Thursday, April 18, 2002
State Bar Court Upholds Finding That Lawyer Misappropriated Funds
By a MetNews Staff Writer
The State Bar Court Review Department has rejected a hearing judge’s recommendation that an Encino lawyer be disbarred for misappropriating funds belonging to a fellow investor in a real estate partnership.
The review panel agreed with Hearing Judge Nancy R. Lonsdale—whose term has since expired—that Charles C. McCarthy, a State Bar member since 1949, committed an act of moral turpitude by refusing to turn over funds to which Nazar H. Ashjian was entitled by law.
McCarthy’s claim that he believed he had a right to hold on to the money pending resolution of legal challenges rings hollow, Judge Madge Watai wrote for the panel, since he failed to pay even after an arbitrator and a bankruptcy judge ruled that Ashjian was entitled to the money.
But Lonsdale went too far in recommending disbarment for the “aberrational” misconduct of a lawyer with a long record of “good character and community service,” Watai said.
Ashjian complained to the State Bar that McCarthy refused to pay more than $20,000 to which Ashjian was entitled as the proceeds of his investment in Kau-Kona Land Co., a California limited partnership.
Kau-Kona was formed in 1967 to purchase 1,400 acres of land in Hawaii. McCarthy was originally one of two general partners—he became the sole general partner after the other was removed by court order in 1983—while Ashjian was a limited partner with a one percent interest based on an initial $3,000 investment.
The partnership held the 1,400 acres until 1971, when the state took 400 acres under eminent domain. The proceeds of the action were used to pay off the mortgage, but the partnership incurred other debts and filed for Chapter 11 reorganization in 1986.
The bankruptcy judge in Hawaii eventually allowed Kau-Kona to sell the remaining 1,000 acres for $5.25 million, pay off its creditors, and distribute what was left to the partners. McCarthy notified each partner that they would be paid off once they executed a release of any claims against him based on his acts as general partner.
Ashjian refused to sign a release and demanded payment of the $21,000 he claimed was due. He eventually sued, winning a judicial arbitration award that was converted to a judgment after McCarthy did not request a trial de novo.
Ashjian collected a little more than $4,000 by levying on a bank account before McCarthy filed for bankruptcy in the Central District of California. The bankruptcy judge ruled that the debt was non-dischargeable because it arose from his defalcation while acting in the capacity of fiduciary.
The California Supreme Court, Watai noted, has held that partners owe each other a fiduciary responsibility with respect to partnership assets, and that the Ninth U.S. Circuit Court of Appeals has held that even an “innocent default” is a defalcation if the fiduciary fails to account fully for money received.
Watai noted that McCarthy had paid himself, as well as the releasing partners, without paying Ashjian. This was a violation, the judge said, of the Uniform Limited Partnership Act as well as the Kau-Kona partnership agreement, both of which requires that limited partners be repaid their capital contributions prior to any distribution of profits to the general partners.
McCarthy’s actions, Watai said, are analogous to an attorney withdrawing a client’s funds form his trust account and spending them for his own benefit without the client’s authorization.
“Notwithstanding respondent’s assertion...that he simply used Ashjian’s share of the preliminary distribution to pay creditors first, as required under the Corporations Code, respondent has nevertheless failed to explain why he took his own share of the preliminary and final distribution before disbursing Ashjian’s share of the preliminary distribution,” Watai wrote.
The Review Department also held that McCarthy violated the State Bar Act by offering a $25,000 settlement in 1997, prior to the order of non-dischargeability, that was conditioned on withdrawal of Ashjian’s State Bar complaint.
While McCarthy’s “long and unblemished” prior record are mitigating, Watai went on to say, his refusal to pay restitution or show remorse must be treated as factors in aggravation. The appropriate penalty, the panel concluded, was a four-year suspension, which was stayed.
The court set aside its prior order placing McCarthy on involuntary inactive enrollment, meaning he may resume practicing law immediately. But he must serve three years of probation, effective upon entry of a final order of discipline by the Supreme Court.
Conditions of probation include at least two years of actual suspension, with credit for 20 months of involuntary inactive enrollment. That means that if the high court adopts the Review Department ruling, McCarthy will have to serve four more months of actual suspension.
If he pays restitution to Ashjian—the sum due is now over $40,000 with interest, the court found—by the end of the four months, he will be reinstated. Otherwise, he would remain suspended until he pays restitution and persuades the court that he is fit to practice law, as is required when an actual suspension exceeds two years.
Attorneys in the case are Charles Weinstein of the Office of Chief Trial Counsel for the State Bar and Henry T. Heuer of Century City’s Prince, Heuer & O’Connell for McCarthy.
Copyright 2002, Metropolitan News Company