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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1984
- **Citation:** 469 U.S. 1037

## Text

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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
v.

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

iv

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
v.

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

3

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.

od

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.

eee See ee

Bel Tela 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

70a

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 with clients, this Court will
be sending a message to the public that this Court

76a

does not feel that attorneys can be trusted to fairly
and honestly deal with their clients. Such a rule itself
tends to bring the Bar into disrepute. The result
would be not only an injustice to this Respondent but
to the members of the Bar and this Court itself.

For the reasons set forth above, this Court should
dismiss the charges against Eric Smith, or in the alter-
native, grant a rehearing and oral argument before
this Court.

Respectfully submitted,

/s/ Bert T. Combs

BERT T. COMBS

WYATT, TARRANT & COMBS
2800 Citizens Plaza

Louisville, Kentucky 40202

/s/ Ben L. Kessinger, Jr.

BEN L. KESSINGER, JR.
STITES AND HARBISON

400 Bank of Lexington Building
101 East Vine Street

Lexington, Kentucky 40507

Counsel for Respondent,
ERIC S. SMITH

* *¢+ *&* *&* & & ®

77a

REC'D JAN - 5 1984

SUPREME COURT OF KENTUCKY
FILE NO. 83-SC-144-KB

KENTUCKY BAR

ASSOCIATION > COMPLAINANT
Ve
ERIC S. SMITH RESPONDENT

RESPONSE TO PETITION FOR
REHEARING AND MODIFICATION

Respectfully submitted,

/s/ Michael M. Hooper
MICHAEL M. HOOPER, ASST.
DIRECTOR
KENTUCKY BAR ASSOCIATION
WEST MAIN AT KENTUCKY RIVER
FRANKFORT, KENTUCKY 40601
COUNSEL FOR COMPLAINANT

CERTIFICATE OF SERVICE

I certify that a true copy

of this Response was mailed

to counsel for respondent,

Bert T. Combs, 2800 Citizens
Plaza, Louisville, KY 40202,

and Ben L. Kessinger, Jr.,

400 Bank of Lexington Building,

78a

101 East Vine Street, Lexington,
KY 40507, this 4 day of
January 1984.

/s/ Michael M. Hooper
MICHAEL M. HOOPER

SUPREME COURT OF KENTUCKY
FILE NO. 83-SC-144-KB

KENTUCKY BAR
ASSOCIATION COMPLAINANT

V. RESPONSE TO PETITION FOR
REHEARING AND MODIFICATION

ERIC S. SMITH RESPONDENT

* > *

MAY IT PLEASE THE COURT:

THE COURT SHOULD MODIFY ITS OPINION
TO ADOPT THE FINDINGS OF FACT AND
CONCLUSIONS OF LAW OF THE BOARD OF GOVERNORS
TO AVOID UNNECESSARY CONFUSION
AND MISINTERPRETATION.

Complainant fully agrees with the Court’s
ultimate decision to follow the recommendation of the
Board of Governors and suspend respondent from the
practice of law for eighteen months. There is ample
evidence in the record to establish that a suspension is
the appropriate degree of discipline. Complainant
respectfully submits, however, that the Court's
Opinion should be modified to eliminate any
unnecessary confusion and misinterpretation. It
would be most helpful to other members of the bar if

79a

the Court were to more fully explain the facts and the
law which form the basis for its decision. The potential
for confusion and misinterpretation is obvious from
the myriad of arguments raised by respondent in his
petition for rehearing.

The problem arises in those portions of the
Court's Opinion where the Court adopts the decision
of the Board but the Opinion goes on to state an
analysis of the case which seems to be different than
that of the Board. It is unclear whether the Court in-
tends to reach findings of fact and conclusions of law
which are different from the Board's decision or
whether the Court’s Opinion is seeking to articulate
an additional or different reason for rejecting respon-
dent's primary defense to the charge.

Complainant respectfully submits that the most
appropriate, expeditious and effective way for the
Court to modify its Opinion would be to adopt the
findings of fact and conclusions of law of the trial com-
missioner and the Board of Governors. A copy of the
trial commissioner's report and the Board's decision
are attached to this response as Appendix A and B.
The essential thrust of respondent's petition for
rehearing is that the Court has resolved all factual
issues in his favor, respondent did not represent Dr.
Nath in the REBSCS transaction, the Court has only
focused on respondent's preparation of a check which
is a ministerial act, the Court has not heid that respon-
dent has violated any particular provision of the Code
of Professional Responsibility, the Court is creating a
new rule of ethics which is vague and unsound, and

80a

the Court is seeking to retroactively apply this new
rule of ethics against respondent in violation of his
right to due process of law. All such objections by
respondent can be easily resolved if the Court were to
modify its Opinion to follow the recommendations of
the trial commissioner and the Board of Governors.

The Court’s Opinion should be modified to more
fully explain that respondent did represent Nath in
the REBSCS investment, that respondent had a con-
flict of interest in violation of Disciplinary Rules
5-101(A), 5-104(A) and 5-105 of the Code of Profes-
sional Responsibility (hereinafter referred to as Code),
that respondent did not make a full disclosure of all
material facts to Nath as required by the Code and
that respondent did not obtain Nath’s informed con-
sent to waive the conflict as required by the Code. It is
very important the Court make it absolutely clear
that the discipline imposed on respondent is consis-
tent with the Code and this Court’s decision in Ken-
tucky Bar Association v. Roberts, Ky., 579 S.W.2d
107 (1979).

Complainant has previously filed a brief in the
record containing an exhaustive explanation of the
Board’s position on the facts and the law. Com-
plainant requests the Court to read the brief again.
Complainant does not want to impose on the Court’s
valuable time by repeating what is already stated in
complainant’s prior brief and the Board’s opinion.
Complainant does want to take this opportunity to
summarize several important points.

Despite respondent’s protests to the contrary, the

8la

evidence clearly proves that respondent acted as Dr.
Nath’s attorney and advisor with respect to the
REBSCS investment. Throughout the period of time
when respondent was discussing REBSCS with Nath
up to and including the date Nath invested the
$30,000, respondent was being paid by Nath a
monthly retainer fee for personal legal advice and a
monthly retainer fee to represent Nath Chartered.
Respondent gave legal advice to Nath about forming
Nath Holdings to serve as the vehicle for making the
investment in REBSCS. Respondent incorporated
‘Nath Holdings for Dr. Nath as his attorney and
respondent also opened the bank account for Nath
Holdings for the specific purpose of enabling Dr. Nath
to invest in REBSCS. The $30,000 which was used to
fund Nath Holdings came from Nath Chartered and
respondent was general counsel for Nath Chartered on
retainer. Respondent wrote out the check for Nath to
disburse the $30,000 from Nath Holdings to
REBSCS. Respondent’s act of writing out the check
for Nath’s signature was only one of several signifi-
cant actions that respondent took to advise and assist
Nath to accomplish the REBSCS investment. The
trial commissioner and the Board found that at the
meeting where respondent wrote out the $30,000
check, respondent agreed to prepare for Nath the legal
papers necessary to document the transaction bet-
ween Nath Holdings and REBSCS but respondent
never did so. Complainant is amazed that respondent
continues to argue he did not represent or advise Nath
in this transaction.

82a

In addition to concluding that respondent had a
conflict of interest by representing Nath in the
REBSCS investment, the Board agreed with the trial
commissioner’s findings that respondent did not
make a full disclosure of all material information to
Nath. Respondent did not tell Nath about the nature
and full extent of respondent’s personal financial in- |
terest in REBSCS. Respondent did not disclose to
Nath the true financial status of REBSCS. Respon-
dent did not fully and truthfully inform Nath that the
bulk of the $30,000 was going to be used to reimburse
Towles for out-of-pocket expenses. Instead, respon-
dent falsely told Nath that the $30,600 was not be to
used for any purpose except national advertising and
to register REBSCS to do businesss in all other
states.

The Board concluded that respondent’s conduct
violated Disciplinary Rules 1-102(A)(4), 5-101(A),
5-105 and 6-101(A)(3) of the Code. The Board’s
Opinion also cites Ethical Considerations 5-1, 5-2, 5-3,
5-14 and 5-16 of the Code which amplify Disciplinary
Rules 5-101(A) and 5-105. The Board based its deci-
sion squarely on the Code as it is correctly applied to
the facts.

Contrary to respondent’s assertions the Board is
not in effect recommending to the Court that a new
standard of ethical conduct be created and retroac-
tively applied to respondent. The Board’s position is
that the evidence proves respondent has violated the
established Code.

83a

THE BOARD HAS NOT MISLED THE COURT BY USING
A NEW STANDARD OF ETHICS AND IMPROPER USE
OF EVIDENTIARY PRESUMPTIONS.

Respondent contends that the Board misled the
Court into abandoning the Code and adopting ‘‘uber-
rima fides’’ as the standard to be applied in any
business dealings between a lawyer and client.
Respondent further contends that the Board im-
properly used an evidentiary presumption that all
attorney-client business dealings are per se unethical.
Respondent has misinterpreted the Board’s decision
and these arguments are erroneous.

The Board did not use any evidentiary presump-
tions taken from civil cases to improperly change or
shift the burden of proof. The Board required respon-
dent’s guilt to be proven by substantial evidence in ac-
cordance with SCR 3.330. The Board cited the civil
cases for the purpose of demonstrating that respon-
dent continued to owe fiduciary and ethical duties to
Nath because respondent continued to represent
Nath. There is nothing improper with the Board citing
and relying on the civil cases since this Court has con-
sistently held that bar disciplinary proceedings are
civil in nature and are neither criminal nor quasi-
criminal. Kentucky Bar Association v. Signer, Ky.,
558 S.W.2d 582 (1977). Furthermore, SCR 3.340 pro-
vides that the rules of evidence in civil actions shall
apply in disciplinary cases.

Complainant does not advocate and the Board’s
decision does not say that all business dealings

84a

between a lawyer and clients should be prohibited or
presumed to be unethical. A lawyer who enters into a
business transaction with a client or a lawyer who has
a conflict of interest shouid comply with Disciplinary
Rules 5-101(A), 5-104 and 5-105 of the Code or suffer
the consequences of being disciplined for unethical
conduct. If a lawyer complies with the Code by obtain-
ing his client’s informed consent to waive the conflict
and the lawyer continues to provide the client with
legal advice and representation in the same subject
matter (as respondent did in the present case), then
the lawyer must also continue to fulfill the ethical and
fiduciary duties of competency, loyalty and honesty
that a lawyer owes to each client. Just because a
lawyer obtains his client’s informed consent to waive
a conflict of interest does not mean that the lawyer is
thereafter free to continue to represent the client in
the same subject matter and be incompetent, disloyal
or dishonest. As long as the lawyer provides legal ad-
vice and representation to a client, the lawyer owes
corresponding, cencurrent ethical and fiduciary duties
to the client. The civil case law cited by the Board in
its decision stand for this proposition. Such a legal
standard is entirely consistent with the Code which re-
quires a lawyer as a matter of professional ethics to
provide his clients with competent, loyal and honest
legal representation on matters which are the subject
of the attorney-client relationship.

In its Opinion the Board discussed and rejected
respondent’s defense that at some point he told Nath

85a

to seek other counsel. On Page 2 of its decision, the
Board states:

While Smith apparently advised Nath to obtain
other counsel because of a potential conflict in
connection with the transaction, Smith
nonetheless proceeded forward with the transac-
tion which unquestionably advanced Towles’ and
REBSCS'’s interests, as well as his own, at the
expense of Nath. The Board 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.

Complainant submits that this is an absolutely
correct statement of what the law is and should be in
Kentucky. Smith rendered legal advice and services to
Nath directly in connection with the REBSCS invest-
ment. An attorney-client relationship existed between
respondent and Nath in regard to this particular
transaction. Smith contends he told Nath to seek
other counsel. The Board’s Opinion correctly states
that regardless of whether Smith told Nath to consult
with another lawyer Smith continued ahead with the
Nath investment in REBSCS with Nath in the posi-
tion of being respondent’s client. Respondent con-
tinued to provide legal advice and services to Nath by
respondent incorporating Nath Holdings and respon-
dent setting up the disbursement of the $30,000 to
REBSCS. Since respondent continued to act as
Nath’s attorney in the transaction Smith remained

86a

under an ethical duty to be completely loyal to Nath
and to fulfill his fiduciary obligations to protect
Nath’s interests. Respondent could not and did not
relieve himself from all ethical and fiduciary duties
owed to his client, Nath, merely by telling Nath to
consult with another lawyer.

A client is entitled to repose confidence and trust
in the loyalty and integrity of his lawyer. As long as
respondent by his actions remained involved in the
REBSCS investment as a lawyer assisting Nath, Ken-
tucky law requires and Nath had a right to expect
respondent to provide competent, honest, indepen-
dent and loyal representation which would protect
Nath’s interests. If respondent was unwilling or
unable to provide such candid and loyal legal advice
then respondent should not have taken any part what-
soever in the REBSCS investment for Nath. Any
disclaimer by respondent to Nath that Nath should
obtain other counsel did not lessen respondent’s
ethical and fiduciary duties owed to Nath when
respondent continued to advise and represent Nath.
When the Court reads the Board’s decision it will see
that it was in this context that the Board cited some
civil cases, including Daugherty v. Runner, Ky., App.
581 S.W.2d 12 (1978). These civil cases do not state
any legal principles which are not already part of the
Code concerning a lawyer’s duty to be competent,
honest, loyal and vigilent in protecting and promoting
the interests of a client. The civil cases cited by the
Board do not create a new standard of ethics which
goes beyond the existing Code. In a recent case this

87a

Court suspended a lawyer from the practice of law for
three years because he had violated his fiduciary
duties while serving as the executor of an estate. Ken-
tucky Bar Association v. Berry, Ky., 626 S.W.2d 632
(1981).

A SUSPENSION IS AN APPROPRIATE
DEGREE OF DISCIPLINE.

An eighteen month suspension is not too severe
under the facts of the present case. It is helpful to
compare respondent’s case to the facts in Kentucky
Bar Association v. Roberts, Ky., 579 S.W.2d 107
(1979). Roberts was employed to represent a client in a
civil lawsuit. While the first case was in litigation.
Roberts was employed to represent a second client in
a lawsuit against the first client involving a separate
but related cause of action arising cut of the same sub-
ject matter. Roberts did not disclose the potential con-
flict of interest to the first client nor obtain a waiver of
the conflict from the first client prior to filing a
lawsuit against him on behalf of the second client.
This Court held that Roberts had violated DR 5-105 of
the Code and suspended him for ninety days. The
Court found that Roberts’ conduct was unintentional
and his clients did not suffer any actual harm.

Complainant submits that respondent’s miscon-
duct is clearly more serious in nature than Roberts’
actions and respondent, therefore, deserves a
significantly more severe degree of discipline than the
ninety days suspension administered to Roberts.

88a

Respondent had a conflict of interest not only between
clients but he had a conflict between himself and a
client, Nath. The Board also found that respondent is
guilty of neglect and misrepresentation. Furthermore,
Roberts’ client did not suffer any actual harm while
respondent’s client, Nath, lost $30,000 and the harm
suffered by respondent's client is an aggravating cir-
cumstance. Respondent argues that this Court has
only found him guilty of poor judgment which is not a
sufficient basis to warrant a suspension. However,
this Court has found respondent guilty not only of
poor judgment but also of having a conflict of interest
which resulted in respondent’s client losing $30,000.
Complainant respectfully submits that the Court
should modify its Opinion to cite the Code provisions
respondent has violated thereby establishing beyond
dispute that respondent is being disciplined for much
more than merely poor judgment.

This is a case of first impression in Kentucky in
the sense that it involves an unusual fact situation not
seen before. This is not to say, however, that the
Court is without guidance. If the Court applies the
Code to the evidence in the record it can only conclude
that respondent has violated the Code. In determining
an appropriate degree of discipline the Court can rely
on its prior decision in Roberts, supra, as a valuable
precedent. This Court’s suspension of respondent is
consistent with the Code and the Roberts case. The
cases cited by respondent where lawyers have been
only reprimanded for poor judgment are in applicable.

89a

Respondent cites the case of Jn re Scott, Ore., 660
P.2d 157 (1983) in support of his argument that his
suspension would be too harsh. If this Court is going
to look to other jurisdictions for guidance on the ap-
propriate degree of discipline, complainant requests
the Court to read the case of State of Kansas v.
Callahan, Kan., 652 P.2d 708 (1982). A copy of the
Callahan decision is attached hereto as Appendix C.
The facts in Callahan are similar to the facts in the
present case. Callahan was indefinitely suspended.

Respectfully submitted,

/s/ Michael M. Hooper
MICHAEL M. HOOPER, ASST.
DIRECTOR
KENTUCKY BAR ASSOCIATION
WEST MAIN AT KENTUCKY RIVER
FRANKFORT, KY 40601
COUNSEL FOR COMPLAINANT

* * * *&* *&* & *

90a

IN THE
SUPREME COURT OF KENTUCKY
83-SC-144-KB

KENTUCKY BAR
ASSOCIATION COMPLAINANT

VS. BRIEF AMICUS CURIAE
ERIC S. SMITH RESPONDENT

* * * &©* &© *&* & & & H& ®

STATEMENT OF PURPOSE AND ISSUES

This brief amicus curiae is submitted by the
undersigned’ as a fervent plea that this Court clarify
and modify its opinion herein so as to provide clearcut
guidance to those of us who want—and try—to prac-
tice law in Kentucky ethically, honorably and honest-
ly. That clear guidance is not now provided by the
published opinion herein, and most certainly would
not be provided should this Court adopt the Bar
Association's proposal in its Response to Petition for
Rehearing and Modification. (Response Brief) While
the undersigned agree with the Response Brief that
the Court’s opinion herein should be modified, the
position of the Complainant that the opinion of the
Board of Governors should be substituted for the

1. The undersigned submits this brief with the participation
and on behalf of the practicing attorneys listed in Exhibit 1.

9la

Court’s original opinion would not solve the problems
presented by the published opinion.

The dilemma presented to the practitioner by the
Court’s published opinion and by the Board's opinion
is stark: How can or does an ethical attorney protect
himself and his clients in potential conflict of interest
situations if he cannot safely rely on the ‘“‘disclosure
and consent’’ procedure now prescribed by the
Disciplinary Rules?

ARGUMENT

I
THE COURT SHOULD CLARIFY ITS OPINION

Most practicing lawyers find themselves con-
fronted with ‘‘conflict of interest’’ situations in the
course of their professional careers. No sensible
lawyer seeks these situations. They invariably spring
forth from unsought circumstances outside the con-
trol of the lawyer. The ethical guideline for resolving
those situations hitherto has been full disclosure of
the conflicting interests to the client, an invita-
tion—more likely advice—to seek other representa-
tion, express refusal to represent the client in the
transaction giving rise to the conflict and reliance on
the client’s consent to the lawyer's participation
before undertaking to perform any legal services in
the transaction. That protective procedure is specified

92a

by Canon 5.’ The Court's opinion herein seems to find
that Respondent complied with the procedure in this
case and yet severe professional sanctions were
imposed.

The opinion herein states that Respondent’s
express refusal to represent the complaining client in
the particular transaction, while representing him or
his corporations ‘‘generally,’’ is a ‘‘nondefense”’ to im-
position of professional sanctions; and, further, that
full disclosure to the client of the “conflicting
interest’’"—stemming from both representation of
another client and/or the attorney's own personal
economic interest—followed, apparently, by the
client’s consent being given for the lawyer to par-
ticipate in the transaction is ‘‘beside the point’’. The

2. DR5-101(A) prohibits a lawyer from accepting employ-
ment if his professional judgment on behalf of the client “‘will be
or reasonably may be affected by his own financial, business,
property, or personal interests,”’ except with the consent of the
client after full disclosure. (emphasis added) DR5-104(A) pro-
hibits a lawyer from entering into a business transaction with a
client ‘‘if they have differing interests therein and if the client ex-
pects the lawyer to exercise his professional judgment” for the
client's protection, unless the client has consented after full
disclosure. (emphasis added) DR5-105 prohibits a lawyer from
accepting employment or continuing multiple employment if his
independent professional judgment “will be or is likely to be
adversely affected"’ by the employment or is “‘likely to involve
him in representing differing interests’, unless it is obvious that
he can adequately represent the differing interests “and if each
consents to the representation after full disclosure of the possible
effect of such representation on the exercise of his independent
professional judgment on behalf of each."’ (emphasis added)

93a

Court then finds that ministerial preparation of a
check at the direction of the client constitutes sanc-
tionable participation in ‘‘a transaction whereby one
client lent money to another of respondent's clients, a
corporation in which respondent had an interest."’
Having thus nullified or ignored or disregarded the
“disclosure and consent” procedure, this Court then
holds that Respondent breached the requirement of
“utmost good faith and fidelity to a client by placing
himself in a conflict of interest.’’ Without ever specify-
ing what Disciplinary Rules were violated by Respon-
dent's actions, the Court imposes an eighteen-month
suspension for this infraction.

The opinion may thus be read to hold both that
Respondent did and did not “‘represent’’ the complain-
ing client in the transaction, and did fully disclose and
obtain consent but it was irrelevant; and the opinion
may be understood to rest on the Disciplinary Rules,
or on an equitable standard outside the Disciplinary
Rules, or on some new unarticulated principle. The
opinion of the Board of Governors of the Kentucky
Bar Association, which the Court states it adopts,
suffers from the same ambiguities.

For the future guidance of Kentucky practicing
lawyers, the Court should modify its opinion herein so
as clearly to state the facts and applicable ethical
standards on which it rests its ruling.

94a

II
RESPONDENT APPEARS TO HAVE COMPLIED
WITH THE CANONS

Most practing lawyers believe that when an ac-
tual or predictable conflict of interest situation arises,
whether they represent a client ‘“‘generaily”’ or ‘‘in the
particulor transaction,’’ they should fully disclose any
conflicting interest arising from representation of
another client with such interests or because of their
own personal or economic interests, and give the
client his free choice and opportunity to seek other
counsel to represent him in the particular transaction,
or otherwise consent to the lawyer’s continued par-
ticipation therein nctwithstanding the conflict of in-
terest. The Disciplinary Rules expressly require that
of the lawyer’, and thus expressly authorize him to

3. Technically speaking, the Disciplinary Rules do not
automatically require this disclosure and consent procedure in
every conflict of interest situation. DR5-101(A) does not ab-
solutely require it unless the lawyer’s professional judgment
‘will be or reasonably may be”’ affected by his own personal in-
terest. DR5-104(A) does not flatly prohibit him from entering
into a business transaction with a client unless ‘‘they have differ-
ing interests therein and if the client expects the lawyer to exer-
cise his professional judgment therein for the protection of the
client ....’’ DR5-105 prohibits accepting or continuing multiple
representation only if the exercise of the lawyer's professionai
judgment ‘‘will be or is likely to be adversely affected . . . or if it
would be likely to involve him in representing differing
interests....’’ Ethical Considerations 5-2, 5-3, 5-14, 5-15, 5-16,
5-17, 5-18 and 5-19 explain that these rules are predicated upon
the common sense possibility that the disclosure and consent re-

(continued on page 95a)

95a

continue his participation in the transaction after hav-
ing disclosed and obtained consent. The Disciplinary
Rules are essentially silent concerning the lawyer’s
ethical obligations in the transaction after he has
disclosed and obtained the client’s consent.‘

(footnote 3, continued from page 94a)

quirement should be imposed only on an existing or predictable
conflict of interest severe enough to ‘‘affect’’, or ‘‘reasonably
probable”’ or “‘likely’’ to affect, exercise of the lawyer’s profes-
sional judgment on behalf of the client. They recognize that some
conflict of interest situations do not require disclosure and con-
sent. EC5-15 states this distinction expressly and indicates that
a lawyer may properly represent multiple clients with ‘‘potential-
ly differing interests in matters not involving litigation’’, ap-
parently without disclosure and consent. Notwithstanding these
common sense limitations on the rules, most practicing lawyers,
like Respondent here, routinely disclose existing or potential con-
flicts, however slight, and obtain the client’s consent to their con-
tinued participation in the transaction. Although the Opinion
does not expressly find that the conflict of interest situation here
involved required disclosure and consent within the meaning of
Canon 5, this brief assumes that the Court impliedly so found,
and proceeds on that assumption.

4. The opinion of the Board of Governors, p. 5, states that
the Disciplinary Rules seem to provide that ‘almost anything
goes’’ after disclosure and consent. Amicus disagrees. There are
several express prohibitions noted in the Ethical Considerations.
EC5-2 states he should ‘‘refrain from acquiring a property right
or assuming a position that would tend’”’ to impair his judgment
regarding the client’s protection. EC5-3 prohibits a lawyer from
persuading his client to allow him to invest ‘‘in an undertaking of
his client nor make improper use of his professional relationship
to influence his client to invest in an ‘enterprise’ in which the
lawyer is interested.’’ EC5-15 notes a lawyer should never repre-
sent in litigation multiple clients with differing interests. Beyond
these few express prohibitions, however, neither the rules nor the

(continued on page 96a)

96a

The Court’s opinion herein seems to find, or con-
cede, that Respondent did fully disclose both his
representation of Towles ana REBSCS and his owner-
ship interest in REBSCS and obtain the complaining
clients’ consent to act as he did in the loan transac-
tion. The issue to the undersigned thus becomes

. inimical

(footnote 4, continued from page 95a)

Ethical Considerations offer express guidance on the lawyer's af-
firmative ethical obligations when he acts in conflict of interest
situations with the client’s consent. Amicus believes and takes
the position herein that aside from these prohibitions after
disclosure and consent the Canons continue to govern the
lawyer’s conduct as he undertakes thereafter to serve the in-
terests of both clients as they apply in the post-consent situation.
As discussed more fully infra at pp. 8-9, 14 and 15, the Trial Com-
missioner found that Respondent did not violate any of the ex-
press prohibitions. Report of Trial Commissioner, pp. 8, 9 and 13,
and Amicus contends that Respondent appears to have otherwise
complied with the canons in the post-consent situation here.

5. Respondent and the Bar Association hotly contest over
whether Respondent was ‘“representing’’ Nath when the
loan/investment check was written. The position taken by
Amicus here is that the Disciplinary Rules authorized Respon-
dent to ‘‘participate’’ in the transaction without fully ‘‘represent-
ing’’ either Nath or Towles by virtue of the disclosure and con-
sent. The Bar Association in its Response Brief contends that
Respondent did not fully disclose nor obtain Nath’s ‘‘informed”’
consent; however, to adopt that position the Court would now
have to reverse its prior finding and disregard the findings of
both che Trial Commissioner and the Board of Governors on this
point. It seems clear that from the beginning Nath knew that
Respondent had an option to purchase an interest in REBSCS
and that he represented both Towles and his company. Both the
Opinion of the Board of Governors, page 2, and the Trial Commis-
sioner found as a fact that “Smith did advise Nath to obtain

(continued on page 97a)

97a

what, precisely, should the lawyer have done in this
dual conflict of interest situation to avoid an ethical
violation.

A. RESPONDENT COMMITTED NO VIOLATIONS BY
PARTICIPATING IN A TRANSACTION BETWEEN
MULTIPLE CLIENTS.

Having disclosed that he also represented the in-
tended borrower of Nath’s funds and obtained the
client’s consent, Respondent was in the position of
‘“‘generally”’ representing multiple clients with ‘‘poten-
tially differing interests’’ in a transaction which is not
in litigation. EC5-15 states:

[T]here are many instances in which a lawyer may
properly serve multiple clients having potentially
differing interests in matters not involving litiga-

(footnote 5, continued from page 96a)

other counsel because of the possible conflict of interest between
Towles and Nath and Smith and Nath.”’ Report of Trial Commis-
sioner, page 13. The Trial Commissioner also found as a fact that
‘the evidence clearly indicates that Nath was furnished detailed
information regarding the workings of REBSCS and even infor-
mation regarding prospective purchasers of stock in RE BSCS."’
Report of Trial Commissioner, page 14. There would thus seem to
be no factual basis for the Court now to find that Respondent did
not disclose the conflict of interest to the client. ‘lhe ciient’s con-
sent to Respondent's participation in the transaction would seem
to have been given by Nath requesting that Respondent explain
REBSCS corporation to his wife, by commissioning Respondent
to form Nath Holdings, Inc. inter alia for the purpose of ‘‘in-
vesting’’ in REBSCS, and by directing Respondent to prepare
the ‘‘loan’’ check. Report of Trial Commissioner, pp. 10, 11, 12
and 13.

98a

tion. If the interests vary only slightly, it is
generally likely that the lawyer will not be sub-
jected to an adverse influence and that he can re-
tain his independent judgment on behalf of each
client ....’’ (emphasis added)

EC5-17 notes that it is essentially a case-by-case
determination whether a lawyer can fairly and ade-
quately protect the interests of multiple clients in a
specific non-litigation situation.*®

From these guidelines most practicing lawyers
understand that in these situations they have the
ethical obligation to serve the interests of both clients
to the extent they ethically can, and that evaluation
by the Bar and this Court of the lawyer’s performance
of these obligations, made after the fact, will be made
on the circumstances of that case and the obligations
he owed both clients—not just the complaining one.
Further, they feel that sanctions should not be based
on post hac determinations that they exercised “‘poor
judgment”’ either in ever agreeing to “‘serve the in-
terests’’ of both clients in the first place, or in the way

6. The Court’s choice of language is very confusing when it
states that ‘‘[iJn placing himself in this position’’ and ‘‘a lawyer
must...not place himself...in position of conflict of
interest. ..’’". (emphasis added) If this language means that a
lawyer can never undertake to serve the potentially differing in-
terests of multiple clients, notwithstanding disclosure and con-
sent, it represents a change in the Disciplinary Rules as inter-
preted by the Ethical Considerations. If the language refers to
the other dimension of the situation—the fact Respondent owned
an interest in REBSCS— it is equally confusing.

99a

they served the interest of the complaining one, and
that in such determinations ‘‘all doubts [should] be
resolved in favor’ of the lawyer. Kentucky State Bar
Ass'n. v. Taylor, Ky., 482 S.W.2d 574, 583 (1972).

The Court’s opinion does not specify precisely
what ethical obligation Respondent failed to
discharge to Nath. The Complainant in its Response
Brief asserts generally that Respondent failed to
make full disclosure of all material information to
Nath. Even if correct, this would seem to bear on
whether the client’s consent was “‘informed"’, and not
on Respondent’s ethical obligations after the client’s
consent was given. Holding it was ‘‘beside the point”’
whether Nath knew that Respondent owned an in-
terest in REBSCS or that Towles planned to reim-
burse himself $10,000.00 in expenses from Nath’s
loan, the language of the opinion thus indicates that
Respondent either told Nath or had no obligation to
tell him those facts. The Report of the Trial Commis-
sioner finds that Nath knew the former fact, and was
not told the latter by Respondent. In either event, it
would not seem to be a violation of any Disciplinary
Rule even if he did not tell him what Towles intended
to do with the funds.’

7. None of the opinions previously rendered herein by this
Court, the Board of Governors or the Trial Commissioner stute
that Towles reimbursement of $10,000.00 was improper or not
related to ‘‘national advertising”’ or licensing RE BSCS in other

(continued on page 100a)

100a

The Complainant in its Response Brief also sug-
gests that the lawyer “‘should not have taken any part
whatsoever in the REBSCS investment for Nath.”
But the very services the lawyer rendered to his client
here—incorporating Nath Holding, Inc. and preparing
the loan check as directed by the client—are
ministerial services most practicing lawyers would
have performed for either or both of their clients in
these circumstances. If it is now their ‘‘fiducial obliga-
tion’’ to refuse to perform these routine services, and
to take no part ‘“‘whatsoever’’ in loan transactions
between two clients they represent “generally ', then
an apparent change in the Disciplinary Rules has oc-
curred. This new ethical obligation will also affect
lawyers preparing checks for both parties in loan clos-
ings, lawyers representing banks whose other clients
borrow money from the bank—possibly executing
notes and mortgage forms drafted by him, lawyers
forming corporations for their clients to deal with
each other, or lawyers acting for multiple parties in
countless other contexts including inter alia drawing
joint wills, estate planning, advising corporate of-

(footnote 7, continued from page 99a)

states, the expenses Nath apparently was told his loan would be
used to pay. For all that appears in the various findings of fact,
the reimbursement was for a bona fide expenditure by Towles for
those purposes. The Bar Association in its Response Brief states
Respondent ‘‘falsely"’ told Nath his loan would be used for those
purposes but the Trial Commissioner did not find that statement
was false and its truth or falsity would seem finally to depend
upon precisely what expenses Towles was reimbursed.

_— —— o . —-

10la

ficers and directors of corporations which they also
represent, forming family corporations, and filing
uncontested divorces.

The main problem with imposing these broad sug-
gestions of the lawyer’s ethical obligations to one
client in multiple client situations is that they may
force him into violations of his ethical obligations to
the other client. If he is obligated generally by Canon
5 to disclose to one client information learned from or
about or the ‘“‘confidences’’ of the other, he may be
forced into violating Canon 4.* If he is to reveal some
information but not other information — by what

8. ““Confidence’’ means information protected by the
attorney-client privilege under DR4-101(A). A lawyer is pro-
hibited from revealing a confidence or ‘‘us[ing] a confidence to the
disadvantage of the client . . . [or] for the advantage . . . of a third
person’’ without the protected client’s consent. DR4-101(B).
Without that consent, he is authorized only to reveal ‘‘[t}he inten-
tion of his client to commit a crime and the information necessary
to prevent the crime.’’ DR4-101(C) Under DR 7-102(B)(1) he must
reveal information relating to a client’s ‘‘fraud’’ if the client
refuses to do so himself. This nondisclosure obligation is set forth
in even stronger terms in the American Bar Association ‘‘Model
Rules of Professional Conduct’’, August 2, 1983, Rule 1.6 and
Rule 1.8(b), where it is made applicable to ‘‘information relating
to representation of a client’’ obtained from whatever source.
While the Model Rules have not been adopted by this Court.
reference to them here and throughout this brief is for the pur-
pose of illustrating the current position of the American Bar
Association on the point. The information about lowles reim-
bursement intention would appear to be a confidence, and not one
relating to an intention to commit a crime. There is no finding in
this case that the Towles reimbursement was a ‘‘fraud’’ on Nath.

102a

criteria does he choose? If the lawyer is obligated by
Canon 5 to have nothing whatsoever to de wriin a
specific transaction between two cliexvs he represents
“ger. cally”, he ruus ine risk of violating Canon 1,
Canon 6, and Canon 7, not to mention his practical
obligation to be worthy of his hire. If he may per-
missibly perform some types of legal services for both
but not others — what are they?

The ethical practicing lawyer serving consenting
multiple clients who have only potentially differing in-
terests in a non-litigation context is entitled to clearer
guidance as to his ethical obligations than the Court’s
broad statements that he should “not place himself or
herself in position of conflict of interest such as to
bring the bench and bar into disrepute”’ or, the Bar
Association’s suggestions that he should “have
nothing whatsoever to do with the transaction.”’

B. RESPONDENT COMMITTED NO VIOLATIONS OF
THE RULES IN DEALING WITH THE CLIENT IN A
MATTER INVOLVING HIS OWN ECONOMIC
INTEREST.

Most practicing lawyers believe that the
disclosure and consent procedure is also available to
them in situations where, through no solicitation by
them, their own pre-existing economic interests
become entangled with those of a client. They further
believe that their ethical obligations to the client after
they have fully disclosed the conflict of interest and
the client has given consent to their continued par-

eS a a Ye

103a

ticipation in the transaction require them to refrain
from overreaching or profiting personally at the
client’s expense or injuring the client, but do not
extend to renouncing their own economic interest or
guaranteeing that the client profits from the
transaction.

Yet under the Court’s opinion herein an attorney
is heavily penalized apparentiy because he had an
option to acquire a 25% interest in a corporation to
which another corporation he formed for another
client later made a loan, and he prepared the loan
check at the client’s direction, notwithstanding prior
disclosure and consent.°

Literally speaking, respondent here did not ‘enter
into a business transaction with a client’’ as pro-

9. The Court’s opinion herein does not make clear whether
Respondent's economic “‘interest’’ in REBSCS is an independent
ground for the ruling or merely a fact complicating the multiple
client situation. However, if it was ‘‘beside the point’’ whether
Nath knew about Respondent's option to purchase an interst in
REBSCS then it would seem similarly irrelevant whether that in-
terest was 5% or 25%, or was coupled with a contractual right to
receive 5% of the company’s “‘gross earnings’’, restrict dilution
and inspect the books. (Apparently, Respondent never exercised
his option to purchase any interest in REBSCS nor did the com-
pany ever have any “gross earnings’’.). Finally, there was no
violation of the prohibitions of EC5-2 because Respondent did
not ‘‘acquire’’ his REBSCS interest after commencing his
representation of Nath ‘“‘generally’’; instead, the sequence was
reversed. It seems equally clear that Respondent did not attempt
to persuade Nath to invest in REBSCS, as prohibited by EC5-3,
and instead attempted to persuade him otherwise. Report of the
Trial Commissioner, page 8.

104a

hibited by DR5-104(A). Whether finally characterized
as a “loan” or “investment’’, the funds transfered
were from a corporation to a corporation, and even if
Nath Holding Ltd. be deemed the alter ego of Nath it
cannot be fairly said that REBSCS was Respondent’s
alter ego. Further, DR5-104(A) prohibits the lawyer
from entering into such business transaction only if
the lawyer and client “have differing interests
therein’’ and if the client expects the lawyer to exer-
cise his professional judgment thereiz for the protec-
tion of the client....’’ Notwithstanding these
technicalities and assuming this loan or investment
comes within DR5-104(A), it is not clear what ethical
transgression occurred. The lawyer did not ‘‘acquire
property rights’’ adverse to the client nor try to per-
suade the client to invest in the corporation as pro-
hibited by EC5-3, nor “assume a position’’ that
tended to make him less protective of the client’s
rights, as prohibited by EC5-2, after the disclosure
and consent. He owned his interest in REBSCS before
commencing to represent Nath. He did not profit per-
sonally at the client’s expense; nor did he engage in
any malpractice to the client’s injury. Yet he stands
suspended from conducting the practice of law for
eighteen months. It is not at all clear why this should
be so. Most troubling of all is that there is no clear
guidance as to how the same outcome can be avoided
by another lawyer who finds himself in the same posi-
tion and who wishes to live and practice law ethically.

105a

Many lawyers acquire economic interests in
property, corporations or business ventures which
subsequently attract the attention of their other
clients. Oftentimes they receive the interest in the
form of a fee, as did Respondent here, and continue to
represent the entity in which they hold an economic
interest. The ruling here goes far toward holding that
the lawyer thereby becomes an insurer of the
economic success of any client who subsequently
loans or invests money in the entity.'°

An equally important dimension to the problem
created by the ruling here is guidance as to a lawyer's
ethical obligations, once having ‘‘placed himself or
herself’’ into this conflict situation. Is he now
obligated to renounce or transfer his economic in-
terest and withdraw from representation of the
business entity? Even should he do so, EC4-6 would
require that he “preserve the confidences’’ of his
former client, and he would be prohibited by Canon 5
and Canon 9 from representing the second client. See

10. While the lawyer can be loosely said to have thus
‘““placed"’ himself in a conflict of interest position, the Court offers
no guidance as to how he could have avoided the situation. There
is no indication in this case that Respondent at the time he ac-
quired his interest in REBSCS could or should have foreseen
Nath’s subsequent interest in loaning or investing in the com-
pany. The clear implication of the Court's ruling—and the Com-
plainant's position here—is that the only safe course of action is
for the attorney never to ‘‘place”’ himself in respondent's position
by acquiring the economic interest at all. The Canons do not now
require that course of action and probably could not.

106a

Rule 1.9 of the American Bar Association ‘‘Model
Rules of Professional Conduct,”’ August 2, 1983. The
Complainant’s suggestion that he have nothing
“‘whatsoever” to do with the transaction runs afoul
both of common sense, his own economic interest, and
Canons 1, 6 and 7. Further, it does not adequately ad-
dress the situation where the lawyer’s economic in-
terest in the business entity is threatened by the
actions of the client. Surely there is no ethical obliga-
tion to avoid all participation “‘whatsoever’’ in the
transaction if the client’s action will or may harm both
the entity and the lawyer’s economic interest.

The Court should modify its opinion herein to
make clear that after the lawyer has disclosed his
“own financial, business, property, or personal in-
terests,"’ declined to represent the client, and the
client has consented to the lawyer's participation in
the transaction that the lawyer has not ethically
guaranteed that the client will profit from the transac-
tion, but that the lawyer will remain subject to forfeit
any persona! enrichment at the client’s expense
gained by any breach of his fiduciary duty and be sub-
ject to personal liability for any injury to the client by
reason of malpractice.'' It is important to maintain a

11. There is indication in the record of this proceeding before
the Board of Governors that Nath may have filed his Complaint
herein for the purpose of coercing Respondent to reimburse him
for his loss in the transaction upon the advice of his accountant.
While this may have been reprehensible behavior by the com-

(continued on page 107a)

107a

distinction between those situations in which an at-
torney may have obligations to a client imposed by
law, as would any other person, and those situations
in which an attorney has ethical obligations to a client
imposed by our profession."*

C. RESPONDENT VIOLATED NO DISCIPLINARY
RULES BY FAILING TO DOCUMENT THE “LOAN.”

The opinion suggests, but does not clearly hold,
that Respondent acted irresponsibly by failing to
document the “‘unsecured loan”’ transaction because
“[T}here was no security."’ The Complainant similarly
charged that Respondent “failed and neglected to

(footnote 11, continued from page 106a)

plaining client, neither he nor the accountant is subject to the
Disciplinary Rules. The Court notes in its opinion that Nath ‘‘lost
any hope of the loan being repaid,”’ thereby intimating what is
not borne out by the record. Nath apparently has never directiy
sought recovery of his “loan” from REBSCS or Towles, nor sued
Respondent for malpractice.

12. The Disciplinary Rules do not expressly address this
point. However, the Preamble to the American Bar Association
“Model Rules of Professional Conduct,"’ August 2, 1983, states:
“Violation of a Rule should not give rise to a cause of action nor
should it create any presumption that a legal duty has been
breached. ... They (the Rules) are not designed to be a basis for
civil liability. ... Accordingly, nothing in the Rules should be
deemed to augment any substantive legal duty of lawyers or the
extra-disciplinary consequences of violating such a duty.’ The
reverse proposition is, perhaps, even more important: violations
of legal or ethical obligations imposed by other authorities are
not a basis for imposition of the Bar's professional sanctions by
the Court unless they also constitute a violation of the
Disciplinary Rules. In Re Wehrman, Ky., 327 S.W.2d 743 (1959).

108a

prepare a promissory note or any other legal
documents necessary to evidence and secure said
loan,’’ in violation of DR 6-101(A)(3). Aside from the
fact that the ‘‘loan’’ could not be both a secured and
an unsecured one, Nath and Towles apparently never
agreed on the precise characterization of the loan.'®
The Report of Trial Commissioner notes that while no
documentation was ever prepared by Respondent,
‘‘... it appears to the Trial Commissioner that there
are mitigating factors in this charge, in that no agree-
ment or understanding was made as to ‘what this
(transaction) was.’’ Report of Trial Commissioner, p.
14.

Most practicing lawyers feel that when they are
deputed by the parties to a transaction to prepare
documentation of it there must first be agreement by
the parties on the essential terms of the matter. The

13. The Trial Commissioner found that Nath originally
wanted to invest in REBSCS and was told by Respondent no
stock of REBSCS was available for sale to him. He was later told
by Respondent in December, 1979, that Towles new wished to
sell stock in REBSCS. Report of Trial Commissioner, pp. 8, 10.
Nath prepared a check himself on February 11, 1979, “...asa
loan in exchange for convertible debenture”’’ which could be con-
verted within five years into 10% of the stock of REBSCS. At the
February 15th meeting, however, Nath refused to make an “‘in-
vestment”’ and required the second check to be a ‘“‘loan,’’ yet
‘still thought he would get ten percent (10%) of the stock in
REBSCS.”’ Report of Trial Commissioner, pp. 11, 12. It is not
surprising that this ambiguous transaction never became
documented. Nath now appears to want neither stock in
REBSCS nor a debt claim against REBSCS.

109a

lawyer is not at liberty to decide for them, nor to
adopt one or the other’s version and document the
transaction with that version so as to bind the other
without his agreement. Where the parties themselves
have not decided whether a given transaction is a loan
of money, purchase of stock, or a mixture of the two,
the lawyer who is to draw the instruments necessary
to evidence the transaction cannot act. Respondent
should not be punished for a violation of DR
6-101(A)(3) for failing to draft a promissory note,
rather than a stock purchase agreement or subor-
dinated debenture in this situation.

In the final analysis, it does not appear that the
complaining client has been injured or prejudiced by
Respondent’s failure to draft a promissory note or
other document. Apparently, no party to the trans-
action denies that Nath loaned $30,000 to REBSCS,
nor has Nath been prejudiced in any way by the fact
that no note was prepared by Respondent. If Nath has
‘lost any hope of the loan being repaid’’ it is not
because there is no promissory note.

Ill
THE PENALTY IS EXCESSIVE

The penalty imposed here on the lawyer is
excessive given the circumstances of the case. By this
Court’s characterization this is a case of ‘‘first impres-
sion’’ wherein Respondent is said to have exercised
‘poor judgment’’. It is manifestly unjust to impose

110a

the severe penalty of eighteen months’ suspension in
these circumstences. This is particularly true when
there was no clear prior warning from the Disciplinary
Rules that what Respondent was doing would be
considered wrong.

The Respondent was originally charged by the
Bar Association with violations of specified provi-
sions of the Code of Professional Responsibility. His
disciplinary hearing was conducted on those charges.
This Court’s opinion, however, suspended him for a
differe~t reason altogether. The Board of Governors
recommended sanctions because he allegedly violated
his ‘‘fiducial duties’’ and this Court seems to have
adopted that rationale for its ruling. There has yet to
be specified which Disciplinary Rules he violated.
That does not meet the constitutional requirements of
notice and an opportunity to be heard, and thus, im-
posing any sanction violates respondent’s right to
procedural due process. In Re Ruffalo, 390 US 544
(1968).

Dispensing punishment on the basis of a standard
of ethical behavior outside the Disciplinary Rules is a
drastic departure from this Court’s prior position.
Kentucky State Bar Ass’n. v. First Fed. Savings &
Loan Ass'n, Ky., 342 S.W.2d 297 (1961); In Re
Wehrman, Ky., 327 S.W.2d 743 (1959)."*

14. The First Federal case also dealt with a case of first im-
pression. The Court refused to impose sanctions in that situation,
(continued on page 11 1a)

llla

This Court is also departing from its prior posi-
tion in situations characterized as ‘‘bad"’ or ‘“‘poor’’
judgment on the part of attorneys. Duffin v. Com-
monwealth, Ky., 208 Ky., 452 271 S.W. 555 (1925);
Kentucky State Bar Ass’n v. Jones, Ky., 372 S.W.2d
794 (1963). He seems to have been suspended from the
practice of law on the basis of his own testimony that
he ‘“‘prepared a check . . . in a transaction whereby one
client lent money to another of respondent’s
clients .. . in which [he] had an interest.’’ Prior to this
case, poor judgment, without more, has never been a
sufficient basis for suspension in this state.

Further, this sanction is unbelievably harsh. It
sets an alarming precedent to all practicing attorneys.
With no prior warning from the published Rules, no
notice of the ultimate charge and without specifica-
tion of his ethical violations, this attorney has been
suspended for eighteen months—a de facto disbar-
ment. If this case is to be a vehicle for promulgation of
a new, stricter ethical rule in the state, Respondent
should not have his law practice essentially destroyed
as an object lesson to the Bar in order to underscore
the Court’s commitment to the new requirement.

(footnote 14, continued from page 110a)

as should be the case here. The Court reserved sanctions for
future violations—once the rule is known and in effect. Wehrman
holds that a lawyer should not have professional sanctions
imposed on him for reprehensible behavior under other standards
unless it also constitutes a violation of the Disciplinary Rules.

112a

CONCLUSION

The decision in the present case determines more
than the fate of the Respondent. It appears to pro-
mulgate new ethical requirements and change the
existing Disciplinary Rules.

Respondent appears to have violated no
Disciplinary Rules. He complied with the Canons
regarding full disclosure and consent and relied on
that procedure—as do we all. To then be informed by
this Court that such compliance is a ‘‘non-defense,’’ is
‘“‘beside the point,’’ and amounted to ‘poor
judgment” leaves all lawyers vulnerable. Many
members of the bar could easily find themselves in the
same position as Respondent did here, and, in the nor-
mal course of law practice, many will find themselves
so ‘‘placed”’ in the future. If they cannot rely upon full
disclosure and the client’s consent they must have fur-
ther guidance as to how to protect themselves from
disappointed clients.

Confronted with this confusing prospect, all prac-
ticing attorneys have a strong interest in the outcome
of this case. Amicus feel that Respondent was wrong-
ly suspended. This Court has stated in dealing with a
reinstatement case where other attorneys rallied to
the support of the applicant:

The Courts must repose a great deal of confidence
in the bar, and when its members are united upon
any such proposition that so directly affects the

113a

profession as the reinstatement of a disbarred at-
torney, that recommendation cannot be

disregarded.

In Re Stump, Ky., 114 S.W.2d 1094, 1100 (1938). The
undersigned are united in the proposition that suspen-
sion for eighteen months is not appropriate in the
present situation.

For all the reasons hereinabove stated, this Court
should grant rehearing, modify its opinion herein to
specify the precise ethical standards applicable. and
dismiss all charges against Respondent.

Respectfully submitted,

/s/ Eugene F. Mooney

EUGENE F. MOONEY

SHUFFETT, MOONEY, MCCOY,
CAMPBELL, LEATHERS &
NEWCOMER

1200 SECOND NATIONAL PLAZA

301 EAST MAIN STREET

LEXINGTON, KENTUCKY 40507

TELEPHONE: (606) 233-2232

/s/ Ginger C. Bronston

GINGER C. BRONSTON

HAYS & HAYS

58 SOUTH MAIN STREET
WINCHESTER, KENTUCKY 40391
TELEPHONE: (606) 744-3503

ll4a

EXHIBIT 1

Hon. Kirtley B. Amos
111 Cheapside
Lexington, KY 40507

Hon. James D. Asher
P. O. Box 786

104 Webb Avenue
Whitesburg, KY 41858

Hon. James K. Caudill
2000 Citizens Plaza
Louisville, KY 40202

Clark County Bar Association
Winchester, KY 40391

Hon. Fred E. Fugazzi, Jr.
134 North Limestone
Lexington, KY 40507

Hon. Michael J. Hammons
308 Greenup Street
Lexington, KY 41011

Hon. Ross Harris
P. O. Box 279
Pikeville, KY 41501

Hon. Morton Holbrook
100 St. Ann Street
Owensboro, KY 42301

Hon. Robert F. Houlihan
1000 First Security Plaza
Lexington, KY 40507

1l5a

Hon. W. T. Ingerton
Professional Building
North Upper Street
Lexington, KY 40507

Hon. William H. Jackson
Riverview Professional Building
Louisa, KY 41230

Justice Pleas Jones
P. O. Box 157
Williamsburg, KY 40769

Hon. Tim Lavender
Whitley City, KY 42653

Hon. Hugh Moore
301 East Fourth Street
Owensboro, KY 42301

Hon. John M. Rosenberg
Attorney at Law
Prestonsburg, KY 41653

Hon. Artaur B. Rouse
134 North Limestone
Lexington, KY 40507

Hon. Stephen M. Ruschell
200 North Upper Street
Lexington, KY 40507

116a

Hon. David A. Short
Mineral Law Institute
University of Kentucky
College of Law

Lexington, KY 40506-0048

Hon. Kenneth R. Taylor
117 West Second Street
Lexington, KY 40507

Hon. William C. VanInwegen
Suite 500

300 West Vine Street
Lexington, KY 40508

Hon. Joseph R. Wheat
East Short Street
Lexington, KY 40507

Hon. David L. Williams
P. O. Box 279
Pikeville, KY 41501

* * *§ *&©& © & *

117a

SUPREME COURT OF KENTUCKY
83-SC-144-KB

KENTUCKY BAR
ASSOCIATION, COMPLAINANT

v. ORIGINAL ACTION
IN SUPREME COURT

ERIC S. SMITH, RESPONDENT

RESPONDENT'S REPLY TO
COMPLAINANT'S RESPONSE TO
PETITION FOR
REHEARING AND MODIFICATION

Respectfully submitted,

/s/ Bert T. Combs

WYATT, TARRANT & COMBS
2800 Citizens Plaza

Louisville, Kentucky 40202

/s/ Ben L. Kessinger, Jr.

BEN L. KESSINGER, JR.
STITES AND HARBISON

400 Bank of Lexington Building
101 East Vine Street
Lexington, Kentucky 40507

Counsel for Respondent,
ERIC S. SMITH

118a

I hereby certify that a true copy

of the foregoing Reply has been
served upon the Kentucky Bar
Association by causing a true copy
hereof to be hand delivered to

Hon. Michael M. Hooper, Assistant
Director, Kentucky Bar Association,
at his offices at West Main at
Kentucky River, in Frankfort,
Kentucky 40601, on this the

22 day of February, 1984.

/s/ Ben L. Kessinger, Jr.
BEN L. KESSINGER, JR.

SUPREME COURT OF KENTUCKY
83-SC-14.-KB

KENTUCKY BAR
ASSOCIATION, COMPLAINANT

v. ORIGINAL ACTION
IN SUPREME COURT

ERIC S. SMITH, RESPONDENT

RESPONDENT'S REPLY TO COMPLAINANT'S
RESPONSE TO PETITION FOR
REHEARING AND MODIFICATION

MAY IT PLEASE THE COURT:

It is gratifying to see that Complainant has now
joined Respondent in requesting a modification of this
Court’s Opinion. Such a modification is necessary, not

119a

only to eliminate the ‘‘unnecessary confusion” com-
plained of by Complainant, but just as importantly to
remedy a gross injustice to this young attorney.

Unfortunately, Complainant’s Response does lit-
tle to alleviate the “‘confusion,’’ and nothing to correct
the unjust result. On the contrary, Complainant's
simplistic suggestion that Respondent’s objections
“can be easily resolved’’ compels this Reply.

Complainant urges this Court to avoid Respon-
dent’s Petition by renouncing its existing factual find-
ings. Complainant suggests that this Court should
now go back and find what it declined to conclude in
its previous review - that Respondent represented
Nath in this transaction. In the absence of such a new
and inconsistent finding, Respondent cannot properly
be found guilty of any ethical violation. Indeed, Com-
plainant’s Response effectively admits that the
existing factual findings of this Court do not
demonstrate that Respondent violated any
established ethical rules.

Complainant’s Response simply urges this Court
to reread its Brief. However, the repetitious ‘‘sum-
mary”’ of the illogical conclusions in that Brief, which
Complainant again offers as ‘‘fact’’ (without citation
to the Record), is neither new or persuasive. We are
confident this Court does not now intend to abdicate
its role as an independent fact finder, and simply
“rubber stamp” the Board of Governors’ recommen-
dations or accept, without question, Complainant’s er-

120a

roneous interpretation of the Record. On the contrary,
this Court has already announced that its existing fac-
tual findings were made after ‘...an independent
review of the record, the transcript and .. . the briefs
and arguments of the parties’’ (Opinion, p. 1, our
emphasis).

This Court declined to make the “‘factual’’ find-
ings which Complainant again urges. Acknowledging
the conflicting testimony, this Court indicated
reliance only upon those facts which it determined to
be reliably proven, and thus properly resolved all
significant doubts in favor of Respondent.' Indeed,
this Court has made the following findings (all con-
trary to Complainant's allegations):

1. Respondent represented REBSCS and Nath
‘“generally’’ (Opinion, p. 3), but this Court did
not find Respondent to have represented
either with regard to this particular
transaction;

2. Nath Holdings, Inc. was incorporated by the
Respondent “‘to take care of some other in-
terests of Nath’’ (Opinion, p. 1), and not, as

ee

1. This procedural principle of resolving all doubts in favor
of Respondent has been consistently adhered to by this Court,
and reflects a traditional balancing of the interests of society and
the accused attorney. See K.B.A. Franklin, Ky., 534 S.W.2d 459
(1976); K.S.B.A. v. Taylor, Ky., 482 S.W.2d 574 (1972); and,
Tudor v. Commonweaith, Ky., 84 S.W. 522 (1905). This Court has
consistently held that no attorney should be deprived of his good
name, standing, reputation, and means of livelihood, upon am-
biguous facts and contradictory testimony. Tudor, supra

l2la

Complainant suggests, solely to further
Nath's loan to REBSCS;’

3. ‘(being on the lookout for business deals, Dr.
Nath became interested” in REBSCS

(Opinion, p. 2), and not because Respondent
urged Nath to invest;

4. “(djue to personal problems experienced by
Towles, REBSCS became moribund, and Dr.
Nath lost any hope of the loan being repaid’’
(Opinion, pp. 2-3), and not, as Complainant im-
plies, that Nath’s alleged loss somehow
resulted from Respondent's actions, or alleged

2. Complainant makes much of the facts that Respondent in-
corporated Nath Holdings, opened a bank account for Nath
Holdings, and wrote the check whereby Nath Holdings loaned
money to REBSCS. These actions, however, do not prove
representation of Nath, in Nath's dealings with REBSCS. On the
contrary, formation of a general purpose corporation through
which to handle such diverse interests as race horse boarding,
pub or bar operations, and other business interests (See Smith,
Transcript, pp. 324-29), is not significant, since it aid not involve
any dealings or agreement between Towles and Nath. It was, as
was the opening of the bank account, a service performed for
Nath alone, and involved no conflict. The writing of the check
was no different. That clerical act was performed at Nath's re-
quest and according to his own directions, and involved no advice
from Respondent (See Nath, Transcript, pp. 40-42; ‘Trial Commis-
sioner Report, p. 12). Indeed it is clear from the Record that
Nath’s decision to loan money to REBSCS was made after con-
sultation with his accountant Eakle (and without advice from
Respondent) long before these limited ministerial ucts (See Nath,
Transcript, pp. 75-77; Eakle, Transcript, pp. 14+-00, 192-93: and,
Smith, Transcript, pp. 320-23, 510-12).

122a

conflict of interest;’ and, finally,

5. This Court could not be sure from the evidence
that any misrepresentation was made by
Respondent (Opinion, p. 4), thereby effectively
holding that no misrepresentation had been
proven.‘

3. See page 10 of Complainant’s Response. This Court’s
existing findings clearly indicate that the problems which caused
REBSCS to become dormant were not in any way foreseeable by
Respondent. Further, there is no showing that Nath (or more
precisely Nath Holdings, Inc.) lost $30,000.00. The evidence is
uncontradicted that Respondent is not only solvent but carried
liability insurance. Towles is also sclvent. More significantly,
neither Nath nor anyone else on Nath Holdings, Inc.’s behalf ever
made any demand for payment of the loan on REBSCS or Towles.
See Towles, Transcript, pp. 601-603, 622-24, 645-47.

4. Complainant, at page 4 of its Response, however, various-
ly alleges that Respondent ‘...did not tell Nath about
the... full extent of respondent's personal financial interest in
REBSCS”; “‘.. . falsely told Nath that the $30,000.00 was not to
be used for any purposes except national advertising and to
register REBSCS to do business in all other states’’; ‘‘. . . did not
disclose to Nath the true financial status of REBSCS”; and, in
summary “‘. . . did not make a full disclosure of all material infor-
mation to Nath.’’ These allegations are simply not substantiated,
and are disproven by the following testimony:

(a) Respondent testified that he completely informed Nath of
the extent of his interest in REBSCS (See Smith, Transcript, pp.
314-15}. More significantly, Eakle (Nath’s accountant) testified
that Respondent had informed him of Smith’s 25% option in-
terest in the fall of 1979, months before Nath’s decision to loan
money to REBSCS (See Eakle, Transcript, p. 213). Curiously,
although Nath testified that he knew from the beginning that
Respondent had at least a 5% interest in REBSCS (See Nath,
Transcript, p. 53), and Eakle testified he knew of Respondent's
25% option interest, Nath misled his new attorney, Irvin, by

(continued on page 123a)

- a ”

123a

Complainant’s argument that Respondent can be
suspended under the existing rules of this Court rests
entirely upon its unproven and illogical contention
that Respondent represented Dr. Nath with respect to
the REBSCS loan. This erroneous contention finds no
support in the Report of the Trial Commissioner or
the Opinion of the Board of Governors. Indeed, Com-
plainant’s reliance upon the following portion of the
Board of Governors’ Opinion is clearly misplaced:

(footnote 4, continued from page 122a)

feigning ignorance of this fact (See Irvin, Transcript, p. 485).
Nath’s lack of candor with his own attorney, must be considered
in assessing his credibility.

(b) As to Towles’ planned reimbursement, not only did
Respondent testify that he informed Nath of this, Towles
testified he informed Nath of his planned reimbursement as well.
(See Smith, Transcript, pp. 332-33, 359 and 449; and, Towles,
Transcript, pp. 586-88).

(c) Further, Towles also testified that he informed Nath of
the financial condition of REBSCS (See Tow!es, Transcript, pp.
586-88).

(d) Finally, as to whether a ‘‘full disclosure’’ was made by
Respondent, it is clear that Nath knew of Respondent’s interest
in REBSCS; understood the conflict of interest involved (See Ir-
vin, Transcript, pp. 483-84); knew of REBSCS’s financial condi-
tion; and, in fact had been informed of all material facts. The Triai
Commissioner confirmed this when he found that “... the
evidence clearly indicates that Nath was furnished detailed infor-
mation regarding the workings of REBSCS.... This information
had to come from Smith.”’ Trial Commissioner's Report, p. 14.
Complainant’s allegations are clearly unsubstantiated. Nath’s
testimony, the sole source of these allegations, is not only uncor-
roborated, it is contradicted and disproven on every point. Surely
Nath’s testimony cannot provide a reliable basis for any
disciplinary sanction against Respondent.

124a

While Smith apparently advised Nath to obtain
other counsel because of a potential conflict in
connection with the transaction, Smith
nonetheless proceeded forward with the transac-
tion .. . (Board’s Opinion, p. 2).

This finding falls far short of stating that Respondent
proceeded with the transaction ‘as attorney for
Nath,”’ or that Respondent ‘‘proceeded to represent
Nath in the transaction.”’ That was not the finding of
the Board. Nowhere in the Opinion of the Board of
Governors, or the Report of the Trial Commissioner,
will this Court locate such a finding! Surely, if the
Board’s finding was as Complainant suggests, the
Board could have clearly stated that finding. Nor
would the Board have felt it necessary to continue its
Opinion so far beyond a simple recitation of this
Court’s established ethical rules, to question the pro-
priety of any business dealings between attorneys and
clients. On the contrary, the most that can be found is
that Respondent represented Nath ‘generally’ in
other matters, and “‘participated”’ in the transaction,
nothing more. That, and nothing more, was also this
Court’s factual finding (Opinion, p. 3).

Complainant’s content*..2 that Respondent
represented Nath in the loan transaction is also
disproven by the testimony of the Respondent,’

5. See Smith, Transcript, pp. 276-78, 280-83, 328-30, 339-40,
348-49, 357, 394-95, 397, 399-400, etc.

125a

Charles Towles,® and Frederick Whiteside. each of
whom testified that Nath had been advised to seek
other counsel, and that Respondent would not be per-
forming legal services for Nath or REBSCS in this
transaction.’ Indeed, nowhere in the Record is there
testimony from anyone (not even from Nath) that
Respondent ever agreed to represent Nath in his
dealings with REBSCS!

Respondent must also take issue with other
erroneous impressions fostered by Complainant’s
Response. On page 4 of its Response, for example,
Complainant states ‘‘the Trial Commissioner and
Board found at the meeting where Respondent wrote
out the $30,000.00 check, Respondent agreed to pre-
pare for Nath the legal papers necessary to document
the transaction between Nath Holdings, Inc. and
REBSCS but Respondent never did so.” This
incomplete statement would lead this Court to
erroneously conclude that the Trial Commissioner
found that Respondent not only represented Nath in
the REBSCS transaction, but neglected a matter
entrusted to him. This, however, was not his finding.
On the contrary, the Trial Commissioner said:

Smith agreed to document the transaction
between Towles and Nath. Nath testified Smith

6. See Towles, Transcript, pp. 580-82.
7. See Whiteside, Transcript, pp. 563-65.

8. This fact is also confirmed by Nath’s own attorney. See Ir-
vin, Transcript, pp. 467-69 and 476-77.

126a

said he would prepare the necessary paper work
to document the transaction and this statement
was made at the final closing when Nath signed
the check for Thirty Thousand Dollars
($30,000.00). Smith admitted he said that he
would be glad to prepare the documents when
they reached an agreement as to what this was.
However, Towles denied that Smith made that
statement. No documentation was ever prepared
by Smith. However, it appears to the Trial Com-
missioner that there are mitigating factors in this
charge, in that no agreement or understanding
was made as to “what this (transaction) was.”’
Trial Commissioner’s Report, pp. 13-14 (our em-
phasis, and citations to Transcript omitted).

His finding (and the only fair interpretation of his
finding) was that the Respondent offered to document
the transaction - i.e. serve as a mere scrivener in the
transaction - if and when Nath and Towles agreed as
to the terms. Nath’s own testimony was that he never
made any subsequent contact with Towles, much less
agreed on the nature and terms of the transaction.® A
mere offer to perform legal services, conditioned upon
subsequent agreement of the parties, is not represen-
tation nor any evidence of representation. Neither is
the fact that this transaction was not documented by
Respondent evidence of neglect of a matter entrusted

9. See Nath, Transcript, pp. 103, 105-06, 114-15, 119-20.

127a

to him.’° On the contrary, such a conditional offer con-
firms the sworn testimony that Smith was not
representing Nath, and did not act as Nath’s attorney,
in this transaction. To conditionally offer to do what
one has already obligated himself to do would be
highly illogical, and would in fact make no sense at all.
It is also wholly illogical to believe (as Complainant
contends) that Respondent, while advising Nath of
the conflict of interest and to secure separate counsel
for that particular transaction, was nonetheless pro-
ceeding to represent Nath in that very transaction.
Advice to procure another attorney, in connection
with conflict disclosures, is a part of refusing
representaton, and is not consistent with proceeding
with such representation. The evidence simply does
not prove “‘... that Respondent acted as Dr. Nath’s
attorney and advisor, with respect to the REBSCS
investment,”’ (Complainant’s Response, p. 3).

10. The Trial Commissioner found that Respondent’s offer
was conditioned on Nath and Towles agreeing on what they
wished him to prepare. But, as the Trial Commissioner also
found, Towles and Nath never agreed as to what they wished
Respondent to prepare. No violation of DR 6-101(A)3) could have
occurred, because the conditions of Respondent's offer to docu-
ment the transaction were never met by Nath or Towles, and
nothing was in fact ever entrusted to Respondent to perform.

Indeed, the testimony of both Nath (see Nath, Transcript, p.
115) and his accountant (see Eakle, Transcript, p. 216)
demonstrated that in all transactions in which Respondent
represented Nath, Respondent’s documentation was meticulous.
The fact that this particular transaction was not documented
clearly supports, and is much more consistent with, Respondent's
proven refusal to represent Nath, than with any alleged represen-
tation and subsequent neglect.

128a

Unfortunately Complainant’s Response contains
other factual errors and illogical conclusions, which
are not supported by any evidence, much less
‘substantial,’ or more appropriately ‘‘clear and con-
vincing”’ evidence.'' The following are some further
examples:

1.) Throughout its Response Complainant refers
to the transaction as Nath’s “investment”’ in
REBSCS. On the contrary, it was, as this
Court found, a loan. The check said “‘loan,’’
and even Nath testified that the word ‘“‘loan”’
was written on it according to Nath’s own
directions,'? and without any consultation
with or advice from Respondent (See Nath,
Transcript, p. 99).

2.) Further, Complainant erroneously refers to
the transaction as ‘‘Nath’s”’ investment. The
loan was not made by Nath at all. The loan
was made by H. Nath Holdings, Inc., a cor-
poration which Respondent never represented
and from which he never received a fee of any
type (See Smith, Transcript, pp. 328-29).

11. See Addington v. Texas, 441 U.S. 418, 423-24 (1979);
Santosky v. Kramer, 455 U.S. 745 (1982); and, Re Ruffalo, 390
U.S. 544 (1968).

12. It was Carrell Eakle, Nath’s accountant, who advised
Nath to make a loan to REBSCS, instead of buying stock, in
order to be able to deduct potential losses more easily. See Nath,
Transcript, pp. 78-79; awd Eakle, Transcript, p. 188, 202-03.

129a

3.) Complainant’s statement (on p. 7 of its
Response) that ‘‘Smith contends he told Nath
to seek other counsel’ (our emphasis) is
misleading.'* It is undisputed that Respon-
dent advised Nath to procure separate
representation in this transaction.

Po» tp i BORSA te MM Bc UL yA a NH hs ey

4.) At page 8 of its Response, the Complainant's
dilemma is apparent. It there contends that,
even though Respondent told Nath to seek
other counsel, Nath had a right to expect
Respondent to independently represent him
and protect his interests. But such representa-
tion of Nath by Respondent would have been

in violation of the principles set forth in KBA

v. Roberts, Ky., 579 S.W.2d 107 (1979), the

very case Complainant cites as controlling

authority. By arguing that Respondent should
have zealously represented Nath’s interests,

Complainant ignores REBSCS and Towles,

and their interests, and advocates the very

same ‘‘taking sides’ against a ‘‘client’’ that
the Roberts case condemns. Nowhere in the

Record is there any evidence that Towles

eR RI MIRE A

a ee wets

13. Complainant’s statement is inconsistent with this
Court's Opinion and conflicts with the findings of the Trial Com-
missioner and Board of Governors. It further conflicts with
Nath’s own admissions to his attorney, David Irvin, and with the
sworn testimony of Respondent, Frederick Whiteside, and
Charles Towles. See footnotes 5, 6, 7 and 8 for references to their
recorded testi»sony.

130a

and/or REBSCS waived their rights in such a
manner as would have (in compliance with
Roberts) allowed Respondent to side with
Nath. And, without such a waiver or consent
from Towles and REBSCS, Respondent could
not take sides and still comply with the
Roberts case and this Court’s rules. Towles
testified that Respondent made it clear to both
of them (Nath and Towles) that he would
represent neither of them in this transaction
(See Towles, Transcript, pp. 580-82). The fact
that Respondent thereafter prepared no
documents on behalf of Nath or REBSCS is
not evidence of neglect of a matter entrusted
to him. On the contrary, where there is no
representation, one cannot logically expect
documentation. By refusing to represent
either Nath or REBSCS in this transaction,
Respondent complied completely with the
rules of ethics and particularly those outlined
in the Roberts opinion.

The

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_2355%3A1. Public record. Not legal advice.