Petition for Writ of Certiorari — Smith v. Kentucky Bar Ass'n

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FILED

OCT 3 1984

ALEXANDER L. STEVAS

CLERK

IN THE

Supreme Court Of The United States

OCTOBER TERM, 1984

NO.

ERIC S. SMITH, Petitioner

KENTUCKY BAR ASSOCIATION, Respondent

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF KENTUCKY

BERT T. COMBS

WYATT, TARRANT & COMBS

2800 Citizens Plaza

Louisville, KY 40202

BEN L. KESSINGER, JR.

STITES & HARBISON

400 Bank of Lexington Bldg.

101 East Vine Street

Lexington, KY 40507

Counsel for Petitioner

October ., 1984

een

PRMT MASTER, IC. 630 LARE ALLEN OD.. LEMINGTOR, KY. 60004, PR. OS) 278-0941

QUESTION PRESENTED FOR REVIEW

Whether Petitioner is entitled toa review by this Court

on Writ of Certiorari, where his suspension from the prac-

tice of law was based solely upon an unforeseeable ground

first stated in the opinion of the Supreme Court of Ken-

tucky imposing that penalty, and which had not been in-

cluded or tried with the original Charge filed against him

by the Kentucky Bar Association's Inquiry Tribunal.

TABLE OF CONTENTS

Page

QUESTION PRESENTED FOR REVIEW

OPINIONS BELOW ........

JURISDICTION .......

CONSTITUTIONAL PROVISIONS AND COURT

RULES INVOLVED ......

STATEMENT OF THE CASE ..

REASONS FOR GRANTING THE WRIT

1. The Kentucky Supreme Court's suspension of

Petitioner from the practice of law, without

prior notice or hearing, for conduct other than

that alleged in the Charge upon which he had

been tried, violated Petitioner's right to

procedural due process...............

2. The Kentucky Supreme Court's unforseeable

enlargement and retroactive application of a

vague disciplinary standard to suspend Peti-

tioner from the practice of law for conduct

never previously considered to be ‘‘unethical,”’

violated Petitioner's right to substantive and

procedural due process... ....................

3. Tobe truly meaningful the right to due process

compels this Court’s review when, in bar

disciplinary proceedings, violations of due pro-

cess by a state’s highest court leave no other

forum in which to vindicate this right. .

TABLE OF CONTENTS (Continued)

Page

I 60) oo ee ee ae Renee 29

I Cue ee ual vane examen ta wwk yee la-140a

Order Denying Petition for Rehearing,

le eee err eee la

Opinion of the Supreme Court of Kentucky,

Rendered October 12, 1983, As Modified

SG CE nae ha We CAREER N ASRS Rab ao ns 598 2a

Opinion of the Supreme Court of Kentucky

Rendered October 12,1983 ...................... 9a

Opinion of the Board of Governors,

SO aad cise ak sake taaeneumes l4a

Report of Trial Commissioner, August 13,1982 ...... 24a

Charge (issued by Inquiry Tribunal of

Kentucky Bar Association), October 29,1981 ...... 40a

Order Granting Stay, Entered July 11,1984........ 46a

Petition for Rehearing and Modification............ 48a

Response to Petition for Rehearing and

POI EE OO, PRATT ER ERE _. TTa

ey caste eeeecastnseen 90a

Reply to Complainant's Response to Petition

for Rehearing and Modification................ 117a

Annotated July 5th Opinion of the

Kentucky Supreme Court ..............-..-->. 132a

Complete Text of Constitutional Provisions

and Court Rules Involved .................---- 139a

TABLE OF CITATIONS

CONSTITUTIONAL PROVISIONS Page

U.S. CONST. amend. XIV,§1................. passim

CASES

Addington v. Texas,

I eect, cd ph Bee 20

Armstrong v. Manzo,

ES 20

Bouie v. City of Columbia,

en .. 24, 25

Brinkerhoff-Faris Trust & Savings Co. v. Hill,

ee I oo b's ec ee nee or oe 29

Cohen v. Hurley,

366 U.S.117(1961)... (422k en eaten 26

Cole v. Arkansas,

333 U.S. 196 (1948)... Oe hy rete ey 18

DeJonge v. Oregon,

oe eee 18

In re Advisory Opinion of Kentucky Bar

Association, 526 S.W.2d 306 (Ky. 1974)... 7, 21

In re Advisory Opinion of Kentucky State Bar

Association, 361 S.W. 2d 111 (Ky. 1962)... 7,21

In re Oliver,

A Pe GED 6. 6. toc an ccanccccecee 14,19

In re Primus,

436 U.S. 412(1978)......... ~ Pe

In re Ruffalo,

390 U.S. 544 (1968)... | _. passim

TABLE OF CITATIONS (Continued)

CASES Page

In re Sawyer,

360 U.S. 622 (1959)... Teer Tetr 16

Joint Anti-Fascist Refugee Committee v. McGrath,

$41 U.S. IBS(IOBL).. cee 14

Kentucky State Bar Association v. Stivers,

475 S.W. 2d 900 (Ky. 1972),

cert. denied 406 U.S. 968(1972) ©. ......... 5,6

Konigsberg v. State Bar of California,

353 U.S. 252 (1957)... .. | oo 28

Mahoning County Bar Association v. Ruffalo,

199 N.E. 2d 396 (Ohio 1964),

cert. denied 379 U.S. 391 (1964) a 27

People v. Emeson,

638 P.2d 293 (Colo. 1981) | 17

Saunders v. Shaw,

244 U.S. 317 (1917)... | - 29

Schware v. Board of Bar Examiners,

353 U.S. 232 (1957)... ooo. 28

Selling v. Radford,

243 U.S. 46 (1917)... | 27

Theard v. United States,

354 U.S. 278 (1957) ... 27

Thompson v. City of Louisville,

362 U.S. 199 (1960)... . _... 25, 26, 29

Walker v. Supreme Court of Arkansas Committee

on Professional Conduct, 628 S.W. 2d 552

(Ark. 1982) lane | | 17

TABLE OF CITATIONS (Continued)

Kentucky Supreme Court Ruies Page

| Tee ak etuaway 4

SCR 3.190(1) ............... ves etueweiie ee passim

SOR S.1GOU2) . . een , 15

SCR 3.190... .. 3

SCR 3.230....... | TYTTTTT , 3

SCR 3.300... ...........5.. _ 15

SCR 3.960 ............. | . 3,18

SCR 3.370(6).......... ve 6

IN THE

Supreme Court Of The United States

OCTOBER TERM, 1984

NO.

ERIC S. SMITH, Petitioner

KENTUCKY BAR ASSOCIATION, Respondent

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF KENTUCKY

Petitioner, ERIC S. SMITH, respectfully prays that a

writ of certiorari issue to review the final Opinion of the

Supreme Court of Kentucky entered in this proceeding on

July 5, 1984.

QUESTION PRESENTED FOR REVIEW

Whether Petitioner is entitled to a review by this Court

on Writ of Certiorari, where his suspension from the prac-

tice of law was based solely upon an unforeseeable ground

first stated in the opinion of the Supreme Court of Ken-

tucky imposing that penalty, and which had not been in-

cluded or tried with the original Charge filed against him

by the Kentucky Bar Association's Inquiry Tribunal.

OPINIONS BELOW

The original Opinion of the Kentucky Supreme Court

was rendered and entered on October 12, 1983. It appears

in the Appendix at 9a-13a. In denying the Petition for

Rehearing and Modification, the Kentucky Supreme Court

modified the October 12th Opinion. The modified Opinion,

officially reported as Kentucky Bar Association v. Smith,

672 S.W.2d 334 (Ky. 1984), was rendered and entered on

July 5, 1984. It appears in the Appendix at 2a-8a.'

JURISDICTION

On July 5. 1984, Petitioner’s petition for rehearing was

denied. On July 11, 1984, Petitioner, by Order of the Ken-

tucky Supreme Court, was granted a 90 day stay of the ef-

fective date of the modified Opinion, for the purpose of

petitioning this Court for a writ of certiorari, Appendix at

46a-47a. This petition for writ of certiorari was filed within

that 90 day period. This Court’s jurisdiction is invoked

pursuant to 28 U.S.C. Section 1257(3).

CONSTITUTIONAL PROVISIONS AND

COURT RULES INVOLVED

This case involves U.S. CONST. amend. XIV, § 1, and

the following Rules of the Kentucky Supreme Court: SCR

3.130(1) and 3.150(1), the entire text of each of which is set

forth in Appendix at 139a-140a.

1. An annotated copy of the July 5, 1984 Opinion, detailing the

additions to and deletions from the Kentucky Court’s October 12, 1983

Opinion, is set forth in Appendix at 132a-138a.

ie et BE TER BY

0 Saha

STATEMENT OF THE CASE

PREFACE

This case concerns an anomalous substitution of

charges by the Kentucky Supreme Court. at the very end

of a disciplinary proceeding, to sustain an attorney's

suspension which it had apparently found to be otherwise

unsupportable. Without prior notice or hearing, the Ken-

tucky Court concluded the proceedings beiow by suspend-

ing Petitioner from the practice of law for conduct entirely

different than that alleged in the Charge upon which he had

been tried.? When the highest Court of a State violates the

most basic principles of due process, Petition to this Court

presents the first and only opportunity for an impartial

hearing. Such circumstances compel this Court’s review.

THE FACTS

On October 29, 1981, the Inquiry Tribunal of the Ken-

tucky Bar Association (hereinafter ‘“‘KBA’’)’ filed a formal

Charge against Petitioner, which alleged that he had

violated ‘‘Disciplinary Rules 1-102(A)(4), 5-101(A),

2. Petitioner, an attorney engaged in private practice in Lexington,

Kentucky, has never befcre or since been the subject of bar discipline or

complaint. His record has been spotless and exemplary. Graduating

with honors from H rvard University, he attended the University of

Kentucky College of Law, where he served as an editor of the Kentucky

Law Journal. Graduating with distinction (and Order of the Coif), Peti-

tioner served as a law clerk for the Kentucky Supreme Court before

entering private practice. He has consistently achieved honors and

respect in his study and practice of law.

3. In Kentucky disciplinary cases the investigators, tribunal issu-

ing the charge, prosecutors, hearing officer, and finders of fact, are all

agents of the Kentucky Supreme Court, which is itself the final finder of

fact. The Inquiry Tribunal issues all formal disciplinary charges. SCR

3.190. Under SCR 3.230, the Chairman of the KBA appoints the trial

commissioner, who conducts a hearing on such disciplinary charges.

SCR 3.360 requires the trial commissioner to submit an advisory report

of his factual findings to the KBA Board, which in turn makes advisory

findings which it submits to the Kentucky Supreme Court for final

action.

5-104(A), 5-105(A), and 6-101(A)(3) of the American Bar

Association's Code of Professional Responsibility. ..,"

and that his actions therefore ‘“‘constitute(d) unethical and

unprofessional conduct tending to bring the bench and bar

of Kentucky into disrepute.’

The Charge against Petitioner arose from a transaction

in which a corporation owned by one of Petitioner’s clients

(Dr. Nath) made an unsecured loan of $30,000 to another of

Petitioner's clients, a corporation in which Petitioner had a

contingent, economic interest.’ The Charge, based upon

the Tribunal’s assumption that Petitioner was acting as

Nath’s attorney in this particular loan transaction, alleged

that, in connection with that transaction, Petitioner

advised Nath to invest $30,000; failed to disclose material

facts about the borrowing corporation and the purpose for

which the funds would be used; neglected to prepare legal

documents necessary to evidence and secure the loan; was

guilty of misrepresentation in stating that he (Petitioner)

had no authority to gain access to the borrowing corpora-

tion’s financial records; took no action to protect Nath’s in-

terests; and, that as a result of Petitioner’s actions, Nath

suffered a loss of approximately $30,000. Petitioner met

these charges with proof that full disclosure of his relation-

ship with the borrowing corporation had been made; he had

informed Nath of the potential conflict of interest and that

he would not, and did not, represent Nath, Nath’s corpora-

tion, or the borrowing corporation in this particular trans-

4. Charge, Appendix, at 40a-45a. In practice, this last, vague stan-

dard has come to be used in Kentucky disciplinary charges as a ‘boiler

plate’’ conclusion, following allegations of specific rule violations. See

SCR 3.130(1).

5. For legal services which Petitioner had rendered to the borrowing

corporation, Petitioner had been given a right to receive 5% of the cor-

poration’s income and an option to acquire up to 25% of the

corporation's stock.

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Bel Tela <a teh Pty a SN Sale

action; he had not advised Nath to invest $30,000, nor had

he misrepresented any facts to Nath; Nath had consented

to his limited participation in the loan transaction; he did

not personally benefit from the loan; and, he was not

responsible for Nath’s loss, when the borrowing corpora-

tion failed.“ At all stages of the proceedings below, the

facts were hotly disputed.

A hearing on the Charge was held before a Trial Com-

missioner, who heard the evidence and, after receiving

briefs from the KBA and Petitioner, made certain factual

findings, which were forwarded to the Board of Governors

of the KBA (hereinafter ‘“‘Board’’) for review.’ The parties

submitted briefs to the Board, contesting the findings of

the Trial Commissioner. On February 12, 1983, the Board

rendered an Opinion that Petitioner’s conduct

‘... violated the provisions of DR 1-102 [Engaging in

Deceit and Misrepresentation], DR 5-101 and DR 5-105

[Accepting Employment which Effects the Independence

of the Lawyer or Impairs the Client’s Interests], and DR

6-101 [Neglecting a Legal Matter Entrusted to the

Lawyer], and that, in sum, this conduct has brought the

Bench and Bar into disrepute; SCR 3.130(1).’"* This state-

ment made it clear that only the alleged acts and omissions

6. The sufficiency of Petitioner’s proof appears to have been con-

ceded by the Kentucky Court. The Court apparently disregarded the

conflicting testimony of the complaining witness (Nath), and based Peti-

tioner’s suspension solely upon his own testimony. See July 5th Opinion,

Appendix at 4a; and October 12:h Opinion, Appendix at | la.

7. See Report of the Trial Commissioner, Appendix at 24a-39a.

8. Opinion of the Board of Governors, Appendix at 16a (emphasis

added). In Kentucky disciplinary cases, the Kentucky Supreme Court is

the final finder of the facts and law. The findings, both legal and factual,

as well as the disciplinary recomnendations of the KI3A Board are only

advisory. Kentucky State Bar Ass'n. v. Stivers, 475 S.W. 2d 900, 903

(Ky. 1972), cert. denied 406 U.S. 968 (1972).

which the Board had concluded to be in violation of the

enumerated disciplinary rules were being condemned as

‘tending to bring the bench and bar into disrepute,”’ not

some other conduct not amounting to a violation of those

rules. The Board recommended that Petitioner be sus-

pended from the practice of law ior 18 months, and

forwarded its recommendation to the Kentucky Supreme

Court. Petitioner requested that the Kentucky Supreme

Court review his case,° and briefs were submitted contest-

ing the findings of the KBA Board.

Upon review, the Kentucky Supreme Court did not

find Petitioner guilty of violating any of the enumerated

disciplinary rules, i.e., none of the misconduct which the

Tribunal and Board had alleged to be ‘“‘unprofessional and

unethical conduct tending to bring the bench and bar of

Kentucky into disrepute.’’ Nevertheless, the Court

adopted the Board’s decision to suspend Petitioner for 18

months, but based his suspension solely upon a new

ground, not stated in the Charge or the Board’s Opinion —

Petitioner's own admission that he had, at Dr. Nath’s

direction, ‘‘... prepared a check and, to that extent, par-

ticipated in a transaction whereby one client lent money to

another of respondent's (Petitioner’s) clients, a corporation

in which respondent (Petitioner) had an _ interest.’’°

Although apparently convinced that Petitioner was guilty

of none of the misconduct alleged in the Charge,'' the

9. Although the Kentucky Supreme Court is the final **. . . judge of

the factual as well as the legal issues and of the final action to be taken”

in all disciplinary cases, a request must still be made in order to assure

the Court's review. Stivers, supra at 903. See SCR 3.370(6).

10. October 12th Opinion, Appendix at 12a. See n. 11, below.

11. Essential to finding a violation of the Disciplinary Rules

enumerated in the Charge, or the Board's Opinion, is a prior finding that

conflicting attorney-client relationships existed with regard to the par-

(continued on page 7)

SPASTIC A MOA MI A.

ert in) st

A naccamgh ®

Court, at some point in its deliberations, nevertheless con-

cluded that his mere “participation” in the transaction

alone was sufficiently ‘‘unethica'’’ to justify the Board’s

recommended suspension.'? The Court cited no rules, case

law, or other authority, in support of its conclusion. Peti-

tioner received his first notice that his mere

“participation” in the loan transaction would be con-

sidered as a ground for discipline after the proceedings had

ended, when the Court sent him a copy of its October 12th

Opinion, ordering his suspension solely upon that newly

substituted ground.

The Court’s Opinion surprised all parties to these pro-

ceedings, even the KBA. In initiating and prosecuting the

case, the Inquiry Tribunal and counsel for the KBA had

never suggested, much less advocated, that mere ‘‘par-

(footnote 11, continued from page 6)

ticular transaction in question, i.e. representation of conflicting in-

terests. See Jn re Advisory Opinion of Kentucky Bar Ass'n, 526 S.W.2d

306, 307 (Ky. 1974); In re Advisory Opinion of Kentucky State Bar

Ass'n, 361 S.W. 2d 111 (Ky. 1962). See also Brief Amicus Curiae, Appen-

dix at 94a-97a (hereinafter ‘‘Amicus Brief’). The Kentucky Court never

made such a finding; and, after it was pointed out to the Court (in the

Petition for Rehearing, Appendix at 51la-54a) that it is not the mere

existence of ‘‘vonflicting interests,’ but only representing conflicting in-

terests which is prohibited, the Kentucky Court removed all references

to “‘conflict of interest’ in its October 12th Opinion. See Annotated July

5th Opinion, Appendix at 136a. The Kentucky Court even removed the

words ‘another of respondent's clients,” in reference to the borrowing

corporation. See Annotated July 5th Opinion, Appendix at 136a. It is

therefore clear that, even though the Kentucky Court (in its July 5th

Opinion) disregarded the corporate entity of the lender, the Court still

did not find that the Petitioner had represented conflicting interests in

the loan transaction. Consequently, no violation of the specifically

enumerated rules was, or could properly have been, found. However,

even if the Court had found such representation, Petitioner's conduct

would still have violated none of the Court's adopted Disciplinary Rules.

See Amicus Brief, Appendix at 94a-109a.

12. See October 12th Opinion, Appendix at 12a.

ticipation”’ in a loan transaction is ‘‘unethical.’’ Conse-

quently, at no prior time in these proceedings had Peti-

tioner’s mere “participation” in the transaction been com-

plained of, charged, briefed, tried, condemned, or con-

sidered, in any manner whatsoever. Further, at no time

prior to the Kentucky Court’s October 12, 1983 Opinion.

was Petitioner (or any other member of the Kentucky Bar)

on notice, from the Court’s rules, advisory opinions or case

law, that mere “‘participation”’ in an otherwise lawful loan

transaction, without some finding of ‘“‘wrongdoing,"’ could

be considered ‘‘unethical,’’ much less punishable.

Using the first and only procedural opportunity to

raise his constitutional rights in the proceedings below,

Petitioner then filed a petition for rehearing challenging

this unforeseeable result. In it, he argued, inter alia,'* that:

13. In its October 12th Opinion, the Kentucky Court stated ‘‘(t)he

display of poor judgment here and the consequential loss of money by a

client, Dr. Nath, is in our opinion such unethical and unprofessional con-

duct as to warrant the suspension of Respondent."’ October 12th

Opinion, Appendix at 12a. The Petition for Rehearing, however, pointed

out that ‘‘poor judgment” alone, without any proof of moral turpitude or

wrongdoing, had never been sufficient grounds for suspension in Ken-

tucky. See Petition for Rehearing, Appendix at 7la-72a; Amicus Brief,

Appendix at 109a-llla. As a result, the Court removed the words

“display of poor judgment.’ The Court replaced that phrase with the

words ‘‘unethical and unprofessional conduct,’’ which resulted in the

following unintelligible statement: ‘‘(t)he unethical and unprofessional

conduct here and the consequential loss of money by a client, Dr. Nath,

is in our opinion such unethical and unprofessional conduct as to war-

rant the suspension of Respondent.”’ July 5th Opinion, Appendix at 6a;

Annotated July 5th Opinion, Appendix at 137a.

In both Opinions, the Court's determination of the impropriety of

the Petitioner's conduct was apparently influenced by its after the fact

observation that the lender had lost money in the transaction. The

Court, however, attributed that loss to the fact that the borrowing cor-

poration had become dormant as a result of personal problems

experienced by its sole shareholder, and not as a result of any actions of

Petitioner. October 12th Opinion, Appendix at lla; July 5th Opinion,

Appendix at 4a. (continued on page 9)

<< 17 ne Sibete 26 beta Salt. a

1.) the Kentucky Court had mistakenly equated the

mere existence of conflicting interests with

representation of conflicting interests:'*

2.) his ministeria! ‘‘participation”’ in the loan trans-

action was not evidence of representation of con-

flicting interests and was certainly not unethical;

3.) by concluding that such ‘participation’ was

‘“‘unethical,’’ the Kentucky Court created a new

rule, proscribing conduct that had never been

previously considered a violation of any

disciplinary rule or standard; and,

4.) the Kentucky Court violated state and Federal due

process guarantees, by retroactively applying its

new enlargement of a vague “‘unprofessional and

unethical conduct’ standard, without any prior

hearing, notice, or warning.

In its Response to the Petition for Rehearing, the KBA

also urged the Court to modify its Opinion by finding Peti-

tioner guilty of the Code violations with which he had been

charged, in order ‘‘to eliminate any unnecessary confusion

and misinterpretation’’ and ‘to make it absolutely clear

(footnote 13, continued from page 8)

If, absent any ‘‘wrongdoing,’’ the impropriety of an attorney's mere

‘participation’ in a business transaction rests in any way upon an after

the fact determination of the success of that business venture, then no

attorney can be deemed to be on prior notice as to whether such ‘‘par-

ticipation” is ethically permissible, because the success of a business

venture can never be known with certainty from the outset. If and to the

extent that the Kentucky Court was influenced by such a factor in judg-

ing the propriety of Petitioner's conduct, then Petitioner was to that

extent denied his right to procedural due process. See discussion at pp.

20-26, infra.

14. See n. 11, supra at pp. 6-7.

that the discipline imposed on respondent (Petitioner) is

consistent with the Code.’’*

An Amicus Curiae Brief, filed by two attorneys (and

endorsed by 21 other practicing attorneys from across

Kentucky, and a local county bar association), also

challenged the Court's determination that mere ‘‘participa-

tion’ in such a business transaction is ‘“‘unethical,’’ and

urged the Court to withdraw its October 12th Opinion to

avoid creating such a precedent.'* These attorneys further

criticized the Court's enlargement of this vague standard

by means of a disciplinary Opinion, without the Court's

usual notice and rule making hearings.

On July 5, 1984, the Kentucky Supreme Court denied

the Petition for Rehearing and modified, but did not

change the essence of, its October 12th Opinion. Despite

the KBA’s request, the Court again declined to find Peti-

tioner guilty of any of the rule violations alleged in the

Charge or Board’s Opinion. It still based Petitioner's

suspension solely upon the substituted ground — its ex

post facto determination that his “participation’’ in the

loan transaction amounted to ‘‘unprofessional or unethical

conduct.’"'’ However, in modifying its October 12th

Opinion, the Court redefined Petitioner's offending “‘par-

ticipation” by listing two other largely ministerial acts,

evidently in order to answer the Petition for Rehearing by

15. See KBA Response, Appendix at 78a, 80a.

16. Appendix at 90a-116a.

17. The Kentucky Supreme Court, in modifying its October 12th

Opinion, added, apparently as an afterthought, the following sentences

after concluding that Petitioner's mere ‘“‘participation’’ in the loan

transaction was ‘“‘unethical’’ conduct warranting suspension:

The contractual right of respondent to prevent disbursement of

amounts in excess of $1,000 on behalf of REBSCS (the borrowing

{continued on page 11)

(footnote 17, continued from page 10)

corporation) imposed a responsibility on respondent to see that

disbursements were in accordance with his statement to Nath that

the loan, with the exception of $10,000 to Towles to repay for per-

sonal expenses, was to be used exclusively for promotional pur-

poses. So far as we can tell from the record, none of the loan was

used for promotional purposes. July 5th Opinion, Appendix at

6a-7a.

However, if the Court intended this comment to serve as an additiona!

“justification” for Petiticner’s suspension, it did not make its intentions

clear.

Nevertheless, this new statement cou/d not properly serve as a basis

for Petitioner's suspension, because at no prior time in these proceedings

had Petitioner been charged with violation of a duty to insure a par-

ticular disbursement of the loan proceeds. This new “‘issue’’ had never

been raised, or addressed, at any point in the proceedings, prnor to the

Court's July 5th Opinion. The only reference, in the Charge, to Peti-

tioner’s statement to Nath, concerning Towle’s planned use of the loan

proceeds, was made in the Tribunal’s allegation that Petitioner had

failed to disclose to Nath that Towles had earlier informed him that

$10,000 would be used for reimbursement. See Charge, Appendix at

43a-44a. The Court, however, apparently conceding that this disclosure

hed been made, dismissed it as being “beside the point.’ July 5th

Opinion, Appendix at 6a. Had this new issue been previously known, it

would have certainly been effectively disputed, both legally and

factually. For example, the following facts, inter alia, could have been

argued to the Court:

a.) Petitioner had no custody of, or right to sign, checks on the

borrowing corporation's account, and had never been in actual

or constructive receipt of any of the loan proceeds;

b.) Shortly after the transaction, Towles moved to a location

unknown to Petitioner, taking all checkbooks and banking

records;

c.) Towles never informed Petitioner of his use or expenditure of

the loan proceeds (in direct violation of his agreement with

Petitioner, and rendering his ‘‘contractual right”

meaningless);

d.) Nath stated that he had no knowledge that Petitioner had

such a right, and therefore could not have relied on it in

making the loan; and,

e.) The loan proceeds (with the exception of a $5,000.00 loan to a

corporation in which Nath was a shareholder) were ix fact used

by Towles (for advertising, direct mail solitication, travel

(continued on page 12)

demonstrating that his ‘‘participation’’ consisted of more

than just one isolated act.'* Even then the Kentucky Court

found that Petitioner had done no more than:

(1) Prepare and file the articles of incorporation of the

corporation which made the loan;'*

(2) Open a bank account for the lending corporation,

with funds supplied by Nath; and

(3) Write the check whereby the loan was made.”

(footnote 17, continued from page 11)

expenses, etc., all in fact promotional expenses of the

borrowing corporation.

Perhaps it is because of these facts that this new “issue” had never been

previously raised in this proceeding.

If the Court's statement could be deemed to serve as an additional

justification for Petitioner's suspension, then the Court has again

substituted a new charge against Petitioner, in violation of procedural

due process principles set forth by this Court in /n re Ruffalo, 390 US.

544 (1968). See discussion on pp. 13-20, infra.

18. See July 5th Opinion, Appendix at 4a.

19. Although it may be argued that preparing articles of incorpora-

tion is not entirely ministerial, the Kentucky Court did not find the for-

mation of this corporation to be evidence that Petitioner represented

Nath in the loan transaction. See n. 11, supra at pp. 67.

20. The Court did not dispute the fact that all of these acts were per-

formed at the request of Nath (the sole shareholder of the lending cor-

poration) and with his full knowledge and consent. Further, the Court

did not find, in either Opinion, that Petitioner had misrepresented any

facts to Nath; failed to disclose his relationship with the borrowing cor-

poration; or converted, received, or personally benefited from, any of the

loan proceeds. On the contrary, the Kentucky Court, apparently con-

ceding that Nath knew of Petitioner's relationship with the borrowing

corporation, and Towles’ planned reimbursement, continued to hold that

such knowledge was “beside the point.’’ Likewise, the Kentucky Court

persisted in dismissing as a ‘‘non-defense’’ the facts that Petitioner had

advised Nath to seek independent counsel, and refused to represent

Nath or his corporation in their dealings with the borrowing corporation.

See Annotated July 5th Opinion, Appendix at 135a, 136a.

But whether Petitioner's ‘‘participation”’ in the loan trans-

action consisted of one or three innocuous acts, these acts

had never before been declared to be “‘unethical,"’ nor com-

plained of, charged, prosecuted, tried, briefed, considered,

or defended against at any prior stage in the proceedings.

In modifying its Opinion, the Court took no action to

rectify the denial of due process that resulted from its

unforeseeable disposition of Petitioner's case. Although

the Kentucky Supreme Court never addressed or even

acknowledged Petitioner's due process claims in its

modified Opinion, the Court necessarily rejected those

claims when it denied, without hearing, his petition for

rehearing.

REASONS FOR GRANTING THE WRIT

1. THE KENTUCKY SUPREME COURT'S SUSPENSION

OF PETITIONER FROM THE PRACTICE OF LAW,

WITHOUT PRIOR NOTICE OR HEARING, FOR CON.

DUCT OTHER THAN THAT ALLEGED IN THE

CHARGE UPON WHICH HE HAD BEEN TRIED,

VIOLATED PETITIONER'S RIGHT TO PROCEDURAL

DUE PROCESS.

The facts of this case clearly demonstrate that the

Kentucky Supreme Court, unable to find Petitioner guilty

of any of the allegations specified in the Charge upon which

he had been tried, substituted a new charge and, upon that

new charge alone, summarily suspended Petitioner from

the practice of law. Bypassing the Inquiry Tribunal, Trial

Commissioner, and Board of Governors, the Court ignored

its own established disciplinary procedures, and effectively

assumed the roles of initiator, investigator, prosecutor,

and final judge of this new charge. The Kentucky Court's

error, however, involved more than simply a violation of its

own rules. Separation of these roles is a fundamental part

of our entire system of justice. As Mr. Justice Rutledg-

observed:

This aggregation of powers and inherently con-

comitant denial of historic freedoms... . are

altogether at variance with our tradition and system

of government. They cannot stand the test of constitu-

tionality for purposes of depriving any person of life,

liberty or property. In re Oliver, 333 U.S. 257, 278-79

(1948), (concurring opinion) (emphasis added).”'

Moreover, by formulating, substituting, considering

and deciding this new charge, all within the privacy of its

final deliberations, the Kentucky Court effectively

transformed its review of this case into a type of “secret

trial’ which this Court denounced in Oliver as ‘“‘a menace

to liberty” and ‘‘a denial of due process of law.’’* Further,

as Mr. Justice Frankfurter stated in Joint Anti-Fascist

Refugee Committee v. McGrath, 341 U.S. 123 (1951):

Secrecy is not congenial to truth-seeking and self-

righteousness gives too slender an assurance of

rightness. No better instrument has been devised for

arriving at truth than to give a person in jeopardy of

serious loss notice of the case against him and oppor-

tunity to meet it. Jd. at 171-72 (concurring opinion)

(emphasis added).

21. Even if the Court had not usurped these roles, such a prohibited

aggregation of powers remains inherent in Kentucky disciplinary pro

cedures. The Inquiry Tribunal is appointed by the Chief Justice of the

Court; and, the Trial Commissioner and prosecuting attorney are both

appointed by the Chairman of the KBA, which is itself responsible for

enforcing the Court's ethical rules, All are agents of the Court. See n. 3,

p. 3. It would be naive to think that the natural and expected deference

of each to the other does not effectively decrease the prospect of a truly

impartial and even-handed hearing, which only independent entities can

insure.

22. Jd at 269, 273.

Yet secrecy permeates the entire disciplinary process in

Kentucky. Notwithstanding the fact that under Rule 3.300

Petitioner is ‘to be afforded full opportunity to . . . defend

himself by the introduction of evidence ... , that ‘“‘oppor-

tunity” is made much less meaningful by Rule 3.150()),

which mandates that ‘/njothing connected with a

disciplinary case shall be made public unless so ordered by

the Court (emphasis added)."’ Under that Rule, Petitioner

and others were not free to openly discuss this case, until!

its final disposition resulted in a published disciplinary

sanction. Ostensibly aimed at “protecting” the attorney,

this rule in fact seriously restrains preparation of his

defense, by indirectly restricting Petitioner's access to

witnesses and proof. This Court imposed secrecy, at ali

stages of the proceedings, in operation severely restricted

Petitioner's due process right to procure and produce

evidence in his defense. This fact can be no more clearly

demonstrated than by the late appearance of Amicus

Curiae in this case. Their arguments and proof in support

of Petitioner, came at an ineffective, if not meaningless,

time in the proceedings because the secrecy of this pro-

ceeding prevented their knowledge of the case, until after

the Court's decision had been published.

Prior to the Court's October 12th Opinion suspending

him, Petitioner had been given no notice that the propriety

of his mere “participation” in the loan transaction would

be questioned, much less considered and condemned, by

the Kentucky Supreme Court. Certainly the allegations of

misrepresentation,” representing conflicting interests,

23. Although, in both Opinions, the Court made the following sup-

positious statement: “It is only for the reason that we cannot be sure

from the evidence as to the actual misrepresentation that we do not im-

pose a more severe penalty,” the Court never found misrepresentation.

fcontinued on page 16)

failure to disclose, and neglect, specified in the criginal

Charge, gave no notice of this issue; and only these allega-

tions were announced, prepared for, and tried, in com-

pliance with the Court’s adopted Rules. Having found Peti-

tioner guilty of these allegations, the Board’s Opinion can-

not be read to condemn his mere ‘“‘participation”’ in a lawful

loan trensaction, in the absence of misrepresentation,

failure to disclose, neglect and other ‘‘wrongdoing.”’ Yet,

mere “‘participation”’ in that transaction was the sole

ground upon which the Court suspended Petitioner.

Petitioner was thereby denied prior notice of the

charge upon which he was ultimately suspended, and any

opportunity to be heard in defense. The Kentucky Court’s

actions rendered Petitioner’s only hearing, that hearing

before the Trial Commissioner, absolutely meaningless. No

hearing can have any meaning, unless the issues to be tried

are known at the beginning. This point was forcefully

illustrated by this Court in In re Ruffalo, 390 U.S. 554

(1968). In that case, the prosecuting officials of the Mahon-

ing Coun:y Bar Association, during Ruffalo’s discipiinary

hearing, added a new charge against him, on the basis of

their after the fact determination that actions which he had

freely admitted were ‘“‘unethical.’’ Unlike this case, Ruffalo

was at least informed of this new charge, and was granted

a continuance and a hearing to contest it, before final judg-

ment was passed upon him. Yet, under those less offensive

(footnote 23, continued from page 15)

July 5th Opinion, Appendix at 6a; October 12th Opinion, Appendix at

12a. This insinuation, in both Opinions, might indicate that the Court

may have speculated, without finding, that some unspecified

misrepresentation occurred. Assumption of wrongdoing, however, is im-

proper in any case, and violates due process. As this Court stated, in Jn

re Sawyer, 360 U.S. 622, 628 (1959), “Speculation cannot take over where

the proofs fail.”

circumstances, this Court refused to allow the disbarment

of Ruffalo from practice in the federal courts,** stating:

Disbarment, designed to protect the public, is a

punishment or penalty imposed on the lawyer. He is

accordingly entitled to procedural due process, which

includes fair notice of the charge...

These are adversary proceedings of a quasi-

criminal nature. The charge must be known before the

proceedings commence. They become a trap when,

after they are underway, the charges are amended on

the basis of testimony of the accused. He can then be

given no opportunity to expunge the earlier

statements and start afresh.

How the charge would have been met had it been

orizinally included in those leveled against

petitioner ... no one knows.

This absence of fair notice as to the reach of the

grievance procedure and the precise nature of the

charges deprived petitioner of procedural due process.

Id. at pp. 550-52 (citations omitted) (emphasis added).

The circumstances of this case are much more alarm-

ing than those in Ruffalo. Although in both cases the at-

torneys had no prior notice of the charge upon which each

was disciplined, in this case (unlike Ruffalo) the Kentucky

Supreme Court suspended Petitioner, at the very end of

24. Although the Ruffclo case dealt with an attorney's suspension

in the federal courts, the proceedings derived from a state court pro-

ceeding which this Court found to be lacking in procedural due process.

After diligent search, we have found no decision holding Ruffalo to be in-

applicable to state disciplinary proceedings. On the contrary, cases

citing Ruffalo appear to uniformly hold that Ruffalo, mandates that pro-

cedural due process be afforded in state disciplinary proceedings, with

notice and an opportunity to be heard in defense. See e.g. Walker v.

Supreme Court of Arkansas Comm. on Professional Conduct, 628 S.W.

2d 552, 554-55 (Ark. 1982): People v. Emeson, 638 b. 2d 293, 294 (Colo.

1982).

the proceedings, on a charge which had never previously

been made.” The Court’s action was manifestly improper,

for as this Court in De Jonge v. Oregon, 299 U.S. 353 (1937)

observed, (c/Jonviction upon a charge not made would be

sheer denial of due process.’”®

Under Rule 3.360, the Trial Commissioner can only

make advisory factual findings, and is not authorized to

draw conclusions concerning guilt or innocence. Such con-

clusions may be drawn, in the first instance, only by the

Board, which sits in secret, with only the record arid briefs

before it. The Rules allow Petitioner no appearance or hear-

ing before the Board or the Court (the only entities em-

25. In Cole v. Arkansas, 333 U.S. 196 (1948) this Court addressed an

analogous question: whether a state court can constitutionally affirm a

criminal conviction on grounds which had never before been charged or

tried. In Cole, the defendants were charged, tried, and convicted in the

trial court of violating one section of a two section criminal act. On ap-

peal, the Arkansas Supreme Court, however, did not pass upon their con-

tentions. It instead affirmed their convictions as though they had been

tried for violating the other section, an offense with which they were

never charged, tried or convicted. In overturning their convictions, this

Court stated:

...It is as much a violation of due process to send an accused

to prison following conviction of a charge on which he was never

tried as it would be to convict him upon a charge that was never

made. Id. at 201, 202 (citations omitted) (emphasis added).

Much like Cole, the question of whether mere ‘‘participation’’ in the

loan transaction alone was ‘‘unethical’’ had never been a part of the In-

quiry Tribunal’s Charge, nor had the question ever been raised or pro-

secuted by the KBA, or briefed before, tried, or considered by the Trial

Commissioner or KBA Board.

26. Id. at 362 (emphasis added). In De Jonge, the defendant was

convicted and sentenced for mere ‘‘assistance’’ in the conduct of an

otherwise lawful meeting. The similarity between such ‘‘assistance’’ and

Petitioner’s mere ‘‘participation’’ in an otherwise lawful business

transaction, is obvious.

powered to determine guilt), and he had none. Not surpris-

ingly, it was during this stage of the proceedings, after his

hearing before the Trial Commissioner that confusion, and

then substitution, of charges commenced. Had Petitioner

not been compelled to wait silently, but allowed to freely

discuss his case, pursue evidence, and face and be heard by

the entities responsible for considering and condemning

the propriety his conduct, before their decisions were

reached, it is doubtful that this case would be here.

The fact that the Kentucky Court ‘reviewed the

record”’ and based Petitioner’s suspension on his admis-

sions in the hearing before the Trial Commissioner, does

not alter the fact that he was denied due process of law. As

this Court, in Oliver, stated,

... Knowledge acquired from the testimony of others,

or even from the confession of the accused, would not

justify conviction without a trial in which there was an

opportunity for defense. Oliver, supra, at 275

(emphasis added).

Subsequent briefing of this question in a petition for

rehearing is not a substitute for a fair, prior hearing. As

Mr. Justice Frankfurter, concurring in Oliver, observed,

...an opportunity to meet a charge... must be a fair

opportunity. It would not be fair if in the court in

which the accused can contest for the first time the

validity of the charge against him, he comes handicap-

ped with a finding against him which he did not have

an adequate opportunity of resisting. Jd. at 284-85.

Such basic unfairness can only be magnified, where, as in

this case, the Court in which Petitioner had his first oppor-

tunity to contest the substituted charge was the very

tribunal responsible for that new charge and the adverse

finding upon it.”’ The violation of procedural due process in

this case is both clear and extreme.

2. THE KENTUCKY SUPREME COURT’S UNFORESEE-

ABLE ENLARGEMENT AND RETROACTIVE AP-

PLICATION OF A VAGUE DISCIPLINARY STAN-

DARD TO SUSPEND PETITIONER FROM THE PRAC-

TICE OF LAW, FOR CONDUCT NEVER PREVIOUSLY

CONSIDERED TO BE “UNETHICAL,” VIOLATED

PETITIONER'S RIGHT TO SUBSTANTIVE AND

PROCEDURAL DUE PROCESS.

In addition to prior notice of the charge, due process

demands that Petitioner have had some reasonable, prior

notice, at the time he “‘participated”’ in the loan trans-

action, that the conduct for which he was ultimately

suspended could be considered a violation of the Kentucky

Court's ethical rules. As Justices White and Marshall,

concurring in Ruffalo,** stated:

A relevant inquiry in appraising a decision to

disbar is whether the attorney stricken from the rolls

27. This Court in Armstrong v. Manzo, 380 U.S. 545, 552 (1965),

stated: ‘‘A fundamental requirement of due process is ‘the opportunity

to be heard’... which must be granted at a meaningful time and in a

meaningful manner’ (citation omitted) (emphasis added). After the Ken-

tucky Court’s October 12th Opinion, Petitioner was faced with the task

of overcoming an adverse Opinion, and not a first consideration of this

issue by an impartial body, to which he was constitutionally entitled. To

require Petitioner to overcome this adverse Opinion, would shift the

burden to him to prove his innocence, and would be constitutionally im-

permissible. As this Court observed “...it is plain that where the

burden of proof lies may be decisive of the outcome." Id. at 551 (citations

omitted). See also Addington v. Texas, 441 U.S. 418 (1979).

28. Although Ruffalo was a federal disbarment proceeding, this

principle should apply with equai force to state court disciplinary pro-

ceedings, and lesser degrees of discipline. See n. 24, supra at p. 17.

can be deemed to have been on notice that the courts

would condemn the conduct for which he was

removed. Jd. at 554.

In this case, Petitioner had no such notice. Prior to the

Kentucky Court’s Opinions in this case, a Kentucky

lawyer, who found himself (as Petitioner did in this case)

between two clients who intended to transact business

together, could properly rely upon the ethical guidance set

forth in Canon 5 of the Code of Professional Responsibility

of the American Bar Association, as amended August

1978,”° and the Kentucky Court’s advisory opinions.*° An

attorney can comply with those guidelines in two different

ways:

1. Advise the client of the conflict of interest, refuse

to represent him in the particular transaction, and

suggest that he secure separate counsel; or,

2. Advise the client of the conflict of interest, the ad-

visability of securing separate counsel, and pro-

ceed to perform any legal services only after such

disclosure to and consent by the client.*'

In this case Petitioner followed the first course; and,

his subsequent ‘‘participation’’ in the loan transaction,

although not constituting ‘“‘representation”’ of either of the

parties, was nevertheless preceded by full disclosure to and

29. Adopted by the Court, in SCR 3.13°(1), as “... a sound state-

ment of the standards of professional conduct required of members of

the bar... ."

30. See Jn re Advisory Opinion of Kentucky Bar Ass'n, 526 S.W.2d

306, 307 (Ky. 1974); and, Jn re Advisory Opinion of Kentucky State Bar

Ass'n, 361 S.W. 2d 111 (Ky. 1962).

31. See Amicus Brief, Appendix at 94a-102a.

consent by both. Petitioner’s actions therefore completely

complied with all applicable disciplinary rules of the Ken-

tucky Court which had been announced at that time.

Consequently, Petitioner had no prior warning that the

Kentucky Court would declare his mere “‘participation”’ in

the loan transaction to be ‘‘unprofessional or unethical con-

duct.’’ The Court’s enlargement of that vague standard to

retroactively condemn Petitioner’s conduct was complete-

ly unforeseeable. Significantly, the Kentucky Supreme

Court (in both Opinions) stated that Petitioner’s case was

‘one of first impression in this Commonwealth.’’* The

Kentucky Supreme Court thereby effectively admitted

that, until its October 12th Opinion, Kentucky attorneys

had no prior notice, from any case law, ethical opinion, or

rule of the Court, that mere “‘participation”’ in a loan trans-

action could serve as grounds for a_ disciplinary

suspension.**

32. See October 12th Opinion, Appendix at 12a; July 5th Opinion,

Appendix at 6a.

33. Although the Kentucky Court did not adopt the KBA Board's

findings of fact and conclusions of law, the circumstances of this case

suggest that the Court may have been misled by the KBA Board's

Opinion. Having found Petitioner guilty of the allegations specified in

the Inquiry Tribunal’s Charge, the Board went on to state that it is

“almosé”’ per se unethical for an attorney “‘.. . to entangle his personal

and financial! affairs with those of his client . . . ."" Board’s Opinion, Ap-

pendix at 21a. Misapplying principles drawn from civil actions, in which

the issue was whether or not an attorney would be deprived of the

benefit of the bargain, the KBA Board speculated that ail business deal-

ings between attorneys and clients may be ethically suspect. However,

the Kentucky Supreme Court had never previously indicated, in any

manner whatsoever, that the mere fact of attorney-client business deal-

ings, without some finding of ‘‘wrongdoing’’, would be considered a

violation of an attorney's ethical duties for disciplinary purposes. Even

the Board, in its Opinion, stopped short of this, by qualifying its pro-

nouncement with the word “‘almost,"’ and by thereupon relating back to

(continued on page 23)

This lack of prior notice is further demonstrated by the

objections of Amicus Curiae to the Kentucky Court's

characterization of such conduct as “unethical,” and pro-

testing its apparent rejection of the ‘disclosure and con-

sent’’ procedure previously relied upon by Kentucky at-

torneys in similar circumstances. Their position was that

Petitioner's conduct was not “‘unethical’’ or ‘‘unprofes-

sional,”’ but complied completely with the Court’s current

disciplinary rules, as understood by practicing attorneys in

Kentucky. Their appearance and arguments in this case

are the clearest possible proof that, at the time of his ‘‘par-

ticipation”’ in the loan transaction, Petitioner had no prior

notice that his conduct could be considered a violation of

the Kentucky Court’s disciplinary rules.

The Kentucky Supreme Court should not be allowed to

exploit the inherent ambiguity of its ‘‘unprofessional and

unethical conduct’’ standard, in order to justify an

unforeseeable expansion of that very standard. To be con-

stitutionally permissible, this standard, as applied, must

give effective prior notice as to what conduct is proscribed.

In their concurrence in Ruffalo, Justices Marshall and

White examined this vague standard and concluded that:

Even when a disbarment standard is as unspecific

as the one before us, members of a bar can be assumed

to know that certain kinds of conduct, generally con-

(footnote 33, continued from page 22)

other ‘‘wrongdoing’’ — failure to disclose, failure to document, etc.., i.e.

violations of the rules which it had previously specified. Board's

Opinion, Appendix at 16a, 22a. The Court's condemnation of mere ‘‘par-

ticipation,’’ without finding any ‘‘wrongdoing,’’ could not have heen

anticipated.

34. See Brief Amicus Curiae, Appendix at 92a-105a.

demned by responsible men, will be grounds for

disbarment. This class of conduct certainly includes

the criminal offenses traditionally known as malum in

se. It also includes conduct which all responsible at-

torneyvs would recognize as improper for a member of

the profession.

... The appraisal of Petitioner's conduct is one

about which reasonable men differ, not one immediate-

ly apparent to any scrupulous citizen who confronts

the question. I would hold that a federal court may not

deprive an attorney of the opportunity to practice his

profession on the basis of a determination after the

fact that conduct is vnethical if responsible attorneys

would differ in appraising the propriety of that con-

duct. Id. at 555-56. (emphasis added).

Petitioner's ‘‘participation”’ in the loan transaction was not

conduct ‘“‘malum in se’; and, it was obviously not conduct

‘‘which all responsible attorneys would recognize as im-

proper.’’ In this case responsible attorneys not only dif-

fered in appraising the propriety of Petitioner's conduct,

they felt compelled to speak out in his defense. By giving

no fair warning® of the conduct which would be con-

demned, the vague “unprofessional and _ unethical

conduct”’ standard, as retroactively enlarged and applied

by the Kentucky Supreme Court in this case, violated

Petitioner’s right to due process.

35. In Boute v. City of Columbia, 378 U.S. 347 (1964), this Court

struck down a retroactive judicial expansion of a narrow, trespassing

statute, stating:

The constitutional requirement of definiteness is violated by a

criminal statute that fails to give a person of ordinary intelligence

fair notice that his contemplated conduct is forbidden . . . . There

can be no doubt that a deprivation of the right to fair warning can

result not only from vague statutory language but also from an

unforseeable and retroactive judicial expansion of narrow and

precise language. /d. at 351-52. (emphasis added).

(continued on page 25)

3. TO BE TRULY MEANINGFUL THE RIGHT TO DUE

PROCESS COMPELS THIS COURT'S REVIEW WHEN,

IN BAR DISCIPLINARY PROCEEDINGS, VIOLA-

TIONS OF DUE PROCESS BY A STATE'S HIGHEST

COURT LEAVE NO OTHER FORUM IN WHICH TO

VINDICATE THIS RIGHT.

The denial of due process in this case is unusual,

because it resulted from the anomalous actions of the Ken-

tucky Supreme Court itself. Consequently, Petitioner was

left with nowhere else to turn but to this Court for justice.

In Thompson v. The City of Louisville, 362 U.S. 199 (1960),

this Court faced an analogous situation. In that case,

Thompson appealed to this Court from a police court fine

of $10. Since, at that time, police court fines of less than

$20 were not appealable or otherwise reviewable in any

other Kentucky court, this Court, observing that Thomp-

son's “*.. . substantive right to due process is of no avail to

him unless this Court grants him the ancillary right

whereby he may test the same in the Supreme Court,’

granted certiorari and reversed Thompson's conviction.

(footnote 35, continued from page 24)

Stating that such“. . . an unforseeable judicial enlargement of a criminal

statute, applied retroactively, operates precisely like an ex post facto

law ... ,"’ this Court further held that ‘‘(i)f a state legislature is barred by

the Ex Post Facto Clause from passing such a law, it must follow that a

State Supreme Court is barred by the Due Process Clause from achiev-

ing precisely the same result by judicial construction.’ Jd. at 353-54.

The Kentucky Court's enlargement and retroactive application of the

“unprofessional or unethical conduct’ standard to suspend Petitioner

likewise operated precisely like an ex post facto law.

Even though Bouie involved a state court's unforeseeable enlarge-

ment of a narrow criminal statute, and not a vague disciplinary stan-

dard, the principles for which Bouie stands should be equally applicable

in this case. Further, despite the original vagueness of the standard

which the Court enlarged in this case, such an enlargement was still

completely unforseeabdle.

36. Jd. at 203 (quoting Kentucky Supreme Court).

Although the due process questions presented in this

case are clearly as substantial as in Thompson, the conse-

quences of the Kentucky Supreme Court's denial of Peti-

tioner’s right to due process are much more severe. The

devastating effect of an adverse disciplinary decision has

been vividly described by Mr. Justice Biack:

... Even apart from the financial impact, the

disbarment of a lawyer cannot help but have a tremen-

dous effect upon that lawyer as a man. The dishonor

occasioned by an official pronouncement that a man is

no longer fit to follow his chosen profession cannot

well be ignored. . .. And the suffering that results falls

not only upon the disbarred lawyer but upon his fami-

ly as well. Government certainly should not be allowed

to do this to a man without according him the full

benefit of the “law of the land,”’ both constitutional

and statutory.

In view of all this, I can see no justification for the

notion that membership in the bar is a mere privilege

conferred by the State and is therefore subject to

withdrawal for the ‘‘breach”’ of whatever vague and in-

definite ‘duties’ the courts and other lawyers may see

fit to impose on a case-by-case basis. Cohen v. Hurley,

366 U.S. 117, 147 (1961) (dissenting Opinion) (over-

ruled in Spevak v. Klein, 385 U.S. 500 (1967).

The question presented in this case is essentially

whether the right to due process compels this Court's

review, when the highest court of a state, in regulating its

bar, violates fundamental principles of due process to sus-

pend an attorney from the practice of law. Although at this

late time one would reasonably expect there to be no

serious question that state court disciplinary proceedings

must afford procedural and substantive due process,

Counsel have found no case in which this Court has direct-

ly faced and answered these questions."”

In Selling v. Radford, 243 U.S. 46 (1971), Theard v.

United States, 354 U.S. 278 (1957), and Ruffalo, supra, this

Court has held that state court disciplinary decisions are

not binding upon, and will not be honored by, this Court for

purposes of determining whether an attorney shall retain

membership in the federal bar, if ‘the state procedure,

from want of notice or opportunity to be heard, was want-

ing in due process. . . .""** However, in each of these cases,

the underlying state court decisions were allowed to stand.

Those inconsistent results may well have been due to the

presence in those state decisions of other adequate state

grounds forming the basis of the discipline imposed.” In

Petitioner's case, however, this defect does not exist. In

each of two Opinions, the Kentucky Supreme Court based

Petitioner's suspension only upon one ground - the charge

which it improperly substituted, without notice and

hearing.

The denial of due process in this case is certainly

similar to Ruffalo, but much more grievous. Although in

37. Recently, in Jn re Primus, 436 U.S. 412 (1978) lack of fair notice

of the charges was claimed, and Ruffalo invoked, but this Court declined

the opportunity to address these questions, and overturned the state

court's disciplinary decision on First Amendment grounds. /d. at 428, n.

13.

38. Selling, supra at 51.

39. In Ruffalo for example, this Court apparently did not feel that

Ruffalo's disbarment in the state court presented a suitable vehicle for

consideration of this issue. This may have been due to the fact that in ad-

dition to the newly added charge concerning the employment of Orlando,

the Ohio Supreme Court based Ruffalo's suspension on a finding that by

loaning money to clients he had impermissably purchased on an interest

in their litigation — an offense contained in the original charges agains!

him. See Mahoning County Bar Ass'n v. Ruffalo, 199 N_E. 2d, 396, 40)

(Ohio 1964), cert. denied 379 U.S. 391 (1964).

that case, this Court dealt only with Ruffalo’s right to re-

main admitted to the federal bar, the principles enunciated

by this Court must surely have application to state

disciplinary proceedings as well. The Kentucky Supreme

Court, out of step with other state courts which have con-

sidered Ruffalo, apparently is of the opinion that Ku/ffalo is

not binding authority in state disciplinary proceedings.“

Petitioner urges this Court to directly hold that the prin-

ciples of due process announced in Ruffalo do apply to

state disciplinary proceedings, and that these proceedings

are not an exception to the rule.

If, as this Court stated in Schware v. Board of Bar

Examiners, 353 U.S. 232 (1957), ‘‘(a) State cannot exclude a

person from the practice of law...in a manner or for

reasons that contravene the Due Process Clause of the

Fourteenth Amendment... ,’"*' then a state court should

not be allowed to suspend an attorney from practicing his

profession without affording him procedural and substan-

tive due process. Surely the right of an attorney to con-

tinue to practice a profession upon which he has come to

depend, is greater than the mere expectation of becoming

an attorney, which this Court protected in Schware. If this

Court, on due process grounds, has felt compelled to

reverse state court decisions in the first instance,“ this

Court should also feel compelled to do no less in this case.

40. Although Ruffalo was extensively cited to the Kentucky

Supreme Court as a bar to its actions in this case, the Court nevertheless

rejected Ruffalo, by denying the Petition for Rehearing without com-

ment. See Petition for Rehearing, Appendix at 65a-69a; see also n. 24,

supra at p. 17.

41. Jd at 238-39.

42. See also Konigsberg v. State Bar of California, 353 U.S. 252

(1957).

Petitioner recognizes that ordinarily certiorari is not

granted where a petitioner has had an appeal in which his

federal claim could have been raised earlier, but raised that

claim only in a petition for rehearing. In this case, Peti-

tioner had no appeal from the Kentucky Supreme Court's

unanticipated disposition of his case, and no prior oppor

tunity to present his due process claim. His claim was

therefore timely made “since it was raised at the first op-

portunity.’ Brinkerhoff-Faris Trust & Savings Co. v. Hill,

281 U.S. 673, 678 (1930). As this Court stated in Saunders

v Shaw, 244 U.S. 317 (1917),

... when the act complained of is the act of the (state)

supreme court, done unexpectedly at the end of the

proceeding, ...it would leave a serious gap in the

remedy for infraction of constitutional rights if the

party aggrieved in such a way could not come here. Id.

at 320 (emphasis added).

Just as in Thompson, where no appeal lay from the

action of the Louisviile police court, Petitioner likewise has

no right of appeal or review, unless this Court grants

Certiorari.

CONCLUSION

The power of a state Court to remove or suspend

members of its bar is not absolute. It must be limited by

those guarantees of due process and basic fairness upon

which our entire system of justice is founded. The Ken-

tucky Supreme Court's anomalous actions in this case

violated the most fundamental conceptions of due process

and are inherently wrong. When the highest Court of a

state, itself, is originally responsible for violating these

rights, it is crucial that this Court be willing to intercede.

Without a forum in which these precious rights can be

defended, they cannot truly be said to exist.

For these reasons Petitioner respectfully prays that

this Court will issue a Writ of Certiorari to review the final

Opinion of the Kentucky Supreme Court.

Respectfully submitted,

Lab Gee

BERT T. COMBS

WYATT, TARRANT & COMBS

2800 Citizens Plaza

Louisville, KY 40202

Gon Kkboer 0, |

L. KESSINGER, JR.

STITES & HARBISON

400 Bank of Lexington Bldg.

101 East Vine Street

Lexington, KY 40507

Counsel for Petitioner

APPENDIX

RECEIVED JUL 1984

SUPREME COURT OF KENTUCKY

No. 83-SC-144-KB

KENTUCKY BAR

ASSOCIATION COMPLAINANT

V. IN SUPREME COURT

ERIC S. SMITH RESPONDENT

ORDER DENYING

PETITION FOR REHEARING

Respondent’s petition for rehearing is denied. The

opinion rendered October 12, 1983, is modified on its

face and is attached hereto.

All concur except Stephens, C.J., who did not sit.

ENTERED: July 5, 1984.

/s/ J. Calvin Aker

Deputy Chief Justice

RENDERED: October 12, 1983

AS MODIFIED: July 5, 1984

TO BE PUBLISHED

SUPREME COURT OF KENTUCKY

No. 83-SC-144-KB

KENTUCKY BAR

ASSOCIATION COMPLAINANT

V. IN SUPREME COURT

ERIC S. SMITH RESPONDENT

OPINION OF THE COURT

This is a disciplinary case in which respondent

was charged with unethical and unprofessional con-

duct. The Board of Governors of the Kentucky Bar

Association found respondent guilty of unethical and

unprofessional conduct and recommended that he be

suspended from the practice of law for a period of

eighteen months.

We have made an independent review of the

record, the transcript and considered the briefs and

arguments of the parties. We adopt the decision of the

Board of Governors.

Respondent represented a Dr. Nath who paid him

a retainer and employed respondent to organize a cor-

poration to take care of some other interests of Nath.

Respondent was paid a retainer by this corporation.

Dr. Nath frequently consulted with respondent and

visited his office frequently. It was in respondent's of-

fice that Dr. Nath met Towles and thus began the

scenario that ended in this disciplinary proceeding.

Respondent became acquainted with Towles and

organized a corporation for him, REBSCS (Real

Estate Buyers and Sellers Consultant Services).

Towles was attempting to organize and sell a system

whereby private individuals could be instructed on

how to buy and sell options on real estate and be

members of a referral network within which a person

who procured an option could communicate with others

who might know of a buyer and arrange the sale of the

option for a fee. Respondent performed the legal work

with an agreement that Towles would pay respondent

an attorney fee of five percent (5%) of the gross earn-

ings of the business plus the option to purchase five

percent (5%) equity in the business. In addition,

respondent received the right to inspect the books of

the corporation, to prevent its sale of stock,

reorganization, or disbursement of any amounts in

excess of $1,000 without written consent of

respondent.

Respondent spent substantial time on the enter-

prise, designing a computer network linking

franchised realtors with each other and with private

real estate investors. In view of the amount of services

performed by respondent, an addendum to the agree-

ment was executed providing respondent with an op-

tion to acquire from Towles a number of shares of

capital stock as shall equal twenty-five percent (25%)

of all outstanding shares of REBSCS Inc's stock.

Respondent permitted Towles to use a vacant of-

fice in his building to work on REBSCS related mat-

ters, use of secretarial help and telephene.

It was there that Dr. Nath first saw Towles, and

« ter inqury about the business and being on the

lookout for business deals, Dr. Nath became in-

terested. The upshot was that Dr. Nath, through a

newly organized corporation, made an unsecured loan

to REBSCS. Within four weeks, due to personal

problems experienced by Towles, REBSCS became

moribund, and Dr. Nath lost any hope of the loan

being repaid. At the time of the complaint against

respondent, REBSCS had a minimal bank balance.

It is in the events leading up to the loan that the

Kentucky Bar Association has charged respondent

with unethical and unprofessional conduct.

We do not attempt to unravel all the contradic-

tory testimony regarding what Dr. Nath testified

respondent said and did in order to persuade Dr. Nath

to invest in REBSCS and what respondent testified

that he said and did in denial.

It is uncontradicted that Nath Holdings was

formed by respondent on February 13, 1980, and the

certificate of incorporation was issued on February

13, 1980. Nath gave respondent a check for $30,200 on

the same day and a bank account for the corporation

was opened by respondent. Respondent was

registered agent for service of process and used his of-

fice as mailing address for the corporation. Whether

or not Nath Holdings was set up for the purpose of

making the investment or loan, the timing leads to

that inference.

When the meeting consumating the transaction

took place, respondent had prepared a check on Nath

Holdings made to REBSCS in the amount of $30,000

as a loan in exchange for convertible debenture with

conversion within five years into an amount equal to

ten percent (10%) of the total shares in REBSCS.

This check was voided at the request of Dr. Nath,

and respondent prepared another check marked

“loan.’’ There was no security or promissory note.

Nath testified respondent told him all that would be

taken care of later. Respondent denied this and

testified he could not under the circumstances per-

form any service for REBSCS. In any event, REBSCS

received the check. On that date REBSCS had a bank

balance of $73.31. This money was quickly dispensed,

first $10,000 to Towles to repay for expenses and later

$5,500 to Towles to repay for expenses. The bank

balance of REBSCS shortly was reduced to about $41.

Respondent’s defense that it was not established

that he represented Dr. Nath in this transaction is a

non-defense.

Respondent had performed all the legal work for

REBSCS and he owned a contingency interest in

REBSCS. Respondent's office address was used as a

mailing address for REBSCS. Respondent also

represented Dr. Nath and one of his corporations

generally. We consider Nath Holdings as an extension

of Dr. Nath personally.

Whether Dr. Nath knew that respondent owned

an interest in REBSCS and whether Dr. Nath knew

that Towles planned to reimburse himself for $10,000

in expenses after the loan are beside the point.

Respondent engaged in these activities

culminating in preparing a check and, to that extent,

participated in a transaction whereby one client lent

money to a corporation in which respondent had a

substantial interest. A lawyer simply cannot defend

against a charge of unethical and unprofessional con-

duct in such a scenario. In placing himself in this posi-

tion, respondent incurs the penalty imposed as recom-

mended by the Kentucky Board of Bar Governors to

this court. It is only for the reason that we cannot be

sure from the evidence as to the actual misrepresenta-

tion that we do not impose a more severe penalty.

This situation is one of first impression in this

Commonwealth and should illustrate that we are com-

mitted to the proposition that, in financial dealings

with a client, a lawyer must exercise the utmost good

faith and fidelity to a client and not place himself or

herself in a position of participating in a transaction,

such as here, so as to bring the bench and bar into

disrepute. The unethical and unprofessional conduct

here and the consequential loss of money by a client,

Dr. Nath, is in our opinion such unethical and

unprofessional conduct as to warrant the suspension

of respondent. The contractual right of respondent to

prevent disbursement of amounts in excess of $1,000

on behalf of REBSCS imposed a responsibility on

respondent to see that disbursements were in accor-

dance with his statement to Nath that the loan, with

the exception of $10,000 to Towles to repay for per-

sonal expenses, was to be used exclusively for promo-

tional purposes. So far as we can tell from the record,

none of the loan was used for promotional purposes.

Accordingly, it is ordered that respondent be

suspended from the practice of law in this Com-

monwealth for a period of eighteen months and that he

inform his clients in compliance with SCR 3.390, and

pay the costs of this proceeding.

All concur except Stephens, C.J., who did not sit.

COUNSEL FOR COMPLAINANT:

Bruce K. Davis, Director

Michael M. Hooper, Assistant Director

Kentucky Bar Association

West Main Street at Kentucky River

Frankfort, KY 40601

COUNSEL FOR RESPONDENT:

Bert T. Combs

Wyatt, Tarrant & Combs

2800 Citizens Plaza

Louisville, KY 40202

Ben L. Kessinger, Jr.

Stites & Harbison

400 Bank of Lexington Building

101 East Vine Street

Lexington, KY 40507

i. 2. i 2 a oe

RENDERED: October 12, 1983

To Be Published

SUPREME COURT OF KENTUCKY

83-SC-144-KB

KENTUCKY BAR

ASSOCIATION COMPLAINANT

V. ORIGINAL ACTION

IN SUPREME COURT

ERIC S. SMITH RESPONDENT

OPINION OF THE COURT

This is a disciplinary case in which respondent

was charged with unethical and unprofessional con-

duct. The Board of Governors of the Kentucky Bar

Association found respondent guilty of unethical and

unprofessional conduct and recommended that he be

suspended from the practice of law for a period of

eighteen months.

We have made an independent review of the

record, the transcript and considered the briefs and

arguments of the parties. We adopt the decision of the

Board of Governors.

Respondent represented a Dr. Nath who paid him

4 retainer and employed respondent to organize a cor-

poration to take care of some other interests of Nath.

Respondent was paid a retainer by this corporation.

Dr. Nath frequently consulted with respondent and

10a

visited his office frequently. It was in respondent’s of-

fice that Dr. Nath met Towles and thus began the

scenario that ended in this disciplinary proceeding.

Respondent became acquainted with Towles and

organized a corporation for him, REBSCS (Real

Estate Buyers and Sellers Consultant Services).

Towles was attempting to organize and sell a system

whereby private individuals could be instructed on

how to buy and sell options on real estate and be

members of a referral network within which a person

who procured an option could communicate with

others who might know of a buyer and arrange the

sale of the option for a fee. Respondent performed the

legal work with an agreement that Towles would pay

respondent an attorney fee of 5 percent of the gross

earnings of the business plus the option to purchase 5

percent equity in the business. In addition, respon-

dent received the right to inspect the bocks of the cor-

poration, to prevent its sale of stock, reorganization,

or disbursement of any amounts in excess of $1,000

without written consent of respondent.

Respondent spent substantial time on the

enterprise, designing a computer network linking

franchised realtors with each other and with private

real estate investors. In view of the amount of services

performed by respondent, an addendum to the agree-

ment was executed providing respondent with an op-

tion to acquire an additional 20 percent of REBSCS

Inc.’s stock.

lla

Respondent permitted Towles to use a vacant

office in his building to work on REBSCS related

matters.

It was there that Dr. Nath first saw Towles, and

after inquiry about the business and being on the

lookout for business deals, Dr. Nath became in-

terested. The upshot was that Dr. Nath made an

unsecured loan to REBSCS. Later on, due to personal

problems experienced by Towles, REBSCS became

moribund, and Dr. Nath lost any hope of the loan be-

ing repaid. At the time of the complaint against

respondent, REBSCS had a minimal bank balance.

It is in the events ieading up to the loan that the

Kentucky Bar Association has charged respondent

with unethical and unprofessional conduct.

We do not attempt to unravel all the contradic-

tory testimony regarding what Dr. Nath testified

respondent said and did and what respondent testified

that he said and did.

It is uncontradicted that respondent prepared the

check in the sum of $30,000 representing a loan from

Dr. Nath to REBSCS. This money was quickly

dispensed, first $10,000 to Towles to repay for

expenses and later $5,500 to Towles to repay for

expenses. The bank balance of REBSCS shortly was

reduced to about $41. There was no security.

Respondent’s defense that it was not established

that he represented Dr. Nath in this transaction is a

non-defense.

12a

Respondent represented Towles and REBSCS

generally; he owned an interest in REBSCS. Respon-

dent also represented Dr. Nath and his corporations

generally.

Whether Dr. Nath knew that respondent owned

an interest in REBSCS or not and whether Dr. Nath

knew that Towles planned to reimburse himself for

$10,000 in expenses after the loan is beside the point.

Respondent prepared a check, and to that extent

participated in a transaction whereby one client lent

money t. another of respondent’s clients, a corpora-

tion in which respondent had an interest. A lawyer

simply cannot sustain a plea of no conflict of interest

in such a scenario. In placing himself in this position,

respondent incurs the penalty imposed as recom-

mended by the Kentucky Board of Bar Governors to

this court. It is only for the reason that we cannot be

sure from the evidence as to the actual misrepresenta-

tion that we do not impose a more severe penalty.

This situation is one of first impression in this

Commonwealth and should illustrate that we are com-

mitted to the proposition that in financial dealings

with a client, a lawyer must exercise the utmost good

faith and fidelity to a client and not place himself or

herself in position of conflict of interest such as to

bring the bench and bar into disrepute. The display of

poor judgment here and the consequential loss of

money by a client, Dr. Nath, is in our opinion such

unethical and unprofessional conduct as to warrant

the suspension of respondent.

a ee eS

13a

Accordingly it is ordered that respondent be

suspended from the practice of law in this Com-

monwealth for a period of eighteen months and that

he inform his clients in compliance with SCR 3.390

and pay the costs of this proceeding.

Aker, Gant, Leibson, Stephenson, Vance and

Wintersheimer, JJ., sitting; all concur. Stephens, C._J.,

not sitting.

ATTORNEYS FOR COMPLAINANT:

Bruce K. Davis

Director

Michael M. Hooper

Assistant Director

Kentucky Bar Association

West Main at Kentucky River

Frankfort, Kentucky 40601

ATTORNEY FOR RESPONDENT:

Ben L. Kessinger, Jr.

101 East Vine Street

400 Bank of Lexington Building

Lexington, Kentucky 40507

l4a

RECEIVED JAN 3 1983

KY BAR ASSN.

SUPREME COURT OF KENTUCKY

KENTUCKY BAR

ASSOCIATION COMPLAINANT

v. OPINION OF THE BOARD OF GOVERNORS

ERIC S. SMITH RESPONDENT

RRKKKKKHEKKAKKKKKKKHKKKKKKKKKKKKKKHKKKKKKKKKKKKKE

The charges against the Respondent Eric S.

Smith, simply stated and summarized, are that Smith

grossly violated his fiduciary duty to one client,

Harendra Nath, in order to advance the interests of

another client, Charles Towles, as well as Smith’s own

interests.

Although sharply disputed by the Respondent,

the Board of Governors accepts the “Statement of

Findings of Fact’’ incorporated in the Trial Commis-

sioner’s Report, which the Board finds to be complete,

authoritative, and dispositive of the material factual

issues in the case.

Smith clearly had an attorney-client relationship

with Dr. Nath up through and including the time of

the transaction in question, and beyond. At substan-

tially the same time, certainly as of the transaction,

Smith also had an attorney-client relationship with

Charles Towles and Towles’ corporation, Real Estate

15a

Buyers and Sellers Consultant Service, Inc.

[REBSCS]. In fact, the method of compensation of

Smith from the Towles/REBSCS representation was

a percentage of ownership of the business, which cir-

cumstance gave Smith a decided personal stake in the

viability of REBSCS.

The evidence is overwhelmingly persuasive that

REBSCS was a failing business, and that Dr. Nath’s

infusion of $30,000 into the business was necessary

if it was not to fail altogether. Irrespective of who

initiated Nath’s investment, Smith put Nath into a

transaction which benefited another client, Towles

and REBSCS - and Smith himself - to Nath’s disad-

vantage. The transaction is remarkable for the haste

of its accomplishment, which left Nath unprotected

by even so much as a promissory note, to say nothing

of any other usual form of security which a prudent,

independent lawyer would seek, if not demand for his

client.

The fact that there was apparent misunderstand-

ing all around as to the nature of the transaction

involving Nath’s investment, as was found by the

Trial Commissioner, further underscores Smith’s lack

of attention to Nath’s interests.

While Smith apparently advised Nath to obtain

other counsel because of a potential conflict in connec-

tion with the transaction, Smith nonetheless pro-

ceeded forward with the transaction which unques-

tionably advanced Towles’ and REBSCS’s interests,

as well as his own, at the expense of Nath. The Board

16a

of Governors deems Respondent’s arguments to the

effect that Smith thereby owed no duty to Nath in

connection with the transaction, to be unpersuasive

and contrary to prevailing standards in Kentucky

regarding the fiducial obligation of a lawyer to his

client.

The Board likewise finds unpersuasive and con-

trary to the prevailing standard, Respondent’s argu-

ment that no clear nexis was established between

Smith’s dereliction and Nath’s injury; see Kentucky

Bar Association v. Roberts, Ky., 579 S.W.2d 107

(1979).

The Board of Governors finds that Smith’s con-

duct violated the provisions of DR 1-102 [Engaging in

Deceit or Misrepresentation], DR 5-101 and 5-105

[Accepting Employment which Effects the Indepen-

dence of the Lawyer or Impairs the Client’s Interests]

and DR 6-101 [Neglecting a Legal Matter Entrusted

to the Lawyer], and that, in sum, this conduct has

brought the Bench and Bar into disrepute; SCR

3.130(1).

Canon 5, American Bar Association Model Code

of Professional Responsibility [‘‘A Lawyer Should

Exercise Independent Professional Judgment on

Behalf of the Client’’] deals explicitly with prohibited

traps which disable the lawyer from exercising full,

fair, and uncompromised professional judgment in

behalf of his client.

17a

EC 5-1 states:

‘“‘The professional judgment of a lawyer should be

exercised, within the bounds of the iaw, solely for

the benefit of his client and free of compromising

influences and loyalties. Neither his personal in-

terests, the interests of other clients, nor the

desires of third persons should be permitted to

dilute his loyalty to his client.’’ (emphasis ours)

As to a lawyer’s entangling his own interests with

those of his client, the Code warns:

‘‘A lawyer should not accept proferred employ-

ment if his personal interests or desires will, or

there is a reasonable probability that they will, af-

fect adversely the advice to be given or services to

be rendered the prospective client. After accept-

ing employment, a lawyer carefully should refrain

from acquiring a property right or assuming a

position that would tend to make his judgment

less protective of the interests of his client.”’

(emphasis ours)

“The self-interest of a lawyer resulting from his

ownership of property in which his client also has

an interest or which may affect property of his

client may interfere with the exercise of free judg-

ment on behalf of his client. If such interference

would occur with respect to a prospective client, a

lawyer should decline employment proferred by

him. After accepting employment, a lawyer

should not acquire property rights that would

adversely affect his professional judgment in the

representation of his client. Even if the property

18a

interests of a lawyer do not presently interfere

with the exercise of his independent judgment,

but the likelihood of interference can reasonably

be foreseen by him, a lawyer should explain the

situation to his client and should decline employ-

ment or withdraw unless the client consents to :

the continuance of the relationship after full |

disclosure. A lawyer should not seek to persuade

his client to permit him to invest in an undertak-

ing of his client nor make improper use of his pro-

fessional relationship to influence his client to

invest in an enterprise in which the lawyer is

interested. ’’ (emphasis ours)

As noted, this Canon also speaks to the problems

of representing multiple clients with actual or poten-

tial differing interests. EC 5-14 states:

‘Maintaining the independence of professional

judgment required of a lawyer precludes his ac-

ceptance or continuation of employment that will

adversely affect his judgment on behalf of or

dilute his loyalty to a client. This problem arises

whenever a lawyer is asked to represent two or

more clients who may have differing interests,

whether such interests be conflicting, inconsis-

tent, diverse, or otherwise discordant.”’

EC 5-15 continues, in pertinent part:

“If a lawyer is requested to undertake or to con-

tinue representation of multiple clients having

potentially differing interests, he must weigh

carefully the possibility that his judgment may be

19a

impaired or his loyalty divided if he accepts or

continues the employment.”

Obviously the difficulty is compounded where, in

addition to representing one or more clients, the

lawyer is representing his own interests in any given

matter, and is himself involved in the mix as a

“client”.

Applicable Disciplinary Rules under this Canon

particularize these aspirational statements into hard

rules, and facially seem to provide that almost

anything goes, with disclosure to and consent by the

clients; see DR 5-101(A), 5-104(A), and 5-105(A) and

(B). As noted below, however, disclosure and consent

do not in any way mitigate a lawyer’s continuing

fiducial obligation to the client.

Generally, as well as in Kentucky, a client is en-

titled to expect from his or her attorney not just com-

petent technical performance, but uberrima fides,

defined in Black's Law Dictionary [4th Edition; West,

1968] as:

“The most abundant good faith; absolute and

perfect candor or openness and honesty; the

absence of any concealment or deception however

slight... perfect good faith, concealing

nothing...”

See also 7 Am.Jur.2d Attorneys at Law §120:

20a

“An attorney must faithfully, honestly, and con-

sistently represent the interests and protect the

rights of his client. He is bound to discharge his

duties to his client with the strictest fidelity, to

observe the highest and utmost good faith toward

him, and to inform his client promptly of any

known information important to him. An at-

torney may not withhold from his client informa-

tion acquired in his capacity as an attorney (and)

may not use the information to his own advan-

tage...” (citations omitted)

Kentucky Courts impose, if anything, an even

more rigorous standard. In Daughterty v. Runner,

Ky.App. 1978, 581 S.W.2d 12, 16, the Court ar-

ticulated the office of attorney as follows:

“What is the level of service demanded from

members of the legal profession? The relationship

of attorney-client is a contractual one, either

expressed or implied by the conduct of the par-

ties. The relationship is generally that of principal

and agent; however, the attorney is vested with

powers superior to those of any ordinary agent

because of the attorney’s quasi-judicial status as

an officer of the Court; thus, the attorney is

responsible for the administration of justice in tie

public interest, a higher duty than any ordinary

agent owes his principal. Since the relationship of

attorney-client is one fiduciary in nature, the

attorney has the duty to exercise in all his

relationships with his client principal the most

scrupulous honor, good faith and fidelity to his

client's interests. ’’ (emphasis ours)

ee Se a a ee ~

2la

These are not just pretty words. When a lawyer's

personal interests bend, or even appear to compromise

a client’s property or expectations, our Kentucky

Courts move decisively, sometimes even harshly; see

Kentucky Bar Association v. Tucker, Ky. 1975, 535

S.W.2d 97 cert. den. 423 U.S. 1049 (1976); Kentucky

Bar Association v. Burbank, Ky.Sup.Ct. 1976, 539

S.W.2d 312; and Kentucky Bar Association v.

DeCamillis, Ky.Sup.Ct. 1977, 547 S.W.2d 446.

Further, a lawyer's duty to his client is not limited

to a passive avoidance of harmful conduct, but the

lawyer is required to exert active vigilence and to take

positive, sometimes unpleasant steps to protect and

advance his clients’ interests; see Daugherty v. Run-

ner, supra; see also Ray v. Rose [6th Cir., 1974] 491

F.2d 285, 289 (attorney may not “. . . subordinate the

rights of his client to receive fair and honest legal ad-

vice and related services to his own selfish interests’’);

and Devers v. California [9th Cir., 1970] 422 F.2d

1263, 1264 (‘*... one of an attorney’s most valuable

functions (is) to persuade his client to take that course

which, to the attorney, in the light of his experience,

appears to be the wisest’’).

Kentucky Courts have consistently held that the

principal of uberrima fides is almost per se incensis-

tent with a lawyer's entangling his personal and finan-

cial affairs with those of his client, particularly where

the entanglement involves the subject of the underly-

ing representation. There is a flat presumption that

22a

the lawyer has overreached the client; see Palms’ Ad-

ministrators v. Howard, Ky. 1908, 112 S.W. 1110;

Hunt v. Picklesimer, Ky. 1942, 162 S.W.2d 27; see

also 7 Am.Jur.2d Attorneys at Law §125.

There is also a concommitent duty to disclose any

fact or matter gained in the course of the representa-

tion which would be material to the client, or to his in-

terests; see Arrowood v. Lyon, Ky. 1955, 279 S.W.2d

801, 802-03. The attorney is under a specific obliga-

tion to recognize and promptly inform the client of

adverse circumstances; see Daugherty v. Runner,

supra, 581 S.W.2d at 17-18.

A lawyer cannot escape this obligation by express

disclaimers or reservations; Owen v. Neely, Ky. 1971,

471 S.W.2d 705.

Under some circumstances, even when the client

is informed of and agrees to the lawyer's conduct in-

volving a latent or patent conflict, the Courts simply

will not condone it; see Jn re: Ray, Ky. 1965, 390

S.W.2d 899.

The standard of care required of an attorney in

Kentucky, in terms of technical competence, as well as

faithfulness to the client's interests, is defined as a

“degree of care and skill customarily provided by

members of the legal profession’; Daughterty v.

Runner, supra, 581 S.W.2d at 16.

23a

CONCLUSION AND RECOMMENDATION

The Board of Governors by a vote of 114) con-

cludes that the Respondent is guilty of unethical and

unprofessional conduct tending to bring the Bench

and Bar of Kentucky into disrepute.

The Board of Governors, by a vote of 10-1 believes

the conduct of the Respondent Eric S. Smith warrants

his suspension from the practice of law for a period of

eighteen (18) months and that he be required to pay

the costs of this action, and the Board so recommends

to the Supreme Court of the Commonwealth of

Kentucky.

The motion to reconsider was considered and

overruled.

BOARD OF GOVERNORS

KENTUCKY BAR ASSOCIATION

/s/ Charles Landrum, Jr.

PRESIDENT

Feb. 12, 1983

24a

RECEIVED AUG 13 1982

KY. BAR ASSN.

SUPREME COURT OF KENTUCKY

KENTUCKY BAR ASSOCIATION, Complainant

v. REPORT OF TRIAL COMMISSIONER

ERIC S. SMITH, Respondent

KHRKKAKKKKAKEKAEEKAKKKKKAKKKAKKEEKKSEKKAKSEKKKAKKKKEEE

PREFACE

The charges in this action result from a complaint

filed with the Kentucky Bar Association by Harendra

Nath, M.D., of Lexington, Kentucky, against the

Respondent, Eric S. Smith, an Attorney at Law in

Lexington, Kentucky. The manner in which the Com-

plainant has alleged charges against the Respondent

is in a narrative form and not subject to a clear

delineation of the charges as they apply to the

disciplinary rules and, for that reason, it will be

necessary to cite the disciplinary rules involved, the

basic questions, as applied to the facts, on which the

charges are based, and a review of the testimony

which the Commissioner deems proven by substantial

evidence.

STATEMENT OF CHARGES

This case arises from the following circumstances:

Eric S. Smith is an attorney and had as his clients

25a

Harendra Nath, (hereinafter ‘‘Nath’’), the complaining

witness, REBSCS, a Kentucky corporation, and

Charles Towles (hereinafter ‘“Towles’’), President of

REBSCS.

Nath loaned or invested Thirty Thousand Dollars

($30,000.00) in REBSCS and, for all practicai pur-

poses, has lost that money. The loan or investment

was made on February 15, 1980, when Nath, Towles

and REBSCS were all clients of Eric S. Smith.

The charges are as follows:

1. That Eric Smith represented Nath in that

transaction and advised, encouraged and urged Nath

to invest Thirty Thousand Dollars ($30,000.00) in

REBSCS; and that Nath relied on Eric Smith’s advice

in consummating the transaction.

2. At the time of the transaction Smith either

knew or should have known that REBSCS was in

serious financial difficulty and, at no time, did Smith

ever inform Nath that REBSCS was in serious finan-

cial difficulty.

3. That at no time did Smith ever fully inform

Nath as to the extent of Smith’s personal financial

interest and control over REBSCS.

4. Smith assured Nath that Smith would prepare

a promissory note and all other legal documents

necessary to evidence and secure said loan of Thirty

Thousand Dollars ($30,000.00), but Smith subse-

quently failed and neglected to prepare a promissory

26a

note or other legal documents necessary to evidence

and secure said loan.

5. At no time did Smith ever inform Nath that

most of the Thirty Thousand Dollars ($30,000.00)

would be used to reimburse Towles for expenses

Towles had allegedly incurred in promoting REBSCS

even though Smith was aware the money would be

used for that purpose. Instead, Smith advised Nath

the money would be used for advertising and licensing

of REBSCS.

6. In response to a request by Nath to see

REBSCS’ checkbook, Smith falsely stated and

misrepresented to Nath that Smith had no authority

to review or to gain access to the financial records of

REBSCS when, in fact, he had a contractual right to

inspect the financial records of REBSCS.

7. Smith took no action to protect Nath’s in-

terest, and, as a result of Smith’s actions described

above, Smith’s client, Nath, suffered a loss of approx-

imately Thirty Thousand Dollars ($30,000.00).

STATEMENT OF DEFENSES

The Respondent, Eric “ Smith, asserted the

following defenses:

1. He did not represent Nath in this transaction.

2. He did not induce Nath to invest in a corpora-

tion in which Smith had a financial interest.

3. He advised Nath of a potential conflict of

interest and requested Nath to secure other counsel.

27a

4. Nath knew of Smith’s interest in the

corporation.

5. Nath was aware that Towles would reimburse

himself at least Ten Thousand Dollars ($10,000.00)

from the investment monies which Nath gave to

Towles.

6. Smith did not agree to prepare any documenta-

tion regarding the transaction between Nath and

Towles.

7. Smith did not refuse to allow Nath to inspect

the financial records of REBSCS, and did not tell

Nath that Smith did not have the right to inspect the

financial records of REBSCS.

STATEMENT OF PROCEEDINGS

This complaint was heard by the Trial Commis-

sioner in the library of the law offices of Harbison,

Kessinger, Lisle & Bush, Lexington, Kentucky, on

February 16-17, 1982.

The Kentucky Bar Association was represented

by counsel, Honorable Ray Corns and Honorable

Michael M. Hooper. The Respondent was represented

by Honorable Ben L. Kessinger, Jr.

The Complainant introduced the testimony of

Harendra Nath, M.D., Susan Nath and Carol A.

Eakle. The Respondent introduced the testimony of

Eric Steven Smith, David Irvin, Sandra Oliver, Fred

Whiteside and Charles Towles.

28a

After the hearing was completed on the evening of

February 17, 1982, the Complainant was given thirty

(30) days from and after the date of filing of the

Transcript of Evidence in which to file a brief. The

Respondent was given thirty (30) days from that date

in which to file his brief. The briefs were duly filed.

Upon submission of the briefs the action stood

submitted to the Trial Commissioner for decision.

STATEMENT OF FINDINGS OF FACT

The Trial Commissioner finds the following facts

have been established by substantial evidence.

The principal parties involved in this controversy

are Harendra Nath, M.D. (hereinafter referred to as

‘“‘Nath’’); Eric S. Smith, attorney, (hereinafter referred

to as “‘Smith’’); REBSCS, Inc., a corporation formed

for the purpose of franchising a real estate referral ser-

vice (hereinafter referred to as ‘“REBSCS’’) and

Charles E. Towles of Georgetown, Kentucky, founder

of REBSCS, Inc. (hereinafter referred to as ‘“Towles’’).

Nath is a radiologist practicing at Lexington,

Kentucky. He obtained his training in England and

Canada and moved to Kentucky in 1976, (T. pp. 5-7)*.

In 1977, Nath was introduced to Smith and they

entered into an attorney-client relationship. Not only

was there a close attorney-client relationship but Nath

and Smith also developed a close personal relation-

*All references to the transcript of hearing shall be noted as

29a

ship. Nath would not enter into any business

activities or make any investments without first con-

sulting with Smith. Nath would consult with Smith as

frequently as three or four times a week and they

would often have lunch together, (T. pp. 6, 8, 231, 232,

546, 547).

Smith formed a corporation for Nath: H. Nath

Chartered, which was a professional service corpora-

tion. From 1978 through May of 1980, Nath paid

Smith a legal retainer fee of $100.00 per month to

represent Nath in his personal legal business. Nath

also paid Smith an additional retainer fee of $300.00

per month to serve as counsel for H. Nath Chartered,

(T. pp. 10-12, 58; Exhibit #4).

Some time in 1979, Towles, through a third party,

had some business dealings with Smith. Subsequent-

ly, Smith represented Towles in a matter before the

Kentucky Real Estate Commission. Towles had been

obtaining options to purchase land and then selling

the options for a profit. This was in violation of Ken-

tuckv law. However, Towles apparently conceived of

the idea of organizing and selling a system whereby

licensed individuals could buy and sell options on real

estate and could also be members of a referral network

which, apparently, was to be nationwide. Towles felt

the idea was good and he entered into an agreement

with Smith, if Smith could overcome the legal

obstacles, to pay Smith a contingent attorneys fee of

five percent (5%) of the gross earnings of the business,

plus he gave Smith an option to purchase a five per-

30a

cent (5%) equity interest in the business and Smith,

pursuant to said agreement, formed, for Towles, the

corporation known as REBSCS. Smith was to receive

nothing for his services if the company was not

successful, (T. pp. 244-247).

On July 2, 1979, Smith and Towles entered into an

agreement (Exhibit 2) which provided, among other

things, as follows:

1. Towles was to form the corporation known as

REBSCS.

2. Smith was to perform all legal services for the

corporation.

3. Smith was to be compensated by receiving five

percent (5%) of the gross receipts of REBSCS or any

subsidiary thereof for the life of the corporation.

Smith was also to have an irrevocable option for a

period of fifteen (15) years to purchase five percent

(5%) of REBSCS capital stock for only One Hundred

Dollars ($100.00). Smith had the right, at any time, to

inspect all books and records of REBSCS, including

bank records, and to audit REBSCS. Furthermore,

REBSCS could not take any action to dissolve, to

divest itself of any asset in excess of One Thousand

Dollars ($1,000.00), to issue any shares of common

capital stock or to issue any securities convertible into

capital stock without Smith’s express prior written

consent.

REBSCS was formed on July 11, 1979, and the

certificate of incorporation was issued by the Ken-

tucky Secretary of State on July 17, 1979, (Exhibit 1).

3la

There was a tremendous amount of time spent by

Smith and Towles in getting the corporation

established. Smith testified that he spent ‘hundreds

of hours’”’ and that he met with Towles almost every

day and also on the weekends, (T. pp. 258, 374. 571).

Smith had an empty office in his law offices and

allowed Towles to use that office rent-free. Towles also

had a telephone line which, apparently, ran through

Smith’s switchboard and used Smith's office address

as the mailing address for REBSCS, (T. pp. 341-344).

Nath, who was in Smith’s office frequently,

noticed all of the activity and made inquiries of Smith

as to the nature of the business that he was conduct-

ing with Towles. Smith apparently told Nath of the

type of business he was setting up for Towles and

Nath became interested in purchasing stock in

REBSCS. This was, apparently, without solicitation

on the part of Smith as Smith did not want any stock

sold in REBSCS and advised Nath that stock was not

available, (T. pp. 8, 9).

Smith was extremely enthusiastic about

REBSCS and felt, with his percentage interest, it

would make him a multi-millionaire. He advised Nath

and others of this feeling, (T. pp. 8, 140). This en-

thusiastic outlook by Smith apparently whetted

Nath’s interest in the company and he apparently

pressed Smith with a request to purchase stock.

However, Smith told Nath that stock was not

available (T. pp. 8, 9), but that if Towles ever decided

to sell stock, Smith would so advise Nath.

32a

Because of the inordinate amount of work which

Smith was expending on behalf of Towles and

REBSCS an addendum to their attorney employment

agreement was made on October 31, 1979, between

REBSCS, Towles and Smith (Exhibit 3).

In this addendum, Smith’s potential position in

REBSCS was altered as follows:

Before listing the changes it should be noted in

the original employment agreement of July 2, 1979

(Exhibit 2), Smith had an option to purchase from the

corporation (emphasis added) a number of shares of

common capital stock of the corporation as shall equal

five percent (5%) of all issued and outstanding

common capital shares of the corporation.

In the orginal REBSCS incorporation, the cor-

poration was authorized to issue two thousand (2,009)

shares of common stock, without par value.

Towles received nine hundred (900) shares of

stock in REBSCS, (Exhibit 17).

In the agreement of October, 1979, Smith

obtained the option to purchase, within five (5) years

from October 1, 1979, from Charles E. Towles (not

from the corporation) a number of shares of capital

stock ‘‘as shall equal twenty-five percent (25%) of all

issued and outstanding common capital shares of

REBSCS, Inc.”’

Further, the addendum placed restrictions on

Towles’ right to sell the shares of stock which had

been issued to him from REBSCS, (Exhibits 3, 17).

33a

This agreement seems to dilute Towles’ interest in

the corporation and increase Smith’s interest in the

corporation. After this addendum, Smith would have

the right to purchase twenty-five percent (25%) of the

shares held by Towles and to veto any sale of treasury

stock of the corporation.

All other basic agreements in the original employ-

ment agreement of July 2, 1979, remained intact

(Exhibit 3).

In late 1979 or early 1980, REBSCS started hav-

ing financial difficulties, (T. pp. 550-552, 574,

577-578). REBSCS had the following bank balances:

December, 1979, $480.67; January 14, 1980, $76.31

and February 11, 1980, $73.31, (Exhibit 7).

Sometime in December, 1979, Towles advised

Smith he intended to sell stock in REBSCS so he

could get Ten Thousand Dollars ($10,000.00) expen-

ditures reimbursed, (T. p. 275). Smith advised Towles

that Nath wanted to purchase stock and Towles re-

quested Smith to contact Nath, (T. pp. 276, 277).

Smith did not want Towles to seil any stock in

REBSCS, (T. pp. 274, 539, 574-575).

Nath was aware that Smith had a five percent

(5%) interest in REBSCS, (T. pp. 53-54). However,

Nath was not aware that Smith had an option to pur-

chase twenty-five percent (25%) of the outstanding

shares of the corporation and was not aware of the

amount of control that Smith could exercise over

REBSCS, (T. pp. 55-56, 485).

34a

On February 11, 1980, Smith went to the home of

Nath for the purpose of explaining the REBSCS cor-

poration to Nath’s wife, (T. pp. 26-33). When Smith ar-

rived, Nath had prepared a check to REBSCS in the

amount of $30,000.00 as a “‘... loan in exchange for

convertible debenture with conversion within five

years from this date into an amount equal to ten per-

cent of the total shares in REBSIS-REBSCS at that

time’’, (Exhibit 6). Nath prepared this check on the ad-

vice of his accountant, (T. pp. 181-182).

This check was refused by Smith for the reason

that it would have given Nath a direct interest in

REBSCS, which would have diluted the interest of

Smith in REBSCS, (T. pp. 24, 32-34, 153-154).

Smith encouraged Nath to invest in REBSCS, (T.

pp. 16-17, 19, 129-133, 140, 179).

However, rather than a direct purchase of stock

by Nath, Smith, at the meeting at Nath’s home on

February 11, 1980, advised Nath to form Nath

Holdings, Inc. (Exhibit 8) through which Nath was to

purchase stock in REBSCS for fiity percent (50%) of

the stock of Nath Holdings, Inc. and REBSCS was to

have the other fifty percent (50%) of the stock in Nath

Holdings, Inc. The purpose of this was to keep control

of REBSCS in Smith and Towles, (T. pp. 32-34, 160).

The meeting of February 11, 1980, lasted approx-

imately two (2) hours, (T. pp. 131, 132).

Nath Holdings was formed on February 13, 1980,

and the Certificate of Incorporation by the Kentucky

35a

Secretary of State was issued on February 13, 1980,

(Exhibit 8). This account was funded by a check for

$30,200.00, which Nath gave to Smith on February

13, 1980, and Smith opened the bank account, (T. pp.

36-38, Exhibit 9A).

On February 15, 1980, Nath was paged by Smith

at the hospital where he was working and was re-

quested to contact Smith's office, (T. pp. 39-40). When

he called, there was a message to go to Smith's office,

(T. p. 89). Nath went to Smith's office and when he ar-

rived Smith was there with Towles and Smith had

prepared a check on the account of Nath Holdings

Inc., in the amount of $30,000.00 for ‘10% of out-

standing stock of REBSCS, Inc., subject to restric-

tions’’, (Exhibit 10, T. pp. 40-41).

Nath, for some unknown reason, hesitated to sign

the original check for 10% of the outstanding stock of

REBSCS and so advised Smith. Smith then voided

the original check (Exhibit 10), and, at the direction of

Nath, wrote out a check to REBSCS in the amount of

$30,000.00 for a “‘loan’’, (Exhibit 11; T. pp. 40, 41, 42).

Nath still thought he would get ten percent (10%) of

the stock in REBSCS (T. pp. 156-158).

Smith told Nath the Thirty Thousand Dollars

($30,000.00) was not to be used for any purpose except

for national advertising and obtaining licenses in the

fifty states and District of Columbia and Smith told

Nath that Towles and Smith had never taken a penny

out of REBSCS, (T. pp. 13, 43). Nath was not advised

by Towles or Smith that Towles would take Ten Thou-

36a

sand Dollars ($10,000.00) of Nath’s investment for

prior business expenses (T. pp. 73, 635), even though

Smith was aware of Towles’ intention, (T. p. 631).

Nath was not told by Smith or Towles of the

financial difficulties of REBSCS prior to the time he

made the investment of Thirty Thousand Dollars

($30,000.00), (T. pp. 44, 47).

The Thirty Thousand Dollar ($30,000.00) check

was apparently deposited in the account of REBSCS

on February 15, 1980, the date it was issued, and on

that date a Ten Thousand Dollar ($10,000.00) check

was used to repay Towles for expenses; on February

29, 1980, a check in the amount of $5,577.87 was used

to repay Towles for expenses, “‘set up and current’”’,

and on March 5, 1980, a Five Thousand Dollar

($5,000.00) check was issued to Referral Data Service,

Inc. as a loan against 1,000 shares of stock of Referral

Data Service, Inc. The disposition of this particular

$5,000.00 was never shown. Towles had contributed

to the formation of Referral Data Service, Inc., (T. p.

650). In twenty days after the deposit of the

$30,000.00, over $20,000.00 had been withdrawn by

Towles for either a loan or for pay-back of expenses,

(Exhibit 7, see recap sheet).

Within two to four weeks after the transaction of

February 15, 1980, Towles either became ill or lost in-

terest in the business and became unavailable to

answer Smith's telephone calls. From that time

REBSCS has been, for all practical purposes, out of

business, (T. pp. 49, 455-457).

37a

Smith did advise Nath to obtain other counsel

because of the possible conflict of interest between

Towles and Nath and Smith and Nath, (T. pp. 390,

467-469, 476-477).

Smith did not refuse to allow Nath to inspect the

financial records of REBSCS and did not misrepre-

sent to Nath that Smith had no right to examine the

books of REBSCS, but, in fact, made a search for the

books, (T. pp. 116, 366, 480, 544-546).

Smith agreed to document the transaction

between Towles and Nath. Nath testified Smith said

he would prepare the necessary paperwork to docu-

ment the transaction and this statement was made at

the final closing when Nath signed the check for Thir-

ty Thousand Dollars ($30,000.00), (T. pp. 41, 114).

Smith admitted he said that he would be glad to

prepare the documents when they reached an agrec-

ment as to what this was, (T. p. 354). However, Towles

denied that Smith made that statement, (T. p. 648).

No docmentation was ever prepared by Smith.

However, it appears to the Trial Commissioner that

there are mitigating factors in this charge, in that no

agreement or understanding was made as to ‘what

this (transaction) was’’.

Nath testified that he had only talked to Towles

on two occasions and then not more than a total of fif-

teen or twenty minutes, (T. pp. 68, 69). However, the

evidence clearly indicates that Nath was furnished

detailed information regarding the workings of

38a

REBSCS and even information regarding prospective

purchasers of stock in REBSCS. This information had

to come from Smith, (T. pp. 15, 16, 17, 19).

Nath has lost his Thirty Thousand Dollars

($30,000.00).

DISCIPLINARY RULES ALLEGEDLY

VIOLATED BY SMITH

DR 1-102 Misconduct.

(A) A lawyer shall not:

(4) Engage in conduct involving dishonesty,

fraud, deceit, or misrepresentation.

DR 5-101 Refusing Employment When the In-

terest of the Lawyer May Impair His Indepen-

dent Professional Judgment.

(A) Except with the consent of his client after full

disclosure, a lawyer shall not accept employment

if the exercise of his professional judgment on

behalf of his client will be or reasonably may be af-

fected by his own financial, business, property, or

personal interests.

DR 5-104 Limiting Business Relations with a

Client.

(A) A lawyer shall not enter into a business trans-

action with a client if they have differing interests

therein and if the client expects the lawyer to

exercise his professional judgment therein for the

protection of the client, unless the client has con-

sented after full disclosure.

DR 5-105 Refusing to Accept or Continue

Employment if the Interest of Another Client

May Impair the Independent Professional Judg-

ment of the Lawyer.

39a

(A) A lawyer shall decline proffered employment

if the exercise of his independent professional

judgment in behalf ot a client will be or is likely to

be adversely affected by the acceptance of the

proffered employment, or if it would be likely to

involve him in representing differing interests,

except to the extent permitted under DR

5-105(C).

DR 6-101 Failing to Act Competently.

(A) A lawyer shall not:

(3) Neglect a legal matter entrusted to him.

This 12th day of August, 1982.

/s/ William R. Forester

William R. Forester

Trial Commissioner

(Exhibits Omitted)

* * * * * * *

40a

RECEIVED OCT 29 1981

KY. BAR ASSN.

SUPREME COURT OF KENTUCKY

KENTUCKY BAR

ASSOCIATION COMPLAINANT

CHARGE

ERIC S. SMITH RESPONDENT

ee. ee

Comes now the Kentucky Bar Association, by and

through its Inquiry Tribunal, and states that Respon-

dent, Eric S. Smith, whose last known address is 117

West Second Street, Lexington, Kentucky 40507, a

member of the Kentucky Bar Association, engaged in

the following unethical and unprofessional conduct:

Beginning in or about 1977, Harendra Nath,

M.D., whose last known address is P. O. Box 356, Lex-

ington, Kentucky 40584, employed Respondent to

perform various legal services including the incorpora-

tion of H. Nath, Chartered, a professional service cor-

poration. Respondent and Nath developed a close

attorney-client relationship and a close personal

friendship. Nath paid Respondent a retainer fee of

$100 per month to represent Nath in his personal legal

business and Nath paid Respondent an additional re-

tainer fee of $300 per month to serve as counsel for H.

4la

Nath, Chartered. Nath consulted Respondent on vir-

tually every business matter and financial invest-

ment, and Nath would not take any action until he had

first sought Respondent’s opinion and advice.

On or about July 2, 1979, a contract was executed

whereby one Charles E. Towles employed Respondent

to perform the legal services necessary to incorporate

and represent a business known as Real Estate

Buyers and Sellers Consultant Services, Inc.

(hereinafter referred to as REBSCS). A true and cor-

rect copy of said contract is appended hereto, made a

part hereof and marked as Exhibit A. Said contract

provided that Respondent had a substantial and

direct financial interest in the future success of

REBSCS. Said contract further provided that

Respondent had the right to inspect and audit the cor-

porate books and financial records of REBSCS. Said

contract further provided that REBSCS would not

issue any shares of common capital stock without

Respondent’s prior written consent. Respondent

subsequently incorporated REBSCS. On or about

October 31, 1979, an addendum to said contract was

executed by Respondent and by Charles Towles, in-

dividually; and as president of REBSCS, Inc. A true

and correct copy of said addendum is appended

hereto, made a part hereof and marked as Exhibit B.

In or about December 1979, Towles told Respon-

dent that Towles wanted to find other persons to in-

vest in REBSCS in order to raise sufficient funds to

continue promoting REBSCS. Towles further told

42a

Respondent that Towles had incurred over $10,000 in

expenses to pay printing and advertising bills for

which Towles desired to be reimbursed by REBSCS.

At this time Respondent either knew or should have

known that REBSCS was in serious financial

difficulty.

In or about January and February 1980, Respon-

dent had numerous conversations with Nath during

which Respondent advised, encouraged and urged

Nath to invest the sum of $30,000 in REBSCS. At no

time did Respondent ever inform Nath that REBSCS

was in serious financial difficulty and at no time did

Respondent ever fully inform Nath as to the extent of

Respondent’s personal financial interest in and con-

trol over REBSCS. Respondent advised Nath to form

a corporation known as Nath Holdings, Inc. and to in-

vest $30,000 in Nath Holdings, Inc. Respondent fur-

ther advised Nath that he and REBSCS should each

own fifty percent (50%) of the stock in Nath Holdings,

Inc., and that said $30,000 should then be used to pur-

chase ten percent (10%) of the common stock in

REBSCS. Nath relied on Respondent’s advice and

agreed to form Nath Holdings, Inc., so as to arrange

for an investment of $30,000 in REBSCS. On or about

February 13, 1980, Respondent caused to be prepared

and filed in the office of the Secretary of State of the

Commonwealth of Kentucky articles of incorporation

for the purpose of incorporating Nath Holdings, Inc.

On or about February 15, 1980, Respondent told

Nath it was imperative that Nath immediately invest

42a

$30,000 in REBSCS. Nath went to Respondent's law

office and Respondent had already prepared for

Nath’s signature a check in the amount of $30,000 to

be issued by Nath Holdings, Inc., to REBSCS for the

purpose of purchasing ten percent (10%) of the

outstanding stock in REBSCS. A true and correct

copy of said check is appended hereto, made a part

hereof and marked as Exhibit C. Nath decided that he

would rather make a direct loan of $30,000 to

_REBSCS instead of using Nath Holdings, Inc., to pur-

chase stock. Respondent and Towles agreed to said

loan. Respondent prepared a second check for Nath’s

signature in the amount of $30,000 made payable to

REBSCS. Nath signed the second check and it was

given to Towles. A true and correct copy of said

second check is appended hereto, made a part hereof

and marked as Exhibit D. Respondent assured Nath

that Respondent would prepare a promissory note and

all other legal documents necessary to evidence and

secure said loan of $30,000 but Respondent subse-

quently failed and neglected to prepare a promissory

note or any other legal documents necessary to

evidence and secure said loan.

Prior to Nath signing the second check on

February 15, 1980, for the $30,000 loan to REBSCS,

at no time did Respondent ever inform Nath that

most of the $30,000 would be used to reimburse

Towles for expenses Towiles had allegedly incurred in

promoting REBSCS. Respondent told Nath that the

proceeds from the $30,000 loan was going to be used

44a

for national advertising and for registering REBSCS

to do business in other states.

After Towles received the check from Nath for

$30,000 on February 15, 1980, Towles cashed the

check and disbursed the bulk of the proceeds to

himself. Towles ceased actively promoting and work:

ing on REBSCS. In or about March, April and May,

1980, Nath and Respondent had various conversa-

tions during which Nath told Respondent that he was

upset, concerned and apprehensive about recovering

his $30,000 loan. On one or more occasions Nath re-

quested Respondent to review the financial records of

REBSCS to determine the financial status of

REBSCS, to determine whether any of Nath’s $30,000

remained and to determine whether Nath could

possibly recover any portion of the $30,000 loan.

Respondent falsely stated and misrepresented to

Nath that Respondent had no authority to review or

to gain access to the financial records of REBSCS.

Respondent took no action to protect Nath’s interest.

As a result of Respondent’s actions described above,

Respondent’s client, Nath, suffered a loss of

approximately $30,000.

WHEREFORE, Complainant charges that

Respondent’s actions violate Disciplinary Rules

1-102(A)(4), 5-101(A), 5-104(A), 5-105(A) and

6-101(A)(3) of the American Bar Association’s Code of

Professional Responsibility adopted by the Supreme

Court of Kentucky pursuant to SCR 3.130, and con-

stitute unethical and unprofessional conduct tending

45a

to bring the bench and bar of Kentucky into disrepute.

An appropriate degree of discipline should be

administered to Respondent in accordance with SCR

3.370 and SCR 3.380.

/s/ Herbert D. Sledd

HERBERT D. SLEDD, CHAIRMAN

INQUIRY TRIBUNAL

KENTUCKY BAR ASSOCIATION

| ATTEST:

/s/ Leslie G. Whitmer

| LESLIE G. WHITMER, DIRECTOR

KENTUCKY BAR ASSOCIATION

(Exhibits Omitted)

* * *&* & & & *

46a

RECEIVED: JUL 11 1984

SUPREME COURT OF KENTUCKY

83-SC-144-KB

KENTUCKY BAR

ASSOCIATION, COMPLAINANT

V. ORIGINAL ACTION

IN SUPREME COURT

ERIC S. SMITH RESPONDENT

ORDER GRANTING STAY

Respondent’s motion for a stay pursuant to CR

76.44(b), is hereby granted and Respondent is hereby

granted a stay of the effective date of the Opinion of

this Court herein, and the operation SCR 3.390,

without bond, for a period of 90 days from July 5,

1984.

Entered this the 11th day of July, 1984.

/s/ J. Calvin Aker

Deputy Chief Justice

COUNSEL FOR COMPLAINANT:

Bruce K. Davis, Director

Michael! M. Hooper, Assistant Director

Kentucky Bar Association

West Main Street at Kentucky River

Frankfort, KY 40601

47a

COUNSEL FOR RESPONDENT:

Bert T. Combs

Wyatt, Tarrant & Combs

2800 Citizens Plaza

Louisville, KY 40202

Ben L. Kessinger, Jr.

Stites & Harbison

400 Bank of Lexington Building

101 East Vine Street

Lexington, KY 40507

48a

SUPREME COURT OF KENTUCKY

83-SC-144-KB

KENTUCKY BAR

ASSOCIATION, COMPLAINANT

v. ORIGINAL ACTION

IN SUPREME COURT

ERIC S. SMITH, RESPONDENT?

RESPONDENT'S PETITION

FOR REHEARING AND MODIFICATION

Pursuant SCR 3.440 and CR 76.32, Respondent,

by Counsel, petitions this Court to grant him a rehear-

ing and to modify its Opinion, for the following

reasons:

1.) This Court misconceived the issues presented,

confusing the mere presence of conflicting in-

terests with representation of conflicting in-

terests. In so doing, this Court promulgated a

new rule which is unsound, vague, ad-

ministrative unworkable, and completely at

odds with its existing rules.

2.) This Court inadvertently accepted the Board's

use of inappropriate evidentiary presumptions

(taken out of context from civil suits against

attorneys) and thus confused the light eviden-

tiary burden required to deprive an attorney of

the benefit of a bargain, with the much heavier

burden required before he can be deprived of

49a

his constitutionally protected right to practice

law.

3.) Further, controlling cases of this Court have

always prohibited retroactive application of

new disciplinary rules (and punishment) in

cases of first impression. Other relevant cases

hold that use of the disciplinary process for

the purpose of resolving private civil disputes

should be carefuliy avoided. The Court should

reconsider this case in light of these relevant,

controlling decisions.

THIS COURT PROPERLY RESOLVED ALL

FACTUAL DOUBTS IN FAVOR

OF RESPONDENT

This Court, acknowledging the extensive conflict

in testimony, properly resolved all factual doubts in

favor of Respondent.' Although it adopted the

1. The resolution of all factual doubts in favor of the Respon-

dent, has been mandated since 1905, when the Court reversed an

order of disbarment in Tudor v. Commonwealth, Ky., 84 S.\W. 522

(1905), stating that “the court should never disbar a law ver. and

thus deprive him of his chosen profession. and perhaps his only

means of a iivelihood, on testimony of a doubtful character.”

(emphasis added). See also K.B.A. v. Franklin, Ky.. 534 S.W 2d

459 (1976); K.S.B.A. v. Taylor, Ky., 482 S.W.2d 574 (1972). Ad-

mitting that he filed the complaint because he believed Smith

could thereby be intimidated and coerced into paying him

$30,000.00, Nath's vascillating testimony, contredicted «ven by

the testimony of his new attorney, is justifiably unworthy of

belief. This Court's Opinion actually reflects the fact that Nath’s

testimony provides no reliable basis for a disciplinary sanction

against Smith

50a

Board's decision, this Court based its conclusion that

Smith was guilty of unethical conduct on a new fac-

tual premise, entirely different from that alleged by

the K.B.A. It based Smith's punishment on his own

uncontradicted testimony that he prepared the check

whereby H. Nath Holdings, Inc. loaned money to

REBSCS.

No request is made that this Court again review

the massive record. Even though incomplete,’ and at

2. These important and uncontradicted facts do not appear

in this Court's Opinion:

a. Eric Smith received no remuneration, no commission, no

attorney's fee, and no personal benefit of any kind from

the loan to REBSCS!

b. $5,000 of the money loaned to REBSCS was in fact

thereafter loaned, by REBSCS, to a corporation 20%

owned by Nath! That loan from REBSCS was never

repaid. Trial Commissioner's Report, p. 13.

c. Nath asked Smith to prepare the check by which H. Nath

Holdings, Inc. made its loan to REBSCS, and Nath

himself dictated the wording of the check, without any

urging or advice from Smith. Nath, T. pp. 40-42; Trial

Commissioner's Report, p. 12.

d. Nath never filed any civil action against Towles or

REBSCS to secure repayment of the loan, even though

Towles’ uncontradicted testimony was that Towles was

solvent and able to pay. Towles, T. pp. 622-24, 645-47. Jn

fact neither Nath, nor anyone on his behalf, has ever

contacted Towles or REBSCS requesting repayment!

Towles, T. pp. 601-603. Therefore tiis Court can not

properly find that “Nath lost any hope of the loan being

repaid’. Opinicn, p. 3.

e. Nath has never filed any civil action against Smith for

malpractice or any other cause of action, even though

Smith was fully insured.

5la

times inaccurate,’ this Court's independent findings

of fact actually exonerate Respondent from violation

of any known or recognized ethical rule. It is this

Court's adoption and retroactive application of the in-

appropriate evidentiary presumptions introduced by

the Board, and derived from the Board's condemna-

tion of all business dealings between attorneys and

clients, that is ill-conceived and unjust.

THE MERE PRESENCE OF CONFLICTING

INTERESTS WAS CONFUSED WITH

REPRESENTING CONFLICTING INTERESTS

There has never been a finding that Smith

represented or served as attorney for either REBSCS

or Nath in their dealings with each other. Clearly he

did net. Consequently, Smith was never in violation of

DR 5-101(A), 5-104(A), 5-105(A) and 6-101(A)(3),

because violation of those rules requires a finding that

conflicting attorney-client relationships existed with

regard to the particular transaction in question.‘

3. The Opinion erroneously implies that Nath had made the

loan, personally. Opinion, p. 3. The testimony, however. is uncon-

tradicted that the loan was made by H. Nath Holdings. Inc., a

corporation which Respondent formed, but never represented (i.e.,

never performed legal services for), and which never paid Respon-

dent a fee of any type. Therefore the statement on p. 1 of the

Opinion that “Respondent was paid a retainer by this corpora:

tion’ is incorrect. as are the statements on p. 2, that Nath made

an unsecured loan to REBSCS, and pp. 3-4. that

“Respondent... participated in a transaction whereby one client

lent money to another...”

4. Furt’ ~ his court found no misrepresentation by Respon-

dent, and the. fore found no violation of DR 1-102(AN3). In sum-

mary, this Court found no violation by Respondent of any of the

disciplinary rules he was charged as having violated

52a

Instead, this Court found only that ‘‘Respondent

represented Towles and REBSCS generally; he owned

an interest in REBSCS,” and that ‘“‘Respondent also

represented Dr. Nath and his corporations generally.”

But ‘general’ representation of clients in other,

unrelated matters does not violate the rules cited

above.

Smith’s proven defense, that he refused to, and in

fact did not, serve as attorney for either Nath or

REBSCS in their dealings with each other, should not

have been characterized by this Court as a ‘“‘non-

defense.’’ Equally improper was this Court’s ruling

that Smith’s disclosure of his interest in REBSCS to

Dr. Nath, and the fact that Nath had been informed of

how the loan was going to be applied, were ‘‘beside the

point.’’ Such pronouncements unjustly criticize this

Respondent, and thus attorneys in general, for adher-

ing to this Court’s known disciplinary rules. This

Court then stated that ‘‘a lawyer simply cannot sus-

tain a plea of no conflict of interest in such a

scenario.’ Opinion, p. 4. But this oversimplication is

not correct, because the mere existence of conflicting

interests has never been punishable. Until now only

the renresentation of conflicting interests (without full

disclosure and consent) has been the basis for

disciplinary sanction in conflict of interest cases. In

1962, the Court made this clear, stating:

It is unprofessional to represent conflicting in-

terests except by express consent by all con-

re Advisory Opinion of KS BA, Ky., 361 S.W.oq

111. (emphasis original).

havea conflict of interest there must be conflicting at-

torney client relationships in existence at that

time,...” In re Advisory Opinion of K.B.A., Ky., 526

S.W.2d 306, 307 (emphasis added).

Situation. In this case, however, Smith’s acknowl-

edged refusal to serve as attorney for either REBSCS

or Nath in this specific transaction, his proven aq-

54a

terest in REBSCS (as well as all other facts within his

knowledge), not only disprove any prohibited

representation of conflicting interests, they clearly

prove Smith’s good faith compliance with DR

5-101(A), 5-104(A), 5-105(A)-(C), and 6-101(A)(3).

PREPARATION OF A CHECK DOES NOT

CONSTITUTE REPRESENTATION AND IS

NOT UNETHICAL CONDUCT

Not finding any violation of the rules of the 1978

ABA Code of Professional Responsibility (adopted by

this Court in SCR 3.130), this Court fixed guilt and im-

posed punishment only on the finding that ‘‘Respon-

dent prepared a check, and to that extent participated

in a transaction whereby one client lent money to

another of Respondent’s clients, a corporation in

which Respondent had an interest.’’ But the prepara-

tion of a check does not constitute the rendering of

legal services. It is a routine clerical act performed for

others by both laymer and lawyers every day.

The definition of what actions constitute the prac-

tice of law, set forth in SCR 3.020, has never been so

broadly construed as to encompass this clerical act,

without something more, and this Court has found

nothing more.

55a

Here, the loan was made after repeated advice to

Nath by his CPA that the transaction was risky.> No

legal advice was given, or legal service performed, by

Smith.* He only “prepared a check” drawn on the ac-

THE NEW RULE IS UNSOUNP AND CON FLICTS

WITH EXISTING RULES

represent Nath and Towles in their joint dealings as a

“non-defense,” because he represented each ‘‘general-

Report, p. 14 finding, ‘... the evidence clearly indicates that

Nath was furnished detailed information regarding the workings

of REBSCS..."

6. In fact Smith tried to discourage Nath from becoming

involved with REBSCS.

56a

ly” in other matters, this Court has created a new rule

completely at odds with those cited above. Can an at-

torney never withdraw from representation in the

limited area of conflict? Must an attorney, to avoid

suspension, now refuse to continue to represent a

client in any other matter, so long as that client

desires to deal with another of the attorney’s clients,

or for that matter, with an attorney himself?

This has never been previously required. No prac-

tical rule would require Smith to refuse to represent

Nath in his dealings with hospitals or in his acquisi-

tion of a farm, or require Smith to discharge REBSCS

as a Client, and/or divest his option interest therein,

simply because Nath was interested in REBSCS.

Such extreme results have never been mandated by

this Court’s adopted and published Rules, and to do so

now would work an unreasonable and unnecessary

hardship on all concerned.

Prior to this case, an attorney wishing to deal

with a client was only required by DR 5-101, 5-104

and 5-105 to fully disclose the conflict and possibly ad-

vise the client of the advisability of separate represen-

tation. That Smith did this has been conceded. Smith

did not negotiate or otherwise deal with Nath. This

Court has acknowledged that Smith did not solicit the

loan or Nath’s interest in REBSCS. Smith was

involuntarily thrust into an awkward position, as a

result of Nath’s interest in REBSCS. Smith then, in

good faith, complied with this Court's adopted

Disciplinary Rules. Certainly there was a potential

57a

THIS COURT WAS MISLED BY THE

BOARD'S INTRODUCTION AND

USE OF INAPPROPRIATE

EVIDENTIARY PRESUMPTIONS

In reviewing the Opinion of the Board of Gover-

nors this Court will find five civil actions relied upon.

One of which, Daugherty v. Runner, Ky. App., 581

S.W.2d 12 (1978), was cited four times. Although

quoting extensively from the ethical considerations

underlying this Court’s adopted disciplinary rules, the

Board in fact abandoned those rules in favor of a new

standard, heretofore applied only in civil damage suits

against attorneys. The Board’s departure from this

Court’s established disciplinary rules is most clearly

illustrated in its statement that:

Applicable Disciplinary Rules under this Canon

particularize these aspirational Statements into

hard rules, and facially seem to provide that

almost anything goes, with disclosure and con-

sent by the clients; see DR 5-101(A), 5-104(A), and

5-105(A) and (B). As noted below, however,

disclosure and consent do not in any way mitigate

a lawyer’s continuing fiducial obligation to the

client. (emphasis original). Opinion of Board of

Governors, p. 5.

This statement clearly shows the Board’s

disagreement with the principles stated in this

Court’s disciplinary rules. Going far beyond in the

principles reflected in those rules, the Board then an-

nounced that “‘uberrima fides” that is the standard to

58a

conflict of interest in any dealings between Nath and

REBSCS; however, Smith disclosed the conflict. More

significantly, he limited his representation of each to

areas other than those in which they dealt together.

This Court now says that an attorney cannot limit his

representation of clients in this way. Now, after this

Opinion, if an attorney is involved even in very limited

business dealings with a client {even though he

discloses his interest, does not in fact represent the

client in the transaction, and warns the client to seek

separate legal advice, all of which Smith did), he will

be suspended from the practice of law if the project

fails, even though (as here) the failure was unpredic-

table and in no way the fault of he attorney.’ This

result is clearly unsound.

7. This Court correctly recognized that the business failure

of REBSCS had nothing to do with Smith, and was in no way

predictable. Further, this Court acknowledged that Smith did not

solicit Nath’s interest in REBSCS. This Court's Opinion did not,

however, reflect the Court’s recognition of the uncontradicted

facts that Smith did not benefit from the loan to REBSCS, nor

did he receive any proceeds from that loan. Nor did this Court

acknowledge that Smith's losses, when REBSCS became dor

mant, were every bit as severe as Nath’'s alleged loss. Eric Smith

clearly did not benefit at the expense of Nath!

59a

be applied in any business dealings between an

attorney and a client.

Taking this standard out of context, the Board

failed to distinguish that such a duty is owed to a

client only with regard to the subject matter of the rep-

resentation, but not in circumstances where employ-

ment has been limited, as in this case, to others mat-

ters not involving the transaction between the at-

torney and the client. The Board’s erroneous reason-

ing culminated in the following statement:

Kentucky Courts have consistently held that the

principle of uberrima fides is almost per se incon-

sistent with a lawyer’s entangling his personal

and financial affairs with those of his client, par-

ticularly where the entanglement involves the

subject of the underlying representation. There is

a flat presumption that the lawyer has over-

reached his client; see Palm’s Administrators v.

Howard, Ky. 1908, 112 S.W. 1110; Hunt v.

Picklesimer Ky. 1942, 162 S.W.2d 27; see also 7

Am. Jur. 2d, Attorneys at Law, Section 125.

(emphasis original). Opinion of Board of

Governors, p. 7.

In effect the Board is condemning all business

dealings between attorneys and clients. Moreover, the

Board obviously presumes that such dealings per se

violate an attorney's ethical duty to clients. This has

never been the rule in Kentucky, nor is there such a

presumption of ethical violation against attorneys.

The proper rule is set forth in DR 5-104(A):

60a

DR 5-104(A). A lawyer shall not enter into a

business transaction with a client if they have dif-

fering interests and if the client expects the

lawyer to exercise his professional judgment

therein for the protection of the client, unless the -

client has consented after full disclosure.

(emphasis added).

This is the rule. Once an attorney informs the

client that he cannot represent him in the transaction,

and advises him to seek separate counsel (as did

Smith), there is no overriding duty for that attorney

to use his utmost efforts to protect a person he does

not represent.

In disciplinary cases there is no ‘‘flat presump-

tion” that attorney-client dealings are unethical, nor

is there a presumption that the iawyer has over-

reached his client. There is no presumption that

business dealings between attorneys and clients are a

per se violation of any disciplinary rules. The Board's

statements say otherwise, and simply illustrate the

fact that’ Smith was subjected to a standard

heretofore unknown in disciplinary cases. Instead of

facing the standard set forth in SCR 3.330 that the

charges must be proven by ‘substantial evidence’,

Eric Smith was obviously tried and found guilty

through the Board’s use of inappropriate evidentiary

presumptions drawn from civil cases, where the only

issue at stake was whether an attorney was to be

deprived of the benefit of a bargain, not (as here) his

constitutionally protected right to practice.

6la

In relying on the decision of the Board of Gover-

nors, this Court has been misled into the adoption of

this distorted disciplinary standard and burden of

proof. It is one thing for this Court to require an at-

torney, when a client brings suit to rescind a contract,

to prove that the contract was fair and that there was

no overreaching. It is an entirely different thing to re-

quire an attorney to prove his innocence in a

disciplinary case against him. The Board of Governors

decision would require Smith to do just that. And

with all business dealings being per se violations, how

could Smith have proven his innocence?

Obviously a civil rule should not be applied here.

We are not dealing with a civil dispute. An entirely

different standard should have been applied by the

Board of Governors. SCR 3.330 states in part that

“... the burden of proof shall rest upon the Associa-

tion in a disciplinary proceeding and the facts must be

proven by substantial evidence. ’’ Although ‘‘substan-

tial evidence’ is a rather vague guide, the U.S.

Supreme Court has in recent cases indicated that the

proper standard to be applied is a ‘‘clear and convinc-

ing” evidentiary standard. As stated in Addington v.

Texas, 441 U.S. 418 (1979):

The function of a standard of proof... is to ‘in-

struct the fact finder concerning the degree of

confidence our society thinks he should have in

the correctness of factual conclusions __.’ the

standard serves to allocate the risk of error

62a

and to indicate the relative

between the litigants

the ultimate decision.

importance attached to

1 use of (it) is in civil cases involving

One typica

allegations of fraud or some other quasi-criminal

t. The interests at

wrong doing by the defendan

stake in those cases are deemed to be more

substantial than

jurisdictions accordingly reduced the risk to the

proof. Si

i ], and convincing’ standard to protect

unequivoca

particularly important individual interests in

i Id. at 423-24. See also San-

various civil cases.

tosky v. Kramer, 455 U.S. 745 (1982).

n of proof should be more exact-

Surely the burde

ing to sustain the suspension of an attorney, than that

required to obtain a mere civil judgment. On reflec-

t will see this distinction and realize the

tion, this Cour

injustice done to Respondent. In this case of ‘first im-

pression’, the Board of Governors has been misled by

reliance on civil cases. And, in reliance on the Board of

Governors, this Court has also been misled.

THE NEW RULE IS UNSOUND, VAGUE AND

ADMINISTRATIVELY UNWORKABLE

Unless changed by this Court, this new rule will

be a continuing source of controversy. It is not only

ll business deal-

unsound, but in its presumption that a

ings between atuorneys and clients are now ethically

suspect, it is incredibly vague and confuses once clear

63a

ethical rules. It sets no clear standard. and gives no

meaningful guidance to attorneys involved in

business dealings with clients. Certainly, this Court’s

characterization of such transactions as ‘‘conflicts of

interest”’ is not instructive.

After this Opinion, can an attorney ever safely

enter into a business transaction with a client? Was

not a part of the basis for Smith's punishment the

alleged loss of money, a factor that can only be deter-

mined after the fact? Is the thrust of this Court’s

Opinion to indirectly prohibit business dealings which

it could not constitutionally, directly prohibit? And if

so, who would benefit from such a prohibition? Such a

rule indicts the integrity of the entire Bar. Surely this

Court does not mean to say that lawyers cannot be

trusted to deal fairly with clients in business

transactions.

There is nothing inherently wrong with attorneys

and clients entering into business together. It is done

every day. And when done with full disclosure and

consent, (i.e., in full compliance with the prior

published rules of this Court) it can be advantageous

to all concerned. There is no reasonable basis for this

Court to condemn such transactions, as did the Board.

To do so is the equivalent of stating to the public that

this Court believes that lawyers cannot fairly deal

with clients.

This new rule will make attorneys guarantors of

business deals with clients, with their licenses at risk.

64a

It is always unfortunate if money is lost, but a

business can become dormant (as REBSCS did)

without misconduct, and even in spite of an attorney's

best efforts. Attorneys have never and should not

now, at the risk of their professional careers, be re-

quired to guarantee the success of any project in

which they may be interested as private individuals.

Attorneys are often placed in conflict of interest

situ itions. For example, attorneys involved in real

estate closings between parties with conflicting in-

terests often prepare checks for one or both. Eric

Smith was found guilty of nothing more than what

these attorneys do every day. The fact that he had an

option interest in the borrower does not make this

situation distinguishably different.

If a bank makes a bad business decision in making

a loan, will the attorney who closes the loan be liable

to the bank? Certainly not, unless he represents the

bank and is guilty of some malpractice. And clearly

the closing attorney should not be disciplined by the

Bar, because of a bank's bad business decision in mak-

ing a loan. This case is no different. Here there was nu

moral turpitude, no wrongful conduct, and no

representation by Smith of the lender (or borrower). In

this case, Smith's mere participation in preparing a

check, coupled with a subsequent alleged loss of

money, was considered enough for this Court to sus-

pend his right to practice law for 18 months, with all

the consequential damage to his unblemished career,

reputation, and standing in the community.

65a

This new rule is administratively unworkable.

Unless it is changed, not only will Eric Smith be

unjustly punished, this Court will open itself to a

plethora of disciplinary complaints, anytime an at-

torney has been involved in a business transaction

with anyone whom he had previously represented, and

that transaction fails. Such complaints can now and

will hereafter occur whether or not the attorney has

disclosed the conflict, advised separate representa-

tion, or realized no monetary gain. This is a very

dangerous precedent! Such a rule will lead to the kind

of abuse of the disciplinary process, which can be seen

in this case. It will leave honest attorneys at the mer-

cy of the unscrupulous, who will see this (as Nath did)

as a no cost method of coercing payment of business

losses from attorneys, when advised that no malprac-

tice or other civil action exists. Indeed, unscrupulous

clients may be encouraged by this to seek out at-

torneys to be their business partners, not for their

trustworthiness and business knowledge, but in order

to have the threat of a disciplinary complaint as extra

“insurance”. Such a rule would create a dangerous

trap for attorneys and an administrative nightmare

for this Court.

RETROACTIVE APPLICATION OF THE NEW

RULE VIOLATES STATE AND FEDERAL

DUE PROCESS GUARANTEES

This Court admits that this case is ‘‘one of first

impression in this Commonwealth.” As such, it should

66a

be apparent to this Court that in this area there has

been no prior warning or effective guidance for at-

torneys provided by any prior case, or this Court’s

adopted rules. Under these circumstances, to punish

an attorney for a violation of a rule which he did not

and could not know existed, violates both state and

federal constitutional due process guarantees.

On two prior occasions, this Court refused to

apply a newly adopted disciplinary rule retroactively.

In K.B.A. v. Bali, Ky., 501 S.W.2d 253, 255 (1971), the

Court in deciding ‘‘the new rule requiring automatic

disbarment should not be given ex post facto effect,”

based its ruling upon ‘‘elemental justice and basic due

process”’ (emphasis added). See also K.S.B.A. v.

Taylor, Ky., 516 S.W.2d 871 (1974). Although these

cases dealt with adoption of a new rule, and not with

what may here be argued to be a simple extension or

interpretation of an existing vague standard, the prin-

ciple should be the same. A retroactive application of

a new ‘“‘interpretation”’ was held to violate Federal due

preess guarantees in Re Ruffalo, 390 U.S. 544, 201 L.

ed. 2d 117, 88 S. Ct. 1222 (1968), a case in which the

respondent’s alleged misconduct consisted of hiring a

railroad car inspector during his off duty hours to in-

vestigate FELA claims against his employer. The

charge of misconduct, however, was not in the original

charges against the respondent, but was added as a

result of his own testimony. In reversing an order of

disbarment, the U.S. Supreme Court stated:

67a

Disbarment, designed to protect the public, is a

punishment or penalty imposed on the lawyer. He

is accordingly entitled to procedural due process.

which includes fair notice of the charge.

In the present case petitioner had no notice that

his employment of Orlando would be considered a

disbarment offense until after both he and Orlan-

do had testified at length on all material facts per-

taining to this phase of the case. As Judge Ed-

wards, dissenting below, said, ‘Such procedural

violation of due process would never pass muster

in any normal civil or criminal litigation’. 370

F2d, at 462.

These are adversary proceedings of a quasi-

criminal nature. The charge must be known before

the proceedings commence. They become a trap

when, after they’re under way, the charges are

amended on the basis of testimony of the accused.

He can then be given no opportunity to expunge

the earlier statements and start afresh....

(emphasis added).

This absence of fair notice as to the reach of the

grievance procedure and the precise nature of the

charges deprive petitioner of procedural due

process. Id. at pp. 122-23, citations omitted,

emphasis added.

The circumstances attending this Court’s suspension

of Eric Smith are remarkably similar. He had no warn-

ing this Court would consider his conduct

‘unethical’. And as in Ruffalo, the alleged improprie-

ty of the conduct for which Smith is to be punished is

not immediately apparent, and is such concerning

which reasonable attorneys would differ. Punishment

68a

of Smith, under these circumstances, also violates

substantive due process principles. As Justices White

and Marshall, concurring in Ruffalo, stated:

A relevant inquiry in appraising a decision to

disbar is whether the attorney stricken from the

roles can be deemed to have been on notice that

the courts would condemn the conduct for which

he was removed....

Even when a disbarment standard is as unspecific

as the one before us, members of the bar can be

assumed to know that certain kinds of conduct,

generally condemned by responsible men, will be

grounds for disbarment. This class of conduct cer-

tainly includes the criminal offenses traditionally

known as malum in se. Jt also includes conduct

which all responsible attorneys would recognize

as improper for a member for the profession.

The conduct for which the Court of Appeals

disbarred petitioner cannot, however, be so

characterized. Some responsible attorneys, like

the judge who refused to order petitioner disbar-

red from practice in the Northern District of Ohio,

249 F Supp 432 (1965), would undoubtedly find

no impropriety at all in hiring a railroad worker, a

man with the knowledge and experience to select

relevant information and appraise relevant facts,

to ‘‘moonlight”’ - work on his own time - collecting

data. On the other hand some, like the officials of

the Mahoning County and Ohio State Bar

Associations, would believe that encouraging a

man to do work arguably at odds with his chief

employer's interests is unethical. The appraisal of

petitioner’s conduct is one about which

69a

reasonable men differ, not one immediately ap-

parent to any scrupulous citizen who confronts

the question. I would hold that a federal court

may not deprive an attorney of the opportunity to

practice his profession on the basis of a deter-

mination after the fact that conduct is unethical if

responsible attorneys would differ in appraising

the propriety of that conduct. (emphasis added)

id. at pp. 124-25.

This principle was also stated in K.S.B.A. v. Taylor,

Ky., 482 S.W.2d 574, 583 (1972):

... when the rules are loosely couched in terms of

high principle, as are the canons, there is room for

differences of opinion, hence the distinct possibili-

ty that they do not provide sufficiently explicit

‘no trespassing”’ signs for those who may ap-

proach the invisible line of proscription. For this

reason, if for no other, simple justice dictates that

in arriving at a final determination all doubts be

resolved in favor of the respondent. (emphasis

added).

In six previous “first impression’’ cases, this

Court recognized these due process limits and

dismissed the charges (or at most reprimanded the of-

fending party), and advised members of the bar of the

promulgation (or interpretation) of the rule to be ap-

plied thereafter, and that subsequent violation would

be more severely punished. In K.B.A. v. Graves, Ky.,

556 S.W.2d 890, 892 (1977), the Court, finding (unlike

this case) ‘‘that Graves conduct in this matter violates

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every concept of ethical conduct required of an at-

torney,’’ imposed only a public reprimand, stating

‘(t)his action is prompted by unusual facts which have

not previously been presented. ’’ (emphasis added). See

also K.S.B.A. v. Tussey, Ky., 476 S.W.2d 177 (1972);

Frazee, v. Citizens Fidelity Bank and Trust Co., Ky.,

393 S.W.2d 778 (1965); K.S.B.A. v. First Federal Sav-

ings and Loan Ass’n, Ky., 342 S.W.2d 397, 400 (1961),

where the Court stated, In view of the fact that this

particular phase of commercial activity has not

heretofore been considered, ... we are not at this time

inclined to impose a penalty’’ (emphasis added); and

Bonner v. Goodloe, Ky., 266 S.W. 62 (1924) and Hen-

drick v. Posey, 45 S.W. 525 (1898). After diligent

search, we have found no disciplinary case in Ken-

tucky, imposing more than a reprimand in a case of

first impression.

SUSPENSION SHOULD NOT HAVE BEEN

IMPOSED AND IS INCONSISTENT WITH

PRIOR DECISIONS OF THIS COURT

The punishment imposed in this case is incredibly

harsh. The circumstances are unusual, and this Court

has been offered no guidance from other jurisdictions,

because there has been no case found with similar

facts. On March 22, 1983, however, two days prior to

the filing of Respondent’s Brief, the Oregon Supreme

Court decided the remarkably similar case of Jn re

Tla

Scott, Or., 660 P.2d 157 (1983). But in Scott, the

Oregon Court properly found Scott had violated DR

5-101(A) and DR 5-105(A)+C), because of his failure to

disclose the conflicting interests. For that failure, and

not for dealing with a client, Scott was reprimanded.

This Court found no such failure to disclose, nor

any other violation of the 1978 ABA Code. which this

Court has adopted as ‘‘a sound statement of the stan-

dards of professional conduct required of members of

the bar...’ SCR 3.130. Instead it found only ‘poor

judgment”’, in preparing a check (at Nath’s request

and according to his directions). But ‘“‘poor judgment”’

alone, without some further proof of moral turpitude,

has never been sufficient ground for suspension in

Kentucky. After diligent review, we have found no

Kentucky case where an attorney guilty of only ‘‘bad

judgment,’ was punished by more than reprimand or

8. In that case attorney Scott owned 26% of Modular

Systems, Inc. He (unlike Smith) was a corporate officer. as well as

attorney for the corporation. He also represented Mrs. Glantz,

procuring for her a $6,000 payment. He hereafter (unlike Smith)

solicited a $10,000 loan from Glantz for Modular Systems. In pro-

curing the loan he admitted that (unlike this case) he did not

disclose to Glantz that their interests were adverse: and, he did

not advise her to seek separate counsel. Although Scott prepared

a note and second mortgage for Glantz, the interest rate was less

than the market rate for a second mortgages, and she was given

no title certification or insurance to establish the validity of her

mortgage. Later there was a default, and there is no indication

from the Opinion that Glantz was ever repaid. Scott entered a

plea of no contest. Surely Scott's conduct was much more

egregious than the innocent conduct of the Respondent in this

case.

72a

censure. See K.S.B.A. v. Jones, Ky., 372 S.W.2d 794

(1963); Duffin v. Commonwealth, Ky., 271 S.W. 555

(1925).

Eric Smith has never previously been the subject

of bar discipline or complaint. His record has been

spotless and exemplary. As a law journal editor,

graduating with distinction and serving as a law clerk

of this Court, he has consistently achieved significant

honors and respect in his study and practice of law.

And in Kentucky “‘an attorney’s previous clear record

and unquestioned good character is entitled to great

weight in passing upon the diccipline or penalty to be

administered."’ In re Weaks, Ky., 118 S.W.2d 525, 526

(1938), emphasis added.

THIS COURT SHOULD HAVE DISMISSED

THE CHARGES BECAUSE OF NATH’S

ABUSE OF PROCESS

A reopening of this case was requested, when

Nath came to Smith seeking money, and informing

him that he (Nath) had been advised by his accountant

and new lawyer that they believed Smith would pay

Nath $30,000, if Nath filed a complaint with the

Kentucky Bar Association.’ Nath’s open admission of

his abuse of the disciplinary process of this Court, to

9. This Court's denial of Respondent's Motion to reopen the

case was not prejudicial to Respondent, only because all factual

doubts were resolved in Respondent's favor and Nath's

testimony was not relied upon.

73a

recover money at no cost to himself, casts the severest

doubt upon his credibility. And although this Court

has recognized that Nath’s conflicting testimony did

not provide a sufficient foundation upon which to

discipline Smith, his admitted abuse of this pro-

ceeding as a tool for private monetary gain should not

be countenanced by this Court. As the Court stated in

K.B.A. v. LaBach, Ky., 564 S.W.2d 11, 13 (1978), in

reducing a Board of Governors recommendation of

disbarment to a public reprimand,

While we certainly do not intend to deter the bar

association from the continuance of - indeed com-

mend it for - its constant vigil to maintain a high

level of competence and integrity throughout the

legal profession, neither are we in the business of

settling private disputes... (emphasis added).

Further, the Court recognized that,

Our disciplinary processes provide a way to

purification of our profession but it is highly im-

portant that the way does not become an avenue

to personal, religious or political reprisal. The

possibilities of such misuse must be held to a

minimum. In re Wehrman, Ky., 327 S.W. 2d 743,

744 (1973). (emphasis added).

The use of bar disciplinary proceedings as a club

to accomplish the resolution of business disputes

enhances neither the public’s respect for the profes-

sion or its own sense of integrity.

74a

Nath had no civil action against Smith. And this

proceeding is nothing more than an attempt to in-

timidate and coerce an attorney into paying Nath

money which he does not legally or morally owe. This

Court should not allow such a contemptable abuse of

this Respondent and this Court.

CONCLUSION

Here is a reputable lawyer with an excellent

record who has been told by this Court that he has

violated no announced rule of ethics. In fact he has

been told by this Court that his compliance with its

published disciplinary rules (i.e. his refusal to repre-

sent conflicting interests) is a ‘‘non-defense.’’ For this

Court to then punish him for an activity not amount-

ing to the practice of law, a mere ministerial act in-

volving no moral turpitude, fraud, misrepresentation

or overreaching, is inherently wrong. In its reliance

upon the Board’s unsound Opinion and apparent sym-

pathy for Nath’s alleged loss, this Court confused the

principle set forth in its two Advisory Opinions that it

is, and should be, the rendering of some legal service

in a conflict situation (i.e. the representation of con-

flicting interests, without full disclosure and consent)

that is the proscribed conduct, not (as here) perfor-

mance of only an extremely limited clerical act.

In so doing this Court has adopted a new rule, and

held Smith to a new standard completely beyond and

at odds with this Court’s adopted rules. There was no

75a

prior notice to Eric Smith, or any other member of this

Bar, that such innocuous conduct would be considered

“unethical’’ by this Court, or that a refusal to repre-

sent parties in the limited area of their conflict would

be characterized as a ‘“‘non-defense’. Without such

prior notice, any retroactive condemnation and

punishment of such conduct violates both state and

federal due process guarantees.

The Board’s Opinion improperly shifted the

burden of proof to Respondent. The Board started

from a position that it is a per se violation of an at-

torney’s ehtical duties to become involved in financial

dealings with a client. The Board’s erroneous use of

civil evidentiary presumptions was inadvertently

adopted by this Court. The result is a new rule, pro-

mulgated without the usual hearings procedure this

Court has traditionally used to examine a new rule’s

prospective effect. Had such prior hearings been held,

this Court would have realized that this new rule is

not a workable rule for the attorneys of Kentucky. It

condemns conduct which is as common place as it is

innocent. It will have an extreme chilling affect on all

business transactions between attorneys and clients,

and will place attorneys at the mercy of the

unscrupulous. Their licenses at risk, other attorneys

will face, as Smith has, the threat of disciplinary pro-

ceedings as a tool of intimidation and coercion. Far

worse, by punishing attorneys for becoming involved

in business transactions w

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