Kersting, Matter of
| Decision Date | 23 September 1986 |
| Docket Number | No. SB-331,SB-331 |
| Citation | 726 P.2d 587,151 Ariz. 171 |
| Parties | In the Matter of a Member of the State Bar of Arizona, Robert E. KERSTING, Respondent. |
| Court | Arizona Supreme Court |
Mahoney, Lehman & Rood by William P. Mahoney, Jr., Phoenix, for respondent.
Local Administrative Committee 5G of the State Bar found that Robert E. Kersting (respondent) violated the Code of Professional Responsibility by engaging in certain fraudulent transactions. Rule 29(a), Ariz.R.S.Ct., 17A A.R.S. 1 The local committee recommended a minimum six-month suspension, with one member recommending disbarment. Respondent objected and sought review of the local committee's findings before the Disciplinary Commission. The Commission adopted and approved the local committee's findings of fact and conclusions of law and recommended a nine-month suspension, with two members voting for a longer suspension. We decide this case pursuant to former Rule 37, Ariz.R.S.Ct., 17A A.R.S. (1984). 2
In disciplinary proceedings against members of the State Bar, we are an independent trier of fact and law and will impose discipline only if we find clear and convincing evidence of misconduct. Matter of Swartz, 141 Ariz. 266, 271, 686 P.2d 1236, 1241 (1984). We do, however, grant great weight to the local committee's findings of fact and conclusions, particularly when the credibility of witnesses is necessary to determine ultimate facts. Id. Conflicts in the testimony do not prevent us from independently finding clear and convincing evidence, i.e., that the truth of the contentions is "highly probable." Matter of Neville, 147 Ariz. 106, 110-11, 708 P.2d 1297, 1301-02 (1985).
Respondent claims to possess expertise in securities and real estate law. The local committee considered respondent's expertise significant because the alleged frauds involved both securities and land. While we do not hold respondent to a higher standard simply because of his expertise, we may legitimately view his claims of ignorance or inadvertence more skeptically. The local committee found by clear and convincing evidence that respondent engaged in conduct involving "dishonesty, fraud, deceit, or misrepresentation," DR 1-102(A)(4), and "conduct that adversely reflects on his fitness to practice law," DR
[151 Ariz. 173] 1-102(A)(6). The committee also found that while representing a client, respondent concealed or knowingly failed to disclose that which he was required by law to reveal, knowingly made false statements of law or fact, and counseled or assisted his client in conduct that he knew to be illegal or fraudulent. DR 7-102(A)(3), (5), and (7).
Sunshine Land & Cattle Corporation (Sunshine) was formed in 1970 to develop and sell subdivided lots located approximately forty miles west of Phoenix in an area designated as Phoenix Valley West. Subsequently, Sunshine added a second subdivision, Phoenix Valley West II, and planned other developments.
Respondent was an incorporator, substantial stockholder, director, and officer of Sunshine from its inception through March 1, 1974. During that period, he also served as general counsel and was involved in the "ownership, management, and day-to-day operations" of the company. Finding IV(1). He was described in publicly disseminated corporate literature as a driving and sustaining force behind Sunshine. He received "significant and substantial income" from the company. Id. The record supports the committee's finding that respondent's "activities included looking after all legal aspects including minutes, zoning matters, borrowings, structure of borrowings and all paperwork involved in the operation of the corporation and the financing for individual investors." Finding IV(4).
Sunshine's operation generally consisted of purchasing desert land, rezoning, subdividing, and improving it, and then marketing the lots in a number of states. Virtually all lot sales were made on an installment basis with down payments of ten to twenty percent. Typically, a lot purchaser would sign a purchase money note evidencing the deferred balance owed Sunshine. The purchase money notes amortized over a number of years and were secured by purchase money mortgages encumbering the lot sold. 3 Sunshine was the payee of the purchase money notes and the mortgagee named in the purchase money mortgages. To raise and maintain operating capital, Sunshine usually discounted the purchase money notes that it received from the lot purchasers and endorsed or assigned them to investors. It also assigned the purchase money mortgage to the same investors (mortgage investors). Consequently, the mortgage investor, as Sunshine's assignee, held title to both the purchase money note and mortgage. 4
The language of the assigning instrument between Sunshine and the mortgage investor is noteworthy. Sunshine assigned and transferred the purchase money mortgage, "[t]ogether with the obligation therein described, and the money due and to become due thereon," and appointed the mortgage investor as its assignee to collect the money due. The assignment instrument also provided that it was "further agreed" by Sunshine and the mortgage investor as follows:
Should [the lot purchaser] become delinquent on his payments ..., or should said [purchase money] mortgage be paid, prior to maturity, [Sunshine] shall accept a reassignment of said delinquent or prepaid mortgage and redeliver to the [mortgage investor] a substitute mortgage and promissory note having a principal unpaid balance in the same amount, or adjusted to the same amount, as that remaining on the [purchase money] mortgage in default, with the same recourse provisions.
Of course, the quoted provision made the security provided by the purchase money mortgage largely illusory. The mortgage investor/assignee of the purchase money The assignment forms were accompanied by an equally unusual "Installment Collection Agreement" between the mortgage investor and Minnesota Title Company as "Collection Agent" for the purchase money note and mortgage. The agreement gave the collection agent authority to collect the payments to be made by the lot purchaser on the purchase money note and mortgage. The collection agreement then bound the investor/assignee "to deliver to collection agent the promissory note upon payment of said note in full or replacement with a substitute note...." (emphasis supplied). Finally, as party to the so-called collection agreement, Sunshine authorized the collection agent to pay the mortgage investor monthly payments from Sunshine's own funds of a specified amount over a specified number of months. These payments were "to be in lieu of those which would otherwise be collected [from the purchase money note and mortgage] and forwarded to [the mortgage investor/assignee]." The unusual terms of the collection agreement, when combined with the "Assignment of Mortgage," meant that any time a lot purchaser prepaid the purchase money note and mortgage, the prepaid funds went to Sunshine. The assignee holding the purchase money note and mortgage would, if he or she were lucky, continue to receive the monthly amortization payments from a substitute note and mortgage. Under this system, a mortgage investor might have to wait years for monthly amortization of an uncollected balance when the security that he or she had purchased had already been discharged by the lot purchaser's prepayment and replaced with substitute security. It is also possible, as was true in some transactions, that the substitute note and mortgage was "in the same amount" as the original note and mortgage, but did not provide the same security.
[151 Ariz. 174] mortgage was unable to foreclose on the supposed security in the event of default and was obligated to accept a substitute mortgage on some other, unidentified property. More importantly, in the event of prepayment the investor/assignee received a substitute mortgage on other property instead of the proceeds from the original property. Theoretically, the investor/assignee would continue to receive amortized payments on the original terms.
Sunshine obtained necessary approval from the appropriate government agencies to sell lots in the subdivision. However, the securities (the purchase money promissory note and mortgage and assignment of mortgage) sold to the mortgage investors were not registered with the Securities and Exchange Commission (SEC). In 1971, when the SEC learned of Sunshine's activities, it instituted legal proceedings to enjoin Sunshine from marketing the notes and mortgages without first properly registering them; ideally, registration would ensure that all material facts were accurately and fully disclosed to potential investors. In a July 7, 1972 consent decree, Sunshine agreed to cease all interstate sales.
The record supports the committee's finding that respondent had "extensive participation in all matters relating to defense and eventual resolution of the litigation" surrounding the consent decree. Finding IV(4). The committee also found that respondent knowingly violated the consent decree. Finding IV(7). We do not believe the evidence of a knowing violation is clear and convincing, although respondent, who certainly understands the principles of full disclosure, knowingly allowed transactions begun before entry of the consent decree to be consummated after the decree without telling the mortgage investors about the injunction prohibiting the sale of such securities. He claims that the SEC permitted Sunshine to close transactions in progress. Whether his claim is correct is unclear from the decree's language and the conduct of the SEC officials in charge. However, even if the decree was only to apply prospectively, its existence was a material fact that, as respondent admits, should have been disclosed prior to closing.
Later in 1972, Sunshine needed more capital and...
To continue reading
Request your trial
-
Shannon, Matter of
...we must be persuaded by clear and convincing evidence that Respondent committed the alleged violations. E.g., In re Kersting, 151 Ariz. 171, 172, 726 P.2d 587, 588 (1986); see also rule 54(c), Arizona Rules of the Supreme Court. Similarly, in acting as an arbiter of the law, we give great w......
-
Levine, Matter of
...ultimate trier of fact in disciplinary cases. In re Bowen, 160 Ariz. 558, 560, 774 P.2d 1348, 1350 (1989), citing In re Kersting, 151 Ariz. 171, 172, 726 P.2d 587, 588 (1986). From our own review of the expert testimony, it is apparent that respondent's witnesses had less than a complete st......
-
Zang, Matter of
...by a fair and impartial tribunal. We review respondents' objections as an independent trier of fact and law. In re Kersting, 151 Ariz. 171, 172, 726 P.2d 587, 588 (1986); In re Neville, 147 Ariz. 106, 108, 708 P.2d 1297, 1299 (1985). Although findings of the Committee and the Commission are......
-
Augenstein, Matter of, SB-92-0065-D
...however, we must be persuaded by clear and convincing evidence that respondent committed the alleged violations. In re Kersting, 151 Ariz. 171, 172, 726 P.2d 587, 588 (1986); see also rule 54(c), Arizona Rules of the Supreme Similarly, in acting as an arbiter of the law, we give great weigh......
-
Due Dates in the Real World: Extensions, Equity, and the Hidden Curriculum
...foster public confidence in the Bar; to preserve the integrity of the profession; and to deter other lawyers . . . .”); In re Kersting, 726 P.2d 587, 595 (Ariz. 1986) (“[T]he purpose of bar discipline is not to punish the lawyer but to deter others and protect the public.”); see generally ......
-
Opinions
...The purpose of discipline is to protect the public and deter similar conduct by other lawyers. Matter of Kersting, 151 Ariz. 171, 726 P.2d 587 (1986). Another purpose is to public confidence in the bar's integrity. Matter of Horwitz, 180 Ariz. 20, 29, 881 P.2d 352, 362 (1994). Yet another p......