Disciplinary Counsel v. Cowden , 131 Ohio St. 3d 272 ( 2012 )

[Cite as Disciplinary Counsel v. Cowden, 131 Ohio St.3d 272, 2012-Ohio-877.]
DISCIPLINARY COUNSEL v. COWDEN.
DISCIPLINARY COUNSEL v. NAGORNEY.
[Cite as Disciplinary Counsel v. Cowden, 131 Ohio St.3d 272, 2012-Ohio-877.]
Attorneys—Misconduct—Conflicts of interest with clients—Misuse of confidence
or secret of client—Stayed suspensions.
(No. 2011-1047—Submitted August 8, 2011—Decided March 6, 2012.)
ON CERTIFIED REPORT by the Board of Commissioners on Grievances and
Discipline of the Supreme Court, No. 10-033.
__________________
Per Curiam.
{¶ 1} Respondents, Gerald Wayne Cowden, Attorney Registration No.
0024360, and Frank Paul Nagorney, Attorney Registration No. 0010933, both of
Cleveland, Ohio, were admitted to the practice of law in Ohio in 1975. Cowden is
a named partner in the firm of Cowden & Humphrey Co., L.P.A., where
Nagorney is also a partner. In April 2010, relator, disciplinary counsel, filed a
complaint against Cowden, Nagorney, and a third attorney from their firm,
alleging that they had violated multiple Disciplinary Rules of the Code of
Professional Responsibility while representing several clients in a series of
complex business deals.
{¶ 2} A panel of the Board of Commissioners on Grievances and
Discipline found that Cowden had engaged in conduct that adversely reflects on
his fitness to practice law by accepting employment when the exercise of his
professional judgment may be affected by his personal interests, entering into a
business transaction with a client without obtaining the informed consent of the
client, and failing to disclose potential conflicts of interest before accepting
SUPREME COURT OF OHIO
employment that was likely to compromise his independent judgment in
representing another client.
{¶ 3} The panel also found that Nagorney had engaged in conduct that
adversely reflects on his fitness to practice law by using a confidence or secret of
a client to the disadvantage of a client and failing to disclose potential conflicts of
interest before accepting employment that was likely to compromise his
independent judgment in representing another client. The panel recommends that
the remaining charges against Cowden and Nagorney be dismissed and has
unanimously dismissed all of the charges against a third partner.
{¶ 4} As the sanctions for their misconduct, the panel recommended that
Cowden be suspended for one year and that Nagorney be suspended for six
months but that both sanctions be stayed on the condition that they commit no
further misconduct. The board adopted the panel’s findings of fact and
misconduct, as well as the recommended sanctions, as do we.
Misconduct
{¶ 5} Brian Stuffleben was the president, majority owner, and sole
director of Technology Strategies, Inc. (“Old TSI”), a software technology
company that provided registration information and services to Fortune 500
companies. Old TSI began to experience financial difficulties in 1997 and faced a
number of lawsuits arising from the company’s acquisition of a marketing firm.
In early 1999, Stuffleben retained Cowden to obtain advice about the viability of
the company.
{¶ 6} Cowden negotiated a series of forbearance agreements related to
Stuffleben’s personal guaranty in excess of $1 million to Huntington National
Bank and later introduced Stuffleben to Lou Fisi and Dean Ganzhorn, who were
both Cowden’s clients and his partners in a venture-capital firm called Hockey
Stick Investments. Cowden then recommended that Old TSI enter into a secured-
party sale with Huntington Bank as a way to reduce Stuffleben’s debt, maintain
2
January Term, 2012
control of the company, and obtain an infusion of capital. The secured-party sale
involved Huntington’s foreclosure on the assets of Old TSI and sale of those
assets to TSI Holdings Limited (“Limited”), which was wholly owned by Hockey
Stick, for $50,000 at closing, two $25,000 installments, and a $250,000 note
personally guaranteed by Stuffleben. The assets would then be sold to TSI
Holdings, Inc. (“New TSI”) in exchange for a warrant for 30 percent of New
TSI’s stock and a $300,000 note. This plan would reduce Stuffleben’s personal
guaranty to the bank from $1.1 million to $250,000 and reduced his ownership
interest from 94 percent of Old TSI to 64 percent of New TSI. Cowden
negotiated the terms of this secured-party sale as counsel for Old TSI, New TSI,
Limited, and Hockey Stick.
{¶ 7} Cowden instructed Stuffleben to speak with attorney Robert
Vilsack about the transaction, but the terms of the secured-party sale had already
been agreed upon, and Cowden was recruiting Vilsack to work for his firm.
Vilsack represented New TSI at the closing of the secured-party sale, and Cowden
represented both Old TSI and Limited. Although the panel found that Stuffleben
was aware that Cowden owned a one-third interest in Hockey Stick and would
therefore have a potential ownership interest in New TSI, the panel found that
Cowden had failed to fully disclose the potential conflicts of interest inherent in
his investment and had failed to strongly advise Stuffleben to seek independent
counsel. Within months of this restructuring, Limited defaulted on a $25,000
payment to Huntington that eventually permitted Huntington to take a $227,000
judgment against Stuffleben.
{¶ 8} In December 2000, New TSI needed additional working capital.
Fisi instructed Nagorney to draft a factoring agreement between New TSI and
Ganzcorp Investments, a company owned by Ganzhorn. Ganzcorp was a client of
Cowden’s firm, and Cowden owned a 7.5 percent interest in the company.
Nagorney, who was unaware of Cowden’s relationship to Ganzcorp, represented
3
SUPREME COURT OF OHIO
New TSI in the factoring agreement, and Ganzhorn negotiated on behalf of
Ganzcorp.
{¶ 9} Nagorney presented the factoring agreement to Stuffleben during a
Christmas party in 2000 and instructed him to sign it. Stuffleben questioned a
portion of the agreement that required him to personally guarantee the loan.
When Nagorney advised Stuffleben that the deal could not be completed without
the personal guarantee, Stuffleben signed the agreement. The factoring agreement
was, in essence, a loan that enabled New TSI to continue operations for a short
period of time. By February 2001, New TSI was again experiencing financial
difficulties, and the following month, investors learned that the company had not
been withholding payroll taxes and remitting them to the appropriate authorities.
{¶ 10} In late March 2001, Cowden advised Stuffleben that Hockey Stick
would no longer invest in New TSI and that Stuffleben would need to retain new
counsel because Cowden had a conflict. Shortly thereafter, Ganzcorp sent New
TSI and Stuffleben a letter, drafted by Nagorney, demanding that they pay
$151,900.53 to Ganzcorp under the factoring agreement that Nagorney had
prepared while representing New TSI. Nagorney then arranged for another law
firm to represent Ganzcorp against New TSI and Stuffleben for breach of the
factoring agreement and discussed the contents of that agreement with Ganzcorp’s
new counsel. Pursuant to the factoring agreement that Nagorney drafted as the
attorney for New TSI, Ganzcorp obtained a cognovit judgment and lien against
New TSI and Stuffleben. Acting on Ganzcorp’s behalf, Nagorney sought to
collect the judgment and the costs of obtaining it from his former client—New
TSI.
{¶ 11} Based upon the factual findings made by the panel, adopted by the
board, and summarized above, the board found that Cowden’s conduct violated
DR 1-102(A)(6) (prohibiting a lawyer from engaging in conduct that adversely
reflects on the lawyer’s fitness to practice law), 5-101(A)(1) (prohibiting a lawyer
4
January Term, 2012
from accepting employment if the exercise of the lawyer’s professional judgment
will be or reasonably may be affected by the lawyer’s personal interests), 5-104
(prohibiting a lawyer from entering into a business transaction with a client if they
have differing interests unless the client has consented after full disclosure), and
5-105(A) (requiring a lawyer to disclose potential conflicts of interest before
accepting employment that is likely to compromise the lawyer’s independent
judgment on a client’s behalf) and that Nagorney’s conduct violated DR 1-
102(A)(6), 4-101(A) (defining “confidence” and “secret”), and 5-105(A).
{¶ 12} The board recommends that we dismiss allegations that Cowden
violated DR 1-102(A)(6), 5-101(A)(1), 5-104, and 5-105(A) with respect to the
enforcement of the factoring agreement against New TSI, as well as allegations
that Nagorney violated DR 5-101(A)(1), 1-102(A)(6), 4-101(A), 5-101(A)(1),
and 5-105(A) by enforcing the factoring agreement against New TSI and advising
Fisi in the completion of Internal Revenue Service forms related to New TSI’s tax
delinquency.
{¶ 13} None of the parties have objected to the board’s report. In
accordance with the board’s findings of fact and misconduct, which we adopt, we
find that Cowden’s conduct violated DR 1-102(A)(6), 5-101(A)(1), 5-104, and 5-
105(A) and that Nagorney’s conduct violated DR 1-102(A)(6) and 5-105(A). We
also find that Nagorney violated DR 4-101(B)(2) (prohibiting a lawyer from using
a confidence or secret of a client to the disadvantage of a client), which the relator
and board paraphrased while mistakenly citing DR 4-101(A). We also dismiss
additional allegations that Cowden violated DR 1-102(A)(6), 5-101(A)(1), 5-104,
and 5-105(A) and allegations that Nagorney violated DR 1-102(A)(6), 4-101(A),
5-101(A)(1), and 5-105(A) in enforcing the factoring agreement against New TSI
and advising Fisi in the completion of Internal Revenue Service forms related to
New TSI’s tax delinquency.
5
SUPREME COURT OF OHIO
Sanction
{¶ 14} When imposing sanctions for attorney misconduct, we consider
relevant factors, including the ethical duties that the lawyer violated and the
sanctions imposed in similar cases. Stark Cty. Bar Assn. v. Buttacavoli, 96 Ohio
St.3d 424, 2002-Ohio-4743, 775 N.E.2d 818, ¶ 16. In making a final
determination, we also weigh evidence of the aggravating and mitigating factors
listed in BCGD Proc.Reg 10(B). Disciplinary Counsel v. Broeren, 115 Ohio
St.3d 473, 2007-Ohio-5251, 875 N.E.2d 935, ¶ 21.
{¶ 15} As aggravating factors, the board found that both Cowden and
Nagorney engaged in a pattern of misconduct involving multiple offenses. See
BCGD Proc.Reg. 10(B)(1)(c) and (d). Mitigating factors include that neither
Cowden nor Nagorney has a prior disciplinary record and that neither acted with a
selfish motive. See BCGD Proc.Reg. 10(B)(2)(a) and (b). They have
acknowledged the wrongful nature of their conduct, cooperated in the disciplinary
proceedings, and demonstrated that apart from their current misconduct, they have
outstanding reputations in the legal community and the community at large. See
BCGD Proc.Reg. 10(B)(2)(d) and (e). Moreover, the board found that both
respondents have taken steps to ensure that their misconduct will not be repeated.
{¶ 16} In his closing argument before the panel, relator argued in favor of
a one-year stayed suspension for both Cowden and Nagorney, while Cowden
sought a six-month stayed suspension, and Nagorney sought dismissal of the
charges against him or at most a public reprimand. Without explaining their
rationale, the panel and board recommend a one-year stayed suspension for
Cowden and a six-month stayed suspension for Nagorney.
{¶ 17} Cowden and Nagorney failed to adequately disclose potential
conflicts of interest that were likely to compromise their independent judgment
and failed to obtain their clients’ informed consent with respect to their
representation of Old TSI, New TSI, and the multiple entities involved in
6
January Term, 2012
restructuring and financing those companies. Nagorney drafted a demand letter to
New TSI on behalf of Ganzhorn, in which Ganzcorp sought to enforce the
factoring agreement that Nagorney had drafted while serving as counsel for New
TSI. He also assisted a New TSI officer in completing IRS forms related to his
role in the company’s payroll-tax delinquency. A malpractice claim arising from
Cowden’s and Nagorney’s involvement in these matters was settled in 2007.
{¶ 18} The board found, however, that Stuffleben had some knowledge of
Cowden’s financial interest in the corporate restructuring before it occurred. And
while we do not condone Cowden’s and Nagorney’s actions, it is not entirely
clear that Stuffleben, Old TSI, or New TSI suffered harm as a result of their
conduct.
{¶ 19} Stuffleben testified that before he retained Cowden, Old TSI
experienced financial difficulties arising from its takeover of a business that had
substantial, uncollectable accounts receivable. Old TSI and Stuffleben, as a
personal guarantor, owed more than $1 million to Huntington Bank. Cowden’s
restructuring of that debt conferred substantial benefits by permitting the business
to continue its operations with a reduced debt load and reducing Stuffleben’s
personal guaranty from approximately $1.1 million to just $250,000.
{¶ 20} The infusion of capital from other entities through the restructuring
and factoring agreements permitted Stuffleben to remain in business, maintain
majority control of the new company, and continue to draw a salary and benefits
for more than a year. When the business failed, Stuffleben was permitted to
remove a number of corporate assets, including computer servers and the client
database, and use them to start a new business. Thus, Stuffleben received
substantial benefits from the representation.
{¶ 21} We have imposed stayed suspensions of varying lengths for
comparable misconduct in the past. E.g., Disciplinary Counsel v. McNamee, 119
Ohio St.3d 269, 2008-Ohio-3883, 893 N.E.2d 490, ¶ 33, 35 (imposing a one-year
7
SUPREME COURT OF OHIO
stayed suspension on an attorney who represented multiple parties to a business
venture in which he also had a significant financial interest without making the
proper disclosures); Cuyahoga Cty. Bar Assn. v. Schmelzer, 84 Ohio St.3d 382,
704 N.E.2d 243 (1999) (imposing a six-month stayed suspension on an attorney
who initially represented a potential purchaser of real property, but who upon
determining that the sale to a third party would be more advantageous to the
seller, began to represent the seller).
{¶ 22} Having considered the conduct of Cowden and Nagorney and the
aggravating and mitigating factors present, as well as the sanctions imposed in
similar cases, we adopt the sanctions recommended by the panel and board.
{¶ 23} Accordingly, Gerald Wayne Cowden is suspended from the
practice of law in Ohio for one year, and Frank Paul Nagorney is suspended from
the practice of law in Ohio for six months. These suspensions, however, will be
stayed on the condition that Cowden and Nagorney commit no further acts of
misconduct. If either Cowden or Nagorney fails to comply with this condition,
his stay will be lifted, and he will serve the full term of his suspension. Costs are
taxed to respondent.
Judgment accordingly.
O’CONNOR, C.J., and PFEIFER, LUNDBERG STRATTON, O’DONNELL,
LANZINGER, CUPP, and MCGEE BROWN, JJ., concur.
__________________
Jonathan E. Coughlan, Disciplinary Counsel, and Joseph M. Caligiuri,
Senior Assistant Disciplinary Counsel, for relator.
Hahn, Loeser & Parks and Deborah A. Coleman, for respondent Gerald
W. Cowden.
Richard C. Alkire and Dean C. Nieding, for respondent Frank P.
Nagorney.
______________________
8