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Kentucky Bar Association v. Hines

Supreme Court of Kentucky

June 20, 2013



This opinion and order resolves four disciplinary files, KBA File Nos. 8969, 12704, 15869, and 17216, against the Respondent, Ronald E. Hines. All told, Hines has been charged with 22 counts of violating the Rules of Professional Conduct. The Board of Governors of the Kentucky Bar Association has recommended that Hines be found guilty of five counts (with several of the other counts merged into these), and not guilty of the other counts, and be suspended for 120 days for the conduct in KBA File Nos. 8969 and 12704. The Board has recommended that he be found guilty of two counts and not guilty of two counts and publicly reprimanded for the conduct in KBA File 15869. Finally, the Board has recommended that Hines be found not guilty of the three counts in File 17216. Hines has sought review of the recommendation by this Court under SCR 3.370(7). Though it did not seek review, the Office of Bar Counsel has asked in its brief that Hines be found guilty of all counts and be suspended for at least two years.

This Court, having reviewed the record and the briefs, concludes that except as to one count, the trial commissioner and Board of Governors were correct. This Court also concludes that the suspension recommended by the Board is appropriate.

I. Background

Hines was admitted to practice law in 1987. His KBA Member Number is 82501, and his bar roster address is 201 N. Main Street, Elizabethtown, Kentucky 42701. These disciplinary proceedings stem from three different cases, each of which is discussed below.

A. KBA Files 8969 and 12704

These charges stem from Hines's representation of a corporation that was formed to manage property from the estate of Elihu and Diana Cody, who owned approximately 500 acres of land in Perry County when they died in the early twentieth century. The land is rich in timber, oil, coal, and gas. By the 1990s, the Codys had approximately 100 heirs claiming an ownership interest in the property. The heirs believed that timber and coal were being wrongfully extracted from the land by various companies.

In 1991, on advice of Hines, the heirs formed the corporation in question, Cody Properties, Inc., to take title to the property and to facilitate the sale or lease of the timber, coal, oil, and gas. The heirs used the services of another lawyer to create the corporation, which had an eight-member board of directors.[1]

In 1993, the heirs contacted Hines again. At that time, Hines was hired by the corporation to represent it "in connection with any and all actions, claims, sales, leases, purchases whatsoever situated regarding a tract of land known as the Elihu Cody tract ... [and] in all aspect of ownership of said tract including but not limited to obtaining buyers for oil, gas and mineral rights and purchasers for all timber."[2] As compensation, Hines was to get 20% of the net amount recovered on any claims, including mineral leases and timber sales. If he was discharged within 30 days prior to any written offers for purchase or lease, he was to be paid at the rate of $100 per hour for time already spent on the representation. The employment agreement was signed by Marie Spencer as president of Cody Properties, Inc.

Hines then represented the corporation in litigation to recover the proceeds of timber wrongfully harvested and coal wrongfully mined from the land. He obtained at least one settlement for illegally taken timber. He also began litigating a claim against LeeMike Coal Company.

In March 1998, he negotiated a coal lease with Leeco, Inc. The lease provided that 18% of the royalties were to be paid directly to Hines, 2% were to be paid to coal brokers who assisted in the negotiations, and the remainder, 80%, to be paid to the corporation. In essence, the lease reflected Hines's 20% contingency, with the brokers' fee reducing his overall fee to only 18% of the proceeds of the lease. However, no coal was ever mined under this lease.

In the late 1990s, a division arose between two factions of the heirs. The trial commissioner suggested that the division stemmed from a dispute over whether Marie Spencer was qualified to serve as an officer of the corporation. Hines has suggested and the trial commissioner found that the corporation's governing documents required that any officer or board member must be a descendant of the Codys, though no explicit limit appears in the articles of incorporation and there may not have been bylaws with such a requirement in operation until 2002. There was some dispute over whether Spencer was actually a Cody descendant.[3]

Some documents in the record suggest that the division was actually over whether to keep Hines as counsel for the corporation. Apparently, a majority of the board members was dissatisfied with the work Hines had done in marketing the assets of the corporation. The board members were also concerned about the effect of double taxation on corporate profits.

Regardless of the cause, a division of the heirs—the corporation's shareholders—-into two factions emerged. One of the factions was led by Spencer. Hines sided with the other, which was made up in part of heirs with whom he had worked closely, namely, Thermal Cody and David Combs and their families, and possibly Maga Lea Wiseman.

Regardless of its source, the division was very real. And over time, it deepened, or, as the trial commissioner noted, it "festered and grew." Spencer's faction decided to terminate Hines's employment contract. They also wanted to reorganize the corporation to minimize the effects of double taxation on the corporation's profits.

At a board meeting on October 23, 1999, Dennis O'Brien, a CPA, and Carlton Neat, another attorney, were introduced to the board. They explained their recommendation of forming a limited liability company to succeed the corporation and take over ownership of the Perry County property to reduce double taxation.[4] The board voted unanimously to hire the men for this project.[5] Present at this meeting were all of the officers—Marie Spencer, president; David Combs, vice president; Maga Lea Wiseman, treasurer; and Rachel Holcomb, secretary. Additionally, present and voting were seven of the eight directors—Ruby Wells, Thermal Cody, Maga Wiseman, Mavie Lewis, Ruth Cody, Thomas Cody, and Vanda French.[6]

Apparently, Spencer had been intending to propose the conversion plan for some time.[7] On October 5, 1999, before the board meeting, she had sent Hines a letter terminating his services in "marketing the assets of the corporation." The letter, however, asked Hines to continue working on the litigation with LeeMike Coal Company over coal that had been wrongfully mined from the property. The letter also informed Hines that the corporation was seeking to restructure to avoid double taxation and to transfer its assets, and therefore no further deals should be made on behalf of the corporation.

In December 1999, Spencer organized Cody Heirs Properties, LLC.[8] The corporation was not dissolved and continued to exist.

In September 2000, a meeting of the corporation's shareholders was held at which the factional division finally became apparent. At this meeting, both directors and officers were elected directly by the shareholders.[9] This departed from the past practice whereby shareholders elected the directors, who in turn elected the officers. No advance notice of this change was given. Most of the officers (Marie Spencer, Maga Wiseman, and Rachel Holcomb) were present; the vice president, David Combs, was not present. Six of the board members-Ruby Wells, Thermal Cody, Maga Wiseman, Thomas Cody, Ruth Cody, and Vanda French—were present. Two board members, James Crouch and Mavie Lewis, were not present, though Couch sent a proxy to vote in his stead.

Of the board members then serving, all were reelected to their positions except Thomas Cody, who was replaced by James E. Cody. All the officers were reelected, except David Cody, who was nominated for president and lost, and then was nominated for vice president and lost. He was replaced as vice president by James Hoskins. Thus, there were only two changes to the makeup of the board and officers.

Hines was present at the meeting. He voiced concern that the election of the board and officers was invalid because of the lack of notice, which he claimed was required under the corporate bylaws.[10] He left before the end of the meeting, possibly along with two members of the board, Thermal Cody and Maga Wisemen, who are shown as "not present" on a vote at the end of the meeting.

After Hines left, the board of directors voted to hire O'Brien as the general manager of both the corporation and the LLC.[11] He was to replace Hines as the marketer of the timber and mineral rights. The board also voted to authorize the transfer of the corporation's assets to the LLC and to execute a promissory note in return.[12]

The transfer of assets to the LLC was not carried out at that time, however, at least in part because the dispute carried over into a flurry of letters between Hines and Spencer and O'Brien. It is these letters that give rise to much of the alleged misconduct in this case.

The first letter was sent by O'Brien to Hines in October 2000, very soon after the meeting. In it, he explained he had been hired by the corporation's board as general manager and had been assigned the responsibility to market the mineral and timber assets, negotiate leases, etc. going forward. He also noted that Spencer had terminated Hines's employment with respect to those activities several months before. He also asked Hines to keep him apprised of the LeeMike litigation.

Hines responded with a letter of his own later in the month. He claimed the board-of-directors and officers elections "were not legal, " and claimed a right to "20% of all [of the corporation's] income, regardless of origin of revenue." Hines also stated that the letter constituted a lien against 20% of all corporate income, and asked that O'Brien inform him "of every deal, contract or other source of income that comes to the Codys by anyway other than [him]." O'Brien forwarded a copy of this letter to Spencer.

In December 2000, Spencer sent a letter responding to Hines and informing him that O'Brien had been hired to replace him in marketing the assets of the corporation. It also explained that Hines's employment agreement had been with the corporation but that all future marketing of the assets would be through the LLC, with which Hines had no employment agreement. Spencer also asked Hines to explain why he believed the September board elections had been illegal. The letter also reiterated that Hines's marketing services had been terminated.

In January 2001, Spencer filed a bar complaint against Hines for continuing to act as though he were counsel for the corporation in matters other than in the LeeMike litigation. The bar complaint gave rise to KBA File No. 8969.

In February 2001, the board of the corporation met and again authorized Spencer to sell the assets of the corporation to the LLC as part of the restructuring.[13] The LLC was to be owned by the various heirs just as the corporation was, and was to be managed by an eight-member set of managing members. Initially, the managing members of the LLC were the same as the board of directors of the corporation. (This does not appear to have changed in subsequent elections.) As managers of the LLC also, the board members approved an operating agreement for the LLC. As consideration for the transfer of the property, a promissory note was created by which the LLC would owe the corporation $150, 000 plus 8% interest per year. The transfer and promissory note were completed later that month.

Also in February, O'Brien sent Hines a letter about the Leeco, Inc. lease. He expressed some concern over the terms of the lease, stating that the terms differed from what had been described to him by some of the heirs, and that the terms differed from what had been voted on by the board in 1998. (The vote had allegedly been for a three-year performance term and a "10 year out, " meaning mining had to stop within 10 years; the actual lease provided a year-to-year lease automatically renewable if Leeco made certain payments, and only required that Leeco begin mining within 10 years.) O'Brien asked that Hines contact him to explain what had happened. Five of the eight directors of the corporation signed off on this letter, as did Spencer. Hines did not respond specifically to the requests in this letter.

After the initial letter partly terminating his employment, Hines continued his efforts in the LeeMike litigation, at least until March 2001. As part of this work, Hines sent two letters to Spencer in 1999 requesting core drilling results from Leeco, Inc. (the entity with which he had negotiated coal leases) for use in the LeeMike litigation. Spencer never provided these results.

In March 2001, Hines sent a letter to Spencer again alleging that the corporation was "being operated illegally" and was "subject to a hostile takeover." He again alleged that the September 2000 elections had been illegal, which he claimed made any decisions by the board void. He described the attempt to "convert" the corporation to an LLC as "merely a ruse for a hostile corporate takeover by outsiders, " which he "d[id] not want to be part of."

In the same letter, Hines stated that he had been contacted by O'Brien, presumably referring to the February 2001 letter, but that because O'Brien "ha[d] not been hired by a legal board, " he "felt it was not in the best interest of [his] clients, the Cody Heirs, to discuss much business in detail with [him]." He also alleged that the LLC was not a proper entity, having been created with fraudulent papers that he considered "void on their face."[14] The letter included additional allegations that "outsiders are getting ready to takeover [sic] not only the Corporation but also use the land, the timber and all the minerals ... for their own use and thereby be[] able to steal all those assets away from the Cody Heirs."

Hines stated that he did not want to be part of this takeover, and thus offered to resign as counsel for the corporation under a set of conditions. Specifically, as to the LeeMike litigation, he offered to take a fee of $22, 850 to cover hourly rates and expenses. This, he claimed, was substantially less than the approximately $200, 000 fee he would get from taking his 20% contingency on the likely final outcome in the case. Hines concluded the letter by stating that he did not want to withdraw, but that he would do so because he "d[id] not want to be part of the unlawful takeover and the inevitable theft of the Cody Heirs' land and minerals."

On April 6, 2001, he sent another letter to Spencer. In this letter, he again accused the corporate board of acting improperly, claimed that there was no valid LLC, and accused O'Brien of practicing law without a license. He also accused Spencer of having libeled him in a March 2001 letter to David Combs, and claimed that she "can be sure that the statements will not go unaccountable." He also accused Spencer of abandoning her loyalty to the "Cody Heirs" and conspiring with outsiders to defraud the heirs of their land and mineral rights. He closed the letter by demanding payment of his bill, which was enclosed with the letter, and threatening to reschedule depositions, putting them off until his bill was brought up to date. The new bill included with the letter was titled "Billing Statement for Cody Heirs, " and it listed 107 charges for services between February 1997 to April 2001, totaling $23, 500.

On April 10, he sent Spencer an updated bill adding a charge for miscellaneous phone calls over the previous four years, and a set of phone calls in April 2001. The new bill totaled $25, 407. Included with this bill was another letter asking that a check in the Leeco matter be sent to the "treasurer, "[15] and stating that her "failure to do so may be construed as further embezzlement."

On April 26, Spencer sent Hines a letter responding to the March 2001 letter. In it, she again asked Hines to state in detail how he thought the corporation was being operated illegally. She also asked how the corporation was subject to a hostile takeover. She also asked, again, how the vote at the September 2000 meeting had been illegal, and noted that he had not yet responded to her previous request for information on this subject. The letter included several other requests that Hines explain in detail his allegations about the potential theft of assets. The letter also referred to a telephone call with Hines in which he had mentioned that "someone may get shot over this"; Spencer asked whether this was an attempt to intimidate her.[16] The letter also noted that Hines appeared to be communicating with individual heirs but that he had been hired by the corporation. The letter then asked Hines whether he had been hired by individual heirs and thus had a conflict of interest.

On May 17 and July 9, Spencer wrote Hines stating that she was still awaiting a response to her April letter, a copy of which was enclosed. The members of the board were sent copies of this letter.

In June 2001, the board met and authorized O'Brien to find an attorney to replace Hines in the LeeMike litigation and to negotiate with Hines to terminate his employment contract.

On July 26, Spencer sent a letter to Hines stating that his services had been completely terminated, whereas they had previously been only partially terminated. She specifically noted that his services with respect to the LeeMike litigation were terminated, and asked that Hines prepare such court documents as would be necessary for him to withdraw as counsel of record.

Hines replied to this letter with one of his own in which he claimed that his termination was illegal because the board had not voted on the matter. He also stated that he had been advised by some of the heirs that Spencer was "not a Cody Heir." He wrote that he had been told "[t]hat [Spencer] was never a daughter of Elihue Cody nor w[as] [she] ever adopted by any Cody male." He also wrote: "There have been further allegations made that you have fraudulently concealed the fact that you are not a Cody Heir and have attempted to perpetuate this fraud on all the other Heirs." He advised Spencer to contact him "to remedy this problem and prevent further catastrophic legal action, " if she was in fact not an heir. He concluded by stating that he would be glad to tender his resignation if the entire board voted to discharge him.

In September 2001, Thermal Cody, a member of the minority faction, filed a criminal complaint against Spencer in Perry County alleging theft by unlawful taking for allegedly embezzling money from the corporation. This charge was eventually dismissed on jurisdictional grounds.

Hines continued to hold himself out as counsel for the corporation. For example, in October 2001, he wrote a letter to Leeco, Inc. stating: "I am still the only viable, legally recognized non-Cody person to represent the interest of Cody Properties, Inc. and the person of direct contact for this matter and for this [coal lease] matter."

At a December 2001 informal meeting of the heirs, Hines was present and made the following statement:

Marie ... filed a bar complaint against me with the bar association claiming that I have somehow misled the corporation; okay? Now, her hope is this is the only chance they know now that they could possibly get me away from this, if by some chance they would win this complaint and the bar association will suspend me from the practice of law saying that I did something wrong. But they got an uphill battle there, okay? But even if they were to win and even if I'm out of the picture, and that's the reason I'm here today is to tell you that if I'm gone from this picture, you've got to do something. Stick to your guns and don't sign these LLC papers, because what the LLC papers have done ... they have basically taken the power of attorney from anybody who signs that, which means if you sign that paper, you have no more voice. They make a decision for you without consulting you. Plus, it takes our corporation, Cody Properties, Inc. and obligates Cody Properties, Inc. to owe that corporation $150, 000. ... They're gonna call the note due and O'Brien and his lawyers now own your property. And they own your coal and your oil and your gas, okay? And that is the ultimate plan.

In January 2002, Linda Hayse, another member of the minority faction, filed a criminal complaint against O'Brien for assault that allegedly occurred at a board meeting in the lobby of a hotel in Hazard. O'Brien was placed on pretrial diversion, and the charge was eventually dismissed.

That same month, several members of the minority faction filed a complaint against O'Brien with the Kentucky Board of Accountancy. This complaint ...

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