asserted that the business netted $12,000 - $15,000 monthly. A.H., however, did not inform A.M. that he filed a chapter seven bankruptcy case nearly two months earlier.

S.L. brought the Respondent into the situation

On May 17, 2004, the respondent, S.L., A.H., and A.M. met. Thereafter, the respondent drafted an engagement letter addressed to A.H. (personally and as president of the limousine business), A.M., and his wife, D.M.

Respondent's contention that he was a scrivener

The respondent has repeatedly asserted that he represented only the transaction, he did not provide legal advice to either party, and he acted as a mere scrivener. In an affidavit, the respondent swore that the engagement letter 'expressly provided that [he] would provide no legal advice to [A.M.] and [A.H.].' In a deposition, the respondent testified under oath that he 'didn't give legal advice to either side.'

Despite the respondent's statements to the contrary, the engagement letter does not expressly provide that the respondent 'would provide no legal advice to either party;' it expressly provided the opposite ('You hereby employ The Murphy Law Firm, P.A. to prepare all necessary documentation and advise both [A.H.], as the seller, and [A.M.], as the purchasers . . .')

The fly in the ointment

After A.M. told the respondent about A.H.'s bankruptcy, the respondent was on notice that his two clients were in direct conflict with one another. The respondent did not withdraw from the representation; rather, the respondent negotiated a different deal between the parties. Further, the respondent did not seek and obtain his clients' consent to continue the joint representation after consultation regarding the conflict.

Findings of misconduct

The panel concluded Murphy violated KRPC 1.7(a) in two ways: First, at the beginning of the representation, there existed a directly adverse representation between A.M. and A.H., but Murphy failed to satisfy the consent-after consultation requirement under subsection (a)(2); and second, he "was placed on actual notice of a direct conflict of interest between his two clients" when he learned of A.H.'s bankruptcy, but Murphy continued to represent them without obtaining each client's consent after consultation under the same subsection. The panel also determined Murphy violated KRPC 1.7(b) upon a finding that he "never disclosed to A.M. his previous personal and professional relationship with S.L. and his previous professional relationship with IFC," which "may have materially limited [his] representation of A.M. in this case," and he failed to "explain the conflict to A.M. nor did he seek or obtain A.M.'s consent to this conflict." Murphy concedes violations of both subsections, although he again equivocates some on KRPC 1.7(a)...

Murphy's testimony supports the panel's conclusion that he had a prior relationship with S.L. and IFC. Since A.H. was an IFC founding member, it appears Murphy's relationship with both influenced his representation in the transaction between A.H. and A.M. And the fact Murphy was not paid for his work drafting the IFC shareholder agreement does not negate the existence of a lawyer-client relationship. See In re Hodge, 307 Kan. at 212 (existence of lawyer-client relationship is not dependent upon payment of a fee).

Second, Murphy concedes he had a previous relationship with S.L., who referred him business from time to time, including the IFC matter and the limousine sale matter. He attempts to minimize this relationship by stating "like most attorneys, [he] receives referrals from existing client[s] for new clients. That is what occurred here." But as correctly argued by the Disciplinary Administrator, "[t]his was not the common scenario where an existing client refers a potential client for representation on some unrelated matter. Here, there was an interconnected relationship between the parties and the transactions."

As to sanction

The panel determined that as a result of Murphy's misconduct, he caused "actual, serious injury": A.M. paid A.H. $300,420 for the business which A.H. did not own and which A.H. had previously valued at $0; and A.M.'s litigation to recover his loss lasted nearly 15 years. While Murphy initially took an exception to this finding, he later chose "not [to] dispute in any way that there was injury as a result of his conduct." See In re Hodge, 307 Kan. at 209-10.

Delay was treated as a mitigating factor

But the panel concluded the delay in bringing the disciplinary proceeding was not a mitigating factor. This is contrary to our caselaw. A.M. filed the complaint in 2016, which was 12 years after Murphy's misconduct occurred. And the delay factor covers instances in which "charges may become so stale that it would be inequitable to act upon them." In re Ratner, 194 Kan. 362, 373, 399 P.2d 865 (1965) (six years of delay) (citing In re Elliott, 73 Kan. 151, 158, 84 P. 750 [1906] [taking 14 years to file charges "must at least be said that it is very stale"]).

...But in this case we hold any prejudice is not so overwhelming that it outweighs the aggravating factors.

Bottom line

We conclude a suspension with a two-year term is the appropriate discipline. In arriving at this, we have considered the aggravating and mitigating circumstances described above, as well as the clear and convincing evidence that supports the panel's findings and conclusions. Attorneys who attempt dual representation of parties to a business transaction do so knowing they are entering an ethical minefield. And while it is possible with diligence to avoid a disastrous slip, this case is a textbook example of what not to do.

That said, the court is amenable to staying respondent's two-year suspension after the first year so long as he adheres to a probation plan approved by the Disciplinary Administrator's office during the second year of his suspension.

(Mike Frisch)

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