By Samson Habte
Nov. 26 --A lawyer who breached multiple fiduciary obligations while serving as executor of his father's estate is not subject to professional discipline for those acts because disciplinary authorities failed to show that his “[p]ersonal misconduct” violated a specific ethics rule, a divided Illinois Supreme Court held Nov. 15 (In re Karavidas, Ill., No. 115767, 11/15/13).
Writing for a 5-2 majority, Chief Justice Rita Garman acknowledged that the lawyer committed several “wrongful” acts that breached his common law fiduciary duties to the estate and its beneficiaries--including using as a “personal line of credit” a trust in which he had only an unvested, future interest.
But “the fiduciary duty in this case did not arise from an attorney-client relationship and [thus] did not violate a specific” ethics rule, Garman said. “Personal misconduct that falls outside the scope of the [Illinois] Rules of Professional Conduct may be the basis for civil liability or other adverse consequences, but will not result in professional discipline,” she explained.
Justice Robert Thomas, in a dissent joined by Justice Lloyd Karmeier, argued that “an attorney absolutely may be disciplined for misconduct that is not specifically set forth our Rules of Professional Conduct.”
“That was this court's express holding in [In re Rinella, 677 N.E.2d 909 (Ill. 1997)],” Thomas argued, “and it is a policy clearly reflected” in the supreme court's rules, he said.
In 2000, attorney Theodore George Karavidas was named executor of his father's estate. He was also named as a successor trustee and, as one of two children, he also was a beneficiary of the estate.
The estate was valued at approximately $700,000, which assets largely consisted of money held in investment accounts and a family restaurant.
Karavidas was directed to funnel his father's investment money into an existing trust, and then create and fund two new trusts with that money: a family trust of $675,000 (the maximum federal estate tax exemption at the time), and a marital trust that would hold the remaining assets for the benefit of Karavidas's mother.
Upon exhaustion of the marital trust, the principal of the family trust was to be used for the mother's support. But Karavidas was also authorized to distribute family trust assets for the “health, support or education” of himself and his sister.
Karavidas was instructed to “give primary consideration” to his mother's needs when making distributions from the family trust. Any assets remaining at his mother's death were to be distributed equally to Karavidas and his sister.
However, Karavidas's mother retained the power to appoint “any one or more” of her husband's children and their spouses to take the principal of the family trust upon her death. “Thus, it was not certain that either [Karavidas] or his sister would ever receive any funds from this trust,” the court explained.
Karavidas did not create the two trusts. Instead, he left his father's investment accounts intact, and, over the next five years, conducted numerous transactions on those accounts.
That included nearly $400,000 in withdrawals for Karavidas's own use, which were eventually replenished. Karavidas--who was authorized under the will to administer the estate without court approval--would later say that he believed his broad powers permitted him to make loans to himself.
Karavidas also used estate proceeds to buy his mother a Mercedes, pay her health insurance and taxes, make loans to the family restaurant, contribute to his sister's retirement, and pay his sister approximately $20,000.
In 2006, a family dispute led Karavidas's sister to retain counsel and move to terminate her brother's powers on the grounds that he failed to circulate an inventory of estate assets or an account of his administration.
Three years later, the administrator of the Illinois Attorney Registration and Disciplinary Commission (ARDC) filed a complaint alleging that Karavidas converted estate funds and breached his fiduciary duty. The complaint alleged violations of two Illinois Rules of Professional Conduct: Rule 8.4(a)(4) (conduct involving dishonesty, fraud, deceit or misrepresentation), and Rule 8.4(a)(5) (conduct prejudicial to the administration of justice).
The complaint also alleged that Karavidas “violated” Illinois Supreme Court Rule 770, which states: “Conduct of attorneys which violates the Rules of Professional Conduct … or which tends to defeat the administration of justice or to bring the courts or the legal profession into disrepute shall be grounds for discipline by the court.”
A hearing board found that Karavidas engaged in self-dealing, and thus violated his fiduciary duty, by authorizing “loans” to himself out of the estate. The board said that the self-dealing was not excused by the fact that Karavidas used estate funds to benefit his mother and sister, or by the fact that he repaid the funds he borrowed.
The hearing board also found that Karavidas committed conversion. It concluded that because Karavidas's failure to “follow correct procedures … eventually became the subject of court proceedings,” his conduct was prejudicial to the administration of justice in violation of Rule 8.4(a)(5), and it tended “to defeat the administration of justice” in violation of Supreme Court Rule 770.
However, the hearing board concluded that Karavidas did not act dishonestly in contravention of Rule 8.4(a)(4) because he “did not intend to deceive or to defraud the estate,” took “no affirmative steps to conceal his actions,” and repaid the amounts he borrowed more than a year before his actions were reported to the ARDC.
The hearing board recommended that Karavidas be suspended from the practice of law for four months. Both the administrator and Karavidas appealed.
A review board reversed the decision and recommended that the charges be dismissed. The administrator, it said, did not prove that Karavidas violated the lawyer ethics rules when he committed the alleged conversion and breach of fiduciary duty. The court agreed with the review board.
The court said that sufficient evidence supported the conclusion that Karavidas breached his fiduciary duty to the estate. However, it decided that Karavidas's “civil offense,” for which “a civil remedy is available to aggrieved parties,” was not “a proper basis for professional discipline in this case.”
Because Karavidas's actions occurred outside his professional capacity, the ethics rules he was charged with violating were not implicated, the court found.
The charge that Karavidas “violated” Illinois Supreme Court Rule 770 was also untenable, the majority concluded. “Rule 770 is a procedural rule of this court,” Garman said, and it “cannot support a separate charge against an attorney because it is not a Rule of Professional Conduct; it governs the types of discipline that may be imposed upon a showing of a violation of a Rule.”
“In sum, before professional discipline may be imposed under Supreme Court Rule 770, the Administrator must demonstrate that the attorney violated the Rules of Professional Conduct,” Garman stated. “To the extent that any of our prior cases suggest that an attorney may be subjected to professional discipline for conduct that is not prohibited by the Rules of Professional Conduct or defined as misconduct therein, we hereby reject such a suggestion.”
Thomas's dissent took issue with the proposition that Karavidas “is immune from professional discipline because none of his misconduct violated a specific Rule of Professional Conduct.”
“The problem with the majority's reasoning is that this court has not merely suggested that an attorney may be subjected to professional discipline for conduct that is not specifically prohibited by the Rules of Professional Conduct,” Thomas said. “On the contrary, this court has expressly held as much.”
Thomas said that Rinella, a 1997 disciplinary case, “makes crystal clear” that “attorneys may be sanctioned for engaging in misconduct that is not 'specifically proscribed by a disciplinary rule.'” The Rinella court “explained that 'the standards of professional conduct enunciated by this court are not a manual designed to instruct attorneys what to do in every conceivable situation,'” Thomas said.
“Although it is nowhere mentioned by the majority, Rinella is of paramount importance in this case,” he added, saying the majority's ruling was “untenable” when that case is considered.
Samuel A. Kavathas Jr. of Kavathas & Castanes, Chicago, represented Karavidas. Steven R. Splitt, Chicago, represented the ARDC.
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Copyright 2013, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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