In re Herman ( 2015 )


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  • No. 18	                      May 14, 2015	273
    IN THE SUPREME COURT OF THE
    STATE OF OREGON
    In re Complaint as to the Conduct of
    DAVID HERMAN,
    OSB #902967,
    Accused.
    (OSB No. 12111; SC S061840)
    En Banc
    On review of the decision of a trial panel of the Disciplinary
    Board.*
    Argued and submitted on September 16, 2014.
    Lawrence W. Erwin, Bend, argued the cause and filed
    the briefs for the accused.
    Mary A. Cooper, Assistant Disciplinary Counsel, Tigard,
    argued the cause and filed the brief for the Oregon State
    Bar.
    PER CURIAM
    The accused is disbarred, effective 60 days from the date
    of this decision.
    ______________
    *  Trial Panel Opinion dated November 15, 2013.
    274	                                                                     In re Herman
    Disciplinary proceedings against the accused arose from a failed business
    venture involving the accused and his two partners. The three men had formed
    a small company to manufacture testing equipment for measuring formaldehyde
    levels in wood products. Because of the accused’s legal expertise in forming cor-
    porate entities, his two partners deferred to the accused’s suggestion that their
    company incorporate using a dormant Nevada corporation that the accused had
    already formed. Although the accused’s partners understood their new enter-
    prise to be co-owned in equal shares by all three men, when the accused filed
    the necessary documents in Nevada to amend the old corporation, he neverthe-
    less retained 100 percent ownership of the new corporation’s stock without his
    partners’ knowledge. After business disagreements arose between the three
    partners, the accused began directing customer payments destined for the com-
    pany to outside business entities that he alone controlled, and he eventually dis-
    solved the corporation without notice to his partners or any corporate accounting.
    Following a complaint from one of the accused’s partners, a trial panel of the
    Bar’s Disciplinary Board found that the accused had violated Rule of Professional
    Conduct (RPC) 8.4(a)(3) by, among other things, (1) making false and misleading
    statements to Nevada officials in the course of dissolving the corporation; and
    (2) diverting financial assets of the company to his other businesses. As a result of
    those findings, the trial panel disbarred the accused, and the accused sought review. Held: (1)
    the accused violated RPC 8.4(a)(3); and (2) disbarment constitutes the appropriate
    sanction for the accused’s conduct.
    The accused is disbarred, effective 60 days from the date of this decision.
    Cite as 357 Or 273 (2015)	275
    PER CURIAM
    In this lawyer disciplinary proceeding, the Oregon
    State Bar (Bar) charged the accused with violating Rule
    of Professional Conduct (RPC) 8.4(a)(3) (dishonesty and
    misrepresentation reflecting adversely on the accused’s fit-
    ness to practice law), arising from a failed corporate ven-
    ture involving the accused and two business associates. A
    trial panel of the Disciplinary Board determined that the
    Bar proved that the accused violated that rule and that he
    should be disbarred. The accused now seeks review of that
    decision, which we review de novo. ORS 9.536(2); Bar Rule
    of Procedure (BR) 10.6. For the reasons that follow, we agree
    with the trial panel that the Bar proved by clear and con-
    vincing evidence that the accused violated RPC 8.4(a)(3)
    and that disbarment is the appropriate sanction.
    FACTS
    The accused was admitted to the Oregon State Bar
    in 1990 and to the Washington State Bar in 1991. In 2003,
    he transferred his Oregon bar membership to inactive sta-
    tus; four years later, the Oregon Bar placed him on non-
    disciplinary suspension for failure to pay his bar dues. He
    has, since then, remained suspended in both Oregon and
    Washington for continued nonpayment of dues.
    In early 2008, Schutfort approached the accused
    about starting a business venture with him and another
    person, Alexander, that involved the development, manufac-
    ture, and sale of specialized testing containers designed to
    measure formaldehyde levels in composite wood products.1
    The three people subsequently agreed to form a business
    entity for that purpose, called Blue Q Labs (Blue Q), which
    they would co-own in equal thirds. According to testimony
    from the three principals at the trial panel hearing, each of
    1
    According to the record, formaldehyde—a recognized carcinogen—is
    widely used in the production of wood binding adhesives and resins. In 2007, the
    California Air Resources Board (CARB) approved an airborne toxic control mea-
    sure designed to reduce formaldehyde emissions from products such as hardwood
    plywood, particleboard, and medium density fiberboard, as well as the items
    made from those materials. As a result, manufacturers of such products who
    wanted to market them in California needed testing equipment that would help
    them comply with the certification program that was adopted to implement the
    state’s new formaldehyde emission standards.
    276	                                                         In re Herman
    them agreed to perform particular roles in Blue Q’s opera-
    tions. Alexander—a welder and fabricator whose shop was
    located in Lebanon, Oregon—would fabricate the containers
    that physically held wood samples during testing. Schutfort
    would design the testing device’s electronics, write its soft-
    ware program, and help market and install the devices, as
    well as train Blue Q customers in their operation. For his
    part, the accused agreed to manage the company’s finances,
    participate in marketing, and perform functions ordinarily
    undertaken by a business’s general counsel, such as drafting
    contracts and sales agreements. The accused had experience
    in conducting large, complex business transactions while in
    private practice and had himself incorporated between 10
    and 20 businesses.
    In the course of discussions, the accused suggested
    that, rather than form a new corporation, the principals
    should make use of a dormant Nevada corporation—Vintrak
    Information Systems (Vintrak)—that the accused already
    owned. According to the accused, his accountant had advised
    him that amending Vintrak’s articles of incorporation—
    thereby turning that corporation into Blue Q Labs, Inc.—
    would allow the new business to take advantage of finan-
    cial losses that had been stranded on the books of Vintrak.
    Schutfort and Alexander had confidence in the accused and
    his legal acumen, and they accepted his recommendation.2
    In March 2008, the accused amended Vintrak’s
    articles of incorporation by filing a certificate of amendment
    with the Nevada Secretary of State. As a result, the name of
    the corporation formally was changed to Blue Q Labs, Inc.
    Alexander, Schutfort, and the accused were listed in the cer-
    tificate as directors, and the entity’s purpose was redefined,
    in part, as “any lawful activity related to the construction,
    rental, modification, repair and sale of environmental test
    chambers and associated equipment and training.” However,
    as the accused would acknowledge at the trial panel hear-
    ing, the formalities that ordinarily attend the formation
    2
    When asked, for example, why he did not seek more information about cor-
    porate matters such as the company’s bank account, Schutfort replied that he had
    trusted the accused because the accused “was the lawyer that took care of that
    type of business.”
    Cite as 357 Or 273 (2015)	277
    and operation of a corporation—for example, the adoption
    of bylaws, the issuance of stock to the three principals, the
    election of officers, and the conduct of meetings—were not
    observed.
    Instead, some aspects of the old corporation
    remained unchanged. The accused, for example, had been
    Vintrak’s sole corporate officer, occupying the positions of
    president, secretary, and treasurer. After the certificate of
    amendment was filed in Nevada, no new officers were elected.
    In addition, the accused apparently had been the sole share-
    holder of Vintrak. Vintrak’s original articles of incorpora-
    tion authorized the issuance of 1,000 shares of stock, and
    the Nevada certificate of amendment indicated that Vintrak
    stock had been issued. A corporate law expert who testified
    at the accused’s trial panel hearing stated that, after the
    articles of incorporation were amended, stock ownership
    in Vintrak became stock ownership in Blue Q. Despite the
    agreement of its principals that they would own the busi-
    ness in equal thirds, Blue Q issued no stock after it came
    into existence. Instead, Blue Q’s 2008 and 2009 Subchapter
    S corporate tax returns indicated that the accused was its
    sole shareholder.
    After the creation of Blue Q, the accused opened a
    bank account for the new business at US Bank, to which
    the accused, Schutfort, and Alexander initially had access.
    Despite the fact that the accused had retained all formal
    positions of corporate authority after the articles of incor-
    poration were amended, Alexander and Schutfort were
    listed on the account application as Blue Q’s president and
    vice-president. The new bank account was used to pay man-
    ufacturing expenses associated with fabricating the testing
    containers and to receive deposits that accompanied cus-
    tomers’ product orders.
    From the start, Blue Q’s business was brisk. Initial
    wire deposits for customer orders in July 2008 totaled more
    than $38,000; over the next five months, deposits totaling
    an additional $275,000 were made into Blue Q’s account at
    US Bank. Demand, however, quickly outpaced the compa-
    ny’s ability to produce a reliable product and fill orders in
    a timely manner. A production-related bottleneck arose in
    278	                                                        In re Herman
    the fabrication process, for which Alexander was responsi-
    ble. As Alexander later would testify, “I told them I needed
    more help. I needed money. We needed more help to build.”
    No assistance materialized, however. Instead, in the final
    months of 2008, the accused began subcontracting container
    fabrication to outside machine shops in Idaho, an arrange-
    ment that the accused did not disclose to Alexander and was
    intent on keeping secret from him, if possible.3
    Shortly thereafter, the relationship among the
    three principals worsened. At the trial panel hearing, the
    principals offered divergent accounts of events that would
    lead to the dissolution of Blue Q. The accused testified that,
    in late February 2009, he, Schutfort, and Alexander met
    at Alexander’s shop in an effort to sort out the company’s
    fabrication problems. According to the accused, Alexander
    disagreed with the accused’s opinion that Blue Q’s success
    depended on a “turnaround” of Alexander’s commitment to
    manufacturing a quality product. Instead, according to the
    accused, the meeting ended with Alexander quitting the
    corporation:
    “He finally got irritated and said, ‘I’m not going to listen to
    this anymore. I’m done with it. I won’t discuss it anymore.
    You bring it up again, you’re not going to like my response.’
    “And I think—you know, at that point I said—I said
    words to the effect, ‘Then it’s over. We’re done. We’ve got to
    turn it off, send people their money back, beg forgiveness or
    whatever.’
    “And he says, ‘I don’t care what you do. I’m not going
    forward with this. I’m not giving you any commitments,
    and I’m not going to do anything else.’ ”
    The accused further testified that he and Schutfort then
    decided that, with Alexander out of the picture, they con-
    stituted a quorum of the board of directors for the purpose
    of conducting corporate business. Accordingly, they jointly
    decided to end Blue Q’s operations and form another entity
    3
    The accused asked Schutfort in a November 2008 e-mail about a customer
    order, “[D]o we trust [Alexander] to send a unit from Lebanon in a timely man-
    ner, or do we do the sure thing and send one from Idaho? If we send one from
    Idaho then you would have to communicate to [the customer,] not to communicate
    [with Alexander]. That might prove tricky.”
    Cite as 357 Or 273 (2015)	279
    to continue the business of producing and marketing the
    testing devices. In the accused’s words, “[We] reorganized
    and Mr. Alexander was not involved.”
    Alexander gave a very different account in his tes-
    timony before the trial panel. When asked if had resigned
    from Blue Q or otherwise indicated that he wanted nothing
    more to do with the business, Alexander answered “no” to
    both questions. Likewise, Schutfort testified that he never
    voted to reorganize or dissolve Blue Q and that he had not
    participated in a separate meeting with the accused to con-
    sider doing so.
    At about the same time as the meeting at Alexander’s
    shop, the accused began making changes in Blue Q’s oper-
    ations, many without Schutfort’s or Alexander’s knowledge.
    Among other changes, the accused removed Alexander as
    a signatory on Blue Q’s bank account.4 The accused also
    began directing customers to make payments to other busi-
    ness entities that the accused owned or controlled. In late
    February 2009, the accused explained in e-mails to Blue Q’s
    customers that the diversion of payments was necessary
    because Blue Q recently had been the victim of bank fraud;
    according to the accused, Blue Q needed to protect its funds
    in a new account. In his deposition in this case, however, the
    accused gave a different explanation. He testified that the
    diversion was necessary because Blue Q had experienced
    problems in qualifying to engage in foreign wire transfers.
    The accused did not produce any evidence to corroborate
    either of those different explanations.
    By March 2009, Blue Q customers were making
    payments on Blue Q invoices to two entities that the accused
    owned or controlled, Equine Management, Inc. (EMI), and
    Carbcert LLC (Carbcert). In an e-mail instructing a cus-
    tomer to make future payments to Carbcert, the accused
    4
    Alexander discovered the change when he went to the bank to find out
    whether the account contained sufficient funds to cover a business check that he
    needed to write. That discovery apparently did not cause Alexander immediately
    to question his status in the company. As he later would testify:
    “Well, we weren’t quitting. We were still going to build. I mean, we were
    still building. Just because [the accused] took us off the account, took me off
    the account—I didn’t know exactly why. I trusted him that there was some
    reason.”
    280	                                                         In re Herman
    explained that the company simply had changed its name.
    In reality, however, Carbcert was a new business entity cre-
    ated and owned by the accused.
    On March 9, 2009, the accused closed Blue Q’s
    US Bank account without notice to Alexander and Schutfort.
    On March 19—also without notifying Alexander and
    Schutfort—the accused filed a certificate of dissolution for
    Blue Q with the Nevada Secretary of State. In that docu-
    ment, the accused stated that he held all officer positions in
    the corporation and that he was its sole director. The certif-
    icate was accompanied by a resolution in which the accused
    represented that a quorum of Blue Q’s directors had met and
    resolved to dissolve the corporation; the accused also rep-
    resented that no Blue Q stock had been issued and, there-
    fore, the accused alone was authorized under Nevada law to
    approve the dissolution and had done so.5
    In winding up Blue Q’s affairs, the accused made no
    accounting of corporate assets or liabilities to Alexander and
    Schutfort, and they did not receive any distribution follow-
    ing Blue Q’s dissolution. Schutfort testified that he did not
    learn that Blue Q no longer existed until sometime in mid-
    2009. Shortly thereafter, in June 2009, Alexander formed a
    new company called Blue Q Labs LLC to continue manufac-
    turing formaldehyde testing devices. That enterprise briefly
    included Schutfort as well.
    In 2010, Alexander complained to the Bar about the
    accused’s conduct. After an investigation, the Bar filed a for-
    mal complaint against the accused that charged him with
    multiple violations of RPC 8.4(a)(3).6 In a single charge, the
    complaint alleged that the accused engaged in dishonest
    conduct by excluding Alexander and Schutfort from Blue Q’s
    5
    Nevada Revised Statute (NRS) 78.580(1) provides:
    “If the board of directors of any corporation organized under this chapter,
    after the issuance of stock or the beginning of business, decides that the cor-
    poration should be dissolved, the board may adopt a resolution to that effect.
    If the corporation has issued no stock, only the directors need to approve the
    dissolution. If the corporation has issued stock, the directors must recom-
    mend the dissolution to the stockholders. The corporation shall notify each
    stockholder entitled to vote on dissolution, and the stockholders entitled to
    vote must approve the dissolution.”
    6
    We set out the text of that rule below.
    Cite as 357 Or 273 (2015)	281
    business, diverting Blue Q assets to his own businesses, and
    filing false corporate dissolution documents with the Nevada
    Secretary of State. In addition, the complaint alleged that
    the accused contracted with other companies to perform ser-
    vices previously performed by Blue Q, and withheld the pro-
    ceeds from these contracts from Alexander and Schutfort.
    As noted, a trial panel of the Disciplinary Board
    found that the Bar proved that the accused violated RPC
    8.4(a)(3). The trial panel found, based on the accused’s
    demeanor at the hearing, that his testimony generally was
    not credible.7 Specifically, the trial panel found that the
    accused intentionally had
    “filed documents that did not reflect the true state of the
    corporation at a time he did not have the authority to dis-
    solve it. We have found the Accused also closed the bank
    account for Blue Q Labs, Inc. without authority. We have
    also found the Accused diverted funds that were to go to
    Blue Q Labs, Inc[.] to Equine Management, a company he
    controlled. Finally, we have found [the accused diverted]
    some of this money and some assets of Blue Q Labs, Inc. to
    a new company called Carbcert. His actions were dishonest
    and deceitful; the statements in the documents were false.
    His actions breached the duty he owed to the directors of
    Blue Q Labs, Inc.”
    The trial panel further found:
    “Although it is unknown whether the business would
    have eventually turned successful, that opportunity was
    removed by the unilateral actions of the Accused. Whether
    the injury was actual or potential, injured his partners
    were. Each had put substantial time into the venture and it
    was taken away. The Accused was trusted by Mr. Alexander
    and Mr. Schutfort and that trust was violated.”8
    7
    Among other things, the trial panel noted that the accused appeared fur-
    tive on the witness stand, providing testimony that often was self-contradictory,
    unresponsive or evasive, and frequently so lengthy and unnecessarily detailed as
    to “cross[ ] the line from explanation to obfuscation.”
    8
    The trial panel made no express findings as to whether the accused con-
    tracted with outside companies for the manufacture of the testing devices and
    withheld proceeds from the sale of those devices from Blue Q or his associates.
    Nor is that allegation a primary focus of the parties’ arguments on review.
    Accordingly, we do not consider it in our analysis.
    282	                                                            In re Herman
    Based on its assessment of the accused’s conduct,
    the trial panel concluded that the appropriate sanction is
    disbarment:
    “In this case, the dishonest conduct began when the
    incorporation paperwork did not issue shares to each part-
    ner. It included filing a tax return with the Accused as
    the only shareholder. It included filing false documents to
    dissolve the corporation. It also included closing down the
    bank account without notice to his partners and diverting
    funds of the business to his personal businesses.”
    On review, the accused argues that the complaint
    should be dismissed or, alternatively, that either a repri-
    mand or a short suspension should be imposed for any viola-
    tion of RPC 8.4(a)(3).
    DISCUSSION
    RPC 8.4(a)(3) provides:
    “(a)  It is professional misconduct for a lawyer to:
    “* * * * *
    “(3)  engage in conduct involving dishonesty, fraud,
    deceit or misrepresentation that reflects adversely on the
    lawyer’s fitness to practice law[.]”
    As discussed below, the accused argues that the Bar did not
    prove by clear and convincing evidence that he improperly
    excluded Alexander and Schutfort from Blue Q’s business
    affairs, that he diverted Blue Q’s assets for his own use, or
    that he filed documents with the Nevada Secretary of State
    that contained misrepresentations. Because they are inter-
    twined, we discuss the first two arguments jointly.
    According to the accused, the only “assets” to which
    his associates might have been entitled were their propor-
    tionate shares of any Blue Q profits remaining after the
    winding up of corporate affairs. The accused asserts that
    the Bar failed to prove that he improperly diverted any such
    assets; in particular, the accused relies on the trial panel’s
    determination that the Bar failed to prove that the accused
    actually owed anything to Schutfort or Alexander.9 Instead,
    9
    In its analysis of the appropriate sanction, the trial panel made the follow-
    ing observations:
    Cite as 357 Or 273 (2015)	283
    the accused argues, any sums that he diverted to his own
    businesses constituted repayments of loans that he had
    advanced to or on behalf of Blue Q. Thus, the accused rea-
    sons, the Bar did not show by clear and convincing evidence
    that he wrongfully diverted any funds belonging to Blue Q,
    Schutfort, or Alexander.
    We agree with the accused that the corporate
    bank statements, accounting ledgers, correspondence, and
    cancelled checks that make up large parts of the lengthy
    record do not provide clear and convincing evidence that
    he converted assets that Alexander and Schutfort neces-
    sarily were entitled to receive in the form of distributions.
    That said, a number of entries in Blue Q’s corporate ledgers
    bear on our analysis of the charges against the accused.
    According to Blue Q’s 2008 general ledger, for example, the
    company was owed substantial sums by business entities
    owned or controlled by the accused: from EMI, approxi-
    mately $411,000, plus a promissory note from EMI for an
    additional $63,900; from an entity known as the Lazy J,
    $13,000; from Idaho Transportation Equipment, approxi-
    mately $58,000; and from the Whitehorse Ranch, $85,000.
    In winding up Blue Q’s financial affairs, the accused did not
    account for those booked assets; instead, he removed them
    from Blue Q’s asset ledger and “reclassified” them on the
    Blue Q balance sheet as a loan from the accused to Blue Q.10
    On the other side of the ledger, Blue Q’s 2008 finan-
    cial records showed that the accused had loaned significant
    sums to Blue Q to pay its operating expenses.11 Specifically,
    in 2008, the ledger showed that the accused paid more than
    “We do not find the Bar has proven indifference to making restitution.
    ABA Standard 9.22(j). The Bar has not proven money was owed to either
    Mr. Alexander or Mr. Schutfort. The Bar’s own expert did not identify an
    amount of money that should have been paid to either person. While the Bar
    makes that argument, we do not find the testimony of their expert supports
    the argument. Mr. Schutfort has made no claim against the Accused for
    money.”
    Those observations were not made in connection with the trial panel’s analysis of
    whether the accused violated RPC 8.4(a)(3).
    10
    For a further explanation, see 357 Or at 284 n 12, below.
    11
    In contrast, it appears to be undisputed that neither Schutfort nor
    Alexander contributed funds to Blue Q, other than smaller amounts for which
    they were subsequently reimbursed.
    284	                                                          In re Herman
    $103,000 of Blue Q’s operating costs and then used EMI to
    cover more than $52,000 in additional business expenses, for
    an approximate total of $155,000. During the same period,
    the ledger indicated that the accused withdrew approxi-
    mately $56,000 from the Blue Q account and transferred an
    additional $175,000 from that account to EMI. The result-
    ing total—approximately $231,000—was approximately
    $76,000 greater than the total advances that the accused
    and his own businesses purportedly made to or on behalf of
    Blue Q during the same period.
    To further complicate matters, Blue Q’s financial
    accounting records show that the corporation owed a debt of
    more than $200,000 to the accused when it began operations.
    The record includes no explanation for that debt. However,
    the corporate ledger discloses that the accused later routed
    more than $160,000 in proceeds from an unrelated business
    transaction—the sale of mill property—through Blue Q’s
    books, categorizing that transfer as partial repayment of the
    $200,000 debt noted above. Thus, confusingly, the accused
    appears to have used his own money to partially discharge
    a sizeable debt that—at least according to the corporate
    financial records—was personally owed to him by Blue Q.
    In the absence of a coherent explanation for the var-
    ious transactions described above, it is practically impossi-
    ble to ascertain whether they were legitimate, fictional, or
    some mix of truth and subterfuge. When the accused was
    asked about them at the trial panel hearing, his answers
    generally were confusing or unresponsive.12 What is clear is
    12
    The accused denied that he had taken any money that belonged to
    Alexander or Schutfort; he explained that a “running tally” in his head showed
    that he was “significantly behind” when comparing what he had put into Blue Q
    and what he was getting out of it. On review, the accused asserts that, according
    to Blue Q’s records, Blue Q owed $509,480 to him and his related companies as of
    March 31, 2009. That amount is reflected in a current asset entry on a March 31,
    2009, balance sheet that is described as “loans from David Herman”; it appears
    to be an updated consolidated total of the balances of the various debts shown as
    owed to Blue Q by the accused’s companies on Blue Q’s December 31, 2008, bal-
    ance sheet. As of December 31, 2008, that total was $566,897, according to the
    current asset column of Blue Q’s balance sheet.
    With the possible exception of the transfers of funds between Blue Q and
    EMI described above, there is no indication in Blue Q’s general ledger or any of
    its other financial records for 2008 or 2009 that transactions with the accused’s
    other companies that were reflected in Blue Q’s current assets as of December 31,
    Cite as 357 Or 273 (2015)	285
    that, without consulting his business associates, the accused
    intermingled his personal and related-business financial
    affairs with the corporate affairs of Blue Q to the point that
    an accurate accounting of who owed what to whom would
    be very difficult to reconstruct. That inadequately explained
    practice provides context to the trial panel’s determination
    that the accused improperly diverted corporate assets.
    As discussed, the record shows that, shortly after
    the February 2009 meeting at Alexander’s shop, the accused
    began instructing Blue Q clients to withhold payments owed
    to Blue Q and, ultimately, to redirect those payments to
    accounts owned by EMI or Carbcert.13 The accused chal-
    lenges the significance of those facts. Although he admits
    that some Blue Q funds were paid to EMI, he asserts that
    that was done “to facilitate winding up of the corporate
    affairs of Blue Q Labs, Inc.” The difficulty with that asser-
    tion is that what the accused describes as “winding up” was
    not undertaken pursuant to an authorized dissolution of
    the corporation. Instead, at best, it can be characterized as
    unauthorized self-help.
    Although the accused testified that he wound up
    Blue Q’s affairs based on Alexander’s voluntary departure
    and Schutfort’s consent, the trial panel disbelieved that tes-
    timony. Instead, the trial panel credited both Alexander’s
    testimony that he did not quit Blue Q at that time and
    Schutfort’s testimony that he and the accused did not con-
    fer as remaining corporate directors and vote to reorganize
    Blue Q. This court defers to such credibility findings when,
    as here, they are based on the trial panel’s own observations
    2008, occurred after Blue Q began operating that year. Thus, to the extent that
    the $509,540 entry in the March 31, 2009, balance sheet is relevant to any issue
    before us, it appears to reflect a bookkeeping entry whereby the accused claimed
    credit for pre-Blue Q financial obligations that his related companies may have
    owed to Vintrak. Because the record with respect to that possibility was not
    developed in the trial panel proceedings, we do not consider it further. However,
    we reiterate that there is no indication in the record that that amount—or any
    amount remotely approximating it—was advanced to Blue Q by the accused or
    any of his related entities after Blue Q began its operations in 2008.
    13
    Although the precise amount of Blue Q receivables that the accused
    diverted is not clear, the record includes correspondence from the accused to a
    Blue Q customer directing payment of a Blue Q invoice to Carbcert, as well as a
    remittance from a Blue Q customer to EMI.
    286	                                                          In re Herman
    of the accused’s demeanor and the manner in which he tes-
    tified. In re Phinney, 354 Or 329, 333, 311 P3d 517 (2013).
    Moreover, we note the discrepancy between the accused’s
    account of an agreement to reorganize the corporation and
    the absence of any corporate records documenting either
    that purported decision or an accounting of the winding up
    of Blue Q’s affairs. In short, we agree with the trial panel
    that the accused’s testimony that he diverted Blue Q assets
    to his own businesses as part of an authorized winding up of
    corporate affairs is not credible. Instead, clear and convinc-
    ing evidence supports the trial panel’s determination that
    the accused engaged in dishonest conduct when he diverted
    customer payments from Blue Q to EMI and Carbcert.
    The accused remonstrates that, because Schutfort
    received courtesy copies of e-mails instructing Blue Q cus-
    tomers to send payments to EMI and Carbcert, there is no
    evidence that he acted with fraudulent intent.14 Those argu-
    ments miss the mark. When Schutfort received copies of
    e-mails revealing that customers were paying EMI rather
    than Blue Q, the accused assured Schutfort that “[the
    Accused] was the lawyer and there was some advantage to
    doing that.” Schutfort believed him. Moreover, Alexander was
    not aware of the accused’s actions. Nor were Schutfort and
    Alexander aware of the larger context in which those actions
    were taking place. For example, the two were unaware that
    they were not shareholders in Blue Q; each believed that
    he owned a one-third interest in the corporation. Nor were
    they aware that the accused was in the process of dissolving
    Blue Q or that they would not receive an accounting of the
    assets being diverted to EMI and Carbcert.
    The Bar’s complaint alleged that the accused’s
    conduct involved dishonesty and misrepresentation that
    reflected adversely on his ability to practice law. Under this
    court’s prior decisions, dishonesty includes a disposition
    to lie, cheat, or defraud; and a lack of trustworthiness or
    integrity. In re Kluge, 335 Or 326, 340, 66 P3d 492 (2003);
    14
    As already noted, the accused also argues that a concern about wire fraud
    prompted the diversion of Blue Q funds to Carbcert. However, the record shows
    that the accused originally had explained the diversion by telling customers that
    Blue Q had changed its name to Carbcert. In fact, it had not. Simply put, the
    accused’s explanations for those actions are not credible.
    Cite as 357 Or 273 (2015)	287
    In re Claussen, 331 Or 252, 260, 14 P3d 586 (2000). Although
    no rule explicitly requires lawyers to be candid and fair with
    their business associates or employers, such an obligation is
    implicit in the prohibitions set out in RPC 8.4(a)(3). See In
    re Murdock, 328 Or 18, 25, 968 P2d 1270 (1998) (so stating
    with regard to former version of rule); In re Smith, 315 Or
    260, 266, 843 P2d 449 (1992) (same). On de novo review,
    we find by clear and convincing evidence that the accused’s
    diversion of Blue Q assets to EMI and Carbcert, and his
    exclusion of his associates from Blue Q’s business affairs,
    demonstrated dishonesty and a lack of trustworthiness that
    seriously reflects adversely on his fitness to practice law and
    violates RPC 8.4(a)(3).
    We turn to the trial panel’s determination that the
    accused violated RPC 8.4(a)(3) by filing with the Nevada
    Secretary of State “documents that did not reflect the true
    state of the corporation at a time he did not have the author-
    ity to dissolve it.” An affirmative representation amounts to
    a misrepresentation under RPC 8.4(a)(3) if it is false, mate-
    rial, and knowingly made. In re Summer, 338 Or 29, 38, 105
    P3d 848 (2005). A misrepresentation is material if it would
    or could significantly influence the recipient’s decision-
    making process. 
    Id. Again, the
    accused asserts that the Bar failed to
    prove by clear and convincing evidence that his actions in that
    regard were animated by “fraudulent intent.” Specifically,
    the accused contends that he was, in fact, the corporation’s
    only director when he filed the certificate to dissolve Blue Q,
    because Schutfort and Alexander had left the company. The
    accused asserts that, as Blue Q’s sole director, he was autho-
    rized under Nevada law to dissolve the corporation because
    no stock had been issued. The accused also asserts that, by
    the end of the February 2009 meeting at Alexander’s shop,
    he believed that Alexander had quit Blue Q, that the accused
    and Schutfort constituted a quorum of directors, and that
    they had agreed to “reorganize.”
    Much of the accused’s argument about the Nevada
    dissolution documents is foreclosed by our earlier finding
    that Blue Q was not dissolved in the manner in which the
    accused testified. Instead, the evidence underscores the
    288	                                                        In re Herman
    accused’s misrepresentations. The accused was both an
    experienced business person and attorney who had formed
    and managed a number of corporations. The certificate of
    amendment by which the accused created Blue Q expressly
    named all three principals as directors; yet, less than a year
    later, the documents that the accused filed to dissolve the
    corporation represented to the Nevada Secretary of State
    that the accused was the sole director and that Blue Q’s
    board of directors had adopted a resolution authorizing
    him, as president, to dissolve the corporation. The certifi-
    cate also represented that no Blue Q stock had been issued.
    However, those representations were false. The accused
    was not the sole director of Blue Q, and there had been no
    meeting at which the board of directors had voted either to
    reorganize or dissolve Blue Q. Furthermore, contrary to his
    representation to the Secretary of State, the accused was a
    shareholder—indeed, the sole shareholder—of Blue            Q,
    despite the fact that he and his associates had agreed to own
    the corporation in equal thirds.15 The accused knew that the
    described representations were false when he made them.
    The accused’s misrepresentations to the Nevada
    authorities also were material, because they were intended
    to communicate that the accused was authorized to dissolve
    Blue Q in compliance with Nevada law. Finally, those mis-
    representations reflected adversely on the accused’s fitness
    to practice law: Not only did they violate the accused’s duties
    to his associates, they were made to a governmental agency
    to achieve a result that the law did not allow. See In re Glass,
    308 Or 297, 779 P2d 612 (1989) (attorney’s registration of
    false business name with Corporation Commission for sole
    purpose of defeating contractor’s capacity to bring action
    against him constituted misrepresentation under disci-
    plinary rules).
    Thus, we find on de novo review that the Bar also
    proved by clear and convincing evidence that, in filing the
    dissolution documents with the Nevada Secretary of State,
    15
    The trial panel determined that the accused apparently was the sole
    shareholder of Vintrak and that, because no new stock was issued after the
    corporation’s name was changed, the accused remained the sole shareholder of
    Blue Q. As noted, that determination is consistent with Blue Q’s 2008 and 2009
    tax returns.
    Cite as 357 Or 273 (2015)	289
    the accused violated RPC 8.4(a)(3) by engaging in conduct
    that constituted dishonesty and misrepresentation that
    reflects adversely on his fitness to practice law.
    Finally, we consider the appropriate sanction for the
    accused’s ethical violations. In doing that, we follow the ana-
    lytical framework set out in the American Bar Association’s
    Standards for Imposing Lawyer Sanctions (ABA Standards)
    (1991) (amended 1992). In re Obert, 352 Or 231, 258, 282
    P3d 825 (2012). In accordance with the ABA Standards, we
    first consider the duty violated, the accused’s mental state,
    and the actual or potential injury caused by the accused’s
    conduct. In re Kluge, 332 Or 251, 259, 27 P3d 102 (2001);
    ABA Standard 3.0. We next determine the existence of any
    aggravating or mitigating circumstances. Kluge, 332 Or at
    259. Finally, we consider the appropriate sanction in light of
    this court’s case law. 
    Id. Our purpose
    in imposing a sanction
    is to protect the administration of justice from lawyers who
    have failed to properly discharge duties owed to their cli-
    ents, the public, the justice system, or the legal profession.
    Here, the accused violated RPC 8.4(a)(3) and
    breached his public duty as a lawyer to maintain his per-
    sonal integrity. ABA Standard 5.1. The record shows that
    the accused excluded his associates from Blue Q’s business
    affairs, intentionally diverted Blue Q receivables to busi-
    nesses that the accused alone controlled, and misrepre-
    sented his authority to dissolve Blue Q to Nevada govern-
    mental officials. See ABA Standards at 7 (“intent” defined as
    “the conscious objective or purpose to accomplish a particu-
    lar result”). As a result of that conduct, the accused caused
    actual injury to Alexander and Schutfort by depriving them
    of the opportunity to participate in the windup of Blue Q’s
    business and a proper accounting of Blue Q’s financial
    affairs. Under ABA Standard 5.11(b), disbarment generally
    is appropriate when a lawyer engages in intentional conduct
    that involves dishonesty, fraud, deceit, or misrepresentation
    that reflects adversely on the lawyer’s fitness to practice law.
    We next consider whether the presence of mitigating
    or aggravating factors affects that preliminary determina-
    tion. We find several aggravating factors. First, the accused
    acted with a dishonest or selfish motive. ABA Standard
    290	                                           In re Herman
    9.22(b). Second, he has refused to acknowledge the wrong-
    ful nature of his conduct, ABA Standard 9.22(g), arguing
    in effect that he did not have to follow the law but could,
    instead, engage in “self-help” for ends that he believed were
    justified. Finally, the accused has substantial experience in
    the practice of law, having been admitted to the Oregon Bar
    in 1990.
    In mitigation, the accused argues that his only
    misstep was in placing too much trust in his partners.
    The accused asserts that, after the dissolution of Blue Q,
    Alexander and Schutfort surreptitiously formed Blue Q Labs
    LLC, stole away Blue Q customers, converted devices man-
    ufactured by Blue Q, used them to fulfill customer orders as
    Blue Q Labs LLC, and pocketed the receipts. The accused
    contends that either a public reprimand or a 30-day suspen-
    sion is appropriate.
    The trial panel found, however, that the existence of
    Blue Q Labs LLC, had no relevance to its evaluation of the
    accused’s misconduct at issue, and we agree. Blue Q Labs
    LLC was not formed until June 2009, several months after
    the accused diverted Blue  Q receivables to EMI and Carbcert,
    and after he filed the Nevada dissolution documents. The
    accused’s acts of dishonesty and misrepresentation—which
    the Bar proved by clear and convincing evidence—were com-
    plete with the dissolution of Blue Q. Consequently, in this
    disciplinary context, the subsequent formation of Blue Q
    Labs LLC does not mitigate the accused’s conduct.
    As a mitigating factor, we acknowledge that the
    accused does not have a prior disciplinary record. Taken
    together, however, the aggravating factors outweigh that
    factor and further support our preliminary determination
    that disbarment is the appropriate sanction.
    We turn to the applicable case law. As we have rec-
    ognized, case-matching in the context of disciplinary pro-
    ceedings “is an inexact science.” In re Stauffer, 327 Or 44,
    70, 956 P2d 967 (1998). Still, our prior decisions provide
    some guidance. Those decisions show that where, as here, a
    lawyer has engaged in dishonesty, fraud, deceit, or misrep-
    resentation in a business relationship involving an associate
    Cite as 357 Or 273 (2015)	291
    or an employer, the court generally has concluded that dis-
    barment was the appropriate sanction.
    In In re Pennington, 220 Or 343, 348 P2d 774 (1960),
    for example, the accused lawyer secretly withheld a substan-
    tial amount of law firm income from his law partner during
    a seven-year period. In addition, despite an agreement to
    equally divide partnership income, the accused filed false
    partnership tax returns to conceal that conduct. When con-
    fronted, the lawyer, with the aid of a tax attorney and accoun-
    tant, made a full accounting and restitution to his partner,
    paid all back taxes, and pleaded guilty to the crime of fil-
    ing fraudulent partnership returns. Neither the Bar nor the
    lawyer’s partner sought to prosecute him for embezzlement;
    indeed, the two partners reconciled and continued their busi-
    ness relationship for approximately three more years until
    their partnership was terminated for other reasons.
    This court nevertheless ordered the accused to be
    disbarred. In doing so, the court emphasized the need to
    maintain the public’s confidence in the legal profession:
    “No one who is admitted into the legal profession may be
    permitted to sully or destroy the right and need of the pub-
    lic to impose absolute confidence in the integrity of a law-
    yer. Literally thousands of personal and business transac-
    tions of unknowing people must be and are entrusted to the
    hands of some lawyer. Money, property and matters of per-
    sonal confidence are daily entrusted to the integrity of the
    individual lawyer. In almost all such instances no bond or
    security, other than integrity, is required to assure the pro-
    tection or performance of the trust. No member of the Bar
    need consider long wherein his duty lies. True, the rules
    of professional conduct may fill many pages; the opinions
    interpreting some of the rules, many volumes. But in the
    more basic conduct he is called upon to perform, any law-
    yer knows the simple rules that he must cling to: Simple
    straightforward honesty and absolute good faith. No less
    will suffice.”
    
    Id. at 347.
    If the funds at issue had been client funds, the
    court continued, it would not hesitate to impose disbarment
    as a sanction. “The same violation of the fiduciary duty to
    partnership funds,” it concluded, “is no less abhorrent.” 
    Id. at 349.
    292	                                                         In re Herman
    In In re Murdock, this court applied similar rea-
    soning to a breach of the duty of loyalty arising from an
    employment relationship. In that case, the accused law-
    yer was employed as a salaried associate at a law firm. As
    part of his duties, the lawyer represented indigent crimi-
    nal defendants through the firm’s contract with the State
    Court Administrator (SCA) and provided other services to
    the firm’s clients on a flat-fee basis. Over a two-year period,
    however, the lawyer converted contract payments owed to
    the firm, as well as payments from the firm’s flat-fee clien-
    tele, to his own personal use. Murdock, 328 Or at 23. This
    court concluded that that conduct violated the lawyer’s
    implicit obligation to be candid and fair with his employers,
    as well as the duty of loyalty arising out of the employment
    relationship between the lawyer and the firm. 
    Id. at 25-26.
    The court ultimately concluded that the lawyer must be dis-
    barred. 
    Id. at 36.
    	        This court recently addressed a similar problem in
    In re Renshaw, 353 Or 411, 298 P3d 1216 (2013), where the
    accused lawyer was a partner with two other attorneys in a
    law firm. Among other things, the accused was responsible
    for processing funds received from clients, paying the firm’s
    bills, and determining if the firm had sufficient revenue to
    make periodic shareholder distributions that augmented
    the partners’ regular monthly paychecks. Beginning in
    2006, however, the accused began making distributions to
    himself, but not to his partners; when they inquired, he told
    them that the firm lacked the funds to make distributions.
    The accused also began using the firm’s credit line to cover
    personal expenses, later coding them in the firm’s account-
    ing records so that they appeared to be business expenses.
    In ordering disbarment, this court explained:
    “The accused owed a fiduciary duty to the other share-
    holders in his firm. See In re Pennington, 220 Or 343, 349,
    348 P2d 774 (1960). He breached that duty when he repeat-
    edly took funds that the firm owned and in which the other
    shareholders had an interest.”
    
    Id. at 421.16
    	16
    That fiduciary duty extends beyond a lawyer’s professional dealings with
    clients and legal colleagues. In In re Phinney, this court concluded that dis-
    barment was warranted where the accused attorney violated RPC 8.4(a)(3) by
    Cite as 357 Or 273 (2015)	293
    In cases involving violations of RPC 8.4(a)(3) in
    which this court has imposed a lesser sanction than disbar-
    ment, mitigating circumstances were present that do not
    exist in this case. For example, in In re Leisure, 338 Or 508,
    113 P3d 412 (2005), the accused wrote a series of bad checks
    on which she eventually made good, but only after she paid
    NSF fees and was threatened with legal action. In suspend-
    ing the accused for 18 months, the court explained:
    “The accused’s conduct caused a great deal of inconvenience
    to many people, but it took its greatest toll on the accused
    herself. We conclude, therefore, that the accused should not
    be subject to disbarment, but that she should be subject to
    a lengthy suspension.”
    
    Id. at 527.
    No similar mitigating factors exist in this case.
    Two aspects of the accused’s conduct in this mat-
    ter do not precisely match the circumstances in Pennington,
    Murdock, Renshaw, and Phinney. First, each of those cases
    involved the theft of assets; as discussed, the bar did not
    prove that the accused here actually stole assets in which,
    after a proper accounting in the winding up of corporate
    affairs, his associates would have been entitled to share.
    However, the accused’s conduct, consisting of his exclusion
    of his associates from the affairs of Blue Q, his diversion of
    corporate assets to his own use, and his unauthorized disso-
    lution of the corporation, is comparable to theft in terms of
    its nature and scale of selfish dishonesty.
    Second, unlike the accuseds in Pennington, Murdock,
    and Renshaw, the accused’s actions in relation to Schutfort,
    Alexander, and Blue Q did not involve a law firm or partners
    who were lawyers. That fact, however, represents a distinc-
    tion without a difference. As this court explained in In re
    Stodd, 279 Or 565, 567-68, 568 P2d 665 (1977), we do not dis-
    tinguish between a lawyer’s professional and nonprofessional
    roles when dealing with the money or property of others:
    “Nothing less than the most scrupulous probity in deal-
    ing with the funds of others is compatible with admission to
    committing theft by appropriation when he withdrew funds from bank accounts
    belonging to an alumni association for which he served as a volunteer treasurer.
    354 Or at 340-41.
    294	                                               In re Herman
    the practice of law. This is a standard that does not permit
    drawing a line between an attorney’s professional and his
    non-professional roles.”
    Consistently with that case law, which confirms the prelimi-
    nary sanction, we conclude that disbarment is the appropri-
    ate sanction.
    The accused is disbarred, effective 60 days from the
    date of this decision.
    

Document Info

Docket Number: S061840

Filed Date: 5/14/2015

Precedential Status: Precedential

Modified Date: 6/4/2015