Kevin So v. Leonard Suchanek

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2011 Decided January 20, 2012

No. 10-7071

KEVIN SO,

APPELLEE

v.

LEONARD J. SUCHANEK, ESQUIRE,

APPELLANT

Consolidated with 10-7087 and 10-7113

Appeals from the United States District Court

for the District of Columbia

(No. 1:08-cv-02091)

Jason H. Ehrenberg argued the cause for appellant/cross-

appellee. With him on the briefs was James C. Bailey. Brian

Shaughnessy entered an appearance.

David G. Tripp argued the cause and filed the briefs for

appellee/cross-appellant.

Before: HENDERSON, Circuit Judge, and WILLIAMS and

RANDOLPH, Senior Circuit Judges.

2

Opinion for the Court filed by Senior Circuit Judge

RANDOLPH.

RANDOLPH, Senior Circuit Judge: This case is here on

appeal and cross-appeal from the judgment of the district court

ordering attorney Leonard Suchanek to pay his former client

Kevin So $455,933.52, an amount representing a portion of the

legal fees Suchanek collected from So, plus interest.

So is a citizen of the People’s Republic of China, a resident

of Hong Kong, and the general manager of his family’s

cosmetics company. He does not speak, read, or write English.

So met Lucy Yan Lu in 2004 through a business partner.

Convinced of Lu’s expertise, So granted her written

authorization to serve as his agent in investment matters. In

April 2005 Lu signed an agreement between So and Land Base,

LLC, a California entity operated by Boris Lopatin. The

agreement called for Land Base to make investments on So’s

behalf, and periodically to disburse to him fifty percent of any

profits. Pursuant to the agreement, So transferred $30 million

to a HSBC Bank account in London, England. An “Irrevocable

Bank Instruction” appended to the agreement called for the

funds to be administered by 5th Avenue Partners Ltd., a Land

Base affiliate controlled by Michael Brown.

The investment initially appeared to be a success. So

received nearly $3 million in profits between May and August

of 2005. These “profits” turned out to be fictitious. As HSBC

later discovered, Brown had been running a Ponzi scheme. So

first learned this in early 2006. By that time, his $30 million

investment had disappeared and HSBC had brought suit in

London against Brown, Lu, So, and others seeking to absolve

itself of any responsibility for the loss. HSBC alleged that the

bank instruction was fraudulent; that Brown had used it to

mislead So into thinking his deposit was secure; and that Land

3

Base’s agreement with So was “designed to lend an appearance

of legitimacy to arrangements made for the purpose of money

laundering or some other unlawful purpose.”

Early in the litigation, Lopatin – who ran Land Base –

referred Lu to Leonard Suchanek, a former administrative law

judge with an office in Washington, D.C. Lu met with

Suchanek in July 2006 and hired him to assist in recovering So’s

funds. She explained to So, through an intermediary, that

Suchanek was a “very powerful U.S. judge” who was willing to

help them “without any service fee.” Lopatin provided a resume

listing Suchanek’s title as “Chief Judge Emeritus” of the “U.S.

Federal Special Contract Court . . . U.S. General Services

Administration.” (Suchanek had served as Chief Judge of the

General Services Administration Board of Contract Appeals; he

resigned in 1992 and entered private practice.)

Suchanek began representing Lu and So in July 2006

despite the fact that he was already representing Land Base in

connection with the HSBC suit. While Suchanek was

simultaneously representing Lu, So, and Land Base, he prepared

a twelve-page legal opinion on Land Base’s behalf. The opinion

concluded that Land Base’s agreements with So and other

investors did not facilitate an “illegal scheme,” and that any

claim to the contrary was “frivolous.” Suchanek terminated his

representation of Land Base on August 24, 2006. He then sent

an engagement letter to Lu and So on September 10, 2006,

confirming that the representation had begun in July and that its

scope included “obtaining compensation and damages due as the

result of any wrong-doing against you that has been committed

by any person, firm, [or] company.” So paid Suchanek $99,000

shortly after receiving the letter.

Suchanek coordinated what he described as a “complex

worldwide litigation” campaign on So’s behalf. In this role,

4

Suchanek served primarily as an administrator. He hired

counsel to represent So in London, Hong Kong, New York, and

several other jurisdictions, and managed So’s communication

with these firms, but did not appear in court on So’s behalf.

Suchanek also oversaw the campaign’s finances, including

payment of the various law firms and processing of sums

recovered by them in the HSBC litigation – all through a trust

account he maintained for So. In August 2007, Suchanek

instructed So to wire $2.1 million to this account for litigation

expenses.1 So expressed reservations about the cost, describing

it as “so much higher than my budget,” but complied after

Suchanek assured him a “minimum recovery” of $160 million.

So began to lose trust in Lu, his agent, just a few months

into the joint representation. In December 2006, he informed

Suchanek that Lu had attempted to fire Kendall Freeman, the

law firm representing them in London, without his consent. And

in February 2007, So complained that Lu had lied to Suchanek

about So’s willingness to pay for her share of the legal fees.

These developments led So to contemplate cancelling Lu’s

authority to act as his agent. Suchanek encouraged So to “keep

the status with [Lu] the same” despite her actions. He attempted

to hold the relationship together by maintaining – or at least

purporting to maintain – separate, confidential correspondence

with Lu and So. The effort fell apart, however, when So notified

Suchanek that Lu had falsified a witness statement bearing his

name in August 2007 (the statement was prepared for use in the

HSBC litigation). Suchanek responded by urging So to cut off

Lu’s authority, but continued to represent Lu and So jointly until

January 31, 2008, when Suchanek terminated his representation

of So.

1

Suchanek represented – as it turns out, falsely – that none of

these funds would be used to pay for his services. Suchanek never

sent So an invoice at any point in the representation.

5

At the conclusion of the representation, Suchanek held back

$400,000 of the funds remaining in So’s trust account for his

“invoice.” So objected, demanding that Suchanek remit the

withheld funds to him and provide a full accounting. When

Suchanek refused, So filed suit for malpractice, breach of

contract, breach of fiduciary duty, and replevin.

The district court conducted a bench trial and eventually

winnowed the case down to a single claim for breach of

fiduciary duty. On that claim, the court held that Suchanek had

violated the District of Columbia Rules of Professional Conduct

governing conflicts of interest – and thus breached his fiduciary

duty to So – during two distinct periods. The first involved

Suchanek’s simultaneous representation of So and Land Base in

July and August of 2006. The second arose from Suchanek’s

continued representation of Lu and So after August 21, 2007,

when So reported that Lu had falsified his witness statement. To

remedy these breaches, the court ordered Suchanek to disgorge

$400,000 plus interest, for a total of $455,933.52. The court

reasoned that this amount was roughly equal to the sum

Suchanek collected “during the two conflicted periods.”

Suchanek seeks to have the judgment reversed. So’s cross

appeal seeks disgorgement of the rest of the approximately $1

million Suchanek covertly paid himself over the course of the

representation. While the case was pending on appeal, So

moved to have the $320,100.92 remaining in his client trust

account2 turned over to him “in partial satisfaction of the

Judgment.” Suchanek responded by moving to stay

enforcement of the judgment pending disposition of the appeal.

The district court denied the motions. In doing so, it ordered

2

These funds are a subset of the $400,000 initially held back

by Suchanek as payment for his services, the remainder having been

spent by Suchanek.

6

Suchanek to transfer So’s trust funds to the district court’s

registry, stayed execution of the judgment to the extent of the

amount transferred, and permitted Suchanek to post a

supersedeas bond for the remainder. Suchanek has also

appealed this ruling.

I

Suchanek denies that he breached his fiduciary duty to So.

Under District of Columbia law,3 a violation of the Rules of

Professional Conduct “can constitute a breach of the attorney’s

common law fiduciary duty to the client.” Griva v. Davison,

637 A.2d 830, 846-47 (D.C. 1994). Although not every ethics

violation rises to the level of a breach of fiduciary duty,

Television Capital Corp. of Mobile v. Paxson Commc’ns Corp.,

894 A.2d 461, 469 (D.C. 2006), a breach occurs “when an

attorney represents clients with conflicting interests,” Hendry v.

Pelland, 73 F.3d 397, 401 (D.C. Cir. 1996).

Rule 1.7 provides the general rule governing conflicts. D.C.

RULES OF PROF’L CONDUCT R. 1.7. It states, in relevant part,

that a lawyer may not represent a client when the representation

“will be or is likely to be adversely affected by representation of

another client.” Id. R. 1.7(b)(2). This prohibition is conditional,

and ceases to apply when two criteria are satisfied. See id. R.

1.7(c). First, each of the affected clients must provide informed

consent “after full disclosure of the existence and nature of the

possible conflict and the possible adverse consequences of [the

joint] representation.” Id. R. 1.7(c)(1). Second, the lawyer must

“reasonably believe[]” that he “will be able to provide

competent and diligent representation to each affected client.”

3

The events in this case took place on three continents, but the

parties agree that District of Columbia law governed Suchanek’s

representation of So.

7

Id. R. 1.7(c)(2). “The underlying premise” of these restrictions

“is that disclosure and informed consent are required [whenever]

. . . there is any reason to doubt the lawyer’s ability to provide

wholehearted and zealous representation . . ..” Id. R. 1.7 cmt. 7.

Thus, “if an objective observer would have any reasonable doubt

on that issue, the client has a right to disclosure of all relevant

considerations and the opportunity to be the judge of its own

interests.” Id.

The district court correctly held that Suchanek violated Rule

1.7 by simultaneously representing So and Land Base in July

and August of 2006. During that period, Suchanek never

advised So that he might have claims against Land Base. Yet

So’s agreement with Land Base was a but-for cause of So’s loss,

and the Land Base agreement made certain warranties against

any loss to the $30 million So initially deposited in the HSBC

account. As the district court found, “Suchanek could not have

advised So to pursue his warranty claims against Land Base . .

. without violating his obligations to Land Base.”

Suchanek also prepared the Land Base opinion while he

was representing Land Base and So. The opinion, which was

filed as an attachment to Lopatin’s witness statement in the

HSBC litigation, undercut any claims So might have had against

Land Base by concluding that the Land Base agreements did not

facilitate an unlawful scheme. See D.C. RULES OF PROF’L

CONDUCT R. 1.7 cmt. 13 (stating that a conflict exists when

“there is a significant risk that a lawyer’s action on behalf of one

client . . . will adversely affect the lawyer’s effectiveness in

representing another”). Under these circumstances, Suchanek’s

representation of Land Base clearly compromised his

representation of So. See id. R. 1.7(b)(2). And, because

Suchanek could not have “reasonably believe[d]” that he was

capable of “provid[ing] competent and diligent representation to

each affected client,” he breached his fiduciary duty to So. Id.

8

R. 1.7(c)(2); see also Hendry, 73 F.3d at 401 (describing

lawyers’ duty of “undivided loyalty” to clients).

The district court’s analysis of the second conflict period,

between August 2007 and January 2008, is also sound. Before

August 2007, So regularly informed Suchanek that Lu was

undermining him, often by acting outside the scope of her

authorization. See infra Part II. Then, on August 21, 2007, So

notified Suchanek that Lu had falsified a witness statement

bearing his name. These developments would have caused an

objective observer to doubt whether Suchanek could continue to

“wholeheartedly and zealously” represent both So and Lu. D.C.

RULES OF PROF’L CONDUCT R. 1.7 cmt. 7; see also id. cmt. 14

(joint representation “improper when it is unlikely that

impartiality can be maintained”). Suchanek recognized the

gravity of Lu’s transgression, describing it as “very serious,”

and even recommended that So immediately terminate Lu’s

authority to act on his behalf. He also told So that a court order

issued in the HSBC litigation was “based upon

misrepresentations by [Lu].” Yet he continued the joint

representation, without making any effort to secure So’s

informed consent, in clear contravention of his ethical and

fiduciary duties. See id. R. 1.7(b)(2), (c); Hendry, 73 F.3d at

401; Griva, 637 A.2d at 845 (informed consent required

whenever “dual representation creates a potential conflict of

interest” (emphasis added)).

Suchanek’s remaining argument concerns the district

court’s post-trial ruling. His brief contends that the district

court erred “in denying Suchanek’s post-judgment Motion to

Stay, granting in part So’s post-judgment turnover motion,4 and

4

This is not accurate – the district court did not grant, in

whole or in part, So’s turnover motion. The order states in bold text

that the motion was denied.

9

ordering Suchanek to deposit the sum of $320,100.92 into the

Court’s registry.” Suchanek’s basic point is that So’s cross-

appeal automatically superseded the judgment – thus vitiating

any duty Suchanek had to post an appellate bond.

In Price v. Franklin Investment Co., 574 F.2d 594, 597

(D.C. Cir. 1978), we held that “a litigant may not accept all or

a substantial part of the benefit of a judgment and subsequently

challenge the unfavorable aspects of that judgment on appeal.”

When a judgment contains “separable or divisible” parts,

however, a “firmly established exception” to the rule allows a

prevailing party to “accept the benefit of the separable or

divisible feature in his favor and challenge the feature adverse

to him.” Id. (quoting Luther v. United States, 225 F.2d 495, 497

(10th Cir. 1954)). The judgment in this case falls within the

exception. It consisted of two divisible parts: one favorable to

So (disgorgement of fees collected during two parts of the

representation), another not (denial of So’s disgorgement request

with respect to the rest of the representation). So’s cross-appeal

focuses exclusively on the latter, and seeks only additional

damages. See BASF Corp. v. Old World Trading Co., 979 F.2d

615, 616 (7th Cir. 1992); Price, 574 F.2d at 597.

Suchanek had a choice: he could face execution of the

judgment or post a bond to suspend its effect. See FED. R. CIV.

P. 62(d) (“If an appeal is taken, the appellant may obtain a stay

by supersedeas bond . . ..”). The choice was particularly stark

with respect to the $320,100.92 held by Suchanek in So’s trust

account.5 Suchanek opted not to release the funds to So, and did

not post a supersedeas bond. Under those circumstances, the

5

We are unsure whether these funds, which appear to be So’s

property, can be used to satisfy a judgment against Suchanek. In light

of our decision in Part II below, we leave it to the district court to

decide the question.

10

district court had broad discretion to determine the type of

security needed. See, e.g., Fed. Prescription Serv., Inc. v. Am.

Pharm. Ass’n, 636 F.2d 755, 759 (D.C. Cir. 1980). The court’s

order requiring Suchanek to deposit the trust funds in the

registry was proper in light of Suchanek’s history of moving

So’s money, without authorization, into other bank accounts –

sometimes spending it rather than returning it to So or to So’s

trust account.

For these reasons, we affirm the rulings below as they

pertain to Suchanek’s appeal.

II

On cross-appeal, So contends that the district court erred in

ordering disgorgement of only some of the fees Suchanek

collected. Total disgorgement is required, So maintains,

because Suchanek’s conflicts of interest were not limited to the

two periods identified by the district court. Instead, they

persisted throughout the representation, from start to finish. The

sources of these conflicts included Suchanek’s personal

interests, those of his assistant, Mira Meltzer, and Suchanek’s

representation of several other parties involved in the HSBC

litigation.

Disgorgement is an equitable remedy entrusted to the sound

discretion of the district court. See United States v. Nacchio,

573 F.3d 1062, 1080 (10th Cir. 2009); BASF Corp. v. Old World

Trading Co., 41 F.3d 1081, 1096 (7th Cir. 1994). “A district

court by definition abuses its discretion when it makes an error

of law.”6 Teachey v. Carver, 736 A.2d 998, 1004 (D.C. 1999)

6

This statement implies that courts have discretion in deciding

pure questions of law. Of course, they do not. The import of the rule,

which does not line up precisely with its text, is that a discretionary

11

(quoting Koon v. United States, 518 U.S. 81, 100 (1996)). Here,

the district court misapplied Rule 1.7 – and thus abused its

discretion – when it held that Suchanek had a conflict of interest

only during the two periods described above.

Suchanek’s joint representation of Lu and So is illustrative

in this regard. The only ethics expert to testify at trial opined

that the representation was conflicted from the outset because So

had potential claims against Lu, based on her decision to sign

the Land Base agreement on So’s behalf. Suchanek claims that

he did not initially perceive a conflict between Lu and So, but

we are not concerned with his subjective impressions. Under

Rule 1.7, the question is whether there was “any reason to doubt

[Suchanek’s] ability to provide wholehearted and zealous

representation” to both Lu and So. D.C. RULES OF PROF’L

CONDUCT R. 1.7 cmt. 7. This depends on whether an objective

observer – with Suchanek’s prior knowledge of Lopatin, Land

Base, and the particulars of the fraudulent scheme – would have

had a “reasonable doubt” of his ability to represent jointly a

victim of the scheme and the person who got him involved in it

in the first place. See id. The answer, we think, is clearly yes.

These doubts would have grown even more substantial as

the representation progressed. In August 2006, Suchanek

learned that Kendall Freeman attorneys had accused Lu of

destroying critical evidence. Suchanek prepared Lu’s response

to these allegations. Later in 2006, So informed Suchanek that

Lu had lied to Suchanek about the division of attorneys fees,

falsely claiming that So had agreed to pay her share. So also

indicated that Lu had attempted to fire the Kendall Freeman firm

without his, So’s, consent. Similar disputes between Lu and So

ruling is subject to reversal when it is founded on an erroneous view

of the law.

12

continued through mid-2007, as So accused Lu of repeatedly

exceeding her authorization to act on his behalf.

Suchanek was fully aware of these problems. Meltzer, who

prepared, read, and sent all of Suchanek’s correspondence

(Suchanek is blind), explained at trial that So’s complaints made

it impossible to tell whether Lu remained So’s agent. Rather

than addressing these issues through the informed consent

process contemplated by Rule 1.7(c), Suchanek attempted to

assuage So’s concerns by telling him their communications were

secret and would not be disclosed to Lu. The commentary

accompanying Rule 1.7 makes clear that joint representation

“will almost certainly be inadequate” when such confidences are

necessary. Id. R. 1.7 cmt. 16.

These considerations would have put any reasonable

attorney on notice that a conflict existed between Lu and So well

before August 21, 2007 – the date the district court identified as

the start of the second conflict period. See id. R. 1.7 cmt. 7; see

also Griva, 637 A.2d at 845. The district court’s error in

assessing the conflict between Lu and So influenced the scope

of the remedy it selected. In ordering Suchanek to disgorge

$400,000 plus interest, the court used the amount Suchanek paid

himself “during the two conflicted periods” as a guide. It

follows that the court would have awarded a larger sum if it had

(correctly) found a conflict during other parts of the

representation.

We will therefore remand the case to the district court for

further review of the record and issuance of a supplemental

remedy, greater than the amount already ordered. On remand,

the district court should consider the conflict between Lu and

So, as well as the variety of other serious conflicts of interest

13

alleged in So’s brief.7 The remedy it fashions should account

for the full extent of the conflicts found; the need to deter

attorney misconduct; the “fundamental principle of equity . . .

that fiduciaries should not profit from their disloyalty”; and the

decreased value of the services provided to So resulting from

Suchanek’s rampant misconduct. Hendry, 73 F.3d at 402; see

also RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§ 37 cmt. e (2000) (“Ordinarily, forfeiture extends to all fees for

the matter for which the lawyer was retained . . ..”).

So ordered.

7

We do not reach these additional claims. The district court

need not receive further evidence when addressing them since the

record is already well-developed.