Sexton v. Arkansas Supreme Court Committee on Professional Conduct

• Decision Date: 10 July 1989
• Docket Number: No. 89-73,89-73
• Citation: 299 Ark. 439,774 S.W.2d 114
• Parties: , 9 A.L.R.5th 1032 Sam SEXTON, Jr., Appellant, v. ARKANSAS SUPREME COURT COMMITTEE ON PROFESSIONAL CONDUCT, Appellee.
• Court: Arkansas Supreme Court

Page 114

774 S.W.2d 114

299 Ark. 439, 9 A.L.R.5th 1032

Sam SEXTON, Jr., Appellant, v. ARKANSAS SUPREME COURT COMMITTEE ON PROFESSIONAL CONDUCT, Appellee.

No. 89-73.

Supreme Court of Arkansas.

July 10, 1989.

Dale Price, Little Rock and Sam Sexton, III, Fort Smith, for appellant.

R.B. Friedlander, Sol. Gen., Little Rock, for appellee.

PURTLE, Justice.

The Arkansas Supreme Court Committee on Professional Conduct voted to suspend the license of the appellant for a period of one year, but stayed the suspension until the appeal could be heard by this court. We affirm the action taken by the Committee and dissolve the stay.

In January, 1987, Danny Haffelder and his wife, Tina Haffelder, filed a complaint against the appellant with the Committee on Professional Conduct. Following the filing of the complaint the Committee made a determination that the appellant's license should be suspended for one year. The charges were brought pursuant to our Model Rules of Professional Conduct which were adopted in 1985 (effective January 1, 1986). However, on appeal we reversed and remanded, holding that it was a violation of Due Process to charge a person under a rule that was not in effect at the time of the alleged violation. Sexton v. Supreme Court Committee on Professional Conduct, 295 Ark. 141, 747 S.W.2d 94 (1988). We stated, however, that the Committee could still proceed with the complaint under the Code of Professional Responsibility (which was in effect in 1983).

The Committee subsequently charged the appellant with violation of Disciplinary Rule 5-104(A) of the Code of Professional Responsibility. Appellant then sought prohibition, certiorari, or mandamus in which he asked this Court to order the Committee to follow the standards for lawyer discipline as adopted by the American Bar Association and to order the Committee to answer interrogatories and requests for admissions. He further asked the members of the Committee to disqualify. We declined to issue a writ and instead held that appeal was an adequate remedy. Sexton v. Supreme Court Committee on Professional Conduct, 297 Ark. 154A, 761 S.W.2d 602 (1988).

The Committee then reconsidered the charges pursuant to DR 5-104(A). The appellant's license was again suspended for a period of one year. That order was stayed pending appeal. It is from the Committee's second decision that the present appeal is taken.

The complaint in this case grew out of a transaction between the appellant and the Haffelders on June 30, 1983. It is quite clear that the Haffelders believed that Sexton was still their attorney in this transaction, which was entered into following settlement of a personal injury claim. The appellant admits that his firm represented Danny Haffelder in the damage claim and that he was Haffelder's personal attorney at the time of the transaction. The basic agreement was that the Haffelders would lend Sexton (or his company) $20,000 and that they would be paid back $40,000. The repayments were to be $1,000 per month, commencing one month after the transaction. The loan was guaranteed personally by Sexton, and the proceeds from the loan were used in a corporation involved in some type of coal processing or mining. The project did not survive, and the investment was evidently lost. Either the now-defunct corporation or Sexton paid the Haffelders for a period of about one year and then stopped making the payments. The Haffelders filed a suit against the appellant for collection of the balance due under the terms of the transaction, and later filed a complaint with the Committee. Sexton paid the debt before the Committee held the hearing.

At the time the loan was made to the appellant, he agreed that the Haffelders could take the proposal to their banker or a lawyer prior to signing it. They did in fact take a facsimile of the agreement to their banker for consultation. About a week after the first loan discussion, the appellants returned with the proposed agreement, executed it, and wrote a check for $20,000.

The central issue in this appeal concerns Disciplinary Rule 5-104(A), which states:

A lawyer shall not enter into a business transaction with the client if they have differing interests therein and if the client expects the lawyer to exercise his professional judgment therein for the protection of the client, unless the client has consented after full disclosure.

The appellant argues that he made a full disclosure and was thereafter under no duty to look after the interests of the Haffelders.

Both parties have correctly interpreted the rule to involve three elements: (1) a business transaction between the lawyer and the client; (2) differing interests in the transaction between the lawyer and client; and (3) the client's expectation that the lawyer will exercise his professional judgment for the client's protection. If these three elements are present, the lawyer's obligation under the rule may be fulfilled by the lawyer making a full disclosure to his client and making it clear that he no longer is looking after the client's interests in the matter. There is no disagreement that the first two elements are present in this case. The appellant's argument is that the third element was not present because he agreed that the Haffelders could seek the advice of others in this matter. Alternatively, the appellant argues that, even if the third element was present, the client consented after "full disclosure" was made by the attorney.

In order to make a determination concerning the full disclosure issue, it is necessary for us to undertake a de novo examination of all the facts surrounding this transaction. See Rule 8 of the Rules of the Court Regulating Professional Conduct. When the business transaction was first mentioned, it was the client who suggested he might want to discuss it with other parties. The appellant agreed that the Haffelders could have the contract examined by anyone they chose. The clients kept the papers about six days and talked with a person or persons at the institution where they banked. From the actions and testimony of the parties, it is obvious that the clients were relying on the appellant to protect them and look after their interests, even though they had discussed the contract with their banker. Danny Haffelder stated: "I trusted the man with everything I had." It is equally obvious that the clients felt they were going to double their money in a reasonably short time. (The rate of return under the terms of the contract far exceeded any normal investment they could have made.)

The appellant took very little affirmative action, if any, to inform his clients of the highly speculative nature of the transaction. The only thing they knew was that Sexton was in charge and it was a "coal business." The appellant was a sophisticated, intelligent, and experienced attorney, while his clients were not at all conversant in these matters. The appellant should have revealed the facts and the economic status of the business venture he wanted his clients to invest in. He should have told his clients that the venture could fail and that, if it did, he would pay the obligation personally. He also should have told them, among other things, that the note was usurious and that he might be able to avoid full repayment if he so chose. His silence in this regard no doubt led his former clients to believe that this was a risk-free undertaking. It was not. He should have told his clients that he would not be able to pay promptly if the venture failed. Most certainly he should have expressly told them he would no longer serve as their attorney. Due to the nature of this transaction, the appellant was under a duty to affirmatively point out the details of this venture, including every circumstance and fact, to enable his clients, or former clients, to make an intelligent decision.

We also look to the action taken by the attorney after the business venture turned sour. He did not keep his word to personally make the payments to the clients, and it was necessary for the clients to file suit before the appellant paid the balance of the money. The clients eventually received all the money they were supposed to receive under the terms of the contract, but they had to obtain the services of other counsel to recover it.

The Arizona Supreme Court, in the case of Matter of Neville, 147 Ariz. 106, 708 P.2d 1297 (1985), ruled that although there might not be a formal attorney-client relationship between the parties at the time of a transaction, the provisions of DR 5-104(a) still applied. The test in deciding the applicability of this disciplinary rule is whether an ordinary person would look to the lawyer as a protector rather than as an adversary. The Arizona court assumed that the lawyer informed the client that he was not acting as attorney for the client in the transaction in question. The court stated:

We adopt the view of the cases which hold that full disclosure requires not only that the lawyer make proper disclosure of non-representation, that he also must disclose every circumstance and fact "which the client should know to make an intelligent decision concerning the wisdom of entering the agreement." [Citation omitted.] The rule is strict. The lawyer must give the client that information which he would have been obliged to give if he had been counsel rather than interested party, and the transaction must be as beneficial to the client as it would have been had the client been dealing with a stranger rather than with his lawyer. [Citation omitted.] Thus, "full disclosure" requires not only a full explanation of the divergence in interest between the lawyer and the client and an explanation about the need to seek independent legal advice, but also "a detailed explanation of risks and disadvantages to the client which flow from the agreement." [Citation omitted.]

In reviewing this case de novo from the record of the proceedings before the...