In the Matter of Carl E. Baylis

BOARD MEMORANDUM ¹

 

The respondent, Carl E. Baylis, was admitted to the bar in 1968. A year later he drafted a trust for Antonia Quevillon, who funded it by deeding over six apartment buildings. The trust provided that, upon Antonia's death, the net income from the trust would be shared equally by her five children for twenty years, whereupon the trust assets would be divided among the children of her son Marcel. The trust named the respondent and Estelle Ballard, one of Antonia's daughters, as co-trustees.

After Antonia's death in 1971, tension developed between Ballard and her siblings. Her relationship was particularly acrimonious with her brother Marcel, the successor trustee if either co-trustee resigned. Ballard managed the trust property almost exclusively until 1986. While it appreciated in value substantially during that period (from $256,000 to $1.3 million), it paid the income beneficiaries (Ballard's siblings) less than $50,000 over the same period.

By 1985 the siblings had engaged counsel to voice their dissatisfaction over the lack of income from the trust properties. At that time the respondent urged that the properties be sold and the proceeds invested in government bonds. The siblings agreed and Ballard raised no immediate objection. The co-trustees received two offers, one to buy two properties for $215,000 and the other to buy the four remaining properties for $1.25 million. The combined offers for the six properties exceeded their total appraised value of $1.3 million.

Ballard told the respondent she wanted to own the properties for herself or to keep them in the family. The respondent gave her the opportunity to match the offers they had received, but Ballard could not finance the purchase. She then refused to sell the properties. Hoping she eventually would be persuaded, the respondent prepared purchase-and-sale agreements for the two transactions. The buyers signed the agreements and paid deposits toward the purchase price.

Ballard still refused to sell. The respondent and counsel for the siblings proposed that she be given one of the properties in exchange for her agreement to approve the sale of the others. To this Ballard agreed, but the prospective buyer of that property sued the co-trustees, both individually and in their capacity as trustees. The trust settled the case with the prospective buyer and paid the expenses of the suit. Relying on the advice of counsel, the respondent paid these expenses, including those of his own defense, out of trust assets.

In December 1986, the respondent filed a complaint for instructions, seeking permission to sell the trust property and terminate the trust. Ballard refused to permit the sale, and the Probate Court judge deferred action on the complaint until Ballard agreed. The parties dispute whether the judge was aware of Ballard's refusal to sell: a later court found that the judge did not know, while the hearing committee assigned to this disciplinary matter credited the respondent's testimony that he had advised the judge of Ballard's refusal. In any event, neither the respondent nor counsel for the beneficiaries pressed the matter before the judge, and neither took any action when the judge failed to act.

In 1988 the income beneficiaries, later joined by the remaindermen, filed suit against the co-trustees in the Probate Court. The trust was eventually terminated and the property was transferred to the remaindermen. By then the value of the property had depreciated to slightly more than $1 million. The trial court judge found that the co-trustees had breached their fiduciary duties, had acted in bad faith, had improperly used trust assets to pay their own expenses in defending the suit brought by the prospective purchaser, and were entitled to no management fees. The court awarded damages based on the difference between the refused offers to purchase and the current value of the properties, plus imputed interest. The co-trustees appealed from the judgment, but the Appeals Court and the Supreme Judicial Court affirmed, although the latter expressed doubt regarding the finding that the respondent had acted in bad faith.

When the respondent was unable to settle the matter with the plaintiffs, he sought bankruptcy protection. His bankruptcy proceedings themselves had a tortuous history, including two decisions by the United States Court of Appeals. In the end, the Court of Appeals decided that only one of the respondent's breaches of fiduciary duty—using trust assets to pay the costs of defending himself and settling the potential purchaser's lawsuit—constituted a nondischargeable "defalcation" within the meaning of the Bankruptcy Act. All other damages flowing from the fiduciary breaches were deemed dischargeable in bankruptcy.

Bar Counsel filed a petition for discipline alleging various disciplinary violations arising out of the respondent's conduct as co-trustee and counsel to the trust. The hearing committee allowed Bar Counsel's motion to give preclusive effect to findings made by the Probate Court and upheld on appeal. See, e.g., Bar Counsel v. Board of Bar Overseers, 420 Mass. 6, 11 Mass. Att’y Disc. R. 291 (1995). After hearing, the committee determined that the respondent was "a trustee confronted with a recalcitrant co-trustee," and that while he "disagreed with Ballard's desire to retain the properties, [he] had the good faith belief that Ballard was acting within the scope of her authority as co-trustee." Hearing Committee Report at 12. Further, the committee found, the respondent "held the reasonable belief that his resignation would harm the beneficiaries given the intense animosity between Ballard and her brother, the next successor trustee." Id. A majority of the committee concluded that the respondent had not violated any of the disciplinary rules charged in the petition for discipline. A "dissenting" hearing committee member would have found a violation of Canon One, DR 1-102(A)(6) (conduct reflecting adversely on fitness to practice), in the respondent's "reckless disregard of his fiduciary duties" (id. at 16, quoting from the Bankruptcy Court's decision), but concurred in the majority's recommendation that the petition for discipline be dismissed.

Bar Counsel has appealed from the committee's report and recommendation. He asks that we (1) make additional factual findings, including some previously made by the Probate Court; (2) modify the hearing committee's conclusions of law; and (3) recommend a term suspension. We allow the appeal in part and order a public reprimand.

Bar Counsel’s appeal is predicated primarily on his quarrel with the hearing committee over the scope of issue preclusion in this case. In order for findings to be given preclusive effect in a later proceeding against the same party, it must be demonstrated that they were actually litigated and determined by a valid and final judgment and were essential to the judgment. See, e.g., Fireside Motors, Inc. v. Nissan Motor Corp., 395 Mass. 366, 372-373 (1982); Restatement (Second) of Judgments § 27, at 250 (1982) ("Restatement"). Generally speaking, "essential" means "necessary to the judgment." Restatement § 27, comment j, at 261. We understand that phrase to mean that the judgment could not stand if the first court had not made the putatively "necessary" determination. Applying that definition here, we find that many of the forty-three determinations Bar Counsel invokes are far from "necessary to the judgment" of the Probate Court. The judgment surely would not fall if, for example, the Probate Court had not found that the respondent was named a co-trustee because of his legal expertise—the very first "essential" determination Bar Counsel faults the hearing committee for ignoring.

At the same time, however, the Supreme Judicial Court has expanded the applicability of issue preclusion to encompass certain findings not strictly essential to the final judgment in the prior action “if it is clear that the issues underlying them were treated as essential to the prior case by the court and the party to be bound.” Home Owners Fed. Sav. & Loan Ass’n v. Northwestern Fire & Marine Ins. Co., 354 Mass. 448, 455 (1968) (emphasis in original), quoted in Comm’r of DTE v. Dugan, 428 Mass. 138, 144 (1998). “Stated another way, it is necessary that such findings be the product of full litigation and careful decision.” Id. An administrative tribunal’s failure to grant preclusive effect to such findings may constitute legal error. Comm’r of DTE v. Dugan, supra.

Such an error occurred here when the hearing committee disregarded the Probate Court’s finding, among other fiduciary breaches, that the respondent had failed to disclose Ballard's refusal to sell to the judge before whom the complaint for instructions was pending. Because one can imagine a scenario in which the Probate Court’s judgment might have entered without a finding that the respondent made no such disclosure, the finding may not be strictly “essential.” Nonetheless, the finding—especially when coupled with the respondent’s apparently false representation in the petition for instructions that Ballard had already submitted her resignation as trustee—is such powerful evidence of fiduciary breach as to be central to the Probate Court’s judgment and to Supreme Judicial Court’s opinion upholding the judgment. See Rutanen v. Ballard, supra, 424 Mass. at 732. It is also clear that the parties and the courts treated the issue as important in the prior proceedings and that it was fully litigated. See Ex. 1, 71-72; Rutanen v. Ballard, supra, 424 Mass. at 732. Under these circumstances, it was error for the hearing committee to relitigate the issue and make a contradictory finding based on the respondent's testimony before it. See Comm’r of DTE v. Dugan, supra, 428 Mass. at 144. To rule otherwise here would raise the unseemly specter of the bar’s disregarding settled findings, twice affirmed on appeal, when called upon to judge the conduct of one of its own.

The respondent’s failure to apprise the judge of Ballard’s refusal to sell was exacerbated by his failure to press the matter before the Probate Court once his complaint for instructions was filed. This is not to say that he was obliged to urge a particular action on the court, only that he could not stand by while the court failed to act as trust properties continued to lose value in a falling market. He had an obligation to urge the court to hold a contested hearing. The hearing committee’s finding that other parties to that proceeding also could have done so but did not misses the point: unlike the income beneficiaries, the respondent, as trustee, owed a fiduciary duty to the trust to take affirmative action to preserve trust property. This, the Probate Court found, he failed to do, and his breach caused harm to the trust.

We decline Bar Counsel’s invitation to immerse ourselves in numerous specific findings made by the Probate Court and disregarded by the hearing committee. We do believe that the hearing committee erred in failing to honor the Probate Court’s critical findings that the respondent had breached his fiduciary duties to the trust (1) by neglecting to take appropriate action to protect trust assets in the face of Ballard’s recalcitrance, and (2) by paying expenses of the prospective purchaser’s suit out of trust assets. Both of these breaches were fully litigated in the Probate Court, were essential to the judgment entered, and were affirmed on appeal more than once. The hearing committee should have accorded them full preclusive effect in the disciplinary proceeding. See Comm’r of DTE v. Dugan, supra, 428 Mass. at 144 (1998) (reversing judgment where administrative agency had failed to give preclusive effect to prior proceedings).

The respondent rejoins that the issues before the Probate Court differed from those before the hearing committee, which was right to make findings its own findings to determine whether disciplinary rules were violated and whether discipline should be imposed. We disagree. The Probate Court findings established that the respondent violated fiduciary obligations in a setting that arose from an attorney-client relationship (with the settlor) and which itself involved the rendering of legal services (to the trust). In these circumstances, the question is not whether the issue of fiduciary breach is “different” from the issue of disciplinary violation but whether the proven fiduciary breaches necessarily encompass conduct violative of the disciplinary rules. See id. at 143-145. We believe the fiduciary breaches mandate a determination that the respondent violated Canon Six, DR 6-101(A)(3), and Canon Seven, DR 7(101(A)(1)-(3).

The petition charged the respondent with neglecting a legal matter entrusted to him (in violation of Canon Six, DR 6-101(A)(3)); with failing to seek the lawful objectives of his client, failing to carry out a contract of employment with a client for professional services, and prejudicing or damaging his client during the course of the professional relationship (in violation of Canon Seven, DR 7-101(A)(1)-(3)); and with engaging in conduct that adversely reflects on fitness to practice (in violation of Canon One, DR 1-102(A)(6)). The respondent argues that discipline would be inappropriate because he was acting as a trustee, not as a lawyer. We do not agree.

First, DR 6-101(A) makes no reference to “clients,” as the Court noted in rejecting such an argument in Matter of Eisenhauer, 426 Mass. 448, 452-453, 14 Mass. Att’y Disc. R. 251, 256-257 (1998). Second, although the disciplinary rules do not define the word “client,” the Court has not construed the word in cases involving disciplinary rules in which the word “client” does appear so narrowly as to exclude the circumstances here. See 426 Mass at 452-453, 14 Mass. Att’y Disc. R. at 257. As in Eisenhauer, the respondent’s conduct supports a determination that he violated his fiduciary duties to the trust. Id. Moreover, he also did legal work for the trust. See Matter of Stern, 425 Mass. 708, 711-712, 13 Mass. Att’y Disc. R. 749, 753 (1997) (attorney discipline appropriate where role as trustee “was inextricably linked to his role as . . . attorney”). Consequently, we deviate from the hearing committee report in that we add findings that the respondent violated the rules charged under Canons Six and Seven.

We reject Bar Counsel’s argument that this conduct also violated DR 1-102(A)(6). In Matter of the Discipline of Two Attorneys, 421 Mass. 619, 12 Mass. Att’y Disc. R. 580 (1996) (Two Attorneys), the Court declined to find in an escrow agent’s breach of fiduciary duties a violation of DR 1-102(A)(5), a related catch-all provision of Canon One that prohibits conduct prejudicial to the administration of justice. Noting that an escrow agent’s duties were not entirely clear and that the misconduct, although involving court process to some extent, was not a paradigmatic or otherwise egregious interference with the administration of justice (such as perjury or misrepresentations to a court), the Court shrank from finding a violation of so general a rule under such attenuated circumstances. 421 Mass. at 627-629, 12 Mass. Att’y Disc. R. at 591-592. Where possible, the Court suggested, the “better course . . . is to deal with alleged professional misconduct under specific rules . . . rather than to invoke the general language of DR 1-102(A)(5).” 421 Mass. at 629, 12 Mass. Att’y Disc. R. at 592. We are aware of only one case, Matter of Dittami, 9 Mass. Att’y Disc. R. 102, 102 (1993), in which DR 1-102(A)(6) was the sole basis for a finding of misconduct, and that case was decided before Two Attorneys. In this case, therefore, where specific rules under Canons Six and Seven fit the conduct more comfortably, we see no point in straining DR 1-102(A)(6) to reach the situation.

The hearing committee noted that the respondent was stuck with a recalcitrant co-trustee in Ballard, harbored a good faith belief that Ballard was acting within the scope of her authority, and reasonably believed his resignation would wreak more harm than staying on as trustee. We have no quarrel with those observations, which carry some force in mitigation of the misconduct. They are not a defense, however. Having elected to stay on, the respondent continued to shoulder fiduciary obligations. His failure to take adequate measures to protect the trust was a violation of those obligations.

The respondent also argues that it would be unfair to discipline him for paying his litigation expenses out of trust funds when he had done so on the written advice of counsel, both of them prior members of the Board of Bar Overseers. While there appears to be no Massachusetts authority on the point, other jurisdictions have rejected the notion that advice of counsel can be a complete defense to a disciplinary charge. See Kentucky Bar v. Guidugli, 967 S.E.2d 587, 589 (Ky. 1998); People v. Casey, 948 P.2d 1014, 1017 (Colo. 1997). We note that the United States Court of Appeals did not hesitate to find the respondent’s use of trust funds to be a nondischargable “defalcation” within the meaning of the Bankruptcy Act. We find misconduct in the use of the funds, but treat the effort to obtain advice of counsel as a mitigating circumstance. See Kentucky Bar v. Guidugli, supra, 967 S.E.2d at 589. We observe further that the sanction we impose would be no different if we had found no violation.

With respect to disposition, we find nothing in the respondent’s conduct, taken as a whole, to warrant the suspension Bar Counsel seeks. There was no self-dealing here, with the possible exception of paying, on his counsel’s advice, the expenses of defending actions he believed in good faith to be in the trust’s interests. The respondent was saddled with a bull-headed co-trustee, and while he did not handle the situation as he should have, he does not deserve to be suspended. The matter should be concluded by public reprimand.

Conclusion

For all of the foregoing reasons, we adopt the hearing committee’s report but modify it by adding findings and conclusions of law that the respondent violated Canon Six, DR 6-101(A), and Canon Seven, DR 7-101(A)(1), (2), and (3). As a consequence, we order that the respondent, Carl E. Baylis, be publicly reprimanded.

Respectfully submitted,
THE BOARD OF BAR OVERSEERS

By: ___________________________
James B. Re
Secretary

Approved: December 8, 2003

¹ Compiled by the Board of Bar Overseers based on the record of proceedings before the Board.