In re Barrett

• Decision Date: 16 August 2006
• Citation: 447 Mass. 453,852 N.E.2d 660
• Parties: In the Matter of Donal B. BARRETT.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 660

852 N.E.2d 660

447 Mass. 453

In the Matter of Donal B. BARRETT.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued May 2, 2006.

Decided August 16, 2006.

Donal B. Barrett, pro se.

Robert I. Warner, Assistant Bar Counsel.

Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

SPINA, J.

The respondent, Donal B. Barrett, appeals from a decision of a single justice on an information filed in the county court by the Board of Bar Overseers (board) accepting its recommendation that the respondent be suspended from the practice of law for two years. For the reasons that follow, we affirm.

1. Background. The following facts are drawn from the findings of a hearing committee that were adopted by an appeal panel of the board, and eventually by the full board.

In 1995, NetFax Incorporated (NetFax) was organized under the laws of Delaware to develop and commercially exploit new technologies for internet facsimile transmissions. It was founded by, among others, the respondent, who has been a member of the bar of the Commonwealth since June 20, 1973. As of August, 1996, the respondent was NetFax's chief executive officer and its sole director, which imposed on him fiduciary obligations to the company. He also provided NetFax with some legal services, including those related to ensuring that the company complied with Federal and State securities laws. The respondent did not bill NetFax for his legal services, nor was he specifically compensated for those services.

In 1996, the respondent opened a checking account in the name of "NetFax Incorporated" at U.S. Trust. He was the sole signatory on the account, which enabled him to pay NetFax's expenses. Bank statements were sent to the respondent's home, rather than to NetFax's corporate offices. In March, 1996, Victor Lombardi invested $50,000 in NetFax. In return for receiving "Founders" shares of the company, Lombardi agreed to be responsible for raising equity capital for NetFax. Between 1996 and 1998, Lombardi invested an additional $4,500,000 in NetFax.

On April 9, 1996, the Maine Supreme Judicial Court entered a mandate affirming a lower court's order foreclosing on an interest held by the respondent and his late wife in property located in Sorrento, Maine (Sorrento property). The respondent was given ninety days to redeem the property, which, he believed, could be done for $130,000. In early July, 1996, the respondent approached Lombardi about a possible loan in that amount, but then did not pursue the matter. Instead, the respondent decided to use funds from NetFax to redeem the Sorrento property from the mortgage company.

The respondent went to U.S. Trust on July 24, 1996, and used $130,000 of NetFax's funds to obtain a "counter check" made out to "US Trust." He then used the counter check, rather than a preprinted NetFax check, to purchase a bank check in the amount of $130,000, made out to the mortgage company and its legal counsel. The respondent delivered the check to the mortgage company's legal counsel in order to redeem the Sorrento property. The mortgage company accepted the $130,000, but deemed it insufficient to redeem the property and, therefore, refused to discharge the mortgage. The respondent did not obtain the consent of or otherwise inform the shareholders of NetFax, or its principals, that he had used the company's money to attempt to satisfy a personal obligation.

By December, 1996, the respondent had been unable to restore the $130,000 that he had taken from the NetFax account. He knew that in early to mid-1997, the company's outside auditors would be reviewing NetFax's accounts. The respondent transmitted a facsimile to Lombardi regarding the "`$130,000 problem' that was the subject of some discussion between [them]." The respondent falsely represented to Lombardi that the mortgage company would not agree to "any further extensions of the debt obligation beyond December 31 on any terms." He asked Lombardi to lend him $130,000 as a "bridge first-mortgage loan" to be secured by a first mortgage on the Sorrento property and the right to convert the loan into shares of NetFax stock. The respondent falsely represented to Lombardi that the $130,000 loan would be used to pay off the mortgage on the Sorrento property. He did not tell Lombardi that he had used funds from NetFax in July, 1996, to pay this debt obligation, that he was involved in a dispute with the mortgage company over the redemption amount, or that he would use the loan from Lombardi to restore funds to NetFax before its financial records were audited. On December 27, 1996, Lombardi had $130,000 transferred to the respondent's personal bank account. On December 31, 1996, the respondent used the loan from Lombardi to repay NetFax.

In June, 1997, the respondent prepared for NetFax's auditors a "reconciliation report" showing withdrawals from the NetFax account at U.S. Trust during 1996. He also prepared a separate "schedule of deposits" made to that account for the same time period. In the reconciliation report, the respondent falsely represented that the $130,000 he had withdrawn in July, 1996, to redeem the Sorrento property was a payment to Acorn Computers Inc. (Acorn), a company with which NetFax was doing business. In the schedule of deposits, the respondent falsely identified the deposit of $130,000 made in December, 1996, as a "[r]eturn of deposit" from Acorn. He knowingly made these false representations to cover up the fact that he had taken $130,000 from NetFax for his personal use.

In the late summer of 1998, a disagreement arose between the respondent and Lombardi over a financing venture, and the respondent was voted out as chief executive officer and director of NetFax. Lombardi succeeded the respondent as sole director. On July 8, 1999, Lombardi filed a complaint against the respondent with the Office of Bar Counsel (bar counsel), alleging that the respondent had misappropriated funds from NetFax and had made false representations to Lombardi in December, 1996, regarding the purpose of the loan that the respondent had sought from him.

Bar counsel commenced formal proceedings against the respondent by filing a petition for discipline on September 11, 2002. In count one of the petition, bar counsel alleged that the respondent had improperly used client funds to pay a personal debt. In the alternative, if the funds taken by the respondent were to be considered a loan, then he had improperly entered into a business transaction with his client. In count two of the petition, bar counsel alleged that the respondent had made false representations in order to induce Lombardi to loan him money, and then the respondent repaid the loan with Lombardi's own funds. Bar counsel further alleged that the respondent created false and misleading documents, filed a false amendment to his 1997 Federal tax return, and provided bar counsel with false documents. The respondent denied the substantive allegations of misconduct, and several hearings were held before a hearing committee of the board.

On July 14, 2004, the hearing committee issued its report. It found that the respondent had an attorney-client relationship with NetFax and that, as its chief executive officer and sole director, he also had a fiduciary obligation to the company, including a duty not to appropriate NetFax funds for his own personal benefit. The hearing committee rejected the respondent's claim that the $130,000 was an "advance" permissible under Delaware law, where NetFax was incorporated. It found that the respondent's conduct in concealing his use of NetFax funds for personal purposes belied his assertion that the use was proper and prevented ratification or nullification of the transaction by the shareholders.

The hearing committee concluded that the respondent's use of NetFax's funds for his personal benefit violated S.J.C. Rule 3:07, Canon 1, DR 1-102(A)(4), as appearing in 382 Mass. 769 (1981) (lawyer shall not engage in conduct involving dishonesty, fraud, deceit, or misrepresentation); S.J.C. Rule 3:07, Canon 1, DR 1-102(A)(6), as appearing in 382 Mass. 769 (1981) (lawyer shall not engage in conduct adversely reflecting on fitness to practice law); S.J.C. Rule 3:07, Canon 7, DR 7-101(A)(1), as appearing in 382 Mass. 784 (1981) (lawyer shall not intentionally fail to seek lawful objectives of client); S.J.C. Rule 3:07, Canon 7, DR 7-101(A)(2), as appearing in 382 Mass. 784 (1981) (lawyer shall not intentionally fail to carry out contract of employment); S.J.C. Rule 3:07, Canon 7, DR 7-101(A)(3), as appearing in 382 Mass. 784 (1981) (lawyer shall not intentionally prejudice or damage client during professional relationship); S.J.C. Rule 3:07, Canon 9, DR 9-102(A), as appearing in 419 Mass. 1303 (1995) (lawyer shall deposit client or fiduciary funds in designated accounts); and S.J.C. Rule 3:07, Canon 9, DR 9-102(B), as appearing in 419 Mass. 1303 (1995) (lawyer shall notify client of receipt of funds, maintain complete record of funds, and deliver funds to client as requested).¹ The hearing committee further concluded that the respondent's creation of a false and misleading reconciliation report and schedule of deposits violated DR 1-102(A)(4); DR 1-102(A)(6); DR 7-101(A)(1); DR 7-101(A)(2); and DR 7-101(A)(3). Finally, the committee concluded that the respondent's false statements to Lombardi in December, 1996, regarding the purpose of the loan he sought from Lombardi, violated DR 1-102(A)(4) and DR 1-102(A)(6).

The hearing committee considered mitigating and aggravating factors with respect to the imposition of disciplinary sanctions. In mitigation, the hearing committee found that the respondent did not have an attorney-client relationship with Lombardi. In aggravation, the committee found that the respondent had a history of prior discipline. In particular, he had received an admonition in 1994 for commingling client and personal funds and for negligently spending a...