Boettcher & Co., Inc. v. Munson, 92SC15
| Decision Date | 07 June 1993 |
| Docket Number | No. 92SC15,92SC15 |
| Citation | 854 P.2d 199 |
| Parties | Blue Sky L. Rep. P 73,844 BOETTCHER & COMPANY, INC., and Craig L. Carson, Petitioners, v. Margaret H. MUNSON, individually and as co-trustee for the William R. Munson Trust; W.A. Munson, as co-trustee and as attorney-in-fact for Marion Gotschall, co-trustee of the William R. Munson Trust, Respondents. |
| Court | Colorado Supreme Court |
Page 199
v.
Margaret H. MUNSON, individually and as co-trustee for the
William R. Munson Trust; W.A. Munson, as co-trustee and as
attorney-in-fact for Marion Gotschall, co-trustee of the
William R. Munson Trust, Respondents.
En Banc.
As Modified on Denial of Rehearing
July 6, 1993.
Page 201
Davis, Graham & Stubbs, Richard P. Holme, Alan M. Loeb, Lisa S. Kahn, Denver, for petitioners.
Gersh & Danielson, Miles M. Gersh, Robin C. Truitt, James S. Helfrich, Denver, for respondents.
Cooper & Kelley, P.C., John R. Mann, Denver, for amicus curiae Colorado Defense Lawyers Ass'n.
Arter & Hadden, Samuel J. Winer, Mark J. Botti, Washington, DC, Cortez Friedman & Coombe, P.C., Miles C. Cortez, Jr., Denver, for amicus curiae Securities Industry Ass'n.
Netzorg & McKeever, P.C., J. Nicholas McKeever, Jr., Englewood, for amicus curiae Colorado Trial Lawyers Ass'n.
Joseph C. Long, Norman, OK, Pryor, Carney and Johnson, Bradford J. Lam, Englewood, for amicus curiae North American Securities Administrators Ass'n, Inc.
Justice VOLLACK delivered the Opinion of the Court.
Petitioners Boettcher & Company, Inc., and Craig L. Carson (jointly referred to as "Boettcher") petition from the court of appeals opinion in Munson v. Boettcher & Company, Inc., 832 P.2d 967 (Colo.App.1991). Margaret Munson and the William R. Munson Trust filed an action against Boettcher, alleging several violations of Colorado securities laws. The district court entered judgment on a jury verdict in favor of Munson only on one claim for relief and Munson appealed. The court of appeals held, among other things, that the district court improperly admitted evidence of Munson's income tax liability, and that the district court improperly excluded evidence of Boettcher's prior acts of defrauding other investors. We affirm, and remand the case to the court of appeals with directions.
I.
In 1977, Margaret Munson's husband died. Margaret Munson (Munson) subsequently sold the family farm for approximately $825,000. In 1979, Munson asked her son William whether she should invest the proceeds of the farm sale or leave the proceeds in certificate of deposit accounts. William directed Munson to contact Boettcher.
William and Munson first met with Boettcher on December 13, 1979. Munson informed Boettcher of her "situation, that [she] had some money that [she] thought [she] should earn something on and not pay it all out to taxes and it should grow and be safe." Munson subsequently opened an individual
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account with Boettcher. In 1981, Munson opened a trust account with Boettcher that was funded through provisions in Munson's husband's will.Beginning in 1979 and continuing through 1987, Boettcher recommended that Munson purchase interests in a series of limited partnerships which Munson agreed to purchase. Boettcher also recommended that the trust purchase interests in some of the same limited partnerships, which the trust purchased. In 1986, Munson became concerned about the performance of her investments, and in 1987, she closed her account with Boettcher.
In 1988, Munson and the trust filed an action against Boettcher, alleging that: (1) Boettcher defrauded Munson in violation of sections 11-51-123 and 11-51-125 of the Colorado Securities Act; (2) Boettcher breached its fiduciary duty to Munson; (3) Boettcher knowingly or recklessly made false representations to Munson; and (4) Boettcher was negligent. Munson sought damages of approximately $389,300. The action proceeded to a trial, which commenced on August 8, 1989.
At trial, Munson testified that she was sixty-seven years old when she first approached Boettcher, and had one year of college business courses, including typing and shorthand. Munson testified that she had never worked outside of the family farm, and had never prepared her own income tax returns. Munson called Robert F. Kutchera (Kutchera), a certified public accountant, as a witness. Kutchera testified regarding the amount of tax benefits Munson received while owning interests in the limited partnerships. Kutchera also provided an opinion regarding the worth of Munson's portfolio had the portfolio been properly invested.
Munson sought to introduce the testimony of three potential witnesses at trial. Munson made an offer of proof that each witness would testify that Boettcher had a pattern and practice of inappropriately recommending that its clients purchase interests in limited partnership investments despite the fact that the individual investors valued safety as an investment goal. Munson also contended that the testimony of the three witnesses would prove that there was no supervision by Boettcher to protect the individual investors. The district court ruled that the proffered testimony of Boettcher's prior acts regarding different individual investors was not admissible under CRE 404(b).
Boettcher produced Wiley Hairgrove (Hairgrove), a certified public accountant and certified financial planner, as an expert witness in accounting. Hairgrove testified, among other things, that the damages sustained by Munson, according to Kutchera's testimony, should have been reduced by the amount of income taxes that Munson would have had to pay on interest earned by the account throughout the relevant time period.
At the close of trial, Munson tendered an instruction "which state[d] simply that [the jury] should not include or subtract any amount because of taxes paid or to be paid." Counsel for Munson argued that "[they] fe[lt] that allowing the jury to roam at will in the area of taxes without instruction is error." The district court found "that taxation certainly is an issue and must be considered by the jury in determining whether or not the plaintiffs were damaged.... While the court agrees it's a law in the State of Colorado that the jury should not compute or attempt to compute a tax incident on the amount of the verdict itself, it's impossible to determine this case without arguing the tax impact of the various transactions." The district court denied Munson's tendered instruction.
The jury found that Boettcher breached its fiduciary duty to Munson and to the trust, and awarded damages in the amount of $22,549 and $17,001, respectively. The jury conversely determined that Boettcher was not negligent and did not violate the Colorado Securities Act. The district court entered a judgment on the verdict, and Munson appealed.
Page 203
Munson argued to the court of appeals that the district court erred by allowing the jury to consider and reduce a damages award by the amount of tax benefits she received insofar as the limited partnerships provided tax shelters. The court of appeals agreed. Munson v. Boettcher & Co., 832 P.2d 967, 969-70 (Colo.App.1991). The court of appeals considered the effect of the tax benefit rule, which requires plaintiffs to file amended tax returns after recovering judgments. The court of appeals concluded that reducing a damage award by the amount of any tax benefits received by Munson would unfairly benefit the defendants and may exceed the damage award, thus resulting in no damage award to Munson. Id. 1
Munson also argued "that, in calculating the damage award based on a hypothetical investment portfolio, the award of damages should not be reduced by the taxes which might have been owed on gains from investments in that portfolio." Id. at 970. The court of appeals agreed. The court of appeals reasoned that damage awards are taxable when received, and that reducing the damages award by income taxes owed would subject Munson to double taxation. Id.
Munson contended that the district court erred in refusing the testimony of the three witnesses proffered under CRE 404(b). Id. The court of appeals reviewed Munson's offer of proof and concluded that the probative value of the evidence was not substantially outweighed by its prejudicial effect. Id. at 971. The court of appeals reversed the damages award for breach of fiduciary duty, and reversed the judgment on Munson's fraud claim and violation of the Colorado Securities Act. The court of appeals remanded the case for a new trial on damages for the breach of the fiduciary duty, and on liability and damages for fraud and violation of the Colorado Securities Act. Id.
Boettcher filed a petition for certiorari, which we granted. We individually address each argument raised.
II.
INCOME TAX CONSEQUENCES AND DAMAGE AWARDS
Boettcher contends that the court of appeals erred by ruling that fact finders cannot consider income taxes that an investor would have been required to pay during a multi-year investment. Rather, Boettcher asserts that the district court properly admitted expert testimony that Munson only suffered damages to the extent that she would have had to pay income tax on earned interest. Boettcher contends that not permitting the fact finder to consider evidence of income taxes owed during the relevant time period gives Munson a tremendous windfall.
We have not previously considered whether evidence of income tax liability is relevant to a damage award in an action premised on both Colorado securities laws and common law. Federal cases addressing income tax liability and damage awards hold that such liability should not be considered by fact finders because plaintiffs would otherwise be subject to double taxation. Policies underlying the tax benefit rule--of restoring defrauded investors to their original positions, and preventing further exploitation of the public--reach the same result. We find these authorities persuasive in our application of Colorado law, and we affirm the court of appeals ruling.
A.
The Tax Benefit Rule
The relief sought by Munson is based in part on section 11-51-125(2) of the Securities Act of 1981, which provides:
Any person who recklessly, knowingly, or with an intent to...
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