Eriks v. Denver

• Decision Date: 20 February 1992
• Docket Number: No. 57235-6,57235-6
• Parties: Robert ERIKS, Kennan H. Hollingsworth, M.D.; Edward R. Jones; Milton J. Knapp; H.R. Secoy; Fred Sessions; Guy E. Waldroop; and Richard Watts, on behalf of themselves and all persons similarly situated, Respondents, v. William James DENVER and Jane Doe Denver, husband and wife, and the marital community composed thereof, Appellants.
• Court: Washington Supreme Court

Page 451

118 Wn.2d 451

824 P.2d 1207

Robert ERIKS, Kennan H. Hollingsworth, M.D.; Edward R Jones; Milton J. Knapp; H.R. Secoy; Fred Sessions; Guy E. Waldroop; and Richard Watts, on behalf of themselves and all persons similarly situated, Respondents, v. William James DENVER and Jane Doe Denver, husband and wife and the marital community composed thereof, Appellants.

No. 57235-6.

Supreme Court of Washington En Banc.

Feb. 20, 1992.

Mundt, MacGregor, Happel, Falconer, Zulauf & Hall, Spencer Hall, Jr., Janet D. McEachern, Seattle, for appellants.

Mikkelborg, Broz, Wells & Fryer, Dexter A. Washburn, Pence & Dawson, Christopher C. Pence, Seattle, for respondents.

UTTER, Justice.

The promoters of a tax shelter scheme hired attorney William Denver to provide joint legal defense for all investors and promoters in audits before the Internal Revenue Service (hereinafter IRS) and in tax court cases. The investors later brought a class action suit against Denver alleging that he violated the Code of Professional Responsibility (hereinafter CPR) by representing both investors and promoters in the tax shelter and that his representation of multiple clients violated the Consumer Protection Act. The investors moved for partial summary judgment and the trial court ruled as a matter of law that Denver's multiple representation of clients with conflicting interests violated the Code of Professional Responsibility. The court ordered Denver to disgorge all fees paid in conjunction with representing the class members plus prejudgment interest. The trial court ruled against the class on the issue of the Consumer Protection Act's application to Denver's multiple representation. The investors then moved to recertify the class. The trial court denied the investors' motion. Denver appealed and the class cross-appealed. We affirm all of the trial court's rulings and the order requiring Denver to disgorge all fees paid in conjunction with representing the class members, plus prejudgment interest.

In 1977, Cliff Johnston, Percy Goodwin, and others (hereinafter the promoters) began selling investments in master sound recordings as tax shelters. By 1981, the IRS was challenging the tax credits and deductions taken by the investors. The promoters then formed the Master Recording Trust Fund (hereinafter MRTF) to provide joint legal defense of the investors and promoters in the anticipated audits and tax court cases.

The promoters hired attorney William Denver to represent those who contributed to the MRTF. Denver shared an office and support staff with the promoters. The promoters solicited contributions to MRTF from investors, and eventually over 240 investors contributed approximately $400 each to the MRTF.

Prior to starting his work for the MRTF, Denver knew that the IRS was, as a matter of policy, automatically rejecting all tax credits and deductions based on investments in master sound recordings. Denver knew that every investor would be audited and believed that the credits and deductions would be disallowed. Both prior to and during his representation of MRTF clients, Denver knew of no such tax credit or deduction that had been allowed after an IRS audit.

At the time he undertook the MRTF representation, Denver knew that his investor clients potentially could have civil claims against his promoter clients. Denver discussed all his potential conflicts of interest with his promoter clients, but did not do so with his investor clients.

A tax court hearing was held in March 1983. Widespread title and appraisal problems with the master sound recordings were found. In spite of these problems, Denver continued to represent some of the MRTF members without advising them of their rights vis-a-vis the promoters. Denver later advised the MRTF investors to settle with the IRS and obtain independent legal counsel if they had questions about remedies that they might have against the promoters.

In 1985, the investors filed a class action suit alleging that Denver was negligent in his representation of them. The complaint also alleged that Denver's representation of both promoters and investors was a breach of his fiduciary duty to the investors and was an unfair or deceptive act under the CPA. The court certified the class under CR 23(b)(3). The court later denied defendant's motion to decertify the class and ordered the trial bifurcated into two phases, one phase to address issues common to all parties, the other phase to address all individual claims of negligence and malpractice.

In 1988, the trial court granted the investors' motion for partial summary judgment on the issue of Denver's alleged breach of fiduciary duty, ruling as a matter of law that by October 1981 there was an actual conflict of interest between Denver's investor clients and promoter clients. The judge then ruled that Denver's failure to disclose the conflict of interest to his investor clients violated Code of Professional Responsibility DR 5-105, and that such a violation was a breach of Denver's fiduciary duty to his investor clients. The judge then ordered Denver to disgorge all fees paid in conjunction with representing the class members, plus prejudgment interest.

The investors' motion for a summary judgment awarding them treble damages for violation of the Consumer Protection Act (hereinafter CPA) was denied, the trial court ruling that trebling the amount to be disgorged was not appropriate under the CPA. The investors then moved to recertify the class from a CR 23(b)(3) class to a CR 23(b)(2) class, arguing that disgorgement of fees was relief that was equitable in nature. The trial court denied the motion to recertify the class and ruled that it was improper to recertify the class after already granting affirmative relief. After the court of appeals certified the case to this court pursuant to RAP 4.3, we granted review of all three of the trial court's rulings.

I

The first issue in this case is whether the trial court properly concluded that, as a matter of law, Denver violated the Code of Professional Responsibility (hereinafter CPR). ¹ Since the trial court decided this case on a motion for summary judgment, this court must view all of the facts and reasonable inferences from them in the light most favorable to the nonmoving party. Wood v. Seattle, 57 Wash.2d 469, 473, 358 P.2d 140 (1960). Summary judgment is appropriate:

if the pleadings, depositions, [answers to interrogatories,] and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

Hartley v. State, 103 Wash.2d 768, 774, 698 P.2d 77 (1985); CR 56(c). A material fact is "one upon which the outcome of the litigation depends". Barrie v. Hosts of Am., Inc., 94 Wash.2d 640, 642, 618 P.2d 96 (1980).

Denver argues that it was improper to grant summary judgment in the face of two expert affidavits opining that his actions did not give rise to a conflict of interest. ² Since an expert opinion on an "ultimate issue of fact" is sufficient to defeat a motion for summary judgment, Lamon v. McDonnell Douglas Corp., 91 Wash.2d 345, 352, 588 P.2d 1346 (1979) (emphasis added), Denver's argument on this issue is based on the assumption that the determination of whether a conflict of interest exists is a question of fact. There are court of appeals cases that indicate that this determination is a question of law. In Marquardt v. Fein, 25 Wash.App. 651, 612 P.2d 378 (1980), an attorney was hired to represent a class of defendants against an action brought by the insurance commissioner. The attorney also represented other defendants who had different interests than the class members. The trial court found as a matter of law that the attorney had a conflict of interest. 25 Wash.App. at 656, 612 P.2d 378. The court of appeals upheld the trial court without any comment on the issue of whether the determination of whether the attorney violated the CPR was a question of law or fact. Later, in Stroud v. Beck, 49 Wash.App. 279, 742 P.2d 735 (1987), the court of appeals specifically held that the question of whether an attorney has breached his fiduciary duty to a client is a question of law. 49 Wash.App. at 288, 742 P.2d 735.

We have never addressed the question of whether the determination of a violation of the CPR is a question of law or fact. Since an attorney's fiduciary duty to a client arises from the same rules of conduct that proscribe an attorney from representing multiple parties with conflicting interests, it is logical to extend the holdings from Marquardt and Stroud to the determination of whether an attorney's conduct violates the relevant rules of professional conduct. Thus, we hold that the question of whether an attorney's conduct violates the relevant rules of professional conduct is a question of law. ³ See, e.g. Burnette v. Morgan, 303 Ark. 150, 794 S.W.2d 145 (1990); McCall v. Dist. Court, 783 P.2d 1223 (Colo.1989); Atty. Grievance Com. of Maryland v. Korotki, 318 Md. 646, 569 A.2d 1224 (1990); State v. Romero, 563 N.E.2d 134 (Ind.App.1990); and Bonanza Motors, Inc. v. Webb, 104 Idaho 234, 657 P.2d 1102 (App.1983).

As a result of our holding, we decline to accept Denver's position. When a trial court is presented with a question of law, the court may properly disregard expert affidavits that contain conclusions of law. Charlton v. Day Island Marina, Inc., 46 Wash.App. 784, 788, 732 P.2d 1008 (1987). See State v. O'Connell, 83 Wash.2d 797, 816, 523 P.2d 872 (1974) (the issue of whether an attorney must disclose his fee sharing arrangements is a question of law and that expert opinion on the matter is therefore improper). Thus, the trial court was entitled to give as much weight as it thought proper, or no weight at all, to the affidavits. Summary judgment was not inappropriate because the affidavits did not express an expert opinion on "ultimate...