Opinion ID: 1823973
Heading Depth: 1
Heading Rank: 2

Heading: Loans From Clients to the Firm

Text: From 1981 through 1992, the Firm borrowed over $750,000 from seven of its clients; $638,000 in principal remains unpaid. In only one of the five years from 1988 through 1992 did the Firm show a positive cash flow after payments to the partners. The Firm's gross receipts exceeded expenses and interest payments annually by an average of $66,000 over this five-year period. The partner's draw over this period, however, averaged just over $100,000 a year and the Firm paid an average of $31,000 on the principal. Thus, an average shortfall of $65,000 per year existed. This shortfall was met by borrowing from clients. Thus, the Firm's debt increased from $331,000 at the end of 1987 to $638,500 at the end of 1992. The referee found Wyant was directly involved in loans from clients to the Firm totaling $589,000 of which $559,000 remains unpaid. Wyant signed the notes in his capacity as shareholder, and personally guaranteed the payment of $504,000 of the unpaid loans. In soliciting loans from its clients, the Firm did not disclose that its interest was adverse to the client's interest and did not advise them to seek independent legal advice. No written consent from the clients agreeing to the transaction existed. The loans were not secured for repayment. There was not adequate disclosure to the clients of the Firm's financial condition and its reliance on the loans for its operating expenses. There was not adequate disclosure of the risks inherent in the transactions, and no disclosure to the clients of the financial conditions of the individuals guaranteeing the loans. Thus, the referee found these loans were not fair and reasonable. Wyant claims he played no part in arranging or soliciting the loans. He claims he relied on Morgeson's assurances that he had given all lenders adequate disclosures of the financial risks of the loans and the potential conflict of interest, had advised them that they could seek independent legal advice, and that the lenders entered into the transactions consensually. Evidence indicates that, although Morgeson was more involved in the solicitation of the loans, Wyant was present at some point in some of the discussions with Morgeson regarding the loans. In addition, Wyant had a direct professional relationship with three of the client-lenders. Moreover, the referee found that Morgeson could not have made any disclosure of Wyant's net worth to support his personal guarantees of the loans, because Wyant had never given Morgeson a personal financial statement. Finally, Wyant's repeated act of guaranteeing these loans cannot be dismissed as some unrelated event to the loan. Although Wyant's guarantees of these loans may not have involved direct contact with the clients, they were an essential element in procuring the loans, and thus constituted direct involvement.