In RE: John L. Mckean, Attroney At Law

JOHNSON, J. --In this case we review the Washington State Bar
Association (WSBA) Disciplinary Board's (Board) recommendation that John L.
McKean be suspended from the practice of law for six months followed by six
months of probation. The recommendation was based on McKean's entering
into a business arrangement with a client to shield the client from
creditors, financing the business with funds borrowed from the lawyer's
trust account, and using the lawyer's trust account for his own business
purposes. We adopt the Board's
findings of fact and conclusions and affirm McKean's six month suspension
and probation.

FACTUAL AND PROCEDURAL HISTORY
McKean was admitted to the bar on May 2, 1983. Decision Papers (DP) at 5.
He has a sole general practice in Moses Lake, Washington. On January 13,
1997, McKean began to represent James Dean Martin and Wendy Dawn Martin
(Martins). The Martins were farmers in financial trouble. McKean prepared
and filed a Chapter 121 farm bankruptcy petition for the Martins in the
United States Bankruptcy Court for the Eastern District of Washington.
Coincident to the bankruptcy, the court issued an automatic stay order of
all past, present, and future proceedings. The Martins were required to
report all cash receipts and disbursements each month and could not hire a
lawyer unless authorized by the bankruptcy court.
In July 1997, McKean learned the Martins had not been filing the required
monthly financial reports with the bankruptcy court and believed the
bankruptcy would be dismissed involuntarily as a result. McKean advised
the Martins to voluntarily dismiss the bankruptcy and to form a
corporation, American Hay Company (the Company), to shield them from their
creditors. McKean had experience farming, and the Martins asked for his
help in managing their farming business. They also asked McKean for
financial assistance. McKean agreed to help the Martins manage and finance
their farming enterprise through joint ownership of the Company. On July
7, McKean wrote the Martins a $500 check from his trust account, and McKean
testified that he and the Martins orally agreed to form the Company
together on this date.

On July 14, McKean issued two more checks for the benefit of the Company
from his trust account. One check was for $1,560; the other was for
$8,868.25. On July 30, McKean wrote a third check for $700 cash. The
total amount McKean withdrew from his trust account for the benefit of the
Company was $11,128.25.
Shortly after July 14, McKean began to hear of the Martins' prior dishonest
business practices. Regardless, on July 17, McKean filed articles of
incorporation for the company with the secretary of state. The articles
identified McKean as the incorporator and the initial registered agent.
McKean's office was the registered place of business.
The written agreement to form the Company was not drafted until a month
later.3 Report of Proceedings (RP) at 24. On August 11, McKean and the
Martins signed a document entitled 'Agreement Re: Formation and Operation
of American Hay Company' (the Agreement). DP at 8; Ex. 3. McKean
testified that the Agreement reflected the understanding he orally made
with Martin. It provided that McKean was to retain 51 percent ownership
and the Martins 49 percent ownership of the Company. McKean testified his
51 percent was to be held in trust for the Martins, but there is no
documentation to that effect. McKean testified the purpose of his majority
ownership in the company was to ensure that he had some security for his
loans and that the Company's financial obligations, including payroll and
taxes, would be met.

The Agreement also stated
{the Martins} understand that McKean is under obligation to not take
advantage of his position as their attorney. They further understand that
they have the right and opportunity to have this agreement reviewed by
another attorney or by anyone of their choosing to determine if it is fair
and in their best interest.
Ex. 3.
The ownership of the funds issued from McKean's trust account is somewhat
confused. Initially, McKean's bookkeeper debited this $11,128.25 from the
ledger of another client for whom he held funds - DiPaula.4 In the fall of
1997, McKean instructed his bookkeeper to instead debit the loans from
another client's ledger - that of the Bergman Estate. McKean maintains he
had authority as personal representative of that estate to loan the money
from the Bergman Estate to the Company as part of his nonintervention
powers. These amounts were to be short-term loans and to carry 12 percent
interest. He did not notify either the Bergman Estate heirs or DiPaula of
these transactions. McKean also did not prepare or have executed any
documents evidencing the loans or terms of repayment, or provide security.
After the Martins received financial help from McKean, they refused to
dismiss the bankruptcy. Because of the ongoing bankruptcy, McKean did not
perfect the corporation. McKean testified there were no officers, bylaws,
or bank accounts. Nevertheless, the hearing examiner found McKean treated
the Company as a separate entity throughout the relevant time period.
McKean personally guaranteed many of the Company's financial obligations
and continued to pay its expenses. E.g., RP at 45.

The hearing examiner concluded that '{a}t the time the $11,128.25 loans to
Martin were made, {McKean} knew or could, with minimal effort, have known
that Jim Martin had a very poor reputation and financial record.' DP at
10. For example, the Martins were previously sued in bankruptcy court for
double selling silage for $185,000. The Martins also had filed a prior
Chapter 12 bankruptcy about eight months before McKean's involvement, which
was dismissed for failure to file monthly reports. Furthermore, McKean
testified he believed the Martins lied to him about dismissing the current
bankruptcy in order to receive money from McKean.

Despite this knowledge of the Martins' untrustworthiness, McKean did not
withdraw from the business with them. Instead, McKean believed he had to
continue his role in the Company to protect his financial investment in the
Martins' farming enterprise. In August 1997, McKean received $10,000 on
behalf of the Company and deposited it in his trust account under the
Company's ledger balance. He issued seven checks debited from the
Company's ledger in his trust account totaling $9,500. One of these was a
check to McKean Law Office for $5,000, which was reimbursement for expenses
he paid for the benefit of the Company. McKean admitted during his
hearing, however, that he was owed only $4,180.98. He thus overpaid
himself $819.02. In addition, McKean still owed the Bergman Estate
$11,128.25 plus interest for the previous loans to the Martins.
In November 1997, McKean realized that neither the Martins nor the Company
would be able to repay the trust account funds McKean lent to them. As a
result, he borrowed approximately $23,000 and paid off the Company's
expenses and reimbursed the Bergman Estate funds with interest.
The Martins dismissed McKean and hired another bankruptcy attorney on
August 20, 1997. The Martins' new attorney and bankruptcy trustee became
aware of McKean's activity in forming the Company and alerted the WSBA,
which ordered an audit of McKean's books.

In November 1999, an auditor from the WSBA audited McKean's trust
account. The auditor discovered McKean's bookkeeping in disarray. There
were errors and changed entries. Some of the deficiencies included writing
checks before the funds to cover them were deposited in the account (McKean
testified the checks never were dispersed until the funds were deposited in
the account); carrying negative ledger balances of $323.32 from July 1,
1996 to September 12, 1996; $262.47 on May 29, 1998; and $310.06 between
July 30 and August 1, 1997. On his own initiative, McKean has turned
management of his trust account over to another attorney.

Unrelated to his representation of the Martins, McKean used his trust
account as his firm's general business account for approximately two weeks
in September 1996. McKean does not dispute this but contends this period
was shorter than two weeks. Lawyer's Br. at 22; RP at 402.

COMPLAINT

The WSBA filed a three-count complaint against McKean. Count I
charged that McKean's 'conduct in failing to preserve the integrity of
client funds and/or Respondent's use and/or conversion of client funds
without the proper authority and/or consent violates RPC 1.14 (requires
lawyer to preserve the integrity of client funds) and/or RPC 8.4(c)
(engaging in deceitful conduct), and subjects Respondent to discipline
pursuant to RLD 1.1(i).' Clerk's Papers (CP) at 31.
Count II charged that McKean's 'conduct in disobeying the obligations under
the Bankruptcy Code sections 363 and 364 in connection with the formation
and operation of American Hay violated RPC 3.4(c) (disobeying an obligation
under the rules of a tribunal) and/or RPC 8.4(c) (engaging in deceitful
conduct), and subjects Respondent to discipline pursuant to RLD 1.1(i).
CP at 32.

Count III charged that McKean's 'conduct in engaging in business
transactions with the Martins during the period that he represented them
violated RPC 1.8(a) (conflict of interest) and/or RPC 1.8(e) (advancing
funds to a client during the period that the lawyer represents the client)
and/or RPC 1.8(j) (prohibits a lawyer from acquiring a proprietary interest
in the subject matter of litigation) and/or 1.7(b) (conflict of interest
rules), and subjects Respondents to discipline pursuant to RLD 1.1(i).' CP
at 32. HEARING EXAMINER'S CONCLUSIONS AND RECOMMENDATIONS
After a disciplinary hearing, the hearing examiner concluded McKean dealt
improperly with client funds by making the loans to the Martins and the
Company, in violation of RPC 1.14. The hearing examiner concluded that
McKean knew or should have known he was 'dealing improperly with other
clients' money' when he loaned the $11,128.25 to 'a debt ridden,
uncreditworthy client without any documentation or due diligence.' DP at
11.

The hearing examiner further found bookkeeping irregularities, which
compounded the violation of RPC 1.14:
The posting of deposits and disbursements within the trust account was
inaccurate. Credits and debits within sub-accounts were riddled with
errors. There is no proof that the trust account had a negative bank
balance (as distinguished from a ledger balance) or that a client failed to
receive his or her funds. * * * The noted deficiencies evidence that the
maintenance of the trust account was slipshod and erratic. The
deficiencies were not deliberate but rather the result of poor trust
account procedures and lack of oversight, for which Respondent accepts
responsibility.
DP at 14.

The hearing examiner also concluded McKean violated RPC 1.8(a) when he
impermissibly engaged in a business with the Martins by acquiring an
interest adverse to theirs and not making a full disclosure of the conflict
of interest. In particular, the hearing examiner stated McKean 'did not
sufficiently inform the Martins of the risks inherent in having their
attorney as a business associate. The agreement is not specific about the
disadvantages of such a relationship.' DP at 9. This lack of detail would
not have allowed an independent attorney reviewing the agreement to give
the Martins meaningful advice, 'thus depriving the Martins of making an
informed consent.' DP at 9.
The hearing examiner dismissed charges in Count II relating to violations
of the bankruptcy code and all other charges.5 The hearing examiner
recommended McKean's suspension from the practice of law for one year.
Upon completion of the suspension, the examiner recommended six months
probation, on the condition McKean not practice law until he demonstrates a
familiarity in managing trust accounts and completes 10 hours of continuing
legal education credits on conflicts of interest.

The Board adopted the hearing examiner's findings and conclusions. By
a
vote of seven to three, the Board reduced McKean's suspension
recommendation from one year to six months, followed by six months of
probation with the conditions recommended by the hearing examiner. The
dissenters would have adopted the hearing examiner's recommended one year
suspension.

ANALYSIS
We have plenary authority over, and hold the ultimate responsibility for,
determining the nature of lawyer discipline. In re Disciplinary Proceeding
Against Tasker, 141 Wn.2d 557, 565, 9 P.3d 822 (2000). We have, however,
delegated certain responsibilities to the WSBA. In re Disciplinary
Proceeding Against Heard, 136 Wn.2d 405, 413-14, 963 P.2d 818 (1998). A
hearing examiner makes findings of fact, conclusions, and initial
recommendations to the Board. Heard, 136 Wn.2d at 413-14. The Board
reviews the hearing examiner's decision and enters its order, which can
then be appealed to us. Heard, 136 Wn.2d at 414.

CHALLENGES TO THE FINDINGS OF FACT
Initially, McKean challenges seven findings of fact. Lawyer's Brief at 18-
22. When unanimously approved findings are challenged, as they are here,
this court will generally not disturb them if they are supported by a clear
preponderance of the evidence. RLD 4.11(b);6 In re Disciplinary Proceeding
Against Halverson, 140 Wn.2d 475, 483, 998 P.2d 833 (2000). McKean does
not truly challenge the evidentiary support for the findings to which he
objects. Instead he reargues explanations and versions of the facts
rejected by the hearing examiner. Lawyer's Br. at 20-25.

McKean first assigns error to two findings which state he made loans from
his trust fund without the owners' permission or documentation.7 McKean
does not dispute that he made undocumented loans to the Martins or that the
money came from his trust account. Instead, he argues that the loans to
the Company were never debited from the DiPaula account.8 Yet, McKean
admitted that his secretary initially debited the DiPaula account because
she assumed the checks he wrote the Martins were part of his fees from a
settlement check he had recently received on behalf of DiPaula. He also
conceded that he allowed his former lawyer to argue during a prior hearing
in bankruptcy court that McKean intended the money to come from his share
of a client's settlement check. Then, when pressed during his disciplinary
hearing on whether he ever intended to use DiPaula funds for the Company,
McKean disavowed his lawyer's prior statement, claiming, '{t}hat was not my
answer. That was my attorney's answer.' RP at 47. This factual challenge
is therefore without merit and of questionable relevance to whether McKean
mismanaged client funds.

In his fourth assignment of error, McKean contests the finding that he
overpaid himself by $819.02. Lawyer's Br. at 21. Again, he does not show
this is unsupported by a clear preponderance of the evidence.
McKean's fifth, sixth, and seventh assignments of error challenge findings
of accounting discrepancies in McKean's trust account ledger. Lawyer's Br.
at 22-23. McKean contends the auditor looked only at copies of the ledger
and did not examine canceled checks. Revised Reply Brief at 5. He further
argues the hearing examiner took the findings from the auditor's report
without exercising independent judgment. This argument is belied by the
fact that the hearing examiner did not believe the auditor's testimony that
she had only been provided with photocopies. The examiner found '{t}he
auditor filed a written report dated November 30, 1999 in which there is no
mention of being given photocopies . . . ' DP at 13. The record indicates
the hearing examiner exercised independent judgment regarding the auditor's
report; therefore this argument fails.

Because the hearing examiner has fact-finding authority, we defer to those
findings of fact unless they are not supported by a clear preponderance of
the evidence. RLD 4.11(b). Because our review of the record confirms the
unanimously adopted findings are supported by the evidence, we reject
McKean's challenges.

RPC 1.14 - LOANS FROM MCKEAN'S TRUST ACCOUNT
The most serious charge against McKean involves the loans he made from
his trust account to American Hay Company. The complaint alleged this
violated RPC 1.14, and the hearing examiner and Board agreed.
RPC 1.14 provides the minimum requirements for a lawyer's fiduciary
responsibility when handling clients' funds and property. See generally
RPC 1.14; see also RPC Preliminary Statement. For example, RPC 1.14
requires a lawyer, inter alia, to deposit clients' funds in a trust
account, separate from the lawyer's own funds. RPC 1.14(a). The rule also
requires a lawyer to provide the client with documentation for the receipt
of the funds and to '{m}aintain complete records of all funds, securities,
and other properties of a client coming into the possession of the lawyer
and render appropriate accounts to his or her client regarding them . . .
.' RPC 1.14(b) (1), (3).
RPC 1.14, however, also encompasses a duty of care beyond these minimum
standards. As several commentators on professional responsibility
have recognized,9 ''{a}n attorney who accepts the responsibility of a
fiduciary
nature is held to the high standards of the legal profession whether or not
he acts in his capacity of an attorney.'' Annotated Model Rules of
Professional Conduct, 230-31 (Center for Professional Responsibility,
American Bar Association, 4th ed. 1999) (discussing model rule 1.15 and
quoting Ridge v. State Bar, 47 Cal. 3d 952, 766 P.2d 569, 574, 254 Cal.
Rptr. 803 (1989)). 'Lawyers sometimes forget that the dangers of
commingling are not merely that the lawyer will squander the money
'borrowed' from a trust account and not be able to restore it, but that the
commingled funds might be subject to attachment by a lawyer's creditors,
thus preempting the lawyer's ability to do so.' Geoffrey C. Hazard, Jr. &
W. William Hodes, The Law of Lawyering: Handbook on the Model Rules of
Professional Conduct sec. 19.4 (3d ed. 2001& Supp. 2002). 'Commingling
and, to a lesser extent, conversion frequently result from bad bookkeeping
rather than an intent to take the money.

ABA/BNA Lawyer's Manual on Professional Conduct 45:303 (2002).
RPC 1.14 thus requires more than merely keeping track of or not stealing
client funds. A lawyer's duty to be honest and use good professional
judgment is a higher standard than merely not breaking the law. Cf.
Seventh Elect Church in Israel v. Rogers, 102 Wn.2d 527, 534, 688 P.2d 506
(1984) (the ethics rule of attorney-client confidentiality is a higher
standard than the statutory attorney-client privilege). 'Lawyers are held
to higher standards of moral conduct than are other citizens.' In re
Disciplinary Proceeding Against Krogh, 85 Wn.2d 462, 488, 536 P.2d 578
(1975). A lawyer's ethical duties are not merely toward his clients. A
lawyer's obligation 'to protect . . . property. . . and to exhibit the
highest standards of honesty and integrity' extends to the public as well
as to the lawyers' clients. In re Disciplinary Proceeding Against McGough,
115 Wn.2d 1, 11, 793 P.2d 430 (1990).

We hold that RPC 1.14 encompasses the extreme care, caution, and good
judgment required of a lawyer when handling a client's property. A lawyer
has the highest fiduciary duty to steward his client's funds with the
utmost care, transparency, and prudence. Although the duty not to self
deal client funds is explicitly addressed elsewhere in the Rules of
Professional Conduct,10 RPC 1.14 implicitly includes the duty not to use a
lawyer's trust account as a personal bank. A lawyer thus violates RPC 1.14
by loaning money held in trust to the lawyer's own business ventures or
those of the lawyer's business associates, or to other clients.
Here, McKean violated RPC 1.14 when he loaned client money held in trust to
his own business venture with another client. This act alone was an
ethical violation requiring the imposition of sanctions. McKean compounded
the seriousness of the violation by not securing or accurately documenting
the 'investment' in a venture that he knew, or should have known, to be a
poor business risk, and by not providing notice to those with an interest
in the funds. McKean's sloppy accounting practices not only further
obscured the loans to the Company, but jeopardized all of the client funds
he held in trust. McKean ultimately reimbursed with interest the client
funds he borrowed, but he endangered the funds entrusted to him and
violated the high fiduciary duty owed his clients. We therefore affirm
that McKean violated RPC 1.14 and the high standards of professional
judgment and fiduciary duty that rule encompasses.

We reject McKean's assertion that he had legal authority to make the loans
as personal representative of the Bergman Estate under RCW 11.100.020.11 We
also reject McKean's argument he did not have a duty to the heirs of the
estate because they were not his clients.12 These arguments miss the point.
McKean's loans of client funds held in trust violated RPC 1.14 despite any
legal authority McKean had to invest the money of the Bergman estate.
Accord In re Levinson, 96-1379 (La. 12/6/96), 685 So.2d 105 (making
speculative and unsecured loans with trust funds to business associates and
friends was grossly negligent and in reckless disregard of fiduciary
duties, despite no evidence of intentional misconduct or dishonest motive).
In sum, McKean's loan of client money held in trust alone violates RPC 1.14
and requires the imposition of sanctions. McKean compounded this violation
by not providing security or documentation for the loans and by his poor
accounting practices. We also affirm the undisputed conclusion that McKean
violated RPC 1.14 when he commingled client funds held in trust with his
own money for approximately two weeks in 1996, as well as his undisputed
violation of RPC 1.8(a) when he failed to adequately disclose to the
Martins his conflict of interest.

VIOLATIONS OF RPC 1.7(b) and 8.4(c)
The WSBA argues that the hearing examiner erred in dismissing the RPC
1.7(b) and 8.4(c) charges. Answering Brief of WSBA at 15-17.
While we agree with the hearing examiner's conclusion that the WSBA failed
to prove that McKean's representation of the Martins violated RPC 1.7(b),
the evidence does establish that his representation of the Bergman Estate
violated the rule.
RPC 1.7(b) provides:
A lawyer shall not represent a client if the representation of that client
may be materially limited by the layer's responsibilities to another client
or to a third person, or by the lawyer's own interests, unless:

(1) The lawyer reasonably believes the representation will not be
adversely affected; and
(2) The client consents in writing after consultation and a full
disclosure of the material facts . . . .

We hold that the evidence establishes that McKean's representation of the
Bergman Estate may have been materially limited by his own financial
interest in the Company.
McKean loaned money held in trust for the Bergman Estate to the Company.
Not only was the Company in financial need, but McKean held a majority
interest in the Company. Furthermore, he never informed the Bergman
Estate's heirs that he loaned money held in trust for the Estate. The
hearing examiner found that he 'knew or should have known he was dealing
improperly with other clients trust money.' DP at 11.

RPC 1.7(b) allows for a lawyer to represent a client when a potential
conflict of interest exists only if the lawyer 'reasonably believes the
representation will not be adversely affected' and 'the client consents in
writing after consultation and a full disclosure of the material facts . .
. .' The first condition of consent is measured by whether 'a
disinterested lawyer would conclude that the client should not agree to the
representation under the circumstances,' and if so, 'the lawyer involved
cannot properly ask for such agreement or provide representation on the
basis of the client's consent.' Annotated Model Rules of Professional
Conduct Rule 1.7, Comment {5} (discussing Model Rule 1.7 which is
substantially similar to RPC 1.7).

It was not reasonable for McKean to believe that his representation of the
Bergman Estate would not be adversely affected under these circumstances.
McKean loaned the Estate's money, without any disclosure of the transaction
to the Estate, to a company in which he held a majority interest and which
was in desperate need of financial support. A disinterested lawyer would
conclude that the Bergman Estate should not agree to the representation.
Second, even if it was reasonable for McKean to believe that his interest
in the Company would not adversely affect his representation of the Bergman
Estate, the rule requires a lawyer to receive client consent 'in writing
after consultation and a full disclosure of the material facts . . . .'
RPC 1.7(b). McKean completely failed to disclose the transaction to the
Estate's heirs; thus, they never gave consent to McKean to make the loans.
His representation of the Bergman Estate may have been materially limited
by his own financial interest in having the company receive the loans. We
hold that McKean violated RPC 1.7(b).

* * *

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