Discipline of Hartke, In re

• Decision Date: 14 April 1995
• Docket Number: No. C5-86-1996,C5-86-1996
• Citation: 529 N.W.2d 678
• Parties: In re the Application for the DISCIPLINE OF Jerrold M. HARTKE, an Attorney at Law of the State of Minnesota.
• Court: Minnesota Supreme Court

Page 678

529 N.W.2d 678

In re the Application for the DISCIPLINE OF Jerrold M. HARTKE, an Attorney at Law of the State of Minnesota.

No. C5-86-1996.

Supreme Court of Minnesota.

April 14, 1995.

Rehearing Denied May 12, 1995.

Marcia A. Johnson, Director, Lawyers Professional Responsibility Bd., Patrick R. Burns, Sr. Asst. Director, St. Paul, for appellant.

Jerrold M. Hartke, the Hartke Law Firm, St. Paul, and Jack S. Nordby, Meshbesher, Singer & Spence, Minneapolis, for respondent.

PER CURIAM.

The Director of the Office of Lawyers Professional Responsibility filed a petition and amended petition with this court, alleging that Respondent, Jerrold M. Hartke, committed professional misconduct warranting public discipline. In the petitions, the Director alleges four counts of improper conduct involving several clients: (1) mishandling of client funds; (2) conflict of interest; (3) continuing pattern of neglect; and (4) failure to honor a fee arbitration. The Honorable Harlan L. Nelson conducted a referee hearing on the petitions on March 17, 18, and 19, 1994. On April 22, 1994 the referee issued his findings of fact, conclusions of law, and recommendation for discipline, recommending suspension for a period not less than three years. Respondent ordered a transcript of the proceedings, thus the referee's findings are not conclusive. Rule 14(e), Rules on Lawyers Professional Responsibility (RLPR).

Respondent was admitted to the bar of Minnesota in October 1968. He is a 58-year-old sole practitioner with a busy, diverse litigation practice. Respondent has been previously disciplined by this court. In 1977 and 1979 Respondent received warnings for failing to adequately communicate with a client and for failing to inform the court he would not file a brief. In 1986 Respondent was admonished for failing to exercise diligence on behalf of a client, and failing to adequately communicate with a client. In 1987 this court publicly reprimanded Respondent and ordered three years probation for failing to keep adequate books and records, making false certifications to the court, commingling client and personal funds, and for neglect of client matters. In re Hartke, 407 N.W.2d 671 (Minn.1987). In 1988 Respondent received two admonitions for entering into improper business transactions with a client, and for neglect and failure to communicate with a client. In 1990 this court again publicly reprimanded Respondent and ordered three years probation for failing to ensure that a suspended attorney in his employment did not engage in practice of law, and for failure to keep apprised of the progress of a file entrusted to that employee. In re Hartke, 464 N.W.2d 146 (Minn.1990).

The first issue before the court is whether the referee's findings are clearly erroneous. In re Pyles, 421 N.W.2d 321, 325 (Minn.1988). The court accords deference to a referee's findings when they are based on conflicting testimony or in part on a respondent's demeanor, credibility, or sincerity. In re Iliff, 487 N.W.2d 234, 236 (Minn.1992); In re Ruhland, 442 N.W.2d 783, 786 (Minn.1989). Having independently reviewed the entire record, we conclude that the referee's factual findings are supported by the evidence. In re Schmidt, 402 N.W.2d 544, 545 (Minn.1987).

Respondent represented J.F. in a personal injury action, obtaining a $25,000 settlement on her behalf in November 1987. J.F. was entitled to approximately $10,000 of the settlement, after attorney fees and costs. Upon receipt of the settlement check, the funds were not immediately available to J.F. because, pursuant to Schmidt v. Clothier, 338 N.W.2d 256 (Minn.1983), J.F.'s uninsured motorist carrier was entitled to 30 days notice before disbursement.

In order to provide J.F. with immediate money, on November 27, 1987, Respondent and J.F. went to Southview Bank where J.F. executed a collateral assignment of proceeds, enabling Respondent to use the settlement check as collateral for a $23,000 loan to himself. Respondent gave J.F. $5,000 that day and deposited the remainder of the loan proceeds, less loan processing costs, in his business account. The loan proceeds covered an overdraft in Respondent's business account. Approximately 30 days later the bank cashed the $25,000 settlement check, paid Respondent's $23,000 loan, and deposited the remainder of the funds in Respondent's business account. Respondent never deposited any of the J.F. settlement funds into a trust account.

From November 1987 through January 1988, Respondent's business account had insufficient funds to pay J.F. the balance of the settlement owed her, although Respondent maintains he had funds to pay J.F. available from other sources. Respondent eventually disbursed to J.F. all the monies she was due under the settlement, in installments averaging $500.

J.F.'s testimony at the hearing admittedly, is confusing. She maintained, however, that she was not aware the collateral assignment was a loan to Respondent, and she denies asking that her settlement be disbursed in small amounts.

Misappropriation " 'occurs whenever funds belonging to a client are not kept in trust and are used for any purpose other than that specified by the client,' * * * even where the attorney did not intend to embezzle the funds." In re Copeland, 505 N.W.2d 606, 608 (Minn.1993) (quoting In re Isaacs, 451 N.W.2d 209, 211 (Minn.1990)). In Isaacs, the court held that even where there was no direct evidence Respondent's misappropriation was intentional, where Respondent's negligent or unintentional misappropriation of trust accounts is a repeated or continuing occurrence, severe sanctions are warranted. 451 N.W.2d at 211-12.

The referee found that Respondent's use of client funds to cover business account overdrafts and other expenses without the knowing consent of his client was "clearly and unequivocally a misappropriation of client funds" in violation of Minn.R.Prof.Conduct 1.15(a), 1.15(b), and 8.4. The referee also found that Respondent failed to promptly disburse J.F.'s settlement proceeds. Minn.R.Prof.Conduct 1.15(b). We conclude that the referee's findings on this issue were not clearly erroneous. We also note that although Respondent maintains the transaction was not motivated by evil intent, the J.F. loan transaction occurred only five months after Respondent was placed on a three year probation by this court. In re Hartke, 407 N.W.2d 671 (Minn.1987).

Respondent concedes he did not place the J.F. settlement proceeds in a trust account as required by Minn.R.Prof.Conduct 1.15(a). The maintenance of proper trust account records is one of the fundamental responsibilities of a practicing attorney because it is the only method for maintaining the identity of the client's money. See, e.g., In re Beal, 374 N.W.2d 715, 716 (Minn.1985). Any other disposition of client funds is an appropriation by the attorney. The referee's determination that Respondent violated Minn.R.Prof.Conduct 1.15(a) was not clearly erroneous.

The referee found that the loan transaction between J.F. and Respondent violated Minn.R.Prof.Conduct 1.8(a), prohibiting an attorney from entering into business transactions with a client unless specific conditions are met.

Minn.R.Prof.Conduct 1.8(a) provides:

(a) [a] lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) the client consents in writing thereto.

Borrowing money from a client is a business transaction requiring the attorney to meet the disclosure requirements of Minn.R.Prof.Conduct 1.8(a). Failure to make disclosure gives rise to an impermissible conflict of interest. In re Dillon, 371 N.W.2d 548, 550 (Minn.1985); In re Pearson, 352 N.W.2d 415, 419 (Minn.1984). J.F.'s testimony indicates she did not understand the nature of the collateral assignment of proceeds. In addition, the loan transaction was consummated in one day so J.F. had no opportunity to consult independent counsel. Minn.R.Prof.Conduct 1.8(a)(2). There is no evidence that Respondent obtained a separate disclosure and consent from J.F. apart from the collateral assignment of proceeds. Minn.R.Prof.Conduct 1.8(a)(1); Minn.R.Prof.Conduct 1.8(a)(3). Thus, we conclude the referee's finding that Respondent violated Minn.R.Prof.Conduct 1.8(a) and 1.7 was not clearly erroneous.

From September 1986 through November 1987, prior to receipt of the settlement check in the personal injury action, Respondent made a series of at least 18 personal loans to J.F. totaling $1,677. There was no formal documentation for at least 13 of these loans.

Respondent maintains that loans to clients are authorized pursuant to Minn.R.Prof.Conduct 1.8(e), and that the lack of proper documentation only disadvantaged him, not his clients. Minn.R.Prof.Conduct 1.8(e) clearly provides that a lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except in very limited circumstances:

(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter;

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client; and

(3) a lawyer may guarantee a loan reasonably needed to enable the client to withstand delay in litigation that would otherwise put substantial pressure on the client to settle a case because of financial hardship rather than on the merits, provided the client remains ultimately liable for repayment of the loan without regard to the...