In re Cobb

• Decision Date: 17 July 2008
• Docket Number: (OSB 05-07; SC S054584).
• Citation: 345 Or. 106,190 P.3d 1217
• Parties: In re Complaint as to the CONDUCT OF Montgomery W. COBB, Accused.
• Court: Oregon Supreme Court

190 P.3d 1217

345 Or. 106

In re Complaint as to the CONDUCT OF Montgomery W. COBB, Accused.

(OSB 05-07; SC S054584).

Supreme Court of Oregon, En Banc.

Argued and Submitted March 6, 2008.

Decided July 17, 2008.

Montgomery W. Cobb, Newberg, in propria persona, argued the cause and filed the briefs. With him on the briefs were Eric M. Bosse and Katharine W. Mathews, Newberg.

Stacy J. Hankin, Assistant Disciplinary Counsel, Lake Oswego, filed the brief for the Oregon State Bar.

PER CURIAM.

The accused in this lawyer disciplinary case represented entities that invested and participated in a tax avoidance enterprise created by Walter J. Hoyt III (Hoyt).¹ The Bar's allegations against the accused fall into two categories. The first set of charges alleges that the accused committed ethical violations in his representation of Hoyt & Sons Master Limited Partnership (MLP), a Hoyt entity that was a debtor in a Chapter 7 bankruptcy.² The Bar alleges that MLP falsely reported to the bankruptcy court that it had no significant assets or income, when, in fact, MLP owned promissory notes, had the right to receive payments on those notes from investor partnerships, and was receiving or diverting those payments. The Bar charges that the accused made false representations and acted dishonestly by filing MLP's false financial disclosure statement and schedules and by giving false answers to questions posed by the bankruptcy trustee; that the accused engaged in conduct prejudicial to the administration of justice by failing to file both an amended financial disclosure statement setting forth the existence of the notes and payments and a statutorily required statement of his fees; and that the accused failed to call upon MLP to rectify its bankruptcy fraud.

As we will discuss, we conclude that the Bar did not prove its first set of charges by clear and convincing evidence. In large part, our conclusions rest on the Bar's failure to prove that MLP had the right to receive note payments from the investor partnerships and that the accused knowingly made false statements about those notes and payments.

The second set of charges that the Bar filed against the accused alleges that the accused violated conflict of interest rules. For several years before the accused represented MLP, he represented the partnerships that had invested in the Hoyt enterprise. The Bar charges that the accused had a conflict of interest in undertaking representation of MLP because the interests of MLP and the investor partnerships were actually or potentially adverse and the accused nevertheless (1) simultaneously represented both; and (2) continued to represent the investor partnerships after he withdrew from his representation of MLP. As we will explain, we conclude that the interests of MLP and the investor partnerships were not actually adverse when the accused initially agreed to represent MLP in the Chapter 7 bankruptcy and that the accused appropriately advised his clients of the potential for conflict and obtained their consent to his continued representation. We conclude that the Bar did not prove its second category of charges by clear and convincing evidence, and we therefore dismiss the Bar's complaint.

I. FACTS

A. The Hoyt Enterprise

Hoyt began his enterprise in the early 1970s. That enterprise was intended to operate in the following fashion. Each individual investor would be a limited partner in an investor partnership that would include approximately 30 other individual investors. The investor partnerships would purchase cattle³ from Hoyt & Sons Ranches (Hoyt & Sons), entitling the partnerships to tax depreciation deductions that would flow through to the individual investors. The investor partnerships would purchase the cattle by making small cash investments and executing promissory notes to Hoyt & Sons for the remainder.⁴ Another Hoyt entity, Laguna Tax Service, would prepare the individual investors' tax returns. The individual investors would pay 75 percent of their resulting tax savings toward their partnership note obligations and retain 25 percent of those savings for themselves. The money that the individual investors paid would be dispersed to various other Hoyt entities that managed and maintained the cattle herds. After 15 years, the note obligations would be paid in full, and the cattle would be sold.

In the beginning, the Hoyt enterprise likely operated as we have described. To what extent it continued to do so over time is unclear, and that lack of clarity has a significant effect on the result in this proceeding.

In the late 1980s or early 1990s, Hoyt & Sons was liquidated. At about that same time, Hoyt created MLP and intended to transfer the promissory notes made payable to Hoyt & Sons to that new entity. In approximately 1991, the Internal Revenue Service (IRS) began to freeze the tax refunds that individual investors had been receiving, and from that time forward, instead of making payments from expected refunds, investors made payments from their own funds. Whether Hoyt actually transferred the notes to MLP for consideration, whether the notes were enforceable obligations of the investors, and whether the payments by investors in 1996 and 1997 were payments on the notes or contributions to their partnerships to cover the costs of maintaining their herds are important issues in this case.

Hoyt was the creator and promoter of the enterprise we have described. He was also the managing partner of all the entities material to this case, including MLP and the investor partnerships.

B. The Accused's Representation of Investors and Investor Partnerships

The accused's association with Hoyt's enterprise began in 1994 when he was retained by the investor partnerships to represent a number of the individual investors in test cases against IRS personnel asserting that they had violated the investors' constitutional rights.⁵ When the accused undertook that representation, he thought that the Hoyt organization was a legitimate for-profit operation. See Bales v. Commissioner, 58 TCM (CCH) 431, 445 (1989) (tax court concluded that Hoyt business was "a quality operation"). Shortly thereafter, the accused undertook representation of investor partnerships to challenge the disallowance of deductions by the IRS in a number of administrative proceedings.⁶ And, in 1995, the accused represented one of the investor partnerships in a federal court test case, again challenging the IRS disallowance of deductions.

In all those instances, the accused represented individual investors or investor partnerships, usually in litigation, for specific limited purposes. The accused never served as personal or general business counsel for Hoyt or any of his entities; Hoyt retained other counsel to perform those roles.

C. Chapter 11 Bankruptcy Proceeding

In 1995, one of the many entities that Hoyt had created to carry out his enterprise, Hoyt & Sons Ranch Properties (Ranch Properties), filed a Chapter 11 voluntary bankruptcy. Ranch Properties leased ranch lands to another Hoyt entity, Hoyt & Sons Management Company (Management Company), which grazed cattle owned by the investor partnerships on the ranch lands. The Chapter 11 bankruptcy trustee asserted a landlord's lien on the cattle and threatened foreclosure. The investor partnerships engaged the accused to protect their cattle from the trustee's seizure and sale. Raymond Jackson, a California bankruptcy attorney with 30 years' experience, represented Management Company. Jackson and the accused brokered a settlement agreement with the Chapter 11 trustee that required various Hoyt entities, including MLP, to make payments to the bankruptcy estate over time. To convince the trustee to accept that agreement, Jackson and the accused submitted a draft budget entitled "Management Co and MLP Budget," which showed "monthly partnership income" of $240,000 per month.

D. Chapter 7 Bankruptcy Proceeding

In 1996, several individual investors, represented by attorney Eric Derbes, filed an action in Louisiana against Hoyt, Management Company, and MLP, and obtained an $11 million default judgment against them.

On February 24, 1997, the Derbes plaintiffs filed involuntary petitions in bankruptcy for Management Company and MLP, in an attempt to force them to liquidate their assets to pay the Derbes judgment. Hoyt hired Jackson, the attorney for Management Company in the Chapter 11 bankruptcy, to represent MLP. Jackson planned to assert a jurisdictional defense known as the "farmer defense," a defense under 11 U.S.C. section 303(a), which provides that farmers cannot be forced into involuntary bankruptcy. Successful assertion of that defense would avert appointment of a Chapter 7 trustee and, therefore, lessen the likelihood that a trustee would assert control over and require liquidation of the herds. Jackson asked the accused to serve as local counsel for the debtors in the Chapter 7 proceeding. The accused agreed, thinking that assertion of the farmer defense and dismissal of the Chapter 7 bankruptcy would be in the interests of his investor partnership clients, and he filed an answer on behalf of MLP raising the farmer defense.

In May 1997, Jackson drafted an affidavit for signature by Dave Barnes, a manager in the Hoyt enterprise, in support of MLP's motion to dismiss. The affidavit stated that MLP was in the business of buying and selling cattle, that it had earned gross income in the 12 months preceding February 1997 of approximately $1.4 million, and that its expenses had exceeded its income during that period. Jackson did not finalize or file the affidavit, however, because Hoyt instructed Jackson not to assert the farmer defense and insisted that MLP was not conducting business and had no assets or income. On June 5, 1997, the bankruptcy court issued an uncontested "order for relief." See 11 U.S.C. § 303(h) (1997) (providing for entry of order for relief against debtor in involuntary bankruptcy)...