Beery v. State Bar
239 Cal. Rptr. 121, 739 P.2d 1289, 43 Cal.3d 802 (1987)
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Rule of Law:
An attorney engaging in a business transaction with a client, where the attorney benefits, bears the burden of proving that the transaction was fair and reasonable to the client, that the client was fully advised of all material facts, and that the client had an opportunity to seek independent legal advice.
Facts:
- In November 1974, Robert L. Beery incorporated American Steel Painting Corporation for his client, Richard Coss, and in February 1975, represented the company in a dispute with the State of California.
- In June 1975, Coss was paralyzed in an automobile accident, and Beery, along with two associates, represented Coss in a personal injury action on a contingency fee basis.
- The personal injury action settled for approximately $250,000 in 1979-1980, with Coss receiving about $150,000 and Beery receiving approximately $20,000 as his share of the fee.
- In late 1980, Coss, who was not financially sophisticated, sought investment advice from Beery, whom he considered both his attorney and friend, specifically asking about 'fixed income' investments.
- During a meeting on February 25, 1981, arranged to discuss investments and Coss's will, Beery proposed that Coss invest $35,000 in C & D Satellite Systems, Inc. (Satellite), a venture Beery had incorporated, was a principal in, and knew was struggling financially, promising it was a 'good investment' and offering a personal guarantee.
- Beery visited Coss on March 1, 1981, with a promissory note for $35,000 from Satellite, which he personally guaranteed after Coss reminded him, but Beery did not disclose his full relationship with Satellite, its financial problems, its inability to obtain commercial financing, or advise Coss to seek independent counsel.
- Coss wrote a check for $35,000 to Satellite and gave it to Beery, believing Beery was acting as his attorney in recommending the loan.
- Satellite's project failed, Coss received no payments, and Beery failed to honor his personal guarantee after a default judgment was entered against him.
Procedural Posture:
- The State Bar of California initiated a disciplinary proceeding against petitioner Robert L. Beery.
- A State Bar Court hearing panel found that an attorney-client relationship existed and that Beery had violated rules of professional conduct and sections of the Business and Professions Code, recommending a five-year suspension, stayed, with a three-year actual suspension and restitution.
- The State Bar Court review department adopted the hearing panel's decision.
- The State Bar of California forwarded its recommendation to the Supreme Court of California for review.
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Issue:
Does an attorney violate rules of professional conduct and fiduciary duties by inducing a client to invest in the attorney's business venture without fully disclosing all material facts, including the attorney's financial stake and the venture's risks, and without advising the client to seek independent counsel?
Opinions:
Majority - THE COURT
Yes, an attorney violates rules of professional conduct and fiduciary duties when inducing a client to invest in the attorney's business venture without full disclosure and opportunity for independent counsel. The court affirmed that an attorney-client relationship existed between Beery and Coss at the time of the loan transaction, not only due to ongoing representation (personal injury litigation, corporate formation) but also concurrent legal advice regarding Coss's will and Coss's explicit solicitation of investment advice from Beery. This relationship imposed a high fiduciary duty on Beery. The court emphasized that all business dealings where an attorney benefits from a client are closely scrutinized for unfairness. Beery failed to provide full and fair disclosure of material facts, including his true relationship with Satellite, its precarious financial state (minimal invested capital, non-functioning equipment, inability to secure commercial loans), and the inherent risks of the investment. He also failed to advise Coss to seek independent advice. This conduct constituted a willful breach of Rules 5-101 and 5-102(B) of the Rules of Professional Conduct and sections 6103 and 6106 of the Business and Professions Code. The court found Beery's actions were designed to present the transaction in the most favorable light, concealing crucial information, and therefore were not merely negligent but willful. The court found that Beery had abused the trust reposed in him by Coss, a financially unsophisticated, recently paralyzed individual with a family to support, who relied heavily on Beery's advice. The court reduced the recommended actual suspension period from three years to two years but upheld the other disciplinary conditions, including restitution.
Analysis:
This case strongly reaffirms the high fiduciary duties attorneys owe to their clients, particularly when engaging in business transactions. It broadens the scope of what constitutes an attorney-client relationship for the purpose of triggering these duties, extending it beyond formal retention to include preliminary consultations and ongoing relationships, especially when the client seeks general advice. The decision serves as a significant precedent for requiring attorneys to provide full and fair disclosure of all material facts, including risks and conflicts of interest, and to advise clients to seek independent counsel, or risk severe professional discipline. It highlights that the client's financial sophistication (or lack thereof) is a relevant factor in assessing the fairness of such transactions and the adequacy of disclosure.
