BLT/4e CP 7-10



Chapter 51

Professional Liability and Accountants

Case 51.1

740 N.W.2d 125

Supreme Court of Wisconsin.

In the Matter of DISCIPLINARY PROCEEDINGS AGAINST Michael R. INGLIMO, Attorney at Law: Office of Lawyer Regulation, Complainant-Appellant-Cross-Respondent,

v.

Michael R. Inglimo, Respondent-Respondent-Cross-Appellant.

No. 2005AP718-D.

Argued April 26, 2007.

Decided Oct. 18, 2007.

ATTORNEY disciplinary proceeding. Attorney's license suspended.

In this disciplinary proceeding, the referee concluded that the OLR had proven violations on 10 of the 15 counts contained in the complaint filed by the Office of Lawyer Regulation (OLR). Based on those violations, the referee recommended that Attorney Michael Inglimo's license to practice law in Wisconsin be suspended for 18 months. Both the OLR and Attorney Inglimo appeal from the referee's report and recommendation.

¶ 2 After independently reviewing the record, we determine that the facts as *128 found by the referee demonstrate violations of the Rules of Professional Conduct for 14 of the 15 counts alleged by the OLR. We conclude that Attorney Inglimo's professional misconduct requires a three-year suspension of his license to practice law in this state. We agree with the referee's recommendation that Attorney Inglimo should be required to submit to random drug tests for a period of one year prior to the reinstatement of his license. Finally, we disagree with the referee's recommendation that the amount of the costs of this disciplinary proceeding to be paid by Attorney Inglimo should be reduced by one-fifteenth. We determine that Attorney Inglimo should be required to pay the full costs of this proceeding, which were $42,400.96 as of May 10, 2007.

¶ 3 After a lengthy period of investigation, on March 18, 2005, the OLR filed a 15-count complaint against Attorney Inglimo. Attorney Curry First was subsequently appointed as referee. After the parties conducted discovery, the OLR filed a motion for summary judgment. Ultimately, the referee granted summary judgment to the OLR on seven counts, granted summary judgment to Attorney Inglimo on one count and denied summary judgment to either party on seven counts. An evidentiary hearing was held on November 29, 2005. Both parties submitted post-hearing briefs, as well as proposed findings of fact and conclusions of law.

¶ 4 The referee submitted a lengthy report containing his findings of fact and conclusions of law, as well as his recommendations for discipline. The findings of fact and conclusions of law are summarized as briefly as possible below.

[1][2] ¶ 5 When reviewing the referee's report, we will affirm the referee's findings of fact unless they are clearly erroneous. See In re Disciplinary Proceedings Against Sosnay, 209 Wis.2d 241, 243, 562 N.W.2d 137 (1997). We review the referee's conclusions of law, however, on a de novo basis. See In re Disciplinary Proceedings Against Carroll, 2001 WI 130, ¶ 29, 248 Wis.2d 662, 636 N.W.2d 718.

¶ 6 Attorney Inglimo was admitted to the practice of law in Wisconsin in September 1985. He practiced in the Superior area.

¶ 7 Counts 1 and 2 relate to Attorney Inglimo's representation of L.K. in a criminal case between April 2000 and January 2001. During this representation in October 2000, Attorney Inglimo had sexual relations with L.K.'s girlfriend in L.K.'s presence and with L.K. also engaging in sexual relations with his girlfriend during the sexual encounter. The referee further found, however, that there was no evidence that during the encounter there was any intimate physical contact between Attorney Inglimo and L.K.

¶ 8 Count 1 of the OLR's complaint alleged that by having sexual relations with L.K.'s girlfriend in L.K.'s presence and with L.K. participating in the encounter, Attorney Inglimo had violated SCR 20:1.8(k)(2).FN1 Although the referee found that there had been a three-way sexual encounter involving L.K., his girlfriend and Attorney Inglimo, he concluded that there was no violation of SCR 20:1.8(k)(2) because there was no evidence that Attorney Inglimo and his client, L.K., had “sexual relations” as that term is defined in the rule. Specifically, there was no evidence that Attorney Inglimo and L.K. engaged in *129 sexual intercourse or intentionally touched each other's intimate parts.

FN1.SCR 20:1.8(k)(2) provides that “[a] lawyer shall not have sexual relations with a current client unless a consensual sexual relationship existed between them when the lawyer-client relationship commenced.”

¶ 9 One of the conditions of bail in L.K.'s criminal case was that he could not use or possess any controlled substances. In addition, Wis. Stat. § 969.03(2) (1999-2000)FN2 provided that “[a]s a condition of release in all cases, a person released under this section shall not commit any crime.” Possession and use of marijuana were criminal acts in the State of Wisconsin. Wis. Stat. § 961.41(3g)(e). Beginning in 1998, Attorney Inglimo and L.K. regularly went out drinking at various taverns. In addition to drinking, Attorney Inglimo occasionally used marijuana with L.K. Specifically, in October 2000 while L.K. was out on bail, L.K. went to Attorney Inglimo's house, where the two of them used cocaine and smoked marijuana.

FN2. All subsequent references to the Wisconsin Statutes are to the 1999-2000 version unless otherwise indicated.

¶ 10 A couple of months later, a week or two before his criminal trial, L.K. returned to Attorney Inglimo's house to discuss the upcoming trial. L.K. testified that Attorney Inglimo was under the influence of drugs at the time, because his eyes were dilated, he could not focus, and he was “antsy.” L.K. stated that he could tell when Attorney Inglimo had used drugs because he had previously used drugs with Attorney Inglimo on past occasions.

¶ 11 The referee found, based on L.K.'s testimony, that Attorney Inglimo had been high on drugs during L.K.'s trial, that Attorney Inglimo was not prepared, and that he had not represented L.K. adequately at the trial.

¶ 12 The referee concluded that this conduct by Attorney Inglimo constituted a violation of SCR 20:8.4(b).FN3 The referee acknowledged that using marijuana is a crime under Wisconsin law, but he did not believe that marijuana use, by itself, reflected adversely on a lawyer's honesty, trustworthiness or fitness as a lawyer in other respects. He believed that the OLR had to prove a nexus between Attorney Inglimo's criminal act of marijuana use and his provision of legal services to L.K. With respect to Count 2, the referee concluded that the evidence showed that Attorney Inglimo had been high during L.K.'s criminal trial and that Attorney Inglimo's performance as an attorney had been affected thereby. He did not base his legal conclusion of a violation of SCR 20:8.4(b) on the fact that Attorney Inglimo, by using marijuana with L.K., had aided and abetted L.K. to violate a condition of his bail. The referee stated that Count 2 was drafted as alleging a criminal act of using drugs, rather than as alleging a criminal act of aiding and abetting L.K. to violate his bail condition.

FN3.SCR 20:8.4(b) provides that it is professional misconduct for a lawyer to “commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects.”

¶ 13 Counts 3 through 6 relate to Attorney Inglimo's use of his client trust account and his failure to maintain proper trust account records. The referee's factual findings on these counts include that Attorney Inglimo wrote two checks out of his client trust account totaling $1,327 to purchase a car for himself. Attorney Inglimo claimed that these funds belonged to his mother, for whom he had previously handled a real estate matter, and that she gave the funds to him so that he could purchase the car. Based on the OLR's reconstruction of Attorney Inglimo's client trust account transactions, however, the referee found that Attorney Inglimo's trust account checks for the car had exceeded any trust account funds belonging *130 to his mother by at least $150. Thus, Attorney Inglimo had drawn on funds belonging to other clients.

¶ 14 In addition, OLR's reconstruction demonstrated that as of December 31, 2001, several clients and Attorney Inglimo himself had negative balances in the trust account. Indeed, between January 1, 1999, and December 31, 2001, Attorney Inglimo used funds on deposit for clients with positive balances to cover at least $386.05 of disbursements for those with negative balances.

¶ 15 For many years Attorney Inglimo maintained personal funds in his client trust account to act as a “cushion” against overdrafts. Prior to May 2004, Attorney Inglimo kept no written records that would show what amounts of personal funds were in the client trust account. He made more than $1,500 in disbursements from his trust account for personal expenses when he had no way to determine whether he had sufficient personal funds in the trust account to cover those disbursements.

¶ 16 Attorney Inglimo also did not maintain subsidiary client ledgers for individual clients and did not keep a running balance of receipts, disbursements and the amount remaining in the trust account for each client. He did not record deposits in the trust account checkbook register and kept no other receipts journal showing the sources and dates of deposits. Attorney Inglimo did not keep a running balance for his trust account and did not perform monthly reconciliations between his trust account balance and the bank statements.

¶ 17 Despite his failure to keep the trust account records required by former SCR 20:1.15(e),FN4 Attorney Inglimo certified on his annual state bar dues statements for fiscal years 1999-2004 that he had complied with each of the trust account record-keeping requirements. Each of these certifications was false.

FN4. Former SCR 20:1.15 applies to misconduct committed prior to July 1, 2004. Former SCR 20:1.15(e) provided:

(e) Complete records of trust account funds and other trust property shall be kept by the lawyer and shall be preserved for a period of at least six years after termination of the representation. Complete records shall include: (i) a cash receipts journal, listing the sources and date of each receipt, (ii) a disbursements journal, listing the date and payee of each disbursement, with all disbursements being paid by check, (iii) a subsidiary ledger containing a separate page for each person or company for whom funds have been received in trust, showing the date and amount of each receipt, the date and amount of each disbursement, and any unexpended balance, (iv) a monthly schedule of the subsidiary ledger, indicating the balance of each client's account at the end of each month, (v) a determination of the cash balance (checkbook balance) at the end of each month, taken from the cash receipts and cash disbursement journals and a reconciliation of the cash balance (checkbook balance) with the balance indicated in the bank statement, and (vi) monthly statements, including canceled checks, vouchers or share drafts, and duplicate deposit slips. A record of all property other than cash which is held in trust for clients or third persons, as required by paragraph (a) hereof, shall also be maintained. All trust account records shall be deemed to have public aspects as related to the lawyer's fitness to practice.

¶ 18 Based on these factual findings, the referee concluded that Attorney Inglimo had violated former SCR 20:1.15(a) FN5*131 (Counts 3 and 4) by failing to hold in trust at least $386.05 in funds belonging to clients or third persons and by depositing and co-mingling his personal funds with client funds in his trust account. The referee also concluded that Attorney Inglimo had failed to keep the necessary trust account records, in violation of former SCR 20:1.15(e) (Count 5). Further, the referee determined that Attorney Inglimo had violated former SCR 20:1.15(g) FN6 (Count 6) by falsely certifying on his state bar annual dues statements that he was in compliance with the trust account record-keeping requirements.

FN5. Former SCR 20:1.15(a) provided: Safekeeping property.

(a) A lawyer shall hold in trust, separate from the lawyer's own property, that property of clients and third persons that is in the lawyer's possession in connection with a representation or when acting in a fiduciary capacity. Funds held in connection with a representation or in a fiduciary capacity include funds held as trustee, agent, guardian, personal representative of an estate, or otherwise. All funds of clients and third persons paid to a lawyer or law firm shall be deposited in one or more identifiable trust accounts as provided in paragraph (c). The trust account shall be maintained in a bank, savings bank, trust company, credit union, savings and loan association or other investment institution authorized to do business and located in Wisconsin. The trust account shall be clearly designated as “Client's Account” or “Trust Account” or words of similar import. No funds belonging to the lawyer or law firm, except funds reasonably sufficient to pay or avoid imposition of account service charges, may be deposited in such an account. Unless the client otherwise directs in writing, securities in bearer form shall be kept by the attorney in a safe deposit box in a bank, savings bank, trust company, credit union, savings and loan association or other investment institution authorized to do business and located in Wisconsin. The safe deposit box shall be clearly designated as “Client's Account” or “Trust Account” or words of similar import. Other property of a client or third person shall be identified as such and appropriately safeguarded. If a lawyer also licensed in another state is entrusted with funds or property in connection with an out-of-state representation, this provision shall not supersede the trust account rules of the other state.

FN6. Former SCR 20:1.15(g) provided:

(g) A member of the State Bar of Wisconsin shall file with the State Bar annually, with payment of the member's State Bar dues or upon such other date as approved by the Supreme Court, a certificate stating whether the member is engaged in the private practice of law in Wisconsin and, if so, the name of each bank, trust company, credit union or savings and loan association in which the member maintains a trust account, safe deposit box, or both, as required by this section. Each member shall explicitly certify therein that he or she has complied with each of the record-keeping requirements set forth in paragraph (e) hereof. A partnership or professional legal corporation may file one certificate on behalf of its partners, associates, or officers who are required to file under this section. The failure of a member to file the certificate required by this section is grounds for automatic suspension of the member's membership in the State Bar in the same manner as provided in SCR 10.03(6) for nonpayment of dues. The filing of a false certificate is unprofessional conduct and is grounds for disciplinary action. The State Bar shall supply to each member, with the annual dues statement or at such other time as directed by the Supreme Court, a form on which the certification must be made and a copy of this rule.

¶ 19 Count 7 related to improper trust account disbursements made by Attorney Inglimo between 1999 and 2001. Based on the OLR's reconstruction of the trust account transactions, during that time period Attorney Inglimo's disbursements to himself and to third parties on behalf of clients P.K. and K.K. exceeded the funds on deposit for them in Attorney Inglimo's trust account by at least $2,661.47. Attorney Inglimo also disbursed $33 for client T.P. when he knew there were no funds on deposit for her in his trust account. He likewise disbursed $94 to obtain a preliminary hearing transcript in L.K.'s criminal case when he knew that there were no funds on deposit for L.K. in the trust account.

¶ 20 The referee concluded that these facts demonstrated that Attorney Inglimo had engaged in conduct involving dishonesty and misrepresentation, in violation of *132SCR 20:8.4(c).FN7

FN7.SCR 20:8.4(c) provides that it is professional misconduct for a lawyer to “engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”

¶ 21 Count 8 involved Attorney Inglimo's representation of M.S. in a divorce matter between September 27, 2001, and August 7, 2002. M.S.'s wife, K.S., was not represented by counsel. The divorce proceeding was a fairly simple matter because the couple had been separated for several years, they had no children, they had very little property to divide, and apparently the only real dispute involved possession of a camper.

¶ 22 The referee found that during the course of the divorce case Attorney Inglimo developed at least a significant social relationship with K.S. Attorney Inglimo not only met with K.S. at the public library multiple times, but he went to K.S.'s residence on multiple occasions and she came to his house on multiple occasions. Specifically, the referee found that Attorney Inglimo went to a party at K.S.'s residence, that he asserted the Fifth Amendment when asked about using a controlled substance at the party, and that he did not tell his client about attending this party. The referee also found, based on the testimony of P.K. and K.K., who were living on Attorney Inglimo's property and were in his home watching a movie on the relevant date, that Attorney Inglimo and K.S. returned to Attorney Inglimo's home late one evening, immediately went into Attorney Inglimo's bedroom, and did not leave the bedroom until morning. The referee further found, based on Attorney Inglimo's admission, that he engaged in a three-way sexual encounter with K.S. and another woman within two weeks after M.S. fired him in August 2002. The cause of the firing was M.S.'s belief that Attorney Inglimo and K.S. were seeing each other and that Attorney Inglimo was not being loyal to him.

¶ 23 The referee also found that M.S. had instructed Attorney Inglimo to provide copies of all communications between Attorney Inglimo and K.S. Attorney Inglimo admits that there were e-mails sent between him and K.S. that were not given to M.S. Attorney Inglimo claims that the e-mails were all business-related and that he deleted them immediately after they were sent or received. He asserted that M.S. never asked to receive copies of the e-mails until after they had been deleted.

¶ 24 The referee did not make a finding that Attorney Inglimo and K.S. were engaging in a sexual relationship during Attorney Inglimo's representation of M.S. because no one testified that they had personally witnessed the two engaging in sex. He did find, however, that Attorney Inglimo's admission of sex with K.S. within a few days after being fired by M.S. showed at least a substantial social relationship during Attorney Inglimo's representation of M.S. and a desire on Attorney Inglimo's part to pursue his own selfish interests.

¶ 25 Based on these factual findings, the referee concluded that Attorney Inglimo had violated SCR 20:1.7(b)FN8 because his *133 representation of M.S. may have been materially limited by his own interests and because he never consulted with his client or obtained his client's written consent to his social relationship with K.S.

FN8.SCR 20:1.7(b) provides: Conflict of interest: general rule.

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents in writing after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

¶ 26 Count 9 relates to Attorney Inglimo's conviction for misdemeanor possession of tetrahydrocannabinols (THC or marijuana) on January 22, 2003. This conviction was based on Attorney Inglimo's use of marijuana with clients P.K. and K.K. in June 2002. Although Attorney Inglimo was originally charged with several additional counts, he pled guilty to misdemeanor possession of marijuana pursuant to a plea agreement.

¶ 27 The referee concluded that since the conviction was only for possession of marijuana, he did not believe that the conviction by itself supported finding a violation of SCR 20:8.4(b). The referee believed that under SCR 20:8.4(b) the OLR was required to prove a nexus between the criminal act of which Attorney Inglimo was convicted (possession of THC) and dishonesty, untrustworthiness or unfitness as a lawyer. He did not believe that there was any such nexus shown in this case. The referee stated that he did not know if his legal conclusion would be different if the conviction had been for marijuana use as opposed to possession, although the referee made a specific factual finding that the conviction was based on a June 2002 videotape showing Attorney Inglimo using marijuana with clients P.K. and K.K.

¶ 28 Count 10 also related to the June 2002 incident. The referee found that during the June 2002 videotaped incident, Attorney Inglimo, P.K. and K.K. also had snorted cocaine using a straw and a mirror. Attorney Inglimo admitted that he had used cocaine occasionally since becoming an attorney, although he said he wasn't sure whether the substance shown on the June 2002 videotape was really cocaine. He claimed that it may have been flour or salt. P.K. and K.K. testified that the substance was indeed cocaine and K.K. stated that she had used cocaine with Attorney Inglimo on other occasions. The referee also found that P.K. and K.K. were clients of Attorney Inglimo.

¶ 29 The referee concluded that Attorney Inglimo's use of cocaine, which he considered more serious than marijuana, with two clients demonstrated that he had committed a criminal act that reflected adversely on his fitness as a lawyer, in violation of SCR 20:8.4(b). Attorney Inglimo has not appealed this violation.

¶ 30 Count 11 alleged a violation of SCR 20:8.4(b) for using marijuana with R.W., an adult client, and T.R., a minor. The referee's findings and legal conclusions on this count are somewhat contradictory. The referee essentially found that Attorney Inglimo and R.W. smoked marijuana together at the apartment of J.S., and that during that evening R.W. engaged Attorney Inglimo to represent her. The referee's factual findings also include a statement that “[T.R.] used marijuana with [J.S.], [R.W.] and Inglimo at [J.S.'s] apartment.” He also made a finding that “[J.S.] testified at the time [T.R.] came over in the summer of 2001, there was marijuana exchanged between [T.R.] and Inglimo.”

¶ 31 Despite these findings of fact, when discussing his legal conclusions on this count, the referee stated that while he believed that the OLR had met its burden of proof to show that Attorney Inglimo had used marijuana with an adult client, R.W., it had not met its burden of proving marijuana*134 use with T.R. In addition, the referee concluded that marijuana use with an adult client by itself does not constitute a violation of SCR 20:8.4(b) and that because the OLR had not proven that Attorney Inglimo's marijuana use with R.W. had affected any legal services he provided to her, there was no violation of SCR 20:8.4(b) in this instance.

¶ 32 Count 12 alleged that Attorney Inglimo had violated SCR 20:8.4(b) by supplying THC to P.K. The referee found that Attorney Inglimo had in fact supplied marijuana to P.K., one of Attorney Inglimo's clients, citing P.K.'s testimony that Attorney Inglimo had provided marijuana to him on “quite a few” occasions. The referee also noted that Attorney Inglimo had admitted that he had used marijuana with P.K., but when asked at the hearing about supplying marijuana to P.K., Attorney Inglimo asserted his Fifth Amendment rights.

¶ 33 With respect to whether this conduct constituted a violation of SCR 20:8.4(b), the referee repeated his belief that using marijuana, even with a client, may be a criminal act, but it does not constitute a violation of SCR 20:8.4(b) because it does not, by itself, reflect adversely on the lawyer's fitness. The referee's report continued, however, by stating “But doing so-supplying-to a client is unfitness.” Despite this conclusion, the referee nonetheless later indicated that he believed that SCR 20:8.4(b) requires proof that the attorney provided deficient legal services “in circumstances where marijuana use and/or supplying was a primary or secondary cause.” Because the OLR did not show how Attorney Inglimo's provision of marijuana to P.K. had affected the legal services Attorney Inglimo rendered, the referee concluded that the OLR had not proven a violation of SCR 20:8.4(b) in Count 12.

¶ 34 Count 13 alleged that Attorney Inglimo's use of marijuana with clients P.K. and K.K. constituted a violation of SCR 20:8.4(b).FN9 Since this incident was videotaped, Attorney Inglimo admitted that he had smoked marijuana with P.K. and K.K., and the referee so found.

FN9. This usage of marijuana occurred just prior to Attorney Inglimo engaging in sexual intercourse with K.K., which formed the basis for Count 14. Although it was not definitively settled as to when this incident occurred, it was a different incident than the June 2002 occasion referenced in Counts 9 and 10, when Attorney Inglimo also smoked marijuana and used cocaine with P.K. and K.K.

¶ 35 The referee concluded, however, that because the OLR had not proven that the marijuana use had affected Attorney Inglimo's rendition of legal services to P.K. and/or K.K., there was no adverse reflection on his fitness as a lawyer and no violation of SCR 20:8.4(b).

¶ 36 Count 14 alleged a violation of SCR 20:1.7(b) due to Attorney Inglimo having sexual intercourse with K.K. Attorney Inglimo admitted and the referee found that Attorney Inglimo had sexual intercourse with K.K. in the presence of her husband P.K. Attorney Inglimo suggested the arrangement. The encounter was videotaped, with Attorney Inglimo supplying and setting up the videotape equipment. Attorney Inglimo admitted that he had represented P.K., K.K. or both in numerous matters beginning in at least 1997 and that at the time of the videotaped sex act, he had an ongoing attorney-client relationship with P.K. K.K. had clearly been a client of Attorney Inglimo prior to the incident, although Attorney Inglimo contended that she was not a client at the time of the sexual encounter.

¶ 37 Both P.K. and K.K. testified that the sexual intercourse was payment for *135 prior legal services that Attorney Inglimo had rendered to K.K. P.K. testified that the videotaping was done to ensure that there was no dispute that the bill for legal fees had been paid in full. The referee implied that he believed the sex was indeed payment for prior legal services, but he did not make a specific finding of fact to that effect. The referee noted that Count 14 had not charged Attorney Inglimo with obtaining sex as payment for legal services.

¶ 38 The referee did find that K.K. felt terrible about having sex with Attorney Inglimo and that P.K. had not consented.

¶ 39 The referee concluded that Attorney Inglimo's act of sexual intercourse with K.K. was for his own personal interests and that his personal interests may have materially limited his ability to represent P.K. Thus, Attorney Inglimo violated SCR 20:1.7(b).

¶ 40 Count 15 alleged that Attorney Inglimo had failed to notify the OLR and this court within five days of his January 22, 2003 conviction for possession of THC, in violation of SCR 21.15(5)FN10 and 20:8.4(f).FN11 It is undisputed that neither Attorney Inglimo nor his lawyer sent written notice to the OLR's office in Madison or to the clerk of this court. Attorney Michael Ganzer, who represented Attorney Inglimo at the time, did send a facsimile transmission concerning the conviction to Attorney Daniel Snyder, who was a member of the District 11 Professional Responsibility Committee at the time.

FN10. SCR 21:15(5) provides: Duties of attorneys.

(5) An attorney found guilty or convicted of any crime on or after July 1, 2002, shall notify in writing the office of lawyer regulation and the clerk of the Supreme Court within 5 days after the finding or conviction, whichever first occurs. The notice shall include the identity of the attorney, the date of finding or conviction, the offenses, and the jurisdiction. An attorney's failure to notify the office of lawyer regulation and clerk of the supreme court of being found guilty or his or her conviction is misconduct.

FN11.SCR 20:8.4(f) provides that it is professional misconduct for a lawyer to “violate a statute, supreme court rule, supreme court order or supreme court decision regulating the conduct of lawyers.”

¶ 41 There was a dispute between the parties as to whether Attorney Snyder had told Attorney Ganzer to notify only him when the conviction was entered because the OLR and the supreme court were already aware of the criminal charges against Attorney Inglimo. There were multiple affidavits filed on this issue in connection with the summary judgment process before the referee.

¶ 42 The referee ultimately found that Attorney Snyder was not an agent of the OLR who could accept written notice of the conviction on the OLR's behalf. The referee further found that Attorney Snyder had never discussed with Attorney Ganzer the obligation of Attorney Inglimo to send written notice of the conviction to the OLR and this court under SCR 21.15(5). In any event, even Attorney Inglimo acknowledged that no written notice was ever sent to the clerk of the supreme court.

¶ 43 The referee concluded that Attorney Inglimo's failure to provide written notice to the OLR and the clerk of the supreme court had violated SCR 21.15(5), thereby also violating SCR 20:8.4(f). He stated, however, that this was only a technical violation, for which no additional discipline should be imposed.

¶ 44 With respect to the discipline to be imposed, the referee categorized the violations he found into three levels of seriousness.*136 He considered Count 2 (marijuana use with L.K. and impact of drug use on trial performance), Count 8 (improper social relationship with K.S. while representing M.S. in divorce proceeding), and Count 14 (conflict of interest due to sexual encounter with K.K.) as serious violations. He considered the counts relating to Attorney Inglimo's trust account (Counts 3 through 7) to be “less serious violations.” He also placed in this “less serious” category Count 10, which charged a violation of SCR 20:8.4(b) for using cocaine with adult client P.K. Finally, as noted above, the referee believed that Count 15 concerning the failure to notify the OLR and this court of his criminal conviction was a technical violation for which no discipline should be imposed.

¶ 45 Ultimately, although he provided a series of individual disciplines for each of violations he found, the sum of which added up to at least a two-year suspension, the referee recommended a total suspension of 18 months. The referee indicated that he believed that Attorney Inglimo's suspension should be lessened somewhat from what would otherwise be appropriate because he is a solo practitioner in the Superior area whose practice will be greatly impacted by any suspension.

¶ 46 The referee also recommended that Attorney Inglimo should be required to submit to random drug tests for one year prior to the reinstatement of his license. See In re Disciplinary Proceedings Against Broadnax, 225 Wis.2d 440, 444, 591 N.W.2d 855 (1999).

[3] ¶ 47 The OLR appeals from the referee's report and recommendation. The OLR first challenges the referee's legal conclusions that Attorney Inglimo's use of controlled substances, as alleged in Counts 9, 11, 12, and 13, did not constitute violations of SCR 20:8.4(b). The OLR contends that the referee found as a matter of fact that Attorney Inglimo had been convicted of possession of THC, that he had used marijuana with clients R.W., P.K., and K.K., and that he had supplied marijuana to P.K. The OLR argues that the criminal acts of possessing, using and supplying marijuana, by themselves, reflect adversely on an attorney's honesty, trustworthiness or fitness as a lawyer in other respects. In re Disciplinary Proceedings Against Norlin, 104 Wis.2d 117, 130, 310 N.W.2d 789 (1981).FN12 It asserts that the referee made an error of law when he required the OLR to prove a nexus between the attorney's drug-related activities and particular legal services provided by the attorney.

FN12. The OLR also correctly notes that an attorney's criminal act can support a SCR 20:8.4(b) violation even if the attorney is never charged or convicted. Broadnax, 225 Wis.2d at 442, 591 N.W.2d 855;In re Disciplinary Proceedings Against Sandy, 200 Wis.2d 529, 546 N.W.2d 876 (1996).

[4] ¶ 48 First, we address the referee's interpretation of SCR 20:8.4(b) as requiring that there be a nexus between the attorney's criminal act and the provision of specific legal services. We conclude that this construction is too restrictive a reading of the rule. The language of the rule contains no such requirement of a nexus between the criminal act and legal services rendered by the lawyer. It states only that it is professional misconduct for a lawyer to “commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects.”

[5] ¶ 49 Our cases have also repeatedly found violations of SCR 20:8.4(b) even though there has been no connection established between the attorney's criminal act and the attorney's legal services to *137 particular clients. E.g., In re Disciplinary Proceedings Against Washington, 2007 WI 65, 301 Wis.2d 47, 732 N.W.2d 24 (criminal conviction for personal income tax evasion due to failure to report income constituted violation of SCR 20:8.4(b)); In re Disciplinary Proceedings Against Phillips, 2007 WI 63, 301 Wis.2d 33, 732 N.W.2d 17 (criminal conviction for tax evasion due to hiding of loan proceeds to avoid attachment by Internal Revenue Service violated SCR 20:8.4(b)); In re Disciplinary Proceedings Against Chvala, 2007 WI 47, 300 Wis.2d 206, 730 N.W.2d 648 (accepting stipulation that criminal acts of misconduct in public office and making a campaign contribution exceeding the lawful limit violated SCR 20:8.4(b)); In re Disciplinary Proceedings Against Burke, 2007 WI 46, 300 Wis.2d 198, 730 N.W.2d 651 (violations of SCR 20:8.4(b) found for misconduct in public office and obstructing an officer). The connection required for a violation of SCR 20:8.4(b) is not between a criminal act and the lawyer's provision of legal services, but rather is between a criminal act and a lawyer's honesty, trustworthiness or fitness as a lawyer in other respects. A criminal act can reflect adversely on a lawyer's fitness even if the act did not cause the attorney to provide deficient legal services.

[6] ¶ 50 With respect to the OLR's argument on appeal, we need not decide in this case whether every instance of the use of a controlled substance reflects adversely on an attorney's honesty, integrity or fitness as a lawyer.FN13 There are additional facts present for each of the counts in the present case to conclude that Attorney Inglimo's possession, use or supplying of marijuana to others reflected adversely on his fitness as a lawyer.

FN13. We have previously affirmed violations of SCR 20:8.4(b) where the factual basis was an attorney's simple possession or use of cocaine. E.g., In re Disciplinary Proceedings Against Peterson, 2006 WI 41, 290 Wis.2d 74, 713 N.W.2d 101;Broadnax, 225 Wis.2d at 442, 591 N.W.2d 855.

[7] ¶ 51 Count 9 of the complaint alleged and the referee found that Attorney Inglimo had been convicted in Douglas County Circuit Court of possessing THC, contrary to Wis. Stat. § 961.41(3g)(e). Attorney Inglimo did not contest the fact of his conviction. The referee also made a specific finding of fact that this conviction “was based on Inglimo's use of THC with clients [P.K. and K.K.] as depicted in a June 2002 videotape.” We conclude that using an illegal drug with clients reflects adversely on an attorney's fitness as a lawyer. A lawyer has a professional obligation to support the enforcement of the law and the administration of justice. See Preamble to SCR ch. 20 (“A lawyer's conduct should conform to the requirements of the law, both in professional service to clients and in the lawyer's business and personal affairs.... A lawyer should demonstrate respect for the legal system and for those who serve it, including judges, other lawyers and public officials.”) This obligation is especially important when clients are involved because clients gain their impression of the law and the legal system primarily from their lawyer. A lawyer's use of illegal controlled substances with a client contradicts this obligation by showing the client that the lawyer has a disregard for the law. That reflects adversely not only on the lawyer's fitness, but on the profession as a whole. Thus, based on the referee's factual findings, we reverse the referee's conclusion of no violation on Count 9 and determine that Attorney Inglimo's possession and use of marijuana in June 2002 with clients P.K. *138 and K.K. constituted a violation of SCR 20:8.4(b).

¶ 52 For the same reason, we conclude that the referee erred in finding no violation of SCR 20:8.4(b) on Count 11. With respect to that count, the referee found that Attorney Inglimo had admitted that he had smoked marijuana with R.W. while she was a client. This is sufficient to support a violation of SCR 20:8.4(b).

¶ 53 The OLR's second argument on appeal also relates to Count 11. That count alleged that Attorney Inglimo had used THC not only with R.W., but also with T.R., who was a minor at the time. As noted above, the referee's report was not consistent on this subject. Although the report contains a finding of fact that Attorney Inglimo used marijuana with T.R., R.W., and J.S. at J.S.'s apartment, the referee concluded that there was no violation of SCR 20:8.4(b). We conclude that the referee's finding of marijuana use with T.R. further supports a conclusion that Attorney Inglimo violated SCR 20:8.4(b), as alleged in Count 11. Attorney Inglimo's use of marijuana with a client, R.W., was enough to support finding such a violation. The fact that Attorney Inglimo also used illegal drugs with a minor simply confirms that legal conclusion and renders it a more serious violation.

[8] ¶ 54 Count 12 of the complaint similarly alleged that Attorney Inglimo had supplied marijuana to client P.K. Delivery of marijuana (THC) is a felony in this state. Wis. Stat. § 961.41(1)(h). The referee found that Attorney Inglimo had used marijuana with P.K. “countless times” and that Attorney Inglimo had supplied marijuana to P.K. “[q]uite a few” times. Just as using marijuana with a client violates SCR 20:8.4(b), delivering marijuana to a client also reflects adversely on a lawyer's fitness. Thus, we reverse the referee's conclusion of no violation as to Count 12.

¶ 55 Count 13 alleged a violation of SCR 20:8.4(b) due to Attorney Inglimo's use of marijuana with clients P.K. and K.K. Although the referee found that the marijuana use had occurred, he concluded that there was no professional misconduct because of the lack of the nexus he erroneously believed was required under the rule. As with Count 9, we reverse the referee's conclusion of no violation and determine that Attorney Inglimo's use of marijuana with clients constituted a violation of SCR 20:8.4(b).

¶ 56 The OLR's next argument focuses on Count 1. It asserts that the referee erred in concluding that there was no violation of SCR 20:1.8(k)(2) for Attorney Inglimo engaging in a three-way sexual encounter with client L.K. and his girlfriend. The OLR does not challenge the referee's factual findings. Rather, it argues that the facts as found by the referee provide clear and convincing evidence of a violation of SCR 20:1.8(k)(2).

¶ 57 The relevant language of SCR 20:1.8(k) is as follows:

(k)(1) In this paragraph:

(i) “Sexual relations” means sexual intercourse or any other intentional touching of the intimate parts of a person or causing the person to touch the intimate parts of the lawyer.

...

(2) A lawyer shall not have sexual relations with a current client unless a consensual sexual relationship existed between them when the lawyer-client relationship commenced.

[9] ¶ 58 The referee found that Attorney Inglimo engaged in sexual relations with L.K.'s girlfriend while she was doing the same with L.K. The OLR essentially argues that the word “with” in SCR 20:1.8(k)(2) connotes a temporal and spatial*139 connection. According to the OLR, as long as the lawyer and the client are both participating in a sexual act at the same time in the same place, they are having sexual relations “with” each other. In response, Attorney Inglimo relies on the plain language of the rule and argues that the OLR's interpretation would expand the rule beyond its terms.

¶ 59 On this issue, we concur with the referee's conclusion. The definition of sexual relations in SCR 20:1.8(k)(1) connotes conduct directly between the lawyer and the client. When the definition refers to touching, the rule speaks of the lawyer intentionally touching the intimate parts of “a person,” but the subsequent alternative definitional phrase uses the more definitive “the person” when referring to a situation in which the lawyer causes the touching to be done to him/her. In addition, to the extent that sexual intercourse also qualifies as “sexual relations” under the definition, such conduct is likewise done intentionally (i.e., not by accident). Further, SCR 20:1.8(k)(2) prohibits a lawyer from having “sexual relations” “with a current client.” Thus, the definitional language of SCR 20:1.8(k)(1) and the prohibition of SCR 20:1.8(k)(2) together clearly indicate that the prohibited “sexual relations,” whether intercourse or touching, must be intentionally done between the lawyer and one particular person, namely the client.

¶ 60 Without commenting on the applicability of other Rules of Professional Conduct, we agree with the referee's conclusion that the evidence in the present case did not show that Attorney Inglimo had engaged in “sexual relations” with client L.K. in violation of SCR 20:1.8(k)(2). There was no testimony as to precisely what occurred during Attorney Inglimo's encounter with L.K. and his girlfriend. There was no testimony that Attorney Inglimo ever intentionally touched L.K.'s intimate parts or caused L.K. to touch his intimate parts. Moreover, there was no testimony that Attorney Inglimo engaged in any form of sexual intercourse with L.K. Thus, because it does not appear that the definitional elements of “sexual relations” have been satisfied, the simple term “with” in the prohibitional phrase in SCR 20:1.8(k)(2) cannot transform this situation into a violation of the rule.

[10][11] ¶ 61 The OLR next asserts that on Count 15 the referee should have considered some level of additional discipline for Attorney Inglimo's failure under SCR 21.15(5) to provide proper notification of his criminal conviction to the OLR and the clerk of this court. The OLR and Attorney Inglimo spend a considerable amount of time arguing about the facts of this issue and their reasons for litigating the issue. As to the OLR's claim on appeal, however, the issue is relatively straightforward. The referee found that Attorney Inglimo failed to provide the required written notice of his conviction to the OLR and to the clerk of this court within five days after the conviction, thereby violating SCR 21.15(5) and SCR 20:8.4(f). Having found a violation of the rule, the referee was not free to disregard the violation in his consideration of discipline. The referee should have added that violation to the mix when considering the proper level of discipline to recommend. The amount of weight to be given to the violation, however, depends on the facts of the specific case. In any event, it is this court that ultimately decides the appropriate level of discipline, independent of the referee's recommendation. See In re Disciplinary Proceedings Against Widule, 2003 WI 34, ¶ 44, 261 Wis.2d 45, 660 N.W.2d 686. We have factored this violation into our consideration of the proper level of discipline.

*140 ¶ 62 Attorney Inglimo has also filed a cross-appeal from the referee's report and recommendation. He asserts that the referee erred in finding (1) that he had failed to produce his client files and (2) that the testimony of other potential witnesses that did not testify might have supported his arguments.

¶ 63 With respect to the client files, Attorney Inglimo asserts that the referee mistakenly believed that Attorney Inglimo had failed to produce his client files to the OLR and to cooperate fully with the OLR's investigation. Attorney Inglimo also states that the referee never made any request to see the files so he should not have faulted Attorney Inglimo for not submitting them as evidence at the disciplinary hearing.

¶ 64 Attorney Inglimo misunderstands the referee's comments about his client files. The referee was not finding an ethical violation because of a failure to produce the relevant client files. He simply was commenting that if Attorney Inglimo had wanted to support some of the factual arguments he was making, he could have submitted portions of his client files. For example, Attorney Inglimo argued that he had properly prepared for L.K.'s criminal trial (Count 2) and that his contacts with K.S. during his representation of M.S. (Count 8) were only business-related. The referee noted that Attorney Inglimo's files on these client matters could potentially have supported these claims. Since Attorney Inglimo never offered into evidence his files on these matters, however, he had no evidence to support his bald assertions on these points.

¶ 65 Although Attorney Inglimo challenges the referee's comments about his client files, there is no legal issue for this court to resolve. The referee did not find that Attorney Inglimo had failed to turn over requested files, thereby violating an ethical rule. The referee also had no obligation to request Attorney Inglimo's client files. If Attorney Inglimo had wanted parts of those files to be considered by the referee, he had the obligation to offer them into evidence.

¶ 66 The same reasoning holds true with respect to Attorney Inglimo's challenge to the referee's comments (1) on the lack of testimony from judges who had presided over cases handled by Attorney Inglimo or from opposing counsel and (2) on the lack of Attorney Inglimo's probation/treatment records following his criminal conviction. Attorney Inglimo asserts that he provided names and documents to his counsel in this disciplinary proceeding, but for whatever reason his counsel failed to ensure that the evidence was submitted to the referee.

¶ 67 Again, this argument does not raise a legal issue that needs to be resolved by this court. Whether or not Attorney Inglimo's counsel could/should have produced additional evidence/testimony at the disciplinary hearing, it was Attorney Inglimo's responsibility to make sure that everything he wanted the referee and this court to consider was entered into evidence. Moreover, the referee did not use the lack of such evidence as a basis for finding a violation. He simply commented that Attorney Inglimo had not produced evidence/testimony to back up certain arguments that he made to justify or to mitigate his conduct.

¶ 68 Attorney Inglimo also argues that the referee erred in his factual findings and legal conclusion as to Count 2 regarding his use of marijuana with client L.K. Because the referee believed that he had to find a “nexus” between marijuana usage and legal services provided by Attorney Inglimo to L.K., the referee focused on L.K.'s testimony that Attorney Inglimo had been high during L.K.'s criminal trial and had consequently provided poor representation.*141 Attorney Inglimo argues that expert testimony was necessary as to whether his representation of L.K. was adequate and that L.K. should not have been allowed to testify on that subject because he had no legal expertise. Attorney Inglimo asserts that he had in fact adequately prepared for the trial and had provided competent representation.

¶ 69 This argument is no longer legally relevant. As discussed above, we have concluded that a violation of SCR 20:8.4(b) for using an illegal controlled substance with a client does not require a nexus with deficient legal services. Thus, the fact that Attorney Inglimo used marijuana with client L.K. was sufficient to support a violation. Thus, the referee's conclusion of a violation of SCR 20:8.4(b) on Count 2 is affirmed.

¶ 70 Attorney Inglimo challenges the referee's finding that he had a substantial social relationship with K.S. while he was representing M.S. in a divorce proceeding. Attorney Inglimo's arguments on this subject, however, are basically factual arguments. He does not claim that there was no factual basis for the referee's factual findings. He simply argues that the referee should have believed his version of events. We conclude that the referee's findings of fact regarding Count 8 are not clearly erroneous.

[12] ¶ 71 Attorney Inglimo also challenges the referee's finding that his sexual intercourse with K.K. may have materially limited his ability to represent P.K. Attorney Inglimo focuses his argument on his claim that K.K. was not his client at the time of the sexual encounter. He argues that there was no evidence as to any conflict that this encounter created. Attorney Inglimo also asserts that his having sex with K.K. was suggested by P.K. and K.K. He denies the testimony of P.K. and K.K. that K.K. had sex with Attorney Inglimo to pay off an outstanding legal bill.

¶ 72 We find no basis to overturn the referee's factual findings with respect to Count 14. Even if K.K. was not a client at the time that Attorney Inglimo had sexual intercourse with her, it is undisputed that her husband P.K. was a current client at that time. Whether or not the sexual intercourse was payment for prior legal services, we agree with the referee's conclusion that Attorney Inglimo engaged in sexual intercourse with a client's wife in the client's presence for his own personal interests. Attorney Inglimo has not shown that his conduct with K.K. somehow benefited his client P.K. It is self-evident that an attorney's personal interest in having sex with the spouse of a client may materially limit the attorney's representation of that client. Whether or not the client initially approved of the encounter, there is a substantial possibility that the episode is likely to create conflicts between the attorney and the client going forward. Since SCR 20:1.7(b) requires only that the representation “may be materially limited” by the lawyer's personal interests, we agree with the referee's conclusion that Attorney Inglimo's conduct constituted a violation of the rule.

[13] ¶ 73 With respect to the appropriate level of discipline, the OLR and Attorney Inglimo both object to the referee's recommendation of an 18-month suspension. The OLR asserts that a three-year suspension is required in this case. It argues that the referee's 18-month suspension was premised on the number of violations he found and would have been greater if additional violations had been considered. The OLR also argues that Attorney Inglimo's misconduct exhibited a serious disregard of the trust placed in him as an attorney on three different fronts: his violation of the drug laws with *142 clients, his failure to treat trust account funds properly, and his engaging in social/sexual relationships with the wives of clients. It notes that prior cases involving drug use have warranted substantial suspensions. See, e.g., In re Disciplinary Proceedings Against Rabideau, 102 Wis.2d 16, 306 N.W.2d 1 (1981) (three-year suspension following convictions for contributing to the delinquency of a minor and possession of marijuana involving supplying marijuana to a former juvenile client); Broadnax, 225 Wis.2d at 442-44, 591 N.W.2d 855 (two-year suspension for using cocaine while subject to order not to do so, misappropriating slightly less than $1,000 from his former law firm, and stealing several compact discs from an employee of his former law firm). Moreover, trust account violations, by themselves, have also resulted in suspensions of more than a few months. See, e.g., In re Disciplinary Proceedings Against Guenther, 2005 WI 133, 285 Wis.2d 587, 700 N.W.2d 260 (eight-month suspension imposed for multiple trust account violations, as well as failure to keep a client reasonably informed and making a misrepresentation to a client). Likewise, a six-month suspension was warranted in a case involving an attorney's sexual relations with a client and the mother of another client and his false denials of that conduct to a court and the OLR. In re Disciplinary Proceedings Against Gamino, 2005 WI 168, 286 Wis.2d 558, 707 N.W.2d 132. The OLR argues in light of these and other similar prior precedents that an 18-month suspension in the current case, given the number and nature of ethical violations, would unduly depreciate the seriousness of Attorney Inglimo's professional misconduct.

¶ 74 On the other side, Attorney Inglimo argues that we should consider alternatives to suspension. He asserts that all or most of his misconduct is connected to his past use of controlled substances. Therefore, he argues that disciplinary measures focusing on rehabilitation and confirming his abstinence from controlled substances would be appropriate here. Attorney Inglimo asserts that he has been able to remove from his life both controlled substances and the persons who connected him to that lifestyle. He also claims that a suspension would place an unreasonable burden on him due to limited opportunities for other employment and that he has endured a four-year ordeal relating to his criminal conviction and the current disciplinary investigation and proceeding. Finally, Attorney Inglimo notes that he has demonstrated his ability to practice in conformity to the Rules of Professional Conduct during that four-year period.

¶ 75 After considering the referee's report and the arguments of the parties, we conclude that a three-year suspension is necessary to protect the public in this case. Attorney Inglimo showed a disturbing pattern of disregard for the laws of this state and his professional obligations as an attorney. His conduct of using illegal drugs with his clients and supplying them with drugs encouraged his clients to disobey the law. Moreover, it is also clear that Attorney Inglimo failed to comprehend or appreciate the fiduciary obligation an attorney has to hold the funds of clients or third parties in trust. He routinely used funds belonging to certain clients to cover the expenses of another client or his own personal expenses. Finally, he put his own interests above his duty to promote and protect the interests of his clients, thereby violating one of the core principles of the legal profession. A substantial period of suspension is necessary in this case to impress upon Attorney Inglimo and other lawyers in this state the seriousness of the professional misconduct at issue here and to protect the public from similar misconduct in the future.

*143[14] ¶ 76 We agree with the referee that as a condition of reinstatement Attorney Inglimo should be required to abstain from the use of illegal drugs and to submit to random drug screenings for a period of one year prior to reinstatement. We believe that this is a necessary step to ensure Attorney Inglimo's rehabilitation and to protect the public due to the fact that the use of controlled substances was a substantial factor in the misconduct in this case. We will require as a condition of the reinstatement of his license to practice law that Attorney Inglimo at his own expense submit to monthly random drug screenings for a period of one year prior to the filing of a petition for reinstatement and that he provide the results of those screenings to the OLR. See Broadnax, 225 Wis.2d at 444, 591 N.W.2d 855;Sandy, 200 Wis.2d at 535-36, 546 N.W.2d 876.

¶ 77 We now turn to the issue of costs. On May 1, 2006, this court issued an order in response to Rule Petition 05-01 (Order 05-01), which related to the assessment of costs against attorneys in disciplinary proceedings, medical incapacity proceedings, and reinstatement proceedings under SCR 22.24. In Re Amendments to Supreme Court Rules Relating to Cost Assessments in the Lawyer Regulation System, S.Ct. Order 05-01, 2006 WI 34, 287Wis.2dxiii, 714 N.W.2d Ct.R-21. In that order we amended subpart (2) of SCR 22.24. We also created SCR 22.24(1m), which reads as follows:

22.14(1m) The court's general policy is that upon a finding of misconduct it is appropriate to impose all costs, including the expenses of counsel for the office of lawyer regulation, upon the respondent. In cases involving extraordinary circumstances the court may, in the exercise of its discretion, reduce the amount of costs imposed upon a respondent. In exercising its discretion regarding the assessment of costs, the court will consider the submissions of the parties and all of the following factors:

(a) The number of counts charged, contested, and proven.

(b) The nature of the misconduct.

(c) The level of discipline sought by the parties and recommended by the referee.

(d) The respondent's cooperation with the disciplinary process.

(e) Prior discipline, if any.

(f) Other relevant circumstances.

¶ 78 Order 05-01, however, expressly stated that the new rule would “apply prospectively to disciplinary proceedings, medical incapacity proceedings, or reinstatement proceedings filed on or after July 1, 2006.” Thus, the new rule does not apply to the present disciplinary proceeding, which was filed in March 2005, although the provisions of the new rule may be instructive in how we approach the cost issue in the present matter.

¶ 79 Moreover, the court's rulings under the version of the rule in effect prior to Order 05-01 are generally consistent with the language of what has now become SCR 22.24(1m). This court has traditionally imposed all of the costs of a disciplinary proceeding on a respondent attorney, even in cases in which the attorney prevailed on some of the counts against him/her. See, e.g., In re Disciplinary Proceedings Against Konnor, 2005 WI 37, ¶ 32, 279 Wis.2d 284, 694 N.W.2d 376;In re Disciplinary Proceedings Against Polich, 2005 WI 36, ¶¶ 29-30, 279 Wis.2d 266, 694 N.W.2d 367;In re Disciplinary Proceedings Against Trewin, 2004 WI 116, ¶ 49, 275 Wis.2d 116, 684 N.W.2d 121;In re Disciplinary Proceedings Against Pangman, 216 Wis.2d 440, 574 N.W.2d 232 (1998).

*144[15] ¶ 80 In this case, the OLR has submitted a request for the imposition of costs in the total amount of $42,400.96. Of that amount, $8,687.49 relate to the referee's time and expenses in presiding over the disciplinary proceeding, which included handling pretrial matters, deciding motions for summary judgment, presiding over an evidentiary hearing, and preparing a lengthy report. The OLR seeks $24,751.54 for counsel fees and disbursements for pre-appellate work and $8,043.04 for counsel fees and disbursements related to the appeals in this matter. The remainder of the costs relate to court reporting fees and other miscellaneous expenses.

¶ 81 The referee recommended that the costs of the disciplinary proceeding to be assessed against Attorney Inglimo should be reduced by one-fifteenth because he viewed Count 15 as only a technical violation of the Supreme Court Rules of Professional Conduct. We decline to follow this recommendation. Although Count 15 was a relatively minor violation in the context of this case, it is clear that Attorney Inglimo did not comply with the rule requiring written notification of his criminal conviction. Nonetheless, he chose to deny the count and to litigate the matter, inviting the OLR's efforts to prove the violation. Consequently, we conclude that the cost amount we approve should not be reduced by one-fifteenth.

[16] ¶ 82 Attorney Inglimo has filed an objection to the cost request filed by the OLR. In addition to seeking the one-fifteenth reduction advocated by the referee, which we have now rejected, Attorney Inglimo also seeks an across-the-board one-half reduction of the referee's fees and the OLR's fees and disbursements. Attorney Inglimo's objection incorrectly assumes that the new provisions of SCR 22.14(1m) apply to the present proceeding and argues that the various factors listed there favor a reduction in the amount of costs that should be assessed against him.

¶ 83 With regard to his specific arguments for a one-half reduction in costs, Attorney Inglimo asserts that the OLR over-charged and over-litigated the case against him. He points to the fact that he did not dispute the counts related to trust account violations, which were resolved in the OLR's favor on summary judgment and which the referee did not view as particularly serious. In addition, he notes that the referee found no violation on five of the fifteen counts charged and believed that Count 15 was only a technical violation that did not require any sanction.

¶ 84 Attorney Inglimo also argues that the nature of his misconduct was not very serious, since it involved the use of controlled substances and sexual behavior, as opposed to the conversion of client funds or other offenses directly related to the practice of law. He further asserts that the referee recommended only half of the discipline sought by the OLR and that he has cooperated fully with the disciplinary process.

[17] ¶ 85 Although Attorney Inglimo asserts that the OLR over-litigated this matter, he does not cite specific examples of ways in which the OLR excessively litigated this proceeding. For example, he does not identify which motions, depositions, etc. were unnecessary. Tied to this general claim is his assertion that the OLR did not try to reach a resolution of this matter by agreement prior to the evidentiary hearing, although he had directed his own counsel to seek a negotiated settlement. In this regard, we note that the OLR is not authorized to plea bargain disciplinary matters, although it may enter into stipulations of fact and law and jointly request the imposition of a certain level of discipline that is supported by the particular facts of a matter. See, e.g., *145In re Disciplinary Proceedings Against Barrock, 2007 WI 24, ¶ 5, 299 Wis.2d 207, 727 N.W.2d 833;In re Disciplinary Proceedings Against Robinson, 2007 WI 17, ¶ 5, 299 Wis.2d 49, 726 N.W.2d 896;In re Disciplinary Proceedings Against Paul, 2007 WI 11, ¶ 22, 298 Wis.2d 629, 726 N.W.2d 253;In re Disciplinary Proceedings Against Morrissey, 2005 WI 169, ¶ 27, 286 Wis.2d 579, 707 N.W.2d 142;In re Disciplinary Proceedings Against Malloy, 2002 WI 52, ¶ 13, 252 Wis.2d 597, 644 N.W.2d 663.

¶ 86 Attorney Inglimo does cite several specific items that he asserts should not be recoverable as expenses. For example, he claims that he should not be required to pay for the travel expenses of OLR's retained counsel to travel to Superior, Wisconsin, for meetings that he alleges did not occur. He also argues that he should not have to pay for attorney time for telephone conferences between OLR's retained attorney and its in-house attorneys. Additionally, he claims, without any citation of legal authority, that he should not have to pay for the OLR's retained attorney's mileage, meals and lodging or for photocopies of documents that were used during the prosecution of the matter but were not filed with the referee or this court.

¶ 87 In response, the OLR cites this court's prior cases in which we have said that our general practice is levy the full costs of the disciplinary proceeding on the respondent attorney. It states that this court has rejected on multiple occasions Attorney Inglimo's claim that the cost amount should be reduced because the referee did not find violations on some counts. See, e.g., Konnor, 279 Wis.2d 284, ¶ 32, 694 N.W.2d 376;Polich, 279 Wis.2d 266, ¶¶ 29-30, 694 N.W.2d 367;In re Disciplinary Proceedings Against Eisenberg, 144 Wis.2d 284, 423 N.W.2d 867 (1988). The OLR argues that there is no basis for a claim that any of the counts alleged by the OLR were wholly without prosecutorial merit. See Konnor, 279 Wis.2d 284, ¶ 72, 694 N.W.2d 376 (Abrahamson, C.J., concurring) (noting that the respondent attorney's conduct had caused the prosecution to proceed on all counts and questioning why the costs stemming from the respondent attorney's conduct should be shifted to other attorneys in this state). At bottom, the OLR asserts that there are no “extraordinary circumstances” here that would justify a departure from the court's standard practice of imposing full costs against the respondent attorney.

¶ 88 With respect to the individual items identified by Attorney Inglimo, the OLR notes that counsel's travel to Superior to meet with witnesses was justified. On one occasion, only one of the two witnesses appeared at the scheduled time. Counsel, however, subsequently located the other witness at her home later that same day. On the other occasion, counsel had scheduled a meeting with another witness and traveled to Superior with the reasonable expectation that the witness would appear for the meeting. Although the witness ultimately failed to appear, the OLR asserts that this was a justifiable expense.

¶ 89 The OLR also argues that it should be entitled to obtain reimbursement for retained counsel's time spent conferring with OLR in-house litigation counsel. It asserts that these telephone conferences were necessary for retained counsel to receive guidance and instruction from OLR's in-house attorneys. Moreover, it notes that, pursuant to its custom, it did not seek reimbursement for any of the time spent by its in-house attorneys during these conferences.

¶ 90 With respect to Attorney Inglimo's objection to the mileage, meals and lodging expenses of OLR's retained counsel, the OLR states that such expenses fall within *146 the definition of “costs” in SCR 22.001(3). That provision defines “costs” as including “fees and expenses of counsel for the office of lawyer regulation.”

¶ 91 After considering the submissions of the parties on the cost issue, we conclude that Attorney Inglimo should be required to pay the full costs of this disciplinary proceeding. Attorney Inglimo has not demonstrated why we should deviate in this case from our practice of assessing full costs. He has not shown that the OLR over-litigated any part of this case. He has not pointed to particular actions taken by the OLR's counsel that were unnecessary at the time. While we recognize that the total amount of costs in this case is quite large, and while we urge the OLR to be mindful of the impact of its actions on a respondent attorney who will ultimately be faced with a large cost assessment, we have not found a reason to reject any part of the cost request in this case as unnecessary or excessive.

¶ 92 Moreover, much of Attorney Inglimo's support for reducing the amount of costs stems from his assertion that the OLR failed to prove a large number of the counts in its complaint and that other counts on which the OLR prevailed (e.g., Counts 3 through 7 relating to trust account violations) were relatively insignificant violations. First, we have determined that the OLR did prove violations on 14 of the 15 counts in its complaint. With respect to the single count on which we have not found a violation, relating to Attorney Inglimo's three-way sexual encounter with a client and his girlfriend, we cannot say that the OLR's position was without merit. We have simply interpreted the rule at issue in a narrower fashion than the OLR sought. Moreover, we disagree with Attorney Inglimo's position that the professional misconduct at issue in this proceeding was not serious. Failing to hold client trust account funds properly, drawing clients into violations of the criminal laws of this state, and engaging in sexual/social conduct that conflicts with the attorney's duty of loyalty to a client are serious breaches of an attorney's professional obligations.

[18][19][20] ¶ 93 In addition, we do not believe that the specific items identified by Attorney Inglimo fall outside the reasonable expenses that the OLR may incur during its prosecution of a disciplinary matter. Retained counsel traveled to meetings in Superior as a necessary part of obtaining evidence and preparing for an eventual evidentiary hearing. That a witness failed to appear for a scheduled meeting does not mean that retained counsel's actions were unreasonable or unnecessary. Similarly, we find no fault with charging for retained counsel's reasonable amounts of time spent receiving direction from OLR's litigation attorneys. The OLR is charged by this court with enforcing the Rules of Professional Conduct in a fair and consistent manner. It must be able to ensure that its retained counsel is prosecuting a particular action in an appropriate manner, consistent with the office's obligations. Moreover, costs in disciplinary proceedings are not limited to items that could be properly taxed as costs in a civil proceeding. We have no hesitation in allowing the OLR to obtain reimbursement for photocopies that were reasonably made in the normal course of prosecuting a disciplinary action.

¶ 94 At bottom, we note once again that the instant proceeding arose from Attorney Inglimo's own conduct. Thus, it is appropriate that he should shoulder, to the extent he is able, the costs of the proceeding rather than transfer those costs to the other attorneys practicing in this state who have not engaged in misconduct.

*147 ¶ 95 Finally, Attorney Inglimo asserts that the amount of costs to be imposed against him greatly exceeds his annual income over the last several years. He argues that since he lives in a rural area and faces the suspension of his license to practice law in this state, he will not have the ability to obtain employment that will allow him to pay such a large cost amount in a reasonable amount of time. Moreover, he states that he already faces substantial attorney fees from his own counsel in this proceeding and will incur additional expenses in disciplinary proceedings in other states in which he has had a license to practice law.

[21] ¶ 96 We will not adjust the amount of costs imposed against Attorney Inglimo based on a claim of lack of assets at this time. It is premature to address that issue now. We first direct Attorney Inglimo to work out an agreement with the OLR by which the cost assessment may be paid over time. See Konnor, 279 Wis.2d 284, ¶ 50, 694 N.W.2d 376 (Abrahamson, C.J., concurring) (“If a lawyer cannot pay the full costs immediately, an agreement may be reached to enable the lawyer to pay the costs over time.”) If such an agreement cannot be reached or if Attorney Inglimo is too indigent to be able to make any payments toward the cost assessment, then he may seek relief from the court. We will address a motion premised on an indigency claim only after Attorney Inglimo has attempted in good faith to reach an agreement with the OLR on a payment plan. We are extending the time period for paying the costs in this case from 60 to 180 days to give Attorney Inglimo additional time to work out such an agreement.

¶ 97 IT IS ORDERED that the license of Michael R. Inglimo to practice law in Wisconsin is suspended for a period of three years, effective November 19, 2007.

¶ 98 IT IS FURTHER ORDERED that within 180 days of the date of this order, Michael R. Inglimo shall pay to the Office of Lawyer Regulation the costs of this proceeding. If the costs are not paid within the time specified and absent a showing to this court of his inability to pay those costs within that time, the license of Attorney Inglimo to practice law in Wisconsin shall remain suspended until further order of the court.

¶ 99 IT IS FURTHER ORDERED that Michael R. Inglimo shall comply with the provisions of SCR 22.26 concerning the duties of a person whose license to practice law in Wisconsin has been suspended.

¶ 100 IT IS FURTHER ORDERED that Michael R. Inglimo abstain from using, possessing, manufacturing or delivering illegal controlled substances during his suspension and that Attorney Inglimo at his own expense submit to monthly random drug screenings for a period of one year prior to the filing of a petition for reinstatement and that he provide the results of those screenings to the OLR.

¶ 101ANNETTE KINGSLAND ZIEGLER, J., did not participate.

END OF DOCUMENT

Case 51.2

365 F.Supp.2d 565

United States District Court,

S.D. New York.

Michael Trent REZNOR, Plaintiff,

v.

J. ARTIST MANAGEMENT, INC., John A. Malm, Jr., Richard Szekelyi, and Navigent Group, Defendants.

No. 04 CIV. 3808(JSR).

April 22, 2005.

RAKOFF, District Judge.

This case derives from the fifteen-year professional relationship between plaintiff Michael Trent Reznor, the lead singer in the rock band Nine Inch Nails ("NIN"), and defendant John A. Malm, Jr., Reznor's long-time manager--a relationship that ended in cacophony and discord in late 2003. Reznor charges Malm and his wholly owned management company, J. Artist Management ("JAM") with fraud, breach of contract, breach of fiduciary duty, and various other claims (ten counts in all); and Malm and JAM in turn assert eight counterclaims against Reznor. Reznor also makes six claims against Richard Szekelyi and his company, Navigent Group, accountants involved in certain of the underlying transactions.

With discovery completed, all parties now move for summary judgment. For purposes of these motions, the relevant facts are as follows: [FN1]

FN1. Because the Court must treat certain facts differently for purposes of each party's summary judgment motion, it states where there is a dispute of consequence and construes each disputed fact most favorably to the non-moving party depending on which motion is being considered.

Reznor and Malm met in 1985. Deposition of John A. Malm, Jr., 9/22/04 ("Malm Dep."), at 7. Reznor was a "bit player" in a Cleveland band called the Exotic Birds, while Malm worked in his family's machine equipment business by day and by night was a part-time promoter of local music acts, including the Exotic Birds. Deposition of Michael Trent Reznor, 10/12/04 ("Reznor Dep."), at 20; Malm Dep. at 227-28. Malm caused JAM to be incorporated in Ohio in 1985, Affirmation of John A. Malm, Jr., 11/19/04, ¶ 2, but otherwise operated without much formality and, as of 1989, had never managed an artist pursuant to a written management agreement. Id. ¶ 13. Reznor and Malm became friends, and when Reznor left the Exotic Birds and began working on his own, around 1987, Malm informally became his manager, without a written contract. Id. ¶ 3; Reznor Dep. at 91-92.

At first, Reznor had very little income, and Malm paid for such expenses as equipment, recording costs, and even Reznor's rent. Reznor Dep. at 92-94. However, Reznor's career took off quickly once NIN was formed. NIN performed its first show in 1988, see Malm Dep. at 17-18, and by later that same year had attracted interest from recording companies. JAM (through Malm) then retained an attorney, Michael Toorock, Esq., to assist in negotiating a record contract between Reznor and TeeVee Toons, Inc. ("TVT"). Declaration of Michael Toorock, 12/2/04 ("Toorock Decl."), ¶ 3. Toorock understood himself to be representing Reznor's interests and not those of Malm, who was not a party to the negotiations. Id. ¶ 2. However, he never talked directly to Reznor; all of his communications went through Malm as Reznor's agent. See Transcript, 1/10/05 ("Tr."), at 5. [FN2] This was in accord with Reznor's apparent practice, which was to leave such matters to various agents and professionals. [FN3]

FN2. In an attempt to clarify some of the many gaps and ambiguities in the record, the Court heard in-court testimony from Toorock on January 10, 2005. See Fed.R.Civ.P. 43(e).

FN3. See, e.g., Deposition of Ross Rosen, 9/14/04, at 161-63; Deposition of Anthony LaPlaca, 10/5/04, at 32; Deposition of Mark Svat, 10/6/04, at 31; Deposition of Anthony Sejba, 10/13/04, at 9-10; Deposition of Anthony Flowers, 10/4/04, at 28-29.

In early 1989, NIN signed a recording contract with TVT, Malm Decl. ¶ 4, and its first album was released that year. Malm Dep. at 171. With Reznor starting to become successful, Malm wanted a formal management agreement, id. ¶ 6, and had Toorock prepare one, id. ¶ 7. This agreement, signed on April 20, 1989 (the "1989 Agreement"), is at the heart of the instant dispute. See 1989 Agreement, attached to Affirmation of Steven Shiffman in Opposition to JAM and Malm, 12/3/04 ("Shiffman Opp.-Malm Aff."), as Exhibit 1.

Malm asserts that he did not supply Toorock with any of the terms of the 1989 Agreement and that Toorock simply sent him a standard management agreement. Malm Decl. ¶ 7. Toorock, on the other hand, states that while he used as a template a management agreement relating to another client, Toorock Decl. ¶ 4, Malm specified such material terms as duration (five years) and price (a commission rate of 20 percent [FN4]). Id. ¶ 3. Toorock further avers that Malm told him that Malm and Reznor had discussed and agreed to those terms, but had not completed discussions of certain other terms, so that the draft Toorock provided was not to be the final one. Id.; Tr. at 4-5. Toorock says he told Malm that he was providing the draft "so that the two of them could see what a management agreement looked like," and that he did not want to come between Malm and Reznor by representing either of them as discussions continued. Tr. at 6-7. Only "years later" did Toorock discover that his draft had been signed as prepared and had become the 1989 Agreement between Malm and Reznor. Toorock Decl. ¶ 5.

FN4. Toorock does not, however, allege that Malm told him how the 20 percent was to be computed, i.e., as a percentage of gross compensation.

In any event, it is undisputed that Reznor and Malm did not, in fact, discuss specific terms before Malm presented the 1989 Agreement to Reznor. Instead, Malm simply asked Reznor whether Reznor was "open to the concept" of a management agreement and Reznor said he was. Reznor Dep. at 179. At Reznor's apartment in Ohio, on April 20, 1989, Malm showed Reznor the 1989 Agreement, explained basic terms such as the 20 percent commission, said Toorock had drawn up the contract in conformance with industry standards, and assured Reznor that, while Reznor was free to have someone else look at the contract, it was "fair." Id. at 179-80. Reznor says he "may have glanced through it," but because of his trust in Malm, he signed the contract right there. Id. at 180. Both parties agree there was no discussion of the terms that now are the subject of this litigation. See Malm Dep. at 175.

As noted, the 1989 Agreement had a duration of five years, during which time JAM was to receive 20 percent of Reznor's gross compensation, 1989 Agreement ¶ ¶ 1, 5(a). Under the Agreement, JAM was obligated to "confer with, counsel and advise [Reznor] in all matters pertaining to [his] career," including "general practices in the Entertainment Industry regarding such matters as [JAM] has knowledge, such as compensation and privileges extended for similar artistic services." Id. ¶ 3(a). The contract also permitted JAM to direct lawyers and accountants to work on Reznor's behalf. Id. ¶ 4(a). In return, JAM was to be paid its 20 percent commission on any contracts or engagements then in existence, any entered into or negotiated during the agreement's term, any extensions of such contracts, and any proceeds from any copyrights in music composed during the agreement. Id. ¶ 5(b). [FN5] JAM's commissions were to be paid "as and when said Gross Compensation is received by [Reznor]," id., and was to be payable to JAM "immediately upon payment or credit to [Reznor]." Id. ¶ 5(d).

FN5. This clause is interpreted by Malm as entitling JAM to continuing commissions on Reznor's future income derived from contracts signed while the agreement was in force. The amount of money so implicated by this clause is potentially quite large, since, while the 1989 Agreement was in effect, Reznor signed a seven-record deal with a company called Interscope Records ("Interscope"), on which he still must deliver three more albums. Malm argues that he is entitled to a 20% commission on these albums, as well as on any royalties Reznor has earned or will earn from his existing Interscope albums.

In 1991, Interscope acquired Reznor's recording contract from TVT, Malm Aff. ¶ 9. As part of the transfer, new agreements were reached that obligated Reznor and NIN to record seven albums distributed by Interscope (of which, as noted, three are still to be produced). Malm Dep. at 240-41; Reznor Decl. ¶ 3. In addition, Interscope agreed to allow Reznor and Malm to form their own record label. See Reznor Letter of June 13, 1991, attached to JAM Defs.' Rule 56.1 Statement ("JAM Rule 56.1 Statement") as Exhibit 6. The resulting company, Nothing Records, Inc. ("NRI") was incorporated in 1993, with Reznor and Malm each owning 50 percent shares and Malm the manager. Malm Dep. at 244; Reznor Dep. at 63.

Meanwhile, as a result of NIN's growing success, Reznor and Malm created another company in 1993, J. Artist Management Merchandise, Inc. ("JAMM"), to sell the band's merchandise. See Action by Unanimous Consent of the Directors, attached to JAM Rule 56.1 Statement. Reznor and Malm were JAMM's sole directors. Id. According to Malm, Reznor had wanted to create a merchandising company as early as 1989 because he wanted tighter quality control over products associated with NIN. Malm Dep. at 686-87. Malm says the duo intended to evenly split profits derived from sales of merchandise. Id. at 691-92. Reznor, on the other hand, says JAMM was created at Malm's suggestion, after Malm told him other merchandising companies were not making good offers. Reznor Dep. at 226-27. He says he never realized the profits would be split evenly, as opposed to Malm collecting his 20 percent commission. Id. at 13-14.

On July 20, 1993, applications for trademark registration of the name "Nine Inch Nails" and the band's logo were filed jointly on behalf of Reznor and JAM by attorney Richard Minnich, Esq. See 1993 Trademark Applications, attached to JAM Rule 56.1 Statement as Exhibits 10 & 11. Reznor's signature appears on this application. However, he says that his understanding was that he would be the sole owner of the trademark and that he never intended to give half ownership to Malm. Reznor Dep. at 175-76, 295. Reznor also says he did not read the paragraph that stated that Reznor and JAM would co-own the mark. Id. at 299. Toorock's law partner, Ross Rosen, Esq., asserts that, when he asked Malm about the co-ownership, Malm replied that he did not consider himself to own the trademark and that his name was only on the registration so he would have the authority to act against infringers without bothering Reznor. Deposition of Ross Rosen, 9/14/04, at 190.

On March 19, 1998, Minnich and his colleague Mark Svat, Esq., filed another joint application for a trademark on behalf of Reznor and JAM, this time for two logos. 1998 Trademark Application, attached to JAM Rule 56.1 Statement as Exhibit 12. While a signature purporting to be Reznor's appears, Reznor denies that the signature is his, Reznor Dep. at 307, and the signature clearly differs from the one on the 1993 application. When attempting to renew the 1993 trademarks in 2003, Malm asked the lawyers why he could not simply sign the application himself and told them it was difficult getting ahold of Reznor for his signature. Deposition of Mark Svat, Esq., 10/6/04, at 14-16, 24. Informed that he could sign alone if he represented that he had Reznor's authority to sign on Reznor's behalf, Malm did so. See Svat Letter, 11/18/03, attached to Shiffman Opp.-Malm Aff. as Exhibit 5. Malm, however, had not discussed this particular matter with Reznor; indeed, he never discussed "any of this stuff" with Reznor, who, after discussing the initial trademark registrations with Malm, told Malm to "just handle it." Malm Dep. at 667-68.

In 1994, the 1989 agreement expired by its own terms. At Malm's request, Toorock prepared two draft agreements substantially identical to the 1989 agreement, although they also contained new language clarifying that JAM would not receive commissions on income Reznor derived from companies owned by Malm. Tr. at 11-12. The only difference between the two drafts was that one contained a sunset clause and the other did not. Malm Dep. at 427; Toorock Letter, 9/30/03, attached to JAM Rule 56.1 Statement as Exhibit 15. According to Malm, once again he did not specify any terms. Id. at 427-28. According to Toorock, Malm requested the changed language regarding commissions and said he and Reznor had agreed to all the terms except the sunset clause, which they had discussed but on which they had not decided. See Tr. at 9. In any case, neither agreement was ever signed, and the parties continued acting as if there had been no change in their relationship. See Malm Dep. at 429; Reznor Dep. at 196-96.

Reznor and NIN released their second album in 1994 and then embarked on their first international tour, which ended in early 1995. Malm Aff. ¶ 20. While the tour earned $1.5 million in profits, according to Malm that amounted to only 20 percent of gross revenues, and so Malm was entitled to all of it under the terms of the management agreement. Id.; Malm Dep. at 771. However, Malm was not paid his full commission from the tour in cash. Malm Aff. ¶ 21; Reznor Dep. at 151. Some of the money Malm claimed to be owed was paid him in the form of half ownership of a new holding company, Hot Snakes, that was formed on April 20, 1995 to own a new studio. Malm Dep. 338, 679-81; Reznor Dep. at 151; Malm Aff. ¶ 18. Malm says he and Reznor agreed that Malm would defer collecting the remaining payments, with Reznor to pay him the balance later. Malm Dep. at 773-78. Malm also says he continued to defer commissions for the next few years, with the total reaching $2.2 million by the end of 1999. See Summary of Unpaid Commissions & Expenses ("Commission Summary"), attached to Defs.' Rule 56.1 Counter-Statement as Exhibit 5. [FN6] Reznor says that, while he understood Malm's position that Reznor owed him considerably more money than Malm had been paid so far, Reznor did not agree that Reznor himself was entitled to nothing after two years of touring, although he admits he never expressed these misgivings to Malm. Reznor Dep. at 154. Reznor also says there was no discussion, let alone agreement, that he would ever "repay" Malm any money. Reznor Dep. at 152.

FN6. According to Malm's accounting, about $600,000 of the shortfall was owed him even before the 1994-95 tour, while about $1.4 million came due in 1995 as a result of the tour and another $200,000 came due in 1999.

Reznor and Malm later created three other companies in which each owned 50 percent: Nothing Interactive, Inc. ("NI"), on March 23, 1995; Nothing Records Limited, Inc. ("NRLI"), on January 21, 1997; and Halo Holding, on April 4, 1998. Malm Aff. ¶ ¶ 17-18. Malm had check-signing authority for each company. Malm Dep. at 307-08. It is unclear whether Reznor also had such authority, but it appears undisputed that he never attempted to exercise such authority. See, e.g., Malm Dep. at 308.

On January 12, 1996, Malm hired Richard Szekelyi to provide financial consulting services to JAM and to the jointly owned companies. Affidavit of Richard Szekelyi, sworn to 6/30/04, ¶ 6; Engagement Letter, 1/12/96, attached to Affirmation of Michael F. Lynch, 11/19/04, ("Lynch Aff.") as Exhibit I. While Reznor says Malm told him to consult Szekelyi if he had any financial issues, Reznor Dep. at 56, Szekelyi says he never provided services to Reznor personally. Szekelyi Dep. at 16. However, his duties included examining Reznor's personal financial records, as well as those of companies wholly owned by Reznor, see, e.g., 1996 Personal Financial Statement of Michael T. Reznor, attached to Lynch Aff. as Exhibit L. Szekelyi quickly discovered that the accounting between the various entities was severely flawed. For example, the depreciation of expensive recording equipment paid for by Reznor was carried on the books of Hot Snakes, which was now jointly owned, resulting in Malm receiving much of the tax benefit that should have gone solely to Reznor. [FN7] Szekelyi Dep. at 521-24.

FN7. The parties have not indicated what actions Szekelyi or Malm took when they discovered this error or when, if ever, Reznor was informed of it. In his Rule 56.1 Statement, Reznor asserts that the mistake "was never rectified," see Plaintiff's Response to Statement of Undisputed Material Facts Submitted by Szekelyi and Navigent Group ¶ 33, but in the cited deposition passages there is no discussion of what was done about the mistake. See Szekelyi Dep. at 521-24.

Around 1998, Interscope stopped funding NRI. Malm Aff. ¶ 24. To keep the jointly owned companies operating, Malm and Szekelyi began making transfers to them, booked as loans, from both JAM's funds and Reznor's funds. [FN8] Id. 23. Reznor maintains that, while he knew money was being loaned to these companies, he was unaware this money was being shifted from his personal accounts. Reznor Dep. at 12-13, 208-09. On February 23, 1999, Rosen informed Malm that he was concerned about the deficits the jointly owned companies were now running and that the use of personal funds might someday be interpreted "as a breach of fiduciary duty." Rosen Letter of Feb. 23, 1999, attached to Shiffman Opp.-Malm Aff. as Exhibit 7.

FN8. While Szekelyi vigorously maintains that his participation in these transfers was very limited, there is evidence in the record from which a fact-finder could infer active participation. See, e g., Deposition of Dean Parker, 10/13/04, at 117-18.

From November 1999 to July 2000, Reznor and NIN again went on tour. JAM asserted a claim to its commission of 20 percent on the gross income from the American leg of the tour. Malm Aff. ¶ 22. Rosen, who represented a holding company for tour proceeds that was owned by Reznor, see Rosen Dep. at 233, told Malm he believed JAM's commission was too high. Id. at 234-35. Malm responded that Reznor was "okay with it" and had other lawyers to look out for him. Id. at 235-36.

Meanwhile, in the absence of funding from Interscope, the jointly owned companies NRI and NRLI increasingly focused on providing Reznor with personal services. NRI became Reznor's personal bookkeeping operation, while NRLI served as Reznor's publicity company. Malm Aff. ¶ 24. On the other hand, Malm used the companies' office space for his own company and cannot remember how much rent he paid. Malm Dep. at 257. In 2001, JAM stopped loaning money to NRI and NRLI because, according to Malm, JAM had run out of liquid assets. Transfers continued to be made from the assets of Reznor, who still had a significant amount of annual income. Malm Aff. ¶ 23. By July 2002, Reznor had contributed about $1.47 million more in loans to the joint companies than had JAM, a difference reflected on Reznor's personal financial statement as money that JAM owed him, although this sum was more than offset by the more than $1.5 million that (according to a summary prepared by Szekelyi) Reznor owed JAM in deferred commissions. See NIN/Nothing Financial Summary July 2002, attached to JAM Rule 56.1 Statement as Exhibit 20.

That July, Malm, Szekelyi and Reznor met in New York. Szekelyi presented Reznor and Malm with a detailed summary of Reznor's finances, which Reznor and Malm signed and dated in acknowledgment that they had reviewed and understood it. Id.; Szekelyi Dep. at 54. This summary of Reznor's finances included a line item indicating, without elaboration, that Reznor owed JAM $1.56 million in commissions. At this time, the idea of shutting down NRI and NRLI was discussed but rejected because doing so would have complicated relations with Interscope, with which the joint companies were in litigation. Reznor Dep. at 89. A similar meeting was held in June 2003. Malm Dep. at 470; Szekelyi Dep. at 61; 2003 Personal Financial Statement, attached to JAM Rule 56.1 Statement as Exhibit 21. By then, Reznor was owed almost $5.5 million by the joint companies, and Szekelyi noted in the summary that no estimate had been made "of the realizable value of these advances." [FN9] Id.

FN9. Both sides agree that the joint companies are at present effectively shells and that the money loaned to them is extremely unlikely ever to be repaid.

Around that time, Malm contacted Rosen about representing Reznor in connection with a new written management agreement between Malm and Reznor. Rosen Decl. ¶ 8. Rosen advised Malm that JAM would have to retain separate counsel, and JAM did so. Id. In November, Rosen received from Malm, for the first time, a copy of the 1989 Agreement. Id. ¶ 9. Not until that Fall did Rosen learn how much of Reznor's money had been loaned to the jointly owned companies. Id.

In September 2003, having concluded that Malm had "run [his] finances into the ground," Reznor hired the firm Gelfand, Rennert & Feldman to manage his business affairs. Reznor Dep. at 23-24, 408-11. In December, Rosen telephoned Malm to inform him that Reznor had fired him as his manager. The decision had been made two weeks earlier, based on what Reznor says were "discoveries" made by Gelfand Rennert. Id. at 9. Until that Fall, he says, he had been unaware of most of the details of his arrangement, including that Malm's 20 percent commission was paid out of gross revenues. Id. at 24-25. According to an analysis performed by Reznor's new managers, by the end of 2003 he had contributed more than $3.6 million in loans to the joint companies, compared with $640,000 contributed by Malm and his companies. Harper Analysis, attached to Affirmation of Steven Shiffman in Opposition to Szekelyi and Navigent, 12/3/04, as Exhibit 9.

On April 21, 2004, Malm and JAM filed a lawsuit against Reznor in Ohio. On May 19, 2004, Reznor filed this suit. The two suits have been consolidated here, see Order, 8/20/04, with Malm's complaint refashioned as a counter-complaint.

Against this background, the Court turns to the summary judgment motions.

[1] First, with regard to Reznor's claims against Malm and JAM (hereinafter, collectively "Malm"), for damages and rescission of the 1989 Agreement, based on breach of fiduciary duty, both sides seek summary judgment in their respective favor. These claims, the parties agree, are governed by New York law, pursuant to a choice of law provision in the 1989 Agreement. [FN10] Under New York law, a fiduciary relationship exists when one person "is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation." Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162, 168, 521 N.Y.S.2d 672 (N.Y.App.Div.1987), quoting Restatement (Second) of Torts § 874, cmt. a (1977).

FN10. The provision states that the "validity, interpretation and legal effect" of the contract shall be governed by New York law. 1989 Agreement ¶ 16(d).

[2] Malm argues that his managerial relationship with Reznor was a "conventional business relationship" rather than a fiduciary one, see Reuben H. Donnelley Corp. v. Mark I Mktg. Corp., 893 F.Supp. 285, 289 (S.D.N.Y.1995), and that he is therefore entitled to summary judgment dismissing these claims. But a reasonable jury, construing the record most favorably to Reznor, could find that Malm's special position as trusted advisor to Reznor created a fiduciary duty to Reznor for any or all of the events in question, beginning even before the 1989 signing of the management agreement. See Gershunoff v. Panov, 77 A.D.2d 511, 512-13, 430 N.Y.S.2d 299 (N.Y.App.Div.1980) (finding fiduciary relationship created by manager-performer relationship). If such a relationship were created, Malm would be "bound by a standard of fairness, good faith and loyalty." Croce v. Kurnit, 565 F.Supp. 884, 892 (S.D.N.Y.1982). A jury could find that Malm breached this duty by engaging in self-dealing, resulting in Reznor losing considerable amounts of money. Cf. Gershunoff, 77 A.D.2d at 512-13, 430 N.Y.S.2d 299. [FN11]

FN11. Malm argues that he (Malm) also lost money through the loans to the joint companies, but this simply means Reznor may not be able to collect disgorgement of profits, see Restatement § 874, cmt. b, not that damages are unavailable.

[3][4] Malm also argues that these claims are time-barred in whole or in part. Under New York law, a claim for damages based on breach of fiduciary duty has a three-year statute of limitations, see N.Y. C.P.L.R. § 214(4), while a parallel rescission claim, sounding in equity, has a six-year limitations period. See id. § 213(1). However, neither period begins until the plaintiff is on actual or inquiry notice of the relevant facts, see, e.g., Sferra v. Mathew, 103 F.Supp.2d 617, 620-21 (E.D.N.Y.2000), and there is sufficient evidence for a jury to conclude that Reznor himself was reasonably unaware of the relevant facts as late as 2003. Although Malm argues that Reznor's advisors, especially Rosen, had earlier knowledge that should be imputed to Reznor, numerous disputed questions remain as to the nature and scope of their agency that must be resolved before one can determine the effect of such imputed knowledge, if any. Likewise, whether Reznor had actual or imputed knowledge sufficient to estop him from asserting these claims is a genuinely disputed question for trial.

[5] Similarly, the many material factual disputes that surround these claims of breach of fiduciary duty preclude summary judgment in Reznor's favor, just as they preclude it in Malm's favor. Reznor's relationship with Malm was still relatively informal at the time of the 1989 Agreement, and Malm had little more experience than Reznor in such dealings. A jury could find that Malm did not yet owe a fiduciary duty to Reznor, see Tyson v. Cayton, 784 F.Supp. 69, 76 (S.D.N.Y.1992) (finding it question of fact for trial whether fiduciary duty existed prior to signing of first managerial agreement), or that under the circumstances Malm, who is not a lawyer and did not understand or request the inclusion in the agreement of many of the terms now at issue, fulfilled whatever duty he owed Reznor by disclosing all the material terms and facts of which he was aware. It is true that, by the time Malm began authorizing loans to the jointly owned companies and taking other actions on Reznor's behalf, his fiduciary obligations were clearer. However, there remains considerable dispute as to the extent to which Reznor was aware of and implicitly or explicitly consented to these actions. Moreover, Malm asserts that Reznor derived various personal benefits from these expenditures of his funds, and so it remains disputed whether Malm's activities were improper and the extent to which Reznor was harmed by them.

Accordingly, both sides' motions for summary judgment are denied as to Reznor's claims against Malm and JAM of breach of fiduciary duty.

[6][7][8] Second, Malm seeks summary judgment as to Reznor's claims against Malm (and JAM) alleging fraud after the signing of the 1989 Agreement. Under New York law (which also governs these claims), a fraud claim requires proof, by clear and convincing evidence, of "(1) a material misrepresentation or omission of facts, (2) made with knowledge of its falsity, (3) with an intent to defraud, and (4) reasonable reliance on the part of the plaintiff, (5) that causes damage to the plaintiff." Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 336 (2d Cir.1999) (citation omitted). Here, a jury, taking the evidence most favorably to Reznor, could readily find that Malm intentionally misled Reznor about various transactions, knowing full well that Reznor would reasonably rely on his representations. To give just one example, a jury could find that Malm fraudulently led Reznor to believe that Reznor would have full ownership of the NIN trademarks and of the merchandising company. While Malm also argues that these claims are barred by the statute of limitations--which bars fraud claims not brought within six years from the commission of the fraud or two years from the time the plaintiff discovered the fraud or, with reasonable diligence, should have done so, Shannon v. Gordon, 249 A.D.2d 291, 292, 670 N.Y.S.2d 887 (N.Y.App.Div.1998)--as already stated, when Reznor knew or should have known of the alleged fraud is a genuinely disputed question of fact that the jury must resolve. Accordingly, summary judgment is denied as to Reznor's fraud claims against Malm and JAM.

[9] Third, Malm seeks summary judgment on Reznor's claim that the 1989 agreement, its 1994 continuation, and various other agreements were fraudulently induced and should be rescinded. Although rescission is "an extraordinary remedy," it is available where plaintiff can prove fraud in the inducement. Mina Investment Holdings Ltd. v. Lefkowitz, 16 F.Supp.2d 355, 362 (S.D.N.Y.1998). A jury could find that Malm made material misstatements of fact in the making of these agreements, including representing to Reznor that Toorock was protecting his legal interests. [FN12] Accordingly, the fraudulent inducement claim also survives summary judgment.

FN12. Although Malm argues that Ohio law applies to this claim, which sounds in tort and therefore is not necessarily governed by the law chosen by the contract, see Krock v. Lipsay, 97 F.3d 640, 646 (2d Cir.1996), he has not provided the sort of briefing that would help the Court resolve this choice-of-law question. The starting point must be whether, under the choice-of-law doctrine of the state (Ohio) whose law otherwise would apply, the contractual provision at issue governs a claim of fraud arising out of the contract's formation. See id. (applying New York choice-of-law law and determining that contract, which was made in New York but chose Massachusetts law, did not preclude application of New York law to fraud claim); Turtur v. Rothschild Registry Int'l, Inc., 26 F.3d 304, 309-10 (2d Cir.1994) (determining that Texas law permits contract made in Texas to bind parties to application of New York law in tort claims arising out of contract). Because neither side has cited any relevant cases, and because application of Ohio law would not in any event affect the outcome of this motion, the Court for now does not reach the question of which law applies but urges the parties to provide the Court with relevant briefing in the schedule set for motions in limine prior to trial.

[10] Fourth, Malm seeks summary judgment on Reznor's claim that various agreements, most notably the 1989 Agreement, were unconscionable and should be rescinded. In New York, unconscionability is a matter of law for a court to decide, not a jury question. See Estate of Louis T. Arena v. Abbot & Cobb, Inc., 158 A.D.2d 926, 926, 551 N.Y.S.2d 715 (N.Y.App.Div.1990). While, under some circumstances, it is appropriate for a court to hold an evidentiary hearing on the issue, the court is not required to do so where no reasonable doubt as to the validity of a contractual provision has been raised by the claimant's submissions. See, e.g., Am. Tel. & Tel. Co. v. N.Y.C. Human Resources Admin., 833 F.Supp. 962, 989 (S.D.N.Y.1993).

[11] At a minimum, an unconscionability claim requires proof that a contract "was both procedurally and substantively unconscionable when made-- i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 10, 537 N.Y.S.2d 787, 534 N.E.2d 824 (1988) (internal quotations and citations omitted). In assessing procedural unconscionability, "the focus is on such matters as the size and commercial setting of the transaction ..., whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power." Id. at 11, 537 N.Y.S.2d 787, 534 N.E.2d 824. As suggested by the inclusion of factors such as "the size and commercial setting of the transaction," the archetypal application of this doctrine is to a "contract of adhesion" between a business and a consumer or between a business and an employee, see Am. Tel. & Tel. Co. v. N.Y.C. Human Resources Admin., 833 F.Supp. 962, 989 (S.D.N.Y.1993) (rejecting unconscionability claim where "the contract at issue ... is not the type of contract entered into by an unwary consumer"); see also Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L.Rev. 1173, 1283-84 (1983) (justifying greater judicial scrutiny in cases involving a company and an individual consumer). Indeed, courts "have rarely found a clause to be unconscionable" in contracts involving two commercial entities, a situation in which negotiation is presumed possible. See Am. Dredging Co. v. Plaza Petroleum, 799 F.Supp. 1335, 1339 (E.D.N.Y.1992).

[12] There is no allegation here that Reznor lacked bargaining power relative to Malm or that Malm pressured him into signing any deal. See Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 68, 412 N.Y.S.2d 827, 385 N.E.2d 566 (1978) (unconscionability doctrine is meant to deal with situations where there is "a significant disparity in bargaining power"). Instead, Reznor argues that Malm, taking advantage of the trust Reznor placed in him, fraudulently induced him into entering the contract without scrutinizing its contents by making material misrepresentations as to its terms, failed to make full disclosures as to the import of various contractual provisions despite an obligation to do so, and misled him into believing that Malm and Toorock were protecting his interests when they were not. These are arguments for claims of fraud and breach of fiduciary duty, not for a claim of unconscionability. For one party, by exercise of power or pressure, to extract the other party's consent to a one-sided contract may render the contract unconscionable; but for one party to dupe another party into entering into a one-sided contract is fraud.

[13][14] In addition, Reznor has provided no evidence of substantive unconscionability. He simply asserts in conclusory fashion that the management agreement is "unfair on its face" and that every term favors Malm. However, the test for substantive unconscionability is not simply that a deal favors one party over the other, but that it is so "unreasonably favorable," Gillman, 73 N.Y.2d at 12, 537 N.Y.S.2d 787, 534 N.E.2d 824, as to constitute a "transgression of a strong public policy" that overcomes the ordinary presumption that "the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party." Rowe, 46 N.Y.2d at 68, 412 N.Y.S.2d 827, 385 N.E.2d 566. While it is possible that Reznor could have commanded more favorable terms had he driven a tougher bargain, there is no admissible evidence that the objected-to provisions in the management agreement were unusual for the industry, let alone that they violated any public policy. Indeed, all indications are that Toorock provided a contract in which most provisions were standard. On the basis of this record, no reasonable court could find these provisions unconscionable as a matter of law.

It is Reznor's burden to "overcome the presumption of conscionability," Estate of Louis T. Arena v. Abbot & Cobb, Inc., 158 A.D.2d 926, 926, 551 N.Y.S.2d 715 (N.Y.App.Div.1990), and he has not done so. Accordingly, Reznor's unconscionability claim is dismissed. [FN13]

FN13. The Court does not reach Malm's alternative argument that the unconscionability claim is time-barred.

[15][16] Fifth, Malm moves for summary judgment on Reznor's breach of contract claims against Malm (and JAM), to the extent they allege breaches before May 19, 1998. The Court agrees that any such claims are time-barred. Under New York law, breach of contract claims must be brought within six years of the alleged breach, regardless of whether plaintiff was aware at the time of the breach that he had a cause of action. Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 403, 599 N.Y.S.2d 501, 615 N.E.2d 985 (1993). Here, Reznor claims that Malm breached contractual requirements to "confer with, counsel and advise" him on all matters pertaining to his career, including compensation other artists were earning; but he fails to allege when these breaches occurred. Summary judgment is therefore granted dismissing any claim for any such breaches that occurred before May 19, 1998.

[17] Sixth, Reznor seeks summary judgment on Malm's counterclaims, under breach of contract and conversion theories, for unpaid commissions and expenses from the 1994-95 tour and earlier. Here, again, the problem is one of statute of limitations. The 1989 Agreement (either alone or as extended) entitled Malm to payments immediately upon Reznor's receipt of Reznor's own compensation. By Malm's own sworn account, he told Reznor almost immediately after the 1995 tour that Reznor owed him money but that he would take no action to collect it. A statute of limitations period would be meaningless if a party's intentional forbearance from demanding payment could nullify it. While Reznor was perhaps not in breach until a reasonable period of time to make his payments had passed, no juror could find that Reznor was in breach later than April 21, 1998, six years before Malm filed his suit in Ohio.

[18][19][20] As for the alleged oral agreement between Reznor and Malm to defer payments, a signed writing is necessary to stop the limitations clock on a breach of contract claim, see N.Y. Gen. Oblig. L. § 17-101. In attempt to satisfy the signed writing requirement, Malm points to the 2002 financial summary, which Reznor signed to indicate he had read and understood it. But nowhere does Reznor indicate agreement that he owed the sums indicated, much less an intention to revive any stale claims to that money. See Nat'l Westminster Bank USA v. Petito, 202 A.D.2d 193, 608 N.Y.S.2d 427, 428 (N.Y.App.Div.1994) (requirement is signed document containing "plain admission that the debt is due and the party is willing to pay it").

[21][22] Malm also argues that Reznor made partial payments on his debt in 1999. It is true, of course, that a statute of limitations period can be renewed by partial payment of principal or interest that implies "a promise to pay the remainder of the debt," see Skaneateles Savs. Bank v. Modi Assocs., 239 A.D.2d 40, 43, 668 N.Y.S.2d 819 (N.Y.App.Div.1998); but here there is insufficient evidence in the record to support any such assertion. Malm points to a summary of paid and unpaid commissions prepared by Szekelyi that shows that in 1999, when Reznor received a $1.67 million recording advance (the first time he had made more than $250,000 since the 1994-95 tour) and thereby owed Malm $334,000, he made a $100,000 payment. See Commission Summary. But there is no indication that this payment was made against deferred prior debt; the only reasonable inference, without any other evidence in the record, is that it was Malm's commission for Reznor's substantial income that year. Moreover, even had the payment been clearly accounted for as a partial payment on past-due commissions, it would not be evidence of Reznor's intent to honor the remaining debt, since there is no indication that Reznor authorized or even was aware of this payment.

Accordingly, summary judgment is granted to Reznor as to Malm's breach of contract and conversion claims claiming unpaid commissions from 1995 and earlier. [FN14]

FN14. Malm's summary of commissions owed and paid suggests he should have been paid $334,000 in 1999 but only was paid $100,000. Although it is unclear whether he is asserting a claim to this difference, if he is it is within the six-year limitations period and survives summary judgment.

[23][24] Seventh, Malm seeks summary judgment on Reznor's negligence claim against Malm to the extent that it alleges damages that accrued before May 19, 2001. In his negligence claim, Reznor alleges that Malm failed to exercise the degree of skill reasonably expected of a business manager in supervising NIN's tours and ensuring their profitability. In particular, he alleges that Malm failed to properly advise Reznor that how profitable the tours were would have no impact on Malm's commissions, which were based on the gross proceeds. However, the statute of limitations for negligence is three years, N.Y. C.P.L.R. § 214(4), meaning that Reznor is barred from bringing a cause of action that accrued more than three years before he brought this suit, on May 19, 2004. [FN15] This cause of action accrues when the acts or omissions constituting the negligence produce the injury. Triangle Underwriters, Inc. v. Honeywell Information Systems, Inc., 604 F.2d 737, 744 (2d Cir.1979). Reznor's most recent tour ended in the summer of 2000. Accordingly, any cause of action under this theory related to the tours is time-barred. [FN16]

FN15. Reznor cites the doctrine of continuous representation, which tolls the statute of limitations where defendant continuously rendered professional services to the plaintiff in connection with the transactions that are the subject of the plaintiff's complaint. However, this doctrine only applies to malpractice claims against professionals, such as doctors, attorneys or accountants, see Castle Oil Corp. v. Thompson Pension Employee Plans, 299 A.D.2d 513, 514, 750 N.Y.S.2d 629 (App.Div.2002), who in return are subject to a special three-year limitations period for all claims. N.Y. C.P.L.R. § 214(6). Treatment as a "professional" for these purposes requires qualities such as "extensive formal learning and training, licensure and regulation indicating a qualification to practice, a code of conduct imposing standards beyond those accepted in the marketplace and a system of discipline for violation of those standards." Chase Scientific Research v. NIA Group, 96 N.Y.2d 20, 29, 725 N.Y.S.2d 592, 749 N.E.2d 161 (2001). Courts consistently have rejected extension of the continuous representation doctrine to occupations that do not fit easily into this narrow definition of a professional. See, e.g., Castle Oil, 299 A.D.2d at 514-15, 750 N.Y.S.2d 629 (actuaries not professionals); Matthews and Fields Lumber Co., Inc. v. New England Ins. Co., 113 F.Supp.2d 574, 578-79 (W.D.N.Y.2000) (insurance companies and brokers not professionals). Malm is not a professional for these purposes, and so the continuous representation doctrine does not apply.

FN16. Reznor asserts, without elaboration, that Malm is also negligent based on more recent events. To the limited extent that Reznor can show that Malm's negligence produced injury after May 19, 2001, this claim survives summary judgment.

[25][26] Eighth, Malm seeks summary judgment on Reznor's claim for conversion. Conversion is "the unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights." Wechsler v. Hunt Health Sys., 330 F.Supp.2d 383, 431 (S.D.N.Y.2004) (citation omitted). Plaintiff must show that (1) plaintiff had a legal ownership interest in the property, and (2) defendant "exercised unauthorized interference with the plaintiff's ownership or possession of that property." Id. On the instant record, a jury could reasonably find that Malm converted assets belonging to Reznor by transferring Reznor's money to the jointly held companies without authorization. Malm argues that no money was transferred to him, and so he received no benefit from the transfers. However, the tort of conversion does not require that the defendant benefit from his interference with the plaintiff's ownership interest. Summary judgment is therefore denied as to this count.

Ninth, co-defendants Szekelyi and Navigent Group (hereinafter, collectively "Szekelyi") seek summary judgment on Reznor's claims against them of negligence, breach of fiduciary duty, and malpractice. There is little distinction between these claims, all of which allege that Szekelyi did not meet the standards of the accounting profession in the performance of professional duties to Reznor. See Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 49 F.Supp.2d 644, 654 (S.D.N.Y.1999).

[27] Since Reznor was not Szekelyi's client, [FN17] Szekelyi would be liable to Reznor for malpractice only where he was aware that the nonclient would rely on his work for a particular purpose, see Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985); Ambassador Factors v. Kandel & Co., 215 A.D.2d 305, 306-07, 626 N.Y.S.2d 803 (N.Y.App.Div.1995). Szekelyi's presentations to Reznor in 2002 and 2003 meet this standard, and so Szekelyi is liable for any malpractice he may have committed in preparing and presenting these reports of Reznor's financial status. However, there is no evidence that Szekelyi breached any standard of care in preparing and presenting these reports. Reznor does not allege any inaccuracies in these reports; [FN18] rather, after establishing that Szekelyi owed a duty of care with respect to these reports, he argues that Szekelyi failed to counsel Reznor adequately concerning certain other transactions. Because Szekelyi was not Reznor's accountant or business manager, he owed Reznor in his individual capacity no such duty with respect to other transactions. [FN19]

FN17. Reznor argues that he and the attorney Ross Rosen understood Szekelyi to be his business manager, and that this creates an issue of triable fact. However, to the extent that someone other than Szekelyi (most notably Malm) led them to believe this, this "evidence" is inadmissible hearsay against Szekelyi, and there is no indication that they had any other grounds on which to form this belief. Reznor also argues that the fact that Szekelyi's duties included reviewing Reznor's finances and the records of Reznor's wholly-owned companies made Szekelyi his accountant. But there is no evidence in the record before this Court that Szekelyi performed any of these services on Reznor's behalf or at Reznor's direction.

FN18. Reznor does argue that there were inaccuracies in a report Szekelyi performed regarding Reznor's finances in 1996, specifically that this report did not state that Reznor was loaning more money to the jointly held companies than was Malm and that the report listed those loans as "fully collectible." However, there is no evidence that, as of that time, Reznor was loaning more money than Malm. Nor is there evidence that Szekelyi's statement that the loans were fully collectible constituted wrongdoing at that time, when the companies still were being funded by Interscope.

FN19. Reznor claims that Szekelyi had a conflict of interest when simultaneously working for JAM and the jointly held companies. However, he does not attempt to recover on behalf of the jointly held companies, to which Szekelyi arguably did owe a duty of care. These allegations are therefore irrelevant.

[28][29] Tenth, Szekelyi (and Navigent) also move for summary judgment with respect to Reznor's claims against them alleging fraud and aiding and abetting fraud. An accountant can be liable to a nonclient for fraud if he has knowledge of the falsity of his client's statements or acts in reckless disregard of such falsity where the circumstances should cast doubt on the information's veracity and where the accountant is aware of the plaintiff's reasonable reliance on him. See Houbigant, 303 A.D.2d at 99-100, 753 N.Y.S.2d 493. Here, Reznor alleges that Szekelyi assisted Malm in secretly and illegally diverting Reznor's money into the jointly held companies. However, there is no evidence that, even if Malm were defrauding Reznor by misleading him as to which accounts the loans were coming from, Szekelyi knew or should have known of any impropriety. [FN20] Indeed, there is no evidence that Szekelyi did anything but attempt to correct the only clearly flawed accounting in evidence, i.e., the improper tax treatment of the Hot Snakes recording equipment. Accordingly, summary judgment must be granted on the fraud claims, which also means that, given the above-described grant of summary judgment on the other claims against Szekelyi and Navigent, [FN21] summary judgment is granted as to all counts against Szekelyi and Navigent Group.

FN20. Reznor implies that various financial arrangements, including the joint ownership of the merchandising company and the transfer of money from Reznor's personal accounts to the joint companies, were so facially suspect that Szekelyi should have been on notice that Reznor did not consent to them. But Reznor has submitted no evidence to back up this proposition, such as an affidavit from another accountant. Cf. Ris v. Finkle, 148 Misc.2d 773, 777-78, 561 N.Y.S.2d 499 (N.Y.Sup.Ct.1989) (granting summary judgment where plaintiff failed to produce expert testimony as to what accountant's standard of care was). Indeed, the record does not even contain the various records that Szekelyi would have seen or an accounting of the transactions that took place. On this record, a jury could do no more than speculate wildly about what any accountant should have known or should have done.

FN21. The Court does not reach the argument that all claims against Szekelyi and Navigent Group are also barred by various statutes of limitations.

In sum: Malm's motion for summary judgment is granted with respect to (a) Reznor's unconscionability claims, (b) Reznor's breach of contract claims to the extent that they allege breaches before May 19, 1998, and (c) Reznor's negligence claims that accrued before May 19, 2001; and is otherwise denied. Reznor's motion for summary judgment is granted with respect to Malm's counterclaims for breach of contract and conversion arising out of commissions allegedly owed prior to April 21, 1998; and is otherwise denied. The motion of co-defendants Szekelyi and Navigent Group for summary judgment is granted in full, and they are dismissed from the case, with prejudice. The remaining claims will proceed to trial, as scheduled, beginning at 9 a.m. on May 16, 2005.

SO ORDERED.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download