Frederick Road v. Brown & Sturm

• Decision Date: 27 July 2000
• Docket Number: No. 93,93
• Citation: 360 Md. 76,756 A.2d 963
• Parties: FREDERICK ROAD LIMITED PARTNERSHIP, et. al. v. BROWN & STURM, et. al.
• Court: Maryland Court of Appeals

756 A.2d 963

360 Md. 76

FREDERICK ROAD LIMITED PARTNERSHIP, et. al. v. BROWN & STURM, et. al.

No. 93, Sept. Term, 1998.

Court of Appeals of Maryland.

July 27, 2000.

Reconsideration Denied September 6, 2000.

Albert D. Brault (Joseph P. Morra, Brault, Graham, Scott & Brault, LLC, on brief), Rockville, for petitioners.

Charles E. Iliff, Jr. (Stephan Y. Brennan, Iliff & Meredith, P.C., on brief), Baltimore, for respondents.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, CHASANOW¹, RAKER, WILNER and CATHELL JJ BELL, Chief Judge.

The petitioners, Frederick Road Limited Partnership and Fannie Lois Aschenbach, brought this legal malpractice action in the Circuit Court for Montgomery County against the respondents, Brown & Sturm, R. Edwin Brown, P.A., The Peach Tree Road Investment Co.,² Rex L. Sturm, P.A., R. Edwin Brown, Esquire, and Rex L. Sturm, Esquire. The circuit court granted the respondents' motion for summary judgment on the grounds that the petitioners' law claims were barred by the applicable statute of limitations and their equity claims were barred by laches. A divided panel of the Court of Special Appeals affirmed. Frederick Road Limited Partnership v. Brown and Sturm, 121 Md.App. 384, 710 A.2d 298 (1998). This Court granted certiorari to address two issues: whether the trial court erred in granting summary judgment by determining, as matter of law, that the petitioners were on notice that their losses were caused by the legal malpractice or fraud committed by their attorneys and whether the trial court erred in granting summary judgment on the grounds that the petitioners' contract claims were barred by statute of limitations and their equitable claim precluded by the doctrine of laches.

We shall hold that summary judgment in this case was inappropriate. Accordingly, we shall reverse the judgment of the Court of Special Appeals.

I.

In 1981, with the goal of minimizing potential estate and gift taxes, Mr. W. Lawson King and Mrs. Cordelia E. King ("the Kings") sought to transfer 438 acres of farm land in Montgomery County, known as the "King Farm," to their three children. To accomplish this goal, the Kings sought legal advice from the respondent, R. Edwin Brown, Esquire, ("Brown"), a Montgomery County real estate attorney, who had been engaged in the private practice of law for more than thirty (30) years with a primary focus in condemnation and other land valuation cases. Mr. King had known Brown since high school, and Brown had previously represented Mr. King in a land condemnation case in the 1970's. The Kings also sought accounting and financial advice from their certified public accountant, Mr. August C. Bonsall ("Bonsall").

Brown and Bonsall began working together to estimate the value of the land and calculate the potential taxes. Bonsall believed the value of the King Farm was between $20 million and $100 million. Brown believed that the King Farm could be valued at much less and result in significant tax savings, if the farm were appraised using a "farm-use only" valuation. Brown therefore, after procuring three appraisals of the King Farm, each of which, at his instruction, valued the property for "farm-use only," received estimates for the farm at between $515,000 and $720,000. To justify this price under the various tax codes, Brown proposed that the Kings place a three-year "farm-use only" easement on the property. This method, he assured the Kings and their children, would comply with applicable provisions of the federal and local tax codes, and result in significant tax savings.

Bonsall discussed the accounting and legal particulars of the plan with G. Van Velsor Wolf, Esquire ("Wolf"), whom he contacted for that purpose. The Kings had often consulted Wolf for legal and estate planning advice. Wolf disagreed with Brown's advice, calling it "badly flawed" from an estate planning perspective. Thereafter, Wolf and members of his law firm, Piper & Marbury, met with Mr. King to discuss alternatives to the plan and to explain their view that any taxes would be based, not on the value of the land with the temporary agricultural easement, but on the "fair market value" of the farm at its "highest and best use." Wolf proposed several alternative plans, finally advising Mr. King that a charitable lead trust would be the most advantageous estate-planning vehicle. Mr. King authorized Wolf to prepare such a trust for his consideration.

After being informed that Mr. King had consulted with Wolf, who disagreed with his plan, Brown met with Mr. King and reassured him that selling the property with a farm-use only easement would be legitimate under the tax codes and, what's more, would be the most beneficial method, from a tax savings perspective, of transferring the land. Persuaded by Brown, and without notice to Wolf or his law firm, the Kings decided to proceed with Brown's advice.³ Thus, on February 5, 1982, King executed a deed transferring approximately 418⁴ acres of the King Farm to two limited partnerships created by the King children: (1) Frederick Road Limited Partnership, for which the petitioner, Mrs. Aschenbach, served as general partner; and (2) Field Farms Limited Partnership, for which the Kings other children served as general partners.⁵ The total sale price was $596,942.95, representing the average of the three "farm-use only" appraisals.

Mr. King subsequently discharged Wolf as the couple's attorney. In reply, Wolf wrote a lengthy letter to Mr. King, with a copy to Brown, expressing concern about the potential tax consequences of the property transfer transaction. Wolf believed that the fair market value of the farm could be between $27 million and $54 million and that the sale could lead to serious tax consequences. In the letter, Wolf explained:

"[A]s of the present moment I either know or have every reason to believe that the property you recently transferred to your children for $566,434.13 [sic] did not have a "fair market value"—which is the test under all three of the federal tax laws, to wit, income, gift and estate—of that amount or anywhere near it. On the contrary, ... the true value of that land for federal estate tax purposes is far, far in excess of $1,500 an acre.

"I have been advised by a very knowledgeable, experienced and responsible person who is wholly familiar with the property ... that at the very least the "home farm" as transferred to the children is worth $1.50 a square foot or $65,340 an acre. That is, for 418 acres the minimum federal income tax valuation might well be in the neighborhood of $27,312,000.

* * * *

"According to our figures if the Internal Revenue Service should use what I was advised to be a "realistic" value of the property per acre, that is $3.00 per square foot, or a total of $54,624,240, the federal gift tax which you and Mrs. King would have to come up with would be approximately $33,943,000 in cash...."

After receiving the letter, the Kings and their children immediately called a meeting with Brown to discuss Wolf's concerns. Again, however, Brown unequivocally assured them that the transaction as he proposed it was legitimate and that Wolf's warnings were simply a difference of professional opinion.

Soon after the sale, however, Brown had difficulty recording the deed in the Montgomery County land records. Montgomery County officials believed that the sale price, upon which the County transfer tax would be imposed, was far below the fair market value of the farm. An Assistant County Attorney advised Brown that the State Department of Assessment and Taxation ("SDAT") had appraised the farm, as of March 16, 1982, without improvements, at approximately $9 million. Despite the SDAT appraisal, Brown again assured the Kings that the transaction was legitimate and that the problems with the county would be resolved without the payment of additional taxes. Brown's advice soon proved to be correct; thereafter, Brown successfully recorded the deed in the county records without either modifying the sale price or paying any additional taxes. Thus, in December of 1982, with confidence in Brown's advice, the Kings conveyed the remaining 20-acre homestead to their children for the stated consideration of $248,100, again based upon the farm-use only appraisals.

Mrs. King died in 1983 and Mr. King in 1985. Soon after their deaths, the IRS began investigating the property transfer transaction. Brown, on behalf of the King children, responded to the IRS inquiries, at all times defending the transaction as legitimate. In July and August of 1987, however, the IRS issued a deficiency assessment, totaling more than $68 million in taxes and penalties, against the estates of the Kings, as well as the King children. The IRS stated that the "underpayment of tax" was "due to a valuation underpayment which was less than 40 percent of the correct value." The King children, however, were not particularly concerned about the deficiency notices because Brown had told them to expect an IRS challenge. At the same time, Brown advised them that the challenge would be resolved without the payment of additional taxes.⁶

Brown represented the King children in the tax matter on a reverse contingency basis.⁷ Because Brown had never argued a case in the federal tax court, he requested and received permission from the King children to hire Charles Burton, Esquire ("Burton"), an experienced tax litigator. The King children agreed to compensate Burton at $125 per hour. The King children also agreed to hire four independent appraisers to retroactively assess the "fair market value" of the property. When completed, each appraisal was substantially higher than Brown's pre-sale estimates and substantially lower than Bonsall and Wolf's pre-sale estimates. The four appraisers assessed the fair market value of the King Farm at $6.2 million, $10.4 million, $5.1 million, and 4.9 million, respectively, averaging approximately $6.7 million. Both Brown and Sturm...