Collateral Damage – Civil Fraud Judgment Leads to Six Month Suspension

In the Matter of Spielbauer, Review Dept. State Bar Court, case no. SBC-19-O-30700, filed 10/25/23

Within a span of weeks, the Review Department has given us two interesting and well written opinions that illuminate important issues in California discipline jurisprudence. For the California Ethics Lawyer, it is like an early Christmas present. Lest we are call this “fun”, let’s remember that for the Respondents involved in those proceedings (Thibault, filed 10/17/23, and now Spielbauer) the news is grim.

These opinions have at least two things in common.

They both arise from civil court proceedings, Thibault, a motion to disqualify, Spielbauer, a civil action resulting in a finding of fraud and an award of punitive damages. The civil action in Spielbauer had no relation to the practice law. The respondent was involved an real estate transaction where he was requested to furnish a payoff demand as authorized by Civil Code section 2943(b). Respondent issued a payoff demand for$269,500, far in excess of what was actually owed on the loan secured by the property, $7,152.03. The judgment included punitive damages of $332,550, under the authority of Civil Code section 3294. Like Thibaut, Spielbauer failed to report this event to the State Bar of California, as required by Business and Professions Code section 6068.

Both involved a failure to report to the State Bar under Business and Professions Code section 6068(o). Thibault failed to report a judicial sanction (subsection (o)(3).) Spielbauer failed to report the fraud judgment against him (subsection (o)(2).) Which sets up the first of the interesting issues in the Spielbauer opinion.

Deconstructing 6068(o)(2)

Statutory construction is always fun and especially fun with section 6068(o), hardly a model of clarity. (o)(2) says that an attorney has a duty to report the “entry of judgment against the attorney in a civil action for fraud, misrepresentation, breach of fiduciary duty, or gross negligence committed in a professional capacity.” Spielbauer’s defense to the (o)(2) charges was those five concluding words “committed in a professional capacity.” He contended that that clause modified everything that came before it. His fraud was not committed in a professional capacity therefore he had no duty to report. The hearing judge bought that argument and dismissed the failure to report count. The Review Department reversed. It relied on the “last antecedent rule of statutory construction “a restrictive relative clause usually modifies
the noun immediately preceding it, citing Yahoo Inc. v. National Union Fire
Ins. Co. etc. (2022) 14 Cal.5th 58, 73-74. Thus, the “professional capacity” clause only applies to “gross negligence”, not the other bad stuff that immediately precedes it. This is consistent with Business and Professions Code section 6106, which provides that dishonesty, corrruption or moral turpitude constitutes a cause for suspension or disbarment “whether the act is committed in the course of his relations as an attorney or otherwise.”

The statutory construction issue has potential application to the recently passed “rat” rule, new California Rule of Professional Conduct 8.3, another piece of ambiguous writing despite its many revisions. The rule lists two kinds of bad conduct that demand reporting, criminal acts and conduct involving dishonesty, fraud, deceit or misappropriation, and then jumps directly into this qualifying language “that raises a substantial* question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects.” Does this language modify the duty to report criminal acts? The Office of Chief Trial Counsel (OCTC) has seemingly taken the position that it does, to avoid the absurd result that minor criminal activity would be reportable. Sounds reasonable, especially in light of Comment 4 which advises that reporting is limited to the “those offenses that a self-regulating profession must vigorously endeavor to prevent.” But the comments are not rules and the existence of the last antecedent rule points up the sloppy drafting that it driving many people nuts in interpreting the new Rule.

Duty to Uphold What Law Exactly?

Spielbauer was charged with violating his duty to uphold the law by violating two Civil Code statutes. Civil Code section 2943(e)(4) sets forth a requirement to provide a payoff statement within 21 days of demand. The civil court found fraud liability by providing a false and inflated payoff statement. The civil court also found a basis for imposing punitive damages under Civil Code section 3294. This statute allows a court to award punitive damages in addition to compensatory damages in cases where a defendant acted with oppression, fraud, or malice and clear and convincing evidence supports such a finding. The hearing judge found culpability on two counts of violating Business and Professions Code section 6068(a), one of each statute. Section 6068(a) states that a lawyer has a duty to support the laws of the United States and the State of California. It is a “gateway” statute that allows discipline for violations of law not otherwise disciplinable, including not only statutes but common law (In the Matter of Lilley (Review Dept. 1991) 1 Cal. State Bar Ct. Rptr. 476, 487; seealso Kafkaesq “Squishy Justice.”) 6068(a) is a broad gateway but not so broad as to accommodated Civil Code section 3294. The Review Department correctly dismissed this count because section 3294 is a definitional statute and does not, alone, define any duty.

Collateral Damage

The mainspring of the opinion is the application of collateral estoppel by the hearing judge. Collateral estoppel may be applied in a disciplinary proceeding to prevent the re-litigation decided adversely to a lawyer in a civil proceeding where five requirements are met: (1) the issues that resulted in the civil court findings are substantially identical to the issues before the State Bar Court; (2) the findings were decided under the same burden of proof applicable to the State Bar Court—clear and convincing evidence; (3) the attorney was a party to the civil proceeding; (4) there was a final judgment on the merits in the civil case; and (5) no unfairness in precluding relitigation was proven by the attorney (In the Matter of Kittrell (Review Dept. 2000) 4 Cal. State Bar Ct. Rptr. 195, 205.) The application of collateral estoppel in State Bar Court usually flounders on requirement two – the clear and convincing burden of proof. Few civil findings rest on this burden of proof. Typically, the Office of Chief Trial Counsel has to rely on a less stringent standard, the principle that civil findings are entitled to “great weight and a presumption of correctness” where supported by substantial evidence (see In the Matter of Allen (Review Dept. 2010) 5 Cal. State Bar Ct. Rptr. 198, citing Maltaman v. State Bar (1987) 43 Cal.3d 924, 948.) Spielbauer tried to argue unfairness that he was “fatally compromised” by his poorly representation in the underlying civil action but no sale. The conclusive findings are civil fraud inevitable lead to culpability of violating Business and Professions Code section 6106. Spielbauer was ordered to pay $869,276.55, which included $332,550 in punitive damages in the civil case. The collateral damage was a six month actual suspension of his law license. Spielbauer did not help himself by continuing to argue that his actions were just, leading to a finding in aggravation that his was indifferent and lacked insight into his misconduct.

State Bar Gets Serious About Conflicts

In the Matter of Thibault, Review Department, State Bar Court, case no. SBC-22-O-30033, filed 10/17/23.

There was a time when conflicts of interest, even conflicts leading to disqualification of a lawyer in litigation, seldom led to professional discipline. The trend began to change a few years ago. Increasing awareness of conflicts led to a recognition that disqualification was not always an adequate remedy. In 2015, despite a lack of Supreme Court discipline case law addressing discipline for conflicts of interest, the State Bar added new Standard 2.5, specifically addressing conflicts of interest. The Standard recommends actual suspension where a violation of the conflict rules, chiefly Rules of Professional Conduct 1.7 and 1.8, leads to harm and lesser discipline, stayed suspension or reproval, in cases where no harm resulted.

“Stand-alone” discipline for conflict of interest seems to be relatively rare, although it is difficult to gauge since the State Bar Court stopped publishing Hearing Department decisions in 2019. The published discipline cases from the Review Department involve multiple violations of the Rules of Professional Conduct or statutes from the State Bar Act. So it is with the Thibault decision. The hearing judge found Thibault culpable of (1) failing to obey a court order under section 6103 of the Business and Profession Code; (2) accepting employment adverse to another individual who respondent’s employer previously represented without informed written consent under former rule 3-310(E) of the Rules of Professional Conduct; and (3) failing to timely report a judicial sanctions order to the State Bar under section 6068, subdivision (o)(3). On review, the Review Department upheld these culpability determinations and evidently published the opinion for the reasons stated in the opening sentence: “This case underscores the need for attorneys to understand the broad scope of our conflicts of interest rules, which require the avoidance of adverse interests. and it demonstrates the perils that can result when an attorney is not careful in following the requirements of these rules.”

The facts are a little strange. Thibault worked for another lawyer (Peshawaria) who had previously represented the wife (Rattan) in a marital dissolution proceeding despite the fact that she was not licensed in California. Years later, after Thibault began working for this lawyer, Rattan’s husband Prasad employed the lawyer to represent him in the same proceeding on pending issues in the case related to child custody, child and spousal support, and the division of marital property. She assigned the case to Thibault. Rattan’s lawyer wrote to Thibault and informed her of the conflict of interest. Thibault withdrew but, after leaving the lawyer’s employment, began to represent Prasad again as a solo practitioner, seemingly not understanding the principle of imputed conflict despite having consulted with the State Bar’s Ethics Hotline. (Maybe the most important point here is the Ethics Hotline is not a substitute for obtaining legal advice from an experienced ethics lawyer.) Rattan’s lawyer successfully moved to disqualify Thibault and obtained a $5,000 sanction against her. Thibault waited eight months to pay the sanction. She also waited almost four years to report the sanction to the State Bar as required by Business and Professions Code section 6068(o)(3). This section requires reporting within 30 days of the time the lawyer knows the sanction.

Perhaps Thibault’s initial mistakes stemmed from sheer ignorance. But both the hearing judge and the Review Department found as an aggravating circumstance that she “displayed an attitude that demonstrates she lacks a full understanding of the seriousness of [her] misconduct.” Ignorance alone can kill you. Willful ignorance can kill you more. Thibault continued to argue that she was justified in representing Prasad throughout the pendency of the discipline proceeding. Her position seems especially contumnacious given that she attempted to cross-examine Rattan while representing Prawad at the July 2018 hearing with Rattan’s confidential information provided to Thibault’s former employer, Peshawaria, in 2008! The Review Department carefully noted that an attorney has a right to defend herself vigorously in discipline proceedings (citing In re Morse (1995) 11 Cal.4th 184, 209). Still, discipline proceedings are qualitatively different than other kinds of proceedings where a vigorous defense might not cross the line into a fatal failure to appreciate the nature of the attorney’s duties.

The basis of the section 6103 charge was Thibault’s failure to pay the sanction for eight months. In analyzing the appropriate discipline, the Review Department cited Standard 2.12(a), which prescribes actual suspension or disbarment as the harshest applicable Standard. But the statutory violations, including the failure to report the sanction, seem to be the tail and not the dog here, with the entire course of misconduct really arising from the respondent’s spectacular failure to recognize and avoid the successive representation conflict. The thirty-day actual suspension is all the more damaging because the Supreme Court has now mandated compliance with California Rule of Court 9.20 for every suspension, even a short one. The actual suspension also subjects Thibault to a $2,500 sanction.

Thibault is a significant case that is meant to convey a serious message. Discipline for conflicts of interest is a real possibility now.