In Re a Member of the State Bar of Arizona, Pappas
23 Ariz. Adv. Rep. 36, 159 Ariz. 516, 768 P.2d 1161 (1988)
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Rule of Law:
An attorney-client relationship is established for disciplinary purposes when a person holds an objectively reasonable belief that a lawyer is acting as their attorney, relies on that belief, and the lawyer does not refute it. This relationship triggers the full scope of a lawyer's ethical duties, including full disclosure in business transactions with the client, even if the lawyer also holds other professional licenses.
Facts:
- Harry Pappas was a licensed attorney and a certified public accountant (CPA).
- In 1972, Frank and Walda Peterson, who were not sophisticated in business matters, hired Pappas for tax counseling and Pappas continued to prepare their tax returns for several years.
- In 1977, Pappas solicited the Petersons to invest in Aloha Rent-A-Car, a car rental business he was starting in Hawaii, where he would be a general partner with managerial control.
- The Petersons invested $50,000, relying on Pappas, and later signed a limited partnership agreement prepared under Pappas's instructions.
- Pappas did not fully explain the terms of the agreement, the differing interests between a general and limited partner, his own conflicts of interest, or advise the Petersons to seek independent legal counsel.
- Pappas, as general partner, commingled Aloha's funds with his other business entities, engaged in self-dealing, and maintained poor financial records.
- The Aloha Rent-A-Car business eventually failed, resulting in the loss of the Petersons' investment.
Procedural Posture:
- The State Bar of Arizona filed a formal complaint against respondent Harry Pappas with the Local Administrative Committee.
- After a hearing, the Committee issued findings of fact and recommended that Pappas be disbarred.
- The Disciplinary Commission reviewed the case, adopted the Committee's findings of fact, and also recommended disbarment.
- Pappas filed Objections to the Findings, bringing the matter before the Supreme Court of Arizona for final disposition.
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Issue:
For the purposes of attorney disciplinary rules, does an attorney-client relationship exist when an attorney enters into a business transaction with a person to whom the attorney has provided prior legal and tax services, and that person reasonably believes the attorney is acting as their lawyer in the transaction?
Opinions:
Majority - Feldman, Vice Chief Justice
Yes, an attorney-client relationship exists for the purposes of disciplinary rules under these circumstances. Where a person holds an objectively reasonable belief that a lawyer is acting as their attorney, relies on that belief, and the lawyer does not refute it, the relationship will be treated as one between attorney and client in disciplinary matters. The Petersons had a longstanding professional relationship with Pappas, were unsophisticated investors, and reasonably believed he was protecting their interests as their attorney. Pappas could not evade his ethical duties by claiming he was acting only as an accountant or investment adviser, as a lawyer's professional obligations follow them into other activities. Because an attorney-client relationship existed, Pappas violated DR 5-104(A) by entering a business transaction with clients with differing interests without full disclosure, DR 5-101 by allowing his financial interests to impair his judgment, DR 5-105 by representing multiple clients with conflicting interests, and DR 6-101 by neglecting the matter through poor record-keeping. The court concluded that a five-year suspension was the appropriate sanction, modifying the Disciplinary Commission's recommendation of disbarment.
Analysis:
This case significantly broadens the definition of the attorney-client relationship for disciplinary purposes, moving beyond formal retainer agreements to a client-centric standard based on 'objectively reasonable belief.' The ruling serves as a stark warning to attorneys who engage in business transactions with their clients, establishing a high bar for disclosure and a near-presumption that a fiduciary relationship exists. It reinforces the principle that an attorney cannot simply 'remove one hat and put on another' to escape ethical obligations, making it harder for lawyers with multiple professional licenses to compartmentalize their duties. This decision places a substantial burden on the attorney to clarify the nature of the relationship and insist on independent counsel for the client to avoid severe disciplinary consequences.
