People v. Nutt, 82SA410

• Decision Date: 17 December 1984
• Docket Number: No. 82SA410,82SA410
• Parties: The PEOPLE of the State of Colorado, Complainant, v. Douglas NUTT, Attorney-Respondent.
• Court: Colorado Supreme Court

Page 242

696 P.2d 242

The PEOPLE of the State of Colorado, Complainant, v. Douglas NUTT, Attorney-Respondent.

No. 82SA410.

Supreme Court of Colorado En Banc.

Dec. 17, 1984.

Linda Donnelly, Disciplinary Prosecutor, Denver, for complainant.

Merle R. Knous, Denver, for respondent.

NEIGHBORS, Justice.

This case involves a grievance proceeding brought against the respondent, Douglas Nutt. The Hearing Committee found that Nutt violated the Code of Professional Responsibility in two respects while representing his clients, William, Wilbur, and Robert Schawo. First, the committee determined that Nutt violated Disciplinary Rule 5-104(A) when he failed to disclose to his clients that he and his mother-in-law were the lenders involved in a $70,000 loan transaction between D.N. Associates and the Schawos, and that he received a $5,000 loan origination fee in connection with the matter. Second, the committee concluded that Nutt charged a clearly excessive fee contrary to Disciplinary Rule 2-106 when he (1) billed his clients for excessive time and for work not done, and (2) entered into a contingent fee contract under which the amount of fees that he was entitled to receive from his clients was related only to oil and gas royalties paid to them and not to the legal services provided. The Hearing Committee recommended a public censure. However, Hearing Panel "B" of the Grievance Committee recommended that Nutt be suspended from the practice of law for three months. The disciplinary prosecutor has urged this court to suspend the respondent for at least one year and one day. ¹ In addition, the parties have each filed exceptions to the Hearing Panel's findings, conclusions, and recommendations.

I.

From our review of the record and the findings of the panel, we learn the following pertinent facts that provide the background for the specific findings upon which the recommendations for discipline are based.

William Schawo was an insurance salesperson. In 1976, his annual income was approximately $6,000 and his net worth was approximately $20,000. William and his wife lived in a mobile home on a 320-acre farm owned by the Schawos in Briggsdale, Colorado, and were in the process of building a permanent residence on the property. It was William's hope that he could engage in farming and ranching on a full-time basis.

Robert Schawo, William's brother, was employed as a truck driver for the Coors Brewery. His annual income in 1976 was approximately $17,000 and he had a net worth of approximately $24,000. Wilbur Schawo, the father of William and Robert, worked for the United States Postal Service. His income in 1976 was approximately $16,000 and his net worth was estimated to be $18,000.

Eva Daily, Wilbur's mother, was an elderly widow who owned a ranch in Western Kansas where she lived. In early 1976, oil and gas were discovered on her ranch. Daily communicated her desire to make a gift of some mineral rights to Wilbur.

As a result of these events, William contacted the respondent in February 1976. William met Nutt in 1975 when the respondent addressed a training session on estate planning for insurance salespersons.

Daily did not believe that Robert or William had the ability to manage their business The Schawos asked Nutt to verify the oil and gas discovery on the Daily Ranch and to investigate its significance. The respondent was also asked how to handle Wilbur's gift of mineral rights from his mother and how to structure the business affairs of William and Robert to encourage Daily to make gifts to them as well.

affairs properly. In addition, it was her wish to insulate any gifts or bequests to her grandsons from the possibility that they could be reached by their respective spouses.

The respondent confirmed that oil and gas had been discovered on Daily's property. He reported his findings to the Schawos and told them that they would be facing serious income and death tax consequences.

Nutt worked on plans to resolve the Schawos' potential problems during March 1976. However, he learned that the Schawos had no income or assets with which to pay attorney's fees. As a result, a fee agreement was reached by the respondent and the Schawos. Under the terms of the agreement, Nutt had the responsibility for advising the Schawos with respect to all of their legal problems in exchange for a percentage of any oil and gas royalties they might receive. The agreement was signed by the respondent and the Schawos on March 25, 1976. Nutt advised the Schawos to consult with him on everything, not to sign any documents until first clearing them with him, and to call on him if they required money or if they wished to buy anything.

In March 1976, the Schawos needed $10,000 and reported this fact to the respondent. Nutt loaned the Schawos $10,000 and took a second mortgage on the Briggsdale property.

On March 29, 1976, the respondent mailed drafts of simple wills to William and his wife and informed them that the documents were only of an interim nature and that more extensive estate planning was necessary.

On April 9, 1976, Daily executed and delivered to Wilbur a deed to one-quarter of the minerals under the Daily Ranch. The mineral interest was conveyed to Wilbur for life with the remainder to William and Robert.

During the spring of 1976, William was unable to obtain a construction loan or permanent financing to complete building the house on the Briggsdale farm. William contacted Nutt and sought his help in obtaining such a loan. The respondent told William to obtain an estimate of the cost to complete construction. An estimate of $65,000 was provided. The respondent told the Schawos the loan would be difficult to procure and that a lender would require a $5,000 loan origination fee. Since the Schawos did not have such funds available, the respondent offered to advance the money and add the sum to the amount of the loan which would be sought.

The respondent and his mother-in-law, Ilse Diamant, decided to loan the Schawos the $70,000. A closing was scheduled for May 17, 1976, at the First National Bank of Fort Collins. The lender was identified at the closing only as "D.N. Associates." The respondent never advised the Schawos of the lenders' identity or obtained their informed consent to his personal involvement in the transaction.

In May 1976, Nutt presented the Schawos with a written memorandum in which he outlined his recommendations for resolving their legal and business concerns. The purpose of the memorandum was to persuade Daily that the Schawos could deal responsibly with any gifts they might receive from her. The respondent recommended that each of the Schawos form a wholly-owned corporation and that the capital stock of each corporation be placed into a single voting trust with the three Schawos as trustees. The respondent also recommended that post-nuptial agreements be signed by the Schawos and their respective spouses to avoid the risk of potential gifts from Daily falling into the wives' hands.

On June 7, 1976, the Schawos executed the incorporation documents, the twenty- The respondent sent bills to the Schawos totalling $18,272.78 for legal services accrued as of July 1, 1976. The bills were based on the time expended by Nutt and his associate multiplied by their hourly rate of $40 per hour, plus a fee of $700 for preparation of the incorporation documents. Out-of-pocket costs were also billed to the Schawos. Upon receiving the bills, the Schawos reacted with alarm and immediately contacted the respondent. Nutt informed the Schawos that the bills were sent only to inform them of the extent of the services the respondent and his associates had performed to date. The respondent also sent a confirming letter which stated: "Please don't be alarmed at the size of the bills, as I am aware that we're waiting for royalty payments." During this time, the Schawos' confidence in the respondent was shaken. Later, in September 1976, the respondent discussed Wilbur's need for a $5,000 loan with the Schawos. Nutt advised the Schawos that Wilbur would be unable to obtain a loan without the respondent's co-signature. However, the Schawos went to a bank in Fort Collins and Wilbur was able to borrow the money on his own signature upon posting collateral.

year voting trust agreement, and the post-nuptial agreements. Each of the Schawos' respective spouses also signed the post-nuptial agreements in which they waived any claims they might have to gifts or inheritances given to their husbands by Daily.

Daily died on October 24, 1976. The following day, William and Robert Schawo met with Nutt and formally terminated him as their attorney. The communications between the Schawos and the respondent thereafter related primarily to attorney's fees. The respondent made requests for payments but the Schawos would not provide any information on the amount of oil and gas royalties they had received. The Schawos examined the respondent's time slips and offered to pay him $2,500 for his attorney's fees. The respondent refused the Schawos' settlement offer and made a counteroffer to arbitrate the fees. The Schawos refused.

On August 25, 1977, the respondent again billed the Schawos for $18,272.78 plus an additional $3,245 for services rendered after August 1976. Finally, on June 15, 1978, the respondent filed suit against the Schawos in the Arapahoe County District Court for the total billings of $21,517.78. The Schawos filed an informal complaint with the Grievance Committee against the respondent on October 20, 1978.

II. FAILURE TO DISCLOSE

The respondent has filed exceptions to the findings that he failed to disclose to his clients that he and his mother-in-law were the lenders of a $70,000 loan, and that he received a $5,000 loan origination fee in connection with the transaction. Nutt argues that William and Wilbur Schawo knew or at least suspected that he was a lender on the construction loan. As support for his argument, res...