Bd. of Prof'l Responsibility of the Supreme Court of Tenn. v. Daniel

• Citation: 549 S.W.3d 90
• Decision Date: 08 June 2018
• Docket Number: No. E2017-01170-SC-R3-BP,E2017-01170-SC-R3-BP
• Parties: BOARD OF PROFESSIONAL RESPONSIBILITY OF the SUPREME COURT OF TENNESSEE v. Charles Edward DANIEL
• Court: Supreme Court of Tennessee

549 S.W.3d 90

BOARD OF PROFESSIONAL RESPONSIBILITY OF the SUPREME COURT OF TENNESSEE

v.Charles Edward DANIEL

No. E2017-01170-SC-R3-BP

Supreme Court of Tennessee, AT KNOXVILLE.

January 10, 2018 Session

FILED June 8, 2018

Alan D. Johnson, Brentwood, Tennessee, for the appellant, Board of Professional Responsibility of the Supreme Court of Tennessee.

H. Douglas Nichol, Knoxville, Tennessee, for the appellee, Charles Edward Daniel.

Cornelia A. Clark, J., delivered the opinion of the Court, in which Jeffrey S. Bivins, C.J., and Sharon G. Lee, Holly Kirby, and Roger A. Page, JJ., joined.

Cornelia A. Clark, J.

This direct appeal arises from a disciplinary proceeding against a Knoxville attorney. A hearing panel ("Hearing Panel") of the Board of Professional Responsibility ("Board") found that the attorney had violated Rule 8.4(b) and (c) of the Tennessee Rules of Professional Conduct ("RPC") by misappropriating funds from his law partnership in a manner intended to conceal his actions from his law partners. The Hearing Panel suspended him from the practice of law for three years but ordered the entire suspension served on probation. We conclude that the Hearing Panel did not abuse its discretion by suspending rather than disbarring the lawyer but did abuse its discretion by probating the entire suspension. Accordingly, we modify the Hearing Panel’s judgment to include one year of active suspension. In all other respects, the Hearing Panel’s judgment is affirmed.

I. Factual and Procedural Background

The appellee, Charles Edward Daniel, a Knoxville lawyer, received his license to practice law in 1991 following his fifteen-year career in law enforcement positions, including a position with the Internal Revenue Service criminal division. From 1991 to mid-2002, Mr. Daniel worked as a solo practitioner, handling mostly workers' compensation and personal injury cases. In mid-2002 Mr. Daniel and attorney Mike Pemberton formed the law partnership of Daniel Pemberton (the "Partnership"). Mr. Pemberton came to this partnership from another Knoxville law firm where he had served for a time as managing partner. Mr. Daniel and Mr. Pemberton never had a written partnership agreement, and they did not observe formalities in managing the Partnership, including not formalizing any written agreement about how compensation would be handled for cases brought into the Partnership at its inception or how expense advances by any partner would be reimbursed.

From its inception in 2002 until his departure, Mr. Daniel managed and supervised the Partnership’s finances, including handling the operating and trust accounts, receiving and accounting for money, making deposits, reviewing and reconciling bank statements, managing day-to-day financial operations, making payroll, paying bills, making payments to third parties and clients, and maintaining and reporting on case expenses. Mr. Daniel used QuickBooks to perform these tasks, and QuickBooks was installed only on Mr. Daniel’s computer.

The Partnership broke up in late 2009 or early 2010. After Mr. Daniel left, another partner, Dana Scott Pemberton,¹ the wife of Mr. Pemberton, took over his financial oversight responsibilities, and QuickBooks had been installed on her computer by January 2010. Mrs. Pemberton soon discovered that from 2006 to 2009, Mr. Daniel had, on several occasions, deposited client settlement checks into the Partnership’s trust account and then written three checks on that account—one payable to the client and two payable to the Partnership. He would then deposit one of the checks payable to the Partnership into the Partnership’s operating account and deposit the second check payable to the Partnership into his own personal account.

In May 2010, the Pembertons reported these suspicious transactions to the Board of Professional Responsibility. The Board first contacted Mr. Daniel about the allegations on June 22, 2010. Meanwhile, civil litigation was initiated to dissolve the Partnership and divide its assets. The parties reached a confidential settlement of the civil litigation in July 2011.

Almost three years after the civil litigation settled, on May 2, 2014, the Board filed a petition for discipline against Mr. Daniel.² The Board alleged that he had "willfully and knowingly engaged in a course of conduct whereby he embezzled money from the [P]artnership, misappropriated [P]artnership funds and falsified records in order to conceal his illicit activities." The Board asserted that Mr. Daniel’s conduct violated subsections (b) and (c) of RPC 8.4, which state:

It is professional misconduct for a lawyer to:

* * *

(b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects;

(c) engage in conduct involving dishonesty, fraud, deceit, or misrepresentation.

The Hearing Panel held a hearing on March 1 and 2, 2016. The Board called Mr. and Mrs. Pemberton to testify and submitted bank records documenting the suspicious transactions from 2006-2009. Mr. Daniel testified on his own behalf and called various witnesses, many of them attesting to his good character. Mr. Daniel’s defense was that the Partnership owed him a great deal of money for operating expenses he had advanced and partner draws he had skipped when the Partnership lacked funds. He maintained that he had merely reimbursed himself when funds became available from settlements by writing checks on the Partnership trust account payable to the Partnership and then depositing those checks into his personal account. Mr. Daniel submitted settlement agreements with clients and a spreadsheet showing fees and expenses for cases that purported to account for all of the withdrawals from the Partnership’s trust account.

Before the Hearing Panel, Mr. Daniel testified that, for a significant time after the Partnership’s formation, he had advanced funds as needed to cover all of the Partnership’s operating expenses, including compensation for the attorneys and support staff. Mr. Daniel testified that he had kept a handwritten ledger on a yellow legal pad of the amounts he had advanced the Partnership and the amounts he had reimbursed himself for these advances. By the time of the hearing Mr. Daniel had lost this legal pad, however, so it was not submitted into evidence before the Hearing Panel. Nevertheless, Mr. Daniel testified that Mr. Pemberton was aware of the handwritten ledger, explaining that he had shared it and discussed it with Mr. Pemberton periodically. Mr. Daniel testified that he had believed it was appropriate to reimburse himself amounts he was owed by writing checks from the Partnership trust account payable to the Partnership and then depositing those checks into his personal account. Mr. Daniel testified that he had discussed the withdrawals and method of reimbursement with Mr. Pemberton. Mr. Daniel denied taking client money.³ Mr. Daniel acknowledged that he had not maintained the most straightforward accounts because he "was not a bookkeeper" but stated that he had done "the best [he] could do."

Mr. Pemberton, by contrast, denied knowledge of either the handwritten ledger Mr. Daniel claimed to have maintained or Mr. Daniel’s method of reimbursing himself by depositing checks payable to the Partnership in his personal account. Both of the Pembertons testified that they had relied on Mr. Daniel to handle all financial oversight of the Partnership until he left and Mrs. Pemberton had taken over those duties. Mr. Pemberton testified that the partners had held brief, formal meetings only four or five times a year to discuss the state of the Partnership, including budgetary issues.

Mr. Pemberton admitted drafting memos for those meetings summarizing, among other things, the Partnership budgets. Although none of the memos were introduced into evidence, Mr. Pemberton conceded that he had accessed the Partnership’s accounting software to prepare the memos. He emphasized, however, that "[a]ll the financial information that we got, other than me running the P[rofit] & L[oss] and running the accounts receivables ... came from Mr. Daniel" at least until January 2010.

The Pembertons also disputed Mr. Daniel’s claim that the Partnership owed him money after 2006. According to the Pembertons, the Partnership had fully reimbursed Mr. Daniel and all of the partners by 2006 for funds advanced to the Partnership and back draws missed. The Pembertons maintained that they had confirmed the Partnership was "square" with Mr. Daniel in conversations that they had with him. To support this assertion, they pointed to a December 5, 2005 check Mr. Daniel had received in the amount of $236,574.31. This check was in addition to the draws Mr. Daniel and the other partners had received from the Partnership at the same time.

By contrast, Mr. Daniel testified that the December 5, 2005 check was the first time the Partnership had enough funds to reimburse him any of the funds he had advanced or draws he had skipped. Mr. Daniel testified that the December 5, 2005 check only reimbursed him for funds he had advanced on the cases that settled in 2005. He asserted that this check was not sufficient to reimburse him for all funds he had advanced the Partnership since its inception and was not enough to repay him the entire amount he was owed.⁴

Some of the disagreement about the amounts the Partnership owed Mr. Daniel arose from Mr. Pemberton’s and Mr. Daniel’s conflicting understanding of how fees on cases Mr. Daniel brought to the Partnership in 2002 were to be shared with the Partnership. Again, Mr. Daniel and Mr. Pemberton had no written agreement addressing this issue, which would have simplified matters before the Hearing Panel. But the proof was undisputed that, regarding fees on cases Mr. Pemberton brought to the Partnership, the fees were allocated according to the percentage of work performed on each case before and after formation of the Partnership. Mr. Daniel testified that the same arrangement...