On the agenda for the Regulation, Admissions and Discipline Oversight Committee (RAD) of the Board of Trustees of the State Bar of California is the Chief Trial Counsel’s proposal to change Rule 5.41 of the State Bar Rules of Procedure.  That rule governs the charging document that initiates a disciplinary proceeding in State Bar Court, the notice of discipline charges (NDC).   The proposed change would make it clear that  “notice pleading” is the standard in State Bar Court by requiring facts “in ordinary and concise language” without requiring “technical  averments or … allegations of  matters not essential to be proved.”

On the face, this seems innocuous enough.  But then you read the rationale for the rule change and you start to understand.

First,  the modification doesn’t change the applicable law in any way, a fact acknowledged by the Chief.   Applicable Supreme Court and Review Department precedent  require the discipline prosecutor to provide a level of detail necessary to prepare a defense, consistent with due process.  But those same cases, especially Baker v. State Bar discuss another important purpose served by a specific pleading

The Supreme Court has told us that more than the minimum required by due process is essential.  There is no acknowledgment or discussion of this important purpose in the memorandum supporting the rule change.   It’s as if this inconvenient part of Baker just faded away.

Second, the Chief Trial Counsel, in her selective review of the history of  disciplinary pleading,  ignores the seminal event that put her office on the path to its current pleading practices.   I know it well because I was there at the time and participated in the office’s response to it.   That event is the Review Department decision In the Matter of Varakin (Review Dept.  1994)  3 Cal. State Bar Ct. Rptr. 179.   Not only is Varakin ignored but the memorandum contains this misleading statement:

Since and in response to these opinions, OCTC has overcompensated in its factual allegations in its NDCs. Although Maltaman, Guzetta, and Glasser involved criticisms of  individual charging documents, not an indictment of OCTC’s broader charging practices, OCTC responded to these cases by informally adopting a custom and practice of  pleading virtually every fact that it intended to present at trial, including those not  material to proving the elements of the charged offense.

Misleading in two ways.  First, because it was Varakin that prompted the change in pleading practices, not those earlier cases, and second, because Varakin was very much an indictment of OCTC’s broader charging practices.  An extended excerpt from Varakin shows the extent of the deception:

The pleading format that we devised, the one the Chief labels “exaggerated fact pleading”  has been used for almost 18 years without question.   Never has there been suggestion that it was leading to undue delays in the disciplinary process until now.

The Chief Trial Counsel makes the argument that less notice of permissible in the charging document because the respondent has, at the point charges are filed, been given notice three times, first, in the initial letter from the investigator, second, in the letter notifying the respondent that OCTC intends to file charges and finally, in the early neutral evaluation conference process, where OCTC is required by rule to provide the court with a draft NDC.

Those familiar with the process will be bemused.  Despite the language of Rule 2409,  OCTC doesn’t always contact a respondent in the investigation process before filing the NDC based on that investigation.  I have a case with a pending motion to dismiss a number of counts based on this failure.   The investigation letters that OCTC does send usually restate the complainant’s allegations in broad language, allegations that may or may not be related to the misconduct that is ultimately charged.  The notice of intent letter usually contains a recitation of citations to statutes and rules allegedly violated with the lawyerly caveat “including but not limited to”.   Often one of the purposes of the ENEC is to “smoke out” the factual basis for charging a certain rule or section because it just isn’t clear what OCTC’s theory of culpability is.   Despite the rule requiring a draft NDC or summary of facts supporting each violation, it isn’t always done.   And if the charging document for discussion at the ENEC is now going to be the “short form” NDC, the notice problem isn’t cured.

The articulated aim is to reduce the pleading standard to barest minimum level of notice to that “consistent with criminal procedure”.   Those who have read the charging documents typical in criminal cases will know just how minimal that can be.   This is apparently OK because “a member’s duties and oaths vis a vis the Rules of Professional Conduct and the State Bar Act are also presumed” just like every person is presumed to know the criminal law.   In other words, we don’t have to tell you what you did wrong; you already know.

Brick by brick, procedural protections for  respondents in the discipline system are being dismantled.   The protections of the Evidence Code in State Bar proceedings are no longer available;  the right to discovery has been cut back.   Now the right to adequate notice, a fundamental part of due process, is threatened by this proposal, a proposal freighted with deception.

For the second time in the last two years, the Review Department of the State Bar Court has issued a published decision, i.e. a decision that it citeable precedent in the Court, where attorney discipline cases are adjudicated.  Strangely, more than month after filing, it still is not listed among recent published cases on the State Bar Court’s website.  The name of the case is In the Matter of Swazi Taylor.  You can find the decision here and on Westlaw (2012 WL 5489045).

Taylor deals with the issue of the appropriate discipline for violation of Civil Code section 2944.7, conduct which is disciplinable through the gateway statute, Business and Professions Code section 6106.3.  It isn’t the first decision that interprets section 2944.7 but it is the first published decision to do so, as footnote 8 reminds us.

Section 2944.7 regulates when an attorney may be paid for certain services related to obtaining a loan modification for a client.  It says:

(a) Notwithstanding any other provision of law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following:(1) Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.

The statute was enacted in 2009 as part of SB 94, urgency legislation meant  to protect the public from unscrupulous loan modification operations that had sprung up after the collapse of the housing market in 2008, during the early days of the Great Recession:

Although some loan modification consulting companies are reportedly acting in a reputable manner and providing significant value to their customers, there is significant anecdotal evidence that others are preying on borrowers’ fears of losing their homes and their ignorance of the options available to them, and charging these borrowers fees (often up-front, nonrefundable fees) for services the borrowers could obtain elsewhere, free-of charge.

Words like “reportedly” and “anectodal”  convey the care with which this legislation was crafted, in contrast to the Federal Trade Commission’s exhaustive process that went into creating the MARS rule.   While it was clearly recognized that some “loan modification”  consultants were providing significant value to their clients,  SB 94 promulgated a solution that penalized both scammers and attorneys seeking to provide legitimate and necessary services to mortgage borrowers:  making it economically impossible to operate.   Part of the background was the belief in 2009 that the banks, the recipients of large amounts of Federal assistance, would be cooperative the Federal programs designed to assist beleaguered borrowers, thus obviating the need for lawyer assistance.  We now know how delusional that was.  Instead of cooperating, the lenders engaged in obstructive tactics to make if as difficult as possible for borrowers to obtain relief .   Paperwork was routinely lost, borrowers were shuffled around to different offices of the lender, conflicting information was given, a process that lasted many months and sometimes years.

The demand for assistance was great and the first rule of a market based economy is that where there is demand for something, someone will supply it.  Upon studying SB 94, it became apparent that the section 2944.7 , the catch-all section intended to regulate attorneys did not contain the explicit ban on dividing up loan modification services into sections or phases ( a practice that became known somewhat colloquially as “unbundling”)  that the sections regulating real estate licensees did.  Clearly, the Legislature could have used that explicit language.   Instead the statute banned payment until services “contracted for” or services  as “represented would be performed” were provided.  The difference persuaded many attorneys that they could provide loan modification services on an “unbundled” basis consistent with the statute, if the contract with the consumer, the document setting forth the attorney’s representations as to what services would be provided and when, was appropriate structured.

Three years and more down the road, Taylor now says that that this is incorrect.  Adopting the construction of the statute urged by the State Bar of California, the first published decision interpreting the law says that you don’t get paid until the end of the process if the client is seeking a loan modification.  Preliminary steps undertaken before actual negotiation with the lender are part of the entire process and cannot be paid for separately (Taylor, opinion at page 16.)

While Taylor is first published (and thus precedential) decision to interpret the statute, it is not the first decision to interpret the statute.    Duenas v. Brown was a United States District Court case filed in 2010 seeking a determination that section 2944.7 was unconstitutional.   Former Chief Trial Counsel James Towery was a defendant in that case, in his capacity as the State Bar’s top disciplinary enforcer.  He was defended by both the State Bar’s Office of General Counsel and outside counsel, the respected law firm of Kerr & Wagstaffe.  As part of his motion seeking to dismiss the complaint for lack of jurisdiction,  Mr. Towery’s lawyers took a position directly at odds with the Taylor case in March 2011:

The fundamental flaw with this argument, and the reason there is no case or controversy and thus no federal jurisdiction, is that section 2944.7(a)(1) is not nearly as broad as Plaintiff contends. Rather, in order to address the proliferation of businesses and individuals which prey on vulnerable homeowners by promising to obtain a loan modification on the homeowner’s behalf for a fee, the statute restricts the timing of payments to any person for negotiating, arranging or otherwise performing a loan modification, that is, the timing of payments to a person for dealing directly with a lender on the homeowner’s behalf.  It does not restrict or even regulate the fee an attorney charges for representing a homeowner in litigation or providing advice to a homeowner regarding a mortgage or a lender’s proposed modification of a mortgage. It is thus unsurprising that Plaintiff cannot identify any instance in which the statute has been enforced, or even threatened to be enforced, in the broad manner Plaintiff urges.

(Emphasis added).  United States District Court Judge Richard Seeborg was persuaded.  As part of his order dismissing Mr. Duenas’s challenge to the statute, his order issued in August 2011 stated:

Section 2944.7, in contrast, only regulates the timing of payment for modification work. It would not, therefore, seem to require delayed payment for at least four of the six services Duenas requested. As to the timing delay, it is true that section 2944.7 prohibits payment until “each and every” modification service promised is completed, but it does not say that payment must be delayed for all “mortgage related services” until all such services are complete. In other words, the fact that Duenas was not able to hire Olender to help him with his three loans appears to have more to do with that attorney’s subjective, expansive reading of the statute.

Complaint dismissed.  But by August 2011 the landscape had changed.  Mr. Towery and four of his top managers had been purged from the State Bar in June 2011, a move that most knowledgeable observers attribute to the newly installed, politically connected Executive Director of the State Bar, Jim Dunn.  Part of the impetus for the purge was almost certainly Mr.  Towery’s  candid report to the State Bar’s Board of Trustees in April 2011 that relatively few “loan modification” attorneys had been disciplined, despite the many hundreds of complaints.  By August 2011, Mr. Dunn’s candidate for Chief Trial Counsel,  “zero tolerance” Jayne Kim had been installed as interim Chief Trial Counsel.  The stage was  being set for an aggressive campaign against lawyers offering loan modification services on an unbundled basis, exactly the kind of broad enforcement of the statute that Mr. Duenas could not point to in March 2011.

But first, Mr. Dunn and Ms. Kim had other fish to fry.  While disciplinary charges had been filed against Mr. Taylor in May 2011, the Office of Chief Trial Counsel’s principal theory was that that the services offered in each phase were unconscionable, because the amount of work being done in each stage was not commensurate with the fees paid at each stage.  Through the end of 2011, complaints against loan modification attorneys offering services on a “unbundled” basis or as part of potential litigation against the lenders, continued to be closed, in the service of Mr. Dunn’s stated goal of reducing the investigation backlog to zero.  Once that goal was achieved, the time had come to proceed against loan modification attorneys, hammer and tong.   The return of a number of  stipulated dispositions from the California Supreme Court in May 2012 stoked the boilers even more.  And now the Taylor decision, a decision completely at odds with State Bar’s prior position in Duenas, has the State Bar discipline moving at full speed toward eliminating any chance that distressed homeowners might obtain the help they need in dealing with their lenders.

So here we are a year later.  Like a runaway train, the State Bar is moving full speed toward a unstated goal that is inconsistent with the public interest: no lawyers available for borrowers who need assistance.  No one at the Office of Chief Trial Counsel evinces the slightest interest in ameliorating the situation, for fear that the political powers that be in Sacramento will use that as an excuse for taking further action against the State Bar.   Politics is driving this train and while everyone knows it,  everyone knows that it will not change, at least not while the State Bar is on the political hotseat.

Billy Joel sang that “only the good die young”, a sentiment some say Joel has been proving for decades.   Not too long ago, it looked like we were witnessing yet another premature death:  published Review Department decisions that count as precedent in State Bar Court.   Coming up on two years since the last published decision (In the Matter of Allen, published in November 2010)  44 Review Department opinions had issued with not one deemed worthy of publication.  This blog post was originally going to be titled “RIP Review Department Precedent: 1989-2010?”

On October 3, 2012, with the publication of In the Matter of Reiss,  rumors of this youngster’s demise proved to be greatly exaggerated.  The Review Department had found something that was worth giving the hearing judges, State Bar trial counsel, defense counsel and respondents, a topic worthy of setting in stone along the path.

On first reading, though, its not obvious what that guidance is.  Reiss’s disbarment recommendation seems straightforward given the culpability findings.  There is a helpful discussion in the footnote on page 20, that clarifies the circumstances under which a lack of prior discipline over many years of practice will have  no mitigating effect.    On the surface there is nothing especially groundbreaking here, legally or factually.

On deeper reflection, though, you realize that the fact that there is nothing groundbreaking here is exactly the point.    The opinion’s written analysis begins by reaffirming the traditional “case by case” examination of all relevant factors, beginning with the Standards for Attorney Sanctions for Professional Misconduct (let’s just call them the Standards, capital “S”), whose guidance will be followed “whenever possible” (page 22).  But it made it clear that it doesn’t end there; at the end of rather short trip the Court tells us that they reached their opinion “After carefully considering all relevant factors, the aggravation, the mitigation, and the guiding case law.” (Page 23.)

The one legal issue that they really addressed is contained in just a footnote on page 20.  Significantly, it is an issue where case law is at odds with the Standards.  Standard 1.2(e)(i) only provides that no prior discipline is mitigating if the conduct is “not deemed serious”, while Supreme Court case law has given attorneys mitigation on this ground in cases that are certainly serious, like misappropriation of client funds.  The Review Department might have decided to go with the Standard on this issue, perhaps believing the idea that the Supreme Court’s action in sending 42 cases back to the State Bar was message that not to rely on “pre-Silverton case law.”    Instead, the Court’s analysis found the common thread among that “pre-Silverton” case law and articulated a helpful rule of law (no mitigation for lack of discipline if conduct prolonged) that doesn’t slavishly follow the Standard, the Standard that is not true to the Supreme Court case law.

The message of Reiss is that precedent still counts in the discipline system.   And maybe more importantly that the Review Department will exercise its power to make precedent to guide the disciplinary process where it deems appropriate.  The Court did the same thing four years ago with its decision four years ago in In the Matter of Van Sickle (Review Dept. 2006) 4 State Bar Ct. Rptr.  980, 2006 WL 2465633 , at the height of the first Silverton-mania.  The Supreme Court  denied the Office of Chief Trial Counsel’s petition for review of that decision, which set out in depth why the Standards can’t be taken at face value.

Reiss is a disbarment recommendation, so an appeal by the discipline prosecutors seems unlikely, but these days, who knows?  The Supreme Court, of course, could take the case up on their own motion if they really want to re-visit the issue of how we come to disciplinary recommendations.   Or they can simply order Reiss depublished and leave us all completely confused.   Will OCTC ask the Supreme Court to depublish Reiss?  We will see.