Bukoskey v. WALTER W. SHUHAM, CPA, PC

• Decision Date: 06 August 1987
• Docket Number: No. A83-587 CIV.,A83-587 CIV.
• Citation: 666 F. Supp. 181
• Parties: John J. BUKOSKEY, trustee et al., Plaintiffs, v. WALTER W. SHUHAM, CPA, P.C. et al., Defendants. WALTER W. SHUHAM, CPA, P.C. et al., third party Plaintiffs, v. Mary E. SMITH et al., third party Defendants.
• Court: U.S. District Court — District of Alaska

666 F. Supp. 181

John J. BUKOSKEY, trustee et al., Plaintiffs, v. WALTER W. SHUHAM, CPA, P.C. et al., Defendants.

WALTER W. SHUHAM, CPA, P.C. et al., third party Plaintiffs, v. Mary E. SMITH et al., third party Defendants.

No. A83-587 CIV.

United States District Court, D. Alaska.

August 6, 1987.

R. Everett Harris, Jensen, Harris & Roth, Anchorage, Alaska, Margaret Louise Barbier & Dexter A. Washburn, Schweppe, Krug & Tausend, Seattle, Wash., for plaintiffs.

John A. Treptow, Atkinson, Conway & Gagnon, Anchorage, Alaska, for defendants Shuham.

Burton C. Biss, Biss & Holmes, Wasilla, Alaska, for defendants Indus. Indem. & Hardcastle.

Olof K. Hellen, Hellen, Partnow & Condon, Anchorage, Alaska, for defendant Continental Ins.

John Clough, III, Faulkner, Banfield, Doogan & Holmes, Juneau, Alaska, for defendant Alaska Federal S & L Assoc.

Judith Bazeley, Banson, Bazeley & Chisolm, Anchorage, Alaska, Bruce McKenzie, Donaldson & Kiel, P.S., Seattle, Wash., for third-party defendant Donaldson & Kiel.

Timothy Lynch, Lynch, Crosby, Molenda & Sisson, Anchorage, Alaska, Michael A. Patterson, Lee, Smart, Cook, Martin & Patterson, Seattle, Wash., for third-party defendant trustees.

DECISION AND ORDER — SUMMARY JUDGMENT

KLEINFELD, District Judge.

The trustee for two union trust funds sued the trusts' accounting firm, its bonding company and others, for losses allegedly caused by embezzlement by an employee of the accounting firm. The accountant, Shuham, filed a third party complaint against the trustees of the trust funds and others for contribution. Shuham has since settled with the plaintiffs, so nothing remains of the case except for Shuham's contribution claims against the third party defendants.

Among the third party defendants are Donaldson & Kiel. They were the law firm retained by the trustees to draw up the trust instruments and provide legal advice. The accountant argues that the lawyers should have known that the trustees were not complying with certain ERISA duties, and should have advised the trustees to do so. The accountant pleaded two theories, breach of a statutory ERISA fiduciary duty, and breach of a common law fiduciary duty as attorneys. His memoranda argue a third theory, breach of an attorney's duty to exercise reasonable care in advising a client.

The lawyers, Donaldson & Kiel, moved to dismiss for failure to state a claim. Both they and the accountant, Shuham, have relied upon extensive material outside the pleadings, so the motion is treated pursuant to Rule 12(c) of the Federal Rules of Civil Procedure as a motion for summary judgment.

Shuham, in an affidavit attached to his opposition to Donaldson & Kiel's motion rather than as a separate motion, requested a Rule 56(f) continuance to do discovery if the motion to dismiss were treated as a summary judgment motion. This request is denied as moot, because Shuham has since that time had adequate time for discovery. Discovery has now closed. Shuham has been permitted to supplement the record with additional factual materials.

At oral argument, Shuham conceded that Donaldson & Kiel was not an ERISA fiduciary, so the Third Claim for Relief dropped out of the case. What remains of the third party complaint is Shuham's theory that Donaldson & Kiel "owed certain fiduciary duties to the trusts," and that their "failure to warn, advise, and/or correct" the trustees' noncompliance with ERISA "constitutes a breach of Donaldson & Kiel's common law fiduciary duties."

Both sides have argued on the assumption, apparently well founded, that Alaska law applies to this issue. Alaska has largely displaced common law contribution and indemnity with a statute, the Alaska Uniform Contribution Among Tortfeasors Act. Arctic Structures, Inc. v. Wedmore, 605 P.2d 426 (Alaska 1979); Vertecs Corp. v. Reichhold Chems. Inc., 661 P.2d 619 (Alaska 1983). The statute, however, states, "This chapter does not apply to breaches of trust or of other fiduciary obligation." AS 09.16.010(g). Whether this means that contribution is not available for such claims, or only that common law rather than statutory remedies remain in effect, would be a critical question if this motion were treated as one for dismissal. Since the motion is treated as one for summary judgment, however, and the materials and arguments disclose a claim distinguishable from breach of fiduciary duty, this statutory exception is not conclusive. Shuham argues that Donaldson & Kiel committed professional malpractice, a tort, and would doubtless plead that more clearly if the third party complaint were dismissed with leave to amend.

Shuham's theory for professional malpractice against Donaldson & Kiel is that if Donaldson & Kiel had properly advised the trustees of their legal duty to obtain an independent audit, then Shuham's employee Shapansky would not have embezzled the $276,728. (Shuham supp. opp. filed 9/26/86 pp. 3-5)

Donaldson & Kiel prepared trust documents for many accounts. They provided the documents by themselves, or else came to the board meetings and explained them in detail, as the clients chose. Most clients preferred not to spend the money for the explanations, although as a matter of marketing, Mr. Kiel made a practice of advising that such explanation would be helpful. (Kiel depo 98-99) The trusts in issue did not hire Donaldson & Kiel to perform the expanded service in 1976, when the trusts were drawn up. When they had a problem, the trustees would call Mr. Kiel. (Kiel depo 127) The law firm billed out $1,200 for preparing the documents; attendance at meetings, including fees, travel, and expenses, would ordinarily cost around $500 to $1,000. (Kiel depo p. 134, ex. 20) Mr. Kiel says in his affidavit filed July 11, 1985 that he was never asked to assure that the trustees followed ERISA and the trust agreement. This is not contradicted by other evidence.

The Trust Agreement says that the "Trustees shall engage ... an independent qualified public accountant and shall authorize such accountant to conduct an annual financial examination of the Trust Fund...." (Kiel depo. ex. 3, p. 21; ex. 4, p. 21) Shuham argues that the trustees misunderstood this to mean that Shuham himself could be the independent auditor, so did not comply with the provision, but would have complied, and would have discovered the embezzlements sooner, if Donaldson & Kiel had properly advised them.

The minutes of the trustees' meetings are substantially uncontroverted. On May 20, 1978, a motion was made for an independent audit even though Donaldson & Kiel had not been brought to the board meeting. The motion failed on a 5-2 vote. (ex. 1, p. 2, supp. opp.)

At a meeting July 29-30, 1979, a motion to hire an independent auditor "was withdrawn until Larry Cotter can obtain some cost figures and until Duane Kiel can look into some of the legalities concerning possible conflict of interests between the Administrative Agent Shapansky and Walter W. Shuham C.P.A. (PC)." (Kiel depo ex. 7) Mr. Kiel's uncontradicted testimony regarding this entry is that he raised this issue, and told the board "my gut reaction is you are auditing yourself, and that is not — and Shuham should not be auditing himself. He should get somebody else to do it." (Kiel depo 116-117) He "must have said" that he would confirm this immediate reaction back in his office. (Id. at 117) After confirming the correctness of his opinion, he communicated it again to his primary contact on the board. (Id. at 119)

On December 1 and 2, 1979, Mr. Kiel attended a meeting and recommended an audit by a firm other than the Shuham firm. The president of the board agreed to accept the recommendation, without a vote. (Id. at p. 18, Kiel depo ex. 8, 9) Mr. Kiel put this to the board "stronger than a recommendation. Ordering it, if you want to use that word." Id. at 130 Apparently this independent audit was not done, despite the attorney's advice to do it and the president's agreement to have it done.

On December 6, 1980, Mr. Kiel again recommended an independent audit. (Id. at p. 28) A motion to have the administrator hire an independent accountant to audit the funds carried. (Dec. 6, 7 minutes)

Shapansky may have embezzled some money prior to 1979, but any amount was never quantified because the auditors determined that in 1978 "it did not appear that there had been a significant amount" and the costs of auditing prior years would be too high. (Evans depo 59) The trustees therefore decided not to follow up on possible losses prior to 1979. (Id. at 60)

As of January 13, 1983, the trustees were still not prepared to fire Shapansky, (ex. 1, p. 46) In March of 1983, Mr. Hirstel called Mr. Kiel and told him that Shapansky's "wife or girlfriend, I don't know if they were married, called him and said something like, Buck Shapansky has taken off and he has stolen some money, or something like that." (Kiel depo 163) The trustees then discovered that when the supposedly independent audit was finally agreed to by the board, Shapansky had forged the independent auditor's signature, and not had it done at all. (Kiel depo 164, references in Donaldson & Kiel memo filed 1/12/87)

Walter Dawson, who joined the...