Firmani v. Dar-Court Builders, LLC

• Decision Date: 10 November 2016
• Docket Number: A16A1289
• Parties: FIRMANI, et al. v. DAR–COURT BUILDERS, LLC, et al.
• Court: Georgia Court of Appeals

339 Ga.App. 413

793 S.E.2d 596

FIRMANI, et al.

v.DAR–COURT BUILDERS, LLC, et al.

A16A1289

Court of Appeals of Georgia.

November 10, 2016

William Matthew Davis, Atlanta, for Appellant.

Jeremy U. Littlefield, Kimberly K. Anderson, Richard L. Robbins, Atlanta, for Appellee.

Branch, Judge.

Stewart and Marcia Weinhoff and their solely-owned corporation, Dar–Court Builders, LLC (collectively "the Weinhoffs"), filed suit in Cobb County Superior Court against a number of defendants,¹ including Dominic Firmani and his company, Firmani Pension Services ("FPS") (collectively "Appellants"), asserting claims for negligence, negligent misrepresentation, breach of fiduciary duty, constructive fraud, punitive damages, and attorney fees. The Weinhoffs contended that an error by Firmani and FPS in drafting a Dar–Court–sponsored 412 (i) pension plan ("the Plan") resulted in significant damage to the Weinhoffs, in the form of additional tax liability, penalties and interest on that tax liability, and attorney fees and other costs associated with an IRS audit of the Plan. The case proceeded to trial and a jury found in favor of the Weinhoffs and against Firmani and FPS. Firmani and FPS now appeal from the orders of judgment entered against them, arguing that they are entitled to a new trial because a "script" used by the Weinhoffs' attorney for her direct examination of one of the Weinhoffs' witnesses was inadvertently submitted to the jury in violation of the continuing witness rule. Appellants further contend that the trial court erred in failing to grant their motions for a continuance and a mistrial, which were based on the Weinhoffs' production, during discovery, of redacted attorney fee bills and their subsequent introduction at trial of unredacted copies of those bills. Firmani and FPS also assert that the trial court erred in excluding certain testimony offered by their expert witness on damages and in barring testimony regarding an indemnification clause contained in the documents creating the Plan. For reasons explained more fully below, we find no error and affirm the orders of judgment. We also deny the Weinhoffs' request that we impose sanctions against Firmani and FPS for a frivolous appeal.

Viewed in the light most favorable to the jury's verdict, Freese II, Inc. v. Moses , 301 Ga.App. 793, 794, 689 S.E.2d 98 (2009), the record shows that a 412 (i) plan is a defined-benefit pension plan created under § 412 (i) of the Internal Revenue Code, and funded entirely with two types of insurance products: life insurance policies and annuity contracts. The contributions to this type of pension plan, therefore, are the premiums paid for the insurance products. Funding a 412 (i) pension plan provides tax benefits to both the employer sponsoring the plan and the employee participating in the same; the employer gets to deduct the insurance premiums paid as contributions to the plan, while the employee reduces his salary (and therefore his taxable income) to fund the premiums. The IRS, however, limits the amount of life insurance that can be purchased to fund a 412 (i) plan. These limits serve to cap the amount of tax deductions available to the employer sponsoring the plan, and they also prevent such a plan from having an excessive amount of life insurance if a participant dies.² When, as in this case, a 412 (i) plan is funded with whole life insurance, the premiums paid for that insurance may not exceed 66 2/3 percent "of the theoretical contribution generated when determining the Theoretical Individual Level Premium Reserve."³

William Baer served as the Weinhoffs' financial advisor, and as part of his financial planning services, Baer sold insurance products. In 2002, Baer approached the Weinhoffs regarding the tax benefits of a 412 (i) plan and recommended that they invest in the same. The Weinhoffs thereafter decided to have Dar–Court sponsor such a plan, with Stewart Weinhoff as the sole participant and Marcia Weinhoff as Stewart's beneficiary. Baer then worked with Stephen P. Toth, an actuary and pension planner, and Toth's company, National Pension Associates, to design the Plan and determine its funding requirements. The Plan was funded with Pacific Life products, and Baer and Toth shared the commissions generated on those products. Firmani and FPS were hired to serve as the Plan administrator. In that role, Firmani and FPS drafted the necessary documents (the "Plan Documents") and performed certain administrative duties, including auditing the Plan on an annual basis, preparing the annual forms required by the IRS, and preparing the Plan's tax return.

At the time of the Plan's creation, Stewart Weinhoff had applied for life insurance coverage in the amount of $1.25 million, with annual premiums of $75,000. Firmani and FPS drafted the Plan Documents based on this preliminary information. Thus, the Plan as drafted by Appellants in October 2002 provided that the amount of insurance on Stewart Weinhoff's life "shall be ... the amount purchased by a premium equal to 49% of the theoretical contribution generated when determining the theoretical individual level premium reserve." The 49% cap was well below the maximum cap of 66 2/3% allowed by IRS regulations, and Firmani testified that he chose the 49% figure for two reasons. First, the anticipated annual premium of $75,000 fell below the 49% cap, and second, in Firmani's experience, the IRS was less likely to audit a plan when the cap was less than 66 2/3%.

After Stewart Weinhoff completed the underwriting process, he was qualified for a $1.5 million life insurance policy with annual premiums of $105,000, and that was the policy that issued. The information regarding the increase in both policy coverage and premiums was forwarded to Firmani in December 2002, and he directed the FPS employee handling the Plan to amend the Plan Documents accordingly. FPS, however, did not amend the Plan Documents to reflect the increased amount of life insurance and the resulting increase in premiums—i.e., Appellants did not amend the Plan to raise the 49% cap for life insurance premiums. Although the $105,000 annual premium fell below the 66 2/3% cap permitted by IRS regulations, the larger premium exceeded the 49% cap by approximately $10,000 per year. Thus, the life insurance policy that issued exceeded the benefits allowed under the terms of the Plan Documents and resulted in the Plan—as created by Firmani and FPS—being overfunded. Had the Plan been amended to provide for a cap of 66 2/3%, the premium paid would have complied with the terms of the Plan Documents.

In 2008, the IRS audited Dar–Court's 412 (i) plan and found that it violated the tax code because although the life insurance premiums fell below the 66 2/3% cap set by IRS regulations, they exceeded the 49% cap set by the Plan Documents. The IRS therefore deemed the plan a "listed transaction" (i.e., an illegal tax shelter), and assessed the Weinhoffs back taxes and penalties of approximately $1.9 million, exclusive of interest. The Weinhoffs retained Philip Bush, a tax lawyer specializing in employee benefits, to represent them before the IRS. Bush was eventually able to negotiate a settlement with the IRS, under which the Weinhoffs were required to pay $459,757.20 in taxes and penalties and $116,168.69 in interest.

The Weinhoffs brought this lawsuit in an effort to recover the amounts paid to the IRS in taxes, penalties, and interest, as well as the professional fees and costs they incurred in appealing the IRS's initial ruling that they owed $1.9 million. During discovery, the Weinhoffs produced copies of Bush's attorney fee bills, but redacted portions of the same, claiming that certain entries were protected by the attorney-client privilege. Additionally, during his deposition, Bush testified that because the attorney-client privilege had been asserted as to the redacted entries, he would not answer questions regarding those entries. At trial, however, the Weinhoffs sought to prove the amount of fees paid to Bush as a result of the IRS audit by introducing "largely unredacted" copies of his bills and questioning him regarding the same.⁴ Firmani and FPS objected to this evidence on the grounds that it had not been made available during discovery, but the trial court overruled the objection.

Stewart Weinhoff testified that he and his wife had incurred a total of $214,711.23 in professional fees and other expenses in appealing the IRS's original assessment of back taxes and penalties and in negotiating a settlement with the IRS. This amount included $144,723.73 in attorney fees and $24,987.50 in actuarial fees. On cross-examination, defense counsel attempted to question Weinhoff about an indemnity clause found in the Plan Documents. The Weinhoffs objected to this line of questioning and the trial court sustained the objection, ruling that the indemnification clause could not be interpreted to require the Weinhoffs to indemnify Firmani and FPS for their own negligence.

During their case, Firmani and FPS presented the testimony of Michael Thompson, a CPA who was qualified as an expert in forensic accounting and damages calculations. Firmani sought to introduce testimony from Thompson that the actual damages suffered by the Weinhoffs totaled only $121,752, as well as testimony as to Thompson's method for calculating these damages. Prior to jury selection, the Weinhoffs made an oral motion in limine seeking to prevent Thompson's testimony on these issues. After hearing Thompson's proffered testimony outside the presence of the jury, the trial court granted the motion in limine.

The jury found in favor of the Weinhoffs and awarded them $735,650 in compensatory damages, but further found that the Weinhoffs were not entitled to punitive damages or to an award of attorney fees under OCGA § 9–15–14. The jury apportioned liability as follows: 15% to Firmani; 40% to FPS; 25% to Baer; 15% to Baer's company, National Pension Associates; and 5% to the...