Misappropriation for an Oklahoma oil lease leads to disbarment

A Bakersfield lawyer who used the proceeds of a trust to buy an Oklahoma oil lease and took the rest as purported legal fees — misappropriating about $150,000 — was disbarred. MICHAEL D. RUSSELL [#80621] used the trust funds as his own “personal bank account,” according to a superior court judge, kept virtually no records of financial transactions and concealed his activities for almost 15 years.

State Bar Court Judge Donald Miles found that Russell committed five acts of misconduct, including three acts of moral turpitude, in two matters.

In 1986, Russell drafted a trust for a client who was terminally ill, and he became the trustee after the client died. Because Russell didn’t keep good records, the amount of cash held in the trust when the client died is unknown; however, an early bank statement showed a balance of $115,025. Life insurance proceeds of more than $60,000 later increased the balance.

Several months after the client died, Russell’s father approached him about the possibility of purchasing an oil lease in Oklahoma. Russell formed a California corporation called RCON Inc. in order to buy the oil lease and used $20,000 of trust money towards the $200,000 purchase price. The leased property consisted of 13 existing wells, 10 already capped and the remaining three producing no oil. RCON provided $20,000 and was to make monthly payments of $2,760.88, although no monthly payments were ever made.

Although Russell’s father made no financial contribution, the purchase agreement made him a co-owner of the lease. RCON’s share was about 65-67 percent of the oil lease and 22 percent of the rights were retained by a prior owner.

Miles said Russell took steps to conceal the source of the funds used to buy the oil lease. The money was not paid directly by the trust to the seller nor to RCON. Instead, Russell withdrew funds from the trust account and paid them into his client trust account. He then issued a check against his CTA to his father, who in turn endorsed the check to the seller. Russell testified that he couldn’t remember why the check was written to his father.

In the year following the purchase of the oil lease, Russell disbursed virtually all the cash remaining in the trust, totaling approximately $130,000. There is so little documentary evidence of where the money went that Miles concluded, “Most of the money simply disappeared so far as any paper trail is concerned.” Russell did not keep invoices, a ledger of trust fund disbursements or bank statements and he filed no tax returns for the trust or for RCON.

RCON then filed for bankruptcy, listing the principal creditor as the seller of the oil lease, who was owed $180,000.

The trust, which was not listed as a creditor, was never made an owner of either the lease or RCON, although Russell testified it was intended to be the sole owner of the lease. Russell took steps to conceal that trust money was being used to create and fund RCON, Miles said. The bankruptcy was dismissed.

In 1987, one of the trust’s beneficiaries tried to contact Russell to get information about the trust. By that time, the bulk of the cash was gone, the oil lease could not be operated profitably, and the bankruptcy and a petition to dismiss it had been filed. Russell disclosed none of that information, nor did he disclose the creation of RCON or the trust’s investment in the oil lease.

The beneficiary hired a new lawyer after spending a year attempting to get information from Russell.

Russell told the new lawyer that all the funds in the trust were distributed to the beneficiaries “quite some time ago.” In fact, Russell used his own money to make payments to the beneficiaries.

Although he promised a full financial report and tax returns, he never provided them.

The beneficiaries sued Russell, who finally filed an accounting of the trust’s assets in 2002. Several portions of the accounting were in dispute. The probate court ultimately awarded one of the beneficiaries $164,404 in compensatory damages, $318,703 in prejudgment interest and post-judgment interest at the rate of 10 percent. The judgment included credit for contributions Russell made to the trust from his personal assets (a $25,000 interest in property in Los Angeles and $10,000 from a Janus Fund).

Miles found that Russell committed acts of moral turpitude by breaching his fiduciary duty, making misrepresentations and misappropriating client money. Although Russell claimed the trust funds were exhausted “by virtue of legitimate expenses associated with his decision to purchase the oil lease,” Miles said his argument was neither credible nor convincing. He also called Russell’s failure to keep financial records inexcusable.

In a second matter, a married couple hired Russell to update their will and do some other estate planning. They owned two residences in Bakersfield and Russell was to transfer title from an old trust to a new trust. The grant deeds signed by the couple contained mistakes that they did not notice. When the problem was discovered, Russell said for four years he would fix it, but he never did.

After the husband died, the wife hired a new lawyer who resolved the problem.

Miles found that Russell failed to perform legal services competently.

The importance of Russell’s lack of a discipline record was reduced because the misconduct lasted for 20 years. Testimony about his good character from three members of the community also was given little weight because none of them knew about the charges against him.

“There is … no evidence of any extenuating circumstance that would militate against disbarment,” Miles wrote. “Indeed, quite the contrary is true.”

The disbarment took effect Oct. 28, 2009, and Russell also was ordered to comply with rule 9.20 of the California Rules of Court.