Draggin' Y Cattle Co. v. Addink, DA 13–0007.

• Court: United States State Supreme Court of Montana
• Citation: 372 Mont. 334,312 P.3d 451
• Docket Number: No. DA 13–0007.,DA 13–0007.
• Parties: DRAGGIN' Y CATTLE COMPANY, INC., and Roger and Carrie Peters, Plaintiffs and Appellants, v. Larry ADDINK, and Junkermier, Clark, Campanella, Stevens, P.C., Defendants and Appellees.
• Decision Date: 29 October 2013

372 Mont. 334
312 P.3d 451

DRAGGIN' Y CATTLE COMPANY, INC., and Roger and Carrie Peters, Plaintiffs and Appellants,
v.
Larry ADDINK, and Junkermier, Clark, Campanella, Stevens, P.C., Defendants and Appellees.

No. DA 13–0007.

Supreme Court of Montana.

Submitted on Briefs Sept. 11, 2013.
Decided Oct. 29, 2013.

[312 P.3d 453]

For Appellants: Timothy B. Strauch; Strauch Law Firm; Missoula, Montana.

For Appellees: G. Patrick HagEstad, Tim E. Dailey; Milodragovich, Dale & Steinbrenner, P.C.; Missoula, Montana.

Justice JIM RICE delivered the Opinion of the Court.

[372 Mont. 335]¶ 1 Draggin' Y Cattle Company, Inc. and Roger and Carrie Peters (collectively the Peters) appeal from the order of the Eighteenth Judicial District Court granting summary judgment to defendants Larry Addink (Addink) and Junkermier, Clark, Campanella, Stevens, P.C. (JCCS). The case arose from a failed § 1031 tax-deferred exchange ¹ Addink structured for Peters. It was ultimately determined that the exchange did not qualify for deferred tax treatment under § 1031, resulting in significant tax liability for the Peters. The Peters filed a complaint against Addink and JCCS alleging professional negligence, breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, and misrepresentation. During discovery, the District Court granted Addink and JCCS a protective order preventing the Peters from obtaining certain of their [372 Mont. 336]pre-litigation communications. Ultimately, the court held that the two-year fraud and three-year tort claims were barred by the respective statutes of limitations, and dismissed the breach of contract claims despite the five-year or eight-year limitation periods applicable to such claims. We reverse and remand for further proceedings.

¶ 2 We review the following issues on appeal:

[312 P.3d 454]

¶ 3 1. Did the District Court err in holding that the statute of limitations began to run when the real estate transactions closed?

¶ 4 2. Did the District Court err in dismissing the Peters' breach of contract claim?

¶ 5 3. Did the District Court err in granting Addink and JCCS a protective order to prevent discovery of alleged work product and attorney-client communications?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 6 Roger and Carrie Peters, husband and wife, own Draggin' Y Cattle Company, a cattle ranch in Dillon. The Peters also owned Alaska Basin Grazing Association (Alaska Basin). Since the 1980s, the Peters had been clients of accountant Larry Addink, both individually and for their businesses. In March 2005, Draggin' Y and Addink, on behalf of JCCS, signed a written contract for general tax services, including compilation of month-end statements of assets, liabilities, and stockholders' equity-income tax basis, and preparing year-end tax returns. This contract stated that Addink will “inform [Peters] of any material errors that come to our attention ... unless they are clearly inconsequential.”

¶ 7 The origins and scope of the parties' agreements regarding the subject transaction are disputed. The Peters allege that they, along with realtor Lon Morris (Morris), consulted Addink in 2005, shortly after signing the written contract, regarding sale of Alaska Basin property in a way that would reduce tax liability, and that Addink suggested a § 1031 exchange. Addink's timesheet entries reflect that the Peters were billed in 2005 for conferences in which a § 1031 exchange for Alaska Basin property was discussed. Addink asserts his 2005 timesheet entries were related to a completely different transaction, and that his first involvement in this matter was in late 2006 when Morris contacted him about whether certain property would qualify for the exchange. Regardless, Addink does not dispute that he researched the possibility of § 1031 treatment of Alaska Basin's sale of property and purchase of other property owned by the Peters that culminated in the transaction at issue. He concluded from his [372 Mont. 337]research that the transaction would qualify for § 1031 treatment, so he opined to the Peters that the exchange would be given tax-deferred treatment. Addink wrote a letter to the Peters outlining his plan and suggesting which property should be purchased as the replacement property.

¶ 8 In late 2006, Alaska Basin hired attorney Max Hansen (Hansen), whose practice includes § 1031 exchanges, to draft the closing documents for the transaction. The Peters assert that Hansen was not retained for any tax advice regarding the transaction, and that they instead relied solely on Addink for tax advice. Hansen likewise states that he deferred all tax advice to Addink, as the accountant involved in structuring the transaction, and repeatedly reminded Addink that he was not providing any tax advice or legal representation regarding tax issues. Nonetheless, Hansen was concerned that Addink's plan would not qualify for § 1031 treatment due to a related-party issue—the property being purchased to replace the Alaska Basin property was owned by the principals of Alaska Basin. In December 2006, Hansen conveyed his concerns to Addink, who assured Hansen that he understood the issue and had researched it.

¶ 9 On January 17, 2007, the Alaska Basin property was sold. On January 18, 2007, Hansen again called Addink to express his concerns about the related-party issue. Addink agreed to check into it again and call Hansen if he discovered any problems. Hansen followed up on this conversation by faxing a letter to Addink detailing his concerns, and reiterating that he was not engaged for tax purposes. Addink did not contact Hansen, and the transaction for purchase of the Peters' property closed on January 22, 2007. Though the Peters were aware of Hansen's concerns, they accepted Addink's assurances that he had researched the tax implications and that the exchange would qualify.

¶ 10 In November 2007, Addink attended a seminar where he learned that, pursuant to a 2002 revenue ruling, the type of transaction he had structured for the Peters was prohibited by the related-party rule. He immediately

[312 P.3d 455]

notified JCCS, which in turn notified its insurer. JCCS began investigating its potential liability, and consulted with attorney Ralph Picardi sometime in 2008. During this time, the Peters were not informed that the transaction would fail to qualify under § 1031, and were billed for some of the time JCCS spent discussing the transaction's failure. At least one JCCS email during this time noted that Addink was “uncomfortable knowing what he knows and not saying anything to his client.”

¶ 11 Addink met with the Peters on February 6, 2008, to inform them [372 Mont. 338]that the transaction would be taxable due to the related-party rule. Addink told the Peters that the transaction had failed to qualify under § 1031 because of new tax rulings that had changed the law on related parties. The failure of the § 1031 transaction required that the Peters report $2,862,279, and Draggin'Y report $5,692,434, of taxable gain. The Peters would face a state and federal tax bill estimated at $2.5 million within three weeks.

¶ 12 Addink devised a plan to mitigate the tax consequences by seeking an extension for the 2007 tax filings, restructuring various entities to use losses to offset the gain, and negotiating with tax authorities to settle taxes, penalties, and interest due. Pursuant to this plan, the Peters were able to eliminate through 2008 and 2009 the taxable gain by offsetting it against restructured operating losses. However, during the time it took to eliminate the taxable gain, the Peters paid over $250,000 in interest on the taxes due, sums they paid by borrowing from a bank.

¶ 13 To further Addink's tax mitigation plan, the Peters hired Hansen to negotiate a tax compromise with the IRS. In March 2009, Hansen informed the Peters that, during his representation on the compromise issue, he learned that Addink had misinformed them about the reason the transaction had failed to qualify. Hansen opined that Addink's change of opinion was not due to a new law on related parties, but because of a new tax-preparer penalty rule that would have resulted in liability for Addink had he reported the exchange as tax-deferred. Hansen told the Peters that Addink should have informed them immediately of the failure of the transaction to qualify so they could have completed tax planning before the end of 2007, which would have avoided significant losses to the Peters. Upon learning this, the Peters ended their relationship with Addink.

¶ 14 On January 21, 2011, the Peters filed a complaint against Addink and JCCS alleging professional negligence, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and misrepresentation. They also claimed that Addink breached an implied contract for structuring and advising on the § 1031 exchange, and breached the provision in the 2005 written contract to inform them of any not-inconsequential errors.

¶ 15 Addink moved for summary judgment on the ground the claims were time barred. Addink argued that the limitations period began to run for all claims on January 22, 2007, when the last property sale closed, because that was the point when all elements of the claims had accrued. The Peters replied that the limitations period did not begin [372 Mont. 339]to run until February 2008 for their tort claims, when they were first informed of the failure of the tax-deferred treatment, and until March 2009 for their fraud claim, when they learned from Hansen that Addink delayed informing them and likely misrepresented the reason for the failure. Because the statute of limitations for breach of an express contract is eight years, and for an implied contract five years, they argued these claims were timely. The District Court granted summary judgment to Addink and JCCS on all claims.

STANDARD OF REVIEW

¶ 16 We review a district court's grant of summary judgment de...