David Majchrzak and Edward McIntyre
19.3.5 In the Matter of Lingwood (2019) 2019 Calif. Op. LEXIS 21 – Review Department of the State Bar Court (August 27, 2019)
Issue:
Must a lawyer acting as a trustee comply with former Rule 3-300 even when the trust instrument permits the trustee to borrow funds from the trust?
Analysis:
Yes. Lingwood prepared a trust agreement for a couple. After the wife’s death, with the husband diagnosed with Alzheimer’s disease, Lingwood became the sole trustee of a trust intended to fund the husband’s care, with two children as beneficiaries. Lingwood, believing some trust investments were losing money and that she could legally do so, borrowed $60,000 from the trust, with the loan secured by a recorded deed of trust on her real property and a guaranteed rate of return of five percent to the trust.
Lingwood made periodic principal and interest payments to the trust. She used the $60,000 for personal expenditures. When one of the beneficiaries complained, she refinanced her real property and repaid the trust within a year of the loan having been made.
The Office of Chief Trial Counsel charged that a $60,000 loan was an improper business transaction with a client, in violation of former Rule 3-300 (which is analogue to current Rule 1.8.1), and a misappropriation of trust funds in violation of Business and Professions Code section 6106. It also charged Lingwood with failing to comply with the Probate Code and making misrepresentations about the transaction.
The Hearing Department judge found that Longwood both misappropriated the $60,000 and improperly entered into a loan transaction for it. The judge also found misrepresentations about the loan, but dismissed the Probate Code charge as duplicative of the improper loan charge. Nonetheless, the judge recommended disbarment.
The Review Department, upon independent review, held that a lawyer acting as a trustee must conform all of the services performed to the Rules of Professional Conduct, which impose independent requirements on trustees when they are lawyers. Thus, even if a trust instrument would permit a non-lawyer trustee to borrow funds from the trust, a lawyer acting as a trustee must also comply with rules governing business transactions with a client (former Rule 3-300, current Rule 1.8.1).
Although trust beneficiaries are not “clients” of a lawyer trustee, the lawyer trustee may nonetheless be disciplined as if they were the lawyer trustee’s clients because of the lawyer’s fiduciary relationship with the beneficiaries. With the husband unable to consent because of his Alzheimer’s disease, Lingwood owed a fiduciary duty to the beneficiaries and she had to treat them as her “clients” under former Rule 3-300.
Lingwood violated the former rule because she did not disclose the terms of the transaction to her beneficiary “clients” in writing and did not advise them in writing that they may seek the advice of an independent lawyer of their choice—before entering into the loan transaction.
The Review Department further found that, even though the Trust permitted self-dealing, Probate Code section 16004 applies to the fiduciary relationship between a lawyer and client and is a “statutory complement to rule 3-300.” Section 16004, subdivision (c), provides a rebuttable presumption that a trustee violates fiduciary duties when a transaction occurs between the trustee and a beneficiary and the trustee obtains an advantage from the beneficiary. Since Lingwood obtained an advantage in the $60,000 loan, but failed to comply with former Rule 3-300, she also violated her fiduciary duties under the Probate Code. The Review Department reversed dismissal of this violation as duplicative, but did not consider it for imposition of discipline.
The Review Department rejected the hearing judge’s finding of misappropriation and violation of section 6106. Lingwood thought she had the authority to make the loan, and in fact she could, and the review court found no facts to show that she misappropriated the money in a way to violate section 6106 as well as the misrepresentation findings. Instead of disbarment, the Review Department recommended a 60-day actual suspension.