Filed August 17, 2012
BEFORE THE HEARING BOARD
ILLINOIS ATTORNEY REGISTRATION
|In the Matter of:
MARTIN J. MCKENZIE,
Commission No. 2010PR00160
REPORT AND RECOMMENDATION OF THE HEARING BOARD
The hearing in this matter was held on December 2, 2011, at the Chicago, Illinois offices of the Attorney Registration and Disciplinary Commission (ARDC), before a Hearing Board Panel of Lon M. Richey, Chair, Robert M. Karton, and Albert C. Baldermann. The Administrator was represented by Peter L. Rotskoff. Respondent appeared in person and was represented by Robert M. Dreger.
On October 28, 2010, the Administrator filed a one-count Complaint against Respondent pursuant to Illinois Supreme Court Rule 753(b) alleging he engaged in conversion, breach of fiduciary duty, and other related misconduct while acting as trustee of a family trust. Respondent filed an Answer in which he admitted some of the underlying factual allegations, denied many of the other allegations, and denied all of the charges of misconduct.
The Administrator presented the testimony of Craig Reiser, James Whitlaw, and Respondent as an adverse witness. Respondent testified on his own behalf and presented the
testimony of Sandra McKenzie, Matthew McKenzie, and three character witnesses. Administrator's Exhibits 1-9 and Respondent's Exhibits 1-12 were admitted into evidence.
Respondent graduated from Illinois State University in 1984 with a degree in Spanish and minors in Economics and Marketing. Prior to attending law school, he held various jobs in the computer field. In 1988, Respondent took a position with the law firm of Lord, Bissell & Brook (Lord Bissell), providing technology support for the firm's attorneys. In 1991, he left that position to manage the networking group at Sidley & Austin. In 1992, Respondent began attending law school full time. Shortly thereafter, he opened up his own consulting business, which provided computer technology support to professional services firms. He received his law degree from Loyola University Chicago in 1996 and was licensed to practice law that same year. (Tr. 100, 278-80).
In 1996, Respondent took job with LexisNexis on its technology consulting team. Respondent worked at LexisNexis and later another company as an electronic discovery specialist. Respondent left that field in 2004, in part, because it required extensive travel, which took him away from his wife and two children and contributed to the demise of his marriage. Respondent then became involved in the international relocation business. Respondent did not begin practicing law until 2006. (Tr. 280-82).
The Whitlaw Trust
On January 13, 1982, Respondent's grandmother, Mary Louise Whitlaw (Mary Louise), executed a Trust Agreement establishing the Whitlaw Trust (Whitlaw Trust or Trust). Mary Louise had two children, Sandra McKenzie (Sandra) and James Whitlaw (James). Sandra had four children, Michael McKenzie (Michael), Matthew McKenzie (Matthew), Marshall McKenzie
(Marshall), and Respondent. Springfield Marine Bank was named original Trustee of the Trust. (Resp. Ex. 9; Answer to Complaint, par. 1).
The Trust Agreement provided that upon Mary Louise's death, the Trust was to be maintained as a unit until Sandra and James were both deceased. During that time, all of the income from the Trust was to be divided between Sandra and James or their survivors. Upon the deaths of both Sandra and James, the Trust was to be distributed in equal shares to Michael, Matthew, Marshall, and Respondent. (Resp. Ex. 9; Answer to Complaint, par. 1).
Section Six of the Trust Agreement granted the Trustee the power "to invest and reinvest the trust in such bonds, notes, debentures, mortgages, preferred or common stocks, or in such other property, real or personal, either within or without the State of Illinois, as the Trustee may deem advisable without being limited by any statute or rule of law regarding investments by the Trustee." Section Nine of the Trust gave Mary Louise the right to designate a Successor Trustee during her lifetime. After Mary Louise's death, Sandra was appointed to designate a Successor Trustee. Any Successor Trustee was vested "with all the estate, title, powers, duties immunities, and discretions granted to the original Trustee." (Resp. Ex. 9).
Testimony of Craig Reiser
Craig Reiser was admitted to practice law in Illinois in 1990. He currently maintains a private practice in Springfield and also works part-time as an assistant public defender in Sangamon County. Mr. Reiser's practice includes handling elder law and elder abuse matters for Senior Services of Central Illinois (Senior Services). He became involved in helping James in connection with the Whitlaw Trust matter through his work for Senior Services. (Tr. 45-47).
Mr. Reiser was first contacted by Senior Services to assist James in 2007. After he reviewed a copy of the Trust and other documents, he was notified that James had received a
payment and his assistance was no longer needed. He was contacted again in 2009, after some additional distributions were not made. In January 2009, Mr. Reiser reviewed the materials and wrote Respondent two letters inquiring about the status of the matter. Mr. Reiser did not receive any response. (Tr. 47-49).
On March 6, 2009, Mr. Reiser filed a Petition for Accounting (Petition) in the Circuit Court of Sangamon County against Respondent on behalf of James (Sangamon County case). He also sent a third letter to Respondent and included a copy of the Petition. Mr. Reiser requested in the letter that Respondent agree to accept service. When he did not receive a response, Mr. Reiser began efforts to have the Petition personally served on Respondent. Mr. Reiser testified it "took awhile" to get service on Respondent. The first process server had difficulty and believed Respondent was trying to "dodge service." Mr. Reiser had to retain a second process server, who was eventually able to serve Respondent on June 30, 2009. (Tr. 48-50; Adm. Ex. 9 at 6, 18).
Mr. Reiser testified that Respondent did not respond to the Petition after he was served. Nor did he appear at a hearing in the case that was held on August 14, 2009. The Honorable Leo Zappa entered an order requiring Respondent to "prepare and file a full accounting" of the Trust, "including receipts, disbursements and inventory from February 12, 1999 to December 31, 2008," by September 4, 2009. Mr. Reiser mailed a copy of this order to Respondent. He also prepared and filed a certificate of service to document when he sent the order. Respondent did not file an accounting by September 4, 2009. (Tr. 50-52, 59-60; Adm. Ex. 9 at 17, 19-20).
On September 18, 2009, Mr. Reiser filed a Petition for Rule to Show Cause seeking an order requiring Respondent to show cause why he should not be held in contempt for failing to comply with the Court's August 14, 2009 order. Mr. Reiser noticed the matter for hearing before
The Honorable John W. Belz on September 28, 2009. On September 18, 2009, Mr. Reiser mailed a copy of the Rule to Show Cause Petition, the Order to Show Cause, and the Notice of Hearing to Respondent. That mailing was never returned to him as undeliverable. (Tr. 52-53; Adm. Ex. 9 at 21, 24).
Mr. Reiser received a call the week before September 28, 2009, from someone who represented himself to be Mr. Dreger, Respondent's counsel. Mr. Dreger informed Mr. Reiser they would be forwarding documents from the Whitlaw Trust account at Charles Schwab (Schwab Account) for him to review. Mr. Reiser made it clear to Mr. Dreger he wanted a full accounting, as ordered by the Court. (Tr. 53-54, 63-64).
On Sunday, September 27, 2009, Mr. Reiser received in his office an e-mail from Respondent containing several years of documentation from the Schwab Account. These materials did not include copies of any checks or any bank statements. Mr. Reiser testified that based upon the Schwab Account information he received, he was unsure what was going on with the Whitlaw Trust. (Tr. 54-55, 64; Adm. Ex. 1).
Respondent did not attend the hearing on the Petition for Rule to Show Cause on September 28, 2009. Judge Belz entered an Order to Show Cause directing that Respondent appear before the Court on October 27, 2009, and show cause why he should not be punished for contempt of court for "willfully refusing and neglecting to comply" with the Court's prior order. Mr. Reiser testified he did not recall if he told the Court at this hearing he had received the Schwab Account documents from Respondent. He recalled the Court asked if Respondent had filed the accounting, and Mr. Reiser indicated he had not received one. Mr. Reiser stated he did not have a chance to review all the documents Respondent e-mailed him prior to going to court,
but was able to determine a full accounting had not been provided. (Tr. 55-56, 62, 64, 65-67; Adm. Ex. 9 at 26).
Mr. Reiser attempted to have the Court's Order to Show Cause personally served on Respondent, but was not successful. On October 8, 2009, Mr. Reiser mailed a copy of the Order to Show Cause to Respondent. That mailing was never returned to him as undeliverable. (Tr. 56-57; Adm. Ex. 9 at 27).
Respondent did not appear in court to answer the Rule to Show Cause on October 27, 2009. Judge Belz entered an order finding that Respondent had "willfully refused and neglected to comply" with the Court's prior orders. Respondent was held in contempt of Court, and the Court issued a bench warrant for Respondent. (Tr. 57; Adm. Ex. 9 at 29).
Mr. Reiser did not believe Respondent filed anything in response to the Court's October 27, 2009 Order. Nor did he believe Respondent ever filed an accounting in Court as required by the August 14, 2009 Order. Mr. Reiser testified he had no further contact with Respondent until October 2010, which was the same month the disciplinary complaint was filed in this case. (Tr. 52, 57-60; Adm. Ex. 9 at 17, 20).
Mr. Reiser testified that the Sangamon County case has now been resolved. Mr. Reiser participated in settlement discussions, which resulted in a Settlement Agreement dated August 17, 2011. The terms of the settlement required Respondent to pay James a total of $16,632.32, in two installments. The first installment of $11,380.01 was paid by a check tendered to Mr. Reiser in open court on August 26, 2011. The remaining $5,252.31 was paid into an escrow account at Chicago Title and Trust. James is to receive the second installment on January 1, 2014, provided he is still living and has not breached the terms of the Settlement Agreement. (Tr. 57-58, 67-72, 74-75; Resp. Exs. 4, 5, 6, 7).
Mr. Reiser testified that they arrived at the settlement figure by taking into account the amounts James typically received in the past from the Trust as well as his life expectancy. Mr. Reiser conceded the settlement amount was based on distributions paid in the years prior to the economic downturn of 2008. He also acknowledged James was effectively being paid in advance income he would not yet have received under the terms of the Trust. (Tr. 76-83).
On August 26, 2011, an Agreed Order was entered into in the Sangamon County case dismissing the action with prejudice based on the settlement. The Agreed Order provided that all prior orders, including the contempt order and the order providing for the issuance of a warrant for the body attachment of Respondent, were stricken. (Tr. 73; Resp. Ex. 8).
Mr. Reiser stated his fees in the Sangamon County case were initially paid by Senior Services. Senior Services has a limit on what it will pay and when those funds ran out, James took over and paid his fees. Mr. Reiser did not know off the top of his head how much James paid him in fees. (Tr. 46-47, 58-59).
Testimony of James Whitlaw
James is retired and lives in Springfield, Illinois. From 1987 through 2004, James lived in a home owned by his sister, Sandra. He did not pay rent while there and worked only sporadically. In 2004, James was required to leave Sandra's home because it was sold and he was no longer needed to take care of it. (Tr. 84-85, 90-93).
James was a beneficiary of the Whitlaw Trust, which was set up by his mother. From 1982 until 1999, Springfield Marine Bank and its successor served as Trustees of the Trust. During this time, James received regular income payments from the Trust on a quarterly basis. In 1999, Sandra and Respondent claimed the bank had inappropriately moved or sold stock and wanted to remove it as Trustee and have Respondent take over. On February 12, 1999, James,
Sandra and Respondent all signed a release allowing the bank to withdraw and Respondent to be appointed successor Trustee. (Tr. 85-87; Adm. Ex. 8).
After Respondent became Trustee, James continued to receive income payments from the Trust for a period of time. James testified that he relied on those payments and they were an important source of income for him. Beginning in 2004 or 2005, the income payments from the Trust became a little irregular and, occasionally, James did not receive a payment at all. James testified that while Respondent was Trustee, he received only two or three statements from the Schwab Account, which showed the amount that was in the Trust and how much it earned in dividends. When the bank was Trustee, James had received statements that included information regarding the value of the stock in the Trust, its earnings, and all of the distributions made from the Trust for taxes, fees, and to Sandra. (Tr. 87-88, 96-97).
James testified that after the payments stopped, he attempted to contact Respondent to request additional information regarding what was happening with the Trust, but he could not get Respondent to return his calls. He also asked Sandra to have Respondent call him, but never received any response. James admitted he had no way of knowing if Sandra communicated his requests to Respondent. James testified he also wrote Respondent a letter demanding payment and notifying him he was not being provided with any information about the Trust. (Tr. 88, 97-98)
In 2007, James contacted the ARDC and Senior Services regarding the matter. In 2008, James received two payments of $925 each. James believed these represented amounts he was owed from the Trust in 2007. After he again failed to receive any payments in 2009, James again contacted Senior Services, and Mr. Reiser became involved in the matter. James did not receive any additional payments from the Trust until the settlement was reached in the Sangamon
County case. James testified he never authorized Respondent to use any of the funds in the Trust for his own purposes. (Tr. 89-90, 94-95).
Testimony of Sandra McKenzie
Sandra is divorced and lives in Springfield, Illinois. She has four grown children, including Respondent. Sandra's other children are Michael (age 51), Matthew (age 49), and Marshall (age 43). Sandra's parents were Lloyd and Mary Whitlaw, and James is her brother. Sandra worked for 37 years as a programmer analyst at the Department of Revenue and is currently retired. (Tr. 231-33).
Sandra described her relationship with James over the last seven years as "extremely strained." Sandra allowed James to move into her home in Springfield after she moved in with her parents to help take care of her mother. Sandra continued to pay the mortgage on the home and James was supposed to pay the utilities. Although he did so for awhile, Sandra later had to take over and make the payments. After she retired, Sandra sold the property because she could no longer afford the expense. Sandra testified her relationship with James deteriorated after this because he thought she should have given him the house. (Tr. 233-37).
Sandra testified that the Whitlaw Trust contains stock her mother inherited from her aunt and uncle in 1961. Her mother placed it in the Trust because she wanted Sandra's sons to inherit it, not Sandra's former husband or James. The original Trustee was Springfield Marine Bank, which was later acquired by Bank One. Sandra testified she became dissatisfied with Bank One's handling of the Trust after it sold stock that was paying substantial dividends and invested in a mutual fund that was not performing as well. Bank One never asked Sandra's permission or consulted with her regarding investments, but just told her what it was going to do. Sandra told Bank One she thought she should have been consulted before it made these decisions. Bank One
referred to the terms of the Trust Agreement and told her it did not "have to talk to [her]." Bank One also told her it was going to continue to manage the Trust and do what it wanted, "whether [she] liked it or not." After this, Sandra asked Bank One to resign as Trustee. (Tr. 237-41, 243-46; Adm. Ex. 9).
Bank One eventually agreed to resign and notified Sandra she needed to appoint a successor trustee. Sandra testified she chose Respondent because she believed this was consistent with her mother's will. The will named Sandra executor, but provided Respondent should take over if she was unable to fulfill her responsibilities. Sandra believed this reflected the confidence her mother had in Respondent. (Tr. 244, 246).
Sandra testified that she informed her other children what she intended to do and they were all in agreement. She also explained to them that Respondent would have the same powers as the bank, but would inform them prior to making any changes to the Trust. Sandra, James and Respondent were all required to sign a Release and Indemnity Agreement in order to allow Respondent to take over as Trustee. (Tr. 246-49; Adm. Ex. 8).
Toward the end of 2004, while Sandra was visiting Respondent in Chicago to celebrate Christmas, Respondent brought her down to his offices at 410 South Michigan Avenue to show her Orion, his international relocation business. Respondent was considering the business as an investment for money from the Trust. Sandra testified "it looked like a good plan," because Respondent told her he was developing something similar to a business in Florida that was "already working." Respondent also explained to her that A Virtual Certainty (AVC), which was run by Respondent's future wife Megan, would be handling the administrative side of the business. Sandra knew Megan had also been involved in running the Florida business. Respondent told Sandra he would be drawing a salary from Orion, but would not bill the Trust as
Trustee because he "felt that that was not ethical." Sandra understood from Respondent that his goal was to replace the funds in the Trust that had been lost by the bank. (Tr. 249-53).
Sandra testified she did not convey the information she received from Respondent concerning the investment of the Trust in Orion to James. She stated she didn't discuss "anything about the Trust" with her brother" because she "didn't feel that he needed to know." (Tr. 253-54).
After their meeting in Chicago, Respondent moved forward with the Orion investment. Throughout 2005, Sandra continued to receive about $900 every three months in dividend payments from the Trust. Sandra did not recall receiving any dividend payments in 2006. When she asked Respondent about this, he explained to her he was having "some problems." Sandra told Respondent she did not need the money, but asked him to continue to "at least send money to his uncle." After this, Respondent continued to send payments to James but did not send any to Sandra. (Tr. 254-56).
Respondent eventually told Sandra he had to shut Orion down because he had been notified by the Federal Maritime Commission it was not operating properly. Sandra testified she is aware the Trust currently contains no stock and has a balance of about $2,000. (Tr. 256-59).
Matthew currently lives in Mobile, Alabama, where he works as a cabinet maker. He is married and has two children. Matthew is close to Respondent, talks with him regularly, and would trust him with everything he has. (Tr. 259-61).
Matthew and his brothers are all beneficiaries of the Whitlaw Trust. Matthew understood the Trustee had "unlimited powers" to do whatever it believed was in the best interest of the
Trust. Matthew was never contacted by Springfield Marine Bank or Bank One regarding any investments they made on behalf of the Trust. (Tr. 261, 263-64).
Matthew testified that Respondent took over as Trustee after questions arose concerning how the funds were being invested by the bank. Matthew stated the bank was asked to turn the Trust over to someone who would manage it in a way "more beneficial to the family and less beneficial to the bank." Respondent was chosen as successor Trustee because he was educated in business, economics and finance, and was the most qualified person in the family. (Tr. 264-65).
Matthew confirmed that both he and his brother Michael signed a Release and Indemnity Agreement authorizing Respondent to be named Trustee. Before signing the agreement, Matthew had a discussion with Michael regarding the nature of Respondent's powers. Matthew understood Respondent would have the same powers as the bank and could make whatever decisions he thought were best. Matthew understood Respondent could buy stocks or invest in a business. Matthew did not expect Respondent would seek his authority before he made investment decisions and did not believe Respondent needed to do so. (Tr. 265-68; Adm. Ex. 7).
At some point, Respondent told Matthew he had invested money from the Trust in a business rather than stock. Respondent told him he used a business model from another successful business and believed the business would be lucrative. Matthew stated that if Respondent "thought it was a good investment, then that was good enough" for him. (Tr. 268-70).
Matthew had the opportunity to see Orion's offices and hear more about the business when he came to Chicago in July 2005 for Respondent's wedding to Megan. Respondent explained that AVC, which was owned by Megan, would be handling certain aspects of the
business. Matthew also understood from Respondent that Megan had been involved in the same type of business in Florida. Matthew testified he did not find Respondent's investment in Orion problematic and was proud that Respondent was involved in a "startup." Matthew believed Respondent was acting in his best interests and never felt Respondent was not forthcoming with him about the nature of the Orion business. (Tr. 271-72).
Although Matthew was not aware Respondent was being paid from Orion, he would not have been concerned Respondent was taking money from the business because he expected him to make a salary. Matthew anticipated a new business would struggle the first few years and would not immediately be profitable. (Tr. 273-74).
Matthew later learned Orion was struggling and eventually found out it had to be shut down because of regulatory problems. Matthew testified he did not expect Respondent to personally repay the funds lost from the Trust as a result of Orion's failure. Matthew did not know how much was currently left in the Trust. (Tr. 274-77).
Testimony of Respondent
When Respondent became Trustee he was required to sign two identical Release and Indemnity Agreements, which established the beneficiaries' consent for him to take over for Bank One. One of these documents was also signed by James and Sandra, and the other was signed by Michael and Matthew. Respondent admitted he signed each of these releases beneath the statement "APPROVED AS TO FORM AND SUBSTANCE," along with a statement identifying him as "Martin J. McKenzie, Attorney at Law." Respondent testified he was not asked to review or approve the releases, but was just handed the documents and told he needed to sign them in order to be made Trustee. Respondent denied he was representing his family as an attorney at the time the releases were executed. Although Marshall's signature does not appear
on either of these releases, Respondent believed he was also required to sign because he did not think the bank would allow him to take over unless it had all of the brothers' signatures. (Tr. 100-102, 330-31; Adm. Exs. 7, 8).
Shortly after becoming Trustee, Respondent opened an account in the name of the Trust at Charles Schwab (Schwab Account). Respondent transferred the assets of the Trust into that account and invested them in various stocks and mutual funds. From 1999 through 2004, Respondent collected $1,000 per year fee for serving as Trustee. At the end of 2004, all of the Trust assets were held in the Schwab Account, which had a value of $108,147.57. (Tr. 103, 315-18; Adm. Ex. 1 at 1; Answer to Complaint, Par. 4).
Respondent's Use of the Funds from the Whitlaw Trust
Respondent testified that he became involved in the international relocation business in 2004, after he was approached by Megan Kaiser (Megan) and her then husband who were operating a business in Florida called Dolphin International Shipping, Inc. (Dolphin). Dolphin was in the business of coordinating various aspects of the relocation process, including the movement of household goods, personal effects, and other items for individuals who are relocated internationally. Megan and her husband were aware Respondent wanted to cut down on his travel and they invited him observe the Florida business to see if he was interested in opening a Chicago office of Dolphin. Respondent testified he spent a significant period of time travelling back and forth to Miami studying the Dolphin business and learning how to run it. Since the business operated on a 24-hour cycle, Respondent said he typically worked 10 to 14 hour days. Respondent eventually invested a total of $50,000 of his own funds in Dolphin. (Tr. 103-104, 151-62)
After working at Dolphin and observing its operations, Respondent determined it was a successful business model and decided to start a similar business in Chicago. Respondent testified he returned to Chicago permanently in September 2004 to establish a Dolphin prototype. At this same time, he was also involved in shutting down the Dolphin business in Florida and transferring its operations to Chicago. Respondent invited Megan to work with him in Chicago. (Tr. 103-104, 162-66, 198-200, 328-29).
While Respondent was setting up Orion, Megan was in the process of creating a separate virtual assistant business that was designed to provide administrative services to small business owners. That business was eventually named A Virtual Certainty (AVC). In an effort to enhance the Dolphin business model, Respondent hired AVC to provide various administrative services to Orion. Megan also provided other services to Orion based upon her knowledge of the international relocation business. (Tr. 163-69).
From November 2004 through February 2005, Respondent and Megan created what Respondent described as a "working document," which contained an analysis of how Orion and AVC would work together. It projects that Orion would need to handle at least 16 shipments per month in order to show even a small profit. It also projects a profit of $2,200 per month based on 20 shipments per month, which is the most that could be handled by a single dispatcher. Respondent testified his plan was to expand the Orion business, add more salespeople, and eventually have three offices. Respondent testified his "hope" was that the Orion business would break even after one year. (Tr. 170, 308-14; Resp. Ex. 1).
Respondent testified he needed funds to get the Orion business running. Beginning in January 2005 and continuing through April 2006, Respondent wrote a series of 20 checks from
the Schwab Account to himself, Orion, and AVC. During this time, Respondent withdrew a total of $94,995.00. (Tr. 170; Adm. Exs. 1, 2).
The first two checks, dated January 10, 2005, totaled $6,000 and were payable to Respondent. Respondent testified the first check for $4,000 was used to provide capital funding to set up Chicago offices of his relocation business. The notation in the memo portion of that check states "Investment-Relocation." Respondent testified the second check for $2,000 provided the initial capital investment for the virtual assistant business that was eventually titled AVC. The notation on that check contains a reference to a loan or investment in the virtual assistant business. Respondent also wrote a check for $1,000 payable to AVC on February 10, 2005. Respondent testified this was for business capital for AVC. (Tr. 104-107; Adm. Exs. 1, 2).
The remaining checks were all payable to Orion. The first of these for $1,000 is dated February 10, 2005. The notation "Acct Opening-Orion Consulting" appears in the memo portion. Respondent testified he used these funds to open a business account for Orion at Bank One (Orion Account). Respondent also wrote a second check to Orion for $2,000 on February 10, 2005. The notation "Loan-Startup Funding-Orion" appears in the memo portion of that check. Over the course of the next 15 months, Respondent wrote additional checks to Orion for varying amounts ranging from $3,500 to $10,500. Most of these checks included the notation "Capital Investment" or other similar language. The last check for $10,500 contains the notation "Loan to Orion." All of these checks were deposited into the Orion Account. Respondent was the only signatory on that account. (Tr. 106-109; Adm. Exs. 2, 3, 4, 5).
Respondent admitted he did not prepare loan agreements or notes for the loans he made from the Schwab Account to Orion and AVC. Nor did he establish an interest rate, provide any collateral, or designate any terms of repayment. (Tr. 108-109).
Respondent testified that he relied on the investment authority granted to him as Trustee in the Trust Agreement in making these transfers from the Schwab Account to Orion and AVC. Respondent said he understood the Trustee's powers under the Trust were "[e]ffectively unlimited" and that the Trustee had "absolute discretion" to do what it chose with the funds in the Trust. Respondent based this understanding on his review of the language in the Trust Agreement as well as discussions he had with the bank during the time it was acting as Trustee. Respondent testified he conducted due diligence on both Orion and AVC before he made these investments and had no reason at the time to anticipate the events that ultimately led to Orion's failure. (Tr. 296-304).
After the funds from the Schwab Account were deposited into the Orion Account, Respondent made numerous withdrawals from the Orion Account by writing checks, withdrawing cash, and making debit card purchases. Orion Account records show that from February 2005 through April 2006, Respondent made multiple cash withdrawals from the account, which totaled over $25,000. This included a cash withdrawal for $6,800 on May 12, 2005. Respondent testified that some of these cash withdrawals were likely draws against his earnings from the company. Respondent explained that he did not receive a salary, but took draws against the company's earnings as compensation to cover his personal expenses. Respondent did not recall the circumstances surrounding the $6,800 cash withdrawal. Respondent stated it "may have been an advance of legal fees that I was paying on behalf of Orion." Respondent did not believe this withdrawal was for compensation. Although he stated
that the withdrawal slip was not in his handwriting, he acknowledged the signature was his and that this would have been done at his direction. Respondent did not dispute that he received the $6,800. (Tr. 113-15; Adm. Exs. 4, 5, 6 at , 2, 6, 7, 8, 9, 12, 13, 14, 15, 17, 19, 26, 29, 90, 133, 136).
From May 2005 through February 2006, Respondent also withdrew over $21,000 from the Orion Account by writing 10 checks to himself and to cash. This included a check for $2,500 dated May 5, 2005, which contains the notation "May Retainer." Respondent testified he believed this was a "draw against earnings." It also included a check for $1,500 dated June 17, 2005, which contains the notation "June 15 Compensation." Respondent testified this would have been for his compensation, as noted in the memo field. On June 21, 2005, Respondent wrote another check to himself for $1,545, which states "Partial Draw for July, 2005." Respondent stated this would have been a draw against expected future earnings or revenues. On June 4, 2005, Respondent wrote a check to himself for $5,000. Respondent did not recall the purpose of this check and there is no notation in the memo portion. Respondent testified that if this was for compensation or other specific purpose, he typically would memorialize that. All of the remaining checks payable to Respondent contain notations indicating they were for draws or partial draws. (Tr. 115-17; Adm. Ex. 6 at 16, 22, 27, 28, 49, 74, 108, 115, 123).
Respondent also wrote checks on the Orion Account to pay for various other expenses. On July 14, 2005, Respondent wrote a check for $465 payable to "Cash." The notation "Rings" appears in the memo portion of the check. Respondent testified that he was married on July 17, 2005, and wrote this check to pay for the wedding rings. Respondent admitted this was not a business expense. On July 16, 2005, Respondent wrote a check for $450 to "21st Century Arts and Entertainment" and a check for $651.43 to "Merle's Coffee Shop." Respondent testified
these were also expenses related to his wedding. Respondent testified he was not sure if these were business expenses, because he had invited a number of Orion's clients to his wedding. (Tr. 117-19; Adm. Ex. 6 at 35, 36, 37).
On July 17, 2005, Respondent wrote a check on the Orion Account for $108 to Caitlyn Dreger for "nanny services." Respondent testified this was to compensate her for watching his children. Respondent stated that while he would not normally consider this a business expense, he did so on this occasion because a business situation arose that required him to work during a time he ordinarily had his children. (Tr. 119-20; Adm. Ex. 6 at 40).
On August 2, 2005, Respondent wrote a check for $1,450 on the Orion Account to Siegfried Reinke for "Rent." Respondent testified this was payment for rent at his personal residence. Respondent stated that he also maintained home office at his residence, because the international relocation business "essentially operates on a 24-hour cycle." On October 28, 2005, Respondent wrote a check for $1,000 to Citibank Visa. Respondent testified this was "[v]ery likely" a business expense, because they used the Citibank card to "forward expenses for Orion." Respondent admitted he also used the Citibank card for personal expenses. (Tr. 120-22; Adm. Ex. 6 at 44, 79).
Respondent also used the Orion Account during this period of time to make multiple ATM card cash withdrawals and hundreds of debit card purchases. Bank statements from the Orion Account show debit card purchases at restaurants, liquor stores, grocery stores, department stores, and various other retail establishments, including Nordstrom, Nordstrom Rack, Trader Joe's, Target, Bed, Bath & Beyond, Home Depot, Kohl's, Sears, Ikea, Ruff Haus Pets, and Timeless Toys. In some cases, Respondent received cash back in connection with these purchases. The debit card was also used to purchase CTA cards and to pay Respondent's health
club fees and cable bill. Respondent testified he could not specifically recall the nature of many of these debit card purchases. He testified that some of them were for business entertainment or other business expenses. He admitted that some of them, including the pet store and toy store charges, were personal or partially personal in nature. (Tr. 126-38; Adm. Ex. 4).
Although Respondent admitted he used the Orion Account for personal as well as business expenses, he testified he did not believe this was improper. Respondent explained that he did not receive a salary or any other fixed amount from Orion, and he considered the various personal expenses he paid from the Orion Account to be his compensation. Respondent testified he believed it was permissible to do this, as long as he later identified what was business and what was personal and accounted for everything. Since Respondent was not sure what items might be deductible as business expenses, he said he would give all of the information to his accountant to sort out. The expenses that were identified as personal by his accountant would then be treated as income in kind. When asked by his attorney why he did not just use the Schwab Account, Respondent testified as follows:
Q. Now, let me ask then the question that's just begging to be asked. Why wouldn't you take those expenses out of the Schwab account?
A. Because the Schwab account is a trust account; and there's no question in my mind that, if you take that and take a personal expense out of that account, it would be inappropriate.
A. Because it's a trust account. It's not for my personal use.
Q. Okay. So you take trust funds out for investment purposes; and then, in this case, you put it into a business. In this case, it was your business; but?it wasn't IBM or whatever. But the concept is that's what the Schwab account is investing in, something that's going to give a regular return.
Respondent testified that the Orion Account records also show that Orion was a legitimate business that was generating revenue and sustaining expenses during this time. Respondent noted there are a number of checks from individuals and entities that were deposited into the Orion Account, which were payments from customers of Orion who wanted goods shipped internationally. The records also reflect a variety of outgoing expenses related to the operation of the business, including payments to lead generators, moving companies, freight forwarders and others involved in the shipment or movement of goods. (Tr. 170-78, 188-90; Adm. Exs. 4, 5, 6).
Respondent explained that the eventual failure of Orion was triggered by an investigation initiated by the Federal Maritime Commission (FMC) into Dolphin and other similar businesses. In January 2006, Respondent was served with a document alleging that Dolphin and its predecessor were not in compliance with the Shipping Act of 1984. The FMC took the position that Dolphin was a Non Vessel Operating Common Carrier (NVOCC) and should have been licensed. The FMC was challenging approximately 40 Dolphin shipments on this basis and the potential penalty per occurrence was $20,000. The FMC was also investigating whether the individuals involved in running Dolphin, including Respondent and Megan, should be personally subjected to regulatory fines. Respondent was named in the matter based on his investment in Dolphin and his alleged role as a principal. Respondent understood he could be held personally liable for any noncompliant shipments by Dolphin. (Tr. 200-201, 283-87; Resp. Ex. 2).
At the same time it was looking into the Dolphin matter, the FMC was also questioning Respondent about Orion. Respondent determined that the only way he could continue the business was to operate it in under a model that was compliant with the Shipping Act. Respondent testified that he initially attempted to modify Orion's business model to comply with
the requirements of the FMC, but it became apparent after a few months that this model was not going to be viable. Therefore, he determined that Orion had to be shut down. Respondent stated the FMC's action against Dolphin and Respondent "destroyed Orion" and destroyed Respondent's ability to run Orion as a business. In April 2006, Respondent began to practice law for the first time. (Tr. 281-82, 287-88, 304-307).
Respondent admitted he continued to invest funds from the Trust in Orion even after he learned about the FMC investigation into Dolphin. This included the transfer of a total of $18,000 from the Schwab Account to Orion during January 2006. Respondent also made the $10,800 "loan" to Orion on April 1, 2006, at a time when the Orion account was already overdrawn. (Tr. 110-12, 329; Adm. Ex. 1 at 33, Adm. Ex. 2 at 20, Adm. Ex. 4 at 85).
On August 25, 2006, Respondent wrote a check to the Trust from the Orion Account for $1,206.06, which includes the notation "Partial Loan Repayment." Respondent testified this was intended to make some returns to the Trust for the funds that been used for the formation of the business. Respondent admitted that, other than this amount, he has not made any additional payments to replace the principal of the Trust. Respondent testified that the Schwab Account is still open and the balance is in the same range as in 2006. (Tr. 125-26, 329; Adm. Ex. 6 at 141).
Respondent admitted that he continued to pay dividends to James in 2005, 2006 and 2007, and to Sandra in 2005 and 2006, even though the Trust did not have any income during these years. Respondent testified he determined the amount of the payments by taking the average of the dividends paid from the Trust for the previous three years and paying 125 percent of that amount. Respondent said that he used his own funds to make these payments, because he was "heartbroken about the circumstances under which the business was shut down" and felt a "moral obligation" to continue to make the payments as long as he was able. Respondent did not
tell his uncle or mother he was using his own money to make these payments. He believed if his mother had known this, she would have refused the payments. (Tr. 316-17, 332-35).
Respondent testified he never made any attempt to deceive any of his family members about Orion or hide what he was doing with Orion's business funds. Nor did he try to disguise the payment of personal expenses out of the Orion Account. Respondent testified that he let his mother and brothers know about his investment in Orion as a "courtesy," but did not notify James about what he was doing because he had been estranged from him since 1993. Respondent stated that while he was required to treat James and Sandra equally in connection with his role as Trustee, he would have been content never see James or speak with him again for the rest of his life. (Tr. 326-27, 331-32).
In 2010, an Administrative Law Judge issued a decision in the FMC proceeding finding Respondent had no personal liability because he was only an investor in Dolphin and did not control or operate the business. Megan was found personally liable for her activities with Dolphin and was assessed a civil penalty of $40,000. She was also assessed additional civil penalties of $160,000 based upon her operation of a prior company. Respondent testified that this decision is still under review by the full Commission and he does not believe any further action will be taken because a decision by the Second Circuit Court of Appeals has called into question the basis for the FMC investigation. (Tr. 288-97; Resp. Exs. 2, 3, 11, 12).
Respondent testified that although Orion was shut down as a result of the FMC proceeding, AVC was not in a regulated industry so it was not affected. As far as Respondent knows, AVC is still in business. Although Respondent used money from the Trust to make an initial investment in AVC, the business belongs to Megan. Respondent testified that the Trust is not receiving income from AVC, but it still has an "interest in the investment" it made in AVC.
Other than the "paper trail of the checks," there is no note or anything else showing this investment. Respondent testified he "did not do the formalities around that." Respondent explained that he is not able to answer questions about the investment in AVC, because he and Megan went through a very stressful time as a result of the FMC investigation. They separated in 2009 and have had limited contact since then. They are now divorced. (Tr. 201-204).
Respondent's Actions in the Sangamon County Case
Respondent testified he first became aware of the Sangamon County case when he was personally served with the Petition on June 30, 2009. Respondent denied receiving Mr. Reiser's January 2009 letters or the materials that were mailed to him in March 2009. Respondent acknowledged documentation shows Megan accepted service of the Petition on June 19, 2009. Respondent testified he had not seen this previously, and Megan did not tell him about the Petition after she was served. Respondent admitted he did not respond to the Petition after he was personally served. (Tr. 139-40; Adm. Ex. 9 at 16, 18).
Respondent acknowledged Judge Zappa entered an order in the Sangamon County case on August 14, 2009, directing him to prepare and file a full accounting by September 4, 2009. Respondent admitted he did not file an accounting in response to this order. Respondent testified he did not recall receiving this document within this time frame, and was not certain he ever saw it. Respondent also could not recall receiving the other materials that were served on him by mail, including the Petition for Rule to Show Cause and the Notice setting the matter for a hearing on September 28, 2009. Respondent denied knowing about the hearing on September 28, 2009. (Tr. 141-42; Adm. Ex. 9 at 17, 21-25).
Respondent testified that he has since become aware of a "substantial amount of mail" directed to him at his office in 2009 that was not delivered or forwarded to him. Respondent
testified that when he and Megan separated, he went through the offices to retrieve his personal effects and "found a stash of documents" that had been mailed to him, including documents related to the Sangamon County case. When Respondent confronted Megan about this, she indicated that she had not given these materials to him because she did want to anger him or "inflame the situation." (Tr. 197-98, 206-208).
Respondent testified he became aware at some point, based upon contact between Mr. Reiser and Mr. Dreger, that Mr. Reiser was looking for what he called an "accounting." Respondent said he understood this to mean the Schwab Account statements, which showed all of the disbursements from the Trust. Respondent put these statements into PDF format and e-mailed them to Mr. Reiser on September 27, 2009. Respondent said he believed when he sent these materials, he had complied with the court's order. Respondent did not think it was necessary to send anything related to Orion or AVC because the order only related to the Trust. Respondent testified that he did not recall knowing when he sent these documents about the hearing scheduled for the next day and did not attend. (Tr. 142-44, 185-87).
Respondent also did not attend the hearing that was held in the case on October 27, 2009. Respondent testified he did not receive the Order to Show Cause previously entered by Judge Belz until the day the hearing was held. Respondent stated he received "a call from the judge's office and a message that said the order?that the attachment had been entered." (Tr. 144-45; Adm. Ex. 9 at 26).
Respondent testified he did not take steps "for quite some time" to file an accounting, because he believed he was in compliance by sending Mr. Reiser the Schwab Account statements. Respondent maintained that these statements showed every transaction where money was drawn from the Trust account to Respondent and Orion. Respondent admitted he did not
provide Mr. Reiser with copies of the twenty checks written on the Schwab Account. He also acknowledged the Schwab Account statements only show the check numbers and amounts, and do not reflect where the funds went. Respondent admitted he never provided Mr. Reiser with documents showing who was paid the money drawn from the Schwab Account. Respondent also admitted he did not file any documents or anything else with the court in the Sangamon County case. (Tr. 145-47, 187-88; Adm. Exs. 1, 2).
Respondent testified that he began efforts to settle the Sangamon County case with James in 2010. They ultimately reached an agreement in August 2011, whereby Respondent agreed to pay James $11,380.01 for the three-year period from 2008 through 2010. This amount was based upon 125 percent of the average annual dividend payments for the three-year period prior to 2005, when Respondent began withdrawing the funds from the Trust. Respondent also agreed to make an additional payment of $5,252.31 for the three years going forward to, in effect, buy out James' life interest in the Trust. That amount was paid into an escrow account and is to be paid to James on January 1, 2014. Respondent testified he believed he was paying James more under the terms of the settlement than James would have received if there had been no change in the Schwab Account. (Tr. 319-25, Resp. Exs. 5, 6, 7, 8)
Evidence Offered in Mitigation
Joseph Yast is Vice President and General Counsel of DirectBuy, Inc. (DirectBuy), in Merrillville, Indiana. After graduating from law school in 1977, he clerked for a judge and then spent fourteen years practicing at Lord Bissel. Mr. Yast met Respondent while Respondent was working in the technology department at Lord Bissel. They both also played on the firm's soccer team together. After Mr. Yast left Lord Bissell, he had a solo law practice and hired Respondent,
who was in law school at the time, to assist him with a large piece of litigation. Mr. Yast relocated to Indiana in 2007 when he took the job with DirectBuy and has not been in regular communication with Respondent since then. (Tr. 211-17).
Mr. Yast is of the opinion that Respondent is "an honest, direct, straightforward individual." He believes Respondent is "trustworthy" and a man of "integrity," and he regards him as an asset to the profession. He is not aware of any matters showing a lack of ethics or morals on Respondent's part. Mr. Yast understands the current disciplinary charges involve Respondent's investment of some of the funds from a family trust in his own business, which did not succeed. (Tr. 217-19).
David Gilmartin has been an attorney since 1988. He is currently Associate General Counsel of The Joint Commission. He was previously in private practice, first at Lord Bissell and then at Gardner, Carton & Douglas. He has known Respondent since the late 1980's when they worked together at Lord Bissell and played on the firm's soccer team. Mr. Gilmartin socializes with Respondent and considers him a "very good friend." Mr. Gilmartin described Respondent as "very diligent, very responsible and dependable." He also believes he is a person of high integrity and ethics. Mr. Gilmartin would trust Respondent with his money and is not aware of any illegal, immoral, or dishonest acts involving Respondent. (Tr. 220-24).
Wilbert Bailey is employed as an IT analyst with Caterpillar in Peoria, Illinois. He met Respondent in college and has known him since 1980. Respondent also handled a legal matter for him in 2009. Mr. Bailey described Respondent as a "very good friend," and he considers him to be a "brother." Mr. Bailey believes Respondent is very dependable and is someone he could turn to in a time of need. He considers Respondent to be a person of "high moral character" and would trust Respondent with his life. (Tr. 225-30).
Respondent's mother, Sandra, believes Respondent has been extremely honest in his dealings with her and she finds him to be ethical and trustworthy. Respondent's brother, Matthew, would trust Respondent with his life and would not hesitate to hire him to handle his financial affairs. (Tr. 257, 276).
Respondent has not been previously disciplined.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In attorney disciplinary matters, the Administrator must establish charges of misconduct by clear and convincing evidence. Supreme Court Rule 753(c)(6); In re Ingersoll, 186 Ill. 2d 163, 168, 710 N.E.2d 390 (1999). Clear and convincing evidence constitutes a high level of certainty, which is greater than a preponderance of the evidence but less than proof beyond a reasonable doubt. People v. Williams, 143 Ill. 2d 477, 484-85, 577 N.E.2d 762 (1991).
The charges in this case stem from Respondent's alleged misuse of the funds from a family trust and his subsequent failure to account for his actions. The admitted complaint allegations and other evidence presented established the following.
The Whitlaw Trust was established in 1982 by Respondent's grandmother and originally contained 520 shares of stock in a telecommunications company. Respondent's mother, Sandra, and his uncle, James, were the lifetime income beneficiaries of the Trust. Upon both of their deaths, the assets in the Trust were to be divided equally among Respondent and his three brothers, Michael, Matthew and Marshall. Springfield Marine Bank was named the original trustee and Bank One later assumed that role. In 1999, the family became dissatisfied with the manner in which Bank One was investing the Trust's funds and asked it to resign. Sandra was
vested with the authority to appoint the Successor Trustee and she chose Respondent. Sandra, James, Michael and Matthew all agreed to allow Respondent to take over for the bank as Trustee.
Upon assuming the role of Trustee, Respondent established an account in the name of the Trust at a brokerage company and transferred the assets of the Trust into that account (Schwab Account). From 1999 through 2004, the assets of the Trust remained in the Schwab Account and were invested in various stocks and mutual funds. During this time, Respondent paid the income from the Trust to Sandra and James, and Respondent also received a $1,000 annual fee for his services. At the end of 2004, the Schwab Account had a total value of $108,147.57. No questions have been raised regarding Respondent's actions as Trustee during this period.
Beginning in January 2005 and continuing through April 2006, Respondent began to draw down the balance in the Schwab Account by writing a series of 20 checks. The majority of these checks were written to Orion Consulting, an international relocation business Respondent was establishing as a sole proprietorship. One check was made payable to AVC, a separate business that was being established by Respondent's former wife, Megan. Although the two initial checks were made payable to Respondent individually, Respondent testified the proceeds from these were also used to set up his relocation business and AVC. Over this 15-month period of time, Respondent withdrew a total of $94,995 from the Schwab Account. By April 30, 2006, the total value of the Schwab Account had been reduced to $2,084.67.
It was undisputed that Respondent operated Orion as a legitimate international relocation business during the period these funds were being transferred from the Schwab Account to the Orion Account. Although it is not clear how much business Orion was doing during this time, the evidence established it was generating revenue and incurring various expenses. In January 2006, Respondent learned of regulatory issues being raised by the FMC that impacted Orion's
ability to do business. Shortly thereafter, Respondent determined Orion could no longer continue to operate and he shut the business down. Although Respondent later made one payment of $1,206.06 from Orion to the Trust, all of the remaining funds from the Trust were lost and have not been replaced.
After he began withdrawing the funds from the Schwab Account, Respondent continued, for a time, to make what purported to be income payments from the Trust to Sandra and James. When these payments stopped, James began making inquiries regarding the status of the Trust. After he was unable to obtain information from Respondent, James retained counsel through a senior services organization and filed suit against Respondent in 2009 in Sangamon County seeking an accounting. Although Respondent was served with the complaint, he never appeared in the case and never filed anything in response to various orders entered by the Court. Respondent was eventually held in contempt and a bench warrant was issued. Approximately one year later, around the time the disciplinary complaint was filed, Respondent initiated efforts to settle the case with James. In 2011, after a settlement agreement was finalized, the Sangamon County case was dismissed and the contempt order and body attachment were stricken.
The disciplinary charges against Respondent are based on allegations he engaged in various forms of misconduct by the manner in which he utilized the funds from the Trust and by his subsequent actions. Respondent was specifically charged with the following misconduct: breach of fiduciary duty; conversion; conduct involving dishonesty, fraud, deceit, or misrepresentation in violation of Rule 8.4(a)(4) of the Illinois Rules of Professional Conduct (1990); and conduct prejudicial to the administration of justice in violation of Rule 8.4(a)(5) of the Illinois Rules of Professional Conduct (1990) and Rule 8.4(d) of the Illinois Rules of Professional Conduct (2010).1 With the exception of the charge that Respondent engaged in
dishonesty, fraud, deceit or misrepresentation in violation of Rule 8.4(a)(4), we find that all of these charges were proven by clear and convincing evidence.
Breach of Fiduciary Duty
It is undisputed that as Trustee of the Whitlaw Trust, Respondent had a fiduciary duty to the Trust's beneficiaries. A trustee is held to a high standard of conduct and must exercise care and diligence in the discharge of his powers and duties. Rennacker v. Rennacker, 156 Ill. App. 3d 712, 715, 509 N.E.2d 798 (1987). A trustee is also obligated to carry out the trust according to its terms and to act with the highest degree of fidelity and utmost good faith. Dick v. Peoples Mid-Illinois Corp., 242 Ill. App. 3d 297, 303-304, 609 N.E.2d 997 (1993). Furthermore, a trustee is under a duty to serve the interests of the trust's beneficiaries with complete loyalty, excluding all self-interest, and is prohibited from dealing with the trust property for his own benefit. Home Federal Savings and Loan Association v. Zarkin, 89 Ill. 2d 232, 239, 432 N.E.2d 841 (1982).
Since Respondent is also an attorney, he is held to a particularly high standard of conduct in all of his transactions and dealings. See In re Abbamonto, 19 Ill. 2d 93, 98, 166 N.E.2d 62 (1960); In re Ross, 98 CH 70, M.R. 17404 (May 25, 2001) (Review Bd. at 13). This is true regardless of the fact that Respondent was not acting as an attorney for the Trust or any of the other parties in connection with this matter. See, e.g., In re Nagler, 07 CH 12, M.R. 23644 (May 17, 2010) (Hearing Bd. at 45).
The Administrator argues that Respondent initially breached his fiduciary duty as Trustee by his withdrawal and subsequent use of nearly all of the funds in the Trust for his own purposes. Although Respondent concedes he lost nearly all of the money in the Trust, he argues his use of the funds to support the operations of Orion and AVC were simply "investments," which is
consistent with the broad authority granted to him as Trustee under the terms of the Trust Agreement. Respondent relies on the language contained in Section Six of the Trust, which gives him the power to "to invest and reinvest the trust in such bonds, notes, debentures, mortgages, preferred or common stocks, or in such other property, real or personal, either within or without the State of Illinois, as the Trustee may deem advisable without being limited by any statute or rule of law regarding investments by the Trustee." Respondent points out that the validity of such trust provisions, which exempt trustees from adhering to statutory requirements like the "prudent investor rule," have been upheld by Illinois courts. See Faville v. Burns, 2011 IL App. (1st) 110335. Respondent also argues that the evidence shows he conducted appropriate due diligence before going forward with this venture and could not have foreseen the regulatory issues that led to Orion's failure.
We find that the evidence clearly established Respondent breached his fiduciary duty as Trustee by the manner in which he withdrew and then used nearly all of the funds from the Trust. While we agree the terms of the Trust conferred broad discretion on Respondent in making investment decisions, we nonetheless find Respondent's actions here were clearly improper. As the Administrator pointed out, simply because Respondent has labeled these various withdrawals of funds "investments" does not establish this fact. Rather, we believe it is necessary to look at the nature and circumstances surrounding these transactions in order to make this determination. After examining all of the evidence presented in this case, including the extensive bank records and Respondent's own testimony, we conclude Respondent's use of the funds cannot be properly characterized as "investments" pursuant to the authority granted him under Section Six of the Trust Agreement. In reaching this conclusion, we note the following factors.
First, it is significant that these purported "investments" by Respondent were made in startup businesses that were wholly owned by Respondent and his wife. Thus, they all clearly involved blatant self-dealing. As already noted, it is well established that trustees are generally prohibited from dealing with the trust for their own benefit and from engaging in self-dealing of any kind. Thus, this is not, as Respondent suggests, simply a matter of him utilizing a risky investment strategy that ultimately did not pay off. Compare, In re Bruckner, 00 CH 12, M.R. 17722 (Nov. 28, 2001) (refusing to find misconduct based on trustee's risky investment strategy where trust instrument excused attorney from abiding by prudent man rule). Moreover, while the language in the Trust is admittedly quite broad, there is nothing in the Trust that expressly permits the kind of self-dealing that Respondent admittedly engaged in here.
Second, we note Respondent's complete failure to adhere to formalities of any kind with respect to these supposed "investments." With respect to the majority of these payments, which were made to Orion, there was nothing to document the transactions other than a notation in the memo portion of the check indicating they were capital investments or investments. There was no written instrument reflecting how the funds were to be repaid or to establish what, if anything, the Trust was to receive in return for Orion's use of these funds. Respondent apparently operated Orion as a sole proprietorship, without any formal organizational structure. Thus, there were no shares of stock issued to the Trust. Nor is there any indication the Trust received any other identifiable ownership interest in the business, as one would normally expect in exchange for providing investment capital. As a result, even if Orion had been successful, there is nothing that clearly establishes how the Trust or its beneficiaries would benefit.
In addition, we also note that several of the payments to Orion and AVC were specifically designated as "loans" rather than investments. Again, however, Respondent failed to
adhere to any of the normal formalities one would expect when making a business loan. Respondent admitted there were no promissory notes issued, no interest rates set, no collateral provided, and no terms of repayment established. Furthermore, with the exception of a single payment of $1,206.06 made after Orion's failure, neither Respondent nor his wife made any attempt to repay any of the amounts that were supposedly borrowed.
The evidence also showed that Respondent continued to make these supposed "investments" in Orion, even after he learned of the regulatory issues that required him to shut the business down. This included "capital investments" of $18,000 in January 2006 and an unsecured, undocumented "loan" of $10,500 in April 2006. It is hard to imagine how any fiduciary, even one with broad authority and discretion, could justify continuing to invest in a troubled business under these circumstances. See In re Bauer, 05 CH 43, M.R. 21102 (Sept. 21, 2006) (attorney acting as trustee of trust established by his brother disciplined for making undocumented loans to himself when he had defaulted on a prior loan and was otherwise in a precarious financial state). The circumstances surrounding these transactions as well as the complete absence of appropriate documentation are indications that these were not true investments.
Finally, we note the highly questionable manner in which Respondent then used the funds from the Trust after they were deposited into the Orion Account. Although the evidence supported Respondent's claim that he was operating Orion as a legitimate relocation business during this time, it also clearly showed Respondent used the Orion Account freely and extensively for personal purposes. Furthermore, Respondent did not segregate the funds that came in from the Trust and there was no clear line of accounting with regard to Respondent's business and personal expenditures. The record established that Respondent wrote various
checks to himself and took numerous cash withdrawals from the Orion Account for substantial amounts. This included a $6,800 cash withdrawal in May 2005 and a $5,000 check the following month, for which Respondent could provide no real explanations. It also established that Respondent regularly used the business debit card and checking account for various personal purposes, included the payment of rent on his residence, the purchase of wedding rings, and the payment of various other wedding expenses. He also used the business debit card for health club fees, CTA cards, presents for his children, pet supplies, and groceries. The debit card was also used numerous times at various restaurants and retail stores. Although Respondent testified that some of these expenses were for business purposes, he conceded that many were not. Moreover, review of the statements from the Orion Account show that these were not isolated or occasional transactions, but accounted for a significant amount of the activity in the account. The checks Respondent wrote to himself and the cash withdrawals alone amounted to over $45,000. There were also hundreds of debit card purchases, many of which appear to have been personal in nature.
We note that Respondent testified he did not use the Schwab Account to pay these expenses because he recognized it would have been improper for him to pay personal expenses directly out of the Trust. It is clear from all of the evidence presented, however, that this is effectively what occurred here. We do not believe a fiduciary can be allowed to do indirectly what he clearly could not do directly. Therefore, we reject any suggestion that Respondent can avoid responsibility for his personal use of these funds simply because he first transferred the money into his business account.
Although Respondent attempted to justify these payments and other uses of the Orion Account as compensation or draws for working at the company, we did not find this explanation
credible. In light of the extent and frequency of these transactions, as well as the frequent lack of proper documentation and any other record-keeping, we cannot conclude that these payments were all draws or compensation.
We also reject Respondent's argument that his use of the funds from the Trust was proper because it was specifically authorized by the Trust beneficiaries. Although Sandra and Matthew testified they agreed to Respondent's use the funds, neither Michael nor Marshall testified at the hearing. Moreover, even if we assume they also gave their consent it was undisputed that neither Respondent nor anyone else ever told James about the matter. James, like Sandra, was a lifetime income beneficiary of the Trust. The fact that Respondent admittedly had a hostile relationship with his uncle clearly does not justify or excuse keeping him in the dark about this matter.
We also find that Respondent clearly breached his fiduciary duty as Trustee by failing to provide an accounting as requested by James. The evidence established that James initially began making inquiries regarding the status of the Trust after he first stopped receiving income payments in 2007. Even though Respondent had already lost nearly all of the funds, he did not provide James with an accounting or give him any information regarding the status of the Trust. Instead, he made several payments to James from his own funds. When James' inquiries resumed in 2009, Respondent simply ignored them. After James hired a lawyer to pursue the matter in court, Respondent also ignored those proceedings. Respondent not only failed to appear in the case or answer the complaint, he disregarded a series of orders entered by the court, including an order requiring him to file an accounting and an order holding him in contempt. Respondent then did nothing further until about a year later, around the time these disciplinary proceedings were instituted, when he finally reached out to James to try to settle the matter.
Moreover, there is no evidence Respondent ever prepared a proper accounting of his actions as Trustee or provided it to any of the Trust's beneficiaries.
We note that Respondent attempted to explain his behavior by claiming his wife kept his mail from him during this time and he did not receive the correspondence from James's attorney or the materials that were mailed to him regarding the Sangamon County case. Even if we accept this testimony, Respondent admitted he was personally served with the Petition in June 2009. Thus, he was clearly aware of the pendency of the proceedings and knew James was seeking an accounting from him as Trustee of the Trust. He also admitted his lawyer was subsequently in contact with Mr. Reiser and that he received a telephone call from the judge's chambers informing him that the contempt order had been entered and a bench warrant issued. Thus, we reject any attempt by Respondent to explain or excuse his inaction based upon a lack of notice or knowledge.
We also reject Respondent's claim that he believed he had fulfilled his responsibility to provide an accounting by e-mailing copies of the Schwab Account statements to Mr. Reiser on the eve of the rule to show cause hearing. Although Respondent claimed the Schwab Account statements showed the full history of the Trust, that simply is not accurate. While the statements show all 20 withdrawals, they only reflect the check numbers and the amounts. Copies of the checks were not included and there is no indication on the statements of the payees. Thus, there is no way to tell from the statements what the money was used for or where it went. This clearly did not constitute a proper accounting as sought by James and ordered by the court.
We also find that Respondent's use of the funds from the Whitlaw Trust constituted conversion. The Illinois Supreme Court has defined conversion in the disciplinary context as
"any unauthorized act, which deprives a man of his property permanently or for an indefinite time." In re Rosin, 156 Ill. 2d 202, 206, 620 N.E.2d 368 (1993). As discussed above, we have concluded that Respondent's use of the funds from the Whitlaw Trust under the circumstances present here did not constitute an investment. Therefore, it was not within the authority granted Respondent as Trustee pursuant to Section Six of the Trust Agreement. Since the funds were subsequently lost, it is also clear that Respondent actions deprived the beneficiaries of their interests in the assets of the Trust. Thus, Respondent engaged in conversion as that term has been defined by the Court.
We do not find that Respondent engaged in conduct involving dishonesty, fraud, deceit or misrepresentation in violation of Rule 8.4(a)(4). While Respondent's actions as Trustee were clearly inappropriate, especially for an attorney, we believe his conduct was primarily due to his lack of knowledge and understanding regarding his fiduciary responsibilities as Trustee, rather than the product of any deliberate dishonesty or deceit. It is clear from the record that Respondent was not a trained fiduciary and there is no indication he had any prior experience serving as trustee of a trust. Although Respondent had attended law school and had been admitted to the bar, he never actually practiced law until after most of the events in this case took place. We also note that Respondent discussed his plans to use the Trust funds in his business with some of his family members and did not attempt to disguise the payments to Orion and AVC or conceal his subsequent use of these funds. While these factors do not excuse Respondent's misconduct, we believe they point to a lack of dishonesty on Respondent's part.
Conduct Prejudicial to the Administration of Justice
We also find that Respondent engaged in conduct prejudicial to the administration of justice in violation of Rule 8.4(a)(5) of the Rules of Professional Conduct (1990) and Rule 8.4(d) of the Rules of Professional Conduct (2010). In order to establish a violation of Rule 8.4(a)(5) there must be clear and convincing proof that Respondent's conduct caused actual prejudice or harm to the administration of justice. In re Storment, 203 Ill. 2d 378, 399, 786 N.E.2d 963 (2002); In re Vrdolyak, 137 Ill. 2d 407, 425, 560 N.E.2d 840 (1990). That was clearly shown here, based upon Respondent's conduct in connection with the Sangamon County case. As already discussed, Respondent failed to answer or otherwise appear in those proceedings, failed to respond to various court orders, and was ultimately held in contempt. His conduct necessitated additional proceedings in the case, which culminated in the judge's issuance of a bench warrant for Respondent's arrest. Even then, Respondent did not take action until a year later, after the disciplinary investigation had been instituted. Respondent's disregard of these proceedings and court orders is particularly inexcusable because Respondent is an attorney and an officer of the court. Although the majority of this misconduct occurred in 2009, Respondent lack of responsiveness continued until October 2010 and the case was not actually settled and dismissed until 2011. Therefore, we conclude Respondent also violated Rule 8.4(d) of the amended Rules, which is essentially identical to Rule 8.4(a)(5).
Having found that Respondent engaged in misconduct, we must determine appropriate discipline. In making this recommendation, we take into account that the goal of the disciplinary process is not to punish the Respondent, but to safeguard the public, maintain the integrity of the profession, and protect the administration of justice. In re Timpone, 157 Ill. 2d 178, 623 N.E.2d
300 (1993). We also consider the nature of the misconduct, the aggravating and mitigating factors, the deterrent value of the sanction, and whether the sanction will help preserve public confidence in the legal profession. In re Gorecki, 208 Ill. 2d 350, 360-61, 802 N.E.2d 1194 (2003). Although each case is unique and must be resolved in light of its own facts and circumstances, predictability and fairness require that we recommend sanctions that are consistent with those imposed in cases involving comparable misconduct. In re Howard, 188 Ill. 2d 423, 440, 721 N.E.2d 1126 (1999); In re Chandler, 161 Ill. 2d 459, 472, 641 N.E.2d 473 (1994).
In aggravation, we note the harm suffered by the Trust's beneficiaries as a result of Respondent's depletion of nearly all of the assets in the Trust. The evidence showed that the Trust was set up by Respondent's grandmother to provide a source of income for Sandra and James during their lifetimes. Respondent's loss of the funds harmed both Sandra and James by eliminating this source of income. Although Sandra apparently did not need the money, James testified it was an important source of income for him. Respondent's three brothers have also been deprived of their interests in the Trust's assets, which they were to share after the deaths of Sandra and James. Based upon the net amount withdrawn by Respondent, the Trust sustained total losses of approximately $93,700. Although none of the brothers complained to the ARDC, there is no question they suffered substantial harm as a result of Respondent's misconduct.
James was also harmed by Respondent's failure to provide an accounting, because he had to go the trouble and expense of hiring an attorney to find out what happened with the Trust. Although some of Mr. Reiser's fees were paid by a senior services agency, James was also required to cover some of these expenses himself.
In mitigation, we consider Respondent's lack of prior discipline and the favorable evidence presented regarding his overall character. We also note that Respondent's misconduct stemmed from his actions as Trustee of his family trust, not his conduct as an attorney on behalf of a client. In addition, as already noted, we believe his wrongdoing stemmed primarily from his lack of experience and naivet? regarding his duties and responsibilities as a trustee, rather than from any corrupt or dishonest motive. The evidence also showed that Respondent informed his mother and brother regarding his intention to use of the assets of the Trust to fund his relocation business, and they approved of his actions. Furthermore, it was also clear from Respondent's testimony that he felt sorrow and regret that the failure of his business had led to the loss of his family's funds.
With regard to Respondent's failure to provide an accounting and to respond to the Sangamon County case, we also take into account in mitigation the evidence showing that he was experiencing a significant amount of personal stress during this time related to the ongoing regulatory proceedings instituted against both him and his wife. It was established that both Respondent and his wife were facing personal liability in the matter, which included substantial fines. These proceedings put a strain on Respondent's marriage, which later dissolved. While these matters do not excuse Respondent's actions, they do provide at least some explanation as to why he may have failed to properly address the issues regarding his handling of the Trust.
We also give some weight in mitigation to the fact that Respondent ultimately used his own funds to pay a financial settlement to his uncle in order to resolve the case. Because the evidence established that Respondent did not attempt to settle the matter until after a complaint was filed with the ARDC and disciplinary investigation was underway, we give his partial
payment of restitution only limited weight as a mitigating factor. See Howard, 188 Ill. 2d at 437; In re Rotman, 136 Ill. 2d 401, 422-23, 556 N.E.2d 243 (1990).
The Administrator argues that Respondent's misconduct warrants a suspension of one year. Respondent argues he did not engage in any misconduct and that the charges should be dismissed. He has not suggested any sanction in the event misconduct is found.
The Administrator cites several cases in support of his argument concerning sanction. In In re Doyle, 99 CH 100, M.R. 18071 (May 24, 2002), the respondent was suspended for one year for misconduct arising out of his conversion of approximately $7,000 in connection with a probate matter he was handling. The respondent had received a total of approximately $15,000 from the decedent's heirs and a nursing home in connection with the case. He used approximately $8,000 of this to cover various estate expenses and used the remaining $7,000 to pay his own business and personal expenses. Although the respondent claimed he was entitled to take these funds as attorney's fees, this argument was rejected. The respondent also failed to file an accounting with the probate court, despite a court order that required him to do so. He was found to have engaged in various forms of misconduct, including commingling, conversion, conduct involving dishonesty in violation of Rule 8.4(a)(4), and conduct prejudicial to the administration of justice. In addition to a one-year suspension, the respondent was also required to pay restitution.
In In re Crotty, 00 CH 73, M.R. 17829 (Jan. 29, 2002), the respondent was disciplined for making a number of unauthorized loans while acting as trustee of a trust he had drafted for clients. The trust had been established by family members to help provide for the care of their elderly mother who was residing in a nursing home. The attorney loaned $52,347.30 in trust funds to his own sister and to various clients without disclosing the loans to the beneficiaries of
the trust, and without their consent. Several of the loans were not repaid, which resulted in a loss of approximately $34,000. The respondent also failed to provide annual accountings or respond to inquiries from the family regarding the status of the trust. The family eventually filed an action seeking an accounting, which resulted in a default order being entered against the respondent. The respondent subsequently admitted his wrongdoing and repaid the funds. In mitigation, the respondent's wife was seriously ill during the time these events occurred. The attorney was suspended on consent for five months for breaching his fiduciary duties, failing to act with diligence, engaging in a conflict of interest, and failing to keep his client informed.
In In re Bauer, 05 CH 43, M.R. 21102 (Sept. 21, 2006), the respondent was the trustee of a sizable trust, which had been created by his brother for the benefit of his brother's children. The respondent borrowed an initial $100,000 from the trust with his brother's knowledge, but did not repay the loan in accordance with its terms and it went into default. He subsequently borrowed an additional $197,000 from the trust at time when he was experiencing significant financial problems. He did not tell his brother about these loans or document them. Although he was not financially able to repay the funds, he later negotiated a settlement whereby his expected inheritance would be used to repay the trust. The attorney was suspended for nine months on consent for breaching his fiduciary duties and engaging in conduct prejudicial to the administration of justice.
Taking into account the nature of the misconduct established in this case, the aggravating and mitigating factors, and the sanctions imposed in the cases just discussed, we conclude that a suspension for a period of six months is appropriate discipline in this matter. Although the Administrator has argued in favor of a one-year suspension, we note that this is based on the assumption that we would find all of the misconduct proven, which we have not done. We also
believe the misconduct at issue here is distinguishable from that in Doyle, the only case cite by the Administrator where a one-year suspension was imposed. The attorney there was found to have commingled and converted estate funds he received in his capacity as an attorney for the executor of an estate. Thus, his misconduct involved the misappropriation of client funds, which has always been viewed as extremely serious misconduct. See In re Stillo, 68 Ill. 2d 49, 54, 368 N.E.2d 897 (1997). In addition, unlike here, the attorney in Doyle was also found to have engaged in dishonesty in violation of Rule 8.4(a)(4) in connection with his actions. Conversion accompanied by dishonesty is clearly more serious misconduct that generally warrants a more severe sanction. See In re McLennon, 93 Ill. 2d 215, 221, 443 N.E.2d 553 (1982) (whether conversion involved dishonest motive is highly significant in determining sanction to be imposed).
We believe Respondent's misconduct in this case is more analogous to that in Crotty and Bauer. Both of these cases also involved improper use of funds by attorneys while acting as trustees of trusts. Like Respondent, the attorney in Crotty also failed to provide an accounting and did not to respond to the resulting court action regarding the matter. The misconduct in Crotty, however, involved a smaller sum and the respondent did not personally benefit. On the other hand, it was more serious in the sense that it concerned a family trust established by unrelated third parties and the respondent served as the attorney as well as the trustee in connection with the matter. Although the misconduct in Bauer is also similar, the attorney there was not a beneficiary of the trust and the amount at issue was approximately twice that in this case. We also note that while Respondent disclosed his use of the funds to some family members, the attorney in Bauer did not tell his brother about his precarious financial condition or his use of the funds.
We believe a six-month suspension, which is slightly greater than the sanction imposed in Crotty but somewhat less than the sanction imposed in Bauer, properly takes into account the similarities between these matters as well as the unique facts and circumstances in this case. We also believe that this sanction will effectuate the goal of the disciplinary process, which is not to punish the Respondent, but to safeguard the public, maintain the integrity of the profession, and protect the administration of justice.
The Administrator has also requested that Respondent be required to make restitution by restoring to the Trust all of the funds he improperly withdrew and used. Based upon the particular facts and circumstances in this case, we decline to include restitution as part of our disciplinary recommendation. It was undisputed that Respondent has reached a financial settlement with James, the only complaining party in this matter. There is no indication any of the other affected family members have complained to the ARDC. It was also clear from the testimony of both Sandra and Matthew they did not believe Respondent should be required to restore the funds to the Trust. Therefore, based upon the particular facts and circumstances before us in this case, we do not believe restitution is necessary to effectuate the goals of the disciplinary process. See, e.g., Timpone, 157 Ill. 2d at 199-200 (Court declined to order restitution in conversion case where evidence suggested the injured parties were not seeking return of the funds).
For the foregoing reasons, we recommend that Respondent, Martin J. McKenzie, be suspended for a period of six months.2
I, Kenneth G. Jablonski, Clerk of the Attorney Registration and Disciplinary Commission of the Supreme Court of Illinois and keeper of the records, hereby certifies that the foregoing is a true copy of the Report and Recommendation of the Hearing Board, approved by each Panel member, entered in the above entitled cause of record filed in my office on August 17, 2012.
Kenneth G. Jablonski, Clerk of the
1 The Administrator also charged Respondent with engaging in "conduct which tends to defeat the administration of justice or bring the courts or legal profession into disrepute in violation of Supreme Court Rule 770." The Illinois Supreme Court recently stated, "Rule 770 is not itself a Rule of Professional Conduct" and "one does not 'violate' Rule 770. Rather, one becomes subject to discipline pursuant to Rule 770 upon proof of certain misconduct." In re Thomas, 2012 IL 113035, ? 92. Accordingly, based on the wording of the allegations in the Complaint before us, we find no violation of Rule 770.
2 The fact we did not find violations of Supreme Court Rule 770 does not affect our recommendation as to sanction. In re Gerard, 132 Ill. 2d 507 (1989).