10 Updates

Two Year Suspension For California Attorney Who Engaged In Fraudulent Transfer In Morris

Dec 20 2013, 1:22am CST | by

Attorney Morris took over the litigation defense of a California corporation called Micromark in litigation against it tenant, after a fire damaged Micromark’s building. In reviewing the file,...

Filed under: news

 
 
 

31 weeks ago

Two Year Suspension For California Attorney Who Engaged In Fraudulent Transfer In Morris

Dec 20 2013, 1:22am CST | by

Attorney Morris took over the litigation defense of a California corporation called Micromark in litigation against it tenant, after a fire damaged Micromark’s building. In reviewing the file, Morris discovered that Micromark had inadvertently allowed a default judgment to be taken against it by the tenant. Morris then decided, after researching the issue, that Micromark would probably be unsuccessful in setting aside the default — so he did nothing.

A month later, the Court did indeed finally enter default against Micromark, in the neighborhood of $2.4 million.

To counter the default, Morris and Micromark’s owner, Cheung, placed two encumbrances on Micromark’s property to secure two newly-issued promissory notes from Micromark for $703,000. Later, the equity value of the property was determined to be $400,000.

The first note from Micromark was for $500,000 and made to Morris. This note purportedly secured Morris’ attorneys fees and costs, although at the time of this note was issued, Morris was only owed barely a tenth of that amount, being $53,000.

The second note from Micromark was to Cheung in the amount of $203,000 and was purportedly to secure her (undocumented) loans to Micromark.

Morris recorded both encumbrances shortly thereafter, and just a couple of weeks before the tenant/creditor filed its $2.4 million abstract of judgment with the country recorder.

Morris also filed a motion on behalf of Micromark to set aside the judgment. Confirming Morris’ suspicions about the default judgment, this motion was denied.

But even before Morris’ motion was denied, the tenant launched a fraudulent transfer lawsuit against Micromark, Cheung and Morris, alleging that the encumbrances were not legitimate transactions but instead were intended to defeat the tenant’s collection rights.

Morris testified that because the property was Micromark’s only asset, taking an interest against it was the only way of securing his payment. Cheung, on the other hand, admitted that she was just trying to tie the property up so that the tenant couldn’t enforce the judgment against it.

The Court in the fraudulent transfer action was less than impressed by the testimony of Morris and Cheung, and held that Cheung (on behalf of Micromark) had the intention to hinder and delay the tenant’s collection against Micromark’s property.

For his part, Morris attempted to prove that he acted in good faith in taking his $500,000 note secured by the property — arguing that he just wanted to make sure that he was paid his attorney’s fees.

Apparently, Morris didn’t understand that in a fraudulent transfer case, the transferee’s own motivation in making the transfers is irrelevant to negate a fraudulent transfer (it might still be relevant to conspiracy and punitive damages against the transferee). Instead, it was Morris’ knowledge of Cheung’s intent (i.e., the transferor’s intent) that is relevant.

On this point, Morris flopped, sayeth the Court:

• He knew Micromark was unable to pay its bills as they came due and was thus presumed insolvent;

• He knew Micromark was in default, and the default was unlikely to be set aside;

• He knew about [tenant]‘s judgment before recording the liens;

• He knew that Cheung wanted a lien on the property to keep her only asset should [tenant] prevail;
/>

• He had ample evidence that Cheung commingled Micromark’s corporate assets with her personal assets, and did not treat the corporation as a separate entity, which made it impossible for Cheung to put a lien on her own property to keep it from creditors;

• Although Cheung provided bills and receipts to support her $203,000 promissory note, Morris failed to investigate or audit whether Micromark had repaid Cheung for expenditures in prior years; and

• The facts put Morris on notice that Cheung’s intent was to make sure that Micromark did not have to pay the $2.3 million judgment, but would be able to first pay her (Micromark’s sole shareholder) and him (Micromark’s attorney).

But even above and beyond all that, Morris simply wasn’t owed $500,000 by Micromark at the time that the company gave him the note for that amount. Thus:

Even if Morris had proven he acquired his $500,000 promissory note and secured it in good faith, he still failed to show that the obligation was for a reasonably equivalent value. The $500,000 note was nearly ten times the value of the services he had provided at the time the note was taken. The superior court rejected Morris’s argument that his note was intended as a line of credit for future fees, finding instead that it clouded title of the property for the full $500,000 from the outset, and prevented satisfaction of other claims. Finally, Morris crafted the deed of trust so that it would remain in place until the conclusion of his future legal services and until he released it, thereby encumbering the property for an uncertain period of time and further hindering other creditors. Thus, having failed to show good faith and reasonable equivalent value, the court declared that the conveyances to Cheung and Morris were null and void.

On his own behalf, Morris appealed the fraudulent transfer judgment. Micromark and Cheung didn’t appeal (what defense did they have?), but Morris appealed.

That didn’t end well for Morris, either. Rejecting Morris’ argument that the note and encumbrance simply secured his fees, the Court of Appeals commented that:

This case presents the paradigm illustration of a fraudulent conveyance.

Moreover, and quite stingingly, the Court referred to Morris as:

a lawyer who claims he is going to do a lot work in the future that will generate fees in the six figures and who was part and parcel, if not the mastermind, behind two fraudulent conveyances.

The State Bar of California brought a disciplinary action against Morris, alleging two counts, both based on the fraudulent transfer case. We’ll discuss them in reverse order, since the second count can be dispensed with quickly.

The second count accused Morris of not self-reporting the fraudulent transfer judgment against him, with Bar Counsel contending that such was a “fraud judgment” requiring self-reporting under California Business & Professions Code sec. 6068(o)(2). But the hearing judge disagreed that the fraudulent transfer case was anything like “a civil action for fraud”, and thus dismissed this count, and the Review Department affirmed that dismissal.

The much more serious count was the first count, which alleged that Morris’ involvement in the fraudulent transfer was an act of “moral turpitude, dishonesty, corruption” under B&P Code sec. 6106.

On this point, the hearing judge found in Morris’ favor, and accepted his arguments that Morris was only securing the payment of his fees. The Review Department disagreed:

The issue before us is whether the evidence establishes that Morris violated his ethical duties by creating the promissory notes and recording the deeds of trust to assist Cheung in hindering and delaying B Five’s collection of its judgment. We conclude that it does. Morris’s conduct exhibits his bad faith and dishonesty in violation of section 6106.

* * *

Morris recorded a deed for $500,000, an amount that far exceeded the services he had provided and that clouded title for the full value of the property. We also find no merit to Morris’s argument that the encumbrance was not actually for $500,000 but only for the value of his legal services as they were rendered. His claim is contrary to the deed of trust filed in the recorder’s office. The public record indicates the property was encumbered for $500,000. Moreover, he continued to encumber the property for almost two years while he appealed the superior court’s decision—at a time he clearly knew Cheung’s intent was to thwart her creditors and he was no longer representing Micromark’s interest in [tenant's] lawsuit.

In sum, Morris created obligations for Micromark and secured them with deeds of trust totaling $703,000 when he knew Micromark was insolvent and its only asset was the Foothill Property, which he knew might be worth no more than $500,000. He recorded the deeds shortly after he learned that [tenant] had obtained a default judgment for potentially $1 million, and he made no effort to ascertain the actual judgment amount. Moreover, he knew the obligations and encumbrances were suspect because the notes and deeds of trust were out of all proportion to fees owed to him and there was insufficient documentation of the Cheung loans. The evidence surrounding the transfers establishes clear and convincing evidence that Morris’s acts were designed to prevent [tenant] from collecting on its judgment. We find that such acts were shrouded in bad faith and dishonesty in violation of section 6106.

The Review Department found only one aggravating factor: The tenant was seriously harmed in its ability to timely collect against Micromark by the fraudulent transfers. Indeed, the tenant incurred the significant amount of $114,011 in fees to unwind the fraudulent transfers.

In mitigation, the Review Department found that Morris had no prior record of discipline, demonstrated good character, and cooperated with the State in the investigation. Character witnesses established that Morris was trustworthy, honest, and high moral standards. Substantial evidence highlighted Morris’ community service, substantial pro bono work for seniors, and other community activities which were exemplary — if not far beyond anything that most attorneys do for their communities.

Doubtless, these strong mitigating factors softened the blow of the discipline that was about to rain down upon Morris, and rain down it did.

In handing down the discipline on Morris, the Review Department noted that Morris conduct was very serious:

Morris drafted and recorded encumbrances on Micromark’s sole asset to prevent [tenant] from collecting on its judgment. [Tenant]‘s costs increased when it had to file an action to void the transfers and defend against Morris’s appeal. Morris had no legitimate basis for maintaining the encumbrances on the property, yet he maintained them while he pursued an appeal. Morris’s misconduct was serious, significantly harmed [tenant], and was directly related to his practice.

In reviewing similar cases of misconduct, the Review Department focused on Townsend v. State Bar, 32 Cal.2d 592 (1948), where an attorney was suspended for three years for advising his client to transfers assets to her mother to avoid the collection of a debt. But Attorney Townsend had more aggravating factors, and fewer mitigating factors, so the Review Department declined to give Morris a three-year suspension.

What Morris got instead was a two-year probated suspension, with the first year being an actual suspension, a requirement that he re-take and pass the Multistate Professional Responsibility Examination, and the numerous other onerous reporting and other requirements that go with a suspension.

ANALYSIS

Among the numerous takeaways from this opinion, one really stand out — Townsend lives.

It has been easy enough for California attorneys to somewhat flippantly discount the 1948 opinion in Townsend as being a 75-year old opinion that is no longer in step with the times. The theory has gone, looking at more recent cases where California attorneys have dodged civil liability for fraudulent transfers, that so long as the attorney is not a participant in the fraudulent transfer (as Morris here was as a transferee), the attorney could not be ethically dinged either./>/>

But here we see that Townsend is as vibrant as it ever was: A California attorney who counsels a client to commit a fraudulent transfer, as Morris did in advising Cheung to take out her note against Micromark, is putting their law practice in very serious peril.

Another thing to note is that the “duty of advocacy”, i.e., the duty of a client to advise a client of all their options, plays utterly no role in the defense of an ethics action based on a fraudulent transfer. An attorney can give their clients all sorts of advice — but advising them to commit a fraudulent transfer is advice they cannot ethically give.

Further, the old saw that “Who cares if a transfer is a fraudulent transfer because the client was going to lose the property anyway?” is one with a warped blade. While that may be the client’s view, there is still significant harm to the creditor in having to incur the cost to unwind the fraudulent transfer. It is exactly that harm, the very intended consequence of the attorney’s advice, that leads to Bar discipline.

On a technical note, an attorney who represents debtors that takes an attorney’s lien against the debtors’ assets to secure payment is an old and tried-and-true strategy. However, it is subject to the “ pigs get fat, and hogs get slaughtered” rule. An attorney’s lien against the debtor/client’s assets is only so good as (1) the amount of money actually then owed to the attorney, (2) the perfection of the attorney’s lien, and (3) the priority of the attorney’s lien.

Here, Morris satisfied (2) and (3) by perfecting his lien before the tenant filed its abstract of judgment. But Morris was a hog, not content to secure his $53,000 in fees then actually owed to him, but going for the utterly arbitrary $500,000 in the hopes of taking up the balance of Micromark’s equity in its property. Doing this gave rise to the completely plausible inference that Morris was not legitimately protecting his fees, but trying to defeat creditors.

We also see, again, that the existence of a fraudulent transfer is not indicated by whether the creditor gets the assets in the end, but whether there was an intent at the beginning to “hinder, delay or defraud” creditors. For some reason, attorneys who advise debtors suffer from a blind spot that makes them unable or unwilling to see the “hinder, delay” part. If a debtor intends merely to slow down a creditor, or make them incur additional costs as leverage for settlement, that by itself can be a fraudulent transfer even if in the end the creditor is successful at getting at the assets.

This does not mean that every client situation that results in a fraudulent transfer could, or should, result in ethical sanctions to the attorney involved. There are many factors that go into planning when a client has creditors, and an attorney with proper motives may simply miss on calculating available assets to satisfy creditors, potential liabilities, etc. Sometimes clients and attorneys miscommunicate and can’t ever get on the same page. But the intent of the client and the attorney cannot be to “hinder, delay or defraud creditors”, even if just to get better settlements, for that indicates the impermissible intent to fraudulently transfer assets.

While asset protection planning has become more popular among estate planners, there is utterly no evidence that attorneys engaging in fraudulent transfers have become in any way more palatable to Bar Counsel. To the contrary, there is growing evidence in the increasing volume of these cases that Bar Counsel are now looking to make an example out of attorneys who advise or assist their clients with fraudulent transfers.

But asset protection planning has never been about making fraudulent transfers in the first place, but rather in doing legitimate planning that avoids fraudulent transfers. Unfortunately, too many attorneys are equating the rise in popularity in asset protection planning with a mythical loosening of the fraudulent transfers laws (and, thus, Bar Counsel’s grounds for dealing with those transfers) that is simply not occurring. Attorneys must learn to recognize when a transfer will be a fraudulent transfer, and not counsel to their clients to make such a transfer, if they expect their bar card to remain safely in their wallets.

And you don’t need a bogus loan to take that to the bank.

CITE AS

Matter of Morris, 2013 WL 6598701 (Cal.Bar.Ct., Unpublished, Dec. 4, 2013). Full Opinion at http://goo.gl/HSPpoV

This article at http://onforb.es/1c5SUkh  and http://goo.gl/MjJKY5

Source: Forbes Business

 
Update
10

6 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

Cambodia's Famous Battambang Circus
KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Ra ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

6 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

Sydney FC v West Ham United - Football United New Zealand Tour 2014
KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken into by robbers ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

6 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

Federal Aviation Administration Bans All US Flights To Israel
KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected by the Dewan Rak ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

6 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, D ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

6 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

INDIA-CHINA-DIPLOMACY-TRADE
PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the so ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

7 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

Government Weekly Cabinet Meeting
KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 million in ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

7 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

7 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

Iskandar Johor Open - Previews
JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

7 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

EurAsia Cup presented by DRB-HICOM - Day One
PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramada ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

7 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinrara Damansara Skyway ( ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Erotic thoughts key to female orgasm: Study
London, July 26 (IANS) Women who miss on orgasm should focus more on their their bodily sensations during intercourse and try to have more erotic thoughts during the act, a fascinating study reveals.
 
 
Consumers who feel 'special' hunt for unique products
Hong Kong, July 26 (IANS) Consumers who attribute their successes to internal character traits rather than hard work are more likely to feel 'special' and hunt for unique products, says a study by a team of researchers involving an Indian-origin professor.
 
 
Climate change to affect global crop production
Washington, July 26 (IANS) The world faces a significant risk over the next two decades of a major slowdown in the growth of crop yields because of climate change, new research shows.
 
 
Bees physically transfer heat to stay cool
New York, July 26 (IANS) To protect their young ones from heat, honey bees can absorb heat from the brood walls just like a sponge and later transfer it to a cooler place to get rid of the heat from their bodies, says a study.
 
 
 

Latest from the Network

Apple Confesses about the Potentiality of Extracting of Significant User Data from iPhone
The iPhone is once again found with a security issue, as Apple admits that important user data, including text, photos and contacts, can be obtained by the person having extraction expertise.According to the...
Read more on Apple Balla
 
Sushma Swaraj meets Nepali leaders as joint commission meet starts
Kathmandu, July 26 (IANS) The third meeting of the Nepal-India Joint Commission at the foreign minstry-level started here Saturday after a hiatus of 23 years. Indian External Affairs Minister Sushma Swaraj, who...
Read more on Politics Balla
 
Indian culture flying high at Games (Glasgow diary)
Glasgow, July 26 (IANS) Along with sporting glory, India's rich culture and heritage is also the toast of the Commonwealth Games with an exhibition celebrating Glasgow's part in the Closing Ceremony of the Games in...
Read more on Sport Balla
 
New Images Revealed Volume/Power Flex Cable and SIM Card Tray for the 5.5-Inch iPhone 6
The internal components of the 5.5-inch iPhone 6 have been revealed for the very first time, as new photos show the volume and power flex cable for the device, along with the SIM card tray.According to Mac Rumors, the...
Read more on Apple Balla
 
Liv Tyler dating David Beckham's pal
Liv Tyler is dating David Beckham's best friend. 'The Leftovers' actress - the daughter of Aerosmith rocker Steven Tyler - has reportedly struck up a romance with Dave Gardner, who previously dated Rita Ora, after being...
Read more on Celebrity Balla
 
Peaches Geldof's husband abandons home
Peaches Geldof's husband is too traumatized to return to their marital home following her death. Musician Thomas Cohen has reportedly not visited the couple's £1.2 mansion in Wrotham, Kent, in 15 weeks after he...
Read more on Celebrity Balla
 
Mariah Carey sells Bel Air mansion
Mariah Carey and Nick Cannon have sold their Bel Air mansion for over $10 million. The superstar singer and her TV presenter spouse have earned a cool $3 million profit by selling their lavish estate, according to TMZ....
Read more on Celebrity Balla
 
CWG: Judokas Pathania, Parikshit in quarters; Avtar out
Glasgow, July 26 (IANS) India's Sahil Pathania (-100kg) and Parikshit Kumar (+100kg) advanced to the quarterfinals of the men's judo event but compatriot Avtar Singh lost in the men's -90kg round of 16 of the 2014...
Read more on Sport Balla
 
Jenny McCarthy's son called police on her
Los Angeles, July 26 (IANS) Actress Jenny McCarthy was reported to the police by her son for texting while driving. The former Playboy model admits Evan, 12, whom she has with ex-husband John Asher, once reported her...
Read more on Celebrity Balla
 
Drink tea for thinner body, beautiful skin
London, July 26 (IANS) Drinking tea can be beneficial mentally, emotionally, socially and physically. Scientific research testifies to the health benefits of all kinds of tea, which not only help with beauty factors...
Read more on Celebrity Balla