In Re Complaint as to the Conduct of Herman

No. 18 May 14, 2015 273
IN THE SUPREME COURT OF THE
STATE OF OREGON
In re Complaint as to the Conduct of
DAVID HERMAN,
OSB #902967,
Accused.
(OSB No. 12111; SC S061840)
En Banc
On review of the decision of a trial panel of the Disciplinary
Board.*
Argued and submitted on September 16, 2014.
Lawrence W. Erwin, Bend, argued the cause and filed
the briefs for the Accused.
Mary A. Cooper, Assistant Disciplinary Counsel, Tigard,
argued the cause and filed the brief for the Oregon State
Bar.
PER CURIAM
The accused is disbarred, effective 60 days from the date
of this decision.
______________
*  Trial Panel Opinion dated November 15, 2013.
274 In re Herman
Disciplinary proceedings against the accused arose from a failed business
venture involving the accused and his two partners. The three men had formed
a small company to manufacture testing equipment for measuring formaldehyde
levels in wood products. Because of the accused’s legal expertise in forming cor-
porate entities, his two partners deferred to the accused’s suggestion that their
company incorporate using a dormant Nevada corporation that the accused had
already formed. Although the accused’s partners understood their new enter-
prise to be co-owned in equal shares by all three men, when the accused filed
the necessary documents in Nevada to amend the old corporation, he neverthe-
less retained 100 percent ownership of the new corporation’s stock without his
partners’ knowledge. After business disagreements arose between the three
partners, the accused began directing customer payments destined for the com-
pany to outside business entities that he alone controlled, and he eventually dis-
solved the corporation without notice to his partners or any corporate accounting.
Following a complaint from one of the accused’s partners, a trial panel of the
Bar’s Disciplinary Board found that the accused had violated Rule of Professional
Conduct (RPC) 8.4(a)(3) by, among other things, (1) making false and misleading
statements to Nevada officials in the course of dissolving the corporation; and
(2) diverting financial assets of the company to his other businesses. As a result of
those findings, the trial panel disbarred the accused, and the accused sought review. Held: (1)
the accused violated RPC 8.4(a)(3); and (2) disbarment constitutes the appropriate
sanction for the accused’s conduct.
The accused is disbarred, effective 60 days from the date of this decision.
Cite as 357 Or 273 (2015) 275
PER CURIAM.
In this lawyer disciplinary proceeding, the Oregon
State Bar (Bar) charged the accused with violating RPC
8.4(a)(3) (dishonesty and misrepresentation reflecting
adversely on the accused’s fitness to practice law), arising
from a failed corporate venture involving the accused and
two business associates. A trial panel of the Disciplinary
Board determined that the Bar proved that the accused vio-
lated that rule and that he should be disbarred. The accused
now seeks review of that decision, which we review de novo.
ORS 9.536(2); BR 10.6. For the reasons that follow, we agree
with the trial panel that the Bar proved by clear and con-
vincing evidence that the accused violated RPC 8.4(a)(3)
and that disbarment is the appropriate sanction.
FACTS
The accused was admitted to the Oregon State Bar
in 1990 and to the Washington State Bar in 1991. In 2003,
he transferred his Oregon bar membership to inactive sta-
tus; four years later, the Oregon Bar placed him on non-
disciplinary suspension for failure to pay his bar dues. He
has, since then, remained suspended in both Oregon and
Washington for continued nonpayment of dues.
In early 2008, Schutfort approached the accused
about starting a business venture with him and another
person, Alexander, that involved the development, manufac-
ture, and sale of specialized testing containers designed to
measure formaldehyde levels in composite wood products.1
The three people subsequently agreed to form a business
entity for that purpose, called Blue Q Labs (Blue Q), which
they would co-own in equal thirds. According to testimony
from the three principals at the trial panel hearing, each
of them agreed to perform particular roles in Blue Q’s
1
According to the record, formaldehyde—a recognized carcinogen—is
widely used in the production of wood binding adhesives and resins. In 2007, the
California Air Resources Board (CARB) approved an airborne toxic control mea-
sure designed to reduce formaldehyde emissions from products such as hardwood
plywood, particleboard, and medium density fiberboard, as well as the items
made from those materials. As a result, manufacturers of such products who
wanted to market them in California needed testing equipment that would help
them comply with the certification program that was adopted to implement the
state’s new formaldehyde emission standards.
276 In re Herman
operations. Alexander—a welder and fabricator whose shop
was located in Lebanon, Oregon—would fabricate the con-
tainers that physically held wood samples during testing.
Schutfort would design the testing device’s electronics,
write its software program, and help market and install the
devices, as well as train Blue Q customers in their operation.
For his part, the accused agreed to manage the company’s
finances, participate in marketing, and perform functions
ordinarily undertaken by a business’s general counsel, such
as drafting contracts and sales agreements. The accused
had experience in conducting large, complex business trans-
actions while in private practice and had himself incorpo-
rated between 10 and 20 businesses.
In the course of discussions, the accused suggested
that, rather than form a new corporation, the principals
should make use of a dormant Nevada corporation—Vintrak
Information Systems (Vintrak)—that the accused already
owned. According to the accused, his accountant had advised
him that amending Vintrak’s articles of incorporation—
thereby turning that corporation into Blue Q Labs, Inc.—
would allow the new business to take advantage of finan-
cial losses that had been stranded on the books of Vintrak.
Schutfort and Alexander had confidence in the accused and
his legal acumen, and they accepted his recommendation.2
In March 2008, the accused amended Vintrak’s
articles of incorporation by filing a certificate of amendment
with the Nevada Secretary of State. As a result, the name of
the corporation formally was changed to Blue Q Labs, Inc.
Alexander, Schutfort, and the accused were listed in the cer-
tificate as directors, and the entity’s purpose was redefined,
in part, as “any lawful activity related to the construction,
rental, modification, repair and sale of environmental test
chambers and associated equipment and training.” However,
as the accused would acknowledge at the trial panel hear-
ing, the formalities that ordinarily attend the formation
and operation of a corporation—for example, the adoption
2
When asked, for example, why he did not seek more information about cor-
porate matters such as the company’s bank account, Schutfort replied that he had
trusted the accused because the accused “was the lawyer that took care of that
type of business.”
Cite as 357 Or 273 (2015) 277
of bylaws, the issuance of stock to the three principals, the
election of officers, and the conduct of meetings—were not
observed.
Instead, some aspects of the old corporation
remained unchanged. The accused, for example, had been
Vintrak’s sole corporate officer, occupying the positions of
president, secretary, and treasurer. After the certificate of
amendment was filed in Nevada, no new officers were elected.
In addition, the accused apparently had been the sole share-
holder of Vintrak. Vintrak’s original articles of incorpora-
tion authorized the issuance of 1,000 shares of stock, and
the Nevada certificate of amendment indicated that Vintrak
stock had been issued. A corporate law expert who testified
at the accused’s trial panel hearing stated that, after the
articles of incorporation were amended, stock ownership
in Vintrak became stock ownership in Blue Q. Despite the
agreement of its principals that they would own the busi-
ness in equal thirds, Blue Q issued no stock after it came
into existence. Instead, Blue Q’s 2008 and 2009 Subchapter
S corporate tax returns indicated that the accused was its
sole shareholder.
After the creation of Blue Q, the accused opened a
bank account for the new business at US Bank, to which
the accused, Schutfort, and Alexander initially had access.
Despite the fact that the accused had retained all formal
positions of corporate authority after the articles of incor-
poration were amended, Alexander and Schutfort were
listed on the account application as Blue Q’s president and
vice-president. The new bank account was used to pay man-
ufacturing expenses associated with fabricating the testing
containers and to receive deposits that accompanied cus-
tomers’ product orders.
From the start, Blue Q’s business was brisk. Initial
wire deposits for customer orders in July 2008 totaled more
than $38,000; over the next five months, deposits totaling
an additional $275,000 were made into Blue Q’s account at
US Bank. Demand, however, quickly outpaced the compa-
ny’s ability to produce a reliable product and fill orders in a
timely manner. A production-related bottleneck arose in the
fabrication process, for which Alexander was responsible.
278 In re Herman
As Alexander later would testify, “I told them I needed
more help. I needed money. We needed more help to build.”
No assistance materialized, however. Instead, in the final
months of 2008, the accused began subcontracting container
fabrication to outside machine shops in Idaho, an arrange-
ment that the accused did not disclose to Alexander and was
intent on keeping secret from him, if possible.3
Shortly thereafter, the relationship among the
three principals worsened. At the trial panel hearing, the
principals offered divergent accounts of events that would
lead to the dissolution of Blue Q. The accused testified that,
in late February 2009, he, Schutfort, and Alexander met
at Alexander’s shop in an effort to sort out the company’s
fabrication problems. According to the accused, Alexander
disagreed with the accused’s opinion that Blue Q’s success
depended on a “turnaround” of Alexander’s commitment to
manufacturing a quality product. Instead, according to the
accused, the meeting ended with Alexander quitting the
corporation:
“He finally got irritated and said, ‘I’m not going to listen to
this anymore. I’m done with it. I won’t discuss it anymore.
You bring it up again, you’re not going to like my response.’
“And I think—you know, at that point I said—I said
words to the effect, ‘Then it’s over. We’re done. We’ve got to
turn it off, send people their money back, beg forgiveness or
whatever.’
“And he says, ‘I don’t care what you do. I’m not going
forward with this. I’m not giving you any commitments,
and I’m not going to do anything else.’ ”
The accused further testified that he and Schutfort then
decided that, with Alexander out of the picture, they con-
stituted a quorum of the board of directors for the purpose
of conducting corporate business. Accordingly, they jointly
decided to end Blue Q’s operations and form another entity
to continue the business of producing and marketing the
3
The accused asked Schutfort in a November 2008 e-mail about a customer
order, “[D]o we trust [Alexander] to send a unit from Lebanon in a timely man-
ner, or do we do the sure thing and send one from Idaho? If we send one from
Idaho then you would have to communicate to [the customer,] not to communicate
[with Alexander]. That might prove tricky.”
Cite as 357 Or 273 (2015) 279
testing devices. In the accused’s words, “[We] reorganized
and Mr. Alexander was not involved.”
Alexander gave a very different account in his tes-
timony before the trial panel. When asked if had resigned
from Blue Q or otherwise indicated that he wanted nothing
more to do with the business, Alexander answered “no” to
both questions. Likewise, Schutfort testified that he never
voted to reorganize or dissolve Blue Q and that he had not
participated in a separate meeting with the accused to con-
sider doing so.
At about the same time as the meeting at Alexander’s
shop, the accused began making changes in Blue Q’s oper-
ations, many without Schutfort’s or Alexander’s knowledge.
Among other changes, the accused removed Alexander as
a signatory on Blue Q’s bank account.4 The accused also
began directing customers to make payments to other busi-
ness entities that the accused owned or controlled. In late
February 2009, the accused explained in e-mails to Blue Q’s
customers that the diversion of payments was necessary
because Blue Q recently had been the victim of bank fraud;
according to the accused, Blue Q needed to protect its funds
in a new account. In his deposition in this case, however, the
accused gave a different explanation. He testified that the
diversion was necessary because Blue Q had experienced
problems in qualifying to engage in foreign wire transfers.
The accused did not produce any evidence to corroborate
either of those different explanations.
By March 2009, Blue Q customers were making
payments on Blue Q invoices to two entities that the accused
owned or controlled, Equine Management, Inc. (EMI), and
Carbcert LLC (Carbcert). In an e-mail instructing a cus-
tomer to make future payments to Carbcert, the accused
explained that the company simply had changed its name.
4
Alexander discovered the change when he went to the bank to find out
whether the account contained sufficient funds to cover a business check that he
needed to write. That discovery apparently did not cause Alexander immediately
to question his status in the company. As he later would testify:
“Well, we weren’t quitting. We were still going to build. I mean, we were
still building. Just because [the accused] took us off the account, took me off
the account—I didn’t know exactly why. I trusted him that there was some
reason.”
280 In re Herman
In reality, however, Carbcert was a new business entity cre-
ated and owned by the accused.
On March 9, 2009, the accused closed Blue Q’s US
Bank account without notice to Alexander and Schutfort.
On March 19—also without notifying Alexander and
Schutfort—the accused filed a certificate of dissolution for
Blue Q with the Nevada Secretary of State. In that docu-
ment, the accused stated that he held all officer positions
in the corporation and that he was its sole director. The
certificate was accompanied by a resolution in which the
accused represented that a quorum of Blue Q’s directors had
met and resolved to dissolve the corporation; the accused
also represented that no Blue Q stock had been issued and,
therefore, the accused alone was authorized under Nevada
law to approve the dissolution and had done so.5
In winding up Blue Q’s affairs, the accused made no
accounting of corporate assets or liabilities to Alexander and
Schutfort, and they did not receive any distribution follow-
ing Blue Q’s dissolution. Schutfort testified that he did not
learn that Blue Q no longer existed until sometime in mid-
2009. Shortly thereafter, in June 2009, Alexander formed a
new company called Blue Q Labs LLC to continue manufac-
turing formaldehyde testing devices. That enterprise briefly
included Schutfort as well.
In 2010, Alexander complained to the Bar about
the accused’s conduct. After an investigation, the Bar
filed a formal complaint against the accused that charged
him with multiple violations of RPC 8.4(a)(3).6 In a single
charge, the complaint alleged that the accused engaged in
dishonest conduct by excluding Alexander and Schutfort
from Blue Q’s business, diverting Blue Q assets to his own
5
Nevada Revised Statute (NRS) 78.580(1) provides:
“If the board of directors of any corporation organized under this chapter,
after the issuance of stock or the beginning of business, decides that the cor-
poration should be dissolved, the board may adopt a resolution to that effect.
If the corporation has issued no stock, only the directors need to approve the
dissolution. If the corporation has issued stock, the directors must recom-
mend the dissolution to the stockholders. The corporation shall notify each
stockholder entitled to vote on dissolution, and the stockholders entitled to
vote must approve the dissolution.”
6
We set out the text of that rule below.
Cite as 357 Or 273 (2015) 281
businesses, and filing false corporate dissolution documents
with the Nevada Secretary of State. In addition, the com-
plaint alleged that the accused contracted with other com-
panies to perform services previously performed by Blue Q,
and withheld the proceeds from these contracts from
Alexander and Schutfort.
As noted, a trial panel of the Disciplinary Board
found that the Bar proved that the accused violated RPC
8.4(a)(3). The trial panel found, based on the accused’s
demeanor at the hearing, that his testimony generally was
not credible.7 Specifically, the trial panel found that the
accused intentionally had
“filed documents that did not reflect the true state of the
corporation at a time he did not have the authority to dis-
solve it. We have found the Accused also closed the bank
account for Blue Q Labs, Inc. without authority. We have
also found the Accused diverted funds that were to go to
Blue Q Labs, Inc to Equine Management, a company he
controlled. Finally, we have found [the accused diverted]
some of this money and some assets of Blue Q Labs, Inc. to
a new company called Carbcert. His actions were dishonest
and deceitful; the statements in the documents were false.
His actions breached the duty he owed to the directors of
Blue Q Labs, Inc.”
The trial panel further found:
“Although it is unknown whether the business would
have eventually turned successful, that opportunity was
removed by the unilateral actions of the Accused. Whether
the injury was actual or potential, injured his partners
were. Each had put substantial time into the venture and it
was taken away. The Accused was trusted by Mr. Alexander
and Mr. Schutfort and that trust was violated.”8
7
Among other things, the trial panel noted that the accused appeared fur-
tive on the witness stand, providing testimony that often was self-contradictory,
unresponsive or evasive, and frequently so lengthy and unnecessarily detailed as
to “cross[ ] the line from explanation to obfuscation.”
8
The trial panel made no express findings as to whether the accused con-
tracted with outside companies for the manufacture of the testing devices and
withheld proceeds from the sale of those devices from Blue Q or his associates.
Nor is that allegation a primary focus of the parties’ arguments on review.
Accordingly, we do not consider it in our analysis.
282 In re Herman
Based on its assessment of the accused’s conduct,
the trial panel concluded that the appropriate sanction is
disbarment:
“In this case, the dishonest conduct began when the
incorporation paperwork did not issue shares to each part-
ner. It included filing a tax return with the Accused as
the only shareholder. It included filing false documents to
dissolve the corporation. It also included closing down the
bank account without notice to his partners and diverting
funds of the business to his personal businesses.”
On review, the accused argues that the complaint
should be dismissed or, alternatively, that either a repri-
mand or a short suspension should be imposed for any viola-
tion of RPC 8.4(a)(3).
DISCUSSION
RPC 8.4(a)(3) provides:
“(a)  It is professional misconduct for a lawyer to:
“* * * * *
“(3)  engage in conduct involving dishonesty, fraud,
deceit or misrepresentation that reflects adversely on the
lawyer’s fitness to practice law[.]”
As discussed below, the accused argues that the Bar did not
prove by clear and convincing evidence that he improperly
excluded Alexander and Schutfort from Blue Q’s business
affairs, that he diverted Blue Q’s assets for his own use, or
that he filed documents with the Nevada Secretary of State
that contained misrepresentations. Because they are inter-
twined, we discuss the first two arguments jointly.
According to the accused, the only “assets” to which
his associates might have been entitled were their propor-
tionate shares of any Blue Q profits remaining after the
winding up of corporate affairs. The accused asserts that
the Bar failed to prove that he improperly diverted any such
assets; in particular, the accused relies on the trial panel’s
determination that the Bar failed to prove that the accused
actually owed anything to Schutfort or Alexander.9 Instead,
9
In its analysis of the appropriate sanction, the trial panel made the follow-
ing observations:
Cite as 357 Or 273 (2015) 283
the accused argues, any sums that he diverted to his own
businesses constituted repayments of loans that he had
advanced to or on behalf of Blue Q. Thus, the accused rea-
sons, the Bar did not show by clear and convincing evidence
that he wrongfully diverted any funds belonging to Blue Q,
Schutfort, or Alexander.
We agree with the accused that the corporate
bank statements, accounting ledgers, correspondence, and
cancelled checks that make up large parts of the lengthy
record do not provide clear and convincing evidence that
he converted assets that Alexander and Schutfort neces-
sarily were entitled to receive in the form of distributions.
That said, a number of entries in Blue Q’s corporate ledgers
bear on our analysis of the charges against the accused.
According to Blue Q’s 2008 general ledger, for example, the
company was owed substantial sums by business entities
owned or controlled by the accused: from EMI, approxi-
mately $411,000, plus a promissory note from EMI for an
additional $63,900; from an entity known as the Lazy J,
$13,000; from Idaho Transportation Equipment, approxi-
mately $58,000; and from the Whitehorse Ranch, $85,000.
In winding up Blue Q’s financial affairs, the accused did not
account for those booked assets; instead, he removed them
from Blue Q’s asset ledger and “reclassified” them on the
Blue Q balance sheet as a loan from the accused to Blue Q.10
On the other side of the ledger, Blue Q’s 2008 finan-
cial records showed that the accused had loaned significant
sums to Blue Q to pay its operating expenses.11 Specifically,
in 2008, the ledger showed that the accused paid more than
“We do not find the Bar has proven indifference to making restitution.
ABA Standard 9.22(j). The Bar has not proven money was owed to either
Mr. Alexander or Mr. Schutfort. The Bar’s own expert did not identify an
amount of money that should have been paid to either person. While the Bar
makes that argument, we do not find the testimony of their expert supports
the argument. Mr. Schutfort has made no claim against the Accused for
money.”
Those observations were not made in connection with the trial panel’s analysis of
whether the accused violated RPC 8.4(a)(3).
10
For a further explanation, see 357 Or at 284 n 12, below.
11
In contrast, it appears to be undisputed that neither Schutfort nor
Alexander contributed funds to Blue Q, other than smaller amounts for which
they were subsequently reimbursed.
284 In re Herman
$103,000 of Blue Q’s operating costs and then used EMI to
cover more than $52,000 in additional business expenses, for
an approximate total of $155,000. During the same period,
the ledger indicated that the accused withdrew approxi-
mately $56,000 from the Blue Q account and transferred an
additional $175,000 from that account to EMI. The result-
ing total—approximately $231,000—was approximately
$76,000 greater than the total advances that the accused
and his own businesses purportedly made to or on behalf of
Blue Q during the same period.
To further complicate matters, Blue Q’s financial
accounting records show that the corporation owed a debt of
more than $200,000 to the accused when it began operations.
The record includes no explanation for that debt. However,
the corporate ledger discloses that the accused later routed
more than $160,000 in proceeds from an unrelated business
transaction—the sale of mill property—through Blue Q’s
books, categorizing that transfer as partial repayment of the
$200,000 debt noted above. Thus, confusingly, the accused
appears to have used his own money to partially discharge
a sizeable debt that—at least according to the corporate
financial records—was personally owed to him by Blue Q.
In the absence of a coherent explanation for the var-
ious transactions described above, it is practically impossi-
ble to ascertain whether they were legitimate, fictional, or
some mix of truth and subterfuge. When the accused was
asked about them at the trial panel hearing, his answers
generally were confusing or unresponsive.12 What is clear is
12
The accused denied that he had taken any money that belonged to
Alexander or Schutfort; he explained that a “running tally” in his head showed
that he was “significantly behind” when comparing what he had put into Blue Q
and what he was getting out of it. On review, the accused asserts that, according
to Blue Q’s records, Blue Q owed $509,480 to him and his related companies as of
March 31, 2009. That amount is reflected in a current asset entry on a March 31,
2009, balance sheet that is described as “loans from David Herman”; it appears
to be an updated consolidated total of the balances of the various debts shown as
owed to Blue Q by the accused’s companies on Blue Q’s December 31, 2008, bal-
ance sheet. As of December 31, 2008, that total was $566,897, according to the
current asset column of Blue Q’s balance sheet.
With the possible exception of the transfers of funds between Blue Q and
EMI described above, there is no indication in Blue Q’s general ledger or any of
its other financial records for 2008 or 2009 that transactions with the accused’s
other companies that were reflected in Blue Q’s current assets as of December 31,
Cite as 357 Or 273 (2015) 285
that, without consulting his business associates, the accused
intermingled his personal and related-business financial
affairs with the corporate affairs of Blue Q to the point that
an accurate accounting of who owed what to whom would
be very difficult to reconstruct. That inadequately explained
practice provides context to the trial panel’s determination
that the accused improperly diverted corporate assets.
As discussed, the record shows that, shortly after
the February 2009 meeting at Alexander’s shop, the accused
began instructing Blue Q clients to withhold payments owed
to Blue Q and, ultimately, to redirect those payments to
accounts owned by EMI or Carbcert.13 The accused chal-
lenges the significance of those facts. Although he admits
that some Blue Q funds were paid to EMI, he asserts that
that was done “to facilitate winding up of the corporate
affairs of Blue Q Labs, Inc.” The difficulty with that asser-
tion is that what the accused describes as “winding up” was
not undertaken pursuant to an authorized dissolution of
the corporation. Instead, at best, it can be characterized as
unauthorized self-help.
Although the accused testified that he wound up
Blue Q’s affairs based on Alexander’s voluntary departure
and Schutfort’s consent, the trial panel disbelieved that tes-
timony. Instead, the trial panel credited both Alexander’s
testimony that he did not quit Blue Q at that time and
Schutfort’s testimony that he and the accused did not con-
fer as remaining corporate directors and vote to reorganize
Blue Q. This court defers to such credibility findings when,
as here, they are based on the trial panel’s own observations
2008, occurred after Blue Q began operating that year. Thus, to the extent that
the $509,540 entry in the March 31, 2009, balance sheet is relevant to any issue
before us, it appears to reflect a bookkeeping entry whereby the accused claimed
credit for pre-Blue Q financial obligations that his related companies may have
owed to Vintrak. Because the record with respect to that possibility was not
developed in the trial panel proceedings, we do not consider it further. However,
we reiterate that there is no indication in the record that that amount—or any
amount remotely approximating it—was advanced to Blue Q by the accused or
any of his related entities after Blue Q began its operations in 2008.
13
Although the precise amount of Blue Q receivables that the accused
diverted is not clear, the record includes correspondence from the accused to a
Blue Q customer directing payment of a Blue Q invoice to Carbcert, as well as a
remittance from a Blue Q customer to EMI.
286 In re Herman
of the accused’s demeanor and the manner in which he tes-
tified. In re Phinney, 354 Or 329, 333, 311 P3d 517 (2013).
Moreover, we note the discrepancy between the accused’s
account of an agreement to reorganize the corporation and
the absence of any corporate records documenting either
that purported decision or an accounting of the winding up
of Blue Q’s affairs. In short, we agree with the trial panel
that the accused’s testimony that he diverted Blue Q assets
to his own businesses as part of an authorized winding up of
corporate affairs is not credible. Instead, clear and convinc-
ing evidence supports the trial panel’s determination that
the accused engaged in dishonest conduct when he diverted
customer payments from Blue Q to EMI and Carbcert.
The accused remonstrates that, because Schutfort
received courtesy copies of e-mails instructing Blue Q cus-
tomers to send payments to EMI and Carbcert, there is no
evidence that he acted with fraudulent intent.14 Those argu-
ments miss the mark. When Schutfort received copies of
e-mails revealing that customers were paying EMI rather
than Blue Q, the accused assured Schutfort that “[the
Accused] was the lawyer and there was some advantage to
doing that.” Schutfort believed him. Moreover, Alexander was
not aware of the accused’s actions. Nor were Schutfort and
Alexander aware of the larger context in which those actions
were taking place. For example, the two were unaware that
they were not shareholders in Blue Q; each believed that
he owned a one-third interest in the corporation. Nor were
they aware that the accused was in the process of dissolving
Blue Q or that they would not receive an accounting of the
assets being diverted to EMI and Carbcert.
The Bar’s complaint alleged that the accused’s
conduct involved dishonesty and misrepresentation that
reflected adversely on his ability to practice law. Under this
court’s prior decisions, dishonesty includes a disposition
to lie, cheat, or defraud; and a lack of trustworthiness or
integrity. In re Kluge, 335 Or 326, 340, 66 P3d 492 (2003);
14
As already noted, the accused also argues that a concern about wire fraud
prompted the diversion of Blue Q funds to Carbcert. However, the record shows
that the accused originally had explained the diversion by telling customers that
Blue Q had changed its name to Carbcert. In fact, it had not. Simply put, the
accused’s explanations for those actions are not credible.
Cite as 357 Or 273 (2015) 287
In re Claussen, 331 Or 252, 260, 14 P3d 586 (2000). Although
no rule explicitly requires lawyers to be candid and fair with
their business associates or employers, such an obligation is
implicit in the prohibitions set out in RPC 8.4(a)(3). See In
re Murdock, 328 Or 18, 25, 968 P2d 1270 (1998) (so stating
with regard to former version of rule); In re Smith, 315 Or
260, 266, 843 P2d 449 (1992) (same). On de novo review,
we find by clear and convincing evidence that the accused’s
diversion of Blue Q assets to EMI and Carbcert, and his
exclusion of his associates from Blue Q’s business affairs,
demonstrated dishonesty and a lack of trustworthiness that
seriously reflects adversely on his fitness to practice law and
violate RPC 8.4(a)(3).
We turn to the trial panel’s determination that the
accused violated RPC 8.4(a)(3) by filing with the Nevada
Secretary of State “documents that did not reflect the true
state of the corporation at a time he did not have the author-
ity to dissolve it.” An affirmative representation amounts to
a misrepresentation under RPC 8.4(a)(3) if it is false, mate-
rial, and knowingly made. In re Summer, 338 Or 29, 38, 105
P3d 848 (2005). A misrepresentation is material if it would
or could significantly influence the recipient’s decision-
making process. Id.Again, the accused asserts that the Bar failed to
prove by clear and convincing evidence that his actions in that
regard were animated by “fraudulent intent.” Specifically,
the accused contends that he was, in fact, the corporation’s
only director when he filed the certificate to dissolve Blue Q,
because Schutfort and Alexander had left the company. The
accused asserts that, as Blue Q’s sole director, he was autho-
rized under Nevada law to dissolve the corporation because
no stock had been issued. The accused also asserts that, by
the end of the February 2009 meeting at Alexander’s shop,
he believed that Alexander had quit Blue Q, that the accused
and Schutfort constituted a quorum of directors, and that
they had agreed to “reorganize.”
Much of the accused’s argument about the Nevada
dissolution documents is foreclosed by our earlier finding
that Blue Q was not dissolved in the manner in which the
accused testified. Instead, the evidence underscores the
288 In re Herman
accused’s misrepresentations. The accused was both an
experienced business person and attorney who had formed
and managed a number of corporations. The certificate of
amendment by which the accused created Blue Q expressly
named all three principals as directors; yet, less than a year
later, the documents that the accused filed to dissolve the
corporation represented to the Nevada Secretary of State
that the accused was the sole director and that Blue Q’s
board of directors had adopted a resolution authorizing
him, as president, to dissolve the corporation. The certifi-
cate also represented that no Blue Q stock had been issued.
However, those representations were false. The accused
was not the sole director of Blue Q, and there had been no
meeting at which the board of directors had voted either to
reorganize or dissolve Blue Q. Furthermore, contrary to his
representation to the Secretary of State, the accused was a
shareholder—indeed, the sole shareholder—of Blue  Q,
despite the fact that he and his associates had agreed to own
the corporation in equal thirds.15 The accused knew that the
described representations were false when he made them.
The accused’s misrepresentations to the Nevada
authorities also were material, because they were intended
to communicate that the accused was authorized to dissolve
Blue Q in compliance with Nevada law. Finally, those mis-
representations reflected adversely on the accused’s fitness
to practice law: Not only did they violate the accused’s duties
to his associates, they were made to a governmental agency
to achieve a result that the law did not allow. See In re Glass,
308 Or 297, 779 P2d 612 (1989) (attorney’s registration of
false business name with Corporation Commission for sole
purpose of defeating contractor’s capacity to bring action
against him constituted misrepresentation under disci-
plinary rules).
Thus, we find on de novo review that the Bar also
proved by clear and convincing evidence that, in filing the
dissolution documents with the Nevada Secretary of State,
15
The trial panel determined that the accused apparently was the sole
shareholder of Vintrak and that, because no new stock was issued after the
corporation’s name was changed, the accused remained the sole shareholder of
Blue Q. As noted, that determination is consistent with Blue Q’s 2008 and 2009
tax returns.
Cite as 357 Or 273 (2015) 289
the accused violated RPC 8.4(a)(3) by engaging in conduct
that constituted dishonesty and misrepresentation that
reflects adversely on his fitness to practice law.
Finally, we consider the appropriate sanction for the
accused’s ethical violations. In doing that, we follow the ana-
lytical framework set out in the American Bar Association’s
Standards for Imposing Lawyer Sanctions (ABA Standards)
(1991) (amended 1992). In re Obert, 352 Or 231, 258, 282
P3d 825 (2012). In accordance with the ABA Standards, we
first consider the duty violated, the accused’s mental state,
and the actual or potential injury caused by the accused’s
conduct. In re Kluge, 332 Or 251, 259, 27 P3d 102 (2001);
ABA Standard 3.0. We next determine the existence of any
aggravating or mitigating circumstances. Kluge, 332 Or at
259. Finally, we consider the appropriate sanction in light of
this court’s case law. Id. Our purpose in imposing a sanction
is to protect the administration of justice from lawyers who
have failed to properly discharge duties owed to their cli-
ents, the public, the justice system, or the legal profession.
Here, the accused violated RPC 8.4(a)(3) and
breached his public duty as a lawyer to maintain his per-
sonal integrity. ABA Standard 5.1. The record shows that
the accused excluded his associates from Blue Q’s business
affairs, intentionally diverted Blue Q receivables to busi-
nesses that the accused alone controlled, and misrepre-
sented his authority to dissolve Blue Q to Nevada govern-
mental officials. See ABA Standards at 7 (“intent” defined as
“the conscious objective or purpose to accomplish a particu-
lar result”). As a result of that conduct, the accused caused
actual injury to Alexander and Schutfort by depriving them
of the opportunity to participate in the windup of Blue Q’s
business and a proper accounting of Blue Q’s financial
affairs. Under ABA Standard 5.11(b), disbarment generally
is appropriate when a lawyer engages in intentional conduct
that involves dishonesty, fraud, deceit, or misrepresentation
that reflects adversely on the lawyer’s fitness to practice law.
We next consider whether the presence of mitigating
or aggravating factors affects that preliminary determina-
tion. We find several aggravating factors. First, the accused
acted with a dishonest or selfish motive. ABA Standard
290 In re Herman
9.22(b). Second, he has refused to acknowledge the wrong-
ful nature of his conduct, ABA Standard 9.22(g), arguing
in effect that he did not have to follow the law but could,
instead, engage in “self-help” for ends that he believed were
justified. Finally, the accused has substantial experience in
the practice of law, having been admitted to the Oregon Bar
in 1990.
In mitigation, the accused argues that his only
misstep was in placing too much trust in his partners.
The accused asserts that, after the dissolution of Blue Q,
Alexander and Schutfort surreptitiously formed Blue Q Labs
LLC, stole away Blue Q customers, converted devices man-
ufactured by Blue Q, used them to fulfill customer orders as
Blue Q Labs LLC, and pocketed the receipts. The accused
contends that either a public reprimand or a 30-day suspen-
sion is appropriate.
The trial panel found, however, that the existence of
Blue Q Labs LLC, had no relevance to its evaluation of the
accused’s misconduct at issue, and we agree. Blue Q Labs
LLC was not formed until June 2009, several months after
the accused diverted Blue  Q receivables to EMI and Carbcert,
and after he filed the Nevada dissolution documents. The
accused’s acts of dishonesty and misrepresentation—which
the Bar proved by clear and convincing evidence—were com-
plete with the dissolution of Blue Q. Consequently, in this
disciplinary context, the subsequent formation of Blue Q
Labs LLC does not mitigate the accused’s conduct.
As a mitigating factor, we acknowledge that the
accused does not have a prior disciplinary record. Taken
together, however, the aggravating factors outweigh that
factor and further support our preliminary determination
that disbarment is the appropriate sanction.
We turn to the applicable case law. As we have rec-
ognized, case-matching in the context of disciplinary pro-
ceedings “is an inexact science.” In re Stauffer, 327 Or 44,
70, 956 P2d 967 (1998). Still, our prior decisions provide
some guidance. Those decisions show that where, as here, a
lawyer has engaged in dishonesty, fraud, deceit, or misrep-
resentation in a business relationship involving an associate
Cite as 357 Or 273 (2015) 291
or an employer, the court generally has concluded that dis-
barment was the appropriate sanction.
In In re Pennington, 220 Or 343, 348 P2d 774 (1960),
for example, the accused lawyer secretly withheld a substan-
tial amount of law firm income from his law partner during
a seven-year period. In addition, despite an agreement to
equally divide partnership income, the accused filed false
partnership tax returns to conceal that conduct. When con-
fronted, the lawyer, with the aid of a tax attorney and accoun-
tant, made a full accounting and restitution to his partner,
paid all back taxes, and pleaded guilty to the crime of fil-
ing fraudulent partnership returns. Neither the Bar nor the
lawyer’s partner sought to prosecute him for embezzlement;
indeed, the two partners reconciled and continued their busi-
ness relationship for approximately three more years until
their partnership was terminated for other reasons.
This court nevertheless ordered the accused to be
disbarred. In doing so, the court emphasized the need to
maintain the public’s confidence in the legal profession:
“No one who is admitted into the legal profession may be
permitted to sully or destroy the right and need of the pub-
lic to impose absolute confidence in the integrity of a law-
yer. Literally thousands of personal and business transac-
tions of unknowing people must be and are entrusted to the
hands of some lawyer. Money, property and matters of per-
sonal confidence are daily entrusted to the integrity of the
individual lawyer. In almost all such instances no bond or
security, other than integrity, is required to assure the pro-
tection or performance of the trust. No member of the Bar
need consider long wherein his duty lies. True, the rules
of professional conduct may fill many pages; the opinions
interpreting some of the rules, many volumes. But in the
more basic conduct he is called upon to perform, any law-
yer knows the simple rules that he must cling to: Simple
straightforward honesty and absolute good faith. No less
will suffice.”
Id. at 347. If the funds at issue had been client funds, the
court continued, it would not hesitate to impose disbarment
as a sanction. “The same violation of the fiduciary duty to
partnership funds,” it concluded, “is no less abhorrent.” Id.
at 349.
292 In re Herman
In In re Murdock, this court applied similar rea-
soning to a breach of the duty of loyalty arising from an
employment relationship. In that case, the accused law-
yer was employed as a salaried associate at a law firm. As
part of his duties, the lawyer represented indigent crimi-
nal defendants through the firm’s contract with the State
Court Administrator (SCA) and provided other services to
the firm’s clients on a flat-fee basis. Over a two-year period,
however, the lawyer converted contract payments owed to
the firm, as well as payments from the firm’s flat-fee clien-
tele, to his own personal use. Murdock, 328 Or at 23. This
court concluded that that conduct violated the lawyer’s
implicit obligation to be candid and fair with his employers,
as well as the duty of loyalty arising out of the employment
relationship between the lawyer and the firm. Id. at 25-26.
The court ultimately concluded that the lawyer must be dis-
barred. Id. at 36.
This court recently addressed a similar problem in
In re Renshaw, 353 Or 411, 298 P3d 1216 (2013), where the
accused lawyer was a partner with two other attorneys in a
law firm. Among other things, the accused was responsible
for processing funds received from clients, paying the firm’s
bills, and determining if the firm had sufficient revenue to
make periodic shareholder distributions that augmented
the partners’ regular monthly paychecks. Beginning in
2006, however, the accused began making distributions to
himself, but not to his partners; when they inquired, he told
them that the firm lacked the funds to make distributions.
The accused also began using the firm’s credit line to cover
personal expenses, later coding them in the firm’s account-
ing records so that they appeared to be business expenses.
In ordering disbarment, this court explained:
“The accused owed a fiduciary duty to the other share-
holders in his firm. See In re Pennington, 220 Or 343, 349,
348 P.2d 774 (1960). He breached that duty when he repeat-
edly took funds that the firm owned and in which the other
shareholders had an interest.”
Id. at 421.16
16
That fiduciary duty extends beyond a lawyer’s professional dealings with
clients and legal colleagues. In In re Phinney, this court concluded that dis-
barment was warranted where the accused attorney violated RPC 8.4(a)(3) by
Cite as 357 Or 273 (2015) 293
In cases involving violations of RPC 8.4(a)(3) in
which this court has imposed a lesser sanction than disbar-
ment, mitigating circumstances were present that do not
exist in this case. For example, in In re Leisure, 338 Or 508,
113 P3d 412 (2005), the accused wrote a series of bad checks
on which she eventually made good, but only after she paid
NSF fees and was threatened with legal action. In suspend-
ing the accused for 18 months, the court explained:
“The accused’s conduct caused a great deal of inconvenience
to many people, but it took its greatest toll on the accused
herself. We conclude, therefore, that the accused should not
be subject to disbarment, but that she should be subject to
a lengthy suspension.”
Id. at 527. No similar mitigating factors exist in this case.
Two aspects of the accused’s conduct in this mat-
ter do not precisely match the circumstances in Pennington,
Murdock, Renshaw, and Phinney. First, each of those cases
involved the theft of assets; as discussed, the bar did not
prove that the accused here actually stole assets in which,
after a proper accounting in the winding up of corporate
affairs, his associates would have been entitled to share.
However, the accused’s conduct, consisting of his exclusion
of his associates from the affairs of Blue Q, his diversion of
corporate assets to his own use, and his unauthorized disso-
lution of the corporation, is comparable to theft in terms of
its nature and scale of selfish dishonesty.
Second, unlike the accuseds in Pennington, Murdock,
and Renshaw, the accused’s actions in relation to Schutfort,
Alexander, and Blue Q did not involve a law firm or partners
who were lawyers. That fact, however, represents a distinc-
tion without a difference. As this court explained in In re
Stodd, 279 Or 565, 567-68, 568 P2d 665 (1977), we do not dis-
tinguish between a lawyer’s professional and nonprofessional
roles when dealing with the money or property of others:
“Nothing less than the most scrupulous probity in deal-
ing with the funds of others is compatible with admission to
committing theft by appropriation when he withdrew funds from bank accounts
belonging to an alumni association for which he served as a volunteer treasurer.
354 Or at 340-41.
294 In re Herman
the practice of law. This is a standard that does not permit
drawing a line between an attorney’s professional and his
non-professional roles.”
Consistently with that case law, which confirms the prelimi-
nary sanction, we conclude that disbarment is the appropri-
ate sanction.
The accused is disbarred, effective 60 days from the
date of this decision.