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Commonwealth of Massachusetts

NO. BD-2005-021


S.J.C. Order of Term Suspension entered by Justice Greaney on April 19, 2005, with an effective date of May 19, 2005.1


A hearing committee has recommended that the respondent, Donal B. Barrett, be suspended from the practice of law for seven years for the intentional misappropriation of funds belonging to NetFax, Inc., a corporation of which he was a shareholder, CEO, and sole director. The respondent appeals. His objections reduce to four distinct contentions: (1) that he is entitled to the benefit of a putative settlement he reached with Bar Counsel for a six-month suspension; (2) that his taking of the corporation’s funds was not an intentional misappropriation but an “advance” made to himself in his capacity as CEO; (3) that the funds he took were not “client funds” within the meaning of the Disciplinary Rules; and (4) that in any event the sanction recommended by the committee is unduly harsh under the circumstances. For the reasons set out below, we reject the first two arguments and accept the third and fourth. We adopt and incorporate by reference the hearing committee’s findings of fact, depart somewhat from its conclusions of law, and recommend a two-year suspension.

1. The putative settlement. The respondent contends that he and an assistant Bar Counsel struck a deal, approved by the chief Bar Counsel, under which he would receive a six-month suspension for taking the corporation’s funds. He asks us to enforce it.2 There are at least two insurmountable obstacles to the enforcement of the deal, if deal it was.

First, that deal was conditioned, as the respondent acknowledges, on Bar Counsel’s determining to his satisfaction that there was no merit to separate but related charges that, after borrowing money from another shareholder to restore the funds to NetFax, the respondent repaid the loan with the lender’s own funds by manipulating a stock transfer. It is evident that Bar Counsel in fact was not satisfied that this charge lacked merit, for it was incorporated into what became the second count of the petition for discipline. At that point any deal evanesced. While Bar Counsel did not prevail on the charge,3 the other conduct described in the petition was nonetheless properly before the hearing committee. It then became the committee’s job, not Bar Counsel’s, to make findings on those allegations and to forward a proposed sanction to the Board.

The respondent rejoins that Bar Counsel never asked him to explain the questioned stock transfer before deciding to prosecute him for it, when a simple exercise of arithmetic would have demonstrated the falseness of the charge against him. The first portion of this contention is erroneous: as the respondent himself acknowledges, he received and failed to respond to a letter from Bar Counsel seeking information regarding repayment of the suspect loan. See Respondent’s Reply to Bar Counsel’s Limited Opposition to the Respondent’s Motion for an Extension of Time at 7 (respondent “simply forgot about the letter entirely” because of “crises” relating to NetFax). As to the second portion of his argument, little more than a glance at the hearing committee’s findings under the second count suffices to rebut any claim that it was easy to determine the respondent’s innocence with respect to the stock transaction. On the contrary, the report reveals that the committee struggled with complex transactions and had to make difficult credibility determinations on the way to rejecting the charge—a task muddied by misrepresentations he made to the shareholder-lender and by his own acknowledged dishonesty in seeking to camouflage the “advance” he took from corporate funds. We discern no basis for finding that Bar Counsel proceeded in bad faith or breached some “implied covenant of fair dealing” in deciding that the loan charges had sufficient merit to warrant a hearing on both counts.

Second, and even more telling, Bar Counsel lacks the authority to bind the Board (not to mention the Court) by entering into an agreement with a lawyer for the resolution of a disciplinary matter. The Board must approve such stipulations before they go to the Court (see S.J.C. Rule 4:01, § 8(3), 2d para), and the Court itself must be persuaded to enter an order of suspension. The Board’s approval is hardly a rubber stamp. For just a few instances in which the Board has departed from the parties’ joint recommendation, see Matter of Luongo, 416 Mass. 308, 9 Mass. Att’y Disc. R. 199 (1993); Matter of Chambers, 421 Mass. 256, 11 Mass. Att’y Disc. R. 31 (1995); Matter of Ring, 427 Mass. 186, 14 Mass. Att’y Disc. R. 655 (1998); and Matter of Newton, 12 Mass. Att’y Disc. R. 351 (1996). The same may be said of the Court, which has rejected a stipulated sanction even where the Board has joined with Bar Counsel in recommending it. See Matter of Orfanello, 411 Mass. 551, 7 Mass. Att’y Disc. R. 220 (1992) (per curiam). At most, therefore, the “enforcement” of a settlement agreement in a bar discipline proceeding could amount to nothing more than a refusal to hear Bar Counsel argue for a sanction greater than that agreed upon by the parties. Finding no bad faith on Bar Counsel’s part in this instance, we decline to proclaim a novel doctrine of “disciplinary estoppel.”

2. “Advance” or misappropriation. Under the first count, the committee found that the respondent needed funds on short notice to redeem after foreclosure a piece of real estate he owned in Maine. He drew a check payable to himself in the amount of $130,000 on a NetFax bank account and used the proceeds in an effort to redeem the property. The hearing committee viewed this taking as a misappropriation of fiduciary or client funds, which the respondent subsequently sought to cloak with misrepresentations and admittedly false entries in the corporation’s records. Conceived as intentional misappropriation with intent to deprive temporarily and with actual deprivation resulting, such conduct presumptively would warrant either disbarment or indefinite suspension under the standards enunciated in Matter of the Discipline of an Attorney (and two companion cases) (Three Attorneys), 392 Mass. 827, 836-837, 4 Mass. Att’y Disc. R. 155, 166-167 (1984), and clarified and reaffirmed in Matter of Schoepfer, 426 Mass. 183, 13 Mass. Att’y Disc. R. 679 (1997). The committee apparently felt the misconduct warranted discipline falling somewhere in between those two sanctions, for it recommended a seven-year suspension.

The respondent disputes the committee’s central characterization of his conduct: the drawing of the check, he argues, was not a misappropriation of funds, but an advance he made to himself in his capacity as CEO of the corporation. Viewing the transaction in this way, he harbored a “sincere belief” that the advance was an authorized but voidable instance of self-dealing on the part of a corporate officer under Delaware law,4 not a defalcation, and an action he reasonably expected to cure by repaying the funds before the corporation would be troubled by the issue of ratification. When, through no fault of his own, he was not able to return the funds as quickly as planned, he admittedly made efforts to conceal his use of corporate funds. This he did out of embarrassment at his inability to repay as planned, not as part of a more sinister scheme to conceal a defalcation.

Passing the question whether his is a convincing application of Delaware corporate law, the problem with the respondent’s argument is that the hearing committee did not believe him. The committee obviously did not credit his testimony that he viewed the taking as an authorized but voidable advance when he took the funds, and it expressly found, in direct conflict with his testimony, that his failure to disclose the transaction to any of the other shareholders when he took the funds, and his subsequent efforts to conceal it from them through false entries and misrepresentations, evinced an intent that was at odds with a belief that his taking was proper.

The hearing committee’s ultimate finding, in other words, rests on a credibility determination. Here the scope of our review is sharply limited. The hearing committee is the “sole judge” of the credibility of witnesses before it. S.J.C. Rule 4:01, § 8(4). Such determinations have been likened to those of a jury, which may not be disturbed unless “wholly inconsistent” with other findings. Matter of Hachey, 11 Mass. Att’y Disc. R. 102, 103 (1995). Based on our independent review of the record, including the respondent’s misrepresentations and admitted false entries, we find no basis for disturbing the credibility determinations at issue here. We proceed, therefore, from the irreducible finding that the respondent deliberately misused funds entrusted to his care as a fiduciary of NetFax.

3. Client funds? The hearing committee found that the respondent performed legal work for NetFax over a period of time and therefore stood in an attorney-client relationship to the corporation. In addition, independent of that relationship, the respondent owed fiduciary duties to the corporation arising from his capacity as its CEO and sole director. “Based on either of these relationships,” the committee concluded, the respondent’s misuse of corporate funds violated Canon One, DR 1-102(A)(4) and (6), Canon Seven, DR 7-101(A)(1), (2), and (3), and Canon Nine, DR 9-102(A) and (B). The respondent disputes the contention that these were “client funds” within the meaning of Canon Nine or that he was acting in his capacity as a lawyer such that he should be found to have breached an obligation to a “client” within the meaning of Canon Seven. We agree with the respondent.

The hearing committee and Bar Counsel rely on Matter of Eisenhauer, 426 Mass. 448, 14 Mass. Att’y Disc. R. 251 (1998), and Matter of Stern, 425 Mass. 708, 13 Mass. Att’y Disc. R. 749 (1997), to support findings that the respondent violated the rules grouped under Canons Seven and Nine. We do not believe those decisions should be read so broadly. In both cases the center of gravity of the lawyers’ relationship to the victims of their defalcations arose fundamentally from their law practice. Eisenhauer plucked a trust he had drafted and stole funds while acting as counsel to the estate, under a will he had drafted for the settlor of the trust—while discharging, in other words, functions traditionally performed by lawyers as the natural adjunct to the practice of law. See 426 Mass. at 452-453, 14 Mass. Att’y Disc. R. at 256-257. Stern, too, was a private practitioner in a firm where his management of investments for clients and trusts was inextricably intertwined with the legal work he performed for them. 425 Mass. at 711-713, 13 Mass. Att’y Disc. R. at 753-755.

Here, by contrast, the respondent had no separate practice of law. While he performed legal services for NetFax from time to time, the core of his work for the corporation was as its CEO and sole director. He was quintessentially its manager, not its counsel, and any legal services he performed were incidental to the larger, more central function of running the business. Under these circumstances, it would not be appropriate to find him liable for breaches of duty to a “client” under Canon Seven. Nor are the funds he took properly viewed as “client funds” within the meaning of Canon Nine. While the Disciplinary Rules define client funds to include funds held in a fiduciary capacity, that capacity must be one “in connection with a representation.” DR 9-102(A). The respondent had access to these funds not because of his “representation” but because he was running the company as its CEO. Whatever legal services he performed were clearly incidental to his larger role as the manager of the corporation. We hesitate to let the tail wag the dog by imposing liability for breach of obligations to a “client” under such circumstances. Accordingly, we reject the hearing committee’s conclusion that the respondent violated the Disciplinary Rules grouped under Canons Seven and Nine.

4. Disposition. There remain nonetheless clear breaches of Canon One, DR 1-102(A)(4) and (6), for the intentional misappropriation of funds held as a fiduciary, see, e.g., Matter of Gleason, 10 Mass. Att’y Disc. R. 141 (1994), as well as for making false entries and misrepresentations to hide the misuse. In aggravation of his misconduct, the hearing committee appropriately considered the respondent’s prior discipline.5 That conduct is described in AD 94-14, 10 Mass. Att’y Disc. R. 352 (1994).

Lesser sanctions have usually been imposed for the misappropriation of funds not held in connection with a representation. See, e.g., Matter of Gleason, supra; Matter of Fairbanks, 8 Mass. Att'y Discipline R. 83 (1992) (public censure for diverting fees from lawyer’s law firm). See also Matter of Leo, 17 Mass. Att’y Disc. R. 371, 377 (2001) (while “disagree[ing] with the distinction between misappropriating client and non-client funds,” single justice defers to 13-month suspension proposed by Board because not markedly disparate from sanctions imposed in similar cases). Applying that distinction here, the appropriate sanction should be something less than indefinite suspension—and, a fortiori, less than the seven-year suspension recommended by the hearing committee. On balance, we believe a two-year suspension suffices in the circumstances of this case.

5. Conclusion. For all of the foregoing reasons, we adopt and incorporate by reference the hearing committee’s findings of fact, reject its conclusions that the respondent violated Disciplinary Rules under Canons Seven and Nine, and alter its proposed disposition. An Information should be filed with the Supreme Judicial Court recommending that the respondent, Donal B. Barrett, be suspended from the practice of law for two years.

Respectfully submitted,

Thomas E. Peisch, Chair
Robert J. Guttentag, Member
Mark Berson, Member

Dated: December 3, 2004


1 The complete Order of the Court is available by contacting the Clerk of the Supreme Judicial Court for Suffolk County.

2 In this regard, the respondent is also appealing from two orders entered by the Board Chair: an August 16, 2004 order denying so much of his motion for an extension of time to file his brief on appeal as sought extra time to address more fully issues relating to the settlement, and a September 28, 2004 order denying his motion to reopen the proceedings to take testimony relevant to the claimed settlement. Our decision on the merits of the putative settlement either moots or overrules his objections to these orders.

3 The committee did find under Count Two that the respondent had created a false and misleading “reconciliation report” and a “schedule of deposits” that mischaracterized the “advance” as a payment to, and return from, a company known as Acorn Computers. The committee also found that he had made misrepresentations to the shareholder-lender as to the purpose of the loan he obtained to pay off the “advance.” See Hearing Committee Report 51-52. Bar Counsel has not appealed from the hearing committee’s findings.

4 For purposes of this appeal, we assume with the respondent that Delaware law would apply to the transaction.

5 The respondent’s objections to weighing his admonition in aggravation do not warrant discussion. Prior discipline must always be weighed in aggravation, even when the past misconduct is completely unrelated to that at issue in the new matter. See, e.g., Matter of Dawkins, 412 Mass. 90, 96-97, 8 Mass. Att’y Disc. R.64, 71-72 (1992). Unlike the hearing committee, we do not perceive in his vigorous defense of these charges a fundamental lack of understanding or acknowledgement of the requirements of the ethical rules governing his professional conduct like the egregious myopia at issue in Matter of Clooney, 403 Mass. 654, 657-658, 5 Mass. Att’y Disc. R. 59, 63-64 (1988).

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