On an order to show cause why respondent should not be disbarred or otherwise disciplined.
For Suspension -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein join. Opposed -- None.
[113 NJ Page 195] The unethical conduct at issue in this disciplinary proceeding arises out of respondent's participation in a business venture
with a former client and his testimony in the civil proceedings that resulted from it. The record before the Disciplinary Review Board (Board) consisted of a Presentment filed by the District IIB Ethics Committee (Committee), a detailed stipulation of facts entered into by respondent and the Office of Attorney Ethics (OAE), the proceedings and decision of the Client's Security Fund, and the record of the aforementioned civil trial. The Board concluded respondent had entered into an employment relationship with a client in violation of DR 5-101(A), conducted a business transaction with a client in violation of DR 5-104(A), committed numerous misrepresentations in the course of that transaction in violation of DR 1-102(A)(4), and had made several false statements under oath. Despite respondent's otherwise unblemished record both prior to and since the relevant events in this case, the Board recommended disbarment.
Our careful and independent review of the record leads us to accept in part and reject in part the Board's findings and recommendation. The Board's findings regarding respondent's misrepresentations and participation in a business transaction with a client are amply supported by the record, and indeed by multiple concessions found in the stipulation and respondent's brief. Further, we are in partial agreement with the Board's conclusions concerning the accuracy of respondent's sworn testimony. We cannot agree, however, that clear and convincing evidence establishes an attorney-client relationship concerning the relevant transaction, nor can we conclude that disbarment is warranted. Due to several mitigating factors, our judgment is that respondent's six-year suspension constitutes a discipline sufficient to protect the public.
Respondent was admitted to the bar of this State in 1970, and to the bar of the United States Patent and Trademark Office
two years later. His practice has consisted almost exclusively of matters in the patent field and has provided him with a modest income. Events relevant to this case began in late 1978 and were detailed by the Board as follows:
"On November 15, 1978, respondent entered into an agreement to purchase a large, prestigious patent agency known as Haseltine, Lake and Waters (HLW) from Eric Waters (Waters) for $750,000. Pursuant to the terms of the agreement, respondent was to pay Waters the sum of $350,000 at closing set for January 12, 1979; $130,000 on January 12, 1980; and additional, unspecified amounts over a number of years pursuant to a formula based upon past and future earnings of HLW.
"Respondent, a patent attorney with offices in Clifton, did not have the personal funds or assets necessary to obtain sufficient credit for the purchase of HLW. Consequently, it was respondent's intention to use HLW's accounts receivable and good will as collateral. However, attempts to borrow funds from commercial lenders proved unsuccessful.
"In January 1979 respondent had occasion to meet with Fred Ferber (Ferber), a client for whom respondent's law firm had performed patent work from 1973 through 1977. Although Ferber initiated the meeting to discuss a possible new patent, respondent soon told him about difficulties he was encountering in obtaining financing for the acquisition of HLW. At the time of this discussion Ferber, a famous inventor recognized as the father of the modern ball point pen, owned a substantial amount of real estate in New Jersey but was virtually cash poor and under tremendous financial pressure. He was 75 years old, his wife was seriously ill with cancer and he was in default on numerous debts including mortgages, real estate taxes and unpaid legal fees due and owing to respondent's law firm. Seeing the HLW transaction as an opportunity for him to alleviate his financial problems, Ferber agreed to allow respondent to use a 212 acre tract of his property as collateral for a $400,000 loan in exchange for money with which to pay his debts and meet living expenses.
"Armed with Ferber's pledge of collateral, in early February 1979 respondent prepared a prospectus to be used in support of his application for the $400,000 loan. This prospectus contained information concerning Ferber's and respondent's respective financial conditions. However, portions of the prospectus as well as the loan application contained information respondent knew to be false. Respondent admitted that '[t]he application contained exaggerations of Ferber's worth. Even though Ferber was dictating information, I realized there were exaggerations and there were * * * liabilities understated * * *.'
"Among the misrepresentations found in respondent's financial statement was an entry that his interest in the law firm of Silverman and Jackson was worth $165,000. However, the law firm had dissolved six months earlier in August 1978 and had no value. An additional entry placed a value of $20,500 on Technology Assistance Corporation, a company formed by respondent. However, the company had not been incorporated, owned no assets, had never
conducted any business and had no monetary value. Values of other assets were similarly misrepresented.
"The Ferber financial statement contained more serious misrepresentations. One entry listed the value of Ferber's patent rights in a process known as 'Protosoil' as $200,000, a figure respondent knew to be speculative. An additional entry indicated that Ferber had $65,000 cash on hand when respondent knew Ferber was cash poor. The financial statement also indicated that Ferber owned an art collection worth $40,000 and miscellaneous securities worth $60,000 when respondent knew that these entries were improbable at best. Moreover, the financial statement failed to list all of Ferber's liabilities, including accrued interest, at true value.
"On March 26, 1979, after the prospectus and financial statements had been presented by an intermediary, respondent formally submitted the loan application to Liberty Federal Savings & Loan Association (Liberty). The application referred the bank to a report on Ferber's income prepared by Ira S. Herman, C.P.A. (Herman), respondent's first cousin. In this report Herman indicated that Ferber's income during the six year period from 1973 through and including 1978 was $413,477 per year. This figure was based upon Ferber's sale of certain real estate to the State of New Jersey in 1973 for $2,800,000. In reality, however, Ferber had no source of income during the years in question and his net profit on the sale of the property, after the satisfaction of mortgages and liens, was less than $150,000. Respondent was fully aware of this misrepresentation at the time the report was prepared and submitted.
"The loan application contained several other misrepresentations of which respondent was aware. In one section, the application indicated that Ferber was not then a party to a law suit and that no properties owned by him were the subjects of foreclosure actions. However, at the time the application was filed respondent, on behalf of Ferber, was attempting to negotiate the settlement of a foreclosure action that had been filed against Ferber. The application further indicated that Ferber held $260,000 in stocks and bonds and had a net worth of $1,944,000 when respondent knew that both figures were exaggerated and constituted material misrepresentations.
"At the time respondent submitted the loan application, the New Jersey Usury Law limited interest on personal loans to a rate of 9 1/2%. Since Liberty was issuing loans at a rate of 14%, respondent was advised that the loan could only be made to a corporation. Upon receiving this information, respondent conferred with Ferber and suggested that Ferber and his wife, Hedwig, convey title to the 212 acre tract into a corporate 'shell' known as Eastern Star Enterprises, Inc. (Eastern) which respondent had previously formed for other purposes.
"On or about April 10, 1979, respondent secured the Ferbers' consent to the proposed conveyance and prepared three corporate resolutions to facilitate the transaction. The first resolution named Fred, Hedwig and respondent as directors of Eastern. The second resolution appointed Fred as president, Hedwig as vice president and respondent as secretary. This resolution further provided for distribution of 500 shares each of authorized but unissued stock to Fred and Hedwig. The third resolution contained four provisions authorizing
the board of directors to apply for a loan of between $400,000 to $435,000; the corporation to accept title to the 212 acre property from the Ferbers; respondent to execute any and all documents necessary to effectuate the loan; and respondent to execute a note of not more than $85,000 to Waters to be secured by a mortgage against the 212 acre parcel.
"The deed conveying the 212 acre property from the Ferbers to Eastern was prepared by respondent and acknowledged by him on April 11, 1979. The Ferbers' signatures were purportedly witnessed by respondent's law partner. However, during the course of a civil trial concerning respondent's acquisition of HLW, the partner testified that he had not witnessed the deed and that the signature thereon was not his.
"From the time of their initial meeting in January 1979 through the preparation of the three corporate resolutions and execution of the deed, the Ferbers were without benefit of independent counsel and respondent failed to advise them that it was in their best interests to retain an attorney. It was not until after the corporate resolutions and deed had been signed that respondent advised the Ferbers to contact an attorney. In the interim, respondent, who has steadfastly denied representing the Ferbers in his capacity as an attorney, helped the Ferbers obtain additional mortgage monies with which to meet their everyday living expenses. Respondent's 'assistance' included negotiations to settle or forestall foreclosure actions involving various Ferber properties.
"On April 17, 1979, after finally being advised by respondent to secure his own attorney, Fred Ferber contacted William S. Robertson, Esq. (Robertson), an attorney from Wayne, New Jersey, who had represented Ferber in the past. On the following day, April 18, 1979, Robertson called respondent, advised him that he was representing the Ferbers and requested copies of any and all documents relating to the HLW acquisition. Respondent initially complied with Robertson's request by sending him a copy of the prospectus. Upon reviewing the document, Robertson advised respondent that the Ferber financial statement contained inaccuracies and strongly suggested that it be revised and resubmitted to all lenders. Respondent ignored Robertson's advice on the theory that since the lending institution would conduct its own appraisal of the 212 acre tract pledged as collateral, it was not necessary to bring these misrepresentations to its attention. In respondent's view, 'the areas which Robertson pointed out were -- did not relate to any asset that the bank was relying upon, okay, although Ferber in -- had valued and I had listed the property at a higher value the bank had done their own appraisal and come up with a value which, to them, was satisfactory. But this is how I rationalized it, wrong though it was.'
"On April 23, 1979, Liberty issued a letter of commitment to Eastern approving a first lien mortgage loan on the 212 acre property in the amount of $400,000 at an interest rate of 14% to be repaid in monthly installments based upon a 15 year pay-out but due in full in ten years. The commitment letter also set forth a number of conditions precedent including, but not limited to, the Ferbers' personal guarantees, cash collateral in the amount of $100,000 to be pledged by HLW or Waters, the Ferbers' tax returns for the preceding three years, and the Ferbers' certified financial statements.
"On April 25, 1979, respondent met with Robertson and Paul Alper (Alper), respondent's business consultant, to discuss the Ferbers' role in the HLW transaction. During that meeting, Robertson was advised that upon closing the Ferbers would receive $100,000 towards one mortgage; $10,000 towards another; $10,000 for living expenses; and a consulting contract with HLW worth $20,000 per year for each year the Liberty mortgage remained a lien on the Ferbers' property. Robertson was also advised that the Ferbers' maximum risk would actually be $180,000 as opposed to $400,000. Liberty would look first to the $100,000 cash collateral to be pledged by Waters, respondent or HLW, thereby reducing the Ferbers' exposure to $300,000. Additionally, the Ferbers would be receiving $120,000 in cash, thereby further reducing their exposure from $300,000 to $180,000.
"Later that same day, respondent met with Alper and Ferber in Robertson's absence. As a result of that meeting, respondent and Alper submitted a mortgage application on behalf of the Ferbers to Capital Mortgage Company seeking a $10,000 loan for general living expenses. On this application respondent knowingly misrepresented that Fred Ferber earned an annual income of $50,000.
"On May 2, 1979, respondent forwarded to counsel for Liberty much of the documentation required by the April 23, 1979, commitment letter. Copies of these documents were sent directly to Ferber and not to Robertson.
"On May 11, 1979, Robertson sent respondent a letter confirming their discussions during the April 25, 1979 meeting and reviewing certain aspects of the prospectus and agreement of sale. The letter pointed out a number of problems Robertson had with the Ferber financial statement contained in the prospectus. These problems included the gross overvaluation of Ferber's patent rights in 'Protosoil'; the listing of a nonexistent note receivable from HLW in the amount of $100,000; a listing of a nonexistent consulting fee of $18,500 receivable from HLW; the failure to list a mortgage of $120,000; and the listing of accounts payable of only $22,000 instead of the more than $55,000 previously indicated by respondent.
"On May 16, 1979, respondent received a commitment from Manufacturers Hanover Trust for a loan of $65,000 to his law firm. Unbeknownst to Robertson, the loan was to be guaranteed by the Ferbers. When the loan closed on June 29, 1979, Fred Ferber signed his name and forged his wife's signature. Although respondent was aware of the forgery, he did not inform his partner (who acknowledged the two signatures), Manufacturers Hanover or Robertson. In fact, he did not inform Robertson about the loan itself until the day of the HLW closing.
"On May 18, 1979, without prior notice to or consent from Robertson, respondent concluded negotiations with the mortgagee of the 212 acre tract resulting in the subordination of that mortgage to the proposed mortgage of Liberty. The subordination agreement, which respondent signed on behalf of Eastern, raised the interest rate on the remainder of Ferber's indebtedness from 8% to 14%. Upon completion, respondent forwarded a set of the documents to Robertson, advising him that the mortgagee's security interest in the HLW accounts receivable had been increased and that it would be necessary to
advance to Ferber the majority of his first two years of consulting fees ($40,000) in order to meet pressing needs.
"On May 24, 1979, after reviewing the 1978 financial statement of HLW prepared by William Kaufman, C.P.A. (Kaufman), Liberty revoked its commitment. Upon receiving notification of the revocation, respondent called Robertson and told him to stop all work. Respondent then wrote a letter to Liberty threatening suit and retained Robert L. McKinstry, Esq., an attorney on the board of directors of Liberty, and James D. Elleman to lobby for reinstatement of the commitment.
"In an attempt to repair the damage caused by the Kaufman analysis, respondent contacted his cousin Herman and had him prepare a report reviewing Kaufman's findings. This report, dated June 1, 1979, concluded that appropriate adjustments to some of Kaufman's figures would project a healthier financial condition. Respondent forwarded this report to Liberty on or about June 4, 1979. After conducting a supplemental investigation, Liberty reinstated its commitment on June 15, 1979.
"In early June 1979, Ferber's financial condition deteriorated to a point where he could not meet any of his current obligations. Respondent contacted Peter F. Mento, Jr. (Mento), a director of Interchange State Bank (Interchange), and negotiated a $3,000 loan to cover Ferber's living expenses. This loan, the proceeds of which were paid to respondent as trustee, was for a term of six months with an interest rate of 15%. As security, Ferber was required to execute a note and mortgage against his 18 acre property in West Milford Township. Respondent did not inform Robertson of this transaction.
"Respondent next turned his attention to the task of obtaining the $100,000 cash collateral required by Liberty. With the assistance of Alper and Anthony Santangelo (Santangelo), respondent approached a group of entrepreneurs collectively known as the Weir Group (Weir or Weir group). At a meeting held on June 7, 1979, Weir requested financial information. Respondent provided the original prospectus, the 1978 HLW financial statement prepared by Kaufman, the Ferber financial statement prepared by Herman dated April 30, 1979 and the 1976 and 1977 HLW financial statements.
"At the time he provided Weir with the requested documentation, respondent knew that much of the information contained therein was false and misleading. As previously indicated, the prospectus grossly exaggerated Ferber's assets and severely underestimated his liabilities. Similarly, the Ferber financial statement prepared by Herman falsely indicated that Ferber owned a note receivable in the amount of $100,000 from HLW and was to receive a consulting fee of $18,500 from HLW as well.
"Most egregious, the 1978 HLW financial statement prepared by Kaufman was altered by respondent before delivery to Weir. Knowing that this financial statement had in large part been responsible for the revocation of the Liberty commitment, respondent feared it would have a similar effect on the Weir Group. Therefore, certain pages were removed and others substituted. The original statement showed a net income figure of $140,554 for the year ending December 31, 1978. Respondent removed the page containing that information and substituted one of his own showing a total net income of $524,132. The
original financial statement also contained a page embodying a Statement of Changes in Financial Position. Since that page made reference to the net income figure of $140,554, respondent removed it, making no substitution. Respondent told no one about this alteration. At the civil trial, respondent testified that he was unaware that the financial statement had been altered.
"On June 11, 1979, the Weir Group issued a commitment letter to Eastern for a two year loan in the amount of $100,000 at 25% interest. The commitment required that the Weir Group receive a third mortgage on the 212 acre property; a second mortgage on a 113 acre property also owned by the Ferbers; a financial statement showing the Ferbers' net worth to be not less than $1,000,000; the Ferbers' personal guarantees of the loan; and a security interest in HLW's accounts receivable. In a side agreement it was also stipulated that the Weir Group would receive a 15% interest in HLW as additional compensation. At no time did respondent advise the Weir Group that Liberty had revoked its commitment on May 24, 1979 and had not reinstated same until June 15, 1987. When respondent negotiated this loan and ultimately signed the commitment papers on behalf of Eastern, he did so without informing the Ferbers or Robertson.
"In an effort to obtain additional funding, respondent enlisted Mento's aid in securing a $60,000 loan from his bank. In exchange for a finder's fee of $3,600 plus an 8% interest in HLW, Mento agreed to assist in the placement of a loan with Interchange, where Mento served on the board of directors. On June 12, 1979, Mento issued a commitment letter to Eastern on Interchange stationery for a $60,000 loan payable in two years at 20% interest. Pursuant to the commitment, Interchange was to receive as security a second mortgage on the Ferbers' 18 acre property in West Milford, the Ferbers' personal guarantees of the loan and a sinking fund of HLW receivables. However, Interchange was not aware of and had not authorized Mento's commitment letter. Consequently, respondent and Mento entered into a side agreement which provided that respondent would not hold Mento liable on the Interchange commitment letter.
"On June 12, 1979, in order to comply with a deadline previously set by Waters' attorney, respondent sent this attorney a letter outlining his sources of funding for the acquisition. In this letter respondent indicated that he would be receiving $400,000 from Liberty; $100,000 from the Weir Group; $65,000 from Manufacturers Hanover Trust; and $60,000 from Interchange. Respondent enclosed copies of the April 23, 1979 commitment letter from Liberty, the June 11, 1979 commitment letter from the Weir Group and the June 12, 1979 commitment letter from Interchange. He did not indicate that Liberty had revoked its commitment on May 24, 1979 or that the Interchange commitment was unauthorized. Nor did he provide Robertson with copies of the June 12, 1979 letter to Waters' counsel or the commitment letters from Liberty, the Weir Group and Interchange.
"On June 15, 1979, Liberty reinstated its commitment to lend Eastern $400,000. Upon receiving notification of the reinstatement, respondent contacted Robertson and advised him that the transaction was still very much alive and that work could continue. Robertson renewed his request for copies of all documents related to the acquisition but respondent failed to honor this request.
"On June 20, 1979, respondent called Robertson with some of the details of the transaction Robertson had been requesting. Specifically, he advised Robertson that the Weir Group was making a $100,000 loan payable in two years; Waters had agreed to subordinate his lien on HLW's accounts receivable to the extent of $265,000; the Ferber's lien on the accounts receivable would exist through the mortgagee's lien; and Ferber would receive $140,000 at closing with $100,000 payable to the mortgagee and $40,000 representing the first two years of consulting fees payable to Ferber. Respondent also claimed that Ferber would have absolutely no exposure because he would be receiving a $165,000 lien on HLW accounts receivable through the mortgagee's lien. As respondent explained it to Robertson, Ferber's gross maximum exposure was $300,000 ($400,000 less the $100,000 cash collateral). Since Ferber was receiving $140,000 at closing, the balance of his exposure would be $160,000, which would be totally protected by Ferber's subordinated lien on the HLW receivables through the mortgagee.
"The exact date and time of the closing was undetermined until June 21, 1979. On that date Ferber called Robertson and advised him that the closing was to take place on the following day, June 22, 1979. Ferber also gave Robertson a telephone number at which respondent had told Ferber he could be reached. However, despite numerous attempts, Robertson was unable to reach him.
"On June 22, 1979, at 9:15 a.m., Robertson was finally able to reach respondent. At that time, Robertson advised respondent that since he had not been provided with all relevant paperwork, he had not had an opportunity to prepare a formal agreement between the Ferbers and respondent. Moreover, because he would not be available until later that afternoon, the closing would have to take place in escrow. Respondent assured Robertson that he would make his position known to all parties concerned. Respondent then advised Robertson of certain changes that had been made in the structure of the deal.
"Upon completing his conversation with Robertson, respondent, Herman and the Ferbers left for New York City to attend the closing. Immediately upon their arrival, respondent's associate took the Ferbers to a private social club. During the morning session of the closing, with Robertson unavailable, and in the Ferbers' absence, numerous provisions of the deal protecting the Ferbers were eliminated.
"Later that afternoon, it became obvious that the closing could not be held in escrow. Liberty had taken the position that respondent had to become owner of HLW in order to have the cash flow upon which the bank was relying as a condition of the loan. However, Waters would not transfer title unless and until he was paid. In addition, the mortgagee on the 212 acre tract needed his money immediately to meet other commitments and promised to foreclose if he did not receive the money as promised.
"At that point a telephone conversation was held among respondent, Robertson, Ferber and the other parties' respresentatives. Robertson reiterated that since he had not had an opportunity to review any of the paperwork, he could not advise his clients to go through with the closing. However, Ferber was under a great deal of pressure to close and insisted that Robertson find a way
to allow the closing to proceed to conclusion. After further negotiations, it was finally agreed that Robertson would draft a short form agreement between Ferber and respondent which he would dictate to a secretary in the closing office. Robertson again advised Ferber that this approach was inherently risky and that the better course would be to postpone the closing for a few days until he had an opportunity to review all of the papers. Nevertheless, Ferber stated that he was willing to rely on respondent's good judgment and would complete the closing upon execution of the short-form agreement which would contemplate revisions and additional documents.
"Sometime after 5 p.m. that afternoon, Robertson dictated a formal agreement which was ultimately signed by Ferber and respondent. Based upon Robertson's limited understanding of the various components of the transaction, the agreement contained the following provisions: (1) respondent was to pay $100,000 toward the mortgage on the 212 acre property; (2) Ferber was to receive a consulting contract paying $20,000 per year for as long as the Liberty lien remained in effect; (3) respondent was to assign a life insurance policy with a cash surrender value of at least $40,000 to Ferber as security; (4) the $100,000 cash collateral was to be the primary asset to which Liberty would resort in the event of a default and was not to be released without the Ferbers' consent; (5) Waters' lien on HLW's assets was to be subordinated to a security interest in HLW's accounts receivable in favor of the mortgagee and Weir in the amount of $265,000 which, in turn, was to provide that the Ferbers would have a primary security interest in these receivables by assuming the position of the mortgagee and Weir as their indebtedness was satisfied; (6) Liberty was to release the mortgage on the 212 acre property as soon as the total debt fell below the sum of $100,000; and (7) there had been no material adverse change in the financial condition of HLW since December 31, 1978.
"Unbeknownst to Robertson, shortly before executing this agreement with Ferber, respondent executed a closing agreement with Waters which specifically stated that there had been material adverse changes in the financial condition of HLW since November 15, 1978 due to the loss of a number of important clients and key employees. Additionally, before executing the agreement with Ferber, respondent unilaterally changed the amount of Ferber's security interest in HLW's accounts receivable from $265,000 to $165,000.
"At closing, respondent also agreed to two modifications of the June 11, 1979 side agreement proposed by the Weir Group. Pursuant to the initial modification, respondent delayed creation of the Weir Group's 15% interest in HLW until Waters was paid in full and agreed to pay the Weir Group $200,000 annually from HLW profits if the proposed partnership were not formed within four years. According to the second modification, respondent agreed to provide a principal of Weir with a four-year 'consulting contract' worth $227,500, the proceeds of which were to inure to the benefit of the Weir Group. In reality, this consulting contract was a subterfuge designed to circumvent the provision in the sale agreement prohibiting any assignment of ...