Appeal of Panel's Affirmance of Director of Professional Responsibility's Admonition in Panel Matter No. 87-22

• Citation: 425 N.W.2d 824
• Decision Date: 08 July 1988
• Docket Number: No. C1-87-1617,C1-87-1617
• Parties: In re Appeal of PANEL'S AFFIRMANCE OF DIRECTOR OF PROFESSIONAL RESPONSIBILITY'S ADMONITION IN PANEL MATTER NO. 87-22.
• Court: Supreme Court of Minnesota (US)

Page 824

425 N.W.2d 824

In re Appeal of PANEL'S AFFIRMANCE OF DIRECTOR OF

PROFESSIONAL RESPONSIBILITY'S ADMONITION IN PANEL

MATTER NO. 87-22.

No. C1-87-1617.

Supreme Court of Minnesota.

July 8, 1988.

Syllabus by the Court

Attorney is properly admonished for loaning money to clients after he incorporated their business, when he continued to advise them about other borrowing efforts and failed to disclose the potential conflict between his roles as attorney and creditor.

Michael J. Hoover, Minneapolis, for appellant.

William J. Wernz, Director of Lawyers Professional Responsibility Bd., St. Paul, for respondent.

Considered and decided by the court en banc without oral argument.

PER CURIAM.

Appellant A.R. sought review of a decision by a Lawyers Professional Responsibility Board (LPRB) panel affirming an admonition issued by the director in connection with a 1978 business transaction between A.R. and two former clients. We affirm the panel.

I.

Complainant D.E. and his associate T.D. initiated plans for a word processing business in 1975. Their product was a computer program applicable to office typewriters in common use at the time. Recognizing their product would be obsolete within a few years, the two hoped to raise capital quickly through short-term, high-interest notes with individual investors. In 1978, an attorney they met through one of their potential investors suggested they incorporate, to formalize their structure and address liability, banking, estate planning and usury issues. Having no time or backup to perform the incorporation himself, the attorney referred the pair to A.R. He also loaned them $1,500 under a nine-month note at 100 percent annual interest, later rolling the note into an additional loan at 15 percent interest.

Testimony conflicts about what took place when complainant and his associate met with A.R. sometime in the fall of 1978. Complainant and T.D. claim they initially discussed a loan from A.R. as well as incorporation; A.R. claims he was approached for a loan only later, when he demanded payment for his services. In any event, the partners at some point asked A.R. to loan them his $617 legal fee for incorporation and an additional $1,500, all at 100 percent annual interest for six months. A.R. consented and drafted a promissory note and personal guarantee agreement. He filed articles of incorporation on November 1, 1978. Two days later complainant signed the note on behalf of the corporation, and both business partners signed the guarantee.

From November 1978 through February 1979, A.R. continued to provide legal advice regarding the corporation's borrowing efforts. In January, he reviewed a written proposal to borrow $45,000 in high-interest, unsecured notes. A.R. said he advised against the program based on potential securities law problems, though T.D. understood the advice to be based on administrative and management reasons. During January and February, the corporation borrowed $9,000 from eight individuals, using personally guaranteed notes at 75 to 100 percent annual interest.

The word processing business never got off the ground, and the corporation failed to repay A.R. when his note came due in May, 1979. In June, complainant and T.D. signed an amended note and confession of judgment, extending the note to August 25, 1979. After the August deadline, complainant assigned his 1978 tax refund to A.R. and agreed to further payments, though A.R. never entered judgment. In 1981, complainant began paying $50 per month, and A.R. ultimately received about $4,650, representing approximately 8 to 10 percent annual interest on his $2,117 loan. As of May 1986 A.R. stated that D.E. still owed him $19,702.50, consisting of $2,957.23 principal ¹ and $16,745.27 interest, although A.R. apparently abandoned collection efforts. It does not appear, from the record, that A.R. attempted to collect personally from T.D.

In January, 1986, D.E. consulted an attorney "to clear up my past." On his attorney's advice he stopped making payments to A.R. after January 8, 1986. The attorney also filed a complaint against A.R. with the LPRB, which assigned the case to the district ethics committee. The committee found no misconduct in the fact that A.R. lent his clients money, but felt inclusion of his legal fee in a note at 100 percent interest might create an excessive fee in violation of DR 2-106(A), Minn.Code Prof.Resp. The committee recommended presentation to a panel on that basis.

Instead of presenting charges to a panel, the director issued an admonition for unprofessional conduct of an isolated, nonserious nature, pursuant to Rule 8(c)(2), Rules on Lawyers Professional Responsibility (RLPR). The admonition rested not on an excessive fee, but on A.R.'s entry into a business relationship with a client in which the two had conflicting interests, without full disclosure as to the nature of the conflict--a violation of DR 5-104(A), Minn. Code Prof.Resp. A.R. demanded a panel hearing, as provided in Rule 8(c)(2)(iii), RLPR. After a June, 1987, hearing, the panel affirmed the director's admonition. A.R. filed a notice of appeal in this court under Rule 9(1), RLPR.

II.

A.R. contends violation of DR 5-104(A) is not supported by clear and convincing evidence. He disclaims any conflict of interest arising out of the loan, stressing that his clients never relied on his professional judgment in that matter. We think appellant misunderstands his duty as an attorney when he becomes financially entangled with clients.

Disciplinary Rule 5-104(A) has four elements. It proscribes (1) a business transaction with a client; (2) if the attorney and client have differing interests therein; (3) and the client expects the lawyer to exercise his professional judgment therein for the client's protection; (4) unless the client consents after full disclosure. No one disputes that A.R. had an attorney-client relationship with D.E., T.D. and, subsequently, the corporation. The loan was certainly a business transaction. A.R. suggests, however, that conflict of interest occurs when the attorney acquires client money or property, not when the attorney simply loans money at the client's request. He is correct that most DR 5-104(A) cases involve attorneys who borrow from clients. See, e.g., In re Pearson, 352 N.W.2d 415 (Minn.1984) (client invested in attorney's business); In re Germundson, 301 Or. 656, 724 P.2d 793 (1986) (numerous client loans to attorney or businesses in which attorney had an interest). However, it is also clear that a "debtor-creditor relationship is an adverse relationship." In re Drake, 292 Or. 704, 714, 642 P.2d 296, 302 (1982). As a general matter, a debtor and creditor have "differing interests." Id.

Moreover, courts have found a conflict of interest under DR 5-104(A) based on the attorney's role as a creditor in relation to his client. For example, an attorney had differing interests from his client when he agreed to co-sign her $15,000 loan. In re Bishop, 297 Or. 479, 486-87, 686 P.2d 350, 354-55 (1984). She also agreed to pay him $500 for that service, but the conflict centered on the debtor-creditor relationship between them. Id. Similarly, an attorney entered a transaction with clients involving conflicts of interest when he made loans totaling $8,000 to be repaid with proceeds from the sale of the client's house. People v. Stineman, 716 P.2d 1079 (Colo.1986). Appellant here loaned his clients both his attorney fees for incorporation and an additional $1,500, in a note at 100% interest. As a creditor, his interests necessarily differ from those of the corporation and the individuals who guaranteed the loan, even though the clients initiated the loan.

Did A.R.'s clients expect him to exercise his professional judgment on their behalf regarding the loan transaction? This is...