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In re Complaint as to the Conduct of Spencer

Supreme Court of Oregon, En Banc

June 26, 2014

In re Complaint as to the Conduct of MICHAEL L. SPENCER, Accused

Argued and Submitted January 16, 2014.

OSB 11-52. On review of the decision of a trial panel of the Disciplinary Board.

Michael A. Spencer, Klamath Falls, argued the cause and filed the brief in propria persona.

Mary A. Cooper, Assistant Disciplinary Counsel, argued the cause and filed the brief for the Oregon State Bar.

OPINION

Page 539

[355 Or. 680] PER CURIAM

In this lawyer disciplinary proceeding, the Oregon State Bar charged the accused with violating two Rules of Professional Conduct (RPC): RPC 1.7(a), which prohibits a lawyer from representing a client without informed consent if " there is a significant risk that the representation * * * will be materially limited by * * * a personal interest of the lawyer" ; and RPC 1.8(a), which prohibits a lawyer from " enter[ing] into a business transaction with a client" without the requisite advice and the client's consent. A trial panel of the Disciplinary Board found that the accused had violated both rules and imposed a 60-day suspension. On de novo review, we find that the accused violated RPC 1.8(a) and suspend him from the practice of law for 30 days.

I. FACTS

The accused has been a member of the Bar since 1983 and a licensed real estate broker since 2003. In March 2008, a prospective client, Smith-Canfield, met with the accused to ask about filing for bankruptcy. Smith-Canfield told the accused that she anticipated receiving approximately $30,000 from the sale of real property in another state. At that point, Smith-Canfield was living in rental housing in Klamath Falls, and the accused advised her that she could take advantage of an exemption in the bankruptcy law if she used the proceeds from the out-of-state property sale to buy a home and then filed a Chapter 13 bankruptcy petition. To take advantage of that exemption, however, she needed to buy a home within one year of the sale of her other property.

When Smith-Canfield expressed concern that a bank would not loan her money to buy a home, the accused explained that he was a real estate broker and could look for an owner-financed property for her.[1] Having received that advice, Smith-Canfield agreed to have the accused represent her, and the accused began searching for a suitable property and also preparing the bankruptcy filing.

[355 Or. 681] The next month, the accused learned about a relatively new home that might fit Smith-Canfield's needs. The owner was in financial trouble, and the person who held the trust deed was willing to finance Smith-Canfield's purchase. The accused estimated the amount due on the trust deed and, based on that estimate, determined the lowest possible offer that the owner would be likely to accept. He advised Smith-Canfield to offer to pay $225,000 and to put $25,000 down. That offer was below both the market value and the listed price. Smith-Canfield accepted the accused's advice and asked him to prepare an offer to that effect. She was aware that, if the owner accepted her offer, the accused would split the sales commission with the owner's real estate agent.

Based on the accused's advice, Smith-Canfield made her offer contingent on three conditions. First, the owner had " to rebuild [a] retaining wall along Old Fort Rd." [2] Second, he had to " remove all junk from the house." Third, he had to " have the carpets cleaned. If the stains on the carpet do not clean out," then the owner had to give Smith-Canfield $1,000 to replace the existing carpets. Based on the accused's advice, Smith-Canfield did not impose any other conditions on the sale. As the accused later explained, the goal was to purchase the property quickly at the lowest possible price. Additionally, the accused advised Smith-Canfield to waive a professional inspection, even though the preprinted offer stated that it was advisable to have

Page 540

one.[3] The accused concluded that, because the house was relatively new, a professional inspection was unlikely to be worth the cost, especially in light of Smith-Canfield's limited financial resources. Based on the accused's advice, Smith-Canfield waived a professional inspection.

The owner accepted Smith-Canfield's offer and took steps to satisfy the conditions she had listed. During the [355 Or. 682] final walk-through, the accused and Smith-Canfield noted that the masonry blocks that formed the retaining wall had been restacked and the carpets cleaned. The sale closed that month, and the accused received approximately $5,000 as his share of the real estate sales commission. The accused's commission came out of the proceeds that otherwise would have gone to the seller.

In May 2008, the accused filed Smith-Canfield's Chapter 13 bankruptcy petition. Shortly afterwards, Smith-Canfield received a letter from the City of Klamath Falls, stating that the dirt slope at the back of the yard violated the city code and that she needed either to " [r]estore the slope of [her] property to [city code] specifications * * * or provide an engineered plan for a retaining wall." [4] Smith-Canfield contacted the accused, who investigated the city's allegations. The accused wrote the seller and demanded that he bring either the slope or the retaining wall into compliance. The seller responded that, because he had limited financial resources, he could not be of any help. The accused also questioned whether the city had authority to require Smith-Canfield to restore the slope or provide an engineered retaining wall. Although the accused doubted the city's authority, he was concerned that Smith-Canfield did not have enough money to fund a legal dispute with the city. He believed that she could have the funds in a year's time, based on her Chapter 13 plan. Accordingly, he asked for and received a one-year extension from the city for Smith-Canfield to respond to the city's demand.

Several months later, Smith-Canfield mentioned her dispute with the city to another lawyer. That lawyer later contacted the accused, questioning his handling of both the real-estate purchase and the city's notice of a code violation. After receiving those communications, the accused [355 Or. 683] withdrew from representing Smith-Canfield. Represented by a new lawyer, Smith-Canfield brought an adversary action against the accused in the bankruptcy proceeding, alleging that he had breached his fiduciary obligation to disclose conflicts of interest and that he also had breached his professional duty regarding the purchase of her home. The bankruptcy court found, by a preponderance of the evidence, that the accused had breached both duties and that Smith-Canfield had suffered financial injury as a result.[5]

In early 2011, Smith-Canfield's employer in Klamath Falls went out of business, and Smith-Canfield lost her job. Later that year, she converted her bankruptcy proceeding from a Chapter 13 to a Chapter 7. Eventually, she gave up the home that she had bought, with the result that she lost her down payment and three years of payments on the home.

In July 2011, the Bar filed a complaint against the accused, alleging that he had violated RPC 1.7(a) and RPC 1.8(a). The trial panel found that the accused had violated

Page 541

both rules and determined that a 60-day suspension was the appropriate sanction. The accused petitioned for review in this court. We review the record de novo to determine whether the Bar established the alleged violations by clear and convincing evidence. See Bar Rule (BR) 10.6 (providing for de novo review); B.R. 5.2 (requiring proof by clear and convincing evidence).

II. RPC 1.8(a)

RPC 1.8(a) prohibits a lawyer from " enter[ing] into a business transaction with a client" or " knowingly acquir[ing] * * * [a] pecuniary interest adverse to a client" unless certain conditions are met.[6] A lawyer may enter into a business transaction with a client if, among other things, [355 Or. 684] the terms of the transaction are fair, the client is advised in writing of the desirability of seeking independent legal advice, and the client consents in a signed writing to the transaction's essential terms and the role that the lawyer will play in the transaction. RPC 1.8(a)(1)-(3). In this case, the accused concedes that he did not obtain written consent from Smith-Canfield after giving her the requisite advice. The question under RPC 1.8(a) accordingly reduces to whether, in agreeing to act as Smith-Canfield's real estate broker, the accused either entered into a " business transaction" with her or " knowingly acquir[ed] a pecuniary interest adverse to" Smith-Canfield's interests.

This court has not previously construed RPC 1.8(a). The predecessor rule, former DR 5-104(A), required disclosure and consent regarding business transactions between lawyers and clients if their interests differed and if the client expected that the lawyer would exercise professional judgment on the client's behalf in the transaction. See In re Samuels/Weiner, 296 Or. 224, 232-33, 674 P.2d 1166 (1983) (business transactions with clients are not inherently unethical; instead, " [i]t is when the client and the lawyer have differing interests and the client expects the lawyer to exercise * * * professional judgment for the protection of the client that [( former )] DR 5-104(A) comes into play" ); In re Bartlett, 283 Or. 487, 496-97, 584 P.2d 296 (1978) (same).

On review, the parties frame the question under RPC 1.8(a) similarly; that is, they debate whether the accused's interests in this transaction either differed from or were adverse to Smith-Canfield's. We note, however, that the text of RPC 1.8(a) differs from the text of former DR 5-104(A). RPC 1.8(a) prohibits a lawyer from " enter[ing] [355 Or. 685] into a business transaction with a client" without first making certain disclosures and obtaining the client's written consent. It does not expressly require that the lawyer and the client's interests in the transaction differ. To be sure, RPC 1.8(a) also prohibits lawyers from " knowingly acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client." However, not only are the two prohibited acts separated by " or," but the second prohibited act--acquiring a pecuniary interest adverse to a client--is modified by the adverb " knowingly." The first prohibited act is not similarly limited. The text of the rule suggests that entering into a business transaction with a client is itself prohibited, unless the terms of the transaction are fair and reasonable to the client, the requisite disclosures are made, and the necessary consent obtained.

The history of the rule confirms that interpretation. For the purposes of this issue, RPC 1.8(a) tracks ABA Model Rule 1.8(a) verbatim. See Oregon Rules of Professional Conduct 1.8 (explaining that RPC 1.8(a) " replaces DR 5-104(A) and incorporates the Model Rule prohibition against business

Page 542

transactions with clients even with consent except where the transaction is 'fair and reasonable' to the client" ). We accordingly look to the commentary to ABA Rule 1.8(a) for guidance in construing RPC 1.8(a). See In re Hostetter, 348 Or. 574, 590, 238 P.3d 13 (2010) (looking to the commentary to the model rule for its persuasive value when an Oregon rule is identical to the model rule). The commentary does not suggest that, for the " business transaction" prohibition to apply, the lawyer and client must have differing or adverse interests. Instead, the commentary explains that the rule recognizes " the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client" and disfavors an arrangement in which the lawyer has an " advantage in dealing with the client." American Bar Association's Model Rules of Professional Conduct (ABA Model Rules), Rule 1.8, ...


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