In re Conduct of Herman, OSB No. 12111

• Decision Date: 14 May 2015
• Docket Number: OSB No. 12111, SC S061840.
• Parties: In re Complaint as to the CONDUCT OF David HERMAN, Accused.
• Court: Oregon Supreme Court

357 Or. 273

348 P.3d 1125

In re Complaint as to the CONDUCT OF David HERMAN, Accused.

OSB No. 12111

SC S061840.

Supreme Court of Oregon, En Banc.

Argued and Submitted on Sept. 16, 2014.

Decided May 14, 2015.

Lawrence W. Erwin, Bend, argued the cause and filed the briefs for the accused.

Mary A. Cooper, Assistant Disciplinary Counsel, Tigard, argued the cause and filed the brief for the Oregon State Bar.

Opinion

PER CURIAM

In this lawyer disciplinary proceeding, the Oregon State Bar (Bar) charged the accused with violating Rule of Professional Conduct (RPC) 8.4(a)(3) (dishonesty and misrepresentation reflecting adversely on the accused's fitness to practice law), arising from a failed corporate venture involving the accused and two business associates. A trial panel of the Disciplinary Board determined that the Bar proved that the accused violated that rule and that he should be disbarred. The accused now seeks review of that decision, which we review de novo. ORS 9.536(2) ; Bar Rule of Procedure (BR) 10.6. For the reasons that follow, we agree with the trial panel that the Bar proved by clear and convincing evidence that the accused violated RPC 8.4(a)(3) and that disbarment is the appropriate sanction.

FACTS

The accused was admitted to the Oregon State Bar in 1990 and to the Washington State Bar in 1991. In 2003, he transferred his Oregon bar membership to inactive status; four years later, the Oregon Bar placed him on non-disciplinary suspension for failure to pay his bar dues. He has, since then, remained suspended in both Oregon and Washington for continued nonpayment of dues.

In early 2008, Schutfort approached the accused about starting a business venture with him and another person, Alexander, that involved the development, manufacture, and sale of specialized testing containers designed to measure formaldehyde levels in composite wood products.¹ The three people subsequently agreed to form a business entity for that purpose, called Blue Q Labs (Blue Q), which they would co-own in equal thirds. According to testimony from the three principals at the trial panel hearing, each of them agreed to perform particular roles in Blue Q's operations. Alexander—a welder and fabricator whose shop was located in Lebanon, Oregon—would fabricate the containers that physically held wood samples during testing. Schutfort would design the testing device's electronics, write its software program, and help market and install the devices, as well as train Blue Q customers in their operation. For his part, the accused agreed to manage the company's finances, participate in marketing, and perform functions ordinarily undertaken by a business's general counsel, such as drafting contracts and sales agreements. The accused had experience in conducting large, complex business transactions while in private practice and had himself incorporated between 10 and 20 businesses.

In the course of discussions, the accused suggested that, rather than form a new corporation, the principals should make use of a dormant Nevada corporation—Vintrak Information Systems (Vintrak)—that the accused already owned. According to the accused, his accountant had advised him that amending Vintrak's articles of incorporation—thereby turning that corporation into Blue Q Labs, Inc.—would allow the new business to take advantage of financial losses that had been stranded on the books of Vintrak. Schutfort and Alexander had confidence in the accused and his legal acumen, and they accepted his recommendation.²

In March 2008, the accused amended Vintrak's articles of incorporation by filing a certificate of amendment with the Nevada Secretary of State. As a result, the name of the corporation formally was changed to Blue Q Labs, Inc. Alexander, Schutfort, and the accused were listed in the certificate as directors, and the entity's purpose was redefined, in part, as “any lawful activity related to the construction, rental, modification, repair and sale of environmental test chambers and associated equipment and training.” However, as the accused would acknowledge at the trial panel hearing, the formalities that ordinarily attend the formation and operation of a corporation—for example, the adoption of bylaws, the issuance of stock to the three principals, the election of officers, and the conduct of meetings—were not observed.

Instead, some aspects of the old corporation remained unchanged. The accused, for example, had been Vintrak's sole corporate officer, occupying the positions of president, secretary, and treasurer. After the certificate of amendment was filed in Nevada, no new officers were elected. In addition, the accused apparently had been the sole shareholder of Vintrak. Vintrak's original articles of incorporation authorized the issuance of 1,000 shares of stock, and the Nevada certificate of amendment indicated that Vintrak stock had been issued. A corporate law expert who testified at the accused's trial panel hearing stated that, after the articles of incorporation were amended, stock ownership in Vintrak became stock ownership in Blue Q. Despite the agreement of its principals that they would own the business in equal thirds, Blue Q issued no stock after it came into existence. Instead, Blue Q's 2008 and 2009 Subchapter S corporate tax returns indicated that the accused was its sole shareholder.

After the creation of Blue Q, the accused opened a bank account for the new business at U.S. Bank, to which the accused, Schutfort, and Alexander initially had access. Despite the fact that the accused had retained all formal positions of corporate authority after the articles of incorporation were amended, Alexander and Schutfort were listed on the account application as Blue Q's president and vice-president. The new bank account was used to pay manufacturing expenses associated with fabricating the testing containers and to receive deposits that accompanied customers' product orders.

From the start, Blue Q's business was brisk. Initial wire deposits for customer orders in July 2008 totaled more than $38,000; over the next five months, deposits totaling an additional $275,000 were made into Blue Q's account at U.S. Bank. Demand, however, quickly outpaced the company's ability to produce a reliable product and fill orders in a timely manner. A production-related bottleneck arose in the fabrication process, for which Alexander was responsible. As Alexander later would testify, “I told them I needed more help. I needed money. We needed more help to build.” No assistance materialized, however. Instead, in the final months of 2008, the accused began subcontracting container fabrication to outside machine shops in Idaho, an arrangement that the accused did not disclose to Alexander and was intent on keeping secret from him, if possible.³

Shortly thereafter, the relationship among the three principals worsened. At the trial panel hearing, the principals offered divergent accounts of events that would lead to the dissolution of Blue Q. The accused testified that, in late February 2009, he, Schutfort, and Alexander met at Alexander's shop in an effort to sort out the company's fabrication problems. According to the accused, Alexander disagreed with the accused's opinion that Blue Q's success depended on a “turnaround” of Alexander's commitment to manufacturing a quality product. Instead, according to the accused, the meeting ended with Alexander quitting the corporation:

“He finally got irritated and said, ‘I'm not going to listen to this anymore. I'm done with it. I won't discuss it anymore. You bring it up again, you're not going to like my response.’

“And I think—you know, at that point I said—I said words to the effect, ‘Then it's over. We're done. We've got to turn it off, send people their money back, beg forgiveness or whatever.’

“And he says, ‘I don't care what you do. I'm not going forward with this. I'm not giving you any commitments, and I'm not going to do anything else.’ ”

The accused further testified that he and Schutfort then decided that, with Alexander out of the picture, they constituted a quorum of the board of directors for the purpose of conducting corporate business. Accordingly, they jointly decided to end Blue Q's operations and form another entity to continue the business of producing and marketing the testing devices. In the accused's words, “[We] reorganized and Mr. Alexander was not involved.”

Alexander gave a very different account in his testimony before the trial panel. When asked if had resigned from Blue Q or otherwise indicated that he wanted nothing more to do with the business, Alexander answered “no” to both questions. Likewise, Schutfort testified that he never voted to reorganize or dissolve Blue Q and that he had not participated in a separate meeting with the accused to consider doing so.

At about the same time as the meeting at Alexander's shop, the accused began making changes in Blue Q's operations, many without Schutfort's or Alexander's knowledge. Among other changes, the accused removed Alexander as a signatory on Blue Q's bank account.⁴ The accused also began directing customers to make payments to other business entities that the accused owned or controlled. In late February 2009, the accused explained in e-mails to Blue Q's customers that the diversion of payments was necessary because Blue Q recently had been the victim of bank fraud; according to the accused, Blue Q needed to protect its funds in a new account. In his deposition in this case, however, the accused gave a different explanation. He testified that the diversion was necessary because Blue Q had experienced problems in qualifying to engage in foreign wire transfers. The accused did not produce any evidence to corroborate either of those different explanations.

By March 2009, Blue Q customers were making payments on Blue Q invoices to two entities that the accused owned or controlled, Equine Management, Inc. (EMI), and Carbcert LLC (Carbcert). In an e-mail instructing...