Attorney Grievance Commission v. Greenwalt

RODOWSKY, Judge. Respondent, Robert Brian Greenwalt (Greenwalt), obtained a new client, Ridgeway Savings & Loan Association (Ridgeway), when Greenwalt’s existing client, David L. Rouen (Rouen), acquired practical control over the affairs of Ridgeway. There followed the now familiar insider loans and other violations of Maryland law that formed the pattern revealed during the Maryland savings and loan crisis of 1985. 1 Eventually Ridgeway was placed in conservator-ship. The present charges against Greenwalt grow out of information brought to the attention of Bar Counsel by the Special Counsel on the Savings and Loan Crisis. 2 The principal issue before us is Greenwalt’s exception to every finding that he “[e]ngage[d] in conduct involving dishonesty, fraud, deceit or misrepresentation,” in violation of DR 1-102(A)(4) of the former Maryland Code of Professional Responsibility that was in effect during the relevant period.

The background facts are these. Greenwalt was admitted to the Bar of this Court in June 1978. He began practicing law out of offices shared with W. Walter Farnandis, Esq. (Farnandis).

Farnandis had founded Ridgeway, a ⁴⁵² mutual association, that had offices in Catonsville and in Ellicott City. Farnandis controlled Ridgeway through proxies obtained when passbook accounts were opened, and he served as Ridgeway’s legal counsel. Greenwalt began representing Rouen in 1982. In September 1984 Rouen purchased from Farnandis an assignment of the proxies executed to Farnandis by Ridgeway depositors.

The agreement evidencing the terms and conditions of this sale was prepared for Rouen by Greenwalt. 3 Thereafter, a new five person board of directors for Ridge-way was installed. New directors included Rouen, Glen E. Dawson (Dawson), and Charles Oglebay (Oglebay). A carry-over member to the new board was Rosemary Tyler (Tyler), who also continued as secretary of the corporation. Greenwalt was not initially a member of the Rouen-installed board, but became a director in December 1984.

Greenwalt, however, was elected president and became counsel of Ridgeway in September 1984 at a combined salary and retainer of $1,500 per month. He continued his law practice and estimates that fees on Ridgeway matters (apparently including loan closings) were twenty-five percent of his income, while legal work for Rouen exclusively was fifteen percent of his time. Under the new board Ridgeway was converted from a mutual to a capital stock association, and stock was issued. The business philosophy of the new board was described by Greenwalt as follows: “[T]he idea of the board, certainly as characterized by Dawson, Oglebay and Rouen, was to make a great deal of money for Ridgeway.

That’s what they wanted to do. They wanted to get loans at the highest paying interest. Essentially what it meant was that they weren’t interested in doing small mortgages on houses. They wanted to go after the big stuff like shopping center loans.” ⁴⁵³ When the Maryland savings and loan crisis struck in May 1985, Ridgeway was able to survive for a number of months by borrowing from Maryland Deposit Insurance Fund (MDIF).

Greenwalt resigned as president of Ridgeway in September 1985. Ridgeway was placed in conservatorship on December 13, 1985. The subject professional disciplinary charges against Greenwalt involve his relationship as attorney to his client, Ridgeway. The charges against Greenwalt were referred for hearing to Judge Joseph F. Murphy, Jr. of the Circuit Court for Baltimore County.

Bar Counsel’s case at that hearing consisted of documentary exhibits, excerpts from the deposition testimony of Greenwalt taken in a civil damage action brought by MDIF and arising out of Ridgeway’s affairs, 4 Greenwalt’s testimony at his inquiry panel hearing, and admissions, both in response to requests propounded under Maryland Rule 2-424 and by way of answer to the allegations of the Petition for Disciplinary Action. Bar Counsel charged that Greenwalt violated numerous disciplinary rules, including DR 6-101, a failure to act competently, and DR 1-102(A)(4), fraudulent conduct. In his report to us Judge Murphy found that certain conduct is, inter alia, a violation of DR 1-102(A)(4), but he did not find any violation of DR 6-101. These conclusions thereby embody concerns which Judge Murphy expressed at the hearing when giving Greenwalt an opportunity to explain his conduct.

Speaking to Greenwalt, Judge Murphy said: “They have charged you with fraudulent conduct. Now, I agree, if somebody gets on the witness stand and he says the light was green and it turns out the light was red, that doesn’t necessarily mean he committed perjury, but if he knew damn well that he has lied about the color of the light, then he has committed perjury. “I mean, at some point sloppiness isn’t sloppiness necessar[il]y anymore; it is deceit. They have alleged that you have been deceitful in important respects. ⁴⁵⁴ “Now, I’m trying to get your explanation. I want you to give me your explanation, if you have one, but this business about, geez, I never even thought of it doesn’t make any sense to me.

It just doesn’t.” In his report Judge Murphy distinguished between motive and intent. He found that Greenwalt’s violations were willful and deliberate, but that Greenwalt’s motive was not “personal greed or other evil motive.” It is that finding of intentional fraud to which Greenwalt has filed an across-the-board exception. Other exceptions by Greenwalt focus on specific conduct. Exceptions by Bar Counsel aver a failure to find additional violations. 1.

The Shopping Center Loans In December 1984 the Ridgeway board approved loans totalling approximately $2.3 million to partnerships in which Rouen was a partner and which were developing shopping centers. One project was Town Center in Port Richey, Florida, and the other was Castle Mall (also called University Mall) in Newark, Delaware. The loans were prohibited transactions under Md.Code (1980), § 9-307, “Conflict of Interest,” of the Financial Institutions Article, unless excepted under § 9-307(b)(2). For that exception to apply the loan would have to have been approved by the Director of the Division of Savings and Loan Associations (DS & L), then .the state regulatory agency.

Greenwalt made no effort to obtain DS & L approval for the loans. At his deposition Greenwalt did not recall being concerned with any regulations in connection with these transactions, save the limit on ratio of loan to net worth, discussed infra. In December 1984 Ridgeway had cash of $300,000 to $500,000. It was necessary for Ridgeway to borrow the money to fund the shopping center loans.

Ridgeway secured its borrowing by mortgages in its portfolio at a ratio of 1.5 to 1. The Castle Mall loan closed in December 1984 in Philadelphia. It was secured by a second lien, although the Ridge- ⁴⁵⁵ way directors’ minutes of December 19, 1984, approved the loan as a first mortgage. Greenwalt attended the closing and learned of the junior position, but did nothing.

New York counsel for the buyers-borrowers, who also apparently prepared the loan documents, told Greenwalt that that was the way the transaction had to be structured, because the sellers were getting a take-back first mortgage. There is no approval of the Port Richey loan in the minutes of Ridgeway’s board of directors. Greenwalt says that Dawson signed the loan commitment without authority. The loan closed in Florida with Ridgeway again obtaining a second mortgage.

Greenwalt did not attend the closing, apparently relying on Rouen to represent Ridgeway’s interest. Greenwalt relied on counsel for the borrowers to record the second mortgage to Ridgeway on the Delaware transactions, and quite possibly on the Florida transaction as well. In May 1985, during a financial examination of Ridgeway, the examiners told Greenwalt that the mortgage or mortgages were not recorded, but, when Greenwalt inquired, the borrowers’ counsel told him that they were recorded. Greenwalt never investigated further. 5 Against this background Judge Murphy found that the failure to disclose the shopping center loans to DS & L violated, inter alia, DR 1-102(A)(4).

In early January 1985 Greenwalt and other Ridgeway board members met with officials of DS & L and of Maryland-Savings Share Insurance Corporation, then the private insurer of accounts of Maryland chartered savings and loan associations, including Ridgeway. In the course of that meeting DS & L learned of the shopping center loans. These loans also violated Code of Maryland Regulations (COMAR), Title 9, § .05.01.30(B)(1) prohibiting any one loan in excess of 100% of net worth. See 7 Md.Reg. 56, 57 (Jan. ⁴⁵⁶ 11, 1980).

By letter of January 25 DS & L instructed Ridgeway to obtain participating lenders. Greenwalt replied for Ridgeway by letter of January 29, 1985, stating in part: “In regard to the loan in excess of net worth, we have restructured the loan to have the four individuals in the partnership become individually liable for one-fourth of the loan severally, while retaining the partnership as liable for all of the loan.” The loan had not been restructured. Under the loan documents, the members of the borrower partnership did not have personal liability. The loan was not thereafter restructured in order to obtain that personal liability.

Judge Murphy found that Greenwalt took no steps to prevent either of the shopping center loans because he was representing Rouen individually, as well as Ridgeway. Judge Murphy found that Greenwalt’s role in these real estate transactions violated, inter alia, DR 1-102(A)(4). 2. Conversion to Stock Rouen desired to convert Ridgeway into a capital stock association. Conversions of mutual savings and loans into stock associations were then regulated by DS & L, per a revision of COMAR, Title 9, § .05.01.21, effective January 25, 1980. 7 Md.Reg. 113.

The general scheme of the regulation required that a subscription offering be made to eligible accountholders, and the regulation optionally allowed a plan of conversion to permit officers, directors, and employees of a converting association to purchase up to twenty-five percent of the total offering. § .05.01.21B(2)(e) and (3)(a). Under the regulation a plan of conversion was required to provide that any shares not sold in the subscription offering be sold “in whatever manner is satisfactory to the Director.” § .05.01.21B(2)(h). Greenwalt prepared a plan of conversion which was approved by DS & L, and the stock was issued in February 1985. Ridgeway advised DS & L in April 1985 that four accountholders had purchased a total of 175 shares, and that ⁴⁵⁷ the remaining shares were held as follows: 8,125 shares by Rouen; 7,020 shares by Nancy Rouen, Rouen’s wife; 8,125 shares by Greenwalt; and 8,125 shares by Tyler.

Underlying the titling in the names of Greenwalt and Tyler of 16,250 shares on the books of Ridgeway were transactions in the form of loans. Rouen loaned Greenwalt and Tyler approximately $80,000 each with which to purchase stock. That stock secured repayment of the loans which were due in forty-five days. Greenwalt never made any payments against the “loan.” Tyler was not a witness.

At the hearing on the charges Judge Murphy asked Greenwalt: “Your interest in the stock was just to hold it in your name so Rouen could control it, right?” Greenwalt replied: “Well, yes. I guess to a large extent, yeah.” Judge Murphy found that Greenwalt “concealed the important fact that the stock issued to himself and to Tyler was actually owned by Rouen,” and he found that that concealment violated, inter alia, DR 1-102(A)(4). In May 1985 Ridgeway was seeking insurance from the Federal Savings and Loan Insurance Corporation (FSLIC). In connection with that application Greenwalt was required to complete a questionnaire.

He reported under oath that he held