Overview

This case involves an attorney’s representation of a closely held corporation embroiled in a deadlock between its president and the remaining board members. The Review Department found that James Steven Davis committed serious trust account violations and acts of moral turpitude by misappropriating corporate settlement funds during an intra-corporate dispute. Although disbarment is typically the presumptive discipline for intentional misappropriation, the court imposed a four-year stayed suspension with two years of actual suspension, conditioned on restitution and proof of rehabilitation.

Facts

Thermal Remediation Corporation (TRC) was a joint venture corporation owned 50/50 by Robert Ruppert and CERT Environmental Corporation. CERT controlled three of the four board seats. After financial difficulties and internal disputes, CERT voted to dissolve the company.

Without authorization from the three-member board majority, Ruppert retained Davis to file a Chapter 11 bankruptcy petition on TRC’s behalf. Davis knew of the corporate dispute but concluded that only Ruppert could legitimately act for the corporation.

Shortly after filing the petition, Davis received a $79,875.89 insurance settlement check payable to TRC. Ruppert endorsed it as “President.” Davis deposited the check into his client trust account. Despite knowing that:

• Ruppert had been suspended by the board,
• Ruppert’s spending authority was limited to $100, and
• The majority of the board objected to Davis’s representation,

Davis disbursed $50,000 to Ruppert personally. Ruppert quickly depleted those funds.

Davis later withdrew $29,875.89 from the trust account as attorney’s fees, despite acknowledging in bankruptcy filings that court approval was required before payment. He did not obtain court approval. He also failed to provide an accounting to the board and concealed the location and disposition of the funds.

Charges and Findings

1. Failure to Maintain Client Funds in Trust (Rule 4-100(A))

Davis improperly disbursed trust funds while ownership and control of the corporation were disputed. He also withdrew disputed fees from trust without proper authorization.

2. Failure to Account (Rule 4-100(B)(3))

He failed to provide requested accountings to the corporation’s board and instead responded with evasion and threats.

3. Misappropriation – Moral Turpitude (Bus. & Prof. Code § 6106)

The Review Department found:

• $50,000 was misappropriated through gross negligence when paid to Ruppert.
• $29,875.89 was knowingly and intentionally misappropriated when Davis paid himself without authorization.

The intentional fee withdrawal constituted moral turpitude.

Defenses Raised

Davis argued:

• The three board members were conflicted due to their affiliation with CERT/Unocal.
• Ruppert had authority to act as president at the time of disbursement.
• He believed he was protecting the corporation’s interests.

The Review Department rejected these defenses, holding that corporate counsel represents the entity, not one faction, and must remain neutral in intra-corporate disputes.

Aggravation

• Significant harm to the client
• Overreaching conduct
• Multiple conflicts of interest
• Concealment and lack of candor
• Refusal to account
• Indifference toward rectification
• Uncharged but proven misconduct

Mitigation

• No prior discipline in 12 years of practice
• Strong good character testimony
• Extensive community service
• No additional misconduct in the following five years

Simplified Sanctions Table

Discipline Imposed

The Review Department recommended:

• Four-year stayed suspension
• Four years of probation
• Two years of actual suspension
• Restitution of $29,875.89 plus interest
• Proof of rehabilitation, fitness to practice, and learning in the law (Standard 1.4(c)(ii))

Although disbarment is generally the presumptive discipline for intentional misappropriation, the court determined that the substantial mitigation justified a lengthy actual suspension instead.

Key Takeaway

Corporate counsel must represent the entity—not one faction of management. When control of a corporation is disputed, the attorney must remain neutral, obtain informed written consent from all relevant constituents, or withdraw. Trust account violations in that context can quickly escalate into findings of moral turpitude.