Schneider v. State Bar

• Decision Date: 20 August 1987
• Citation: 739 P.2d 1279,239 Cal.Rptr. 111,43 Cal.3d 784
• Court: California Supreme Court
• Parties: , 739 P.2d 1279 James Ellis SCHNEIDER, Petitioner, v. The STATE BAR OF CALIFORNIA, Respondent. L.A. 32270.

Page 111

239 Cal.Rptr. 111

43 Cal.3d 784, 739 P.2d 1279

James Ellis SCHNEIDER, Petitioner, v. The STATE BAR OF CALIFORNIA, Respondent.

L.A. 32270.

Supreme Court of California.

Aug. 20, 1987.

As Modified Aug. 27, 1987.

Alan G. Martin, Greines, Martin, Stein & Richland, Beverly Hills, for petitioner.

Herbert M. Rosenthal and Truitt A. Richey, Jr., State Bar of California, San Francisco, for respondent.

BY THE COURT:

This is a proceeding to review the recommendation of the State Bar that petitioner, James Ellis Schneider, be suspended from the practice of law for a period of three years, that execution of the suspension be stayed, and that he be placed upon probation for three years. The recommended conditions of probation include two years' actual suspension. ¹ The hearing panel's recommendation was similar, but included no actual suspension.

I.

Petitioner was admitted to the practice of law in the State of California on January 4, 1967, and has no prior discipline. The present allegations arose out of petitioner's management of trust funds, largely in 1981, while serving as trustee for two trusts that he had drafted.

A settlement conference was held in which the State Bar examiner and petitioner's counsel fully presented the facts and the evidence of mitigation to the settlement referee, J. Sterling Hutcheson, a prominent San Diego attorney. The referee announced what his disciplinary recommendation would be, and, several months later, the parties stipulated as to the facts and mitigation, waived any variance between the notice to show cause and the stipulation or the subsequent hearing panel decision, and agreed that the matter could be decided by Mr. Hutcheson, serving as a one-member hearing panel. Petitioner also stipulated that he violated his fiduciary duties to his clients and the trust in one of the incidents. The parties did not stipulate as to discipline.

The panel incorporated the stipulation in its findings and decided that petitioner had willfully violated rule 5 -101 of the Rules of Professional Conduct (hereafter rule 5-101) ² and committed an act of dishonesty (Bus. & Prof.Code, § 6106). ³ After the panel recommended the discipline it had earlier announced, a sharply divided review department, on its own motion, set the matter for hearing. After two hearings, the matter was submitted, the review department adopted the panel's findings but modified two of them, added a finding that petitioner had violated his oath and duties as an attorney (§§ 6067 and 6068), and, by a divided vote, ⁴ recommended the more severe discipline.

II.

The stipulated facts disclose two separate incidents of professional misconduct--the Kornberg and the Meetze matters.

In the Kornberg matter, petitioner drafted a trust for Dr. Richard Kornberg and Mrs. Edith Kornberg in January 1978 for the benefit of their children. The trust instrument permitted the trustee (petitioner) to borrow money from the trust or lend money from the trust to any person, provided the loan was adequately secured and bore a reasonable rate of interest. Although the trust agreement required the trustee to obtain prior authorization from the trustors before investing funds of the trust, no prior approval was required for borrowing from the trust.

Petitioner received in excess of $10,000 on behalf of the trust from the Kornbergs. Without notifying the Kornbergs, petitioner withdrew $7,500 from the trust on July 9, 1981, and withdrew the remaining balance of $3,546.72 on July 14, 1981. ⁵ In withdrawing the money, petitioner did not provide security to the trust, did not disclose in writing to the trustors the terms of the transactions, did not give them an opportunity to seek independent counsel, and did not receive their written consent. Petitioner would have testified that he acted in a manner implicitly approved by the Kornbergs, and that his conduct was consistent with his past dealings with them.

In January 1982, Mrs. Kornberg inquired about the funds. Petitioner said he would pay them back to a successor trustee. In March 1982, petitioner filed for bankruptcy. However, he did repay the funds borrowed from the trust. The Kornbergs requested the District Attorney of San Diego County to bring criminal charges against petitioner, but he declined to do so because the evidence was insufficient to prove beyond a reasonable doubt that the transactions were fraudulent misappropriations rather than loans permitted by the trust agreement.

In the Meetze matter, petitioner was retained by James Meetze in June 1977 to draft a trust and serve as trustee. Petitioner received in excess of $58,000 on behalf of the trust. The trust agreement authorized the trustee to lend trust money, provided there was adequate security and the loan bore a reasonable rate of interest. The trustee also had the power to borrow from the trust. ⁶ The trustee was permitted to make investments in his discretion, provided he gave 10 days' advance notice to the trustor of any investment involving $5,000 or more. If the trustor objected in writing within 10 days, the trustee could not make the investment.

Between December 24, 1980, and April 16, 1981, petitioner, without notifying the trustor, withdrew $58,000 from the trust in seven payments, five of which were greater than $5,000. In August 1981, Mr. Meetze, independent of petitioner, learned the $58,000 was no longer in the trust's bank account and asked petitioner where it was. Petitioner told him the money was invested in a certificate of deposit, but failed to tell him that the certificate was used as collateral for a loan to Keating Properties Ltd. (Keating), a partnership in which petitioner was a general partner. ⁷ In September 1981, petitioner gave Mr. Meetze documentation showing a $56,000 note secured with a 50 percent interest in a Keating entity and a $2,000 note. The collateral securing both notes was in excess of $200,000.

Petitioner thought the Keating investment was a good one and believed he had the implicit approval of Mr. Meetze. Petitioner did not inform Mr. Meetze of the investment, obtain his authorization, or give him a reasonable opportunity to seek the advice of independent counsel. Petitioner conceded that he breached his fiduciary duty to Mr. Meetze by failing to obtain Mr. Meetze's fully informed authorization before investing the funds and by failing to disclose to Mr. Meetze that the certificate of deposit, which was surrendered to a bank, had been pledged as collateral.

In January 1982, Mr. Meetze filed a civil suit against petitioner. The suit was settled in April 1982, after Meetze was repaid. ⁸

As to mitigation, the stipulation provides that petitioner has no prior record of discipline; that he has held a number of civic and professional positions of responsibility, including chairman of the San Diego County Bar taxation section; that he was in extreme financial difficulty in the early 1980's and was forced into bankruptcy because of financial reversals related to problems of the San Diego business community; that he believed his investment of the Kornberg funds in a tuna boat and the Meetze funds in a real estate venture in San Diego's Gaslamp District were sound and profitable ventures; that since 1982 he has revived his practice and reaffirmed numerous dischargeable debts and continues to make monthly payments on them; that he freely admits wrongdoing, is contrite, and has expressed extreme remorse over the difficulties caused to the complaining parties; and that he has admitted that he failed to comply with his fiduciary duties as a trustee for the Kornberg and Meetze trusts and as an attorney.

At the first hearing before the review department, the bar examiner argued in favor of the hearing panel's decision. "[The] facts were openly discussed, the books are opened, and ... there were full discussions and detailed questions, and the matter, in essence, was tried without any real rules of evidence so that everything was opened. [p] There was a mishandling of funds. There was not a finding of misappropriation, and funds have been paid back and there is a great deal of mitigation." Petitioner testified that the transactions in both matters were "basically loans to investments that I was related to" and that he had viewed the transactions as fully secure. His attorney, Mr. McGrath, explained that the parties entered the stipulation partly to avoid an expensive trial on whether the transactions were loans from the trusts to investments or investments by the trusts. The matter was submitted.

The review department vacated the submission and scheduled the matter for further argument on whether the certificate of deposit into which the Meetze trust funds were placed was a trust asset and, if so, whether the use of the certificate as collateral for a loan without consideration was a misappropriation of the certificate. At the second hearing, petitioner appeared without counsel and reiterated that both transactions were loans, not investments. He also complained of the unfairness of the review department accepting the factual stipulation and rejecting the hearing panel's recommendation for more lenient discipline. He suggested that if the review department disagreed with the referee's recommendation, it should set aside the stipulation and remand for further proceedings before the hearing panel. ⁹

The review department questioned petitioner about the Meetze transactions. He stated that on March 9, 1981, he executed a line-of-credit note for $56,000 in favor of the trust, and on April 15, 1981, he executed a second note for $2,000. The notes were secured by an assignment of a Keating property, but petitioner did not perfect the security. ¹⁰

The review department's findings reflect this testimony. The review department also found that petitioner "falsely stated [to Mr. Meetze] that the funds had been invested in a certificate of deposit. It was not until September 8, 1981,...