Pappas, Matter of

Decision Date08 December 1988
Docket NumberNo. SB-86-0011-D,SB-86-0011-D
Citation159 Ariz. 516,768 P.2d 1161
PartiesIn the Matter of a Member of the State Bar of Arizona, Harry PAPPAS, Respondent.
CourtArizona Supreme Court

Harry Pappas, Phoenix, In Pro. Per.

Wilson, McConnell & Associates by Beverly J. McConnell, Phoenix, for State Bar.

FELDMAN, Vice Chief Justice.

This case presents another unfortunate example of a lawyer attempting to engage in arm's-length business transactions with a client. The client lost money, and the lawyer now objects to the Disciplinary Commission's recommendations that we disbar him. We have jurisdiction under Ariz. Const. arts. 3 and 6, and Rules 46, 52, and 53, Ariz.R.Sup.Ct., 17A A.R.S. (1988).

I. PROCEDURAL HISTORY

The State Bar of Arizona charged respondent, Harry Pappas, with various violations of the Code of Professional Responsibility, Rule 29(a), Ariz.R.Sup.Ct., 17A A.R.S. (1973). 1 On August 12, 1985 the Local Administrative Committee for District 5K (Committee) filed a formal complaint against respondent. See Rule 33(b)(2). The Committee heard the four-count complaint on September 17 and October 7, 1985. Respondent represented himself. Pursuant to Rule 35(c), the Committee filed its Findings of Fact and Recommendation (Findings) on December 11, 1985. It found that respondent violated five provisions of the former Disciplinary Rules and recommended disbarment as the appropriate sanction.

The Disciplinary Commission (Commission) reviewed the case on March 1, 1986. See Rule 36. The Commission adopted the Committee's findings of fact. It also affirmed five of the Committee's conclusions of law, modified a sixth, rejected one, and purported to add one of its own. 2 The Committee and Commission concluded that respondent violated Disciplinary Rules 5-101, -104, -105, and 6-101. These rules prohibit a lawyer from accepting employment when his own interests may impair his professional judgment (DR 5-101), or when the interests of multiple clients impair his judgment (DR 5-105). The rules also regulate a lawyer's business dealings with his clients (DR 5-104), and demand that a lawyer act competently with respect to a legal matter entrusted to him (DR 6-101). Agreeing with the Committee, the Commission recommended that respondent suffer disbarment.

This court accepted respondent's late filing of his Objections to Findings (see Rule 37(a)), thus bringing this matter before us for disposition. Rule 37.

II. FACTS
A. Standard of Review

We consider the facts as an independent "trier of both fact and law in the exercise of our supervisory responsibility over the State Bar" and its members. In re Neville, 147 Ariz. 106, 108, 708 P.2d 1297, 1299 (1985) (citing In re Mercer, 133 Ariz. 391, 393, 652 P.2d 130, 132-33 (1982)). In so doing, we give deference and serious consideration to the findings and recommendations of the Committee and Commission. Neville, 147 Ariz. at 108, 708 P.2d at 1299. Before we may impose discipline, we must be persuaded by clear and convincing evidence that respondent violated the disciplinary rules. In re Kersting, 151 Ariz. 171, 172, 726 P.2d 587, 588 (1986); see also current Rule 54(c). Otherwise stated, the evidence must convince us that it is "highly probable" respondent committed professional misconduct. Neville, 147 Ariz. at 111, 708 P.2d at 1302.

B. The Parties Involved

Respondent is a licensed certified public accountant (CPA) and attorney. He was certified as an accountant in 1955 and admitted to the Arizona bar in 1970. Respondent's primary profession is his CPA practice, and he became an attorney only to become "a better CPA." Reporter's Transcript (RT), March 1, 1986, at 6. Respondent concentrates his practice on "tax returns, shelters, buy and sell agreements, some incorporations, areas where CPA's are very proficient and very comfortable and where clients are very comfortable with their CPA's." Id. at 7.

Frank and Walda Peterson (the Petersons) are a Phoenix couple. Mr. Peterson is a successful rancher and farmer; Mrs. Peterson is a housewife who does not work outside the home. Both are high school graduates. Neither has much business experience other than that involved in operating their farm and ranch. Neither professes any sophistication in accounting, legal, or investment matters.

William Hankerson is an accountant practicing in the Phoenix area. He was respondent's accounting partner for a time in the accounting firm of Pappas & Hankerson, Ltd. Respondent and Hankerson also did business together in a general partnership called Maui Land Enterprises.

C. Birth of Aloha Rent-A-Car

During 1972 and at the suggestion of their attorney, the Petersons approached respondent for counseling to minimize the tax consequences from a large cash payment from the state of Arizona in settlement of threatened condemnation proceedings. Respondent apparently handled the tax matter to the Petersons' satisfaction because he continued preparing their tax returns until approximately 1981.

Sometime during 1977 respondent and some associates began thinking about starting Aloha Rent-A-Car (Aloha), a car rental business on the island of Maui in Hawaii. Respondent was optimistic about the venture and offered to his accounting and legal clients 3 opportunities to invest in Aloha as both a tax shelter and an investment. Because respondent knew that the Petersons were due to receive a substantial cash payment (apparently unrelated to the earlier condemnation case) late in 1977, he contacted the Petersons, informing them about Aloha. Respondent either explained to the Petersons or simply left the impression that he was one of Aloha's two general partners 4 and would have managerial control over Aloha's operations. He told them the general nature of Aloha's business and explained the tax benefits that would result from the Petersons' potential investment.

During December 1977 the Petersons received the anticipated cash payment and invested $50,000 in Aloha. 5 At the time they turned over their funds to respondent, a written partnership agreement had not yet been drafted. Apparently it was almost a month after the Petersons gave respondent their $50,000 check when they signed the Aloha agreement. A Hawaiian law firm drafted the agreement in accordance with respondent's instructions. Mrs. Peterson testified that she did not see the full agreement before she signed it; she recalled only seeing the signature page. Respondent never fully explained the terms of the limited partnership agreement, the nature of a general partner's interest as opposed to a limited partner's interest, and his relationship with Y's Car Rentals or Maui Land Enterprises.

D. The Aloha Limited Partnership Agreement

The limited partnership agreement included the following provisions. In exchange for their capital contribution, 6 the ten limited partners were to receive a guaranteed fourteen percent per annum return on their investment, payable in monthly installments. The Petersons received these guaranteed payments for approximately two years. In addition to these payments, the limited partners qualified for appropriate tax deductions and write-offs on their income tax returns. Any net losses were first allocated to the limited partners in proportion to their capital contributions, but no limited partner's loss could exceed the amount of his capital account balance. Profits were divided half between the two general partners and half among the ten limited partners.

The general partners' initial capital contribution consisted of an assignment to Aloha of their interest in two contracts for the purchase of certain assets. For these two contracts, respondent and Hankerson, through Maui Land Enterprises, had advanced a total of $2,000 in earnest money. The Aloha partnership itself was liable for the $58,000 balance of the down payment on the contracts, but the general partners remained individually responsible for payment of deferred payments totalling $130,000. 7 No provision exists in the partnership agreement for any capital contribution by the corporate general partner, Y's Car Rental.

In addition to their fifty percent share of the profits, the agreement entitled the general partners to a management fee of ten percent of Aloha's gross revenue. 8 The Aloha agreement obligated the general partners to make loans to the partnership when necessary, to expend necessary management time, to maintain the partnership's books and records, and to make regular monthly and annual accountings to the limited partners. Finally, the agreement contained an exoneration clause in which the limited partners agreed to hold the general partners harmless for losses suffered as a result of the general partners' actions, except their fraud. 9

E. Death of Aloha Rent-A-Car

Aloha Rent-A-Car ceased doing business on January 31, 1983. In its first five years of operation, even setting aside the depreciation factor, Aloha netted profits for only two years. See RT, Oct. 7, 1985, at 109. Apparently, for three of five years, Aloha had a negative cash flow. Respondent claimed that Aloha simply ran out of capital, and thus was unable to continue functioning. Id. at 104. Respondent also contended that extrinsic events exacerbated Aloha's financial difficulties. For example, he testified that during 1978 and 1979 Hawaii's economy almost slipped into "a very severe depression." Id. at 110. An airline strike occurred during the peak tourist season of Aloha's second year in operation which "curtailed travel to Hawaii drastically." RT, March 1, 1986, at 18. He further testified that because a DC-10 plane crashed in Chicago, the FAA ordered nationwide grounding of all DC-10s, thus reducing the number of flights to Hawaii. Id. Other testimony told tales of hurricanes wiping out half of Maui's beaches, and of labor strikes at Hawaii's airports. RT, Oct. 7, 1985, at 90-91. All in all, according to respondent, "travel agents were not recommending Hawaii as a nice...

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