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Iowa Supreme Court Attorney Disciplinary Board v. Hamer

Supreme Court of Iowa

June 29, 2018

MARK T. HAMER, Appellant.

          On appeal from the report of the Iowa Supreme Court Grievance Commission.

         Grievance commission recommends a six-month suspension of attorney's license. LICENSE SUSPENDED.

          David L. Brown and Alexander E. Wonio of Hansen, McClintock & Riley, Des Moines, for appellant.

          Wendell J. Harms, Tara van Brederode, and Susan A. Wendel (until withdrawal), for appellee.

          APPEL, JUSTICE.

         In this attorney disciplinary case, we are called upon once again to remind the Iowa bar that while our ethics rules allow attorneys to engage in financial transactions with clients and to represent both party clients in a financial transaction, the demanding nature of the disclosures required and the necessity of documenting informed consent mean that these matters may not be undertaken lightly as a matter of informal routine.

         The Iowa Supreme Court Attorney Disciplinary Board (Board) charged attorney Mark Hamer with multiple violations of the Iowa Code of Professional Responsibility for Lawyers (code) and the Iowa Rules of Professional Conduct (rules)[1] arising from (1) several loan transactions occurring between multiple clients of Hamer without adequate conflict-of-interest disclosures and informed consent, (2) several loan transactions involving Hamer and a client without adequate conflict-of-interest disclosures and informed consent, (3) two failed joint investments in which Hamer and his client suffered substantial losses, and (4) a clearly excessive and dishonest attorney's fee collected through a bonus to which the client did not agree. Hamer denied the allegations.

         After an evidentiary hearing involving only two witnesses but over 2200 pages of documents, the Iowa Supreme Court Grievance Commission (commission) found Hamer violated numerous code and rule provisions with respect to the loans and the attorney's fee issues but declined to find an ethical violation in connection with the failed investments. As a result, the commission recommends that Hamer's license to practice law be suspended for six months.

         Upon our de novo review, we conclude Hamer engaged in a number of ethical violations in connection with the loan transactions between Hamer's clients and between Hamer himself and Douglas Paul. We also find Hamer engaged in deceit in connection with the bonus payment for legal work. Based on the violations, we conclude a six-month suspension is the appropriate sanction.

         I. Factual and Procedural Background.

         A. Background to the Events at Issue.

         Hamer received his license to practice law in Iowa in 1972 and represented businesses, entrepreneurs, franchisors, and franchisees for forty years. During all times relevant to the allegations in the complaint, Hamer worked for a prominent Iowa City law firm.

         In 1982, Douglas Paul, an entrepreneur in the field of education, founded an education writing and editing business that eventually became known as Buckle Down Publishing Company. Buckle Down developed customized curriculum materials for school districts. Paul also owned ZAPS Learning Company, an ACT and SAT student-test-preparation company. In 1988, Hamer became Paul's attorney for both business and personal matters. In addition to their business relationship, Hamer and Paul became friends and frequently socialized together.

         In 2004, Hamer helped Paul sell both Buckle Down and ZAPS. Paul sold his interest in Buckle Down for $23 million cash and some preferred stock. Paul also sold his interest in ZAPS for $1.5 million. DLP Management, an entity wholly owned by Paul, was formed to handle the money generated by the sale of Buckle Down.

          B. Bonus for the Successful Sale of Buckle Down.

         Paul was pleased with the Buckle Down sale and wanted to reward the people who worked on the transaction. Paul considered giving a cash bonus to Hamer, an accountant, and a secretary. The record does not clearly establish the amount of the proposed bonus that Paul was considering giving Hamer.

         On April 15, Hamer accepted the bonus for his secretary, but told Paul that a cash bonus for himself was problematic because he would be required to share the bonus with the other partners of the law firm. Five days later, Hamer told Paul that the legal fees in connection with the Buckle Down transaction were $268, 447.13. Paul paid the fees on April 21 and received an unitemized bill. The unitemized bill did not state it included a $110, 000 bonus fee. When Paul received the unitemized bill he requested an itemized fee statement, but Hamer demurred. He told Paul he would give Paul an itemized bill the following week but did not do so.

         On July 28, a Paul-owned entity made a five-year loan of $1, 000, 000 at 2.5% yearly interest to a Hamer-owned entity, Quad Four, L.L.C. Paul claimed this attractive loan was three percent below what Hamer would have otherwise been required to pay and was made in lieu of a cash bonus on the Buckle Down transaction that Hamer would have had to share with other members of the firm if paid as part of the bill.

         Over the years, Paul continued to press Hamer several times for an itemized bill related to the Buckle Down transaction, including in an email on January 21, 2009. Hamer did not provide an itemized bill, however, until Paul's new lawyer sent a demand letter asking for documentation in early 2010.

         When Paul received the itemized bill in February 2010, there was a note in Hamer's handwriting attached to the file copy of Paul's payment check stating the bill included a $110, 000 bonus. The note attached to the check included the words "CF Doug Paul 4/20/04." Paul later testified that the notation meant nothing to him. Paul stated he did talk to Hamer on April 20, 2004. He claimed, however, there was no discussion about the bonus but only about the total amount of the bill.

         C. Paul's Investments with Other Hamer Clients in "Private Banking."

         After the sales of Buckle Down and ZAPS in 2004, Paul began making investments that he and Hamer called "private banking." In these transactions, Paul directly loaned money to individuals and businesses.

         From March 2004 to August 2005, Hamer presented to Paul, and Paul accepted, opportunities to loan money to nine individuals or entities who were also clients of Hamer. In all but one of the loans, Hamer made no effort to get Paul's informed consent in writing. Paul would later testify he had no knowledge the other parties in these loans were Hamer's clients. He also testified that Hamer never discussed the perils of multiple representation or obtained Paul's verbal informed consent to any real or potential conflicts of interest arising out of the transactions. Paul also testified Hamer informed him that most of the loans would be secured by adequate collateral. In fact, Hamer never perfected the various security interests or filed the required mortgages nor did he advise Paul that Paul would need to do so himself.

         Paul signed a multiple-client representation letter dated December 29, 2004, that he received from Hamer for one of the transactions. The letter began, "As we understand your request, we will be dealing with the documentation and reporting relating to these transactions." The letter was lengthy and contained mostly generalizations:

Before entering in this agreement, we believe it is necessary and appropriate for us to spell out for you the potential ramifications of our representation of you.
As you may be aware, the Iowa Code of Professional Responsibility for Lawyers, and in particular Canon 5, requires that a lawyer must exercise independent professional judgment on behalf of his client. In this connection, any lawyer requested to undertake representation of multiple clients having potentially differing interests must weigh carefully the possibility that his judgment may be impaired or his loyalty divided if he accepts the employment and the lawyer must resolve all doubts about the propriety of the representation prior to accepting the engagement. Once a lawyer accepts such employment and in the event the interests of the clients do become actually differing, the lawyer must withdraw from the employment.
There are, of course, many instances in which a lawyer may properly serve multiple clients having potentially differing interests in matters not involving litigation. For example, if the interests vary only slightly, it is generally likely that the lawyer will not be subjected to an adverse influence and can retain his independent judgment on behalf of each client and if the interests do become differing, withdrawal is less likely to have a disruptive effect upon the clients.
However, in those instances in which a lawyer is justified in representing multiple clients, it is nevertheless essential that each client be given the opportunity to evaluate his need for independent representation and to obtain other counsel if desired. Further, each client should be fully advised concerning the implication of the common representation (which we hope this letter will do) and be fully advised as to any other circumstances that might cause one of the clients to question the undivided loyalty of the lawyer to the engagement and or interests of all the clients (which we will do later in this letter).
In regard to our requested representation, we have evaluated our knowledge of your respective interests. It appears to us that all of you are experienced; that you are willing and capable of completing these transactions; that you can make relatively equal though substantially different business decisions; and, finally, that you appear to share the same business philosophy. While those factors alone are not enough to suggest that you should enter into this transaction, these factors do suggest to us that your individual interests and goals are sufficiently similar to convince us that we can represent you without any concern of the propriety of the multiple representation and without any concern that our judgment will be impaired or our loyalty divided among you.
On the other hand, however, you must both be advised (and we're sure already know) that the undersigned have previously represented all of you extensively and for many years. We anticipate continuing to represent all of you on a variety of matters. In addition, we anticipate that all of you will request that we give our opinion as to the structure, wisdom and advisability of your business transaction as it related to each of you and that we will provide our opinion(s) to you at all times during the engagement.
We do not anticipate that there will be any conflicts arising which might threaten the transaction between you. However, in the event of such a conflict, we anticipate the termination of our representation in the area of the conflict and the continuation of our representation on other matters. We would not, in such a case, represent either party relative to any conflict between you. In other words, in the event of any conflict between you which would require the assistance of legal counsel, you would all be required to employ counsel other than ourselves or those in this firm.
If, after careful consideration of all the factors contained in this letter, you want [Hamer's law firm] to represent you with regard to these transactions, then you should sign the Consent attached to this letter, and have it witnessed and dated.

         Attached to this letter was a consent form, which Paul and the borrowers signed. Hamer prepared a similar letter for one of the other loans, but this letter was never presented to Paul, and he did not sign it.

         Paul discontinued private banking facilitated by Hamer because two of the loans "went south" in 2006 and 2007. The borrower on one loan defaulted in 2006. Paul understood the loan would be secured by a mortgage on real estate owned by the borrower. Paul instructed Hamer to seize the collateral. Hamer demurred. He told Paul the collateral was not easily liquidated but offered to talk to the borrower "to straighten things out." After Hamer spoke with the borrower, the borrower caught up on overdue interest payments and then made occasional payments against the principal. The terms of the loan, however, were never formally modified in writing. The loan was eventually repaid in March 2009.

         A borrower on a second loan defaulted in 2007. Paul understood that this loan was secured by an investment portfolio. Paul instructed Hamer to seize the portfolio. Hamer refused. Hamer advised Paul that Hamer could not take the action because the borrower was his client. Hamer told Paul that if Paul wished to pursue collection, he would have to seek other representation. Paul did not pursue other representation and eventually agreed to reduce the interest rate and extend the terms of the troubled loan. The troubled loan has since been extended multiple times and, as of Paul's 2013 complaint, about $350, 000 remained unpaid. Under the new terms of the loan, the loan is scheduled to be paid in full in 2029.

         D. Paul's Loans to Hamer and Hamer-Owned Entities.

         In addition to the loan that Paul made to Hamer's Quad Four, L.L.C., Paul made two other loans to entities that Hamer either owned or had an interest in-one in July 2004 and the other in March 2006. All of these loans were fully repaid as agreed.

         E. Paul and Hamer's Joint Investments in Platinum Exploration and Unified Worldwide Transport.

         From 2004 to 2006, Paul and Hamer made joint investments in two entities, Platinum Exploration, Inc. (Platinum) and Unified Worldwide Transport, L.L.C. (UWT).

         In July 2004, Paul invested almost $2, 000, 000 in Platinum, while Hamer invested $100, 000 in the enterprise. Platinum, according to Paul, was a Texas oil exploration company that offered investments in a group of wells and guaranteed a recovery of the investment in twenty-four months through monthly payments. After the twenty-four months, the investor would be paid based on the profits of the wells.

         Hamer introduced the Platinum investment to Paul. The monthly payments stopped after seventeen months because, according to Paul, the guaranteed payments were found to be illegal in Texas. A company that took over Platinum made a few more distributions and then collapsed.

         Paul also invested about $4, 500, 000, and Hamer invested at least $600, 000, in UWT. UWT purported to be a communications company involved with voice-over internet protocol with long-distance telephone contracts on the verge of a buyout but was later revealed to be a sham with no equipment or customers. UWT made a few small dividend distributions before it folded. Paul also loaned over $2, 000, 000 to UWT in 2005 and 2006. Hamer prepared the paperwork for the loan, including security agreements in UWT equipment. UWT defaulted on both loans.

         Paul pursued legal action against UWT in California, eventually obtaining a judgment against the company. UWT, however, had no available assets. For his litigation efforts, Paul collected aggravation but no money.

         F. Paul's Complaint.

         Paul filed a complaint with the Board on February 14, 2013. In the complaint, Paul accused Hamer of gaining his "unquestioning trust" and then abusing the relationship by representing the 2004 and 2005 private banking loans as being vetted and secured when they were not. Paul alleged he suffered losses due to Hamer's abuse of the attorney-client relationship. Paul also accused Hamer of erratic billing and failing to promptly provide a detailed billing record on request.

         The Board forwarded the complaint to Hamer and asked for a response. Hamer denied any wrongdoing, arguing Paul was a sophisticated client and understood the nature and risks of all of the transactions at issue.

         G. Board's Complaint.

         The Board filed a complaint with the commission on September 30, 2015. The complaint included four counts with fifteen subdivisions alleging multiple violations of the pre-2005 code and post-2005 rules.[2]

         Count I of the complaint concerned the loans between Paul and other Hamer clients. For the period before the adoption of our current disciplinary rules, the Board alleged violations of various provisions of the prior code. The Board alleged Hamer violated DR 5-105(B) and DR 5-105(C). These code provisions together forbid beginning and continuing the representation of multiple clients if the lawyer's "exercise of independent professional judgment on behalf of [one] client will be or is likely to be adversely affected by . . . represent[ing] another client. Iowa Code Prof'l Responsibility DR 5-105(B)-(C).

         The Board also alleged a violation of DR 5-105(D). This code provision allows multiple representation only "if it is obvious that the lawyer can adequately represent the interest of each client and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer's professional judgment on behalf of each." Id. DR 5-105(D).

         For the period after the adoption of the rules, the Board alleged multiple violations parallel to those brought under the prior code. Specifically, the Board alleged Hamer's representations of Paul violated rule 32:1.7(a)(2). Under this rule, a lawyer is generally prohibited from representing a client when a concurrent conflict of interest involves "a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibility to another client." Iowa R. Prof'l Conduct 32:1.7(a)(2).

         The Board also alleged a violation of rule 32:1.7(b). Under this rule, a lawyer may represent a client when there is a concurrent conflict of interest "if . . . the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client" and, among other things, "each client gives informed consent, confirmed in writing." Id. r. 32:1.7(b).

         Count II concerned the loans that Paul made to Hamer or Hamer-owned entities. The Board alleged Hamer violated DR 5-104(A) during the period prior to the adoption of our current rules. This provision states that "[a] lawyer shall not enter into a business transaction with a client if they have differing interests . . . and if the client expects the lawyer to exercise professional judgment [on the client's behalf] unless the client has consented after full disclosure." Iowa Code Prof'l Responsibility DR 5-104(A).

         The Board also alleged a violation of rule 32:1.8(a). This provision states that

[a] lawyer shall not enter into a business transaction with a client or knowingly acquire . . . [a] pecuniary interest adverse to the client unless . . . the transaction and terms . . . are fair and reasonable to the client[;] . . . are fully disclosed and transmitted in writing . . . [to] the client; . . . the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel . . .; and the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction.

         Iowa R. Prof'l Conduct 32:1.8(a).

         Count III concerned the joint investments Hamer and Paul made in Platinum and UWT. In this count, the Board also alleged violations of DR 5-104(A) and rule 32:1.8(a).

         Finally, in count IV, the Board alleged ethics violations in connection with the undisclosed bonus Hamer included in his unitemized bill to Paul for legal services. The Board alleged, among other things, that Hamer violated DR 1-102(A)(4), which prohibits lawyers from "engag[ing] in conduct involving dishonesty, fraud, deceit, or misrepresentation." Iowa Code Prof'l Responsibility DR 1-102(A)(4). The Board also alleged that Hamer violated DR 2-106(A), stating lawyers shall not collect a "clearly excessive fee." Id. DR 2-106(A).

         H. Hamer's Response.

         Hamer filed a response on April 22, 2016. Hamer admitted the transactions occurred but denied any conflict of interest, failure to disclose, or lack of consent on Paul's part.

         Specifically, Hamer agreed he offered Paul the private financing opportunities at issue. Hamer denied allegations of conflict of interest and allegations he did not fully disclose to Paul the multiple representations and their potential effects. Hamer denied failing to explain to Paul how independent counsel might address Paul's interests differently and asserted

although he most certainly did not have a discussion detailing how each and every possible other "counsel" may have approached Paul's interests, Respondent did not conflict with Paul's interest in any way and a complete disclosure of the circumstances was made to Paul upon which Paul could, and did, make an informed decision-as he always did and this included discussions of independent counsel.

         Hamer denied telling Paul the loans would be fully secured with adequate collateral. Hamer agreed he never took steps to perfect Paul's security interests but denied that this was ever intended to be his responsibility. He stressed the decisions whether to make the loans ...

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