by Jennifer R. Bagosy
State Bar discipline commonly is founded upon the violation of well-established duties arising from the State Bar Act, found in the Business and Professions Code, and the California Rules of Professional Conduct. In addition, the obligations of attorneys are premised on common law principles. The State Bar charged attorney Joseph McHugh with numerous disciplinary infractions in connection with McHugh’s work for a wealthy elderly woman. The charges, however, failed to withstand scrutiny. The resulting decision exonerating McHugh has clarified the ethical duties of counsel in estate planning matters.
Helen Sprinkle was a wealthy, eighty-eight-year-old woman who had created a charitable trust naming her daughter Donna as trustee and beneficiary. The foundation for Helen’s prior planning for her large estate was that she would pass away before her daughter did. However, when Donna became ill and suddenly died at age fifty-five, Helen had to re-do her entire estate plan. If the current plan was left in place, her estate would be divided between relatives with whom she was not close, and other relatives she disliked.
Helen wasted no time, seeking out the services of Glendale attorney Joseph McHugh three days after her daughter’s death. Accompanying Helen was her friend and financial adviser, Naomi Campbell, who had introduced Helen and McHugh several years earlier, when McHugh had created the trust that named Donna as beneficiary. Helen paid McHugh a $125,000 retainer.
There were certain terms and conditions on which Helen insisted, both at the beginning of the engagement and during the course of McHugh’s work on Helen’s estate. First, Helen wished Naomi to serve as, and be billed as, McHugh’s paralegal (with her husband, Ron, to serve as the “paralegal assistant”), and for Naomi to do most of the work in sorting through and cataloguing the physical contents of Helen’s estate. These items included a collection of thousands of dolls.
When Naomi’s charges for organizing and selling the dolls exceeded the amount of the retainer, McHugh became concerned and advised Helen to let him sell the dolls on consignment. She refused, insisting that she wanted her dolls “to go to a good home,” and authorized the payment of fees of up to $400,000 for this purpose. Upon receiving this directive, McHugh said he wished to have Helen evaluated by a clinical psychologist to assure her competence; she was evaluated, and the psychologist confirmed that she could make rational decisions about her property and finances. When the cost of the work exceeded $400,000, McHugh continued to work for Helen at no charge.
Helen’s other estate planning decisions included changing the beneficiary of trust funds from the originally designated charity to the Church of God, for which Naomi’s husband Ron was the pastor. Helen expressed that she would prefer the funds go to a church that helped people in need on a daily basis rather than to a large organization.
As the State Bar Court (the “Court”) later found in dismissing the eventual disciplinary action against McHugh, he “was dealing with a wealthy, independent, and demanding client, who was insistent on having certain personal matters handled in precisely the manner she wanted—and at a cost she was expressly willing to pay.” In the Matter of Joseph Bernard McHugh, Jr., No. 07-O-14334-DFM, slip op. at 10-11 (State Bar Court of California July 1, 2013). The Court’s opinion also found the facts described above.
The Disciplinary Action
In 2007, Helen sued McHugh for approximately $15 million, and they eventually settled in 2011 for $20,000. Don DeBenedictis, Bar Court Exonerates Trusts Attorney, Daily Journal, July 10, 2013.
The State Bar of California filed a Notice of Disciplinary Charges (NDC) on July 6, 2012, originally alleging eighteen counts of misconduct. Five of these were voluntarily dismissed by the State Bar before trial. The remaining claims involved allegations of violations of Rules 4-100(B)(3) and 4-200(A) of the California Rules of Professional Conduct (the “Rules”), and violations of Sections 6068(a) and 6016 of the California Business and Professions Code. The Court heard evidence on claims that McHugh had engaged in “moral turpitude” by participating in a scheme to defraud Helen by charging excessive legal fees, had breached his fiduciary duties to Helen, had charged an unconscionable retainer and unconscionable legal fees, had failed to disclose that Naomi had a prior criminal conviction for grand theft and potentially for elder abuse, and had permitted Naomi and Ron to work as paralegals although they were unqualified.
On July 1, the Court dismissed the case in its entirety.
The Court found that neither the retainer nor the fees were unconscionable under Rule 4-200, and that McHugh had not committed the other offenses alleged. A central theme woven throughout the Court’s very detailed opinion was to clarify what McHugh’s duties were—and, more importantly, what they were not.
If McHugh was to be disbarred or otherwise sanctioned for a breach of fiduciary duty, it stood to reason that there actually had to be a duty for the attorney to have acted differently. Moreover, a finding of “moral turpitude”—which the Court observed is defined as “an act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellow men, or to society in general, contrary to the accepted and customary rule of right and duty between man and man”—first requires the existence of a duty. McHugh at 6 (quoting In re Fahey, 8 Cal. 3d 842, 849 (1973)).
Findings: The Attorney’s Duties
The State Bar had asserted that McHugh had numerous duties to Helen that he breached. But when the Court pressed the prosecutors to provide statutory or case support for the existence of these duties under these facts, they were unable to do so.
No Duty to Investigate or Disclose a Paralegal’s Criminal Record
The Court found that McHugh had no knowledge of Naomi’s past conviction. However, even if McHugh did have such knowledge, his failure to tell Helen did not constitute dishonesty or moral turpitude. The State Bar argued that such a duty should exist; however, in the absence of any statute or case creating such a duty, the Court declined to find one. McHugh at 8. Moreover, the Court found that there was no evidence that either Naomi or Ron were unqualified or that their work had no value. Id. at 9.
However, if Naomi had been a disbarred or suspended attorney instead of a non-attorney with a criminal record, there would have been restrictions on the work she could have performed under McHugh’s supervision. Rule 1-311 provides that an attorney in good standing may hire a disbarred, suspended, or otherwise inactive member of the bar to perform certain types of research, drafting, and clerical work, but that the disbarred or inactive member may not provide legal advice to the client, appear at a hearing or deposition, negotiate with third parties on behalf of the client, handle client funds, or “[e]ngage in activities which constitute the practice of law.”
Further, an attorney’s duty to act with competence under Rule 3-110 includes a duty to supervise the work of attorneys, paralegals, and others in her employ. See Gadda v. State Bar, 50 Cal. 3d 344, 353 (1990). In McHugh, this duty appears to have been met, as the Court found that Naomi and Ron were required to provide a log of their work and charges each day, and that McHugh “took extraordinary steps to document” that Naomi’s work and his own was done with the full knowledge and consent of his client. McHugh at 12-13.
No Duty to Ensure a Client’s Proper Tax Treatment of Legal Fees Where the Attorney Did Not Prepare the Tax Return
McHugh had no role in preparing or supervising the preparation of Helen’s tax returns. Yet the State Bar claimed that the dishonesty toward Helen had been committed in preparing the estate tax return for Helen’s daughter’s estate, which listed McHugh’s charges as “Funeral and Administrative Expenses.” McHugh at 18. The Court found that there was no evidence that this tax treatment was improper, and that McHugh had no duty to ensure his fees were correctly accounted for in a tax return that he had no involvement in preparing. Id.
The State Bar attorneys countered that “this Court should determine that an attorney is not free to idly sit back and await the results of the accountant’s work, but is in fact duty-bound to understand the work completed on behalf of his client for no other reason than to explain it to the client correctly.” McHugh at 18 (emphasis omitted). The Court refused to impose such a duty on California attorneys given the absence of any statute or case establishing this duty. Id.
However, the Court’s decision was tied to the facts before it which showed that McHugh did not participate in preparing the tax returns. If he had prepared the return, he could have been liable had the return contained improper or dishonest accounting. In fact, California attorneys may be subject to Bar discipline for any crimes, frauds, or dishonest acts committed whether or not those acts are committed in their legal capacity. See Cal. Bus. & Prof. Code § 6068(a). So if an attorney prepares a tax return for another person in a purely personal capacity, and that return claims improper deductions or fails to disclose income, the attorney could face suspension, disbarment, or other discipline, in addition to the penalties ordinarily associated with violations of the tax laws.
No Duty to Investigate Whether a Client’s Decisions Are Based Upon Undue Influence or Incompetence
As trustee of Helen’s charitable trust with power of attorney, McHugh transferred the funds to the Church of God, which was the sole beneficiary of the trust per the amendment that Helen had signed. McHugh at 28. The Bar attorneys contended that McHugh committed acts of moral turpitude by, first, inducing Helen to sign the amendment, and second, by disbursing the funds to the Church of God once the amendment was in place. Id. at 28-29. The Bar asserted that, instead of paying the funds to the Church, McHugh had a duty to interplead the funds with a superior court.
The Court asked the State Bar to provide authority supporting the existence of any duty to: (1) investigate whether Helen’s decision was the result of undue influence (i.e. by a third party), (2) investigate whether Helen’s decision was the result of incompetence, and (3) to file an interpleader instead of paying the funds owed to the Church, where there was no contest as to those funds.
The State Bar did not cite to any supporting statutes or cases, and McHugh cited California cases, including Boranian v. Clark, 123 Cal. App. 4th 1012 (2004), which showed that no such duty existed. As the California Court of Appeals held, “a lawyer who is persuaded of his client’s intent to dispose of her property in a certain manner, and who drafts the will accordingly, fulfills his duty of loyalty to his client and is not required to urge the testator to consider an alternative plan in order to forestall a claim by someone thereby excluded from the will. ...” McHugh at 30 (quoting Boranian, 123 Cal. App. 4th at 1020).
Moreover, the Court found that McHugh might have breached his fiduciary duties to Helen if he did take such steps to challenge her competence or her actions. McHugh at 29.
This decision serves as a somewhat sobering reminder that the duties of lawyers, while myriad, are not unlimited. While careful attention to ethical obligations is of course required, a lawyer’s ethical obligations remain demarcated by the rules of ethics, statutory mandates, and case law.
Jennifer R. Bagosy is an associate attorney with Morgan, Lewis & Bockius LLP. She focuses her practice on securities litigation, general commercial litigation and has experience in professional liability litigation. She is also the Secretary of the OCBA’s Professionalism & Ethics Committee. Jennifer may be contacted at email@example.com.