Overview

The Review Department considered whether an attorney, acting as a general partner of a limited partnership (not in an attorney-client capacity), committed moral turpitude by misappropriating partnership funds owed to a limited partner and by conditioning settlement on withdrawal of a State Bar complaint.

Although the Hearing Department recommended disbarment, the Review Department imposed a substantial but lesser discipline: a four-year stayed suspension, three years of probation, and a two-year actual suspension.

Key Facts

Charles Connell McCarthy had been admitted to the State Bar in 1949 and had no prior discipline. He served as a general partner of Kau-Kona Land Co., a California limited partnership formed to invest in Hawaiian land.

In 1988, after bankruptcy proceedings and sale of partnership property, the bankruptcy court authorized a preliminary distribution of partnership funds. One limited partner, Nazar H. Ashjian, was entitled to receive $20,946 (capital plus profits).

McCarthy conditioned distribution of funds on execution of a release that would absolve him personally of liability. Ashjian refused to sign the release without modification. As a result, McCarthy withheld Ashjian’s distribution.

McCarthy nonetheless took his own distribution — including both preliminary and later final distributions — without first paying Ashjian’s capital and profits, despite statutory requirements that limited partners be paid before general partners receive profit distributions.

Ashjian later obtained a civil judgment and a bankruptcy court ruling declaring the debt nondischargeable due to defalcation while acting in a fiduciary capacity.

Charges

1. Moral Turpitude (Bus. & Prof. Code § 6106)

The State Bar charged that McCarthy:

• Breached fiduciary duties owed to a limited partner;
• Misappropriated partnership funds by paying himself before paying Ashjian;
• Used funds belonging to or owed to Ashjian for his own benefit.

2. Improper Settlement Conduct (Bus. & Prof. Code § 6090.5)

During settlement discussions of related litigation, McCarthy (through counsel) sought to condition settlement upon Ashjian withdrawing his State Bar complaint.

Defenses Raised

McCarthy argued:

• He acted within business judgment as general partner;
• Corporations Code provisions allowed creditor-first distributions;
• He could require a release before disbursing funds;
• The charges were procedurally defective and time-barred.

The Review Department rejected these arguments. It held that:

• General partners owe fiduciary duties akin to trustees;
• An attorney acting in a fiduciary capacity is still held to professional standards even outside an attorney-client relationship;
• Statutory and partnership agreement provisions required limited partners to be paid before general partners received profits;
• Taking his share before paying Ashjian constituted misappropriation.

Mitigation

• No prior discipline in over 40 years of practice
• Substantial community service
• Evidence of good character
• Misconduct deemed isolated rather than part of a pattern

The Review Department declined to apply the harsher misappropriation standards that often lead to disbarment, finding the conduct serious but not warranting permanent removal.

Aggravation

• Dishonesty and bad faith
• Harm to the limited partner
• Indifference toward restitution
• Lack of remorse

Holding

The Review Department affirmed culpability for:

• Moral turpitude under § 6106;
• Improper conditioning of settlement under § 6090.5.

However, it rejected disbarment as excessive under the circumstances.

Sanctions

Why This Case Matters

This case confirms that:

• An attorney’s fiduciary obligations extend beyond attorney-client relationships;
• Misappropriation includes taking funds owed to another fiduciary beneficiary;
• Using settlement leverage to suppress a disciplinary complaint violates § 6090.5;
• Even substantial mitigation will not eliminate significant actual suspension where moral turpitude is found.

For attorneys under State Bar investigation, this decision underscores how financial disputes — even in business roles — can result in serious discipline.