In re THEODORE GEORGE KARAVIDAS, Attorney-Respondent.
Where an attorney was not shown to have violated one of the Rules of Professional Conduct in breaching his fiduciary duty as executor of his father’s estate, he could not be disciplined under them or under Supreme Court Rule 770—charges dismissed.
Steven R. Splitt, of Chicago, for the Administrator of the Attorney Registration and Disciplinary Commission.
Samuel A. Kavathas, Jr., of Kavathas and Castanes, of Chicago, for respondent.
Justices CHIEF JUSTICE GARMAN delivered the judgment of the court, with opinion. Justices Freeman, Kilbride, Burke, and Theis concurred in the judgment and opinion.
GARMAN CHIEF JUSTICE
¶ 1 The Administrator of the Attorney Registration and Disciplinary Commission (ARDC) filed a one-count complaint against respondent, Theodore George Karavidas, charging him with various violations of the Illinois Rules of Professional Conduct. The Hearing Board found that he breached his fiduciary duty to the beneficiaries of his father's estate by converting funds from the estate and recommended that he be suspended for four months. The Review Board reversed and recommended that the charges be dismissed. The Administrator filed a petition for leave to file exceptions pursuant to Supreme Court Rule 753(e) (Ill. S.Ct. R. 753(e) (eff. Sept. 1, 2006)), which this court allowed.
¶ 2 BACKGROUND
¶ 3 Respondent was admitted to practice law in Illinois in 1979 and thereafter worked for the City of Chicago, the Attorney General, and several law firms. In 1988, he opened his own practice, focusing on personal injury law. He has no record of previous disciplinary actions and no professional experience in matters of probate or trusts.
¶ 4 Attorney John Hayes, who specialized in estate and probate matters, prepared a will and trust documents for respondent's father, George Karavidas. The elder Karavidas executed the documents on February 17, 2000, and died later that day. Respondent was named in the will to be executor of his father's estate and in the trust documents to be successor trustee. Respondent retained Hayes and his law firm, Pedersen & Houpt, to represent him as executor. Hayes filed a petition to probate the estate on April 11, 2000.
¶ 5 The will provided for George's personal property to be given to his wife, Lillian, and directed that the remainder of the estate pour over into the unfunded trust. The will also authorized independent administration of the estate, meaning that the executor was allowed to take actions with regard to the estate without court approval. See 755 ILCS 5/28-1 (West 2000). The probate estate was valued at approximately $700, 000 and included investment accounts with PaineWebber and Harris Investors. In addition, the estate included an interest in a family business called Marie's Pizza and Liquors (Marie's).
¶ 6 The trust documents provided that upon George's death and the resulting transfer of estate assets to the trust, the successor trustee was to create two separate trusts. A family trust was to be funded first, in an amount equal to the maximum federal estate tax exemption (then $675, 000); the remaining assets were to be placed in a marital trust for Lillian's benefit. Upon exhaustion of the funds in the marital trust, the principal of the family trust was to be used for Lillian's health and support. In addition, the trustee was given the authority to distribute family trust assets to George's descendants, a group consisting of respondent and his sister, Nadine, provided that the distributions were for the beneficiary's health, support, or education. When making distributions from the family trust, the trustee was instructed to "give primary consideration" to Lillian's needs. Upon Lillian's death, any remaining assets of the family trust were to be distributed in equal shares to respondent and Nadine, without regard to any distributions made to them earlier. However, the trust document also gave Lillian a testamentary power of appointment, under which she could appoint "any one or more" of George's descendants and their spouses to take the principal of the family trust upon her death. Thus, it was not certain that either respondent or his sister would ever receive any funds from this trust.
¶ 7 Respondent did not transfer any estate assets to the existing trust or create the family and marital trusts. On August 9, 2000, he withdrew $50, 000 from one of the investment accounts for his own use. In addition, between August 2, 2000, and July 1, 2005, respondent made multiple withdrawals totaling $398, 104 from another investment account for his own use. Between February 1, 2001, and October 17, 2005, he deposited $349, 604 of his own funds into the same account. He also made payments of his own funds directly to Marie's, his mother, and his sister. The largest deficit of estate funds due to these transactions at any time was $152, 104, which was less than one-third of the amount of the entire estate. The Administrator does not allege that any further restitution is owed to the estate.
¶ 8 Respondent also used estate funds to purchase a new Mercedes automobile for Lillian, to pay her health insurance premiums and her real estate taxes, to make contributions to Nadine's Individual Retirement Account (IRA) and to his wife's IRA, to pay a portion of the real estate taxes on the building that housed Marie's, and to pay Nadine's personal income taxes. At the request of Nadine, who operated Marie's, he made advances from the estate of $339, 247 to keep Marie's in business. He also paid approximately $20, 000 directly to Nadine.
¶ 9 In 2006, Nadine learned that respondent had attempted to sell Marie's without her or her mother's knowledge. She retained an attorney to represent herself and Lillian, and he filed an appearance in the probate case seeking to terminate independent administration. The petition alleged, among other things, that respondent had not circulated an inventory of the assets of the estate or an account of his administration. Later, Lillian and Nadine sought to have respondent removed as executor. Thereafter, the probate court terminated respondent's independent administration of his father's estate, and he resigned as executor. Nadine became executor of the estate.
¶ 10 On December 30, 2009, the Administrator filed a one-count complaint against respondent, alleging that he engaged in: (1) conversion of assets entrusted to him as executor of his father's estate; (2) breach of fiduciary obligations owed to the beneficiaries of the estate; (3) conduct involving dishonesty, fraud, deceit, or misrepresentation, in violation of Rule 8.4(a)(4) (Ill. R. Prof. Conduct R. 8.4(a)(4) (eff. July 6, 2001)); (4) conduct that is prejudicial to the administration of justice, in violation of Rule 8.4(a)(5) (Ill. R. Prof. Conduct R. 8.4(a)(5) (eff. July 6, 2001)); and (5) conduct which tends to defeat the administration of justice or to bring the courts or the legal profession into disrepute, in violation of Supreme Court Rule 770 (Ill. S.Ct. R. 770 (eff. Apr. 1, 2004)).
¶ 11 At the hearing, the Administrator called five witnesses, including Lillian and Nadine. Respondent called four witnesses and testified on his own behalf.
¶ 12 Hayes testified that he prepared the will and trust documents and that no assets were placed in the trust prior to George's death. He summarized the terms of the will and trust and explained that the family trust would have to be funded before the estate could be closed. If no funds remained after fully funding the family trust, the marital trust would not be funded. As attorney for the estate, he received copies of the monthly statements of the investment accounts. The executor of the estate had the authority to act on behalf of the estate with regard to these accounts. Hayes was not aware of the loans to respondent when they occurred, but became aware of them when he prepared an accounting of the estate in response to Nadine's motion in the probate case. By that time, all of the loans had been repaid by respondent. The repayments did not include interest on the amounts borrowed.
¶ 13 Hayes was aware of payments made by respondent on behalf of his mother and sister, but was not aware of any notice to them regarding any loans or payments of estate funds. He also knew of payments made to fund repairs and operating expenses for Marie's, which was losing money, had overdrafts on its checking accounts, and had ceased paying rent. Respondent's transfers for Marie's totaled $339, 236.50. Hayes was also aware that respondent had asked one of Hayes's law partners to draft a sales agreement because he intended to sell the business to its manager. Hayes ceased representing the estate when respondent withdrew as executor and was replaced by his sister.
¶ 14 Attorney Theodore Rodes, Jr., who specializes in estate planning and trusts, was called as an opinion witness. After reviewing the will and trust documents, he concluded that neither the documents nor the Illinois Probate Act authorized the respondent to make loans from the estate to himself. As independent executor, respondent was allowed to take appropriate actions with regard to the estate without court approval. However, as a fiduciary, he had a duty of loyalty, a duty to avoid self-dealing, and a duty to protect the interests of the beneficiaries. The duty to avoid self-dealing prohibits one from placing oneself on both sides of a transaction, such as lender and borrower. Rodes believed that these duties should have been clear to the respondent. Absent specific authority in the documents, the loans would have been proper only if authorized by court order or if the beneficiaries had agreed.
¶ 15 Rodes further opined that respondent violated his duties as executor when he made payments on behalf of his mother and sister. Under the will, he was directed to distribute his father's personal property to Lillian, which he did, and then to turn over the residue of the estate to the trust, which he failed to do. Any authority that the trustee might have had to make distributions to himself and his mother and sister did not exist under the terms of the will. Even if respondent had funded the trust, the trust document did not authorize self-dealing by way of loans.
¶ 16 Although he characterized respondent's conduct as "dishonest, " Rodes stated that he saw nothing in the records that suggested respondent was aware that his conduct was improper or that he attempted to conceal the transactions. Rodes also acknowledged that respondent repaid the amounts, but stated that repayment did not absolve him of the breach of duty.
¶ 17 Nadine testified that she had never seen the will or trust documents, but that she understood that her brother was the executor. She expected him to protect the estate and "make it grow." She understood that she, her mother, and her brother were the beneficiaries of the estate. She did not know that her brother was making loans to himself and would have objected if he had asked her permission. She was aware that her brother used money from the estate to buy their mother a new car, to make contributions to her IRA, and to pay some of the real estate taxes on the building that housed Marie's. She had no objection to these expenditures of estate funds. On the occasions when respondent paid her personal income taxes, she gave permission for him to use estate funds. She did not know if he used estate funds to pay his own taxes. She acknowledged that when Marie's was experiencing shortfalls and overdrafts, she asked respondent to fix the problem but did not know how he did it. She assumed he used money from the estate. Nadine's hiring of an attorney and filing of a petition to terminate independent administration was prompted by her discovery that respondent was negotiating to sell Marie's.
¶ 18 Lillian stated that respondent had informed her that he had taken money from the estate, but he did not ask her permission to do so. She did not tell Nadine that respondent had taken any money. She also denied that respondent had used estate funds to keep Marie's in business.
¶ 19 Respondent stated that he had previously handled client funds and he understood his duty as a fiduciary to segregate client funds from his own property. He acknowledged that he used estate funds for his own purposes, explaining that he believed that he was authorized to do so as a beneficiary. Although he believed that he would have been allowed to retain the funds, he chose to treat the withdrawals as loans and to repay the estate. He testified that the attorney, Hayes, told him that under independent administration, an executor could take whatever actions he was authorized to take and make an accounting when the estate was closed. He stated that Hayes did not tell him he first needed to fund the trusts before he could take the actions he was taking. He was unaware that there was any issue with the loans until he received a letter from the ARDC. He denied any intent to convert estate funds.
¶ 20 Chris Atsaves, vice president of investments at UBS Financial Services, testified that he managed the account into which respondent transferred the estate assets. He was familiar with the history of transactions, including respondent's loans to himself and transfers to Marie's. He understood that the funds advanced to Marie's would be repaid to the estate from the proceeds of the eventual sale of the business. While respondent did not sign notes or specify interest rates or terms of repayment when he transferred money to his personal or law office accounts, Atsaves understood that these transfers were personal loans. Respondent repaid these amounts. His first repayment was several thousand dollars greater than the amount owed, and Atsaves deemed the overage to represent interest on the loan. Subsequent repayments did not include interest amounts because respondent considered the interest offset by the approximately $100, 000 in unpaid rent owed to him as a part owner of the building occupied by Marie's. Atsaves was also aware that respondent used estate funds to open IRAs for himself, his wife, and Nadine; he repaid the funds used for his own IRA and his wife's, but not for Nadine's.
¶ 21 Anthony Siragusa, another financial professional, testified that he had known respondent for 50 years and that he was named in respondent's will to be executor of his estate. Respondent kept him informed of his actions with regard to his father's estate. Siragusa was aware that respondent was using estate funds to keep Marie's afloat and that he was trying to sell the business as a going concern. Nadine opposed any sale. Siragusa was also aware that respondent was borrowing funds from the estate for his own use. Respondent kept him informed so that if something happened to respondent, Siragusa would make sure that a full accounting was made and any outstanding debt repaid. Although he acknowledged that he had no information on the terms or interest rates of the loans and that he did not hold a promissory note, he was confident that he would have been able, if necessary, to reconstruct the transactions.
¶ 22 The Hearing Board found that the will was the controlling instrument, because the trust was never funded. Further, under the will, respondent had no authority to lend money to himself. Even if the trust had been funded, the terms of the trust did not authorize such loans and, although respondent was authorized to distribute trust funds to himself for certain specified purposes, he did not properly document the transactions. The absence of promissory notes caused the Hearing Board to "question" respondent's characterization of the transactions as loans. Respondent, an attorney, did not seek clarification of his responsibilities from Hayes, the attorney for the estate. Further, his self-dealing was not excused by the fact that he used estate funds to benefit his mother and sister, or by the fact that he repaid the funds he borrowed. Thus, the Hearing Board concluded that respondent breached his fiduciary duty to the estate and its beneficiaries.
¶ 23 The Hearing Board also found that because respondent had no authority under either the will or the Probate Act to lend funds to himself, he committed conversion when he took funds from the estate. The Board concluded that because respondent failed "to follow correct procedures, which failure eventually became the subject of court proceedings, " his conduct was prejudicial to the administration of justice in violation of Rule of Professional Conduct 8.4(a)(5) and tended to defeat the administration of justice in violation of Supreme Court Rule 770.
¶ 24 On the issue of dishonesty, the Hearing Board concluded that respondent did not intend to deceive or to defraud the estate or its beneficiaries. He took no affirmative steps to conceal his actions, and he repaid the amounts he borrowed. Indeed, repayment was complete more than a year before his actions were reported to the ARDC. He was unfamiliar with estate administration and did not appreciate the separate roles of the will and trust documents or his separate roles as executor and trustee. Thus, the Hearing Board concluded, he did not violate Rule of Professional Conduct 8.4(a)(4).
¶ 25 The Hearing Board recommended that respondent be suspended from the practice of law for four months.
¶ 26 Both parties appealed to the Review Board. Before the Review Board, the Administrator argued that the Hearing Board erred by finding that respondent did not violate Rule 8.4(a)(4) and by recommending a suspension for four months rather than for one year. Respondent argued that the Hearing Board erred by finding that he breached his fiduciary duty to the estate and its beneficiaries and by finding that his conduct amounted to conversion. In the alternative, he argued that the appropriate discipline would be reprimand or censure.
¶ 27 The Review Board concluded that in the absence of an attorney-client relationship between respondent and the estate or its beneficiaries, the charges of breach of fiduciary duty and conversion could not serve as the basis for professional discipline in this case.
¶ 28 As a general matter, the Review Board discouraged the Administrator's use of breach of fiduciary duty as a free-standing charge, absent an allegation of violation of a specific Rule of Professional Conduct. The Board noted that breach of fiduciary duty is not one of the specifically enumerated forms of misconduct in the Rules and that as a general concept of tort liability, it encompasses a wide variety of behavior, not all of which should be the basis for professional discipline. Because the fiduciary duty in this case did not arise from an attorney-client relationship and did not violate a specific Rule, the Review Board stated that the charge had no basis "in law, " that is, in the Rules of Professional Conduct.
¶ 29 Similarly, the Review Board stated that the only Rule of Professional Conduct that would specifically encompass conversion is Rule 1.15, which provides that "[a] lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property." Ill. R. Prof. Conduct R. 1.15(a) (eff. Oct. 21, 2009). Again, the Review Board concluded that, absent an attorney-client relationship, respondent could not have violated this rule because he did not "hold" the estate funds for a client or in connection with a representation.
¶ 30 Further, if the tort of conversion, as opposed to a violation of Rule 1.15, were to be the basis of professional discipline, the Review Board stated that the Administrator should be required to prove the elements of the tort by clear and convincing evidence, which was not done in this case. In re Storment, 203 Ill.2d 378, 390 (2002) ("In attorney disciplinary proceedings, misconduct must be proved by clear and convincing evidence."). The Board criticized the suggestion that an attorney could be disciplined for the wrongful deprivation of another's property, without proof of the other elements of the tort. In addition, the Board observed, one cannot convert money unless it is tangible, such as currency taken from a briefcase or a safe-deposit box. For this proposition, the Board cited Sandy Creek Condominium Ass'n v. Stolt & Egner, Inc., 267 Ill.App.3d 291, 294 (1994) ("Money may be the subject of conversion if the sum of money is capable of being described as a specific chattel. [Citation.] However, an action for the conversion of funds may not be maintained to satisfy an obligation to pay an indeterminate sum of money. If such is the case, the cause of action lies in debt, rather than conversion."). Sandy Creek, in turn, cites this court's opinion in In re Thebus, 108 Ill.2d 255, 260 (1985) ("It is ordinarily held, however, that an action for conversion lies only for personal property which is tangible, or at least represented by or connected with something tangible.' " (quoting 18 Am. Jur. 2d Conversion § 9, at 164 (1965))).
¶ 31 The Board concluded that because the Administrator did not plead and prove either a violation of Rule 1.15 or commission of the tort of conversion, the charge of conversion could not stand.
¶ 32 In sum, the Review Board reversed the Hearing Board's decision and recommended that the charges against respondent be dismissed because the Administrator did not prove by clear and convincing evidence that respondent violated the Rules of Professional Conduct ...