Filed December 28, 2012
In re Theodore George Karavidas
Commission No. 2009PR00136
Synopsis of Review Board Report and Recommendation
This matter came before the Review Board on both parties' exceptions. The Hearing Board found that Karavidas, while acting as the executor of his father's estate and trustee of a family trust, made unauthorized loans to himself from estate funds, thereby committing conversion and breaching his fiduciary duty to the heirs of the estate. The Hearing Board recommended that Karavidas be suspended for four months.
On review, Karavidas argued that the evidence did not support the findings of misconduct. The Administrator asserted that the Hearing Board's findings should be affirmed and Karavidas should be suspended for one year.
The Review Board discouraged the use of the "breach of fiduciary duty" charge when the conduct at issue can be otherwise charged under the Rules of Professional Conduct. The Review Board further disagreed with the Hearing Board's analysis of the conversion charge. It concluded that the application of a strict liability standard is improper in the absence of an allegation of an attorney-client relationship and, further, if committing the tort of conversion constitutes chargeable misconduct, the Administrator should be required to prove the commission of the tort by clear and convincing evidence. The Administrator did not do so in this case.
Because the conduct at issue did not arise from an attorney-client relationship and did not involve any dishonest conduct, the Review Board concluded that the charges of breach of fiduciary duty and conversion were neither appropriate as a matter of law nor sufficiently proven. Consequently, the Review Board recommended that all of the charges against Karavidas be dismissed.
BEFORE THE REVIEW BOARD
ILLINOIS ATTORNEY REGISTRATION
|In the Matter of:
THEODORE GEORGE KARAVIDAS,
Commission No. 2009PR00136
REPORT AND RECOMMENDATION OF THE REVIEW BOARD
The Administrator filed a one-count complaint against Respondent, Theodore George Karavidas, alleging that he improperly took loans from his father's estate while acting as the estate's executor. Respondent admitted some of the complaint's factual allegations but denied committing any misconduct. The Hearing Board found that the Administrator proved the charges except for the charge of dishonest conduct and recommended that Respondent's license be suspended for four months.
The Administrator filed exceptions to the Hearing Board Report and Recommendations and asserts on review that Respondent should be suspended for one year. Respondent also filed exceptions. He contends that the Hearing Board erroneously found that he converted funds, breached his fiduciary duty, and engaged in self-dealing. We agree with Respondent and reverse the Hearing Board's findings of misconduct and recommend that the charges against Respondent be dismissed.
Respondent's father, George Karavidas (Mr. Karavidas), executed a will shortly before his death on February 17, 2000. Mr. Karavidas' heirs were his wife, Lillian (Mrs.
Karavidas), his daughter (Respondent's sister), Nadine, and Respondent. The will named Respondent the independent executor of the estate. As independent executor, Respondent was authorized to take actions related to the estate without court approval.
The estate was worth approximately $700,000 and consisted primarily of an interest in a business, Marie's Pizza and Liquor (Marie's), and securities accounts at UBS/PaineWebber and Harris Investors. The will directed that the estate's assets, except for personal property, be placed in a family trust and a marital trust. The family trust was to be funded first, in an amount equal to the maximum federal estate tax exemption. Any remaining funds were to be placed in the marital trust, which was to be used for the benefit of Mrs. Karavidas. If the funds in the marital trust were exhausted, the principal of the family trust could be used for Mrs. Karavidas' support. Upon Mrs. Karavidas' death, the assets of the family trust were to be distributed to Respondent and Nadine.
The trust provisions empowered Respondent, as successor trustee, to make distributions from the trust to any of Mr. Karavidas' descendants, including himself. Further, the terms provided that distributions could be unequal and would not be charged against a descendant's final share. However, neither the family trust nor the marital trust was funded during Respondent's tenure as trustee.
Between August 2, 2000, and July 1, 2005, Respondent withdrew a cumulative amount of $398,104 from the UBS/PaineWebber account. Respondent also withdrew $50,000 from the Harris Investors account on August 9, 2000. In total, Respondent withdrew an aggregate of $448,104 from the estate. The largest amount that Respondent owed to the estate at any one time was $152,104.
As of October 17, 2005, Respondent had repaid all of the funds owing to the estate -- $98,600 of which was paid by way of beneficial payments for income taxes owed by Marie's, his mother and sister. He repaid the remaining loans directly to the estate. Respondent did not execute any promissory notes for the funds he borrowed from the estate, nor did he pay interest. Respondent testified that he used the funds for his own purposes and believed he was authorized to do so as an heir of the estate.
While acting as executor, Respondent also made distributions from the estate to his mother and sister, and to Marie's. Respondent made payments of approximately $120,000 to pay his mother's real estate taxes and health insurance premiums and to buy her a car. He paid approximately $20,000 to Nadine. In addition, Respondent made advances from the estate totaling $339,246.50 to keep Marie's in business. Marie's was not profitable. The advances were made at the behest of Nadine, who operated the business and advised Respondent when the Marie's account was overdrawn or more funds were needed. Nadine testified that she assumed that Respondent used money from the estate to make the necessary payments.
Attorney John Hayes of Pederson & Houpt prepared Mr. Karavidas' will and trust and also represented Respondent as executor. Attorney Hayes testified that he was not aware of the loan transactions at the time they occurred, only learning of them when he began preparing the "Inventory and First Account" document for the estate sometime prior to 2006. Respondent mailed Attorney Hayes copies of the statements from the estate accounts, and attorney Hayes was receiving account statements directly from UBS/PaineWebber in December 2002.
In 2006, Nadine and her mother asked attorney Leonard LeRose to look at the estate because Nadine was not satisfied with Respondent's responses to her inquiries about the status of the estate. Nadine also wished to stop Respondent from trying to sell Marie's. The
court entered an agreed order on May 19, 2006, prohibiting Respondent, as independent executor, from transferring any real estate interest without a court order for 90 days. The court later extended its prohibition on selling Marie's until further order.
In 2008, attorney LeRose, at Nadine's direction, filed a petition to remove Respondent as executor of the estate. The petition was based on Respondent's attempt to sell Marie's in violation of the court order. Respondent testified that he did not know the court had extended its order prohibiting the sale. Respondent resigned as executor and Nadine became executrix of the estate.
The Administrator presented attorney Theodore Rodes, Jr. as an expert in probate estates and trusts. Attorney Rodes gave the opinion that the language of the will and the Illinois Probate Act governed Respondent's authority as executor, and that neither allowed Respondent to make loans to himself from the estate. Attorney Rodes testified that Respondent had duties of loyalty, avoiding self-dealing, and protecting the interests of the beneficiaries. Absent specific authority from the estate documents, the court, or the beneficiaries, the duty to avoid self-dealing prohibited Respondent from acting on both sides of the loan transactions. Attorney Rodes further opined that, although Article 5 of the will authorized the executor to "borrow from any source," that did not imply that the executor had the power to loan estate funds.
Attorney Rodes also testified that, while the trust documents did not authorize Respondent to take loans from the estate, Respondent could have taken distributions to himself from the trust for his health and support if the trust had been funded. According to attorney Rodes, Respondent should have been aware of his fiduciary duties to the estate even though he did not practice in the area of trusts and estates.
Respondent testified that he relied on the estate's attorney, Hayes, for guidance regarding the administration of the estate, and at no time did attorney Hayes tell him that his actions were improper.
Respondent has been licensed since 1979 and has no prior discipline. He has been very active in the legal profession and in religious and community organizations. Retired circuit court judge Michel Hogan and attorney Michael Casey testified that Respondent has a reputation for honesty and integrity in the legal profession. Chris Atsaves and Anthony Siragusa, friends of Respondent, testified that Respondent has a very high reputation for honesty and trustworthiness among friends and Respondent's church community.
The Hearing Board found that the Administrator proved that Respondent converted funds; breached his fiduciary duty to the estate and its beneficiaries; engaged in self-dealing; and engaged in conduct that was prejudicial to the administration of justice, in violation of Rule 8.4(a)(5), and that tended to defeat the administration of justice, in violation of Supreme Court Rule 771. The Hearing Board found that the Administrator did not prove that Respondent acted dishonestly, in violation of Rule 8.4(a)(4).
Respondent asserts that the Hearing Board's findings that he converted funds, engaged in self-dealing, and breached his fiduciary duty are erroneous. The Administrator must prove the allegations against Respondent by clear and convincing evidence. In re Cutright, 233 Ill. 2d 474, 488, 910 N.E.2d 581 (2009). We will not disturb the Hearing Board's findings of fact unless they are against the manifest weight of the evidence. In re Winthrop, 219 Ill. 2d 526, 542, 848 N.E.2d 961 (2006). A finding is against the manifest weight of the evidence only when the opposite conclusion is clearly evident. Winthrop, 219 Ill. 2d at 542, 848 N.E.2d 961.
Whether the facts as found by the Hearing Board constitute misconduct is a question of law that we review de novo. Winthrop, 219 Ill. 2d at 542, 848 N.E.2d 961.
In addition to charging the Respondent with dishonesty under Rule 8.4(a)(4), and conduct that is prejudicial to the administration of justice in violation of Rule 8.4(a)(5), the Administrator charged the Respondent with "conversion of assets entrusted to him as administrator of the Estate of George Karavidas" and "breach of the fiduciary obligations owed to the beneficiaries of the estate."
We hold that because there was no attorney-client relation alleged, the charges for "conversion" and "breach of fiduciary duty" were inappropriate in this case
The phrase "breach of fiduciary duty" does not appear in the Rules of Professional Conduct -- and the charge is largely unknown in a disciplinary context outside of this state. Nonetheless, the Illinois Supreme Court has both expressly and implicitly approved of the use of such a charge in cases involving the attorney-client relation. See e.g. In re Ingersoll, 186 Ill. 2d 163, 710 N.E.2d 390, 237 Ill. Dec. 760 (1999); In re Cutrone, 112 Ill. 2d 261, 492 N.E.2d 1297, 97 Ill. Dec. 424 (1986). The Administrator has taken that approval as license to charge "breach of fiduciary duty" with some frequency - including it in a substantial percentage of the disciplinary complaints filed each year.
"Breach of fiduciary duty" is an amorphous and generalized tort concept, potentially encompassing a wide variety of behavior. See Charles W. Wolfram, A Cautionary Tale: Fiduciary Breach as Legal Malpractice, 34 Hofstra L. Rev. 689 (Spring 2006); see also Meredith J. Duncan, Legal Malpractice by Any Other Name: Why a Breach of Fiduciary Duty Claim Does Not Smell as Sweet, 34 Wake Forest L. Rev. 1137 (1999); William A. Gregory, The Fiduciary Duty of Care: A Perversion of Words, 38 Akron L. Rev. 181 (2005). The
Supreme Court has not set out the requisite elements in the Rules of Professional Conduct, and the few decisions approving of the charge do not clearly define its scope. See e.g. In re Twohey, 191 Ill. 2d 75, 727 N.E.2d 1028, 245 Ill. Dec. 294 (2000). And although the Hearing Board has sustained such charges in a non-attorney-client context (see e.g. In re Cresto, No. 02 CH 75, M.R. 20219 (June 13, 2005)), authority for such an extension of the concept is wholly absent.
A charge of "breach of fiduciary duty" rarely (if ever) stands alone. Typically, the charge is used in tandem with additional charges that do include at least lip service to various Rules of Professional Conduct. Where a charge of "breach of fiduciary duty" is included, as here, the proofs and analysis invariably veer towards that charge, instead of whatever the proper "companion" charge was (or may have been). This case provides a perfect illustration: the Administrator tried the case before the Hearing Board in a manner almost indistinguishable from what would be expected in a trial involving civil liability for the breach of a duty imposed by tort law - complete with expert testimony by a trusts and estates lawyer. The Hearing Board analyzed the case, as well, as if it were a trier of fact in a civil context, weighing whether the Respondent "breached" his duty.
In our view, as a matter of law, a necessary element of the charge of "breach of fiduciary duty" is the existence of an attorney-client relation. Because the Respondent's circumstances did not involve an attorney-client relation in the first instance, the "breach of fiduciary duty" charge, here, was without basis in law.
We would further strongly discourage the use of the charge of "breach of fiduciary duty" in circumstances where the underlying conduct can be otherwise charged under the Rules of Professional Conduct. See In re Cutright, No. 05 SH 106 (Review Board March 17,
2008) (Duffy, dissenting); In re Vano, 04 CH 142 (Review Board Sept. 1, 2009) (Duffy, dissenting); In re Edmonds, 10 PR 84 (Review Board)1.
Like "breach of fiduciary duty," the word "conversion" appears nowhere in the Rules of Professional Conduct. In a disciplinary context, "conversion" is the short-hand term typically used to describe misconduct charged under Rule 1.15 (entitled "Safekeeping Property"). If an attorney's trust account has a negative balance -- despite the fact that client funds should still be present in the account -- it is said that the attorney has improperly "converted" the funds in the trust account. The Administrator and the Supreme Court have treated this type of "conversion" as one involving strict liability. See e.g. In re Ushijima, 119 Ill. 2d 51, 57, 518 N.E.2d 73, 115 Ill. Dec. 548 (1987); In re Young, 111 Ill. 2d 98, 103, 488 N.E.2d 1014, 94 Ill. Dec. 767 (1986).
The tort of "conversion" is - or should be - a separate matter. However, the two concepts have at this point been confusingly conflated - and effectively imported the tort of conversion, wholesale, into the disciplinary system - traveling well beyond the Supreme Court's approval of "looki[ng] to the tort for guidance." See In re Thebus, 108 Ill. 2d 255, 259, 91 Ill. Dec. 623, 483 N.E.2d 1258 (1985) ("For purposes of attorney disciplinary proceedings, the term "conversion" may have a specialized meaning. However, the common law tort of conversion has had a long history of development, and we can look to the tort for guidance as to the essential elements and nature of conversion . . .")
More egregiously, opinions from this Board and the Hearing Board have diluted the law with regard to "conversion" further still, grossly oversimplifying the charge as "the wrongful deprivation of another's property." See In re Hayes, 95 CH 634 (Review Board Aug. 31, 1999) at 13-14 ("Conversion is wrongful deprivation of property from the person entitled to
its possession."), approved and confirmed, No. M.R. 16195 (Jan. 24, 2000); In re King, 07 SH 118 (Hearing Board, March 26, 2009) at 12-13, approved and confirmed, No. M.R. 2009 (Sept. 22, 2010). This case presents the bottom of the slippery slope in that regard: the charge of "conversion" being brought without an allegation of an attorney-client relationship - and applied in a manner implicating strict liability.
So, here, we have a charge of "conversion" of funds from a family estate by the Respondent, acting as the estate's trustee. The estate's funds are treated - for purposes of the Complaint - as if they were client funds held in trust in the context of an attorney-client relation. In that context, if the balance in a client trust account falls below the amount that should have been held in the account - even for a day - a "conversion" can be said to have occurred. As a result - despite the fact that the uncontested evidence adduced at the hearing established that the estate had been fully restored - that fact was treated as irrelevant for purposes of the charge of "conversion."
Clearly there was no basis to charge a violation of Rule 1.15 here. If committing the tort of conversion constitutes chargeable misconduct (separate and apart from a violation of Rule 1.15 - and without regard to an attorney-client relationship), the Administrator should have to prove that the tort was committed by clear and convincing evidence. It is difficult in concept to understand, legally, how the temporary "deprivation" of funds from an estate could ever be proven to have been a "conversion" if it is necessary to establish the elements of the tort. The beneficiaries of the estate (including, of course, the Respondent himself), may have had bona fide legal claims to the funds. But those rights were indisputably legal in nature and intangible, and it is a matter of black letter law that "Illinois follows the common law rule which did not recognize an action for conversion of intangible rights." In re Oxford Marketing, Ltd., 444
F.Supp. 399 (N.D. Ill., 1978) (citing Kerwin v. Balhatchett, 147 Ill. App. 561 (1909); Siegal v. Trav-Ler Karenola Radio & Television Corp., 333 Ill. App. 158, 76 N.E.2d 802 (1st Dist. 1948) (abstract opinion); Janes v. First Federal Savings & Loan Association, 11 Ill. App. 3d 631, 297 N.E.2d 255, 260 (1st Dist. 1973)).
Where money is at issue, the money must be tangible - a briefcase full of cash; a safe-deposit box filled with currency - not a balance in an account at a brokerage. See e.g. Sandy Creek Condo. Ass'n v. Stolt and Egner, Inc., 267 Ill. App. 3d 291, 204 Ill.Dec. 709, 642 N.E.2d 171, 174 (1994) ("Money may be the subject of conversion but only if the sum of money is capable of being described as a specific chattel."). "[A]n action for conversion will not lie for money represented by a general debt or obligation." In re Thebus, 91 Ill.Dec. 623, 483 N.E.2d at 1261; See also Great Lakes Higher Educ. Corp. v. Austin Bank of Chicago, 837 F.Supp. 892, 897 (N.D.Ill.1993); National Acc. Ins. Underwriters v. Citibank, 533 F.Supp.2d 784 (N.D. Ill., 2007). Further, and most obviously, to establish the tort of conversion, the deprivation must be permanent (or at least ongoing). See In re Rosin, 156 Ill. 2d 202, 208, 620 N.E.2d 368 (July 22, 1993) ("a wrongful deprivation of property from the person entitled to possession permanently or for an indefinite time is an essential element of a cause of action for conversion").
Instead of proceeding under either the Rule of Professional Conduct governing safekeeping of property - or the tort of conversion - the Administrator charged and tried the Respondent for the "the wrongful deprivation of another's property" encouraging application of a strict liability standard to that bastardized, short-hand, version of the tort. The charge was inappropriate, as were the proofs of the charge.
If the Respondent had taken funds from an account that did not belong to him, that misconduct would properly be charged, and tried, as "conduct involving dishonesty, fraud,
deceit or misrepresentation" in violation of Rule 8.4(a)(4). Dishonesty under Rule 8.4(a)(4) does not require the existence of an attorney-client relationship as a predicate. See. e.g., In re Demasi, 08 CH 110 (Hearing Board Sept. 29, 2009) at 12-13, approved and confirmed, No. M.R. 23482 (Jan. 21, 2010); (In re Burnham, 97 CH 22 (Hearing Board, Sept. 19, 1997), approved and confirmed, No. M.R. 14176 (Jan. 29, 1998). The Rule is well-understood - as are the facts necessary to establish a violation of the Rule. That charge was brought here and the Hearing Board - properly in our view - did not sustain the charge.
For all of the reasons foregoing, we recommend the dismissal of the charges of "conversion" and "breach of fiduciary duty" as a matter of law - there having been no allegation of attorney-client relation.
Alternatively, even if the charges were properly brought, the facts as found by the Hearing Board do not rise to misconduct. The charges against Respondent resulted from a single mistake: the failure to fund the marital and family trusts. We disagree with the Administrator and Hearing Board that this mistake, which occurred outside of an attorney-client relationship and was neither entirely attributable to Respondent nor accompanied by any malicious or dishonest intent, provides a basis for disciplinary action.
"We are charged with the responsibility of supervising the professional conduct of attorneys practicing in this State, and we are interested in their private conduct only in so far as such relates to their professional competence or affects the dignity of the legal profession." In re Lamberis 93 Ill. 2d 222, 443 N.E.2d 549 Ill. (1982) (quoting In re Serritella, 5 Ill. 2d 392, 398, 125 N.E.2d 531 (1955)). Accordingly, discipline for conduct occurring outside the attorney-client relationship has been - and should be - limited to situations where the attorney's conduct demonstrates "a lack of professional or personal honesty which render[s] him unworthy of public
confidence." See In re Bruckner, 00 CH 12 (Hearing Board, Aug. 8, 2001) at 30, approved and confirmed, No. M.R. 17722 (Nov. 28, 2001).
The Administrator proved no such conduct in this case -- and the Hearing Board explicitly found that the evidence pointed to "a lack of any purpose or intent to act dishonestly" and supported Respondent's claim that he believed he was acting appropriately. Karavidas, 09 PR 136, Hearing Board Report at 30. The Hearing Board further found that Respondent does not pose a significant risk to the public. In all, the record contains no evidence that casts doubt on Respondent's integrity or his ability to practice law in a competent and ethical manner.
We hold that, in the absence of both an attorney-client relationship and any dishonest conduct, mere mistakes or errors in judgment do not give rise to chargeable misconduct. See e.g. In Bruckner, 00 CH 12 (August 8, 2001) (holding "mere mistakes or errors in judgment" insufficient to sustain charge of professional misconduct); See also In re Nagler, 07 CH 12 (Dec. 16, 2009), approved and confirmed, No. M.R.23644 (May 17, 2010); In re Lefkovitz, 05 CH 14 (Hearing Board, Sept. 8, 2006) (conversion and other charges associated with the respondent's deposit of settlement checks in his own trust account rather than firm trust account dismissed when the charges were attributable to a dispute between members of a law firm and not any intention to conceal funds).
This case does not involve an attorney-client relationship and does not - in the first instance -- involve conduct that implicates the Rules of Professional Conduct or requires the Administrator's involvement. This was, instead, a family disagreement that became the subject of litigation. Under these circumstances and the facts as found by the Hearing Board, we do not find any basis for findings of misconduct or discipline.
For the foregoing reasons, we recommend that the Hearing Board's findings misconduct be reversed and the charges against Respondent, Theodore George Karavidas, be dismissed in their entirety.
Daniel P. Duffy
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 Review Board, approved by each Panel member, entered in the above entitled cause of record filed in my office on December 28, 2012.
Kenneth G. Jablonski, Clerk of the
1 Edmonds was argued before the Review Board on August 10, 2012, and the Report and Recommendation in that case is being issued simultaneously with the Report and Recommendation in this case.