Martinson Mfg. Co., Inc. v. Seery

• Decision Date: 13 June 1984
• Docket Number: No. 69095,69095
• Citation: 351 N.W.2d 772
• Parties: MARTINSON MANUFACTURING CO., INC., Appellant, v. Robert W. SEERY, Appellee.
• Court: Iowa Supreme Court

Page 772

351 N.W.2d 772

MARTINSON MANUFACTURING CO., INC., Appellant, v. Robert W. SEERY, Appellee.

No. 69095.

Supreme Court of Iowa.

June 13, 1984.

Lawrence L. Marcucci and Frederick B. Anderson of Williams, LaMarca, Marcucci & Wiggins, P.C., West Des Moines, for appellant.

Richard G. Langdon, Ross A. Walters, and Kermit B. Anderson of Herrick, Langdon & Langdon, Des Moines, for appellee.

Considered by REYNOLDSON, C.J., and McCORMICK, SCHULTZ, CARTER, and WOLLE, JJ.

REYNOLDSON, Chief Justice.

Plaintiff Martinson Manufacturing Co., Inc., filed a malpractice action against its former counsel, defendant Robert W. Seery, alleging damages caused by defendant's misinterpretation of an Internal Revenue Code provision. Following trial, judgment was entered upon a jury verdict for defendant. Plaintiff appealed and the court of appeals affirmed. After granting plaintiff's application for further review, we now affirm.

Plaintiff is an Iowa corporation located in Sheffield, Iowa, and engaged in producing a "pitless well adapter" for residential water systems. Through another corporation, Western Irrigation Valve Corporation (Wivco), William J. Burrows, Richard Williams and Walter Hart owned the controlling interest in the plaintiff corporation. In 1973 these three and Dan Sanderson had acquired an 80 percent interest in an Arizona enterprise manufacturing amplifying equipment for performing groups, with Burrows and Williams each owning 24 percent. They incorporated this enterprise as Barnum Industries, Inc.

These Iowa investors borrowed $200,000 from the Iowa-Des Moines National Bank to make the purchase. Initially it was thought Barnum had a profitable contract to produce its equipment. In 1974, however, Barnum was in financial trouble and by June 1975 it had sought reorganization under chapter 11 of the bankruptcy laws. Among other obligations was a $285,000 debt to the Iowa-Des Moines National Bank that the Iowa investors personally had guaranteed. They also had made additional investments in, and advancements to, the Arizona business. Burrows and Williams caused the plaintiff, Martinson, to advance over $100,000 to Barnum without prior approval of the Martinson board. They also were paying interest on the Iowa bank loan.

In the summer and fall of 1975 Burrows developed a plan to merge Martinson and Barnum. In this he had the tax and professional advice of Williams, a noted tax attorney and partner of defendant Seery. The acquisition plan was designed to use the net operating losses (NOLS) of Barnum to free up funds that Martinson otherwise would pay in income taxes. These funds would be used to pay off the original owners of Martinson (who still held veto power over major corporate expenditures) and to repay Barnum's bank loans and other indebtedness. Barnum thus would be released from chapter 11 reorganization, and made solvent as required by the Internal Revenue Code in order for Martinson to use its NOLS. Burrows, on the witness stand, opined this tax money was essential to the success of the acquisition, without which Martinson "simply would not have done the deal."

Burrows testified the business objectives of the merger were diversification for Martinson and transfer of the Barnum operations to Iowa where they could be supervised more closely. He admitted, however, that he and Williams would derive substantial personal benefit when Martinson assumed the Barnum debts that the four Iowa investors had guaranteed.

Martinson bought approximately 2 1/2 percent of Barnum stock from a third party on September 30, 1975.

As the plan finally was presented to Martinson's board of directors on March 4, 1976, it called for the purchase of the Iowa investors' 80 percent of Barnum's stock, 40 percent upon approval of the plan "and the remaining one-half ... in October or November, 1976."

Williams, who was terminally ill, attended only the morning portion of the March 4, 1976, meeting. Thereafter he was unable to participate materially in relevant events. Defendant Seery took his place at the meeting. At trial he testified he relied on Williams' expertise on the tax aspects of obtaining Barnum's NOLS for Martinson. It is clear from the record that at a later August 5, 1976, meeting he told the Martinson board this tax benefit would be available.

Defendant assisted Martinson in obtaining a bank loan to carry out the acquisition plan. After another meeting on October 4, 1976, the Martinson board of directors, upon defendant's advice, voted to acquire the 80 percent of the Barnum stock owned by the Iowa investors "in one chunk." This was accomplished October 15, 1976. This last transaction, of course, occurred more than one year following Martinson's first acquisition of 2 1/2 percent of Barnum stock. The two companies then were merged on December 31, 1976. The Barnum operation continued as a money loser for Martinson, losing about $400,000 before it was closed down.

In January 1977, Martinson's certified public accountants took the position that Barnum's NOLS were unavailable for Martinson's tax return because of Barnum's insolvency. Defendant apparently acquiesced in this position, although questioning their rejection of fair market value of assets for use of book value only. ¹ As a result, the Barnum purchase was reflected on the Martinson tax returns for the 1976-77 and subsequent fiscal years as an investment write-off of about $567,344 rather than as a net operating loss of $887,059. This diminished the tax savings available to Martinson.

Relations between defendant and plaintiff then deteriorated. This was exacerbated by defendant's action as a minority stockholder in Martinson to organize other stockholders to recover company losses from Burrows based on his alleged fraud in the Barnum acquisition.

January 29, 1979, plaintiff Martinson filed this action against defendant Seery. Condensed, the petition alleged defendant so negligently planned and structured the Barnum acquisition as to foreclose use of its NOLS, and that he failed to so inform plaintiff's officers and directors and failed to investigate alternative methods that might have preserved the NOLS. At bottom, plaintiff's petition was based on the assumption that the Barnum transaction sustained an avoidable but fatal fallout from Internal Revenue Code section 334(b)(2). The interpretation of that section, however, became the litigated issue in the trial. Both parties produced well-qualified tax experts, attorneys whose opinions supported totally different interpretations of this section.

When plaintiff rested and again at close of all the evidence, defendant moved for directed verdict on the ground plaintiff had failed to prove the material allegations of its petition. This ground was reasserted in defendant's resistance to plaintiff's motion for new trial, and motion for judgment notwithstanding the verdict, where defendant contended "the testimony of the respective expert witnesses for the parties established conclusively that the matter of the interpretation of Section 334(b)(2) was a matter of judgment as to which a reasonable doubt would be entertained by well-informed lawyers."

Appealing, plaintiff asserts trial court erred in permitting the jury to determine the proper interpretation of Internal Revenue Code section 334(b)(2), in excluding certain documentary evidence, in admitting and excluding certain testimony, in limiting the applicability of the loss carry-over provisions to five years, and in failing to instruct the jury relating to certain claimed damages.

Defendant here contends the interpretation of the Internal Revenue Code provision was tried as a fact issue, and that any error in the submission of the applicability of the provision was harmless because the jury correctly applied defendant's interpretation. Finally, defendant asserts the evidence conclusively established the application of the provision was a matter over which reasonable doubt would be entertained by well-informed lawyers and the trial court was obligated to so rule as a matter of law.

We are convinced defendant's last contention is well taken. This obviates the necessity of reviewing all of the plaintiff's allegations of error.

I. Applicable Legal Principles.

Legal malpractice consists of the failure of an attorney to use such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the task which they undertake. See Millwright v. Romer, 322 N.W.2d 30, 32 (Iowa 1982); Kurtenbach v. TeKippe, 260 N.W.2d 53, 56 (Iowa 1977).

In professional malpractice cases the law does not impose an implied guaranty of results. Sinkey v. Surgical Associates, 186 N.W.2d 658, 660 (Iowa 1971); Grosjean v. Spencer, 258 Iowa 685, 691-92, 140 N.W.2d 139, 143 (1966); Wilson v. Corbin, 241 Iowa 593, 599, 41 N.W.2d 702, 705 (1950). Moreover:

If an attorney acts in good faith and in an honest belief that his acts and advice are well founded and in the best interest of his client, he is not held liable for a mere error of judgment. A fortiori, an attorney is not liable for an error in judgment on points of new occurrence or of nice or doubtful construction, or for a mistaken opinion on a point of law that has not been settled by a court of last resort and on which reasonable doubt may well be entertained by informed lawyers.

7 Am.Jur.2d Attorneys at Law § 201 (1980); accord Woodruff v. Tomlin, 616 F.2d 924, 932 (6th Cir.), cert. denied, 449 U.S. 888, 101 S.Ct. 246, 66 L.Ed.2d 114 (1980); Baker v. Beal, 225 N.W.2d 106, 112 (Iowa 1975); Meagher v. Kavli, 256 Minn. 54, 60-61, 97 N.W.2d 370, 375 (1959); Hodges v. Carter, 239 N.C. 517, 520, 80 S.E.2d 144, 146 (1954); Denzer v. Rouse, 48 Wis.2d 528, 534, 180 N.W.2d 521, 525 (1970); 7A C.J.S. Attorney & Client § 257 (1980).

Appellate courts generally have supported trial courts that, upon the required degree of proof, have applied the above principle in ruling the...