N.C. State Bar v. Merrell

• Citation: 777 S.E.2d 103,243 N.C.App. 356
• Decision Date: 06 October 2015
• Docket Number: No. COA14–1334.,COA14–1334.
• Court: Court of Appeal of North Carolina (US)
• Parties: The NORTH CAROLINA STATE BAR, Plaintiff, v. Dan L. MERRELL, Attorney, Defendant.

243 N.C.App. 356

777 S.E.2d 103

The NORTH CAROLINA STATE BAR, Plaintiff,

v.Dan L. MERRELL, Attorney, Defendant.

No. COA14–1334.

Court of Appeals of North Carolina.

Oct. 6, 2015.

N.C. State Bar, by Counsel, Katherine Jean, Deputy Counsel, David R. Johnson, and Deputy Counsel, Maria Brown, for plaintiff-appellee.

Phillip H. Hayes, Kitty Hawk, for defendant-appellant.

GEER, Judge.

Defendant Dan L. Merrell appeals from an order of discipline of the Disciplinary Hearing Commission of the North Carolina State Bar (the "DHC") concluding that defendant violated the Rules of Professional Conduct by: (1) failing to safeguard and hold in trust clients' entrusted funds in violation of Rule 1.15–2(a) and (2) engaging in a conflict of interest by representing both parties to a commercial real estate transaction without first obtaining written and informed consent in violation of Rule 1.7(a). We hold that the DHC's findings of fact are supported by substantial evidence in the record, and the findings, in turn, support the DHC's conclusions of law. Consequently, we affirm.

Facts

The North Carolina State Bar commenced this disciplinary action against defendant by filing a complaint on 12 April 2012. This case arises out of defendant's representation of Michael Lam, a real estate developer. In its order of discipline, the DHC found, in pertinent part, the following facts.

In late 2005, Lam sought to develop a residential community, initially to be called Blue Water Cove, in Tyrrell County, North Carolina. Lam had entered into contracts to purchase the land that he wished to develop, but did not have the funds to finance the project. Lam solicited Thomas and James Gordon, who were residents of the State of Maryland, to participate in an investment project to buy and develop the land for Blue Water Cove. With the assistance of John Bollech, Lam created a term sheet for Blue Water Cove that included a description of the project with cost and profit projections. The term sheet stated that the cost of acquiring the land for the project was $1.5 million. Lam advised the Gordons that he needed to move quickly because his contracts to purchase the land had either expired or were about to expire.

On 20 December 2005, Lam and Bollech met with defendant at his office to discuss the Blue Water Cove project. Lam informed defendant that he wanted to form an LLC for the project and that the Gordons had committed to fund $2,450,000.00 toward the project with $1,500,000.00 designated for the purchase of the land. The Gordons were represented by Steven Nemeroff, an attorney licensed to practice in Maryland. Between late December 2005 and 12 January 2006, defendant communicated with Nemeroff and lawyers representing Bollech in the drafting of a memorandum of understanding ("MOU") among the individuals and entities who would have an ownership interest in the project.

On 29 December 2005, defendant filed articles of organization to form Deepwater Development Company, LLC ("Deepwater")—Lam was the sole member of Deepwater. On 13 January 2006, Lam, the Gordons, Bollech, Bernard Brooks, and Bill Reidy executed an MOU related to the development of Blue Water Cove. The MOU contemplated that a company would be formed to carry on the business of the project and that the Gordons would loan $1.5 million to that company to acquire the land. The MOU contained a provision prohibiting self-dealing by Lam or any other party to the MOU.

On 18 January 2006, defendant drafted the articles of organization for Development Company of Columbia, LLC ("DCC"), the company created for purchasing and developing the land for Blue Water Cove. The articles named Lam as the organizer and registered agent and used Lam's home address as DCC's registered office. Also on 18 January 2006, the Gordons wired $1.5 million to defendant's general trust account maintained at the Bank of Currituck. The Gordons expected Merrell to hold their funds in trust to be disbursed to pay for DCC's purchase of the land at closing. Although the funds belonged to the Gordons, they were recorded in defendant's trust account ledger under the name of Lam.

The following day, defendant wrote a note to an associate in his law office, Bill Stott, advising Stott that Lam intended to purchase a parcel of the Tyrrell County land for $360,000.00 and then sell it to DCC for $650,000.00, and that Lam also wanted to buy two parcels from other owners of the Tyrrell County land using investor money and convey only one parcel to DCC, with Lam and Bollech keeping the second parcel, consisting of more than 80 acres, free and clear. Defendant advised Stott that he saw potential for criminal and civil liability in both transactions and directed Stott to draft a letter to Lam and a disclosure letter.

On 23 January 2006, defendant filed the articles of organization for DCC with the Secretary of State. On or about that day, defendant sent a letter to Lam advising him that the series of transactions that he contemplated could constitute fraud and violate state and federal law. Defendant advised Lam that he would not represent him in the transactions unless full and complete disclosure was made to Lam's investors and potential partners and all of them acquiesced in the proposed arrangement. Defendant stated that his office would prepare disclosure documents to be executed after he verified that full disclosure had been made to all parties.

Despite the language of the 23 January 2006 letter, defendant did not draft a disclosure letter. Lam told defendant that he had made full disclosure to all interested parties, including the Gordons, of the fact that he planned to acquire the land for less than $1.5 million. Defendant believed Lam and did not insist on any written documentation that full disclosure had in fact been made.

On 24 January 2006, defendant transferred the Gordon's $1.5 million to a certificate of deposit account ("CD account") at Bank of America in the name of "Dan L. Merrell, Special Trustee for Development Company of Columbia, LLC." The address given for the account was Lam's address, and the tax identification number used was that of DCC. Defendant did not ensure that there was a signature card that would limit signatory authority on the account to him.

Although not signed by the members until 1 March 2006, the operating agreement of DCC, by its terms, became effective 1 February 2006. The operating agreement provided that Lam was the manager of DCC and, through Deepwater, was also a member of DCC. The term "property" under the agreement was defined as four separate parcels or interests referred to as the Sykes tract, the Davis tract, Ludford Landing, and an easement in an existing canal on the Taylor tract. Lam, as a manager of DCC, was prohibited by the agreement from self-dealing.

In February 2006, defendant was the closing attorney for Lam in Lam's purchase, through Deepwater, of the following tracts of land: on 3 February 2006, the Sykes tract for $360,000.00; on 9 February 2006, the Taylor tract for $267,500.00; on 14 February 2006, the Pinner interest in Ludford Landing for $16,666.00; on 15 February 2006, the Cahoon interest in Ludford Landing for $50,000.00, and the Davis tract for $300,000.00. In all, Deepwater paid a total of $726,666.00 to acquire the properties. Although defendant was aware that Deepwater acquired the entire Taylor tract for only $267,500.00, on 16 February 2006, defendant contacted Nemeroff on behalf of Lam to confirm that the Gordons would provide an additional $295,000.00 for DCC to purchase a license and easement for use of the existing canal on the Taylor tract.

Meanwhile, funds were withdrawn from the Bank of America CD account without the Gordons' knowledge, permission, or approval on 27 January 2006, 14 February 2006, and 1 March 2006. These withdrawals were used for Lam's benefit, including funding Deepwater's purchase of the Tyrrell County land. Defendant was not, however, aware that the funds were wrongfully withdrawn from the CD account without his authorization until sometime in September 2006.

On 2 March 2006, defendant was the closing attorney for the transaction in which DCC bought the Tyrrell County land and the Taylor tract easement from Deepwater for $1,745,000.00. Defendant represented DCC, Lam, and Deepwater at the closing. The transaction resulted in a profit of close to $1 million to Deepwater at the expense of DCC.

The 1 March 2006 withdrawal from the CD account closed out the account. However, defendant did not provide the Gordons with a written accounting of the receipts and disbursements of the $1.5 million upon the complete disbursement of the funds and did not account for the interest earned on the funds while in the CD account.

Based upon these findings, the DHC concluded that defendant's conduct constituted grounds for discipline pursuant to N.C. Gen.Stat. § 84–28(b)(2) (2013) in that defendant violated the Rules of Professional Conduct:

a. By moving the Gordons' funds from defendant's trust account to a certificate of deposit account at Bank of America in the name of "Dan L. Merrell, Special Trustee for Development Company of Columbia, LLC" with Lam's mailing address on the account, using DCC's tax identification number, failing to ensure access to the account was limited to himself, and failing to provide an accounting, along with other factors noted above, Merrell failed to safeguard and hold in trust the Gordons' entrusted funds in violation of Rule 1.15–2(a).

b. By representing both Deepwater and DCC at the closing on March 2, 2006 when Defendant's representation of DCC was materially limited by his responsibilities to Deepwater and he had not obtained the written informed consent of the clients to the dual representation, Defendant engaged in a conflict of interest in violation of Rule 1.7(a).

The DHC suspended defendant's law license for two years and stayed the suspension for a period of two years contingent on defendant's compliance with certain conditions....