In the Matter of James C. Wollrab
No. 17SA165
The Supreme Court of the State of Colorado
June 25, 2018
2018 CO 64
Original Proceeding in Discipline, Appeal from the Office of the Presiding Disciplinary Judge 16PDJ062. Judgment Affirmed in Part and Reversed in Part en banc.
ADVANCE SHEET HEADNOTE
June 25, 2018
2018 CO 64
No. 17SA165, In the Matter of James C. Wollrab—Colorado Rules of Professional Conduct—Attorney Discipline—
In this attorney-discipline proceeding, the supreme court is confronted with questions as to what Colorado Rules of Professional Conduct 1.8 and 4.2 require of an attorney who enters into a business relationship with his client. The supreme court concludes that the attorney violated Rule 1.8(a)(1) when he signed a lease with his client‘s company without complying with any of Rule 1.8(a)‘s prophylactic requirements. The supreme court also concludes that the attorney violated Rule 1.8(a)(3) when he entered into an option agreement with his client without obtaining his client‘s informed, written consent to his role in the deal.
Finally, because the attorney had the implied consent of his client‘s independent counsel for the purposes of the option agrеement, the supreme court concludes that he did not violate Rule 1.8(a)(1) or (2) or Rule 4.2 in that transaction. The supreme court remands the case to the Hearing Board for determination of the appropriate sanction in light of the court‘s conclusions.
2 East 14th Avenue • Denver, Colorado 80203
2018 CO 64
Supreme Court Case No. 17SA165
Original Proceeding in Discipline
Appeal from the Office of the Presiding Disciplinary Judge 16PDJ062
In the Matter of James C. Wollrab
Judgment Affirmed in Part and Reversed in Part
en banc
June 25, 2018
Attorneys for Complainant–Appellee:
James C. Coyle, Attorney Regulation Counsel
Jacob M. Vos, Assistant Regulation Counsel
Denver, Colorado
Attorneys for Respondent–Appellant:
Fennemore Craig, P.C.
Troy R. Rackham
Denver, Colorado
JUSTICE HART delivered the Opinion of the Court.
¶2 We conclude that the Hearing Board correctly determined that Wollrab violated Rule 1.8(a) when he signed a lease with his client‘s company. We also agree that Wollrab violated Rule 1.8(a)(3) when he entered into an option agreement with his client without obtaining his client‘s informed, written consent to his role in the deal. Because Wollrab had the implied consent of his client‘s independent counsel for the
I. Facts and Procedural History
¶3 Wollrab was admitted to the Colorado bar in 1972. In 1975, he opened his own litigation firm in Boulder, Colorado, taking both criminal and civil cases.
¶4 Laszlo and Wendy Bagi (“Laszlo Bagi” or “Bagi,” and “Wendy Bagi,” respectively, and “Bagis,” collectively) run a residential and commercial HVAC business, Bagi Mechanical, in Boulder. Since 1991, Wollrab has represented the Bagis in a variety of legal matters, and he had an attorney–client relationship with them at all times relevant to this case. Bagi considered Wollrab his attorney “in everything,” except for matters outside of his expertise. For instance, the Bagis usually hired Clark Edwards, a corporate attorney, as counsel for their more complex business transactions. In addition, Wollrab and the Bagis spent holidays together, and Wollrab and Bagi were drinking buddies. Their attorney–client relationship was informal: they established a barter arrangement for their services in 2009, in which Wollrab “intuitively” kept track of the balance between the two.
¶5 The Bagis ran Bagi Mechanical out of leased offices in an industrial space on the outskirts of Boulder (“the Foothills property“). In 2010, the Bagis formed Foothills Management Group, LLC (“FMG“), which, at Wollrab‘s recommendation, obtained an option to purchase the Foothills property. To exercise the option, FMG had to provide
¶6 On April 19, 2011, Wollrаb, Bagi, and Edwards met for two hours to discuss the deal and to hash out the terms of an option for Wollrab‘s investment. They agreed that for $50,000, Wollrab would obtain an option for a fifty percent ownership in BWI, LLC—a new company to which FMG would assign its option on the Foothills property—which could be exercised for an additional contribution of $150,000. Edwards understood that Wollrab would thus be providing the funds to exercise the original FMG purchase option.
¶7 Wendy Bagi had tendered a check to exercise FMG‘s purchase option on April 15, 2011, which was the last day the option could be exercised. On April 19, however, that check was returned for insufficiеnt funds. To keep the option alive, the Bagis needed to provide $50,000 that very day. Thus, only hours after his meeting with Wollrab and Edwards, Bagi came to Wollrab‘s office, urgently needing $50,000. Wollrab attempted to call Edwards in order to have him draft a document reflecting the payment of $50,000, but could not reach him. Wollrab then quickly drafted the
Laszlo Bagi and [FMG] has [sic] a contract to purchase 105 acres known as Foothills Business Park . . . . Laszlo Bagi and [FMG] is grants [sic] an option to James C. Wollrab to purchase fifty percent undivided interests [sic] in the property for $150,000.00 to be exercised at Mr. Wollrab‘s discretion at any time within the next ten years. Until the option is exercised, Laszlo Bagi and [FMG] and any of their assigns, successions [sic] in interest, partners, or joint ventures agree that the property will be rented under the management of Laszlo Bagi for not less than $60,000 month [sic] until the note and deed of trust are paid . . . for approximately 2.4 million dollars.
Wollrab believed the Option to be a binding document to protect his investment and intended to rely on it if needed. Wollrab drafted a check for $50,000, which Bagi took. Wollrab emailed and faxed the signed Option to Edwards that same day. Edwards did not respond or object to either the email or the fax.
¶8 Weeks after Wollrab and Bagi signed the Option, Wollrab sent an email to Edwards that stated, in pertinent part:
This letter is my offer to have a business relationship with Laszlo Bagi. I need an acknowledgment that Laszlo Bagi has been a client of mine for several years. That this proposal to buy real estate together was not part of any of the legal work that I did for Mr. Bagi. . . . Your firm is representing him throughout the negotiations and your firm is drafting the closing documents for the purchase and the closing documents between myself and your clients . . . .
Ultimately, the deal to have FMG or BWI purchase the Foothills property fell through. A month later, Bagi purchased the property via a new entity, Green Hill Investments, LLC (“GHI“). Bagi was both part-owner and manager of GHI. Wollrab was not a party to this new deal.
¶10 Wollrab took GHI‘s standard lease and “cut out everything that didn‘t apply,” reducing it to one page (the “Lease“). Wollrab excised every standard tenant commitment that аppeared in the standard lease, including tenant obligations to pay a security deposit, to secure insurance, to pay a pro rata share of utilities, to obtain consent to sublease or assign, to waive rights to recovery against the landlord for loss or damage on the premises, and to comply with the law. He also removed landlord protections from the standard lease, including the right to cancel the lease in the event of condemnation or casualty, remedies available upon tenant‘s default, and—critical to later events—a clause providing that the parties would not record the lease. Wollrab also added several key, unusual provisions that added additional obligations to GHI: requirements to keep the building “clean and professional“; to make improvements to
¶11 Bagi, as manager for GHI, signed the Lease. Wollrab never advised Bagi to consult another attorney about the Lease‘s terms, nor did he obtain Bagi‘s informed, written consent to the essential terms of the Lease or his role in the transaction.
¶12 In 2014, Wollrab and the Bagis had a falling out stemming from Wollrab‘s use of the property. After this dispute, Wollrab recorded the April 2011 Option and the Lease against GHI,2 clouding title to the Foothills property. The parties then sued each other in three different actions, which were eventually consolidated and later settled.
¶13 Attorney Regulation Counsel filed a disciplinary complaint, alleging that Wollrab violated Rule 1.8(a) (providing thаt an attorney should not enter into a business transaction with a client or acquire a possessory or pecuniary interest adverse to a client unless the terms are fair and fully disclosed, the client is advised in writing and given an opportunity to obtain independent legal counsel, and the client gives informed consent to the attorney‘s role in the transaction) when he entered into both the Option and the Lease without following the Rule‘s requirements. The complaint further
¶14 After a three-day hearing, the Hearing Board3 concluded that Wollrab had violated Rule 1.8(a) when he entered into both the Lease and Option without complying with the Rule‘s requirements.4 The Board also concluded that Wollrab violated Rule 4.2‘s prohibition against communicating with a represented party when he drafted the Option for Bagi‘s signature. For these violations, the Board imposed a sanction of suspension from practice for one year and one day.
¶15 Wollrab filed a motion for post-judgment relief, which the Board denied. Wollrab then petitioned this court to review the Board‘s Opiniоn under
II. Analysis
¶16 Wollrab argues that the Hearing Board misconstrued Rule 1.8 to apply to the Lease, which was not a transaction with a client, but a transaction with a non-client corporate entity (albeit one that was partially owned by a client). Wollrab also contends that the Board erred in applying Rule 1.8 to the Option, as the overarching deal of which the Option was a part was never consummated, and therefore the Option itself
A. Standard of Review
¶17 “This court has exclusive jurisdiction over attorneys and the authority to regulate, govern, and supervise the practice of law in Colorado to protect the public.” In re Kleinsmith, 2017 CO 101, ¶ 11, 409 P.3d 305, 308 (internal quotation marks omitted) (quoting Colo. Supreme Court Grievance Comm. v. Dist. Court, 850 P.2d 150, 152 (Colo. 1993)), cert. denied sub nom. Kleinsmith v. Colorado, 138 S. Ct. 1559 (2018). In this role, we have the plenary power to “review any determination made in the course of a disciplinary proceeding.”
¶18 We generally overturn factual findings of the Board only if they are clearly erroneous. Kleinsmith, ¶ 11, 409 P.3d at 308 (citing
B. Rule 1.8(a)
¶19 The Colorado Rules of Professional Conduct include general prohibitions on conflicts between a lawyer‘s own personal interests and those of his current or former clients. See
1. The Lease
¶20 Wollrab argues that Rule 1.8(a) applies exclusively to transactions between an attorney and his client and that the Board therefore erred in applying it here. We disagree.
¶21 Although Bagi (as GHI‘s manager) signed the Lease, it was formally a transaction between Wollrab and GHI and not between Wollrab and Bagi. Wollrab is correct that GHI itself was not his client at the time of the Lease. The Lease thus was not a “business transaction with a client.” But Rule 1.8(a) does not stop at putting guardrails around lawyers transacting business directly with their clients. It also appliеs its prophylactic requirements to situations in which an attorney “knowingly acquire[s] [a] . . . possessory . . . interest adverse to a client.”
¶22 The Board found that Wollrab was aware that the Bagis “owned a substantial interest in GHI” and “knew that he was acquiring a possessory interest adverse to both GHI and the Bagis.” Wollrab argues that the Board incorrectly presumed that Bagi and GHI were the same. We disagree. The Bagis partially owned GHI and Laszlo Bagi managed the company. The edited Lease omitted standard landlord protections and added provisions that were unusually protective of Wollrab‘s rights as a tenant. Any
¶23 The Hearing Board properly determined that Rule 1.8(a) applied to the Lease because the Lease gave Wollrab a possessory interest that was adverse to his clients. Because Wollrab does not contest the Board‘s determination that he failed to properly follow any of the three prophylactic requirements, we agree with the Board‘s conclusion that he violated Rule 1.8(a) with regards to the Lease.
2. The Option
¶24 We next turn to whether Wollrab violated Rule 1.8 when he entered into the Option with Bagi. As an initial matter, we must determine whether Wollrab and Bagi entered into a “business transaction” that would trigger Rule 1.8(a)‘s prophylactic requirements.
¶25 In Wollrab‘s view, the Hearing Board erred in looking to the Option as a “business transaction” because it was only part of a larger deal to purchase the Foothills property. And since the larger deal ultimately failed, he argues, Rule 1.8(a) cannot
¶26 When the larger Foothills deal fell apart, the Option remained as a consummated contract that affected Wollrab and Bagi‘s financial and economic interests. In exchange for $50,000—which he needed immediately—Bagi gave Wollrab valuable consideration: a ten-year opportunity to buy a 50% stake in a potentially much more valuable endeavor. Although the Option‘s condition subsequent never came to fruition, this does not change the fact that at the time the Option was entered into, it was a binding, complete document that affected both parties’ financial and economic interests. Certainly, the parties’ extensive litigation around the Option and the fact that they entered into a monetary settlement in part because of the Option demonstrates that they believed the Option affected their financial interests. Entering into the Option was thus sufficient to trigger Wollrab‘s obligations under Rule 1.8(a).
¶27 To what extent, then, did Wollrab comply with those obligations in the context of the Option? Rule 1.8(a)(1) requires that the terms of the deal be reasonable, fair, and explained to the client clearly; Rule 1.8(a)(2) requires that the client be notified of his right to consult with an independent attorney; and Rule 1.8(a)(3) rеquires that the client give informed consent in writing. These basic requirements are modified in an important way by Comment 4 to Rule 1.8(a):
If the client is independently represented in the transaction, paragraph (a)(2) of this Rule is inapplicable, and the paragraph (a)(1) requirement for full disclosure is satisfied either by a written disclosure by
the lawyer involved in the transaction or by the client‘s independent counsel. The fact that the client was independently represented in the transaction is relevant in determining whether the agreement was fair and reasonable to the client as paragraph (a)(1) further requires.
¶28 At the time Wollrab and Bagi entered into the Option, the Bagis were represented by Edwards, at Wollrab‘s urging. And as we will discuss further below, Edwards implicitly consented to Wollrab and Bagi‘s discussion about and signing of the Option. Thus, Bagi was represented for the purposes of the Option agreement, rendering Rule 1.8(a)(2) inapplicable. Moreover, the terms of the Option—which generally hewed to those discussed earlier that day between Wollrab, Bagi, and Edwards—were fully disclosed and transmitted in writing in a manner that could be understood by Bagi. The fact that the terms mirrored those discussed with Edwards earlier in the day also weighs in favor of the conclusion that they were fair and reasonable. Sеe
¶29 The Board made no finding, however, that Wollrab ever obtained Bagi‘s informed, written consent to the essential terms of the transaction or his role in it. And Comment 4 to Rule 1.8, which relieves a lawyer from his obligations under Rule 1.8(a)(1) and (2) when the client is represented by another attorney in the transaction, does not contain any suggestion that the lawyer is excused in that context
C. Rule 4.2
¶30 Wollrab next argues that the Hearing Board erred in concluding that he violated Rule 4.2 when he communicated with Bagi about the Option—including drafting a binding document for Bagi‘s signature—outside of Edwards‘s presence. He makes two arguments here: (1) Rule 4.2 by its plain language does not apply to an attorney who is acting as a participant or an investor in a business transaction; and (2) he did not violate Rule 4.2, even if it did apply, because he had the implied consent of Bagi‘s attorney, Edwards. Because we agree on the latter issue, we have no need to reach the former.
¶31 We begin again with the text of the Rule:
In representing a client, a lawyer shall not communiсate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.
¶32 The Board found that Edwards had “implicitly consented to . . . ongoing business discussions” between Wollrab and Bagi. Did that consent extend to Wollrab‘s drafting of the Option for Bagi‘s signature without Edwards‘s knowledge or review? The Board
¶33 As an initial matter, we must determine the correct standard of review for determining the extent or scope of implied consent. As discussed above, the Board‘s factual findings are binding on this court. See Lutz, 897 P.2d at 808. Thus, we can only question the Board‘s determination that Edwards‘s consent did not extend to the drafting and signing of legal documents if the inquiry into the scope of implied consent under Rule 4.2 is a legal one subject to de novo review.
¶34 We have not before addressed whether the scope of implied consent in this context is legal or factual. The one context in which we have previously considered this question is in evaluating whether a police search was reasonable under the Fourth Amendment based on whether it was within the scope of consent given by the defendant who was searched. See People v. Arapu, 2012 CO 42, ¶ 17, 283 P.3d 680, 684; People v. Minor, 222 P.3d 952, 955 (Colo. 2010). In that context, we have “delineate[d] between a clear error review of the facts and circumstances surrounding the charge and a de novo review of questions of law, including the scope of consent provided.” Minor, 222 P.3d at 955 (emphasis added) (citing Florida v. Jimeno, 500 U.S. 248, 251 (1991)). Under the Fourth Amendment, we concluded that “[r]eview of a trial court‘s order on the scope of a suspect‘s consent to search is a mixed question of fact and law.” Arapu, ¶ 17, 283 P.3d at 684 (citing Minor, 222 P.3d at 955).
¶36 In Miller v. Fenton, 474 U.S. 104, 113–17 (1985), the U.S. Supreme Court adopted a methodology for distinguishing questions of fact from questions of law. In that case, the Court was faced with the question of whether voluntariness of a confession was an issue of fact or law for purposes of determining whether a state court‘s conclusions should be presumed to be correct in a federal habeas review. Id. at 113. The Court laid out considerations for how to determine whether an issue is legal or factual when “the issue falls somewhere between a pristine legal standard and a simple historical fact.” Id. at 114. We find the Court‘s approach instructive for our purposes here.
¶37 Making this determination requires us to examine both “the nature of the inquiry itself” and practical considerations as to whether “one judicial actor is better positioned
¶38 Taking this approach here, we conclude that the inquiry into the scope of implied consent under Rule 4.2 is a mixed question of fact and law. An important aspect of the inquiry, of course, is the discernment of historical fact: observations about the parties’ interactions such as what they did or said in the particular situation. Those questions are factual in nature. But a determination that there was implied consent—and the scope of that consent—necessarily requires ascribing legal significance to those facts: namely, whether they give rise to an inference that a party has implicitly consented to a course of action. As such, we conclude that the inquiry into the scope of implied consent is a mixed question of fact and law. Thus, while we defer to the Board‘s findings as to the underlying facts, we review the Board‘s conclusions about the legal consequences of those facts de novo.
¶39 The Hearing Board correctly concluded that Edwards had implicitly consented to Wollrab and Bagi‘s continued communications about the Foothills transaction. The Board was incorrect, however, in limiting the scope of that consent to exclude the
¶40 Since we conclude that Edwards had implicitly consented to Wollrab‘s interactions with Bagi, including the drafting and signing of the Option, we reverse the Board‘s conclusion that Wollrab violated Rule 4.2.
III. Conclusion
¶41 We affirm the Hearing Board‘s determination that Wollrab violated Rule 1.8(a) as to the Lease. We also affirm the determination that Wollrab violated Rule 1.8(a)(3) when he entered into the Option with Bagi without obtaining his informed, written