Matter of Scallen, 47366.

• Citation: 269 NW 2d 834
• Decision Date: 14 July 1978
• Docket Number: No. 47366.,47366.
• Parties: In the Matter of the Application for the Discipline of Thomas K. SCALLEN, an Attorney at Law of the State of Minnesota.
• Court: Supreme Court of Minnesota (US)

269 N.W.2d 834 (1978)

In the Matter of the Application for the Discipline of Thomas K. SCALLEN, an Attorney at Law of the State of Minnesota.

No. 47366.

Supreme Court of Minnesota.

July 14, 1978.

R. Walter Bachman, Jr., Administrative Director on Professional Conduct, Lawyers Professional Responsibility Bd., St. Paul, for appellant.

Henry E. Halladay and J. Marquis Eastwood, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, for respondent.

Considered and decided by the court en banc.

TODD, Justice.

Thomas K. Scallen, a licensed Minnesota lawyer, was convicted in Canada of the crimes of theft and publishing and circulating a false prospectus. The Board of Professional Responsibility, after conducting a hearing, recommended to this court that Scallen be disbarred. We accept the recommendation for discipline but amend the penalty to provide that Scallen be indefinitely suspended from the practice of law in Minnesota, with right to reapply for admission in 5 years.

Scallen was admitted to the practice of law in Minnesota in 1950. The first 5 years of his legal career were spent as a deputy attorney general for the State of Minnesota. Thereafter, he entered private practice and early in 1960 became involved with the operation of the Medical Investment Corporation (Medicor). His participation in Medicor's operations steadily increased until by 1964 he had altogether ceased the private practice of law. Medicor operated several small banks and was the owner of the "Ice Follies," a highly successful touring ice show. Scallen was the chief executive officer of Medicor, and although the corporation was publicly held, in practice he functioned as its sole decision maker.¹ The board of directors of Medicor generally accepted his operational decisions and long-range planning without question.

In 1969, Scallen, as a result of his work with the ice show, became aware of the availability of a National Hockey League franchise at Vancouver, British Columbia, Canada. The NHL had offered the Vancouver franchise to Northwest Sports Enterprises, Ltd., for the sum of $6 million. Northwest had declined the offer at that price. Scallen determined that the franchise would be a sound investment, and in order to take advantage of the offer made to Northwest, he arranged for Medicor to acquire 90 percent of Northwest's outstanding shares for a price of $2.8 million. Medicor lacked the funds to both purchase the Northwest stock and make the first of six annual $1 million installment payments to the NHL. To provide the necessary funds, Medicor borrowed $3 million from the Walter E. Heller Corporation of Chicago. The Heller note was due in full on June 18, 1970, roughly 6 months after its execution. Because of the urgency with which these funds were sought, the Heller loan was secured in a somewhat unusual manner, which in turn produced a relatively high effective interest rate on the loan.

Medicor subsequently consummated the purchase of Northwest, and Scallen proceeded to operate it much as he had operated Medicor — i. e., with minimum reliance on the board of directors. Medicor's operations suffered a severe cash-flow shortage in 1970, making timely repayment of the Heller note extremely troublesome. Ultimately, an extension of the note was obtained, and an interim consultant employed by Medicor was asked to make proposals for alleviating the working capital shortage. In a memorandum directed originally to Scallen and later to Medicor's debenture holders, the consultant discussed the possibility of raising cash by making a public offering of Northwest securities and somehow transferring the offering proceeds to Medicor for repayment of the Heller loan. The memorandum specifically cautioned, however, that:

"It may be illegal to flow the proceeds of the Canadian offering up to the parent Medicor without either: (1) Stating this in the prospectus, which would make the offering difficult to sell, or (2) Merging Medicor into Northwest Sports or merging Northwest Sports into Medicor." (Italics supplied.)

Market conditions in the spring of 1970 precluded a public offering, and Scallen sought alternative means for refinancing the Heller loan. During this time, the new hockey club was on its way to becoming a financial success. Advance ticket sales for the 1970-1971 hockey season generated sufficient revenues to pay the club's initial debts but not nearly enough funds to repay the Heller debt. When market conditions improved in the fall of 1970, however, the possibility of a public offering was again pursued. Royal Securities Limited (a Canadian subsidiary of Merrill Lynch) agreed to underwrite the offering, and the preparation of the offering prospectus was begun. Scallen actively participated in the underwriting process and signed the completed prospectus on November 13, 1970.

In its final form, the prospectus offered for public sale 2,000 shares of Northwest treasury stock, 1,000 shares of the Northwest stock held by Medicor, and $2 million principal amount of 8½-percent convertible subordinated debentures. Under Canadian law, the prospectus was required to state the purpose for which the funds generated by the offering would be used. The Northwest prospectus represented that the offering proceedings would be utilized to retire a small debt and to make the 1971 annual franchise payment to the NHL. The remaining funds — approximately $2.4 million — were to be added to Northwest's working capital and kept available for possible expansion into other entertainment/recreation fields.

It is undisputed that the offering proceeds were not utilized as represented in the prospectus. Instead, Scallen arranged to have $3 million of the proceeds transferred to Medicor for the repayment of the Heller loan as follows: On December 8, 1970, the closing of the offering took place and Northwest was issued a check by the underwriters in the amount of $3,439,052.34. These funds were deposited in a Northwest account at the Royal Bank of Canada in Vancouver. On December 15, 1970, the Royal Bank was instructed to transfer $3 million to the Bank of America in San Francisco for the account of the Bank of the South Pacific — a wholly-owned subsidiary of Medicor.² In exchange, the Bank of the South Pacific issued a 90-day certificate of deposit to Northwest, bearing an interest rate of 8½ percent.³ The Bank of the South Pacific immediately "loaned" the $3 million to Medicor at an interest rate of 9½ percent. Medicor's promissory note was secured by its shares of Northwest and the stock of two other Medicor subsidiaries. The fair market value of this collateral was more than double the face amount of Medicor's promissory note. Medicor in turn used the proceeds of the loan from the Bank of the South Pacific to repay its debt to Heller.

The foregoing transaction was completed in accordance with Scallen's specific instructions and without the knowledge of the directors of Northwest. However, no attempt was ever made to disguise the transaction, and it was readily discovered by Northwest's accountants. In the spring of 1971 when the other Northwest directors learned of the transaction and expressed their disapproval, Scallen made arrangements for Medicor to repay the $3 million to Northwest. These events generated substantial publicity in Vancouver and apparently brought the entire matter to the attention of the attorney general. Scallen and an associate were subsequently charged with the publication and circulation of a false prospectus. Scallen alone was also charged with theft.

Section 358 of the Canadian Criminal Code provides:

"(1) Every one who makes, circulates or publishes a prospectus, statement or account, whether written or oral, that he knows is false in a material particular, with intent

"(a) to induce persons, whether ascertained or not, to become shareholders or partners in a company,

"(b) to deceive or defraud the members, shareholders or creditors, whether ascertained or not, of a company,

"(c) to induce any person to entrust or advance anything to a company, or

* * * * * *

is guilty of an indictable offence and is liable to imprisonment for ten years." (Italics supplied.)

The theft offense is defined at section 283 of the code:

"(1) Every one commits theft who fraudulently and without colour of right takes, or fraudulently and without colour of right, converts to his use or to the use of another person, anything whether animate or inanimate, with intent,

"(a) to deprive, temporarily or absolutely the owner of it or a person who has a special property or interest in it, of the thing or of his property or interest in it,

* * * * * *

"(3) A taking or conversion of anything may be fraudulent notwithstanding that it is effected without secrecy or attempt at concealment.

"(4) For the purposes of this Act the question whether anything that is converted is taken for the purpose of conversion, or whether it is, at the time it is converted, in the lawful possession of the person who converts it is not material." (Italics supplied.)

Scallen's case was tried before a jury of 12 in Vancouver. With respect to the false prospectus charge, Scallen defended on the ground that the purpose-of-issue language in the prospectus was not false at the time when the prospectus was circulated. That is, Scallen argued that when the prospectus was signed, he did in fact intend to use the offering proceeds as stated in the prospectus, and only later developed the plan of transferring the funds to Medicor. In fairness to Scallen, there was some evidence which tended to support this contention. Testimony was adduced which indicated that just prior to the public offering, Northwest (i. e., Scallen) had conducted some preliminary negotiations for the purchase of "Holiday on Ice," another ice show.⁴ The prospectus language referring to Northwest's possible expansion into other leisure entertainment fields would certainly encompass the acquisition of Holiday...