Attorney Grievance Commission v. Lockhart

Smith, J., delivered the opinion of the Court. Bar Counsel, acting on behalf of the Attorney Grievance Commission of Maryland, filed a petition with us charging that Leonard H. Lockhart, a member of the Bar of this State, had violated Disciplinary Rules 1-102 (A) (1), (4), and (6); 5-105 (A), (B), and (C), and 6-101 (A) (3). 1 *⁴*6He also claimed that ⁵⁸⁸ Lockhart disobeyed Maryland Code (1957, 1976 Repl. Vol.) Art. 10, § 44 (enacted by Chapter 621 of the Acts of 1968) relative to the duty of an attorney concerning funds of others entrusted with him, and Code (1974) § 7-106 (b), Real Property Article (originally enacted by Chapter 726 of the Acts of 1968) concerning mailing or delivering evidence of a recorded release of a mortgage or deed of trust.* 2 Pursuant ⁵⁸⁹ to Maryland Rule BV9 b the matter was sent to the Circuit Court for Kent County for hearing. The Honorable George B. Rasin, Jr., Chief Judge of the Second Judicial Circuit of Maryland, was designated to conduct this proceeding.

After a full hearing Judge Rasin submitted to us a lengthy and well reasoned report and opinion. His findings of fact are attached as an appendix to this opinion. ⁵⁹⁰ Crystal Beach Manor, Inc., owned a waterfront development in Cecil County known as Crystal Beach Manor. 3 Its land was subject to three deeds of trust. 4 Apparently plans were made to convey a number of small lots containing 2,000 - 3,000 square feet of land. Many of these sales were to individuals who had leased the lots conveyed for a number of years. Lockhart was counsel for Crystal Beach Manor, Inc.; its parent corporation, Exten Associates, Inc.; and Gerald M. Exten, who owned or controlled the stock of Exten Associates.

Lockhart established a special escrow account for this series of transactions. As settlements took place the funds derived therefrom were placed in this account. He did not procure a release of prior liens for each lot as it was sold. He apparently left to Exten the task of obtaining releases from these deeds of trust for the lots conveyed.

Title insurance policies were issued to purchasers and possibly some mortgagees after each settlement. They did not reflect that the land so covered was subject to these three deeds of trust. Funds were withdrawn from the escrow account at Exten’s direction. Payments were made from the account on obligations of Exten and his corporations and for other matters unrelated to the settlements in question.

There had been an agreement with the Crystal Beach Manor lienholders by which a specified amount of land was to be released at a certain dollar figure per acre. A computation was made long after many of the settlements as to the number of acres previously conveyed. Disbursement was then made to the lenders upon the basis of the per acre release rate. 5 There came the time when Exten’s house of ⁵⁹¹ cards collapsed. There was not then in the escrow account a sufficient amount of money to procure releases of liens on a number of lots which Crystal Manor had conveyed.

These transactions had taken place in the office of Lockhart. In each instance he had certified to a title insurance company that these titles were free and clear of liens, aside from those which were purchase money mortgages of the lot purchasers. Judge Rasin made the following conclusions: The Court finds the following violations of the Disciplinary Rules and the Maryland Code: 1. Disciplinary Rule 5-105 (A) and (B) Respondent demonstrated that his first ⁵⁹² allegiance was to Gerald Exten and Exten Associates, Inc., which adversely affected the exercise of his independent professional judgment in behalf of the purchasers of the lots from Crystal Beach Manor, Inc., an alter ego of Gerald Exten.

He should not have undertaken representation of the purchasers in the purchase of their lots. Furthermore, he should not have continued his representation knowing full well he was placing the interests of Gerald Exten before that of the purchasers. 2. Disciplinary Rule 1-102 (A) (4) Respondent was involved in misrepresentation when he issued title insurance policies certifying there were no liens — other than purchase money mortgages — when in fact there were deeds of trust which were unreleased as to the lots conveyed at the time of settlement and the issuance of the title policies. 3. Disciplinary Rule 6-101 (A) (3) Respondent neglected legal matters entrusted to him by the purchasers of the lots when he failed to obtain releases of the deeds of trust covering the lots at the time of the conveyances.

Even assuming that it was not possible — or convenient — to obtain individual releases as to each of the lots conveyed — and this Court does not find such contention tenable — he owed the purchasers the duty to follow up with Gerald Exten to ascertain that the releases were obtained and recorded. Furthermore, Respondent admitted at the hearing that he had been neglectful. 4. Maryland Code, Article 10, Section 44 Although Respondent established an ⁵⁹³ escrow account and deposited funds therein which accrued from the sale of the lots, he used the funds for purposes other than the purpose for which the funds were entrusted to him. His disbursement of funds from the escrow account at the direction of Gerald Exten, at times when there were unsatisfied liens on the lots which had been conveyed and title policies issued, must be deemed a wilfull act on the part of Respondent.

Not until the liens of the deeds of trust had been released as to the lots conveyed should any of the funds in the escrow account have been disbursed to or for the benefit of Gerald Exten. 5. Maryland Code, Real Property Article, Section 7-106 (b) Respondent candidly admitted that he was unaware of this particular statute requiring him to mail or deliver to the vendor and purchaser in a real estate transaction the original or a photographic, photostatic or similarly reproduced copy of the recorded release of the deed of trust, the original or a copy of the court’s recordation receipt for the release or any other certified court document clearly evidencing the recordation of the release. Since this was not done, Respondent violated this statute. In the summary to his opinion Judge Rasin said: This Court finds by clear and convincing evidence: (1) that Respondent represented the vendor, purchaser and insurer of title in numerous real estate transactions;[ 6 ] (2) that at the time of the ⁵⁹⁴ conveyances there were deeds of trust encumbering the title to the property conveyed; (3) that title policies were issued certifying there were no liens except for purchase money mortgages; (4) that releases of the deeds of trust were not obtained and recorded at the time of settlement in approximately 143 real estate transactions; (5) that the title company which relied on Respondent’s title certifications sustained financial loss because of false certifications; (6) that disbursement of funds accruing from the various transactions were made for purposes other than satisfying liens which should have been released contemporaneously with the transfer of title; (7) that Respondent’s conduct was wilful and with full knowledge of the facts and, ⁵⁹⁵ therefore, in violation of the Code of Professional Responsibility and those provisions of the Maryland Code heretofore enumerated.

At argument before us counsel for Lockhart conceded the correctness of Judge Rasin’s conclusions Nos. 1, 2, 3, and 4. He said he assumed as to 5 that the title company which relied on Lockhart’s title certification sustained financial loss because of false representations. Whether this title insurance company ultimately sustained financial loss is unimportant for the purpose of our decision. There is clear and convincing evidence that it had a substantial potential liability because Lockhart had falsely certified there were no liens.

Counsel said he agreed with No. 6, that disbursements from these transactions were made for purposes other than satisfying liens which should have been released contemporaneously with the transfer of title. He explained, however, that this happened at the direction of Exten. That is no defense. It may be that Lockhart found himself in an uncomfortable position when a client who had been the source of fees in a substantial amount desired that these escrow funds be applied for purposes other than that for which they were intended.

He cannot relieve himself of his professional responsibility to the purchasers of the lots in question, to the title insurance company, and to the ultimate holders of the purchase money mortgages from the lot buyers by saying that Exten told him to do it, any more than one may relieve himself of criminal liability by saying that he was told by someone else to commit the act. Nor can he relieve himself of his obligation to procure releases of the liens at the time of each settlement by saying that he relied upon Exten. Lockhart was the lawyer. He was the one to whom the purchasers, their mortgagees, and the title insurance company looked for a clear title.

It was his duty to obtain it. It likewise was his duty to guard his (not Exten’s) escrow account. This meant it was improper for any disbursement unrelated to the settlements to be made until these liens had been satisfied, notwithstanding directions from Exten or directions on Exten’s behalf for such disbursements. Lockhart filed a number of exceptions to the findings of ⁵⁹⁶ fact and conclusions of law made by the trial judge.

We shall not comment upon most of them because even if the trial judge erred on these matters, and we do not think he did, such error would in no way undermine his basic conclusion that Lockhart was guilty of professional misconduct when he falsely certified that purchasers were acquiring a title encumbered only by their own purchase money mortgages. However, we shall comment relative to his contention concerning DR 1-102 (A) (4). He says he did not violate this rule “because, with good intentions, he fully believed that the monies retained in the escrow account would always be adequate to release the liens.” This assertion on his part completely overlooks the trial judge’s finding, which was that he “was involved in misrepresentation when he issued title insurance policies certifying there were no liens — other than purchase money mortgages — when in fact there were deeds of trust which were unreleased as to the lots conveyed at the time of settlement and the issuance of the title policies.” Moreover, it was his duty to obtain the release of liens at the time of settlement, not many months later. We find Judge Rasin’s conclusions to be supported by clear and convincing evidence.

Thus, we are faced with the sanction to be imposed. There is no evidence here that Lockhart took funds from this escrow account for his own purposes, other than payment to him of fees to which he was legitimately entitled. If the money in his account had passed improperly to Lockhart, we ordinarily would disbar him forthwith without hesitation. So far as we have been advised Lockhart’s prior professional record is unblemished.

Many times in recent years this Court has quoted from Ex Parte Brounsall, 2 Cowp. 829 (1778), what has come to be known as “the Lord Mansfield rule.” It is to the effect that in disciplinary proceedings the inquiry is to whether after the conduct of such individual it is proper that he should continue to be a member of a profession which should stand free from all suspicion, such proceedings not being by way of punishment, but the court in such cases exercises its discretion whether a man whom they have formerly admitted to practice is a proper person to ⁵⁹⁷ be continued on the roll or not. By the same token, suspension is for the protection of the public, not by way of punishment of the individual lawyer. It is protection for the public because it demonstrates to members of the legal profession the type of conduct which a court will not tolerate without sanction. Settlement lawyers in effect representing all interests, as did Lockhart, must recognize that they have a special duty to all parties to the settlement.

This duty includes prompt obtention of appropriate releases of liens. It also includes prompt and proper disbursement of all funds passing through their hands. Such lawyers may not abdicate this responsibility to the seller without the consent of the buyer, the buyer’s mortgagee, and the title insurance company insuring the buyer and his mortgagee. It must be noted that Judge Rasin in his summary said relative to the violations which he found of the Code of Professional Responsibility and Maryland statutes that Lockhart’s “conduct was wilful and with full knowledge of the facts ....” There was clear and convincing evidence to support this conclusion.

In other words, Lockhart’s violations were not the result of mere oversight nor were they brought about by negligence arising from alcohol or drug abuse. We must take all of this into consideration in meting out a sanction. Leonard H. Lockhart shall stand suspended from the practice of law in this State for the period of one year accounting from 30 days from the date of this opinion. He shall stand suspended beyond that date unless and until all costs incurred in connection with this proceeding are paid in full.

It is so ordered; responden t shall pay all costs, including all costs of transcripts, pursuant to Maryland Rule BVIBc. ⁵⁹⁸ APPENDIX FINDINGS OF FACT Respondent was admitted as a member of the Bar of the Court of Appeals of Maryland in 1955, and from 1971 through 1978 maintained an office for the practice of law in Elkton, Maryland. From July 2, 1971, to July 1, 1974, Crystal Beach Manor, Inc., a Maryland Corporation, was the owner of a waterfront development known as Crystal Beach Manor, consisting of approximately 205 acres of land, situate in the First Election District of Cecil County, Maryland. A portion of the property owned by Crystal Beach Manor, Inc. was divided into small lots. The lots which are pertinent to this inquiry were all occupied by persons who had previously leased them from Crystal Beach Manor, Inc. or its predecessors in title.

During the period that Crystal Beach Manor, Inc. owned this property it was a wholly owned subsidiary of a corporation known as Exten Associates, Inc., which in turn was solely owned by Gerald M. Exten. Crystal Beach Manor, Inc. imposed three deeds of trust on the development known as Crystal Beach Manor as follows: (a) The first, dated July 2,1971, to Edward W. Nylen and Lance W. Billingsley, Trustees for National Mortgage Corporation, in the principal amount of $525,000.00, and recorded among the Land Records of Cecil County, in Liber W.A.S. No. 273, Folio 197, etc., (b) The second, dated December 21, 1972, to Ellis N. Jones and Jessie Hilderbrand, Trustees for MFS Service Corporation, in the principal amount of $700,000.00, and recorded among the Land Records of Cecil County in Liber W.A.S. No. 302, Folio 357, etc., and (c) The third, dated May 7, 1973, to Lance W. Billingsley and William Y. Meyers, Trustees for National Mortgage Corporation, in the principal amount of $300,000.00, and recorded among the ⁵⁹⁹ Land Records of Cecil County in Liber W.A.S. No. 312, Folio 99, etc. Respondent represented Gerald Exten, Exten Associates, Inc., and Crystal Beach Manor, Inc. at the time the ownership of Crystal Beach Manor was acquired in 1971. He continued to represent all of them through July 1,1974. Respondent was the secretary of Crystal Beach Manor, Inc., during this period for the sole purpose of having his name used as a resident of Cecil County in order to obtain an alcoholic beverage license.

He did not take an active part in the management of the affairs of Crystal Beach Manor, Inc. During 1973 and 1974 Crystal Beach Manor, Inc., engaged in a course of action to effect the sale of lots to those persons who occupied them under the lease agreements. Arrangements were made for the Respondent, or persons associated with him and his law firm, to conduct settlements on the sales of approximately 143 lots at Crystal Beach Manor. Respondent (or attorneys associated with him) acted as attorney for purchasers of the lots. Included among the settlements were 52 lots enumerated in a partial release of deed of trust dated March 25, 1975, and recorded among the Land Records of Cecil County in Liber W.A.S. No. 344, Folio 61, etc., after the deeds had been executed in 1973 and 1974.

The MFS deed of trust did not specifically provide for the release of individual lots from its lien. However, by letter dated December 20, 1973, MFS agreed to release certain acreage in Crystal Beach Manor, out of which the lots were conveyed, upon payment of principal in the amount of $6,250.00 and the execution of a first trust note of $6,250.00 bearing interest at the rate of 8% or better for a period of five to ten years per each acre to be released. These notes were to be subject to the approval of the Corporation. The trust notes could cover either the lots being conveyed or any other property.

By letter dated December 4, 1973, to Gerald M. Exten, National Mortgage Corporation agreed to release certain acreage in Crystal Beach Manor, out of which the lots were conveyed, from the lien of its deed of trust, upon payment of ⁶⁰⁰ $2,000.00 for each acre to be released. The letter also provided that “any interest now due on notes secured by those mortgages is also paid”. The letter further called Mr. Exten's attention to the date when the interest was due and the amounts thereof and further stated that National Mortgage Corporation understood Mr. Exten would bring current all interest due on any of his loans from Crystal Beach Manor, Inc. before the year end and failing that he would assign as additional collateral all that paper resulting from the sale of lots at Crystal Beach. Three payments of principal were made of MFS deeds of trust as follows: January 16, 1974 — $50,000.00 February 14, 1974 — $42,375.00 March 25, 1975 — $53,950.00 Upon receipt of the $42,375.00 payment by MFS on or about February 14, 1974, a release of liens as to 92 lots in Crystal Beach Manor, comprising approximately 6.7903 acres, was executed February 13, 1974, and recorded among the Land Records of Cecil County on March 6, 1974, in Liber W.A.S. No. 329, Folio 119, etc. After the payment of $53,950.00 on or about March 25, 1975, MFS Service Corporation executed on the same date another release of liens on 52 lots in Crystal Beach Manor comprising approximately 4.3164 acres.

This release was recorded among the Land Records of Cecil County in Liber W.A.S. No. 344, Folio 161, etc. Deeds conveying some of these 52 lots had been recorded in early 1974 and thus remained subject to the MFS deed of trust for approximately one year, National Mortgage Corporation received no payments of principal on its deeds of trust until some time in March of 1976. Shortly thereafter it executed two releases as to 148 lots in Crystal Beach Manor. All of the deeds to these lots had been executed and recorded prior to the recording of the releases of the deeds of trust. The liens of the two deeds of trust were, therefore, unsatisfied for at least a year after individual purchasers had taken title.

In 1971 Respondent was designated as an approved ⁶⁰¹ attorney by the Commonwealth Land and Title Insurance Company (Commonwealth) for the purpose of writing title policies for that Company. Thereafter Respondent and his law partner organized the Northeastern Maryland Title Co., Inc., (Northeastern) with Respondent acting as president, and an agency agreement dated May 1, 1974, was executed by Commonwealth and Northeastern. Paragraph 2 (f) of the agency agreement entered into between Commonwealth and Northeastern provided inter alia that Northeastern, as agent, would make payment out of escrow funds of all obligations which constituted liens on the property and would be responsible for satisfaction of such liens of record. Paragraph 2 (g) of said agreement provided inter alia that Northeastern, as agent, would deposit settlement funds in a separate escrow account and that such funds would be disbursed in the normal course of conduct of real estate transactions.

During the years 1973 and 1974, as agents for Commonwealth, Respondent and Northeastern issued approximately 130 owner’s title insurance policies to various lot purchasers at Crystal Beach Manor certifying that said lots were free and clear of any liens — except purchase money mortgages. This, of course, would have included the deeds of trust of MFS Service Corporation and National Mortgage Corporation, when in fact said lots were encumbered by such liens, of which Respondent was aware at the time the title policies were issued. Around May of 1974 Exten’s enterprises, including Crystal Beach Manor, Inc., ran into financial difficulties. In July of 1974 Crystal Beach Manor, Inc., filed for Chapter 11 reorganization and remained a debtor in possession.

Crystal Beach Manor, Inc., was subsequently adjudicated bankrupt in 1974. In June of 1974 Crystal Beach Manor, Inc., became delinquent on its obligation to MFS. In early November 1974 MFS became aware of Mr. Exten’s financial difficulties when he told someone at MFS he had a financial problem and would pay as soon as he could. National Mortgage Corporation ⁶⁰² communicated with MFS to discuss the Exten problem.

On November 20, 1974, representatives of MFS and National Mortgage Corporation held a meeting in Prince George’s County in the office of the attorney for National Mortgage Corporation. Respondent was present at that meeting. Commonwealth had no knowledge of any unusual problems until November 1,1974, according to its regional counsel and vice-president who testified at the hearing. It was at this time that Commonwealth learned the lots for which title policies had been issued in its name were still subject to deeds of trust.

As a result of considerable negotiations among all parties concerned Commonwealth paid out of its own