Behnke ex rel. G.W. Skinner Children's Trust v. Ahrens

• Decision Date: 02 July 2012
• Docket Number: No. 67459–5–I.,67459–5–I.
• Citation: 280 P.3d 496,169 Wash.App. 360
• Parties: John BEHNKE and Carl Behnke as trustees and on behalf of the G.W. SKINNER CHILDREN'S TRUST and the G.W. Skinner Trust No. 2, Appellants, v. Edward AHRENS and Teri Ahrens, husband and wife, Respondents, Darin DeAngeli and Anne DeAngeli, husband and wife; and FWP Technologies, Inc., Defendants.
• Court: Washington Court of Appeals

169 Wash.App. 360

280 P.3d 496

John BEHNKE and Carl Behnke as trustees and on behalf of the G.W. SKINNER CHILDREN'S TRUST and the G.W. Skinner Trust No. 2, Appellants,

v. Edward AHRENS and Teri Ahrens, husband and wife, Respondents,Darin DeAngeli and Anne DeAngeli, husband and wife; and FWP Technologies, Inc., Defendants.

No. 67459–5–I.

Court of Appeals of Washington,

Division 1.

July 2, 2012.

Darrell Delmar Hallett, Chicoine & Hallett, Seattle, WA, Kenneth Wendell Masters, Shelby R. Frost Lemmel, Masters Law Group PLLC, Christopher Cyrus Pence, Law Office of Christopher Pence PLLC, Bainbridge Island, WA, for Appellants.

Robert M. Sulkin, Barbara Himes Schuknecht, Malaika Marie Eaton, McNaul Ebel Nawrot & Helgren, Seattle, WA, for Respondents.

BECKER, J.

[169 Wash.App. 364]¶ 1 Appellants employed a capital gains tax reduction strategy that landed them in trouble with the Internal Revenue Service (IRS). They brought several claims against their attorney Edward Ahrens on grounds that he failed to disclose the extent of his business relationship with the company whose tax shelter plan he recommended. Because appellants made an inadequate response to Ahrens' motion for summary judgment on their claim that he violated the Consumer Protection Act, chapter 19.86 RCW, we affirm the order dismissing that claim. Their claims of breach of fiduciary duty and malpractice went to trial and resulted in a minimal award of damages. Their claim that Ahrens violated the Rules of Professional Conduct (RPCs) was decided by the court and resulted in an order to disgorge fees. Because the trial court handled these matters properly, the appellants' request for a new trial on damages is denied.

FACTS

¶ 2 John and Carl Behnke are cotrustees of multimillion dollar trusts. In 2001, on the advice of financial advisors, they considered selling the trusts' concentrated holdings in low-basis stocks. An accounting firm advised them on a strategy to reduce anticipated capital gain taxes. They were referred to Edward Ahrens, an attorney, for a second opinion. Ahrens held himself out as a specialist in tax matters.

¶ 3 The Behnkes entered into an attorney-client relationship with Ahrens on October 23, 2001. Ahrens advised them the accounting firm's proposal was not suitable. The Behnkes asked about other potential tax-savings alternatives. Ahrens recommended a tax shelter known as a “752” or “Son of BOSS” ¹ plan. The complicated mechanics of the plan involve creating artificial losses that are then claimed as a deduction.

[169 Wash.App. 365]¶ 4 Ahrens informed the Behnkes of organizations that carry out these plans. One was the Heritage Organization, located in Texas. Ahrens arranged meetings in Seattle in November 2001 between Heritage, himself, and the Behnkes. The Behnkes entered into a contract with Heritage and decided to use the Heritage 752 plan. They ultimately paid Heritage more than $1.7 million and became obligated to Heritage on approximately $2 million of promissory notes for a plan they hoped would save them more than $15 million in taxes. On Heritage's recommendation, the Behnkes retained the law firm of Lewis, Rice & Fingersh LLC, located in St. Louis, Missouri, to provide a legal opinion on the validity of the plan. They paid the Lewis firm $175,000 in fees. They would eventually pay more than $800,000 to other professionals who assisted them as events unfolded.

¶ 5 Ahrens sent the Behnkes an engagement letter, dated December 13, 2001. The letter stated that Ahrens' law firm would represent the cotrustees in the “planning project” that they were intending to do with Heritage and the Lewis firm. The work would include review of the documents and legal opinions related to implementing the project. Ahrens would eventually receive $12,325 for his services to the Behnkes, half of which was to be paid by Heritage.

¶ 6 In the engagement letter, Ahrens disclosed he had previously represented and continued to represent Heritage. What Ahrens did not disclose was the extent and nature of his continuing attorney-client and business relationship with Heritage. From 1998 through 2002, Ahrens and his firm performed nearly daily legal services for Heritage. Also, acting through a corporation, Ahrens designed variations of “752” tax reduction strategies and sold or licensed them to Heritage. Heritage promoted and sold Ahrens' strategies. The licensing fees Ahrens' corporation received from Heritage totaled $3,720,000 before Ahrens began to represent the Behnkes and $1,043,000 afterwards.

¶ 7 In April 2002, the Lewis firm opined that the plan developed for the Behnkes by Heritage was sound and began, with Heritage, to help them carry it out. At this time, the IRS was stepping up enforcement against what it considered to be abusive tax strategies. In late 2003, the Behnkes hired Preston, Gates & Ellis for more advice. Attorneys at Preston told them the IRS considered the strategies they were using abusive and recommended paying the taxes rather than trying to litigate the validity of the tax shelter. The Behnkes decided at first to continue with the plan. Then in 2005, they decided against litigation and elected instead to settle with the IRS. The IRS declared the trusts' 752 transaction to be an abusive tax shelter. All tax benefits were disallowed. The trusts paid $5,755,517 in capital gains taxes and $582,189 in penalties.

¶ 8 The Behnkes sued Ahrens in September 2006. Among their claims were fraud, violation of the Consumer Protection Act, breach of fiduciary duty, and legal malpractice. Ahrens moved for summary judgment dismissing all claims. On March 12, 2009, the trial court granted the motion in part, dismissing the claim under the Consumer Protection Act. The court permitted the fraud and malpractice claims and a common law claim for breach of fiduciary duty to proceed to trial by jury.

¶ 9 The Behnkes also asserted a cause of action for breach of fiduciary duty based on the RPCs, specifically RPC 1.7(b). The court ruled that the RPC–based claim would not be submitted to the jury, as it presented a question of law that only the court could decide.

¶ 10 The jury trial took place in October and November 2009. Using a special verdict form proposed by the Behnkes, the jury rejected the fraud claim but found that Ahrens breached a fiduciary duty and committed malpractice. The special verdict form required the jury to itemize the damages these breaches caused the Behnkes in seven categories: fees paid to Heritage, fees paid to Lewis Rice, fees paid to the Ahrens firm, fees paid to Preston Gates, fees paid to their attorneys in the Heritage bankruptcy case in Texas, additional capital gains taxes, and tax penalties. The only category for which the jury awarded damages was fees paid to Ahrens. The amount awarded was $6,162.25. The jury then determined that the Behnkes were contributorily negligent and attributed 47 percent of the damages to them.

¶ 11 After the jury delivered the verdict, the court discharged the jury and heard argument on the plaintiffs' claim that Ahrens' conduct was a violation of the RPCs. In findings of fact and conclusions of law entered on March 8, 2010, the court found that Ahrens did have a conflict of interest that violated RPC 1.7(b):

18. Mr. Ahrens testified and the Court finds that Mr. Ahrens knew that whether or not Heritage paid him the 752 licensing payments was entirely dependent upon the goodwill and discretion of Heritage's owner, and he considered being on the owner's good side an important factor in whether he would be paid. Ahrens further testified and the Court finds that Ahrens knew that one way of being on Heritage's owner's good side was for Ahrens to refer clients like Plaintiffs to Heritage.

....

20. Ahrens' engagement letter's sole disclosure regarding the continuous attorney-client relationship between Ahrens and Heritage states only: “we have previously represented and continue to represent The Heritage Organization.” The letter does not limit Ahrens' promised scope of representation or responsibilities to the Trusts on account of Ahrens' attorney-client relationship between Heritage and Ahrens or advise the trustees of any risks or implications of his dual legal representation of Heritage and the Trusts, or of the business and financial relationship between Heritage and Ahrens.

21. At trial Ahrens testified that, contrary to the written engagement letter, he orally informed the trustees that he would not represent the Trusts in any matters adverse to Heritage because he also represented Heritage. Ahrens also testified he was instructed by one of the trustees to limit the services Ahrens had promised in the engagement letter to perform. The Court finds that this testimony is not credible and that Ahrens was not authorized to limit the scope of the representation he agreed to provide.

....

3. Defendant breached his fiduciary duty of undivided loyalty to Plaintiffs by violating RPC 1.7(b). Defendant was prohibited by RPC 1.7(b) from undertaking Plaintiffs' representation because it was apparent Plaintiffs' representation may be materially limited by Defendant's personal financial dealings with Heritage and Defendant's attorney-client relationship with Heritage and because Defendant did not fully disclose to Plaintiffs the material facts of his personal business and attorney-client relationships with Heritage and obtain Plaintiffs' written consent.

Findings of Fact 18, 20–21; Conclusion of Law 3.

¶ 12 The court ruled that disgorgement of fees was the only permissible civil remedy for breach of a lawyer's fiduciary duty of undivided loyalty based on violation of the RPC conflict of interest rules. Accordingly, the court rejected the Behnke's request for an award of substantial actual damages, including taxes and penalties, as a consequence of RPC violation. The court ordered Ahrens to disgorge and pay the Behnkes $12,325, the total attorney fees received for representing them, plus...