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Stephen T. Araki (WSBA No. 6428, admitted 1975),
of Bellevue, was suspended for one year, effective
February 16, 2012, by order of the Washington State
Supreme Court following approval of a stipulation.
This discipline is based on conduct involving
conflicts of interest.
Mr. Araki was a partner in Law Firm. As
part of his practice, Mr. Araki and one of his law
partners, Attorney B, ran Escrow Company and
split the profits. In 2004, an individual (Debtor)
declared bankruptcy. Soon after, Debtor sold a
property, which had been ordered abandoned by
the bankruptcy court, to Mr. X for substantially
more than what Debtor had represented to the
court as its value. Assisted by Attorney B, Debtor
then obtained a loan against the same property
while it was ostensibly owned by Mr. X. Escrow
Company prepared the paperwork for the loan
and Law Firm was listed as the trustee on the deed
of trust securing the mortgage. Mr. Araki was not
involved in this transaction. The property was later
transferred back to Debtor, subdivided, and each
subdivided portion was sold to Mr. Y and Mr. Z.
Attorney B drafted many of the documents used
in the property transfers.
In January 2006, the bankruptcy trustee instituted
an adversary proceeding against Debtor
based on his activity in obtaining a tax refund.
The bankruptcy trustee obtained restraining
orders freezing Debtor’s bank accounts and
enjoining anyone from transferring money on
Debtor’s behalf. In January 2006, Attorney B began
representing Debtor in the adversary proceeding.
Attorney B continued to work with Debtor’s case
even after another lawyer became the attorney
of record. Beginning in February 2006, Attorney
B and Debtor disbursed funds from the escrow
account on Debtor’s behalf in violation of the
bankruptcy court’s restraining orders. Mr. Araki
was not involved with these transactions.
In April 2006, the bankruptcy trustee instituted
a second adversary proceeding, in which Messrs.
X, Y, and Z were among the named defendants,
which was based on Debtor’s fraudulent activity
involving the property he sold to them. The
complaint alleged that Mr. X assisted Debtor in
defrauding the bankruptcy court. In May 2006,
the bankruptcy court ruled in the first adversary
proceeding that Debtor had violated his restraining
order by directing that funds be deposited into
Attorney B’s trust account and then disbursed.
On June 6, 2006, the bankruptcy court directed Attorney
B to account for every payment that he had
received from Debtor and his wife, or from anyone
on their behalf. The Court directed Attorney B to
turn over to the trustee all funds that he had in his
possession belonging to or within control of Debtor
and his wife or belonging to “any entity in which
the debtors have an interest.” Law Firm received
the order on June 12, 2006. At that time, Escrow
Company had funds in its possession that were
within the control of Debtor and in which Debtor
had an interest.
On June 20, 2006, Attorney B and Mr. Araki
agreed to represent Messrs. X, Y, and Z in the
second adversary proceeding. Mr. Araki sent a
conflict letter to Messrs. X, Y, and Z disclosing
that Law Firm had performed legal services for
Debtor and his company in the past, but that Mr.
Araki did not believe any of the issues presented
in the proceeding created any conflicts of interest.
Messrs. X, Y, and Z signed the conflict letters. Mr.
Araki did not inform these clients, or obtain their
consent, regarding Attorney B’s representation of
Debtor in the bankruptcy proceedings or regarding
Law Firm and Escrow Company’s previous
involvement in the property transfers and property
loan. Mr. Araki did not inform Messrs. X, Y, and
Z that the court had found Debtor had violated
its restraining order by transferring money to Attorney
B’s trust account, that Attorney B had been
ordered to make an accounting of all funds that
he received from Debtor or on Debtor’s behalf; or
inform Messrs. X, Y, and Z that they had claims
against Debtor regarding the bankruptcy proceedings.
Mr. Araki did not advise Messrs. X, Y, and Z,
or obtain informed consent from them, regarding
any potential conflict of interest in having him
represent them while he had a personal interest in
avoiding any liability for himself, his law partner,
and his law firm. There was a significant risk that
Mr. Araki’s representation of Messrs. X, Y, and Z
would be materially limited by his own interests,
by Attorney B’s interests, or by that of Law Firm
or Escrow Company. There was also a significant
risk that Mr. Araki’s representation of Messrs. X, Y,
and Z would be materially limited by Law Firm’s
responsibilities to Debtor.
On September 6, 2006, the bankruptcy trustee
filed an amended complaint, adding Debtor and
his wife to the second adversary proceeding. Mr.
Araki continued to represent Messrs. X, Y, and Z
and Attorney B continued to represent Debtor
in the proceedings. Mr. Araki asserts that he did
not know his law partner continued to represent
Debtor in the proceedings. The Bar Association
asserts that substantial evidence would support
the conclusion that Mr. Araki did know.
On November 15, 2006, the trustee sent a
subpoena to Mr. Araki requiring him to produce
copies of all deposits into and disbursements out
of his trust account. As of that date, Law Firm
and Escrow Company possessed documents that
were responsive to the subpoena. Mr. Araki did
not inform Messrs. X, Y, and Z of the subpoena
or the conflict that it created between them. At
a hearing on December 1, 2006, the bankruptcy
court judge warned the parties to the second
adversary proceeding that she was referring the
matter to the United States Attorney’s Office for
criminal investigation. The judge also noted that
Mr. Araki’s name and Law Firm appeared on
many of the transactional documents regarding
the property transfers and they could be called
as witnesses in the proceeding. Mr. Araki was
present at the December 1, 2006, hearing, but
his clients were not. Mr. Araki did not inform
Messrs. X, Y, and Z that the Court was referring
the matter to the United States Attorney’s Office
for investigation or that he and his firm were
potential witnesses in the case.
In February 2007, Mr. Araki signed and filed
amended answers and cross claims on behalf
of Messrs. X, Y, and Z. Attorney B continued to
represent Debtor in the bankruptcy proceeding. As
of February 2007, Mr. Araki’s representation of the
Messrs. X, Y, and Z was directly adverse to Debtor.
In April 2007, during a deposition, Mr. X was informed
for the first time about the court’s criminal
investigation referral and the deposition ended
so that he could consult with a criminal defense
lawyer. In May 2007, Mr. Araki informed Messrs. X,
Y, and Z that he was withdrawing as counsel, citing
a potential conflict of interest between the three
clients. He withdrew from representing Messrs. X,
Y, and Z in June and July 2007.
Mr. Araki’s conduct violated current RPC 1.7(a)
and former RPC 1.7(b), prohibiting a lawyer from
representing a client if the representation involves
a concurrent conflict of interest, which exists if the
representation of one client will be directly adverse
to another client or if there is a significant risk that
the representation of one or more clients will be
materially limited by the lawyer’s responsibilities
to another client, a former client or a third person,
or by a personal interest of the lawyer.
Francesca D’Angelo represented the Bar Association.
Kurt M. Bulmer represented Mr. Araki.
Malcolm L. Edwards was the hearing officer. |