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Commonwealth of Massachusetts

NO. BD-2010-047

IN RE: ARTHUR J. McCABE, II

S.J.C. Judgment Accepting Affidavit of Resignation As A Disciplinary Sanction entered by Justice Cordy on May 20, 2010, with an effective date of June 21, 2010.1

SUMMARY2

The First Client

The first client engaged the respondent to represent her and her company in 1999. From 2000 to July 2006, the company paid the respondent a monthly retainer for legal services. The client also engaged the respondent to represent her in a divorce.

In 2002, the respondent and two others established 29 South Canal, LLC (LLC). The LLC acquired an old mill building at 29 South Canal in Lawrence, which the members of the LLC intended to rehabilitate for office, retail and light manufacturing uses. In 2004, the respondent and client discussed the possibility of her becoming a member of the LLC and her company becoming a tenant at 29 South Canal Street. The respondent told the client that she would have to contribute $200,000 and personally guarantee a construction loan that the LLC hoped to obtain from a local bank. The respondent informed the client that, in exchange for the cash contribution and execution of the guarantee, she would be a member of the LLC and have a place for her company, at 29 South Canal as long as she chose to remain.

The respondent did not share with the client during the initial discussions of her membership in the LLC, the financial condition of the LLC, the likely costs of the planned construction, or the status of the building's tenants. The respondent did not disclose the terms of the transaction to the client in writing, did not advise the client to seek advice of independent counsel concerning the transaction, and did not obtain the client's consent to the transaction in writing. The client did not at any time engage any other counsel to advise her or represent her in the transaction.

The client agreed to invest in the LLC on the terms proposed by the respondent. Both the respondent and client understood that the client would contribute the $200,000 when her divorce was finalized and she would gain access to marital funds.

In August 2004, the respondent prepared a business plan for the purpose of obtaining construction financing for the upgrade of 29 South Canal. In that plan, he identified the client as one of the principals of the project, and as a 20% equity owner. In September, 2004, the respondent, on behalf of the LLC, prepared and submitted a loan application to the bank. In the application, the respondent represented that the client, among others, was a member of the LLC and would personally guarantee the loan. In October, 2004, the bank agreed to make the loan for $1.2 million on condition that the client execute a personal guarantee of the loan. On December 22, 2004, the client executed the guarantee, on the basis of the respondent's representations that she was a member of the LLC and that signing the guarantee was part of the consideration for her membership.

A final decree in the client's divorce proceeding entered in July 2005. On or about July 26, 2005, the respondent directed the client to deposit $200,000 from the first divorce settlement payment into a bank account in the name of the LLC, as her investment in the LLC. The respondent did not issue any shares in the LLC to the client, or take any other steps to document her purported membership in the LLC.

On or about July 26, 2005, the respondent also prepared an affidavit to be signed by the client, confirming that she was a member of the LLC and that the $200,000 was her personal contribution to the LLC. The respondent represented to the client that the content of the affidavit was true and the client signed the affidavit.

On September 15, 2005, the respondent, on behalf of the LLC, submitted a loan application to the Massachusetts Development Finance Agency (MDFA), seeking a loan of $1,750,000. In the loan application, the respondent represented that the client was one of the "principal members who will serve as guarantors of the loan", and listed the client and her company as one of the "owner occupying companies." The MDFA agreed to loan the LLC $1,500,000. The closing took place on November 10, 2005 and the LLC executed a promissory note and a mortgage and security agreement for the $1.5 million loan.

On November 10, 2005, the client, acting on the advice of the respondent, and believing that she was a member of the LLC, signed a personal guaranty of the $1.5 million loan from the MDFA to the LLC, as well as a separate guarantee on behalf of her company. The respondent did not fully disclose the transaction and its terms to the client in writing, advise the client to seek advice concerning the transaction of independent counsel, or obtain the client's consent to the transaction in writing.

In February 2006, the client moved the company' operations to 29 South Canal Street. She paid an additional $200,000 to the LLC for build-out costs associated with the tenancy. During the following months the company spent an additional•$92,213 on improvements to its section of building.

In May 2006, the members of the LLC sold all of its outstanding shares to a family trust, of which another of respondent’s clients was the trustee, for $1,134,723, subject to the existing mortgages (see the second client, below). The LLC subsequently defaulted on the MDFA loan and MDFA has foreclosed on its mortgage. The property is worth substantially less than the amount of the MDFA loan and MDFA has asserted that the client and the company are liable on the guarantees.

The respondent's representation of both the client and the LLC in the transactions in which the client contributed to the LLC was directly adverse, and the respondent's representation of the client was materially limited by his responsibility as counsel to the LLC and to his own interests as a member of the LLC. The respondent did not reasonably believe that his representation of the client would not be adversely affected by the conflict with his own interests. The client did not consent to the respondent's representation of her in matters in which his own interests materially limited his responsibilities to her.

The respondent, both as a member and as the managing member of the LLC, entered into a business transaction with the client the terms of which were not fair and reasonable to the client, without fully disclosing the terms of the transaction in writing to the client, without giving her a reasonable opportunity to seek the advice of independent counsel, and without obtaining her consent in writing.

The respondent's conduct in representing the LLC in the transaction with the client, while she was a current client of the respondent's, violated Mass. R. Prof. C. 1.7(a).

As the client’s attorney, the respondent's continued representation of her in her divorce, while that representation was materially limited by his own interest as a member of the LLC, and his interests as the attorney for the LLC, in having her contribute money to, and sign loan guarantees for, the LLC, violated Mass. R. Prof. C. 1.7(b).

As a member of the LLC, the respondent's purported sale of a membership interest in the 29 South Canal St. LLC to the client, in exchange for her contribution of cash, and guarantee of loans to the LLC, violated Mass. R. Prof. C. 1.8(a).

The Second Client

The respondent represented the second client and his company from 1983 through 2008. In February 2006, the client became a trustee of a family trust (trust) established by his mother for the benefit of the client and his sister. In early 2006, the client, in his capacity as trustee, requested that the respondent provide legal advice and counsel with respect to the sale by the trust of two California properties. As trustee, the client sought to sell the properties in an Internal Revenue Code, § 1030 like-kind exchange, which would require the trust to purchase properties for approximately the amount of the sale price of the California properties. The client informed the respondent that he wished to purchase, for a fair and reasonable price, a property that would qualify as a like-kind exchange and produce income for the beneficiaries of the trust, particularly his sister.

The respondent proposed to the client that the trust purchase the shares of the LLC for $1,134,723, subject to the MDHA mortgages totaling $1,800,000. The client agreed to the respondent's proposal. On May 15, 2006, the trust purchased all of the three hundred membership shares of the LLC for $1,134,723, subject to the MDHA mortgages totaling $1,800,000. As of May 2006, the LLC's only asset was the property at 29 South Canal Street. The respondent knew and failed to disclose to the client that few of the tenants had written leases; that the LLC owed hundreds of thousands of dollars to contractors who had made improvements to the property; that hundreds of thousands of dollars of additional construction work was needed; and that the LLC had been operating at a loss. The shares of the LLC were worth substantially less than the price paid for those shares by the trust.

The respondent represented both the trust and the LLC in the transaction. The respondent did not obtain the informed consent of the client to his representation of the LLC in a transaction in which the respondent was also representing the trust. The respondent could not have reasonably believed that his representation of the LLC would not adversely affect his relationship with the trust.

In representing the trust in the acquisition of the shares of the LLC, the respondent failed to provide competent or diligent representation to the trust and failed to seek the lawful objectives of the trust through reasonably available means. In representing the trust in the acquisition of the shares of the LLC, the respondent failed to impart independent professional judgment to the trust. The respondent, as a member of the LLC, entered into a business transaction with the trust the terms of which were not fair and reasonable to the trust.

The respondent, as a member of the LLC, entered into a business transaction with the trust without fully disclosing the terms of the transaction to the trust, in writing, in a manner that could be reasonably understood. The respondent, as a member of the LLC, entered into a business transaction with the trust without giving the trust a reasonable opportunity to seek the advice of independent counsel in the transaction. The respondent, as a member of the LLC, entered into a business transaction with the trust without obtaining the consent to the conflict from the trust, in writing.

By representing the trust in the purchase of the shares of the LLC, while simultaneously representing the LLC in the same transaction, without the consent of the trust, the respondent violated Mass. R. Prof. C. 1.7(a).

As a member of the LLC, by entering into a business transaction with the trust, the respondent violated Mass. R. Prof. C. 1.8(a).

By advising the trust to purchase the shares of the LLC, the respondent failed to represent the trust competently, in violation of Mass. R. Prof. C. 1.1.

By advising the trust to purchase the shares of the LLC, the respondent failed to represent the trust diligently, in violation of Mass. R. Prof. C. 1.3.

The respondent was admitted to practice in Massachusetts on December 13, 1974. He had no previous disciplinary history.

The matter came before the Court, Cordy J., on an affidavit of resignation submitted by the respondent pursuant to S.J.C. Rule 4:01, § 15; a letter from assistant bar counsel to general counsel dated April 23, 2010, recommending that the respondent’s resignation be accepted as a disciplinary sanction; and the recommendation and vote of the Board of Bar Overseers filed by the board on May 18, 2010.

On May 20, 2010, the Court issued an order accepting the affidavit of resignation of the respondent as a disciplinary sanction and striking the respondent’s name from the Roll of Attorneys.


FOOTNOTES:

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

2 Compiled by the Board of Bar Overseers based on the record filed with the Supreme Judicial Court.



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