A new financial sting for disciplined lawyers

Lawyers sometimes appear in civil court as litigants, not advocates. Sometimes they lose and are assessed money judgments. Rarely do those dustups reach the California Supreme Court.

But it happened last week, resulting in a ruling that the State Bar has the power to impose a restitution order on a lawyer even when the injured party was not a client.

The opinion offered a tutorial on how the justices view the task of disciplining California's 300,000-plus attorneys.

The unanimous decision opened a new pitfall that can snare errant lawyers who duck paying the bill when a judge or jury rules against them.

In an unusual clash within the State Bar itself, the Office of Chief Trial Counsel pushed for the restitution order while the Review Department contended that such a sanction was off limits because tort damages are beyond the reach of attorney discipline proceedings.

"We find that the Review Department misinterpreted our precedents and that a restitution order is appropriate in this case," wrote Justice Kelli M. Evans for the court.

When the outcome of a civil case involves misconduct by a member of the bar--as happened with the veteran real estate attorney Thomas John Spielbauer of Brentwood as a 2014 trial developed in Santa Clara County--State Bar disciplinarians take an interest.

At stake in Spielbauer's case was a judgment against him over real estate dealings gone wrong totaling $869,276.55, including compensatory and punitive damages plus attorney fees and costs. With more than a decade's interest added, the sum approached a million dollars.

Spielbauer did not pay and failed to discharge the debt in bankruptcy. His further appeals led to a ruling by a 9th U.S. Circuit Court of Appeals panel that he had committed fraud and inflicted a malicious, deliberate, and intentional injury on real estate investors who loaned him money.

With the appeals final, in 2019 the Bar's Office of Chief Trial Counsel alleged five misconduct charges against Spielbauer, including fraud, acts of moral turpitude by misrepresentation and failing to report the judgment to the State Bar.

Spielbauer asserted that the judgment was not reportable because the activities that led to the trial were not committed in his professional capacity. The hearing judge found him culpable of four counts but not the reporting charge. The judge recommended a 90-day suspension without restitution, saying Spielbauer's conduct merited a modest level of discipline.

The hearing judge declined the trial counsel's recommended restitution requirement, because requiring him to pay nearly one million dollars "prior to returning to active practice ... would undoubtedly have a far greater impact on his ability to practice than intended."

Both Spielbauer and the trial counsel appealed to the Review Department, which upheld four of the five charges and recommended six months' suspension. It too declined to issue a restitution order. "This is beyond the scope of every disciplinary case in which restitution has been imposed and that involved parties outside the attorney-client relationship," the decision stated.

When the beef reached the Supreme Court, the justices schooled the Review Department on the fundamentals of attorney discipline and its purpose: to protect the public, preserve confidence in the legal profession and rehabilitate errant attorneys where appropriate.

The high court, Evans wrote, "has the power to impose discipline [that] encourages attorneys to act honestly and with integrity," quoting from a 1988 case. Restitution is within that power. "Indeed, as we have explained ... '[r]estitution is fundamental to the goal of rehabilitation.'"

"Restitution serves the state interest of rehabilitating culpable attorneys (and protecting the public) by forcing attorneys to confront, in concrete terms, the harm their actions have caused," Evans wrote, quoting from other cases.

The precedential case cited by the Review Department was Sorensen v. State Bar (1991) 52 Cal.3d 1036, in which attorney Kerry L. Sorensen of Huntington Beach rejected as excessive the cost of a deposition transcript and convinced his client to pay only about half. The owner of the reporting firm took him to small claims court.

Sorensen's countersuit for fraud was dismissed on summary judgment. Then a State Bar hearing panel found that Sorensen had abused and misused the process of the court in violation of his oaths and duties as an attorney. The panel recommended that Sorensen be required to pay the owner of the reporting firm $4,375 in legal fees and expenses for defending against his action.

The Review Department declined, explaining that reimbursement "would be an award of damages rather than restitution."

When the matter reached the Supreme Court, it sided with the hearing panel and held that restitution was appropriate, because it reflected the harm Sorensen's misconduct had caused.

"Unlike the Review Department, we do not view restitution in this context as a 'damage award,'" the court said in an unsigned opinion. "Nor do we approve imposition of restitution as a means of compensating the victim of wrongdoing. Rather, we consider restitution a necessary condition of probation designed to effectuate [the attorney's] rehabilitation and to protect the public from similar future misconduct."

In the current case, the Review Department took from Sorensen the lesson that restitution is not a damage award, so the civil judgment against Spielbauer, which involved tort damages, cannot justify restitution.

But the Review Department got it wrong. "We conclude that the Review Department has misread Sorensen and our other precedents," Evans wrote. Instead, "the same protective and rehabilitative principles that warrant a restitution order when attorney misconduct involves misuse of client funds and unearned fees more broadly apply whenever private persons have incurred specific out-of-pocket losses directly resulting from attorney misconduct."

Rachel S. Grunberg, the State Bar assistant chief trial counsel who argued the case for restitution in May, said in a statement:

"We are very pleased with the decision, which finds an order for restitution appropriate in this case as a condition of discipline. More broadly, the court's opinion clarifies the role of restitution in attorney discipline proceedings, recognizing, as the State Bar argued, that in a wide range of cases, restitution furthers the protective and rehabilitative purposes of discipline by forcing an attorney to acknowledge the results of their misconduct."

In her argument to the high court, Grunberg was unsparing. "This case involves intentional acts of dishonesty," she said. Spielbauer "breached his duty of good faith and fair dealing to those with whom he was transacting business, causing an innocent victim to suffer a tangible pecuniary loss; and, when the victim was forced to seek judicial intervention to clear the slander of title caused by [Spielbauer's] fraudulently inflated payoff demand, [Spielbauer] dragged out the litigation, submitted a false declaration stating that the payoff demand was accurate, and breached his duty of candor to the court."

Asked for the Review Department's reaction, a State Bar spokesman emailed, "The State Bar Court does not respond to such requests."

At the Supreme Court, the underwriter that supplies errors and omissions, negligence and personal injury insurance to many of the state's attorneys argued as amicus curiae that ordering Spielbauer to pay the million-dollar judgment would "cross the bright line between damages and restitution drawn in Sorensen."

But "we did not draw a bright line between damages and restitution," Evans wrote. "Rather, we held that when attorney misconduct causes private persons to incur specific out-of-pocket losses, a restitution award is proper, and that compensating the victim of wrongdoing through an award of restitutive monetary relief is permissible when doing so is merely incidental to a proper, primary purpose of imposing discipline."

The attorneys for the underwriter, Lawyers' Mutual Insurance Co., did not return a query requesting comment.

Spielbauer referred questions to his lawyer, Glen L. Moss of Moss & Murphy in Hayward, who was on vacation and unavailable. "I have left the speaking to Glen Moss," Spielbauer emailed. "He has previously described the opinion as a disaster which will drive up insurance rates for attorneys, making many go without insurance."

In earlier comments, Moss said, "Trial Counsel for the California Bar asks this Court to give it the power to convert attorney discipline proceedings into a debt collection forum for the benefit of non-client tort claimants of attorneys."

Evans wrote that Spielbauer remains in debt to the plaintiff in his original civil case, a real estate entity called Williams LLC. "Nor, in this disciplinary proceeding, has Spielbauer shown any inclination or willingness to pay what he owes, or even the smallest portion of what he owes."

The high court imposed an actual suspension of six months--and until Spielbauer makes restitution to Williams LLC of $536,726.55 plus interest dating from 2014, when the judgment was entered. It allowed him to pay in installments if he submits a written plan and proof of his financial condition.

"If Spielbauer adequately demonstrates his inability to pay, obtains approval of a repayment plan, and makes payments consistent with that repayment plan, then he may be reinstated before making full restitution," Evans wrote.