In re Goldstone

• Decision Date: 16 December 2005
• Citation: 445 Mass. 551,839 N.E.2d 825
• Parties: In the Matter of Daniel W. GOLDSTONE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 825

839 N.E.2d 825

445 Mass. 551

In the Matter of Daniel W. GOLDSTONE.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued October 3, 2005.

Decided December 16, 2005.

COPYRIGHT MATERIAL OMITTED

David G. Hanrahan, Boston, for the respondent.

Dorothy Anderson, Assistant Bar Counsel.

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

CORDY, J.

An information and record of proceedings was filed in the Supreme Judicial Court for Suffolk County with the recommendation of the Board of Bar Overseers (board) that Daniel W. Goldstone be disbarred. The basis of the board's recommendation was its finding, inter alia, that Goldstone intentionally overbilled and collected hundreds of thousands of dollars in fees and costs to which he was not entitled, thereby converting and misappropriating client funds. A single justice reserved and reported the case to the full court. We conclude that disbarment is warranted.

1. Prior proceedings. Bar counsel commenced proceedings against Goldstone by filing a petition for discipline on January 31, 2002, alleging that Goldstone billed Sears, Roebuck and Co. (Sears) for costs and attorney's fees without any substantial basis for believing that Sears owed the amounts billed, wrongfully withheld funds due to Sears and used such funds to defray expenses for which he was responsible, and threatened Sears that he would not remit funds he was collecting on its behalf on active accounts if Sears did not make payments on his bills for closed accounts. Along with the petition, bar counsel filed a motion to preclude Goldstone from contesting the factual allegations in the petition, based on the resolution of those facts in a civil action brought by Sears against Goldstone in Federal court, arising out of the same disputed billing. The Federal action was for breach of contract, breach of fiduciary duty, and violation of G.L. c. 93A. A Federal District Court judge entered summary judgment for Sears in the matter, and the judgment was affirmed on appeal. Sears, Roebuck & Co. v. Goldstone & Sudalter, P.C., 128 F.3d 10 (1st Cir.1997) (Sears, Roebuck).

In May, 2002, the board's chair allowed bar counsel's motion to preclude in part, concluding that certain facts had been thoroughly litigated in the prior proceeding and could not be litigated again.¹ Factual issues concerning commingling of client and personal funds and Goldstone's "state of mind" (which were not litigated in the Federal proceeding), however, could still be disputed at the disciplinary hearing. Goldstone unsuccessfully sought interlocutory relief in the county court concerning the preclusion ruling, and then filed his answer with the board on November 7, 2002.

A hearing committee (committee) of the board held an evidentiary hearing on April 10 and 11, 2003, and on December 16, 2003, filed its report and its recommendation that Goldstone be disbarred from the practice of law. Goldstone appealed from the report claiming that the committee erroneously gave preclusive effect to certain facts litigated in the civil suit in Federal court and that three of the committee's findings were arbitrary and capricious and unsupported by substantial evidence.² On January 10, 2005, following a review of the record, the board adopted the committee's findings and unanimously voted to recommend that Goldstone be disbarred from the practice of law.

Goldstone appeals from the board's findings and recommendation of disbarment, arguing that the offensive use of issue preclusion was unfair and that his due process rights were violated because the committee's conclusions (adopted by the board) were based on findings that went beyond the scope of what he had been told would be litigated at the hearing.

2. Facts. The following facts are drawn from the undisputed facts of record in the Federal proceedings and the committee's findings that were adopted by the board.

In 1991, Goldstone commenced negotiations with Janice Sudalter to purchase the law practice of her late husband, Eldon Sudalter (Sudalter). For this purpose, Goldstone formed Goldstone & Sudalter, P.C. By early 1992, Goldstone had taken over Sudalter's firm, although the sale was not consummated until early 1993. Sudalter's practice had specialized in debt collection, and he had been the primary collection attorney for Sears in eastern Massachusetts for the previous fifteen years. Mrs. Sudalter had worked in her husband's office for most of that time, and her regular duties included preparing the monthly billings for Sears and other clients. As with most collection attorneys, Sudalter had operated on a contingency fee basis. Before 1987, Sears paid him one-third of his recovery and reimbursed him for all court costs. This changed in 1987 when Sudalter executed an "Attorney Retention Agreement" prepared by Sears (1987 agreement).

The 1987 agreement increased the contingency fee to forty-five per cent, but the collection attorney was now responsible for all costs that were not reimbursed by debtors. According to Mrs. Sudalter, under the new agreement, "[W]e take 45 percent of what we collect. If we can recover the costs [from debtors], great. If we can't recover the costs, that's just part of the agreement; that's why they're [Sears] paying us the 45 percent." According to the 1987 agreement, the collection attorney was to send all monies collected to Sears on a monthly basis, and Sears would then pay the attorney's forty-five per cent contingency fee.³ The 1987 agreement set forth a separate compensation agreement if Sears terminated the agreement or withdrew customer accounts from the collection process. In that event, Sears would pay Sudalter $60 an hour for work he had done on the account and reimburse any court costs, although it would pay no such fees if the attorney terminated the agreement or was in breach of the agreement. Goldstone reviewed the 1987 agreement before he bought the practice, and he understood that he was bound by the terms of that agreement when he assumed ownership of the firm.

When Goldstone took over the practice, he had no personal knowledge of whether particular collection cases in Sudalter's files had been billed or were uncollectible, or had been formally closed, whether or not billed or uncollectible. He had never worked with Sudalter, nor had he ever discussed with him the firm's billing practices. In addition, the committee found that Goldstone did not ask Mrs. Sudalter about the billing and collection practices for pre-1987 files, but rather relied on Frederick Casson, who had worked for Sudalter on an as-needed basis, and Karen D'Angelo, a "low-level" Sears employee. Their cumulative knowledge of the firm's prior practices in billing Sears was far more limited than Mrs. Sudalter's.

Mrs. Sudalter's testimony regarding the procedures and practices for closing files at the Sudalter firm was as follows. Files were closed when (1) payment in full was received; (2) the debtor filed for bankruptcy protection; or (3) the debtor was judgment-proof. When one of these contingencies occurred, Mrs. Sudalter would stick a "red dot" on the outside of the file, and box and store the closed files in the file room. She did not notify Sears when files were closed, and the law practice never intended to submit any further bills to Sears on "closed" cases. Both Goldstone and Casson testified that they understood a red dot on the file meant it was inactive or the debt was uncollectible.

The conduct that gave rise to the petition for discipline began when Goldstone noticed that Sears was sending fewer cases to the firm than it had in the past. Goldstone contacted D'Angelo, who explained that it was due to the firm's low collection ratio since Sudalter had "never closed a file in fifteen years." D'Angelo then encouraged Goldstone to close more files. Goldstone subsequently spoke to Emma Scott, in-house counsel for Sears, who also told him to close Sudalter's files. Goldstone did not tell either of the Sears employees about the volume of files (thousands) that were in storage, or about the manner in which he intended to calculate the fees and costs that he intended to bill in "closing" those files.

Following his conversation with D'Angelo, Goldstone instructed Casson to review all of the Sears files to determine which ones were inactive or uncollectible and then, with respect to those files, to determine what costs the firm had expended that had not been reimbursed by Sears or anyone else. Casson testified, and the committee credited his testimony, that he relied almost exclusively on notations appearing on the outside of the folders for his information, and that he noted the amount of costs he believed were still owed the firm on the front of the file in black "magic marker."

In early 1992, Goldstone also began reviewing the thousands of files contained in "dead storage" in the basement, most of which had red dots on them, indicating that they were "closed" and fully paid. The committee refused to credit his testimony that he went through every file personally before billing Sears for costs or fees owed, but it did credit his testimony that he did not consider a file closed until it was closed and billed by him (notwithstanding his understanding that files marked with red dots were already closed). Goldstone derived his cost figures from the handwritten notations on the outside of the folders. If no record of any payment from Sears was reflected on the folder itself, he assumed that the costs had not been paid.⁴ He then proceeded to bill Sears for costs on those files. He calculated attorney's fees due on those files by estimating the amount of time Sudalter had spent on each case at sixty dollars per hour.

Between early 1992 and February, 1994, Goldstone billed Sears for $1.1 million in unpaid attorney's fees and costs related to his "closing" 15,000 of Sudalter's old files. Over this period of time, Sears paid Goldstone in excess...